Income Tax Appellate Tribunal - Ahmedabad
M. Kantilal Exports,, Surat vs Department Of Income Tax
IN THE INCOME TAX APPELLATE TRIBUNAL
AHMEDABAD BENCH "D"
(BEFORE S/SHRI P K BANSAL AND MAHAVIR SINGH)
ITA No.3862/Ahd/2004
(Assessment Year: 2001-02)
The Assistant V/s M/s M Kantilal Exports,
Commissioner of Income- Ambika-Niwas, Mohan-ni
tax, Central Circle-2, Chawl, Varachha Road,
Room No.504, Aayakar Surat
Bhavan, Majura Gate,
Surat
[Appellant] [Respondent]
PAN No.: AAAFM 4325 L
Appellant by :- Shri B S Sandhu, CIT - DR
Respondent by:- Shri Ashwin Parekh
ORDER
Per P K Bansal (Accountant Member): This appeal has been filed by the Revenue against the order of the CIT(A) dated 19 th October, 2004 for Assessment Year (AY) 2001-02, by taking the following effective grounds of appeal:
1 The CIT(A) has erred in law and on facts in directing the AO to delete the addition of Rs.17,50,00,000/- made on account of unexplained expenditure u/s 69C of the I.T. Act.
2 The CIT(A) has also erred in law and on facts in opining that the AO should not have passed the order u/s 144 of the I.T. Act without allowing adequate opportunity of being heard to the assessee, ignoring the fact that the case was heard by the AO on 16 (sixteen) 1 occasions between 2.7.2003 and 29.3.2004 as is evident from the order-sheet of the assessment order.
2 The brief facts of the case are that the assessee is a Partnership firm engaged in the business of import of rough diamonds, manufacturing and export of polished diamonds. The AO noted in the assessment order that during the course of hearing, it was noticed that as per Annexure D to Form No.3CD total raw material of rough diamond available to consumption, was as under:-
Op. Stock 1,01,995.17 cts.
Add: Purchase during the year 2,40,066.36 cts.
------------------
Total 3,42,061.53 cts.
============
The AO further noted that against this availability, rough diamond for disposal, consumption during the year was shown at 4,30,701.14 cts. and rejection was shown at 26,555 cts., and the total closing stock of rough diamond was shown at 24,805.39 cts. Therefore, the total rough diamond available for disposal on the basis of consumption, rejection and closing stock was as under:-
Consumption 4,30,701.14 cts.
Rejection 26,555.00 cts.
Cl. Stock 24,805.39 cts.
--------------------
Total 4,82,061.53 cts.
=============
2
The AO compared raw material of rough diamond available for disposal, on the basis of opening stock and purchases and noted that there was excess rough diamond consumption / rejected. The assessee was asked to explain the same. A show cause notice u/s 142(1) of the Income-tax Act, 1961 ["the Act" for short] was issued to the assessee vide letter dated 15-12-2003 in response to which the assessee stated vide its letter dated 31-12-2003 that in the Audit Report the consumption of rough diamonds has been shown at 4,30,701.14 cts. due to a typing mistake in Form No.3CD. As per the stock records of rough diamonds, manufacturing records of consumption of rough diamonds and job work bills and registers, the consumption of total rough diamonds is 2,90,701.14 cts. The Auditor had wrongly signed the incorrect typed figure. The assessee also submitted vide letter dated 31-12-2003 that they have written a letter to the Auditor bringing the said mistake to the notice of the Auditor and a Certificate issued by the Auditor was also submitted before the AO. The AO observed that there is no provision for filing revised certificate from auditor u/s 44AB of the Act and such revised certificate is baseless as how the auditor could remember the state-of-affairs of the audit report, signed two years back. Thereafter, another notice u/s 142(1) dated 10-02-04 was issued to the assessee stating that the figure of consumption of 4,30,701.14 cts. and the figure quoted by the assessee firm of 2,90,701.14 cts. was quite different. The assessee firm was asked to produce Shri Umesh Shah, Auditor and Shri Himmatbhai Kheni, Partner for verification along with necessary records. Shri Umesh Shah, Auditor stated that the mistake was due to the 3 typographical error. Similarly, Shri Himmatbhai Kheni, Partner of the firm also stated that the figure of 4,30,701.14 cts was a typing mistake. Ultimately the AO made the addition of excess consumption of rough diamonds as unexplained expenditure u/s 69C by observing as under:-
"It can be seen from the above that the assessee is relying upon the figure of yield at 24.61% to justify the consumption figure of 2,90,701.14 carats However, it is seen that along with the figure of consumption, if we consider the figure of rejection of rough, the actual situation regarding yield emerges. This is necessary to get a real picture as the rejection comes out of rough diamonds used for consumption. For AY 1990-00, the figure of consumption was 3,36,684.09 carats The figure of rejection is 1,03,898.49 carats The quantity of manufactured diamonds comes to 69,443.60 carats The yield comes to 15.76%. For AY 2000-01, the consumption figure is 5,64,211.36 carats The rejection figure is 25,364.98 cts. For the AY 2001-02, if we take the consumption figure at 430,701.14, as per the audit report and the rejection figure at 26,555 carats and the manufactured polished diamonds at 71,529.17 carats, the yield comes to 15.64%. for AY 2002-03, as per the audit report, the consumption is 3,20,088.22 carats and the rejection figure of 4,86,067.33 carats The manufactured polished diamonds are 95,987.34 carats and the yield comes to 11.89%. Therefore, we can see that the gross yield has varied between 10% to 18%. At no time, the same has exceeded 20%, as claimed by the assessee in its explanation.
Sr. AY Yield Cost of rough (Rs.) Per Carat
No.
1 1999-00 15.76% 1,122.67
2 2000-01 18.98% 1,369.63
3 2001-02 15.64% 1,962
4 2002-03 11.89% 672.41
5 2003-04 16.27% 1,120.04
9 From the above chart, it is clearly established that the yield ratio
is decreasing year by year, generally. If we take consumption as per the assessee's claim for the year under consideration at 290,701.14 carats, it will to give rise to yield, which is contrary to the trend of the yield of the assessee, over the years, as discussed above. Therefore, 4 the correct figure of consumption mentioned in Annexure "D" of the Form No.3CD at 4,30,701.14 carats appears to be correct and the hypothetical consumption or the consumption calculated on backward calculation from polished diamonds, opening stock and closing stock, measuring 2,90,701.14 carats as claimed by the assessee is not correct. In fact, the assessee has prepared duplicate books of accounts to suit the consumption measuring 2,90,701.14 carats of rough diamonds, to the extent of accounted purchases in the books of accounts and has suppressed actual consumption figure.
10 If we compare the figure of labour charges paid / payable vis-à- vis, the figure of consumption of rough, it is seen that for AY 1999-00, the labour charges debited to the Trading and Profit & Loss A/c were Rs.7,49,98,425/-. The figure of rough consumption was 336684.09 which gives a labour charges rate of Rs.222 per carats rough. If we seen Trading and Profit & Loss A/c of AY 2001-02, the labour charges debited are Rs.13,51,28,577/-. The rough consumption as per the audit report is 5,64,211.36 carats, which gives a labour rate of Rs.239/- per carat of rought. For AY 2001-02, the labour charges debited to Trading and Profit & Loss A/c, are Rs.7,89,28,551/-. If we adopt the figure of rough consumption at 2,90,701.14 carats as claimed by the assessee, rate of labour charges comes to Rs.271/- per carat of rought, which is quite high and shows that the claim of the assessee is not correct. Looking to the above factors and also to the facts that the consumption of 4,30,701.14 carats as mentioned in the audit report u/s 44AB of the Act. The books of accounts produced before me are not reliable and are not the same books which must have been present at the time of preparing the audit report. Hence, the same are rejected u/s 145 of the Act. Accordingly the actual excess consumption of roughs of 140,000 carats is taken as unexplained expenditure of the assessee firm.
11 From the chart, as discussed in earlier para, giving the yield and the cost of the rough per carats as per Profit & Loss A/c it is apparent that the % of yield is definitely affected by the quality of rough diamonds. During the year under consideration, average yield on the basis of consumption, as per Annexure "D" in Form No.3CD, comes to 15.64%, which is in the range of 15.76% that for the AY 1999-00. For computing unexplained purchase cost, it would be proper to average out the cost of rough diamond purchase for five years, as discussed above. The average cost of rough diamonds per carats, as per Profit & Loss A/c for the five assessment years, as discussed 5 above, comes to Rs.1250/- per carats. By adopting the value of Rs.1250/- per carats for the excess rough diamond of 1,40,000 carats, the unexplained expenditure comes to Rs.17,50,00,000/-. As per the provisions of section 69C of the Act "Where in any financial year an assessee has incurred any expenditure and he offers no explanation about the source of such expenditure or part thereof, or the explanation, if any, offered by him is not, in the opinion of the AO, satisfactory, the amount covered by such expenditure or part thereof, as the case may be, may be deemed to be the income of the assessee for such financial year:
Provided that, notwithstanding anything contained in any other provision of this Act, such unexplained expenditure which is deemed to be the income of the assessee shall not be allowed as a deduction under any head of income.
12 Therefore, it can be seen that the assessee is not entitled to set off his unexplained expenditure against any income. Moreover the unexplained expenditure is income from other sources and, therefore, the assessee is not entitled for deduction u/s 80HHC, against the same."
3 When the matter went in appeal before the CIT(A), the CIT(A) deleted the addition by observing as under:-
"05 I have perused the contentions raised by the appellant and also gone through the assessment order. A remand report was called for and the AO submitted the same on 29-04-2004. A copy of the remand report was given to the appellant for necessary comments and the reply was received during the course of hearing. I have carefully gone through the same. In my opinion the AO should not have passed order under section 144 of the Act without allowing adequate opportunity of being heard especially when such a huge addition of Rs.17,50,00,000/- was being contemplated. The AO was not justified in making presumption or estimation of such a high magnitude on the back of the appellant especially when day-to-day hearings were conducted in the regular course of assessment proceedings. The AO was also not justified in ignoring the evidences and explanations with regard to the typing mistake in the audit report. The AO has seen the Books of account then why figures regarding opening stock, closing stock and 6 relevant consequential figures of sale, purchase or consumption should not be accepted. The Assessing Officer's finding that the appellant might be having 'other books of account' is a wild guess and no action is required to be taken unless adverse evidence other than evidence recorded in the books of account is detected or found. Submissions of the appellant discussed above appears to be in accordance with the correct state of affairs and law. The Assessing Officer's invoking provisions of section 69C is not in accordance with law as per written submissions and supporting evidence filed before me. The method and manner under which the Assessing Officer has worked out the yield is far away from reality and practice adopted by the appellant. The estimation of higher yield if any can not be made without corroborative evidence in the form of sales or closing stock of finished goods. The entire addition is based on a typographical error that crept into while typing out the consumption figure which is typed as 403701.14 Carat instead of correct consumption of 290701.14 Carat as per Books of account. The Assessing Officer's presumption and belief is unfounded whereas he was supposed to take into account the other opening and closing figures. Thus, in view of the facts of this case addition of Rs.17,50,00,000/ under section 69C of the Act is deleted."
4 The learned DR before us vehemently contended that the CIT(A) was not correct in law in deleting the addition merely on the basis that the addition has been made by the Assessing Officer on the basis of the presumption or estimation while in fact the addition has been made by the Assessing Officer on the basis of the audit report in Form No.3CD duly given by the Chartered Accountant as pointed out by the assessee. The AO has to rely on the audit report otherwise the provisions of section 44AB will become otiose. Referring to the audit report in Form No.3CD at page-31, it was pointed out that in Annexure-D to Form No.3CD which contains quantitative details of the principal items of raw materials and finished products, the consumption of raw materials during the year has been certified at 430701.14 cts.
7There is no mistake while working out this figure. Had there been a mistake, the assessee would have pointed out the same immediately after filing the return. The revised return can be filed by the assessee u/s 139(5) before expiry of one year from the end of the relevant assessment year. The assessee has not filed any revised return upto 31-03-2003. It is only when the Assessing Officer issued notice u/s 142(1) on 15-12-2003 and has made specific query about the excess diamond consumption and also asked the assessee to reconcile the same, the assessee vide letter dated 31-12-2003 took the plea that the auditor wrongly signed the incorrect figure and the actual consumption of the rough diamond is 290701.14 cts and not 430701.14 cts. and enclosed a certificate from the Chartered Accountant to that effect. In the same very notice the Assessing Officer has asked the assessee to furnish the percentage of the yield on the basis of consumption for the last year. The yield of the assessee in the earlier assessment years is as under:-
AY 1999-00 15.76 %
AY 2000-01 18.98 %
AY 2001-02 15.64 %
AY 2002-03 11.89 %
AY 2003-04 16.27 %
The yield in the assessment year comes to 15.64% only if the consumption figure is taken at 430701.14 cts. If the consumption is taken at 290701.14 cts., the yield will be more than 24%. The yield at the rate of 16.4% is nearer to the average yield. Therefore, the figure at 430701.14 cts., as per the audit report is correct. He has also drawn our attention towards peculiar facts in 8 this case pointing out the conduct of the assessee and submitted that there had been search in the case of the assessee and other group concerns on 7-1-1999 which was concluded on 23-3-1999. During the course of search cash book, ledger and other books were found showing the unaccounted manufacturing and trading carried out by the assessee in diamond. Most of the entries in these books were not recorded in the regular books and huge addition has been made to the extent of Rs.2,59,22,64,015/- towards the undisclosed income on the basis of such books of accounts. A copy of the assessment order in the case of the company belonging to the assessee-group was filed before us. Our attention was also drawn towards various books of accounts, etc. being seized during the course of search. Referring to the assessment order para-16.2 in the case of M/s Kantilal & Co. Ltd. it was also pointed out that during the course of examination before the DDIT one Shri K B Patel ran out of the room of DDIT (Inv.)-1, Surat and as soon as he got the possession of the sealed floppy box, out of which the Department was extracting the Data and threw it out of the window at the end of the corridor. Floppy box was taken away by a Scooter rider who was standing under the window and could not be traced. Criminal complaint was filed by the Income-tax Department. The case is under investigation. It was pointed out that this clearly shows that the assessee was habitual in the business of manufacturing and sale of diamond out of the books. Our attention was also drawn towards para-10 of the assessment order and it was pointed out that the actual consumption was 430701.14 cts. is also duly supported by the fact that if the labour charges are compared 9 with labour charges incurred during AY 1999-2000, the labour charges as debited in the P&L Account were Rs.222 per cts. During the AYs 2000-01 and 2001-02, these were Rs.239 per cts. If the claim of the assessee that the correct consumption was 290701.14 cts., the rate of labour charges will come to Rs.271 per cts. This clearly shows that the assessee was maintaining different books and the auditor has taken the correct figure of the consumption of 430701.14 cts. on the basis of these books. Since the assessee failed to reconcile the figure, therefore, the assessee has come with the version that there had been a typing error. The case was selected for sample scrutiny and the notice was issued but the assessee did not bother to point out any such mistake. It is only when the Assessing Officer made a specific query, the assessee came with the version that there had been a mistake in the figures given in the audit report. Even the tax audit report for the next year was also finalized prior to the issue of query letter by the AO but no such mistake was pointed out. Our attention was drawn towards para-4 of Form No.3CB and it was pointed out that the particulars given in Form No.3CD have been certified by the Chartered Accountant as true and correct. It is not a case where the Chartered Accountant has expressed his opinion. Referring to item No.9 at page-30 of the paper book it was pointed out that the auditor has also certified that he has examined the cash book, bank book, purchase register, sales register, ledger, stock register, etc. and the information had been given by him on the basis of examination of these books of accounts. The statement of the auditor recorded u/s 131 along with the affidavit cannot be accepted. The assessment in this case 10 has been framed on 31-03-2004 while the affidavit of the auditor is dated 10-04-2004 i.e. after the date of the assessment order. For this attention is drawn to Pages 20 to 28 of the paper book filed by the assessee. Similarly the affidavit of the computer typist is also dated 10-04-2004. These affidavits were not before the Assessing Officer and cannot be accepted as piece of evidence. He also vehemently stated that the certificate given below the Index to the paper book filed by the assessee is false. In the certificate it is statedthat Page No. 17 to 183 were produced before the AO and CIT(A). The affidavits appearing at pages 20 to 28 are dated 10-04-2004. How these can be filed before the AO when the assessment order has been passed on 31- 03-2004. This also reflects the conduct of the assessee. Referring to the order of the CIT(A) it was pointed out that the CIT(A) has merely relied on the submissions of the assessee and has wrongly observed that the Assessing Officer has made the addition on the basis of presumptions and estimation ignoring the fact that the addition has been made on the basis of consumption shown by the assessee in the certificate given by the Chartered Accountant as per the provisions of section 44AB of the Act. The Assessing Officer has rightly made the addition.
5 The learned AR, on the other hand, supported the order of the CIT(A). He drew our attention towards the audit report u/s 44AB page-31 and pointed out that no doubt in the audit report in Form No.3CD the consumption has been shown at 430701.14 cts. but this has happened due to the clerical mistake. The correct consumption is 290701.14 cts. When the AO asked 11 for the difference the assessee has submitted all the following evidences to prove that a mistake has occurred:-
- Affidavit of Shri Suresh Khetani - Typist
- Affidavit of the Auditor
- Copy of Audit Report of Anjan Exports
- Details of manufacturing of rough diamond
- Details of the job worker-wise of manufacturing of rough diamond.
The assessee has not purchased the rough diamond of 380066.36 cts. as alleged by the Assessing Officer. The opening stock and purchases totaled at 342066.53 cts. If the consumption of 430701.14 cts. is considered, the consumption will be negative which is not possible. The auditor has submitted the correct certificate on 31-12-2003 which is explanatory evidence under the Evidence Act. The entries in the books of accounts are final evidence and this proves that there was error in the consumption of raw material shown by the assessee. Alternatively it was contended that the assessee should be allowed deduction for the alleged expenditure of Rs.17,50,00,000/- if the addition is sustained on account of unexplained expenditure towards excess consumption outside the books of accounts.
6 We have carefully considered the rival submissions and, perused the material on record along with the order of the tax authorities below. We have also gone through the paper book. We have noted that in this case the tax audit has duly been carried out by a Chartered Accountant u/s 44AB. Annexure-D to Form No.3CD states the quantitative details of raw materials as 12 required to be certified by the Chartered Accountant as per clause 28(b) of the said Report, which are as under:-
"Particulars Quantity (in Cts)
(A) Raw Materials Rough Diamonds
1 Opening Stock 101995.17
2 Add:- Purchase during the year 240066.36
342061.53
3 Less: 1.Consumption during the year 430701.14
2.Rejection 26555.00
24805.39
4 Less: Sales during the year 0.00
5 Closing Stock 24805.39
This audit report has been filed by the assessee along with the income-tax return. The audit report is dated 8-6-2001. The income-tax return was filed by the assessee on 29-10-2001. The assessee is engaged in the business of processing and exporting of diamonds. Notice u/s 143(2)(ii) was issued within 12 months from the end of the month in which the return was filed. This fact has not been disputed by the assessee. Notice u/s 142(1) was also issued which was also not challenged. Subsequently, the Assessing Officer during the course of hearing through the notice u/s 142(1) dated 15-12-2003 made the following queries from the assessee:
"Sub:- Notice u/s 142(1) of the I.T. Act - Regarding Please refer to the above.
2 The assessment proceedings for the AY 2001-02 are in progress and with reference to the same, I would like to have further information as follows:-13
[a] As per Annexure D to form no.3CD where total raw material of rough diamond available to consumption, which is as under:-
Op. Stock 1,01,995.17 cts.
Add: Purchase during the yr. 2,40,066.36 cts.
-------------------
Total 3,42,061.53 cts.
============
Against this availability, rough diamond for disposal, consumption during the year has shown at 4,30,701.14 cts. and rejection has been shown at 26,555 cts. Therefore, the total closing stock of rough diamond has been shown at 24,805.39 cts. Therefore, the total rough diamond available for disposal on the basis of consumption, rejection and closing stock are as under:-
Consumption 4,30,701.14 cts.
Rejection 26,555.00 cts.
Cl Stock 24,805.39 cts.
-------------------
Total 4,82,061.53 cts.
============
Therefore, compared to raw material of rough diamond available for disposal, on the basis of opening stock and purchases, there was excess rough diamond consumption / rejected, you are requested to reconcile the same.
[b] You are requested to furnish percentage of yield, on the basis of consumption for the last AY."
In reply to this notice, vide letter dated 31-12-2003 the assessee pointed out to the Assessing Officer that there is a typing mistake in Form No.3CD as per the stock record of the rough diamonds manufacturing, record of consumption or rough diamonds and job work bills and registers. The correct 14 consumption of total rough diamonds is 290701.14 Carats. The auditor had wrongly signed the incorrect typed figures. It was also stated in this letter that this fact was brought to the notice of the auditor after the receipt of the letter of the Assessing Officer. The assessee also enclosed a certificate from the auditor in this regard, the copy of which was not filed before us.
7 We also noted that the tax audit for the AY 2002-03 was also completed before the issue of the letter dated 15-12- 2003 by the Assessing Officer. The assessee himself accepted in its letter dated 31-12-2003 that they came to know for the first time about the consumption of the raw materials being shown in the audit report at a wrong figure. In our opinion, it can not be believed that the audit for the succeeding year was completed and the return for the succeeding year was filed by the assessee and the assessee would not come across with the mistake being committed in the audit report. It is only when the Assessing Officer detected that the consumption in the audit report has been certified by the Chartered Accountant at 430701.14 Carats, and when he asked for the reconciliation, the assessee came out with the version that there had been a typing error.
8 Section 139(5) of the Income-tax Act allows an assessee to rectify, in case there is a mistake being found in the return submitted by him by filing a revised return at any time before the expiry of one year from the end of the relevant assessment year or before completion of the assessment whichever is earlier. This is an admitted fact that the assessee has not submitted any revised return in accordance with the 15 provisions of section 139(5) pointing out the omission in the original return. Under section 139(9) of the Income-tax Act, 1961 if return filed by the assessee is not accompanied by audit report referred to in section 44AB, the return will be regarded to be defective one. It is only when the Assessing Officer has asked for the explanation on the consumption of raw materials, the assessee came up with the submission that there was a mistake on the part of the auditor, i.e., only after the expiry of more than 2 ½ years when the tax audit for the succeeding assessment year also was completed by the Chartered Accountant.
9 The provisions of section 44AB were inserted by the Finance Act, 1984 with effect from 01-04-1985. The scope and effect of these provisions at the time of insertion was explained by the Board in a Circular No.387, dated 06-07-1984 [152 ITR (St) 11], as under:-
"17.1 Accounts maintained by companies are required to be audited under the Companies Act, 1956. Accounts maintained by co- operative societies are also required to be audited under the Co- operative Societies Act, 1912. There is, however, no obligation on other categories of taxpayers to get their accounts audited.
17.2 A proper audit for tax purposes would ensure that the books of accounts and other records are properly maintained, that they faithfully reflect the income of the taxpayer and claims for deduction are correctly made by him. Such audit would also help in checking fraudulent practices. It can also facilitate the administration of tax laws by a proper presentation of the accounts before the tax authorities and considerably saving the time of assessing officers in carrying out routine verifications, like checking correctness of totals and verifying whether purchases and sales are properly vouched or not. The time of the assessing officers thus saved could be utilized for attending to more important investigational aspects of a case."16
From this it is apparent that the objective of making the tax audit compulsory was to help the Assessing Officer in checking fraudulent practices. The Assessing Officer, therefore, has to rely on the figures certified by the Chartered Accountant as defined u/s 288(2) of the Act. The Chartered Accountant certified the figures as given in Form No.3CE which is clear from the audit report as required to be given u/s 44AB. Para-4 of Form No.3CB relating to the audit report states as under:-
"4 The statement of particulars required to be furnished under section 44AB is annexed herewith in Form No.3CD. In my / our opinion and the best of my / our information and according to the explanations given to me / us, the particulars given in the said Form No.3CD are true and correct."
From the aforesaid paragraph it is apparent that the auditor has to certify the particulars given in Form No.3CD as true and correct. It is not a case where the auditor has to express an opinion. There is difference in the certificate as well as in the report. When the Legislature desires the Chartered Accountant to certify the figures as true and correct, the Chartered Accountant is bound to look into the figures and certify the correctness thereof.
10 We have also noted that there had been search in the case of the assessee and its group concern on 7-1-1999 which was concluded on 23-3-1999. During the course of search duplicate cash book, ledger and other books showing the unaccounted manufacturing and trading carried out by the assessee in diamonds were found. The huge addition has been 17 made in the case of the assessee's group in the block assessment on the basis of the books so found. This proves that the assessee was maintaining the books of accounts outside the regular books.
11 We have also gone through para-16.2 of the assessment order in the case of M/s M Kantilal & Co. Ltd. This paragraph explains the conduct of the assessee which itself is explanatory. This paragraph is reproduced for ready reference as under:-
"16.2 Apart from the statement on oath, the following incident also reveals that these floppies were very important and belonged to the assessee group only.
As per the panchnama prepared by DDIT(Inv.)-I, Surat, on 26.2.99. shri Himmatbhai M Kheni, one of the directors of the assessee company was asked to remain present in the I.T. Office of DDIT (Inv.)-I, Surat along with Shri Ambalal H Desai, Shri Uday Singh, Computer Operator and two panchas for the purpose of extracting data from these floppies. The box of three floppies were given for inspection of seals to the Authorised officers, Shri Ambalal H Desai and two panchas. One of the panchas, Shri Kanti B Patel ran out of the room of the DDIT (Inv.)-I, Surat, as soon as he got the possession of the sealed floppy box and threw it out of the window at the end of the corridor. The floppy box was taken away by a scooter rider who was standing under the window and could not be traced.
Later a criminal complaint was filed by the I.T. Department against four persons including Shri Himmatbhai M Kheni, director of M Kantilal & Co. Ltd. & the unknown scooter rider for stealing these floppies and obstructing the work of Govt. Officials before Umra Police Station (FIR No.1/191/99). Shri Himmatbhai M Kheni, director of the assessee company and two other persons were taken into police custody and kept in jail on remand for 5 days. Till the passing of this order, the police is still investigating the case.
16.3 The above incident clearly shows that the three floppies were too important to the assessee company group and must be containing 18 valuables information related to its unaccounted activities, which promoted the assessee to take such daring steps.
This also substantiate the fact that the group was in the habit of hiding documents related to their unaccounted activities with their employees and other persons."
No assessee would like to snatch away the sealed floppy box from the Department. This, in our opinion, clearly proves that the assessee was habitual in carrying on the business of manufacture and sale of diamonds outside the books of account. Had the assessee had any explanation, the assessee would have never snatched away the floppy box from the Revenue. Similarly in this case the Chartered Accountant carried out the audit and certified the actual consumption on the basis of the books of account produced before him which can be different from the one produced subsequently. When the Assessing Officer examined the details, he noted the discrepancies and, therefore, asked for the explanation of the assessee. The assessee instead of reconciling the figures, made the submission that there was an error committed by the Chartered Accountant while certifying the quantitative figures in the audit report. In our opinion, when the assessee did not have any explanation and was caught by the Assessing Officer about the actual consumption of the rough diamonds, the assessee came forward with the contention that a typing error was committed by the Chartered Accountant. It is unbelievable that the audit for the succeeding assessment year has been carried out. The audit report for the succeeding assessment year has been signed by the same Chartered Accountant but he could not come across that any typing error 19 was committed in the audit report for the impugned assessment year. Had there been an error, the assessee could have rectified it even at the time of filing the return for the subsequent assessment year. This has not been done by the assessee. It is only when the Revenue detected that the assessee has consumed the rough diamonds by not recording the purchases in the books of account, the assessee submitted the certificate of the Chartered Accountant that a typing error had been committed. Negligence to such high attitude can not be expected from a member of the Institute of Chartered Accountant, in our opinion, which maintains high professional ethics and standards. Even there is no evidence on record what action has been taken by the assessee against such Chartered Accountant; whether any complaint has been lodged before the Institute of Chartered Accountants so that the Institute may take action against the Chartered Accountant. When a query was raised during the course of hearing, the learned AR was fair enough to concede that no such action has been carried out. This proves that the assessee has taken the contention that a mistake has occurred in the audit report while certifying the consumption of rough diamonds, is an after- thought. This contention cannot be accepted.
12 The learned AR submitted the paper book before us in which he has filed the copies of affidavits of the Typist Suresh Khetani and Shri Umesh J Shah, CA, appearing at pages 20 to 23 and 24 to 28 of the paper book respectively. These affidavits are dated 10-04-2004. A certificate has been appended to the paper book certifying that "Page No. 17 to 183 were produced before 20 the Assessing Officer and the CIT(A). No additional evidence is placed before the Bench." The assessment order in the case of the assessee has been passed on 31-03-2004. Apparently the certificate issued by the assessee is incorrect as the affidavits which were given on oath on 10-04-2004 cannot be filed before the authority who completed the assessment proceedings on 31- 03-2004. These affidavits cannot be accepted. The submission of such certificate by the assessee itself proves the conduct of the assessee that he did not bother to give incorrect certificate even before us, the Forum of final fact finding authority.
13 The Hon'ble Supreme Court in the case of CST v Esufali (H M ) Abdulali (H M) (1973) 90 ITR 271 (SC) took the view that the assessee can not be permitted to take advantage of his own illegal acts and that it was his duty to place all the facts truthfully before the AO. If he fails to do his duty, he cannot be allowed to call upon the Assessing Authority to prove conclusively what turnover he had suppressed. That fact must be within his personal knowledge and the burden of proving that fact is on him. In this case it is apparent that the assessee even during the course of investigation carried out by the Revenue instead of cooperating the Revenue, snatched away the evidences so that the Revenue may not bring contrary evidence on record; although the floppies might have related to the period up to the date of search but it may contain material evidences against the assessee due to which he snatched away the floppies seized by the Revenue. The assessee cannot be permitted to go scot free by snatching away floppies seized from his possession from the 21 Revenue. If this thing is allowed to be perpetuated, the assessee will continue to apply such illegal means and tactics and there will not be any machinery to check the tax evasion being carried out by the assessee. The data in seized floppy would have depicted the conduct of the assessee whether the assessee is carrying out manufacturing and sales outside the books of account; whether the assessee has incurred any expenditure on the purchase of rough diamonds outside the books in earlier years. The assessee since destroyed the evidence, this itself proves that the assessee continued to maintain duplicate books of account during the year under consideration. The destruction of the evidence by the assessee will draw an inference against the assessee. No person can be permitted to snatch away the evidences from an authority which has been legally constituted under the Constitution of India. If that is permitted, the authority will not be able to carry out the function entrusted to it under the IT Act. In that case, we will be turning the society living in an era in which if any evidence is found by the department against the assessee, the assessee will take the law into its hands. Income-tax proceedings and criminal proceedings both are different. In income-tax proceedings the income has to be computed and determined on the basis of evidence found and brought on record while in criminal proceedings oral evidence also have evidentiary value. Under these circumstances we are of the view that since the assessee did not have any answer to the explanation asked for by the AO with regard to over consumption of the rough diamonds, he came out with an after-thought theory that a mistake has crept in the audit report of the Chartered 22 Accountant. Keeping in view the over all facts and circumstances of the case and the conduct of the assessee, we are, therefore, of the view that the CIT(A) was not correct in deleting the addition made by the AO. The excess consumption of the rough diamonds represents only the purchase of the rough diamonds outside the books of account of the assessee.
14 Now coming to the alternate claim of the assessee that if an addition is made that the assessee has incurred the expenditure outside the books of account in rough diamonds, the assessee should be allowed deduction as this expenditure has been incurred wholly and exclusively for the purpose of business of the assessee. No doubt, section 37 of the Act allows deduction to the assessee in respect of an expenditure not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee incurred or expended by the assessee wholly and exclusively for the purpose of the business. Proviso to section 69C which was inserted by the Finance Act, 1998 with effect from 1-4-99 puts an embargo in respect of an expenditure which has been incurred outside the books of account and has been added u/s 69C, as under:-
"Provided that, notwithstanding anything contained in any other provision of this Act, such unexplained expenditure which is deemed to be the income of the assessee shall not be allowed as a deduction under any head of income."
From the perusal of the said proviso it is apparent that this proviso overrides all other provisions of the I.T. Act and 23 prohibits the deduction of such unexplained expenditure while computing the total income of the assessee under any head of income. This proviso is applicable to the assessment year under consideration. When a query was raised to the learned AR during the course of hearing, he could not explain how this proviso to section 69C will not apply in the case of the assessee. We, therefore, set-aside the order of the CIT(A) and restore the order of the AO on this issue.
15 In the result, the appeal filed by the Revenue is allowed.
Order pronounced in the open court today on 11-09-2009 Sd/- Sd/-
(MAHAVIR SINGH) (P K BANSAL)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Date : 11-09-2009
Copy of the order forwarded to :
1. M/s M Kantilal Exports, Ambika-Niwas, Mohan-ni Chawl, Varachha Road, Surat
2. The Assistant Commissioner of Income-tax, Central Circle-2, Room No.504, Aayakar Bhavan, Majura Gate, Surat
3. CIT concerned
4. CIT(A)-II, Ahmedabad
5. The DR, ITAT, Ahmedabad
6. Guard File 24