2007 (9) TMI 292 - AT - Income Tax

Issues Involved:
1. Legality of reopening the assessment under section 148 of the Act.
2. Disallowance of the claim for deduction under section 80HHC of the Act.
3. Disallowance related to the cost of purchase of ball pens.
4. Levy of interest under sections 234B and 234C of the Act.

Issue-wise Detailed Analysis:

1. Legality of Reopening the Assessment under Section 148 of the Act:
The assessee opted not to press this ground. Consequently, the ground was dismissed as not pressed.

2. Disallowance of the Claim for Deduction under Section 80HHC of the Act:
The assessee claimed a deduction under section 80HHC amounting to Rs. 36,03,895. The AO issued a letter requiring details such as purchase register, bank statement, and the production of the supplier, M/s Divya Enterprises. The assessee submitted a letter but did not produce the supplier. The AO issued a show-cause notice questioning the rate of 70 paise per piece for ball pens and considering Rs. 9,23,437 as income from undisclosed sources due to lack of verification from M/s Divya Enterprises.

The AO was not convinced by the explanations provided by the assessee and noted that the Directorate of Revenue Intelligence (DRI) investigated the case, proving that the exported goods did not reach Russia but were diverted to Cyprus and destroyed. Statements from Shri V.C. Kamdar and Shri Chetan Kamdar confirmed this modus operandi. Consequently, the AO disallowed the deduction under section 80HHC.

The CIT(A) upheld the AO's decision, noting that the goods had not reached the desired destination and were destroyed. The CIT(A) observed that the black money was sent to Dubai through hawala channels, and US dollars were routed to Russia from Dubai, making the exports only paper transactions. The CIT(A) cited McDowell & Co. Ltd. vs. CTO, emphasizing that tax planning within the law is legitimate, but colourable devices are not.

The Tribunal examined the assessee's contention that once goods are exported out of India, the deduction under section 80HHC should be allowed. The assessee argued that the export was complete once the goods left Indian shores by 50 nautical miles. However, the Tribunal noted that the goods were destroyed at the high sea at the instance of the assessee, and there was no sale of the exported goods. The Tribunal concluded that the assessee did not fulfill the essential ingredients for claiming deduction under section 80HHC, which include export of goods, sale of the exported goods, and receipt of sale proceeds in convertible foreign exchange. Therefore, the assessee was not entitled to the deduction.

3. Disallowance Related to the Cost of Purchase of Ball Pens:
The AO observed that the purchase cost of ball pens was shown at Rs. 3.40 per piece, whereas it was accepted by Shri V.C. Kamdar to be 70 paise per piece. This resulted in a disallowance of Rs. 9,23,437, later rectified to Rs. 35,61,826. The CIT(A) upheld this disallowance.

The Tribunal noted that the assessment was reopened based on information from the DRI. The customs authorities initially treated the purchases as non-genuine, but the Addl. Commr. of Customs later dropped the proceedings, concluding that the Department had not satisfactorily proved overvaluation. The AO relied on the customs authorities' investigation and did not conduct an independent inquiry. The Tribunal found that the statement of Shri V.C. Kamdar was not sufficient evidence to disallow the purchases, especially since the customs authorities had exonerated the assessee. Therefore, the Tribunal set aside the CIT(A)'s order and deleted the addition.

4. Levy of Interest under Sections 234B and 234C of the Act:
This issue was not specifically addressed in the detailed judgment provided.

Conclusion:
The appeal by the assessee was partly allowed. The Tribunal upheld the disallowance of the deduction under section 80HHC but deleted the addition related to the cost of purchase of ball pens.

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