Income Tax Appellate Tribunal - Mumbai
G.G. Diamond International vs Deputy Commissioner Of Income Tax on 22 November, 2005
Equivalent citations: (2006)104TTJ(MUM)809
ORDER
K.P.T. Thangal, Vice President
1. In this appeal by the assessee, for the asst. yr. 2001-02, the following grounds are urged:
1. The CIT(A) has erred in passing the order under Section 250 as it is based on illegal/uncalled remand report of the AO and consequently the order be squashed.
Without prejudice
2. The CIT(A) has erred in enhancing the assessment by Rs. 1,21,68,258 by recomputing the unaccounted peak investment at Rs. 4,67,01,433 from Rs. 3,45,33,175 as determined in the assessment order which is as it is based on illegal and uncalled remand report of the AO.
3. The CIT(A) has erred in confirming the additions of Rs. 3,45,33,175 as an unexplained investment in business for cost of diamonds exported out of India at the market value being 1/0.82 times of the peak credit of Rs. 2,83,17,204.
4. The CIT(A) has erred in confirming the conclusion of purchases at Rs. 6,45,88,956 in cash instead of credit purchase as declared by the appellant and thereafter adding Rs. 1,29,77,912 being 20 per cent of alleged cash purchase under Section 40A(3) of Rs. 6,45,88,956 to derive at the taxable profits under Section 80HHC at Rs. 34,23,864.
5. The CIT(A) has erred in confirming the derivation of taxable profit at Rs. 34,23,864 as explained in para 13(4) in the order of AO instead of Rs. 32,75,841 as declared by your appellant.
6. The CIT(A) has erred in confirming the disallowance of Rs. 1,29,77,912 under Section 40A(3) of the Act being 20 per cent of alleged cash purchase of Rs. 6,45,88,956 and also adding the said amount to the profit for the purpose of calculating income under Section 80HHC.
2. The facts leading to the dispute, briefly, are as under:
Assessee filed the return on 31st Oct., 2001 declaring income at Rs. 49,56,390. Assessee is a trader in diamonds and VCD rights and claimed deduction under Sections 80HHC and 80HHF of the IT Act, 1961, for the relevant year on account of exports. Assessee's turnover comes to Rs. 6,90,23,486 on account of sale of diamonds from the purchases of Rs. 5,30,87,813. Assessee earned net profit of 23.4 per cent on sales as compared to a net profit of 28.11 per cent on the sales in the earlier year. Assessee-firm came into existence on 7th Jan., 2000 and this is the second year of assessee's business.
3. AO held, in fact the fall in GP from. 28.11 per cent to 23.4 per cent is quite abnormal and does not seem to have any bona fide reason, except during the relevant period assessee's deduction has come down from 100 per cent to 80 per cent. He further noted, the expenses during the year on account of diamond trading are also very nominal. It comes to 0.003 per cent and 0.004 per cent for the asst. yrs. 2000-01 and 2001-02. He also noted, the sales and purchases effected during the year, if one looks at the time gap, (are) also quite important. It appears that the assessee sells diamonds, in a period of seven days, at a profit of 23.5 per cent, which according to the AO, gives room for some doubt and suspicion. He further noted that the holding of the stock was for very few days. But he held, it is pertinent to note that the assessee is processing orders for supply of diamonds when actually there was no stock available with the assessee. He further noted, assessee makes the payment to the purchase parties most of the time after realisation of exports and almost all the purchase parties give credit of almost 3 to 4 months. The details of purchase payments and sales receipts are given at p. 3 of the assessment order.
4. Assessee was asked to give confirmation letters from the purchase parties. Assessee furnished confirmation letters from these parties, viz. Veni Gems, Saroj Diamonds, Mahavir Exports, Priyanka Exports, Girish Diamond and Shree Nakoda Exports. AO records that from Yash Gems, Pritam Exports, Rough Stones and Neha Gems, the assessee has not filed confirmation letters (p. 3, para 7.6). Subsequently, Rough Stones and Neha Gems also filed confirmations stating that they have sold the goods to the assessee. However, assessee has not filed confirmations from Yash gems and Pritam Exports. Assessee was given opportunity sufficiently to get confirmations from these parties and in the absence of such confirmations; these were treated as bogus purchases.
5. When summons were issued under Section 131, all the parties attended except Yash gems and Pritam Exports, who were found not existing at their given address. However, AO records that all the parties confirmed that they made sales to the assessee and gave details of payments received from the assessee and also the details of the parties from whom goods purchased were sold to the assessee. AO noticed that though all of them confirmed the transactions, none could reply satisfactorily the amount of credit given, i.e. number of days and their profit margin, which was around 1 per cent or less, though they stated at times they were purchasing goods on commission basis. AO, vide para 8.4 of his order (has), given the list of parties along with their suppliers. He noticed, all the supplier parties are from Surat, whereas the purchase parties are from Mumbai. He further noted that though all the suppliers to the assessee's sellers are based at Surat, none of these parties were traceable. The existence and bona fides of these parties was referred to Investigation Wing of the Department at Surat. Investigation revealed that none of the parties are in existence. No local information was available regarding these parties. AO further noted from the bank accounts of these parties that there were cash withdrawals from these accounts. He held, this leads to a conclusion that the deposited money goes back to the assessee.
6. The modus operandi of the people in diamond business is recorded by the AO at p. 5 onwards of his order. He records briefly : parties open a bank account in their name and also simultaneous bank accounts in the name of their relatives and employees. These accounts are opened for a short period, less than a year. Bills are provided when approached from a party, who needs accommodation bill, as is the case of most of the exporters. They raise an invoice on the party, like assessee and charge commission of 1 to 3 per cent depending on their standing in the market. The exporter who takes the bill normally does not pay immediately. The payments are made only on export realisation. If the payments are received in the next financial year, it goes to a different entity of the bill provider group as most of these parties operate for only one financial year or perhaps even less. He further records, the parties with dummy accounts have accounts in the same branch of the bill providers and these dummy account parties have a very nominal amount in a year. Cheque books signed by the operating parties at the account opening stage itself are in possession of the bill providers, who encash self cheques by depositing them in these accounts and the money is returned to the exporter. Most probably the money is realised on the very same day. The suppliers to bill providers file commission income in the return and the bill providers file confirmation of its supplier. Whenever asked during the assessment proceedings, they produce it but the party may not be traceable. He further records, there are other parties who are heavy weight bill providers, who do the same in the second or third layer by introducing three or four purchase parties and then the cash is withdrawn and the one who imports have added benefits, as at most of the time these bill providers who in part transfer the amount received on accommodation bill to import payments. He records : it cannot be clearly traced in the first layer but for import payments encashed similarly by creating one more layer. These people are strong players and their bill commands more price than a regular bill provider. AO then discussed the details of the parties, briefly stated as under:
7. Neha Gems : The party had a turnover of Rs. 22.9 crores and net profit of Rs. 1,19,959, which is effectively 0.1 per cent. This party supplied to the assessee diamonds worth Rs. 49,12,740. Neha Gems in turn purchased from Anmol Gems, Neelam Exports, who are not traceable according to the AO. They filed returns showing commission income. Parties like Gautam Gems and Neelam Exports are essentially in the name of proprietors and are in existence for a short period. Gautam Gems had transactions of Rs. 14.25 crores; 80 per cent are cash withdrawals and the average daily balance comes to Rs. 10,000 or so. Neelam Exports had transactions of Rs. 15.08 crores; 80 per cent of the deposits withdrawn by cash and the average daily balance comes to Rs. 10,000. Hence AO held, all these can be safely concluded as accommodating parties.
8. Rough Stones : This party supplied goods worth Rs. 95,05,440 to the assessee. They purchased from Parmar Exports and Sagar Gems almost on the same line, i.e. 80 per cent of the deposits are withdrawn in cash. These parties (viz. Parmar Exports and Sagar Gems) are conduit for accommodation bills, AO opined. The margin shown by Rough Stones from the transactions with the assessee is about only 1 per cent.
9. Girish Diam : This party supplied goods worth Rs. 19,35,802, which they in turn purchased from Sanskar Diamond. Summons were issued to Girish Diam and it was submitted by one Shri Vijay Jain that the source of sales was Sanskar Diamond. From the account of Sanskar Diamond also the cash was withdrawn practically every day. Girish Diam's turnover comes to Rs. 64.55 crores and net profit is Rs. 1,34,285, which is roughly 0.12 per cent.
10. Saroj Diamond : This party supplied to the assessee diamonds worth Rs. 1,08,80,126. They had transactions with Advance Diamonds, Peacock Exports, Anmol Gems, Deep Impex, King Star, Khushboo Diamonds, etc. The cash deposited is withdrawn almost within a short gap. These Surat based parties are also having bank accounts in Mumbai. The turnover of Saroj Diamond comes to Rs. 78.2 crores altogether.
11. Mahavir Exports : This party purchased goods from Alaska International. Bank account of Alaska International showed 95 per cent of the deposits withdrawn in cash, out of the total transactions of Rs. 4.97 crores. The total transactions of Mahavir Exports comes to Rs. 24 crores and their net profit comes to Rs. 1,26,885 for the asst. yr. 2001-02 on a turnover of Rs. 29.69 crores.
12. It is almost the same case with every other party. The conclusion is arrived at by the AO at p. 13 of his order. He held, in short, the parties give accommodation bills at the rate of 1 to 2 per cent and make only that kind of profits and obviously, as the transactions are not bona fide; they show minimum profit in the business. He noted; it is a foolish thing-from a turnover of Rs. 500 crores the reward is about Rs. 10 lakhs, whereas the assessee made the profit of Rs. 1.66 crores from 11 transactions within a year. Hence he came to the conclusion that the assessee made purchases of diamonds from open market in cash and in turn had taken accommodation bills from these parties to arrive at a higher deduction of income under Section 80HHC.
13. Assessee was given a show-cause notice on 19th March, 2004 to explain. The parties from whom the purchases (were) made by the assessee were examined. It was found that in almost all cases the goods which were sold to the assessee were shown to have been purchased from the parties who are non-existent and their bank accounts show only cash withdrawals from various deposits. Hence AO came to the conclusion that in most of the cases cheques are finally encashed as self withdrawal. Assessee made a profit of about 24 per cent, whereas all other parties made profits of around 1.5 per cent or less." Assessee, in response to the above notice replied, briefly as under on 24th March, 2004:
Genuineness of the export sales is accepted. Quantity of purchase and sales tallied. At the time of search, no diamonds were found to be in possession of the assessee and no discriminating materials seized to show that the assessee had mala fide transactions or in possession of diamonds. Undoubtedly the creditors are in diamond business. They had office in Panch Ratna, Opera House. All of them are examined and the payments were made by crossed account payee cheques. Transactions of purchase and sales were examined and accepted in the block assessment by the Department. Size of business and number of transactions is not the criteria to assess the genuineness of the transactions. None of the creditors confessed that the transaction is not genuine. Sales are accepted. Naturally there should be corresponding purchases. Payments are made through proper banking channel. Bank statements are in possession of the Revenue. Eight parties were summoned. All of them were examined. Only two parties, viz. Yash Gems and Pritam Exports have not appeared. But they appeared and filed confirmations in block assessment, which proves the existence of the parties. It was further submitted, it is not for the assessee to find out whether the source or sources from which the creditor agreed to sell the stock of diamonds were genuine or not. If the creditor has a particular stock of diamonds with him, there is no limitation under the law on the part of the assessee to buy such stock of diamonds or part of it from the creditor. If the creditor fails, it is his failure to satisfy the Department. The said stock of diamonds cannot be treated as assessee's income from undisclosed sources. Assessee proved the genuineness as well creditworthiness of the parties from whom the assessee made purchases. Assessee has not to explain the source or sources.
14. The conclusion of the AO, briefly, is as under:
AO held, the statement of the assessee is that it is not the duty of the assessee to verify from where the purchase party procures goods and a mere failure of a sub-creditor cannot in the absence of clinching evidence be treated as income of the assessee derived from undisclosed sources. AO held, in this case the sub-creditors were not found. All their accounts show cash withdrawals every day with a minimum balance and this is not a mere co-incidence. The supplier to the assessee-firm earns a profit of less than Rs. 10 lakhs on a total turnover of Rs. 500 crores, whereas the assessee earns income of about Rs. 1.6 crores by mere 11 transactions. The fact that finance incharge even after date of search on llth Oct., 2000 confirmed that this was a money laundering activity itself is a proof that the assessee was not conducting a bona fide business. Hence he rejected assessee's contentions. He worked out the peak credit on account of purchases of Rs. 2,83,17,204 and treated the same as assessee's unexplained investment.
15. Assessee shown a net profit of 23.4 per cent during the year under consideration. AO held, it was not realistic profit. The profit could be somewhere 5 to 6 per cent. He held, in view of this it can be presumed that the assessee has invested around 18 per cent in unaccounted cash to inflate its net profit to avail the deduction under Section 80HHC. In view of the above, he computed Rs. 3,45,33,175 as unexplained investment in the business of the assessee, being the cost of diamonds, which were exported at market value, being 1/0.82 times of the peak credit of Rs. 2,83,17,204 (the same being 82 per cent of market price), which covers the actual cost of diamonds at, the prevailing market rate, taking into account the fair market profit of around 6 per cent.
16. While computing the deduction under Section 80HHC, AO noted, the total purchases reflected in the books of account of the assessee was Rs. 5,30,87,813 and he calculated the net profit at around 5 to 6 per cent in the case of trading as per the market conditions. The purchases of the assessee were rejected and he estimated the purchases. He held, the sales during the year (excluding exchange fluctuation which is allowed as it being beyond the control of the assessee) at Rs. 6,90,23,486 and the total trading and establishment expenses at Rs. 2,93,120. The difference of Rs. 6,87,30,366 after deducting the expenses was treated as such. The actual cost of purchase and expenses treated at 94 per cent of the sales, which comes to Rs. 6,48,82,076. He allowed indirect expenses to the tune of Rs. 2,93,120. AO, thus treated the actual purchase at Rs. 6,45,88,956, whereas the assessee has shown only Rs. 5,30,87,813. He also made an addition under Section 40A(3) being 20 per cent of the cash purchases of Rs. 6,45,88,956.
17. Aggrieved by the above order, assessee approached the first appellate authority on the following grounds:
(1) The AO has erred in adding Rs. 3,45,33,175 as unexplained investment in business for cost of diamonds exported out of India at the market value being 1/0.82 times of the peak credit of Rs. 2,83,17,204 as per table on p. 16 of the order.
(2) The AO has erred in concluding the total purchases at Rs. 6,45,88,956 in cash instead of credit purchases as declared by the appellant and thereafter adding Rs. 1,29,77,912 being 20 per cent of alleged cash purchases under Section 40A(3) of Rs. 6,45,88,956 to derive at the taxable profits under Section 80HHC at Rs. 34,23,864.
(3) The AO has erred in deriving taxable profit at Rs. 34,23,864 as explained in para 13(4) of his order instead of Rs. 32,75,841 as declared by your appellant.
(4) The AO has erred in disallowing Rs. 1,29,77,912 under Section 40A(3) of the Act being 20 per cent of alleged cash purchase of Rs. 6,45,88,950 and adding the amount to the profit for the purpose of calculating income under Section 80HHC.
18. Before the CIT(A), assessee filed written submissions, briefly, to the following effect:
Assessee's partners and family members are in business for about 20 to 25 years and regularly assessed to tax. For the asst. yr. 2000-01, assessee offered income of Rs. 73,44,023 under the head "Business". After deduction under Section 80HHC of Rs. 73,43,599, assessee declared taxable income at Rs. 1,423. The GP declared by the assessee was 28.18 per cent and net profit 28.11 per cent. Assessee submitted, the assessment completed based only on presumptions, conjectures and surmises and recording certain transactions of the parties with whom the assessee had no direct dealings or any transactions. Assessee's books of account have not been rejected. The actual reason was unreasonable high profit, which led the AO to an adverse inference. AO has relied upon the evidence of ex-accountant, Shri Rajan A. Pawaskar, whose statement was recorded on 26th Sept., 2002, vide which he stated that assessee obtained bogus bills and made bogus claims of profit to avail benefit under Section 80HHC. The conclusions arrived at by the AO in the instant case of the assessee and the block assessment is quite contradictory to each other. The Dy. Commr. of Customs, Mumbai, handling the diamond exports confirmed that all the export of diamond's transaction of the assessee is genuine. It had documentary evidences. Dy. Commr. of Customs held that the statement of Shri Rajan A. Pawaskar is self contradictory and he himself has retracted from the statement subsequently and disproved by several documents, which is also part of the seized material. Hence assessee contended, the finding now arrived at by the AO is pre-determined, pre-mediate and based only on presumptions and assumptions, ignoring the facts on record. It was further submitted, assessee was not required to prove the details of the sources/transactions of the assessee's suppliers. Even the details collected were not put to the assessee, which is violative of principles of natural justice. Assessee established the identity of its creditors. Relying upon the decision of the Hon'ble Gauhati High Court in the case of Nemi Chand Kothari v. CIT (2003) 185 CTR (Gau) 635 : (2003) 136 Taxman 213 (Gau). It was contended, if the assessee proved the source, it was not necessary for the assessee to prove the source of sources. In the case of the assessee, the creditworthiness of the creditors is established. Only the sub-creditors had no capacity, according to the AO, which is not the concern of the assessee.
19. Assessee also objected the finding of the AO that the purchase of Rs. 6.45 crores have been effected in cash and none of the purchase parties of the assessee's suppliers was in a capacity to supply goods to the assessee as they were non-existent. But the fact that assessee made the payment and made the purchases from the parties is not rejected. There is no evidence, except suspicion, that the cheque paid is encashed and returned back to the assessee. Relying upon the judgment of the Hon'ble Supreme Court in the case of State of Kerala v. C. Velukutty Co. , it was submitted that the judgment is a faculty to decide the matters with wisdom truly and legally and not to depend on the arbitrary caprice of a Judge, but on settled and invariable principles of justice. It is true, there is an element of guesswork in a best judgment assessment, but it has to have a reasonable nexus to the material available and the circumstances of the case. The materials collected behind the back of the assessee at least should have been put to the assessee and assessee should have been given an opportunity to explain. For the above proposition reliance was placed upon the decision of the Hon'ble Supreme Court in the case of C. Vasantlal and Co. v. CIT . Assessee further submitted, AO has not collected any material from any source to the effect that any part of the funds given by the assessee to its parties by cheque has come back, except the suspicion. Relying upon the decision of the Hon'ble Gujarat High Court in the case of CIT v. M.K. Brothers , it was submitted, this finding of the AO is illegal and cannot survive. It was further submitted, in fact details of purchase payments and sales realisation have been verified from the books and found to be correct and also confirmed by the respective suppliers and purchasers, including payments made/received. Hence, the assessee has discharged the onus. The parties have confirmed the transactions.
20. It was further submitted, in the block assessment AO himself has recorded that suppliers like Neha Gems and Rough Stones appeared before him with their books of account and bill vouchers and confirmed the transactions. Assessee also furnished confirmations from other parties as well. Assessee further objected the finding of the AO that Yash Gems and Pritam Exports have not filed the confirmations. Physical enquiry was conducted at the given address and the parties could not be found at the given address. Assessee submitted that the transactions of very same parties have been proved in the block period referred to above. Assessee further objected the remark regarding holding of stock for a very short period. It was irrelevant, it was submitted. It can vary from party to party and at best it can form part of business terms unrelated to hypothetical figures.
21. Considering that during assessment proceedings no opportunity was provided to the assessee to contradict the evidence gathered by the AO, the matter was remanded back to the file of AO for providing assessee an opportunity to cross-examine and to controvert the evidence gathered. Assessee was given copies of statements recorded during the course of assessment proceedings and was asked to appear for cross-examination of the parties on 7th Jan., 2005, to be conducted on 19th Jan., 2005 and 20th Jan., 2005. However, on 18th Jan., 2005, assessee's representative appeared and stated that cross-examination would not be possible since there is a marriage in the family of the assessee. The parties, i.e. suppliers to assessee appeared on 19th Jan., 2005 and 20th Jan., 2005. However, one party, viz. Girish Diam only appeared on 3rd Feb., 2005, whose statement was recorded on similar facts. Assessee's representative was given the statements on 4th Feb., 2005. Assessee replied on 1st March, 2005 and stated that the assessee does not want to cross-examine the above parties. The findings of the AO during the remand proceedings, recorded from p. 25 onwards by the CIT(A) are briefly given as under:
Saroj Diamond sold diamonds worth Rs. 1.08 crores to the assessee. This party was asked to give the details of their suppliers. They failed to give any details. Saroj Diamond admitted that the Surat parties, who supplied them diamonds, viz. Advance Diamond, Peacock Exports and Anmol Gems were not having any relation with the assessee and they are not in business after 2000-01. It was further questioned (Question No. 12) that the investigation carried out by the Department at Surat revealed that presently there are no parties located at the address provided and what the party wants to say on the point. Saroj Diamond stated, the parties might have changed their address and since they are not having any connection with these parties, it was not a position to do anything. Question No. 21 put to Saroj Diamond was whether they could provide the business address of the supplier parties in Mumbai. The answer was No. It is almost the same with every party. One of the questions put to the party was since the diamonds supplying parties are based in Surat, to explain how the diamonds were transferred from Surat to Mumbai and also to provide evidence in the form of expenses incurred on insurance, couriers, transport expenses, etc. The answer was, the diamonds were brought by couriers and the expenses were being debited to P&L a/c by self-made vouchers and the goods transported were not insured.
22. Priyanka Exports, Mahavir Exports, Veni Gems, Rough Stone, Girish Diam, Shree Nakoda Exports and Neha Gems were all questioned. Assessee was provided copy of the remand report on llth March, 2005. Assessee, in reply, submitted, though the AO was requested vide letter dt. 10th Sept., 2004 to provide opportunity to cross-examine, however, AO chose the dt. 19th and 20th Jan., 2005, when there was a marriage in the family of the assessee on 20th/21st Jan., 2005. Assessee also objected the following:
CIT(A) remanded the matter just to cross-examine the parties, whereas the AO has taken fresh statements without assessee's presence. Assessee further submitted "the fresh cross-examination of all the parties reveals that a set of standard questions have been put to each party and that the statement of replies recorded. All these have been reproduced in the remand report. In not a single case has any of the parties examined stated that accommodation bills have been provided to the assessee or that cash has passed from these parties back to the assessee. This is a mere presumption which the AO has made on the basis of an examination of a few parties who have no business connections with the assessee; they have only business connections with the purchasers or sellers of the assessee. The alleged statements of third parties cannot be relied upon to make fresh additions in the case of the assessee in the absence of some direct linkage of evidence which goes to show that the assessee has in fact adopted dubious means to obtain any unfair advantage. In this connection we have already relied upon the decision of the Supreme Court in the case of Dhakeshwari Cotton Mills Ltd. v. CIT (1954) 26 ITR 775 (SC).
23. Assessee further submitted as under:
The AO has further referred to news published in mid-day of 16th Dec., 2004 regarding importance of Jangad. The non-maintenance of Jangad of such parties according to the AO establishes that transactions recorded in their books of account are not entered in the regular course of business. The question, which needs to be addressed, is whether whatever records are maintained by such parties conclusively prove what the learned AO alleges. If the statement recorded are considered, the learned AO could not have come to this conclusion, which he has. Moreover, the appellant's books of account have not been rejected by the learned AO.
24. CIT(A) records that during the course of appellate proceedings he found that AO had incorrectly worked out the peak of the assessee's unexplained investment in making the alleged purchases of diamonds at Rs. 3,45,33,175 instead of Rs. 4,67,01,433. Accordingly, enhancement notice was issued on 10th March, 2005. The relevant portion of the notice reads as under:
A perusal of the above discussed working of unexplained investment shows that the AO has worked out the peak credit at Rs. 2,83,17,204 by reducing the total amount of payments made by you to the seller parties from the total amount of the value of purchases on a transaction-wise basis. However, the AO has not taken into account the purchases made by you from M/s Veni Gems while working out the unaccounted peak investment. The AO, further, worked out your unaccounted peak investment on the basis of the dates of payment as per your bank statement instead of working out such peak investment on the basis of the dates of various purchase bills. The correct amount of peak investment, according to me, needs to be worked out on the basis of the following table:
...THE REVISED WORKING OF PEAK CREDIT...
On the basis of above discussed facts, I propose to compute your unexplained investment in purchasing diamonds against cash payments, after considering the supposed reuse of cash received back at the time of making cheque payments, at Rs. 4,67,01,433 as against the same computed by the AO at Rs. 3,45,33,175 after upholding the AO's point of view regarding your understatement of purchase consideration in order to increase the profit ratio, giving rise to earning of unrealistically high profits which are eligible for deduction under Section 80HHC of IT Act, 1961. Your actual profit from export of cut and polished diamonds is, therefore, proposed to be restricted to 5.4 per cent as against the same declared by you at 23.4 per cent of the total purchase consideration. This means that you have inflated your profits by about 18 per cent. In other words, I am inclined to agree with the AO regarding his observation that you had suppressed the purchase price for inflating the profits. The inevitable conclusion which emerges from these facts is that you are making higher payment in cash for the purchase of diamonds but issuing cheques of lesser amounts, as per the purchase invoices, meaning thereby that you were having lesser funds available to meet the subsequent purchases. Hence, the adjusted peak investment after taking into account the inflated profit rate, is proposed to be worked out as per the abovementioned table computing the unaccounted peak investment at Rs. 4,67,01,433. This amount of Rs. 4,67,01,433 as computed above, is proposed to be taxed as your unexplained investment within the meaning of the provisions of Sections 69B and 69C of IT Act, 1961.
You are, therefore, requested to file your objections, if any, to the proposed enhancement of your assessed income. This letter may be treated as a notice under Section 251(2) of IT Act, 1961 and your reply in this regard should be filed on or before 15th March, 2005.
25. In response to the above notice, assessee further submitted that the AO was never directed by the CIT(A) to re-examine the parties, which he has done, which means he has gone beyond his jurisdiction. Assessee further replied as under:
The onus is on the Revenue to prove that the real investment exceeds the investment shown in the assessee's books of account. The additions under these sections cannot be made merely on the basis of an inference; more so when such an inference is attempted to be drawn on the basis of an examination by the AO of parties with whom the assessee had no dealings. It is not the concern of the assessee to confirm or verify the genuineness of the transactions of the parties from whom the assessee has purchased its goods. If at all anything is found wanting or irregular in such cases, any addition if at all is required to be made in the hands of such parties. All the parties in question who have been examined have confirmed that they have filed necessary returns of income and that they have been assessed to tax on such income. It is therefore, submitted that on a plain and simple reading of both the above sections, the proposed addition on account of peak credit of Rs. 4,67,01,433 cannot be made.
26. Regarding the peak credit also the assessee objected as under:
Peak Credit In working out the peak credit, the AO, in his remand report has added 18 per cent of the purchase price and worked out the market value of the goods stating that this figure is the credit enjoyed by the assessee, i.e., how the peak credit has been worked out at Rs. 4,67,01,433. If one looks at the assessment order in addition to this figure, there is an addition of profit of Rs. 34,23,864 on account of diamond exports. If the profit of 18 per cent has already been included in working out the peak credit, then the addition of Rs. 34.23 lakhs as taxable income amounts to a double addition and cannot be sustained. Probably in his enthusiasm to inflate the figure as much as possible, the learned AO has resorted to this measure.
27. It was further submitted that part of the current assessment year is covered in the block assessment and in the block assessment the suppliers like Neha Gems and Rough Stones appeared before the AO with their books of account, bills/vouchers and confirmed the transactions with the assessee. Assessee also furnished confirmations for the remaining suppliers to establish the genuineness of the purchases. Even the Dy. Commr. of Customs, Mumbai, handling diamond exports has confirmed that all the export of diamond transactions of the assessee are genuine and he further found that the statement of Shri R.A. Pawaskar was contradictory and hence he held "it is not worthy of credence". Assessee submitted, while framing the block assessment, the Revenue has given a clean chit but for part of the assessment year taken steps just contrary to the one taken in the block period. Hence, assessee requested, the enhancement proceedings are to be dropped.
28. However, the learned first appellate authority rejected the claim. He held that AO had fixed the opportunity of cross-examination on 19th and 20th Jan., 2005 not with an intention. The marriage was to take place on 21st Jan., 2005. But this claim is not supported by any evidence; whereas the fact remains that the assessee failed to avail the opportunity. Hence he rejected the assessee's claim of violation of principles of natural justice. He further held, AO has not brought any fresh evidence during the remand proceedings; but merely examined the parties and reiterated the conclusions drawn by him during assessment proceedings. There is nothing objectionable. CIT(A) held, it is true, all the parties confirmed the sales and receipts by cheque, which were duly deposited in their regular bank accounts. However, the assessee is not having any other evidence except this to prove the genuineness of purchases from these seller parties. On the other hand, he held, AO conducted extensive investigation to prove that these seller parties did not have any capacity actually to sell the impugned diamonds to the assessee, as their own suppliers were not traceable at the given address. He further held, examination by the AO of the bank accounts of the seller parties and their supplier parties convince that the purchase consideration paid by the assessee through cheques has been finally withdrawn in cash after its movement through various bank accounts, which leads to a reasonable suspicion that the amount has been received back by the assessee in cash. Hence he agreed with the AO. He held, mere production of sale bills and payments through cheques is not conclusive proof that the assessee in fact purchased the impugned goods from the same parties if the subsequent investigation indicates that all this was stage managed.
29. CIT(A) held that the addition can be made on the basis of preponderance of probability and it is not necessary to prove the facts leading to such an addition, beyond any reasonable doubt. In the case of the assessee, he held, the facts clearly indicate that the assessee has not purchased the diamonds from its disclosed seller parties against cheque payments and the only reasonable conclusion that can be drawn is that same were actually purchased against cash consideration in open unorganized market. Hence he held, provision of Sections 69B and 69C is applicable in the instant case of the assessee. He held, assessee has understated the value of purchases and has not disclosed correct identity of the seller parties. He held, assessee has invested more money in effecting the purchases of diamonds than what is disclosed in the regular books of account. He held, assessee recorded only 82 per cent of the actual expenditure on effective purchases of diamonds. In other words, the balance 18 per cent of the expenditure was unexplained. Hence he held, the provision of Sections 69B and 69C are clearly applicable in the instant case of the assessee.
30. CIT(A) further held, the export of diamonds and receiving the sale consideration in foreign exchange has not been disputed. There cannot be any sale without purchase. The only conclusion is that the assessee purchased the exported diamonds against cash payment in open market and merely obtained accommodation bills from the above seller parties. This is a reasonable conclusion. He further held, assessee has shown unreasonably high profit ratio, i.e. 23.4 per cent in respect of the same diamonds, whereas the other parties earned profit of only 1 per cent from the assessee. He held, the high profit earned by the assessee against the very meagre commission earned by the sellers also indicates that the assessee was showing unreasonably high rate of profit to claim the benefit under Section 80HHC. He held, hence the finding of the AO that the assessee has used its unaccounted money for financing the purchases of the diamonds from the open market and thereby tried to route the same back into its books of account in the form of export profits after taking the benefit under Section 80HHC is a reasonable conclusion. He worked out the peak credit as on 16th March, 2001 at Rs. 4,67,01,425. He further held, while working out the peak unaccounted investment, it could reasonably be presumed that various cheque payments made by the assessee during the period of purchases were available with the assessee in cash form. CIT(A) further held : "as observed above, the appellant has deliberately shown an unusually high rate of profit by understating the purchase consideration. Hence, in order to arrive at the reasonable purchase consideration which must have been paid by the appellant, the ostensible purchase consideration paid by the appellant at Rs. 5,21,38,209 needs to be treated as representing only 82 per cent of the real purchase consideration and the same is required to be increased to 100 per cent, i.e., Rs. 6,35,83,184 on the basis of the fact that the appellant's real profit in respect of export of diamonds was only 5.4 per cent as against the same recorded at 23.4 per cent in the books of account. For this purpose, the appellant was issued a notice of enhancement under the provisions of Section 251(2) of IT Act, 1961. Accordingly, I hold that the appellant's unaccounted peak investment works out to Rs. 3,55,70,422 as per the appellant's own books of account and the same is to be treated as representing only 82 per cent of the real purchase consideration paid by the appellant in view of the fact that the appellant has recorded an unreasonable as well as manipulated profit rate of 23.4 per cent as against the same reasonably estimated at 5.4 per cent by the AO. In order to arrive at the realistic unaccounted peak investment, the figure of Rs. 3,55,70,422 is required to be increased to Rs. 4,67,01,433, which will be at par with the 100 per cent value of the purchase consideration actually paid in cash by the appellant. Therefore, the appellant's unaccounted peak investment in effecting purchase of diamonds is increased from Rs. 3,45,33,175 to Rs. 4,67,01,433."
31. Assessee also objected the disallowance made by the AO of Rs. 1,29,77,912 under Section 40A(3), being 20 per cent of the cash purchases of Rs. 6,45,88,956. CIT(A) held, the decision relied upon by the assessee in the case of CIT v. Banwarilal Banshidhar (1998) 148 CTR (All) 533 : is distinguishable on facts. On the other hand, he confirmed the disallowance relying upon the decision of the Hon'ble Supreme Court in the case of Attar Singh Gurmukh Singh v. ITO and the decision of the Hon'ble Punjab & Haryana High Court in the case of Chanana Associates v. CIT . Aggrieved by the above order, assessee is in appeal before the Tribunal.
32. Learned Counsel for the assessee submitted, there was search and seizure action in the instant case of the assessee during the middle of the year, i.e. on 26th Sept., 2000; though this appeal does not emanate from the block assessment and that block assessment order is at pp. 126 to 140 of the paper book. AO cannot ignore the facts entirely. In that case the purchase and sales are accepted and the books of account were found correct. Assessee was asked to file confirmations. Confirmations were filed. All the purchase parties are assessed to tax. They are established parties, where the purchase parties' turnover is in fact much more than the assessee. They were summoned and examined and all of them accepted sale to the assessee and they confirmed it, as it appears in the books of account of the assessee. Payments were made by cheque and also deposited and reflected in their bank account. They also procured diamonds from third parties. The parties from whom assessee made purchases were also paid by cheque. What now the Revenue authorities want is to examine the source of sources i.e. the Surat parties. The case of the Revenue is that the turnover disclosed is not genuine and the suspicion of the Revenue is that assessee has purchased these diamonds from the parties, who sold to the assessee by cash payment. But there is no material. An iota of evidence to this effect was not available even during search and seizure action. This is mere suspicion. Another objection of the Revenue is that the profit made by the assessee is unreasonably high. The profit should have been somewhere around 6 per cent. No comparative cases have been brought except the parties who sold the goods to the assessee. The difference between 6 per cent estimated by the AO and the profit disclosed by the assessee is treated as assessee's additional cost. Also on the total turnover the Revenue authorities disallowed 20 per cent, resorting to Section 40A(3). Assessee is objecting all these.
33. Learned Counsel filed written submission dt. 23rd Sept., 2005. The submission can be summed up, briefly, as under:
Assessee is a registered firm engaged in trading of diamonds, silver bars and pieces. Assessee is also dealing in VCD rights and claimed deduction under Sections 80HHC and 80HHF for the relevant assessment year on account of assessee's exports. Assessee-firm came into existence on 7th Jan., 2000. PAN No. AACFG5730E by DCCC-3, Mumbai. Assessee filed the return on 31st Oct., 2001 declaring income of Rs. 49,56,390. Assessment was completed under Section 143(3) fixing income at Rs. 3,96,37,587 vide order dt. 29th March, 2004. Assessee, aggrieved by the above order, approached the first appellate authority. CIT(A) enhanced the assessed income by Rs. 1,21,68,258. Aggrieved by the above order, assessee is in appeal before the Tribunal.
34. The first submission of the learned Counsel is that the AO started the very assessment with a pre-conceived notion that the transactions of the assessee were stage managed. It is pointed out by AO in para 7.5 of his order. It is stage managed, AO held, because the assessee's turnover is Rs. 6,90,23,486 and the purchases comes to Rs. 5,30,87,313, taking the net profit on sale of 23.4 per cent as compared to 28.11 per cent in the previous year. AO found fault with this profit vide para 6 of his order because according to the AO "the income of the assessee was non-taxable in the last assessment year as deduction under Section 80HHC was 100 per cent and during the relevant assessment year it is at 80 per cent. The fall in GP from 28.11 per cent to 23.4 per cent is therefore, quite abnormal and does not seem to have any bona fide reason but for the limitation of deduction during the relevant year from 100 per cent to 80 per cent being done as per IT Act". AO further held, the expenses claimed, average comes to only 0.003 per cent and 0.004 per cent for the asst. yrs. 2000-01 and 2001-02, which is quite abnormal. The time gap between the purchases and sales are too short, i.e. about less than 10 days. Another reason given by the AO for suspicion is that the assessee does not even pay the purchase parties when it buys goods and most of the time the payment is made after realisation of exports and the purchase party thus gives credit of almost 3 to 4 months on these transactions, as is evident from the chart given, which shows certain transactions out of 11, wherein the payment has been received by the assessee after realisation.
35. Learned Counsel submitted, in order to establish the veracity of the transactions, confirmations of all the purchase parties were filed before the AO and the same are being filed once again vide pp. 1 to 68 of the paper book. He submitted, the finding of the AO that two parties, viz. Yash Gems and Pritam Exports, never filed confirmations is incorrect because they had filed confirmations at the time of block assessment. These confirmations (are) also placed at pp. 3 to 5 and 6 to 9 of the paper book. He further submitted, AO issued summons to all the abovementioned parties, from whom assessee made the purchases. The statements were recorded from all these parties under Section 131 and all of them confirmed sale to the assessee and also gave details of the payment received from the assessee/details of parties from whom goods purchased in turn by the assessee. The export of the assessee is confirmed by the Dy. Commr. of Customs, Mumbai. However, the AO, in spite of all this, did not accept the fact, which is established on the basis of evidences because of his pre-conceived notion. Learned Counsel further submitted, bank accounts of the abovestated parties (suppliers to the purchase parties of the assessee) were traced, which reflected huge cash withdrawals. AO stated "RBI guidelines states of reporting of Rs. 10 lakhs and above cash transaction, to evade the same a sum of Rs. 9,95,000 and odd figures are withdrawn everyday on account of cheque deposits in relevant accounts. All the above parties have opened a large number of accounts and the cheque of higher denomination deposited are splitted into convenient amount of Rs, 10 lakhs each and transferred to various bank accounts and then cash is withdrawn in amounts of Rs. 9,98,000 and odd in each of these accounts". AO concluded, this is the modus operandi in the diamond trade. Goods are supplied for payment in cash and the bills are obtained from third parties and vice versa. These parties are called 'bill providers'. Accommodation bills range between 1 to 2 per cent. The total turnover altogether comes to more than Rs. 500 crores. The profit earned is about Rs. 10 lakhs or less; whereas the assessee from 11 transactions made Rs. 1.66 crores GP. It is just to avail the benefit under Section 80HHC.
36. Learned Counsel also objected the peak credit working by the Revenue authorities. Even on the peak credit working, 18 per cent was further taken as unaccounted cash because assessee's profit was taken at 24 per cent, whereas actual profit was about 6 per cent. The case of the assessee before the CIT(A) was that the assessee's family members are in the business for more than 20 to 25 years and are assessed to tax regularly and the assessee has declared Rs. 73,44,023 under the head "Business", etc. which did not satisfy the AO. The findings of the AO are based on some statements recorded from third parties with whom assessee had no dealings or transactions. In fact the books of account of the assessee have not been rejected. The only comment was that the profit declared by the assessee is unreasonably high. The above conclusion was arrived at on the basis of some statement recorded from Shri Rajan A. Pawaskar, which in fact (was) rejected by the Customs Department as untrustworthy statement. Learned Counsel submitted, identity of all the purchase parties is established. All except two parties physically appeared before the AO and confirmed the transactions. Assessee is not required to establish anything further, learned Counsel contended. He relied upon the decision of the Hon'ble Gauhati High Court in the case of Nemi Chand Kothari v. CIT (supra) for the above proposition. Learned Counsel further submitted, there is no material to show that any part of the funds given by the assessee to its parties by cheque came back to the assessee in any form. Reliance was placed upon the decision of the Hon'ble Gujarat High Court in the case of CIT v. M.K. Brothers (supra). Assessee carried out the same business in the previous year. It was accepted on similar set of facts. Hence it was contended, the conclusion arrived at is on the basis of hypothesis and not supported by any material/evidence. Assessee also objected for not providing an opportunity to cross-examine the parties from whom the evidence was considered against the assessee.
37. Learned Counsel further objected the opportunity given to the assessee for cross-examination, which coincided with the marriage in the family of the assessee. The cross-examination (was) fixed on 19th and 20th Jan., 2005, whereas the marriage was fixed on 21st Jan., 2005. AO's action was also objected by the assessee before the CIT(A) on the ground that no fresh interrogation was directed by the CIT(A) and the AO went beyond the scope of remand order. The assessee again objected disturbance of peak account. Learned Counsel contended, all these objections were overlooked by the CIT(A), merely observing "I am not impressed by the appellant's allegation that the AO had fixed the appellant's opportunity of cross-examination on 19th and 20th Jan., 2005 with any intention to effectively deny such opportunity to the appellant in view of a marriage ceremony taking place on 20th Jan., 2005 in the appellant's family. Such an allegation is not supported by any evidence whereas the fact remains that the appellant had failed to avail this opportunity despite the same being offered by the AO". Assessee objects all these as well on the following grounds:
First of all, learned Counsel reiterated that the purchase parties have confirmed all the purchases by filing evidences, which are attached, vide paper book pp. 1 to 68. When questioned, none of the parties denied the sales to the assessee. This is also part of the record. Merely huge cash withdrawals are made from the accounts of the purchase parties does not justify the theory of bill accommodation, learned Counsel contended. Not a single party was questioned about such cash withdrawal or the withdrawal ever directly or indirectly connected to the assessee. These crucial questions were never put to any of the purchase parties. Cash withdrawal, claimed to have reflected in the bank statement of the third parties, is not within the knowledge of the assessee. It was never put to the assessee. Even if that happened, how the assessee could be fastened with such liability that the money came back to the assessee, learned Counsel contended. Assessee was subjected to search and seizure action under Section 132 on 20th Sept., 1990. No incriminating material or anything else was found in the course of such search proceedings even remotely hinting that the assessee is engaged in bill accommodation. In the absence of any concrete evidence, the AO as well the CIT(A) was not justified in rejecting the purchases reflected in the books of account, holding that these were cash purchases. Books of account were maintained in the regular course of business of the assessee, contended the learned Counsel. The Hon'ble Assam High Court in the case of Tolaram Daga v. CIT (1966) 59 ITR 632 (Assam) held that the books of account maintained in the regular course of business are relevant and afford prima facie proof of the entries and correctness thereof. The Hon'ble Kerala High Court in the case of St. Teresa's Oil Mills v. State of Kerala held that accounts regularly maintained in the course of business have to be taken as correct unless there are strong and sufficient reasons to indicate that they are unreliable. Learned Counsel contended, there is no evidence with the Revenue that the account books of the assessee are unreliable or incorrect. In fact, it has not been rejected at all. No purchase has been omitted. No addition has been made on that account either. In the case of St. Teresa's Oil Mills (supra) the Hon'ble High Court held that rejection of books should not be done light-heartedly. Relying upon the decision of the Hon'ble Delhi High Court in the case of Addl. CIT v. Jay Engineering Works Ltd. , learned Counsel contended, books of account are evidence under Section 34 of the Evidence Act after the relevant entries are proved or admitted. As the rules of evidence are not strictly applicable to the assessment proceedings, AO should accept such books and/or entries therein, barring the special deeming and specific onus provisions, to be correct unless he has in his possession some material to the contrary. In the instant case there is no contrary material except guessing of AO. Assessee also relied upon the following decisions:
(1) CIT v. Orissa Corporation (P) Ltd. ;
(2) Elite Developers v. Dy. CIT (2000) 68 TTJ (Nag) 616 : (2000) 73 ITD 379 (Nag):
(3) Bedi and Co. (P) Ltd. v. CIT ;
(4) CIT v. Bedi and Co. (P) Ltd. (1998) 145 CTR (SC) 309 : (1998) 230 JTR 580 (SC).
38. Learned Counsel submitted, the Revenue has taken inconsistent stand in handling the case, i.e. on the one hand, bank statement of the parties supplying goods to the purchasers and their supplier parties to establish the notion of bill accommodation and on the other hand, the statement given by such parties accepting the fact that they sold the goods to the assessee is being ignored. This pick and choose method is not acceptable, learned Counsel submitted.
39. Learned Counsel further submitted, legally also the case fails because the rules of natural justice have not been observed. While framing the assessment order, the assessee was not given opportunity to cross-examine the parties and subsequently deliberately fixing cross-examination on dates inconvenient to the assessee due to marriage in the family. Learned Counsel, relying upon the judgment of the Hon'ble Supreme Court in the case of Tin Box Co. v. CIT , submitted that "an assessment made without giving the assessee an opportunity of setting out his case was liable to be set aside". So also, the Hon'ble Supreme Court observed in the case of Dhakeswari Cotton Mills Ltd. v. CIT (1954) 26 ITR 775 (SC). Learned Counsel submitted, if the AO proposes to use any material against the assessee, which is obtained by private enquiry, it should have been communicated to the assessee so as to know full particulars of the case and the failure to do so vitiates the case of the Revenue. For the above proposition, learned Counsel relied upon the following judgments:
(1) Bhogilal H. Patel v. CIT ;
(2) Gargi Din Jwala Prasad v. CIT (1974) 96 JTR 97 (All);
(3) Nagulakonda Venkata Subba Rao v. CIT (1957) 31 ITR 781 (AP);
(4) M.O. Thomakutty v. CIT (1958) 34 ITR 501 (Ker).
Learned Counsel further reiterated the submissions made before the CIT(A) with regard to the remand report, which was made beyond the scope of the direction. Learned Counsel submitted, instead of providing an opportunity to cross-examine, the parties were examined afresh by the AO. Hence, AO went beyond the scope of the direction itself.
40. Learned Counsel also brought our attention to the decision of the Tribunal is SA No. 244/Mum/2005, dt. 5th Aug., 2005, while granting stay. Learned Counsel submitted, though prima facie observation of the Tribunal which clinches the idea and the facts "in our opinion the assessee has prima facie discharged the onus by producing the entities from whom it made purchases, more so the entities confirmed the sales to the assessee. In such situation assessee is not required to prove the source of source. Therefore, in our opinion assessee has prima facie arguable case". Hence learned Counsel submitted, the following additions are to be deleted:
(1) Enhancement of peak credit from Rs. 3,45,33,175 to Rs. 4,67,01,433.
(2) Confirmation of addition of cash purchases to the tune of Rs. 6,45,88,956.
(3) Addition of Rs. 1,29,77,912 under Section 40A(3) on the ground that assessee allegedly made cash purchases of diamonds mentioned above.
(4) Re-computing profit for the purpose of claiming deduction under Section 80HHC.
41. Learned Counsel once again objected the confirmation of the addition made on account of unaccounted investment being Rs. 3,45,33,175 and enhancement of the same further to Rs. 1,21,68,258 by recomputing the peak credit at Rs. 4,67,01,343. Learned Counsel submitted, once the addition of Rs. 3,45,33,175 is deleted, the addition of Rs. 1,21,68,258 does not hold any meaning. Learned Counsel again reiterated, confirmation of cash purchases to the tune of Rs. 6,45,88,956 will not stand the legal scrutiny for the reason, firstly, no evidence regarding such purchases was found even during the block assessment for a part of which AO himself has accepted (under Chapter XIV-B) and further disallowance by applying provisions of Section 40A(3). Hence, learned Counsel submitted, the orders of the Revenue authorities are liable to be set aside.
42. Objecting the above, the learned Departmental Representative briefly made the following submissions:
The contention of the assessee that the purchases were accepted in earlier years is of no relevance. Assessee-group trades in VCD rights. Assessee was not in diamond trade, which was formed on 7th Jan., 2000. In fact, this is the only completed first assessment year. There is no long past history of acceptance or rejection. Further, each year is a separate year and acceptance or rejection in preceding year has no much relevance except on the basis of facts for every year.
43. The learned Departmental Representative further submitted, the fact that no adverse evidence was found in block assessment completed on 27th March, 2003, where purchases were examined, parties were summoned and purchases and sales were held genuine as assessed at nil also has no much relevance.
The learned Departmental Representative submitted, it is well-settled position that block assessments have to be completed on the basis of material found during the course of search and not on the basis of post-search inquiries. If no material was found during the search doubting the genuineness of the purchases and parties confirmed the purchases made by the assessee, then there is no scope or reason for the AO to make any adverse finding in the block assessment when prima facie it would found to be correct. Therefore, the learned Departmental Representative submitted, no reliance could be placed on the averments of the assessee that no adverse finding has been recorded in the block assessment.
44. Referring to the argument of the learned Counsel that the sellers of the diamonds confirmed the transactions, payments were made by cheque and had shown income in their hands, the learned Departmental Representative made the following submissions:
Out of the ten parties, assessee filed confirmations from six. Remaining two parties filed confirmations themselves, but regarding two parties, viz. Yash Gems and Pritam Exports, no confirmations were filed despite giving various opportunities, as they did not exist at the given address. The fact that confirmations were filed during the block assessment does not discharge the onus cast on the assessee as even summons sent to them came back unserved. In the present case, the issue relates to purchases and not of loan. In case of loan, genuineness is subsequently proved by way of entry through the bank. The averment of the assessee that the assessee has not to prove the source of sources or the origin of origin has no much relevance in the instant case of the assessee. The decisions relied by the assessee is connected with the loan transactions, whereas this is a case of purchase and sale. The purchases does not involve only money/credit but it also deals with material, movement of material/transport, stocking of material and insurance of material if a valuable item as in this case. All these issues are very relevant to prove the genuineness of the purchase. The learned Departmental Representative submitted, in the case of purchases, if the purchase is doubted, it is very important to prove the source of the goods and the route they reached the assessee to Judge the genuineness of the transaction. The Department has conducted detailed inquiries based upon preponderance of probabilities. Inquiries found that the so-called sellers did not have the goods they alleged to have supplied, had no source, no capacity nor creditworthiness to procure the diamonds and supply of goods. In the light of such glaring evidence it is for the assessee to prove that the assessee had in fact purchased the goods from the alleged sellers and also rebut the evidence gathered by the Department. When confronted, the assessee shied away. Assessee cannot take shelter of Section 106 of Evidence Act or the decisions of the Courts, which have been rendered in different context, like S. Hastimal v. CIT (1963) 49 ITR 273 (Mad). The learned Departmental Representative submitted, the decision relied by the assessee of the Hon'ble Gauhati High Court in the case reported in (2003; 185 CTR (Gau) 635 : (2003) 136 Taxman 213 (Gau) (supra) has no relevance. In the present case, the AO has discharged the onus but the assessee has not made any efforts to controvert the evidence collected by the Department to prove that the purchases shown are genuine.
45. Learned Departmental Representative also objected assessee's plea that the assessee was not given proper opportunity to cross-examine the parties, even though they were witnesses of the Department. The assessee relied upon the bills given by these parties, though assessee claims that they are the witnesses of the Department. In spite of all these the CIT(A) remanded the matter back to the file of AO for providing cross-examination to the assessee and the dates were given. But the assessee, on the ground that there was a marriage in the family on 21st Jan., 2005, did not avail it. The statements were given to the assessee again on 4th Feb., 2005, to which assessee relied on 1st March, 2005 and stated that the assessee does not want to cross-examine the parties.
46. Coming to the objection of the assessee that the AO exceeded his power by recording fresh evidence, the learned Departmental Representative submitted, AO did not bring on record any fresh evidence and merely examined to reiterate the conclusions arrived at by him during the assessment proceedings. Even otherwise, learned Departmental Representative submitted, the materials collected can be used in the proceedings even if it is not collected by a mode, which is not as per law. The learned Departmental Representative relied upon the decision reported in Pooran Mal v. Director of Inspection (Inv.) for the above proposition.
47. Learned Departmental Representative submitted, the statement of Shri Rajan A. Pawaskar at the time of search on 26th Sept., 2000 is very relevant. This could not be substantiated of course during the course of block assessment, but this can be used against the assessee in the normal assessment. Learned Departmental Representative further submitted, assessee is doing a new business totally unrelated to the existing business of the group and assessee is purchasing the materials without making the payment quite long time. He submitted, it is very material to consider the fact that the assessee's profit is very high, abnormal, about 23 per cent against the normal profit of 5 to 6 per cent in this line of export business. Learned Departmental Representative also submitted, assessee's expense is very nominal. Assessee is having no stock of goods, purchase and sale of exact quantities with clear nexus between purchase and sale, which creates a doubt about the modalities of trading. Assessee is making the payment to seller parties after realisation of sale proceeds. In other words, there is a credit of over 3 to 4 months of amount ranging from Rs. 50 lakhs to over crores of Rupees.
48. Coming to the verification of parties, learned Departmental Representative submitted, two parties were not at all found. Assessee reported to have filed their confirmations during the block assessment, but as rightly noted hereinabove, this does not absolve the assessee from furnishing their new address. In the case of remaining parties, on examination, the following anomalies were noticed:
All the purchase parties of suppliers are based at Surat. All of them have address at Sardar Diamond Complex, Surat, except for Rough Stones purchase parties. None of these parties were found at the given address. Veni Gems, Saroj Diamonds and Mahavir Exports having same Mumbai address and have similar purchase parties. Neha Gems and Shree Nakoda Exports have also same Mumbai address and have similar purchase parties. Since the Surat parties' genuineness was in doubt, the matter was referred to Investigation Wing, Surat. Enquiry revealed that none of the above parties (was) in existence. There was no local information available regarding any of these parties. Hence bank accounts of these parties were traced and it was seen that there were huge cash withdrawals from these accounts. RBI guidelines states of reporting of Rs. 10 lakhs and above cash transaction. To evade the same, a sum of Rs. 9,95,000 or similar figures are withdrawn every day on account of cheque deposit. The learned Departmental Representative supported the order of the AO and held, the modus operandi hereinabove mentioned, as found out by the AO, clearly establish that the bills, etc. are make-belief and way to deprive the Revenue its due. He further submitted, the turnover of the suppliers was about 70 times more than that of the assessee, but the profit earned is as low as 0.1 per cent: whereas assessee's business profit is Rs. 104 lakhs out of the total turnover of Rs. 7 crores and that too purchases are on credit basis, which is an impossible situation to imagine. The learned (Departmental Representative) further submitted, all the eight parties failed to furnish the residential address and telephone number of the parties, who supplied them the diamonds. Further, the parties failed to provide the present business address and telephone numbers of Surat based supplier parties. The parties expressed their inability to produce the supplier parties for verification. The sale invoices of Surat based parties do not bear the telephone number of the said parties. Surat based supplier parties are maintaining bank account in the same branch of the suppliers to the assessee despite the fact that they are not maintaining any office at Mumbai. The opening of bank account in the same branch at Mumbai shows close nexus between the seller parties and the supplier parties but the seller parties could not furnish the abovementioned details. As noted hereinabove, there is no evidence of transportation of the diamonds. They are maintaining only self-made vouchers but could not provide any ticket, insurance charges, courier charges, etc. all of which raise curiosity as to how the diamonds are transported from Surat to Mumbai, if the purchase and sales are genuine. The cheques deposited on the same day in the account of the seller parties, further transferred to other accounts on the very same day, which shows that accounts at Mumbai were handled by someone staying in Mumbai, coupled with the fact that Surat based supplier parties do not have any office at Mumbai. Learned Departmental Representative further submitted, all the parties are having meager capital to the tune of Rs. 2 to 3 lakhs but have achieved a turnover of Rs. 50 lakhs in the year. Scrutiny of income-tax records of the parties shows very high creditors and debtors ratio, meaning that most of the trade is carried out on credit basis. It is not a mere coincidence that all the third parties discontinued the business within a year or so. None of the parties found to be maintaining Jangad to prove the movement of goods. The proprietors and partners appear to be men of no means. All of them are staying in small rented accommodation in Mumbai suburbs. None of them owns any residential or commercial property, which are curious circumstances. The argument of the assessee that the assessee exported diamonds and it is certified by the Customs Department goes against the assessee. It means the assessee purchased the material from undisclosed sources and exported, exactly the case of the Revenue. Hence the learned Departmental Representative submitted, the peak worked out was the correct method to find out the investment and the disallowance made under Section 40A(3) being cash purchases to the tune of 20 per cent is also correct. Hence he submitted, recomputation of deduction under Section 80HHC and the profit is on the right steps. Learned Departmental Representative submitted, the orders of the Revenue authorities are liable to be upheld.
49. Hearing the rival submissions and going through the orders of the Revenue authorities and the facts and on the basis of the decisions, we are of the view that the issue has to go in assessee's favour.
50. The first objection of the Revenue authorities is that the assessee earned a high profit of about 23.4 per cent, whereas in this line of business normally the profit is 6 per cent. No comparative case brought on record to substantiate this point. The reasoning of the AO to come to such a conclusion mainly is that in the preceding year the profit shown by the assessee was 28.11 per cent; whereas the assessee was claiming 100 per cent deduction under Section 80HHC and in this year it is only 80 per cent. It is true, the percentage of profit is substantially high, but in the absence of any comparative cases brought on record, we are unable to subscribe the view canvassed by the learned Departmental Representative.
51. The second reason for the Revenue authorities is that though the assessee had filed confirmation letters from the immediate purchase parties and in response to summons issued under Section 131 they attended and admitted the sale; the Revenue authorities having knowledge of the modus operandi of the diamond export business, conducted inquiries with the third parties, all of whom are based at Surat. Either they are not known or if known, most of them had offices in the same building. Their profit is about 1 to 2 per cent; whereas the assessee earned profit of 23.4 per cent. From the above facts, the Revenue authorities came to the conclusion that the claim of the assessee that the assessee purchased the goods from 11 parties mentioned in the assessment order at p. 2, is incorrect. AO came to the conclusion that in fact the assessee might have purchased the diamonds from the open market in Mumbai against cash payments. These 11 parties are bill accommodating parties. They earned only a meager commission. Another reason for coming to the above conclusion is that all these 11 parties sold the diamonds to the assessee on credit basis and assessee paid them after realisation of the exports. It is to be mentioned that all these findings are not based on any facts except that the assessee purchased the diamonds from 11 parties on credit. But we are afraid, this alone is not sufficient to hold that the assessee had not purchased the goods/diamonds from these parties. AO mentioned that two parties have not filed confirmations, viz. Yash Gems and Pritam Exports. But the case of the assessee is that for the very same year in the block assessment these parties have confirmed the purchases. We are of the view that on the basis of the above facts the reasoning of the AO that these parties have not confirmed their dealings with the assessee cannot be a factor that goes against the assessee. The facts demand that the parties confirm the transaction and also in response to notice, they appear. One of the objections of the AO is that (para 8.2) though the parties appeared and confirmed the transactions, they are not existing at the given address. This alone cannot be the reason for rejection of their confirmation.
52. One of the contentions of the assessee is that the assessee did not get proper opportunity to rebut the statements taken from the third parties/Surat parties. When the matter was carried before the CIT(A), he called for the remand report from the AO and also directed the AO to give the assessee an opportunity to cross-examine the parties. AO recorded statements from all these parties and the date was fixed for cross-examination; but the assessee could not avail it due to marriage in the family. Hence the AO came to the conclusion that the assessee is not interested in cross-examining the parties.
53. The case of the assessee is that the assessee is not bound to prove the source of sources. The immediate parties, from whom the assessee made purchases, confirmed their sales. Revenue authorities are in fact doubting the capacity of the parties who sold diamonds to the assessee and also the assessee perhaps purchases the diamonds from open market and obtained bills from these parties. None of these facts, except the reasoning, are based on any evidence.
54. The CIT(A) remanded the matter back to the file of AO and the AO obtained statements from Surat based parties. But going through the statements, we find two of the most important factors have not been brought out of this questioning. First the assessee made the payments through cheques to these parties and these parties in turn also paid to the third parties. The real case of the AO is that the third parties (had) withdrawn these amounts in cash and then it reached back to the assessee. But to say the least, no question to a single party has been put, whether the money withdrawn by cash by any of the parties ultimately reached back to the assessee or even to the second party. This is the most crucial point AO wants to establish, but has not established at all.
55. Another reasoning of the Revenue authorities is that the assessee's profit is too high, whereas the other parties who provided the accommodation bills are obtaining only a meager commission. But it is borne out of the record that these 11 parties had transactions almost to the extent of Rs. 500 crores. For example, Girish Diam showed turnover of Rs. 64.55 crores. This party supplied to the assessee diamonds worth Rs. 19,35,080. According to the Revenue authorities, the seller parties withdrew their money, which was received by cheque and ultimately it reached back to the assessee. But then the question remains how much they might have withdrawn everyday and where it (has) gone. This fact has not at all been considered or looked into by the Revenue authorities, except coming to the conclusion that the money reached back to the assessee. For example, Saroj Diamond sold diamonds worth Rs. 1,08,80,126 to the assessee. Their turnover is given at Rs. 78.2 crores. That means they have withdrawn about Rs. 20 lakhs per day. Again, there is nothing on record to show that where the money went ultimately. It is almost the same case with every party. This most vital point was never even suggested to the parties. Therefore, the basic theory of the AO that the amount paid by the assessee by cheque ultimately reached back to the assessee is not a finding based on any facts. Unless there is some evidence in support of the claim that the money reached back to the assessee, we are unable to hold that the finding arrived at by the Revenue authorities is the right one. Suspicion alone however strong is not sufficient. It is true, the AO clearly established the modus operandi in this line of business. But unless there is some evidence against the assessee, however weak, the decision has to go in assessee's favour.
56. The CIT(A) found that the assessee made purchases to the tune of Rs. 5,30,87,813 and resorting to Section 40A(3), he disallowed 20 per cent being the cash purchases. Again we have to say that there is not an iota of evidence, except the reasoning of the AO, to show that the assessee made purchases by making cash payments.
57. Hereinabove we have recorded the statement obtained by the Revenue from Shri Rajan A. Pawaskar, chartered accountant, wherein he stated that the assessee is not engaged in diamond business activity rather the said transactions were merely used to launder black money of the assessee. But the fact remains that the assessee exported the goods, which is certified by the Customs Department. They rejected Shri Pawaskar's statement. Therefore, the issue that whether assessee exported or not does not arise. The question is whether the assessee purchased the diamonds by paying cash. There is nothing on record to suggest to the above conclusion. The reasoning however powerful cannot take the force of evidence. No evidence has been brought on record to this effect. As we have already noted, not even a single question was put to any of the parties from whom the statements were recorded by the AO, as to whether the payment made by the assessee by cheque was withdrawn and paid back to the assessee. In the absence of any other evidence on facts, we are unable to accept the reasoning of the AO that the assessee made the cash purchases.
58. In view of the above facts, the further addition made by the Revenue authorities, resorting to Section 40A(3) also does not survive. In view of the above, we also hold that there is no material to recompute the profits for the purpose of deduction under Section 80HHC.
59. We have also noted hereinabove that the AO worked out the peak credit at Rs. 3,45,33,175 and the CIT(A) enhanced the peak investment at Rs. 4,67,01,433 holding that the difference of 18 per cent (i.e. profit proposed to be restricted to 5.4 per cent as against 23.4 per cent declared by the assessee) is to be considered as inflated profit. Since we have already held that there is no basis for making any addition on account of cash purchases, this excess peak investment worked out by the CIT(A) automatically does not survive.
60. There is no case for the Revenue that the assessee is not maintaining books of account. The purchases are recorded in the books of account. Payments are made by cheque to the immediate purchasers. They accepted and confirmed the sale. To hold otherwise, there should be some evidence in the possession of the Revenue. Suspicion, however strong, cannot take the place of evidence and that alone cannot be the criteria for deciding the matter.
61. Though it may not be that relevant strictly, search was conducted during the period under consideration. Nothing incriminating was found during the search action. There is no evidence to show that the money has come back to the assessee or claim of the payment as bogus. In such circumstances, for the subsequent period to hold that the entire purchase is bogus is a conclusion that is very difficult to arrive at. Another reasoning of the AO to come to the conclusion that the assessee had not actually purchased the diamonds from the immediate suppliers is that their suppliers from Surat had no capacity and even if they had the capacity, there is no evidence that they transported it to Mumbai. According to the AO, the diamonds worth crores of Rupees, if they claimed to have transported, these diamonds should have been insured and the mode of transportation or at least the details of tickets, etc. of the persons who brought diamonds should have been mentioned. Be that as it may, we are not making any proposal. No question has been put to immediate suppliers to the assessee whether they purchased the material from the open market other than the parties who said to have supplied them from Surat. Therefore, the proposition that in the absence of insurance, mode of transportation, etc. the claim that the diamonds came from Surat cannot be accepted, is not a sound conclusion arrived at. It is true, the profit shown by the assessee is extremely high, which may not be possible in this line of business, at least not a general trend in the market. But then, no similar cases "of export have been mentioned anywhere by the AO or by the CIT(A) to discredit the assessee's claim of higher profit. Export of the assessee is accepted by the Customs Department, which shows that the export of diamonds cannot be doubted.
62. Coming to the decision relied upon by the Revenue authorities reported in the case of Attar Singh Gurmukh Singh (supra), the issue before the Hon'ble Supreme Court was the validity of Section 40A(3) of the Act and the applicability of Section 40A(3) to payment made for acquiring stock-in-trade. Their Lordships upheld the Constitutional validity of Section 40A(3). The Hon'ble Supreme Court held that this section is not arbitrary and does not infringe fundamental right to carry on business.
63. Coming to the decision of the Hon'ble Punjab & Haryana Court in the case of Chanana Associates (supra), in this case the assessee did not produce any material to show that the belief that Section 40A(3) was not attracted where the profit was determined on estimate basis after rejecting the book results of the assessee. The facts in the instant case of the assessee are not so. So also in the case of Chanana Associates (supra) there was no dispute that the payments were made in cash in excess of the prescribed limit under Section 40A(3); whereas in the instant case of the assessee there is no evidence on record to show that the payments were made in cash but it is an assumption, resorting to the modus operandi adopted by the business circle in diamonds.
64. Coming to the results of the inquiry made by the AO with the third parties and the reliance placed by the assessee that no opportunity was provided to the assessee, we are afraid, has no much relevance. Summons issued were received by these parties. They confirmed the sales. Payment made by cheque is confirmed. The only reasoning of the AO to disallow assessee's claim is that subsequently these parties withdrew the amount reflected in their accounts by cash and disappeared. But there is no evidence to show that the money has come back to the assessee. Further, as we have stated hereinabove already that the reasoning of the AO, as confirmed by the CIT(A) is that there is no evidence to show that the material has been transported from Surat to Mumbai. The third parties are not the parties who sold to the assessee directly. Surat parties claimed that they have delivered the goods to the sellers from whom assessee purchased. Therefore, this point also cannot be strictly taken against the assessee.
65. In the case (supra), the Hon'ble Delhi High Court held that unless there is contrary evidence in the possession of the AO, though the rules of evidences are not strictly applicable to the assessment proceedings, books of account are evidence under Section 34 of the Evidence Act, after the relevant entries are proved by oral evidence or admission. The decisions relied upon by the assessee in the case reported in (1966) 59 ITR 632 (Assam) (supra) and (supra) also supports this view. In the light of the above discussion, we are of the view that the orders of the Revenue authorities are liable to be set aside as there is no evidence on record to show that the payments made by the assessee has come back to the assessee, except the modus operandi said to be prevalent in this line of business.
66. Coming to the purchases made by the assessee on payment of cash also cannot be accepted as there is no evidence to this effect because the payment is made by the assessee by cheque, which is also reflected in the books of account of the purchasers as well as of the assessee.
67. In the result, appeal of the assessee stands allowed.