Income Tax Appellate Tribunal - Mumbai
Vijay C. Kamdar vs Income Tax Officer on 7 September, 2007
ORDER
Sunil Kumar Yadav, Judicial Member
1. This appeal by the assessee is directed against the order of the CIT(A) on various grounds which are as under:
1. The learned CIT(A) has erred in law and in facts in not holding that the reopening of the assessment by issuing of notice Under Section 148 of the Act was bad in law and illegal.
2. The learned CIT(A) has erred in law and in facts in disallowing the claim of the appellant for deduction Under Section 80 HHC of the Act amounting to Rs. 36,03,895/-.
3. The learned CIT(A) has erred in law and in facts in upholding The disallowance of Rs. 35,61,826/- (incorrectly mentioned at Rs. 9,23,437/-) made by the Assessing Officer. The learned CIT(A) ought to have directed the Assessing Officer to reduce the total income of the appellant by Rs. 10,86000/- being the amount of duty drawback.
4. The learned CIT(A) ought to have directed the Assessing Officer to delete the levy of interest Under Section 234B and 234C of the Act.
2. During the course of hearing the learned Counsel for the assessee has opted not to press ground No. 1. Accordingly ground No. 1 is dismissed being not pressed.
3. With regard to ground No. 2, brief facts borne out from the record are that during the course of reassessment proceedings in order to verify the claim of deduction under Section 80 HHC raised by the assessee, Assessing Officer has issued a letter to the assessee requiring him to furnish details such as purchase register, bank statement and also to produce the supplier of the assessee, namely Divya Enterprises and in response thereto assessee filed a letter dated 14/09/2004 but the proprietor of M/s Divya Enterprise was not produced. Thereafter the Assessing Officer issued the show cause notice on 20th September 2004 to the assessee for explanation why the rate of 70 paise per piece should not be adopted for the quantity of 13,19,195 ball pens and why Rs. 9,23,437/- should not be considered as income from undisclosed sources, more so, in the absence of necessary verification from M/s. Divya Enterprises. Assessee filed a letter stating that purchases were made through Shri Rajesh Shah, who had approached and persuaded the assessee to start export business as he was in the said business for more than twenty years. Assessee reposing trust and confidence in Shri Rajesh Shah executed a power of attorney in favour of Shri Kaushik Shah as suggested by Shri Rajesh Shah to operate bank account and that only one consignment of ball pen was exported to Mrs. Panimex Trading P. Ltd., Moscow. The assessee further contended before the Assessing Officer that their purchases should not be treated as non-genuine as the experts done were out of the said purchases only-which are not rebutted as non-genuine and deduction was initially allowed by the Assessing Officer. It was also stated that export was undertaken after due compliance of the rules and regulations framed by various Departments of the Government and export realization was received through normal banking channel, certificate of export realization was issued by the bankers, IEC number was allotted by Director General of Foreign Trade and therefore, the transaction involving checks and rechecks at various levels cannot be non-genuine. With regard to return of duty drawback to the Customs Department, which was the basis for reopening of the assessment, assessee has pointed out that it was done under pressure and the assessee can always retract form it if the amount offered cannot be taxed under law.
4. Assessing Officer was not convinced with the explanations of the assessee and he observed that the case was investigated by the Directorate of Revenue Intelligence (DRI) and it was successfully proved that the exported goods did not reach the final destination, i.e. Russia but the same were diverted to Cyprus and thereafter destroyed. And these facts are given more credence by the statement of Shri V.C. Kamdar and the statement of Shri Chetan Kamdar before DRI wherein they have accepted this modus operandi and the goods were destroyed by the assessee, the title for the same belonged to the assessee and hence it cannot be said that export had taken place. Assessing Officer accordingly held that deduction under Section 80HHC was not to be allowed to the assessee.
5. With regard to the cost of purchase, the Assessing Officer has observed that the purchase of the pen was shown at Rs. 3.40 per piece whereas in actual reality, the same was accepted by Shri V.C. Kamdar to be for 70 paise per piece and he accordingly disallowed the extra claim of Rs. 2.70 per pen resulting into a total disallowance of Rs. 9,23,437/-. Assessee preferred an appeal before the CIT(A) and reiterated its contentions.
6. The CIT(A) re-examined the issue in the light of assessee's contention but was not convinced with it and has confirmed the disallowance of deduction under Section 80HHC after having observed that the goods has not reached the desired destination and were destroyed thereafter It was also noted by the CIT(A) that the alleged modus operandi in this case was that black money was sent to Dubai through hawala channel and in turn US dollars were routed to Russia from Dubai from where the remittance was shown against the export-invoices and exports as such were only paper transactions. Relevant observation of CIT(A) is extracted hereunder:
7. I have carefully examined the appellant's submissions. It has been held in McDowell & Co. Ltd. v. CTO 154 ITR 148, 171 (SC) that:
Tax planning may be legitimate provided it is within the framework of the law. Colurable devices cannot be part of tax planning and it is wrong to encourage or entertain the belief that it is honourable to avoid the payment of tax by dubious methods. It is the obligation of every citizen to pay the taxes honestly without resorting to subterfuges.
Therefore, the issue arising in the present appeal is whether affairs have been planned in such a manner as to fall in the category of colourable device which may properly be called a device or a dubious method of subterfuge clothed with apparent dignity (Union of India v. Azadi Bachao Andolan 263 ITR 706, 759 (SC) stating that the observation of Gujarat High Court in Banyan and Berry v. CIT 222 ITR 831 at 850 accords with their own view of the matter).
8. The appellant's plea in letter dt. 18.1.06 is that merely stating that assessee had agreed that the goods had. not reached the-desired destination is not enough sine although the goods did not reach the desired destination and were destroyed thereafter, this does not mean that no exports had taken place more so, once the goods leave the Indian shore by 50 nautical miles, the export is complete, which is an undisputed fact and the same has not been disputed by the Departmental authorities. The contention that the export is complete once the goods leave the Indian shore by 50 nautical miles was not raised before the AO and even during the appeal proceedings has been raised for the first time in the letter dated 18.1.2006. Therefore, the contention that this is undisputed fact is not correct. Moreover, no evidence has been filed to justify the contention. Therefore, the contention is not accepted.
9. As noted above, the appellant has filed a copy of the order dt. 16.2.2004 of Settlement Commission, Customs and Central Excise, Mumbai. In the 'Brief facts of the case given in the final order No. 12/CUS-2004 dt. 16.2.2004, it is inter alia noted The consignment did not reach Moscow. Export goods were destroyed at Limassol on 10.6.97, under instruction from the applicant' (emphasis supplied). It is also noted that 'The alleged modus operandi in this case was that the black money was sent to Dubai through hawala channel and in turn US dollars were routed to Russia from Dubai from where the remittance was shown against the export-invoices and exports as such were only paper transactions'.
10. Moreover, the Duty Drawback amounting to Rs. 10,68,280/- was voluntarily deposited by the appellant during the course of investigation by the DRI which substantiates the AO's finding that no export had taken place. The assessee's explanation is that there cannot be any estoppel against legal principles and the assessee can always retract if the amount offered cannot be taxed under law. However, the factual matrix is that the voluntary deposit of drawback of Rs. 10,68,280/- is not shown to have been subsequently retracted before the Customs Department of the DRI. Therefore, the appellant's contention that the Duty Drawback was returned to the Customs Department under pressure cannot be accepted.
11. The appellant's contention it that the conditions prescribed for deduction Under Section 80HHC are satisfied since there is export out of India, the sale proceeds are received in convertible foreign exchange and the report in from No. 10CCAC was submitted to the AO. However, the goods did not reach the destination and as noted in the order of the settlement commission dt. 16.2.04 supra, the export goods were destroyed at Limassol on 10.6.97, under instruction from the applicant. The duty drawback claim received was refunded to the Customs Department by the appellant. These facts support the citation in order of the Settlement Commission dt. 16.2.04 supra that the alleged modus operandi that the black money was sent to Dubai through hawala channel and in turn US dollars were routed to Russia from Dubai from where the remittance was shown against the export invoices and exports as such were only paper transactions. The affairs can therefore be said to be planned in such a manner as to fall in the category of colourable' device which may properly be called a device or a dubious method of subterfuge clouded with apparent dignity for the purpose of making a claim of deduction Under Section 80HHC of the Act. The AO's findings that no deduction Under Section 80HHC is being allowed to the assessee is confirmed.
7. Now the assessee has preferred an appeal before the Tribunal and has contended that in the instant case the goods were exported out of India and assessee has realized the sale proceeds in convertible foreign exchange as such he is entitled for deduction under Section 80HHC of the Act. Once the goods are exported out of India assessee is entitled for deduction in spite of the fact that the goods might have been destroyed during the course of transit in the high sea He invited our attention to the definition of export out of India in Clause (aa) of the Explanation to Section 80HHC. This clause means that it will not an export out of India if two conditions are satisfied: i.e. (i) it should be a transaction by way of sale of otherwise, in a shop, emporium or any other establishment situated in India; (ii) it should not involve clearance in the customs situation as defined in the Customs Act. Hence if the transactions involved clearance at customs it is export out of India within the meaning of said Clause (aa). That Clause (aa) has nothing to do with the seller or purchaser. If the transaction involves clearance at customs it is an export out of India within the meaning of Clause (aa). It is not correct to say that it is only if the seller gets clearance from customs that can be treated as an export out of India. If the goods are got cleared through the customs station stations either by purchaser or seller it would be an export out of India. In support of his contention he placed reliance upon the judgement of the Allahabad High Court in the case of Ram Babu & Sons v. Union of India and the Rajasthan High Court in the case of ITO v. Vaibhav Textiles 258 ITR 346. He has also placed reliance upon the judgement of the apex court in the case of CIT v. Silver & Arts Palace 259 ITR 648 in which it has been held that where the transactions of counter sales affected by the respondent involved customs clearance within the meaning of Explanation (aa) to Section 80HHC and further sales were in convertible foreign exchange the respondent was entitled to such deduction under Section 80HHC in respect of profits from those transactions. The learned Counsel for the assessee further pointed out that the assessee has placed all relevant evidences to prove that the goods were exported after customs clearance and compliance of other formalities and within the period of six months sale proceeds were also realized in foreign convertible exchange, as such the assessee is eligible for deduction under Section 80HHC.
8. The learned Counsel for the assessee further contended that merely stating that the assessee has agreed that goods have not reach the desired station is not enough for disallowing the claim of deduction under Section 80HHC because, although the goods has not reached the desired station and were destroyed thereafter it does not mean that no export have taken place. Once the goods leave the Indian shore by 50 nautical miles, export is complete. It is an undisputed fact that as per Section 2 (18) of the Customs Act, 1962 export with its grammatical variations and cognate expressions means taking out of India to a place outside India. As per Section 2 (27) of the Customs Act, 1962, 'India' includes the territorial waters of India. As per Section 2 (28) of the Act Indian Customs waters' means the water extending into sea up to the limit of contiguous zone of India under Section 5 of the Territorial Waters, Continental Shelf, Exclusive Economic Zone and other Maritime Zones Act, 1976 and includes any bay, gulf, harbour, creek or tidal river. The learned Counsel for the assessee contended that when the goods cross the territorial waters the export is complete and in the instance case there is no dispute with regard to this fact that the goods have reached Cyprus. Moreover the goods were exported on FOB basis, which indicates that the liability of the consignor, i.e. the assessee, ceased to exist at the moment the goods have been boarded on the ship. The assessee succeeded in getting the remittance of the consideration of export from the buyer. Under the circumstances it is clear that the export has taken place and accordingly the assessee is entitled for deduction under Section 80HHC of the Act.
9. With regards to the observation of the CIT(A) with respect to the facts mentioned in the order of the Settlement Commission that the alleged modus operandi in this case was that the black money was sent to Dubai through hawala channel and in turn US dollars were routed through Russia from Dubai from where the remittance was shown against the export invoices and export as such, were only paper transactions, the learned Counsel for the assessee has contended that CIT(A) has acted on this observation of the custom authorities without application of his mind independently and considering the documents and information placed on record. The learned Counsel for the assessee further contended that the export consideration was received through normal banking channels and the report in Form No. 10CCAC was submitted to the Assessing Officer. While doing export the custom authorities strictly verified not only the export documents but also the IEC Number allotted by the Director General of Foreign Trade & Commerce in favour of exporting party issued. Even all the export documents when submitted to the Banker under LC were duly verified before they were dispatched to the LC opening Bank at foreign country. It was further contended that only after verification of such documents and their acceptability under the law, the export remittance was released by the bank under the LC in the account of the beneficial of the LC. Moreover, the Reserve Bank of India closely monitors the LCs' relating to the export. Thus there is a complete check of the export document and the existence of the party. In support of his contention he has relied upon the order of the Tribunal in the case of Smt. Grover v. ACIT 99 TTJ 837. He further contended that judgement of the apex Court in the case of McDowell and Co. Ltd. v. CTO 154 ITR 148 has been substantially watered down by the subsequent decision of the Hon'ble Supreme Court in the case of CWT v. Arvind Narottam 173 ITR 479 wherein the Hon'ble Supreme Court relying upon the case of Gartside v. Indland Revenue Commissioner (1968) AC 533 (HL) has held that "where the language of the deed of settlement is plan and admits of no ambiguity, there is no scope for considerations of tax avoidance". Therefore, tax planning within the four corners of law is, not to be seen with suspicion and doubt. The learned Counsel for the assessee has submitted that since the assessee's claim is valid and genuine it should be allowed.
10. The learned DR, in oppugnatioin, has submitted besides placing heavy reliance upon the order of the CIT(A) that the assessment was reopened on receipt of information from the Directorate of Revenue Intelligence (DRI) wherein the assessee has returned back Rs. 10,86,000/- to the Customs Department being the duty drawback so claimed by way of deduction under Section 80HHC of the Act. The dispute with the Customs and Excise Department has traveled to the Settlement Commission, Customs and Central Excise in which they have examined the modus operandi of the assessee and has observed in, its order dated 16/02/2004 that the black money was sent to Dubai through hawala channel and in turn US dollars were routed through Russia from Dubai from where remittance was shown against the export invoices and export as such were only paper transactions. Undisputedly the alleged exported goods did not reach the final destination, i.e. Russia but the same were diverted to Cyprus and were destroyed in high sea at the instance of the assessee. Assessee has not given any valid reason as to why the exported goods were destroyed in high sea and if it is destroyed how communication was made to the Captain of the Ship for compliance of his instruction. All these queries remained unanswered. The learned DR further invited our attention to the provision of Section 80HHC with the submission that for claiming deduction under Section 80HHC export of the goods is one of the essential ingredients but it should be coupled with its sale and the realization of sale proceeds in foreign convertible exchange. It cannot be allowed only on account of export of goods as per the definition of the Customs Act without its sale and realization of sale proceeds in foreign convertible exchange. The learned DR has invited our attention to the provision of Section 80HHC(2) with the submission that Section 80HHC applies to all goods or merchandise, other than those specified in Clause (b) if the sale proceeds of such goods or merchandise exported out of India are received or brought into India by the assessee in convertible foreign exchange within a period of six months from the end of the previous year or within such further period as the competent authority may allow in this behalf, meaning thereby deduction under Section 80HHC can only be allowed if the goods or merchandise are exported from India to some other country and the sale proceeds were received by the assessee in foreign convertible exchange. If the chain is not complete and is broken somewhere assessee would not be eligible for deduction under Section 80HHC of the Act. In the instant case, though assuming for the sake of argument but not admitted that the goods were exported out of India but were not sold to the buyer and once it is not sold there is no question of receipt of sale proceeds in foreign convertible exchange. The learned DR further contended that according to the assessee itself the goods were destroyed at the high sea at assessee's instruction meaning thereby the goods were in constructive possession of the assessee till it was destroyed. Assessee has received certain amount in foreign convertible exchange from the so called buyer without making any sale to him. It is also interesting to note that the so called buyer has not raised any claim either for the destruction of consignment in the high sea or for the refund of the money given to the assessee in the form of alleged sale proceeds. The entire events strengthen the case of the Revenue that the entire export transaction is a paper transaction and in fact it was a receipt of black money through hawala channel in the form of remittance against the export invoice.
11. The learned DR has also invited our attention to the definition of sale given in Section 4 of Sale of Goods Act, 1930 in which it has been stated that where under a contract of sale the property in the goods is transferred from the seller to the buyer the contract is called sale but where the- transfer of property in the goods is. to take place at a further time or subject to some conditions thereafter to be fulfilled the contract is called an agreement to sale. It has been further clarified that an agreement to sale become a sale when the time lapses or the conditions are fulfilled subject to which the property in the goods is to be transferred. The learned DR further invited our attention to Section 30, 31 & 32 of the Sales of Goods Act which talks about the duties of the seller and buyer and the payment and delivery. Section 31 deals with the duties of the seller and buyer and according to it, it is the duty of the seller to deliver the goods and the buyer to accept and pay for them in accordance with the terms of contract of sale and Section 32 deals with the payment and delivery and according to it unless and otherwise agreed, delivery of the goods and payment of the price are concurrent conditions, i.e. to say, the seller shall be ready and willing to give possession of the goods to the buyer in exchange for the price and the buyer shall be ready and willing to pay the price in exchange of the possession of the goods, meaning thereby sale can only be completed when the possession of the goods were given to the buyer. In the instant case the alleged exported goods were destroyed in the high sea at the instance of the assessee, the seller, meaning thereby the assessee had no intention to transfer the possession of the goods to the buyer. Since the delivery of the goods to the buyer is not there, the entire transaction cannot be converted into sale and if it is not a sale there cannot be any question of sale proceeds to have been received by the assessee. Since the assessee has not received any sale proceeds he is not entitled (or deduction under Section 80HHC of the I.T. Act. The learned DR further contended that though the judgement of the apex Court in the case McDowell was watered down by subsequent judgements of the apex Court but it does not confer any discretion to the assessee that he can adopt dubious means for avoidance of tax liability.
12. The learned DR further contended that the amount introduced in the books of accounts of the assessee as sale proceeds convertible into foreign exchange on which deduction under Section 80HHC is claimed is in fact is not sale proceeds of the exported goods as the sale was never completed. It also strange to note that the so called buyer has not raised any claim either for the goods or for the money paid to the assessee on account of sale of exported goods till date. If all these events are closely examined only one inference would be drawn that it is all made up affairs and assessee has made its efforts to convert its black money through hawala transaction and also in the shape of receipt of foreign convertible exchange to claim deduction under Section 80HHC of the Act. As such the Revenue has rightly disallowed the claim of the assessee under Section 80HHC of the Act and taxed the receipt.
13. We have given a thoughtful consideration to the rival submissions and from a careful perusal of record we find that the assessment was reopened by the Assessing Officer on receipt of information from the Directorate of Revenue. Intelligence wherein the assessee has returned back Rs. 1 0,86,000/- to the Customs department, being the duty drawback so claimed by way of deduction under Section 80HHC of the Act. It is also undisputed fact that the consignment exported by the assessee never reached the destination, it was diverted during the course of transit to Cyprus and thereafter destroyed in the high sea. During the course of hearing a specific query was raised from the learned Counsel for the assessee as to how and why the export consignment was destroyed in high sea and on whose instruction. The learned Counsel for the assessee candidly admitted that the consignment was destroyed in the high sea at the instruction of the assessee but he could not explain as to why it was destroyed instead of sending to the destination point or to the buyer. This mystery remains shrouded. The learned Counsel for the assessee strongly harped upon the argument that once the goods move out of the Indian territory after proper customs clearance it amount to export under the Customs Act. It was further argued that once the goods moves out of the Indian shore by 50 nautical miles the export is complete. There is no dispute with regard to the fact as the Revenue's stand is that the exported goods/consignment were diverted to Cyprus and was destroyed at the instance of the assessee. Now the question arises whether for claiming deduction, only export is sufficient or any other conditions are required to be fulfilled? From a careful perusal of the provisions of Section 80HHC we find that export of the goods is one of the ingredients to claim deduction under Section 80HHC of the Act but it is not a sole factor on the basis of which deduction can be claimed. No doubt the export has not been defined under the Income Tax Act but in Customs Act it has been defined and according to it, once the goods move out of the Indian Shore by 50 nautical miles it means to an export, but on account of export of any good, can the assessee claim deduction under Section 80HHC of the Act? In order to understand the essential ingredients for claiming deduction under Section 80HHC of the Act we reproduce the provision of Section 80HHC as under:
Deduction in respect of profits retained for export business.
80HHC. ((1) Where an assessee, being an Indian company or a person (other than a company) resident in India, is engaged in the business of export out of India of any goods or merchandise to which this section applies, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, [a deduction to the extent of profits, referred to in Sub-section (1B),] derived by the assessee from the export of such goods or merchandise:
Provided that if the assessee, being a holder of an Export House Certificate or a Trading House Certificate (hereafter in this section referred to as an Export House or a Trading House, as the case may be,) issues a certificate referred to in Clause (b) of Sub-section (4 A), that in respect of the amount of the export turnover specified therein, the deduction under this sub-section is to be allowed to a supporting manufacturer, then the amount of deduction in the case of the assessee shall be reduced by such amount which bears to the (total profits derived by the assessee from the export of trading goods, the same proportion as the amount of export., turnover specified in the said certificate bears to the total export turnover of the assessee in respect of such trading goods}.
(1A) Where the assessee, being a supporting manufacturer, has during the previous year, sold goods or merchandise to any Export House or Trading House in respect of which the Export House or Trading House has issued a certificate under the proviso to Sub-section (1), there shall, in accordance with and subject to the provisions of this section, be allowed in computing the total income of the assessee, [a deduction to the extent of profits, referred to in Sub-section (1B),J derived by the assessee from the sale of goods or merchandise to the Export House or Trading House in respect of which the certificate has been issued by the Export House or Trading House.
[(1B) For the purposes of Sub-sections (1) and (1A), the extent of deduction of the profits shall be an amount equal to-
(i) eighty per cent thereof for an assessment year beginning on the 1st day of April, 2001;
[(ii) seventy per cent thereof for an assessment year beginning on the 1st day of April, 2002;
(iii) fifty per cent thereof for an assessment year beginning on the 1st day of April, 2003;
(iv) thirty per cent thereof for an assessment year beginning on the 1st day of April, 2004, and no deduction shall be allowed in respect of the assessment year beginning on the 1st day of April, 2005 and any subsequent assessment year.] (2)(a) This section applies to all goods or merchandise, other than those specified in Clause (b), if the sale proceeds of such goods or merchandise exported out of India are [received in, or brought into, India] by the assessee [(other than the supporting manufacturer)] in convertible foreign exchange [,within a period of six months from the end of the previous year or, [within such further period as the competent authority may allow in this behalf].]-
[Explanation.-For the purposes of this clause, the expression "competent authority" means the Reserve Bank of India or such other authority as is authorised under any law for the time being in force for regulating payments and dealings in foreign exchange.]
(b) This section does not. apply to the following goods or merchandise, namely:
(i) mineral oil; and
(ii) minerals and ores [(other than processed minerals and ores specified in the Twelfth Schedule)].
[Explanation 1.-The sale proceeds referred to in Clause (a) shall be deemed to have been received in India where such sale proceeds are credited to a separate account maintained for the purpose by the assessee with any bank outside India with the approval of the Reserve Bank of India.
Explanation 2. -For the removal of doubts, it is hereby declared that where any goods or merchandise are transferred by an assessee to a branch, office, warehouse or any other establishment of the assessee situate outside India and such goods or merchandise are sold from such branch, office, warehouse or establishment, then, such transfer shall be deemed to be export out of India of such goods and merchandise and the value of such goods or merchandise declared in the shipping bill or bill of export as referred to in Sub-section (1) of Section 50 of the Customs Act, 1962 (52 of 1962), shall, for the purposes of this section, be deemed to be the sale proceeds thereof] [(3) For the purposes of Sub-section (1),-
(a) where the export out of India is of goods or merchandise manufactured [or processed] by the assessee, the profits derived from such export shall be the amount which bears to the profits of the business, the same proportion as the export turnover in respect of such goods bears to the total turnover of the business carried on by the assessee ;
(b) where the export out of India is of trading goods, the profits derived from such export shall be the export turnover in respect of such trading goods as reduced by the direct costs and indirect costs attributable to such export;
(c) where the export out of India is of goods or merchandise manufactured [or processed/ by the assessee and of trading goods, the profits derived from such export shall,-
(i) in respect of the goods or merchandise manufactured [or processed] by the assessee, be the amount which bears to the adjusted profits of the business, the same proportion as the adjusted export turnover in respect of such goods bears to the adjusted total turnover of the business carried on by the assessee; and
(ii) in respect of trading goods, be the export turnover in respect of such trading goods as reduced by the direct and indirect costs attributable to export of such trading goods:
Provided that the profits computed under Clause (a) or Clause (b) or Clause (c) of this sub-section shall be further increased by the amount which bears to ninety per cent of any sum referred to in Clause (iiia) (not being profits on sale of a licence acquired from any other person), and Clauses (iiib) and (iiic) of Section 28, the same proportion as the export turnover hears to the total turnover of the business carried on by the assessee:
Provided further that in the case of an assessee having export turnover not exceeding rupees ten crores during the previous year, the profits computed under Clause (a) or Clause (b) or Clause (c) of this sub-section or after giving effect to the first proviso, as the case may be, shall be further increased by the amount which bears to ninety per cent of any sum referred to in Clause (iiid) or Clause (iiie), as the case may be, of Section 28, the same proportion as the export turnover bears to the total turnover of the business carried on by the assessee:
Provided also that in the case of an assessee having export turnover exceeding rupees ten crores during the previous year, the profits computed under Clause (a) or Clause (b) or Clause (c) of this sub-section or after giving effect to the first proviso, as the case may be, shall be further increased by the amount which bears to ninety per cent of any sum referred to in Clause (iiid) of Section 28, the same proportion as the export turnover bears to the total turnover of the business carried on by the assessee, if the assessee has necessary and sufficient evidence to prove that,-
(a) he had an option to choose either the duty drawback or the Duty Entitlement Pass Book Scheme, being the Duty Remission Scheme; and
(b) the rate of drawback credit attributable to the customs duty was higher than the rate of credit allowable under the Duty Entitlement Pass Book Scheme, being the Duty Remission Scheme:
Provided also that in the case of an assessee having export turnover exceeding rupees ten crores during the previous year, the profits computed under Clause (a) or Clause (b) or Clause (c) of this sub-section or after giving effect to the first proviso, as the case may be, shall be further increased by the amount which bears to ninety per cent of any sum referred to in Clause (iiie) of Section 28, the same proportion as the export turnover bears to the total turnover of the business carried on by the assessee, if the assessee has necessary and sufficient evidence to prove that,--
(a) he had an option to choose either the duty drawback or the Duly Free Replenishment Certificate, being the Duty Remission Scheme; and
(b) the rate of drawback credit attributable to the customs duly was higher than the rate of credit allowable under the Duty Free Replenishment Certificate, being the Duty Remission Scheme.
Explanation.-For the purposes of this clause, "rate of credit allowable" means the rate of credit allowable under the Duty Free Replenishment Certificate, being the Duty Remission Scheme calculated in the manner as may be notified by the Central Government:] [Provided also that in case the computation under Clause (a) or Clause (b) or Clause (c) of this sub-section is a loss, such loss shall be set off against the amount which bears to ninety per cent of-
(a) any sum referred to in Clause (iiia) or Clause (iiib) or Clause (iiic), as the case may be, or
(b) any sum referred to in Clause (iiid) or Clause (iiie), as the case may be, of Section 28, as applicable in the case of an assessee referred to in the second or the third or the fourth proviso, as the case may be, the same proportion as the export turnover bears to the total turnover of the business carried on by the assessee.] Explanation.-For the purposes of this sub-section,-
(a) "adjusted export turnover" means the export turnover as reduced by the export turnover in respect of trading goods;
(b) "adjusted profits of the business" means the profits of the business as reduced by the profits derived from the business of export out of India of trading goods as computed in the manner provided in Clause (b) of Sub-section (3);
(c) "adjusted total turnover" means the total turnover of the business as reduced by the export turnover in respect of trading goods ;
(d) "direct costs" means costs directly attributable to the trading goods exported out of India including the purchase price of such goods ;
(e) "indirect costs" means costs, not being direct costs, allocated in the ratio of the export turnover in respect of trading goods to the total turnover;
(f) "trading goods" means goods which are not manufactured for processed] by the assessee.] [(3A) For the purposes of Sub-section (1A), profits derived by a supporting manufacturer from the sale of goods or merchandise shall be,-
(a) in a case where the business carried on by the supporting manufacturer consists exclusively of sale of goods or merchandise to one or more Export Houses or Trading Houses, the profits of the business;
(b) in a case where the business carried on by the supporting manufacturer does not consist exclusively of sale of goods or merchandise to one or more Export Houses or Trading Houses, the amount which bears to the profits of the business the same proportion as the turnover in respect of sale to the respective Export House or Trading House bears to the total turnover of the business carried on by the assessee.] [(4) The deduction under Sub-section (1) shall not be admissible unless the assessee furnishes in the prescribed form, along with the return of income, the report of an accountant, as defined in the Explanation below Sub-section (2) of Section 288, certifying that the deduction has been correctly claimed [in accordance with the provisions of this section:]] [Provided that in the case of an undertaking referred to in Sub-section (4C), the assessee shall also furnish along with the return of income, a certificate from the undertaking in the special economic zone containing such particulars as may be prescribed, duly certified by the auditor auditing the accounts of the undertaking in the special economic zone under the provisions of this Act or under any other law for the time being in force.] [(4A) The deduction under Sub-section (1A) shall not be admissible unless the supporting manufacturer furnishes in the prescribed form along with his return of income,
(a) the report of an accountant, as defined in the Explanation below Sub-section (2) of Section 288, certifying that the deduction has been correctly claimed on the basis of the [profits] of the supporting manufacturer in. respect of his sale of goods or merchandise to the Export House or Trading House; and
(b) a certificate from the Export House or Trading House containing such particulars as may be prescribed and verified in the manner prescribed that in respect of the export turnover mentioned in the certificate, the Export House or Trading House has not claimed the deduction under, this section:
Provided that the certificate specified in Clause (b) shall be duly certified by the auditor auditing the accounts of the Export House or Trading House under the provisions of this Act or under any other law.] [(4B) For the purposes of computing the total income under Sub-section (1) or Sub-section (IA), any income not charged to tax under this Act shall be excluded.) [(4C) The provisions of this section shall apply to an assessee,-
(a) for an assessment year beginning after the 31st day of March, 2004 and ending before the 1st day of April, 2005;
(b) who owns any undertaking which manufactures or produces goods or merchandise anywhere in India (outside any special economic zone) and sells the same to any undertaking situated in a special economic zone which is eligible for deduction under Section 10A and such sale shall be deemed to be export out of India for the purposes of this section.] Explanation.-For the purposes of this section,-
(a) "convertible foreign exchange" means foreign exchange which is for the time being treated by the Reserve Bank of India as convertible foreign exchange for the purposes of the Foreign Exchange Regulation Act, 1973 (46 of 1973), and any rules made thereunder;
[(aa) "export out of India" shall not include any transaction by way of sale or otherwise, in a shop, emporium or any other establishment situate in India, not involving clearance at any customs station as defined in the Customs Act, 1962 (52 of 1962) ;]
(b) "export turnover" means the sale proceeds (, received in, or brought into, India] by the assessee in convertible foreign exchange fin accordance with Clause (a) of Sub-section (2)] of any goods or merchandise to which this section applies and which are exported out of India, but does not include freight or insurance attributable to the transport of the goods or merchandise beyond the customs station as defined in the Customs Act, 1962 (52 of 1962);] [(ba) "total turnover" shall not include freight or insurance attributable to the transport of the goods or merchandise beyond the customs station as defined in the Customs Act, 1962 (52 of 1962):
Provided that in relation to any assessment year commencing on or after the 1st day of April, 1991, the expression "total turnover" shall have effect as if it also excluded any sum referred to in Clauses (iiia), (iiib) [, (iiic), (iiid) and (iiie)] of Section 28 ;] (baa) "profits of the business" means the profits of the business as computed under the head "Profits and gains of business or profession" as. reduced by-
(1) ninety per cent of any sum referred to in Clauses (iiia), (iiib) [, (iiic), (Hid)-and (iiie)] of Section 28 or of any receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature included in such profits; and (2) the profits of any branch, office, warehouse or any other establishment of the assessee situate outside India ;] [(c)] "Export House Certificate" or "Trading House Certificate" means a' valid Export House Certificate or Trading House Certificate, as the case may be, issued by the Chief Controller of Imports and Exports, Government of India;
[(d)] "supporting manufacturer" means a person being an Indian company or a person (other than a company) resident in India,[manufacturing (including processing) goods] or merchandise and selling such goods or merchundise to an Export House or a Trading House for the purposes, of export;] [(e) "special economic zone" shall have the meaning assigned to it in Clause (viii) of the Explanation 2 to Section 10A.]
14. From a plain reading of Section 80HHC we find that if the assessee is engaged in the business of export out of India of any goods or merchandise to which this section applies, it is eligible for deduction of the profit derived by the assessee from the export of such goods or merchandise. Sub-section 2 of Section 80HHC further states that the section applies to all goods or merchandise other than those specified in Clause (b), if the sale proceeds of such goods or merchandise exported out of India are received in, or brought into India by the assessee other than the supporting manufacturer in convertible foreign exchange within a period of six months from the end of the previous year or within such further period as the competent authority may allow in this behalf. From the careful perusal of this section we find that the section itself is a complete code for the purpose of computation of deduction under Section 80HHC and different formulas are laid down to compute deduction in different type of activities of the assessee, but three ingredients are essential which makes the assessee eligible for deduction under Section 80HHC of the Act. These are: (i) there shall be an export of goods and merchandise to which the section applies out of India; (ii) there shall be a sale of the exported goods so that profit on its sale can be worked out; and (iii) the sale proceeds of such goods or merchandise exported out of India shall be received by the assessee in convertible foreign exchange within a period of six months from the end of the previous year or within such further period as the competent authority may allow in this behalf. If any of the condition is not fulfilled assessee shall not be eligible for deduction under Section 80HHC of the Act.
15. In the instant case the assessee might have exported goods as per the definition of the Customs Act but the goods never reached the destination or in the hands of the buyer meaning thereby the sale of the exported goods were never effected. To understand as to how the sale is complete, we referrer the relevant provisions of the Sales of Goods Act and according to Section 4 of the Sale of Goods Act, 1930 wherein a contract of sale the property in the goods is transferred from the seller to the buyer, the contract is called sale but where the transfer of the property in the goods is to take place at a future time or subject to some conditions thereafter to be fulfilled, the contract is called an agreement to sell, meaning thereby unless and until the goods are transferred from the seller to the buyer the sale is not complete. We further refer to Sec) ion 31 of the Sales of Goods Act which talks about the duties of the Sellers and Buyers and according to it, it is the duty of the seller to deliver the goods and of the buyer to accept and pay for them in accordance with the terms of the contract of sale. In the instant case it is an admitted position that the consignment or the exported goods were destroyed during the course of transit at the instance of the assessee meaning thereby till the consignment was destroyed it remained under the constructive possession of the assessee and was destroyed at his command. It is also beyond our comprehension how the assessee has communicated to the Captain of the Ship to destroy the consignment at Cyprus in the high sea. All these circumstances lead us to a conclusion that assessee has no intention to deliver the consignment of the exported goods to the buyer. Once the delivery of the goods or the consignment is not effected, there cannot be sale to make the assessee entitle for the sale proceeds. With out sale there cannot be sale proceeds which can be received in foreign convertible exchange by the assessee in India. Once the assessee did not receive the sale proceeds in foreign convertible exchange in India, he is not entitled for deduction under Section 80HHC of the Act as he has not fulfilled all the three essential ingredients to claim deduction under Section 80HHC. During the course of hearing a specific query was also raised from the learned Counsel for the assessee as to what happened to the receipts obtained by the assessee from the so-called buyer. Whether he has enforced the delivery of the consignment or claimed refund of the so-called payment made to the assessee on account of the exported consignment. These queries were not replied and remained unanswered.
16. On perusal of record we find that the Revenue has tried to make out a case that the assessee is engaged in hawala transaction and the modus operandi observed by the Settlement Commission, Customs & Excise in his order dated 16/02/2004 is that the black money was sent to Dubai through hawala channel and in turn US dollars were routed through Russia from Dubai from where remittance was shown against the export invoices and export was only a paper transaction. A close examination of the facts of the case strengthen the belief of the Revenue. It is beyond our comprehension as to how and why the assessee has instructed the Captain of the Ship to destroy the consignment in the high sea at Cyprus and subsequently why the so called buyer has not enforced for the delivery of the exported goods if he in tact has made payment to the assessee in foreign convertible exchange? And if delivery is not possible why has not he enforced refund of The so-called payment even till date, i.e. even after the lapse of 10 years? This mystery remained unsolved despite repeated queries from the learned Counsel for the assessee. Since there was no sale of exported goods, there cannot he sale proceed to determine the profit derived from export for its deduction us/ 80HHC of the Act. We, therefore, of the view that assessee is not entitled for deduction under Section 80HHC as he has not fulfilled the basic three essential ingredients to make him eligible for deduction. We have also carefully examined various judgements referred to by the assessee but we do not find any where in any of the judgement that assessee can claim deduction only on the basis of export of goods without proving its sale and receipt of sale proceeds in foreign convertible exchange.
17. With regard to taxability of the receipt is concerned we are of the view that this amount was offered as income of the assessee so it is to be taxed. We however get support from the judgement of the apex Court in the case of CIT v. P. Mohanakala 291 ITR 278 (SC) in which it has been held that where the explanation of the assessee is found unacceptable and unsatisfactory the sum found to be credited in the books of the assessee for any previous year the same may be charged to tax as income of the assessee for the previous year. The relevant observations of the apex Court are extracted hereunder:
We may at this stage profitably note that the Assessing Officer, the Commissioner of Appeals and the Tribunal in one voice held that the explanation offered by the assessees as regards cash credit entries is not acceptable. The material and the evidence available on record according to each one of the authorities lead to one and only possible inference that the so-called gifts received by the assessees in reality are no gifts.
The High Court virtually re appreciated the evidence available on record and substituted its own findings for that of the Tribunal and the other authorities. The High Court came to the conclusion that the reasons assigned by the Tribunal and other authorities "are in the realm of surmises, conjectures and suspicions the authorities under the Act have failed to draw the only conclusion that is possible legally and logically." The judgement of the High Court is assailed in these appeals.
It is true that even after rejecting the explanation given by the assessees it found unacceptable, the crucial aspect whether on the facts and circumstances of the case it should be inferred the sums credited in the books of the assessees constituted income of the previous year must receive the consideration of the authorities provided the assessees rebut the evidence and the inference drawn to reject the explanation offered as unsatisfactory. We are required to notice that Section 68 of the Act itself provides, where any sum is found credited in the books of the assessees for any previous year the same may be charged to income tax as the income of the assessees of the previous year if the explanation offered by the assessee about the nature and source of such sums found credited in the books of the assessees is in the opinion of the Assessing Officer not satisfactory. Such opinion found itself constitutes a prima facie evidence against the assessees, viz., the receipt of money, and if the assessees fails to rebut the said evidence the same can be used against the assessees by holding that it was a receipt of an income nature. In the case in hand the authorities concurrently found the explanation offered by the assessee unacceptable. The authorities upheld the opinion formed by the Assessing Officer that the explanation offered was not satisfactory. The' assessee did not take the plea that even if the explanation is not acceptable the material and attending circumstances available., on record do not justify the sum. found credited in the books to be treated as a receipt of an income nature. The burden in this regard was on the assessees.
18. Keeping in view the totality of the facts and circumstances of the case we are of the considered opinion that the assessee is not entitled for deduction under Section 80HHC and the Revenue has rightly taxed the receipt.
19. Next ground relates to the addition on account of difference in the cost price of the ball pens purchased by the assessee. Assessee has claimed to have made purchases from M/s Divya Enterprises but during the course of assessment proceedings assessee could not produce Divya Enterprises despite adequate opportunities. He, however, field letters explaining the mode of purchase but the Assessing Officer was not convinced with it and he noted that the purchases of pen was shown at Rs. 3.40 per piece but in actual reality the same was accepted by Shri V.C. Kamdar to be for paise 70 per piece and he disallowed the extra claim of Rs. 2.70 per pen resulting into a disallowance of Rs. 9,23,437/- as per the assessment order which was later on rectified under Section 154 of the I.T. Act and the quantum of disallowance was enhanced to Rs. 35,61,826/-. The assessee preferred an appeal before the CIT(A) with the submission that the purchases were not doubted by the Revenue as the ball pens/consignments were exported after due clearance. The dispute was with regard to the cost of the pen purchased by the assessee. The contention of the assessee was not accepted by the CIT(A) despite the finding of the Additional Commissioner of Customs in his order dated 14/10/1999 in which he accepted the purchase price and dropped the proceedings. Now the assessee has preferred an appeal before the Tribunal and has contended that the assessment was reopened on the basis of the information received from the Directorate of Revenue Intelligence. Separate proceedings were conducted under the Customs Act. Initially the purchases were also treated as non-genuine by the Customs authorities and the appeal was filed; to the Commissioner of Customs (Appeals) who vide its order dated 27/10/1998 has observed that the assessee has certainly not given reasonable opportunity for representing against the results of the market enquiry which has formed the basis of the order. He accordingly set aside the order in original dated 12th March, 1998 and allowed the assessee's appeal by referring back the case to the adjudicating authorities for deciding it afresh after giving the details of the market enquiry to the assessee. The Additional Commissioner has re-examined the evidences and, the enquiry report in the light of various judicial pronouncements and has finally arrived at a conclusion that the Department has not satisfactorily discharged their burden to prove over valuation in this case. He accordingly dropped the proceedings after holding that the show cause notice was not found maintainable. The Assessing Officer in the Income Tax proceedings has relied upon the survey conducted by the Excise officials and he himself did not make any independent enquiry. Since the authorities concerned has exonerated the assessee, the Assessing Officer or the CIT(A) has no independent material in hand to make the disallowance on adhoc basis. The learned Counsel for the assessee placed heavy reliance on the following judgements in support of his contention that purchases made by the assessee against the invoices should not be doubted on the basis of the enquiries made by other departmental officials who were finally convinced with the claim of the assessee:
i) DCIT v. Kay Poly Plast Ltd. (2004) 81 TTJ (Jd) 374
ii) ITO v. Murlidhar Narian Das 1 TTJ 15 (Del.)
iii) Ellenbarrie Industrial Gases Ltd. v. JCIT 83 ITD 111
iv) CIT v. Orissa Corporation (P) Ltd. 159 ITR 78 (SC)
v) Sumati Dayal v. CIT 214 ITR 801
vi) CIT v. Durgaprasad More 82 ITR 540
20. The learned DR, on the other hand, has placed heavy reliance on the order of the CIT(A).
21. Having gone through the orders of the lower authorities we find that undisputedly the assessment was reopened on receipt of the information from the DRI and the Assessing Officer has formed a view that the assessee has over invoiced the purchases of the ball pens on the basis of the investigation conducted by the customs authorities. The Assessing Officer has summoned. M/s. Divya Enterprises under Section 131 but it did not appear nor was it produced by the assessee. The Assessing Officer has relied upon the statements of Shri V.C. Kamdar recorded by the customs authorities for forming a view that assessee has over invoiced the purchases of ball pens. The custom authorities has also independently initiated actions under customs Act and held that the assessee has over invoiced the purchases bills and that order was challenged before the Commissioner of Customs (Appeal) who set aside this original order and restored the matter for further adjudication to the Additional Commissioner of Customs. The Additional Commissioner of Customs re-examined the issue afresh in the light of evidences placed by the assessee and investigation made by the Customs officials and he finally concluded that the Department has not satisfactorily discharged their burden to prove over valuation in this case. He accordingly dropped the proceedings. The action of the Additional Commissioner was not challenged or revised under the Customs Act. For the sake of reference we extract the relevant portion of the order of the Additional Commissioner of Customs:
The department has not satisfactorily discharged their burden to prove over valuation in this case. Moreover the market price of the goods in question at the rate of 70 paise per piece is also not found substantiated by any documentary evidence. On the contrary the exporter has been bale to put forward his contentions well supported by the documentary evidence that the market price of the ball pens in question at the material time was within the range of Rs. 1.90 to 2.10. The market price of Rs. 1.90 per piece being higher than the drawback at the rate of 82.5 paise per piece claimed by the exporter, the allegations leveled in the impugned Show Cause Notice dtd. 1.1.99 are not found maintainable.
In view of the foregoing discussions and. findings 1 order for dropping the proceedings initiated under show Clause dated 1.1.99 and its Addendum dated 24.9.99 with consequent relief, if otherwise admissible to the exporters.
22. But the Assessing Officer formed a belief that the assessee has over invoiced the purchase bills on the basis of the enquiry conducted by the Customs authorities and non-appearance of M/s Divya Enterprises from whom the ball pens were purchased. The Assessing Officer has formed a view that the purchases of pen was shown at Rs. 3.40 per piece whereas its cost was. of 70 paise per piece, according to Mr. V.C. Kamdar. The statement of Shri V.C. Kamdar recorded by the Customs authorities were not confronted to the assessee during the course of the impugned assessment proceedings. This is the only evidence on the basis of which; Assessing Officer has formed the belief with regard to over invoicing of the purchase bills. This statement of Shri V.C. Kamdar was not relied on by the Additional Commissioner of Customs and he has dropped the proceedings. But this statement was relied upon by the Assessing Officer in the Income Tax proceedings and made the disallowance without making any further enquiry only for the reason that M/s. Divya Enterprises did not appear before him. These materials are not sufficient to hold that the assessee had over invoiced the purchases. We accordingly do not find ourselves in agreement with the findings of the lower authorities in this regard as except the statement no other enquiry was conducted by the Revenue authorities and more so no material was brought by them to establish that assessee has over invoiced the purchase bills. Moreover, there are different varieties of pens available in the market whose costs differ upon their quality and different factors arc also there to determine the cost of pens. Without bringing any material on record the disallowance made by the Revenue authorities is not justifiable. We, therefore, set aside the order of the CIT(A) and deleted the addition.
In the result, appeal by the assessee is partly allowed.
Order pronounced in the open court on 07/09/2007.