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2015 (10) TMI 2432 - AT - Income TaxFraudulent claim of drawback and DEPB credit by export of mis-declared goods - extension of the enquiry to the unexplained credit and the bogus purchases - reopening of assessment - Held that - Though in the reasons, the issue of bogus purchases has not been specifically mentioned and the allegation is limited to the extent of fraudulent claim of drawback and DEPB, but in the facts and circumstances of the case, it cannot be said that Assessing Officer was not within its power to make addition in respect of unexplained credit and the bogus purchases. The Assessing Officer having reopened the assessment under section 148 on the basis of the fraudulent claim of drawback and DEPB credit, in our opinion, he was well within his right to extend the enquiry to the unexplained credit and the bogus purchases during the course of the reassessment proceedings. The case laws relied upon by the learned AR are distinguishable on facts. In those cases the additions were made which were completely different than the issue on which reopening was done. In this case the reopening has been done on the allegation of fraudulent claim of drawback and DEPB credit and this will include purchases and sales on which such claim was made. As such this contention of the assessee is rejected. As going through the documents filed by the assessee in support of the purchases made by it. The learned DR could not point out any error or defect in these documents so as to ignore these evidences. We are of the view that in such circumstances, it cannot be said that purchases are not genuine. The report received from the DRI by the Assessing Officer being a trigger point for carrying out further investigation, the report per se cannot be a conclusive evidence to hold and make addition on that basis. The assessee having led the evidences in support of its contention, it was incumbent upon the Assessing Officer to discredit such evidences and material so as to substantiate its allegation that the purchases are not genuine. We are of the view that in the facts and circumstance, the finding of the Assessing Officer cannot be sustained. On the issue whether sales are not genuine, from the assessment order we note that the Assessing Officer has not tinkered with the trading account. He has also not rejected the books of accounts. The assessee during the course of the assessment had produced complete books of account which included sales invoices, stock records, excise record and quantitative details. No observation has been made by the Assessing Officer regarding any of these evidences. In these circumstances and facts it cannot be said sales are not genuine. In fact this is not the case of the Assessing Officer also. Addition to the peak amount of the payments made against purchases - Held that - s rightly contended by the learned AR that this chart has been prepared by the learned CIT(A) himself on the basis of the copy of account of the suppliers placed in the paper book which were before the Assessing Officer as well as learned CIT(A). This chart was not filed by the assessee and that is why the learned CIT(A) has enclosed this chart as part of its order. On enquiry from the Bench whether there is any factual inaccuracy in this chart prepared by the learned CIT(A), the learned DR was fair enough to admit that there does not appear to be any factual inaccuracy so far as the peak amount of the payments made against purchases as stated in the Annexure A. The learned CIT(A) has given detailed reasoning for not sustaining the entire addition and restricting the addition to the peak amount of the payments made against purchases and enhancing the gross profit rate to 3% as against 1.42% declared by the assessee which is justified. CIT(A) having held that purchases are not genuine, thereafter has done the right exercise by rejecting the trading results of the assessee and estimating the profit on sales. For this purpose the learned CIT(A) has worked out the comparative gross profit rate and on that basis he has estimated the income on the sales made by the assessee. The learned CIT(A) has gone a step further. He has also worked out the investments, the assessee would have made on account of the payments made for so called alleged purchases. Thus the methodology applied by the learned CIT (A) is correct approach once he has held that purchases are not genuine. However since we have held that the findings of the AO that the purchases are not genuine, on the facts and circumstances of the case as discussed hereinabove is untenable, the entire addition made on account of purchases is directed to be deleted Bogus export sale - allegation made by the AO on the basis of the DRI report where the allegation apparently is that the assessee has mis-declared the goods and the value of such goods was not of that level at which the same have been declared and accordingly Assessing Officer, after allowing deduction of cost of purchases at the rate of 6.35%, he has disallowed the balance amount brought in by way of export sale as an unexplained credit - Held that - There is no material to hold that these purchases were not genuine. Further the fact that the export was made in the preceding year cannot be ignored. The allegation in the DRI report pertains to subsequent year when one of the shipments was examined. The subsequent shipment cannot be a basis for holding that the shipments made earlier were sub-standard. Each of the shipment is physically verified by the Custom people and as pointed out by the learned AR, the samples have been drawn in respect of each shipment and nothing adverse has been reported from the sample report issued by the Central Revenue Controlled Laboratory. The payment has also been realized in respect of such goods through banking channel. Bank has also issued the realization certificate of such export. There is no discussion or adverse comment by the Assessing Officer on this aspect also. In view of these facts we are of the view that the learned CIT(A) was not justified in sustaining this addition There is no discussion in the assessment order about the amount of the purchases which has been claimed as deduction against such export. The Assessing Officer, in case was having any doubt about the export sale, the right course of action would have been to disallow the purchases against such export as difference of amount of export sale and purchases against such export stand already included in the income. In the absence of any adverse finding in respect of purchases for such export the AO s action of making the addition as unexplained credit is unsustainable - Decided in favour of assessee.
Issues involved:
1. Reopening of the assessment under section 147 of the Income Tax Act. 2. Addition of Rs. 16,34,83,676/- on account of bogus purchases. 3. Addition of Rs. 61,69,546/- on account of inflated export sales. 4. Validity of extrapolating findings of the DRI, Amritsar to goods exported during the financial year 1999-00. 5. Procedural adherence under Rule 46A of the Income Tax Rules. Issue-wise detailed analysis: 1. Reopening of the assessment under section 147 of the Income Tax Act: The assessee originally filed a return declaring a loss of Rs. 66,05,500/-. The assessment was completed at a loss of Rs. 52,74,450/-. On receiving information from the Director of Revenue Intelligence (DRI) about fraudulent claims of drawback and DEPB credit through mis-declared goods, the AO reopened the assessment under section 148. The reassessment was completed at an income of Rs. 16,43,78,772/-. The CIT(A) upheld the reopening, stating that fresh material indicated income had escaped assessment. However, the ITAT quashed the reopening, stating the notice issued beyond four years was bad in law due to the absence of any indication that income had escaped assessment due to the assessee's failure to disclose material facts. The Delhi High Court reversed the ITAT's decision, stating that only a prima facie view is required at the initiation of reassessment proceedings. 2. Addition of Rs. 16,34,83,676/- on account of bogus purchases: The AO disallowed the entire purchases made by the assessee, deeming them non-genuine based on the DRI report. The CIT(A) disagreed with the AO, noting that the sales were not disputed and that the purchases should be added based on the peak amount of payments made, along with the gross profit rate. The CIT(A) computed the peak amount at Rs. 56,50,600/- and added Rs. 23,72,208/- for the understatement of gross profit, restricting the addition to Rs. 80,22,802/-. The ITAT found that the AO did not conduct any independent verification and relied solely on the DRI report, which was not conclusive. The ITAT held that the AO should have conducted further investigation and discredited the evidence provided by the assessee. The ITAT directed the deletion of the entire addition made on account of purchases. 3. Addition of Rs. 61,69,546/- on account of inflated export sales: The AO, based on the DRI report, held that the export sales were bogus and made an addition after allowing a deduction for direct costs. The CIT(A) confirmed the addition, stating the assessee failed to contradict the findings. The ITAT found that the AO did not carry out any independent verification and solely relied on the DRI report. The ITAT noted that the assessee provided substantial evidence, including export invoices, bank certificates, and excise records, which were not discredited by the AO. The ITAT held that the AO's methodology was incorrect and that the entire export sale proceeds could not be added as unexplained credit. The ITAT directed the deletion of the addition made on account of export sales. 4. Validity of extrapolating findings of the DRI, Amritsar to goods exported during the financial year 1999-00: The assessee contended that the DRI's findings related to subsequent exports and could not be extrapolated to past exports. The ITAT noted that the Punjab & Haryana High Court had held that past exports could not be challenged based on irregularities in subsequent exports. The ITAT found that the AO's reliance on the DRI report without independent verification was unjustified and directed the deletion of the addition. 5. Procedural adherence under Rule 46A of the Income Tax Rules: The Revenue contended that the CIT(A) admitted additional evidence without calling for a report from the AO, violating Rule 46A. The ITAT found that the chart prepared by the CIT(A) was based on the copy of accounts of suppliers filed before the AO and the CIT(A), and no fresh evidence was filed by the assessee. The ITAT held that there was no violation of Rule 46A. Conclusion: The ITAT allowed the assessee's appeal partly, holding that the AO's reliance on the DRI report without independent verification was unjustified. The ITAT directed the deletion of additions made on account of bogus purchases and inflated export sales. The ITAT dismissed the Revenue's appeal, upholding the CIT(A)'s methodology of estimating income based on the peak amount of payments and gross profit rate. The ITAT emphasized the need for the AO to conduct proper verification and investigation before making additions.
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