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2008 (11) TMI 276 - AT - Income TaxEnhancement of peak credit - Income from Undisclosed Sources - registered firm engaged in trading of diamonds - Assessee is also dealing in VCD rights and claimed deduction under ss. 80HHC and 80HHF - Addition u/s. 40A(3) - cash purchases of diamonds - Assessee-firm came into existence on 7th Jan., 2000 - filed the return on 31st Oct., 2001 - Assessment was completed u/s.143(3) - CIT(A) enhanced the assessed income - 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. HELD THAT - 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 u/. 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 ld DR. 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 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. Contentions of the assessee is that the assessee did not get proper opportunity to rebut the statements taken from the third parties/Surat 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. 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, CA, 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. The reasoning however powerful cannot take the force of evidence. No evidence has been brought on record to this effect. As we have 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. Therefore, the further addition made by the Revenue authorities, resorting to s. 40A(3) also does not survive. we also hold that there is no material to recompute the profits for the purpose of deduction u/s. 80HHC. We have also noted that the AO 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 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. In the case of Chanana Associates, in this case the assessee did not produce any material to show that the belief that s. 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 there was no dispute that the payments were made in cash in excess of the prescribed limit under s. 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. 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. 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. Appeal of the assessee stands allowed.
Issues Involved:
1. Legality of the remand report by the AO. 2. Enhancement of assessment by recomputing unaccounted peak investment. 3. Confirmation of additions as unexplained investment in business. 4. Conclusion of purchases in cash instead of credit purchases. 5. Derivation of taxable profit. 6. Disallowance under Section 40A(3) of the IT Act. Detailed Analysis: Issue 1: Legality of the Remand Report by the AO The assessee contended that the CIT(A) erred by relying on an "illegal/uncalled remand report of the AO." The Tribunal noted that the CIT(A) remanded the matter to the AO to provide the assessee an opportunity to cross-examine the parties and controvert the evidence gathered. The assessee failed to avail this opportunity, citing a family marriage. The Tribunal concluded that the remand report was not illegal as it provided the assessee with the opportunity to cross-examine, which the assessee did not utilize. 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 found that the CIT(A) incorrectly worked out the peak credit and that the enhancement notice was issued properly. However, the Tribunal held that the enhancement was not justified as there was no concrete evidence to support the AO's findings regarding unaccounted peak investment. Issue 3: Confirmation of Additions as Unexplained Investment in Business The AO added Rs. 3,45,33,175 as unexplained investment in the business, which the CIT(A) confirmed. The Tribunal found that the AO's conclusion was based on suspicion and not on concrete evidence. The Tribunal emphasized that suspicion, however strong, cannot replace evidence. The Tribunal noted that the assessee made payments through cheques, and there was no evidence that the money withdrawn by third parties ultimately reached back to the assessee. Therefore, the addition of Rs. 3,45,33,175 as unexplained investment was not sustainable. Issue 4: Conclusion of Purchases in Cash Instead of Credit Purchases The AO concluded that the purchases were made in cash and added Rs. 1,29,77,912 (20% of Rs. 6,45,88,956) under Section 40A(3). The Tribunal found no evidence to support the AO's conclusion that the purchases were made in cash. The Tribunal held that the payments were made by cheques and confirmed by the suppliers. Therefore, the conclusion that the purchases were made in cash was not justified. Issue 5: Derivation of Taxable Profit The AO derived the taxable profit at Rs. 34,23,864, which the CIT(A) confirmed. The Tribunal found that the AO's calculation was based on the assumption that the assessee's profit was unreasonably high. The Tribunal held that the profit shown by the assessee, though high, was not sufficient to conclude that the purchases were bogus. Therefore, the derivation of taxable profit at Rs. 34,23,864 was not justified. Issue 6: Disallowance under Section 40A(3) of the IT Act The AO disallowed Rs. 1,29,77,912 under Section 40A(3), which the CIT(A) confirmed. The Tribunal found that there was no evidence to show that the payments were made in cash. The Tribunal held that the disallowance under Section 40A(3) was not justified as the payments were made by cheques and confirmed by the suppliers. Conclusion: The Tribunal allowed the appeal of the assessee, setting aside the orders of the Revenue authorities. The Tribunal held that there was no concrete evidence to support the AO's conclusions regarding unaccounted peak investment, unexplained investment in business, cash purchases, and disallowance under Section 40A(3). The Tribunal emphasized that suspicion, however strong, cannot replace evidence and that the assessee had discharged its onus by producing evidence of purchases and payments through cheques.
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