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2005 (11) TMI 432 - AT - Income TaxUnexplained investments - cash credit - disallowance u/s 40A(3) - taxable profits - deduction u/s 80HHC - purchases by making cash payments - HELD THAT - 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. 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the statements were recorded by the Assessing Officer, as to whether the payment made by the assessee by cheque was withdrawn and paid back to the assessee.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 Assessing Officer that the assessee made the cash purchases. Thus, further addition made by the revenue authorities, resorting to section 40A(3) also does not survive. Hence, we also hold that there is no material to recompute the profits for the purpose of deduction u/s 80HHC. We have also noted hereinabove that the Assessing Officer worked out the peak credit and the CIT(A) enhanced the peak investment 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. There is no case for the revenue that the assessee is hot 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. According to the Assessing Officer, 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 m the market. But then, no similar cases of export have been mentioned anywhere by the Assessing Officer 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. Coming to the decision in the case of Chanana Associates 1996 (7) TMI 106 - PUNJAB AND HARYANA HIGH COURT ), the assessee did not produce any material to show that 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 40(A)(3); whereas in the instant case of the assessee there is no evidence as record to show that the payments were made in the cash but it is an assumption, resorting to the modus operandi adopted by the business circle in diamonds. 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. In the result, appeal of the assessee stands allowed.
Issues Involved:
1. Legality of the CIT(A)'s order based on the remand report of the Assessing Officer. 2. Enhancement of assessment by recomputing unaccounted peak investment. 3. Confirmation of additions as unexplained investment for the cost of diamonds exported. 4. Conclusion of purchases in cash instead of credit purchases and addition under section 40A(3). 5. Derivation of taxable profit. 6. Disallowance under section 40A(3). Issue-wise Detailed Analysis: Issue 1: Legality of the CIT(A)'s Order Based on the Remand Report The assessee argued that the CIT(A)'s order was based on an illegal and uncalled remand report from the Assessing Officer (AO). The Tribunal noted that the AO had conducted extensive investigations, including issuing summons and recording statements from the purchase parties. The remand report was used to provide the assessee an opportunity to cross-examine the parties, which the assessee did not avail due to a family marriage. The Tribunal found that the CIT(A) had correctly remanded the matter to provide the assessee an opportunity to rebut the evidence gathered by the AO. Issue 2: Enhancement of Assessment by Recomputing Unaccounted Peak Investment The CIT(A) enhanced 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. The Tribunal observed that the CIT(A) had incorrectly worked out the peak credit and issued an enhancement notice. The assessee contended that the AO had gone beyond his jurisdiction by re-examining the parties. The Tribunal held that the CIT(A)'s enhancement was not justified as there was no evidence to show that the payments made by the assessee had come back to the assessee. Issue 3: Confirmation of Additions as Unexplained Investment for Cost of Diamonds Exported The AO had added Rs. 3,45,33,175 as unexplained investment in the business for the cost of diamonds exported. The CIT(A) confirmed this addition based on the AO's findings that the purchase parties did not have the capacity to supply the diamonds and that the payments made by the assessee were withdrawn in cash and returned to the assessee. The Tribunal found that there was no evidence to support the AO's conclusion that the payments had come back to the assessee and held that the addition was not justified. Issue 4: Conclusion of Purchases in Cash Instead of Credit Purchases and Addition Under Section 40A(3) The AO concluded that the purchases were made in cash instead of on credit and added Rs. 1,29,77,912 under section 40A(3). The CIT(A) confirmed this addition. The Tribunal noted that there was no evidence to show that the purchases were made in cash and held that the addition under section 40A(3) was not justified. Issue 5: Derivation of Taxable Profit The AO derived the taxable profit at Rs. 34,23,864, which was confirmed by the CIT(A). The assessee contended that the taxable profit should be Rs. 32,75,841 as declared. The Tribunal found that the AO's computation of taxable profit was based on the assumption that the purchases were made in cash, which was not supported by evidence. Therefore, the Tribunal held that the AO's derivation of taxable profit was not justified. Issue 6: Disallowance Under Section 40A(3) The AO disallowed Rs. 1,29,77,912 under section 40A(3), which was confirmed by the CIT(A). The Tribunal noted that there was no evidence to show that the purchases were made in cash and held that the disallowance under section 40A(3) was not justified. Conclusion The Tribunal allowed the appeal of the assessee, holding that: - There was no evidence to support the AO's conclusion that the payments made by the assessee had come back to the assessee. - The addition of unexplained investment and the enhancement of peak credit were not justified. - The conclusion that the purchases were made in cash and the disallowance under section 40A(3) were not supported by evidence. - The AO's derivation of taxable profit was not justified. The Tribunal set aside the orders of the revenue authorities and allowed the appeal in favor of the assessee.
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