Case Law Details
ACIT Vs Shivprakash S Chandak (ITAT Mumbai)
ITAT Remands Addition on Alleged Unrecorded Imports Because Customs Assessable Value Was Not Properly Examined; Addition Under Section 69C Sent Back After ITAT Finds Incomplete Verification of Import Transactions; Gross Profit Addition on Unrecorded Imports Requires Verification of Stock and Corresponding Sales; ITAT Questions Basis of Peak Addition in Case Involving Alleged Out-of-Book Imports; Section 69C Addition Reopened After ITAT Finds Customs and Purchase Data Not Properly Reconciled; ITAT Remands Case Because Customs Assessable Value and Invoice Value Were Incorrectly Treated as Same.
The Mumbai ITAT dealt with appeals filed by the Revenue and cross-objections filed by the assessee against the order of the Commissioner of Income Tax (Appeals) for Assessment Year 2015-16. The dispute related to additions made on account of alleged unrecorded imports, unexplained expenditure under Section 69C, and estimation of gross profit.
The assessee, an individual engaged in the business of trading in yarn and fabrics through his proprietary concern, filed a return declaring income of Rs. 25.74 lakh. During scrutiny assessment, the Assessing Officer examined customs duty payments and compared the figures disclosed in the books with information available from customs authorities. It was found that the assessee had recorded customs duty payments of Rs. 2.11 crore in the books, whereas customs data reflected customs duty payments of Rs. 2.50 crore, resulting in a discrepancy of Rs. 39.74 lakh.
Further examination revealed that customs authorities reported imports worth Rs. 10.71 crore, whereas the books showed purchases of only Rs. 7.92 crore. The difference in imports amounted to Rs. 2.78 crore. The assessee, in response to a show-cause notice, stated that due to multiple transactions he was unable to reconcile the discrepancies and offered Rs. 3.18 crore, including customs duty, as undisclosed turnover, proposing that gross profit at 9.836% be applied.
The Assessing Officer accepted the gross profit approach and made an addition of Rs. 31.34 lakh on account of undisclosed sales. Simultaneously, the Assessing Officer also treated the entire difference of Rs. 3.18 crore as unexplained expenditure under Section 69C and completed assessment under Section 143(3).
On appeal, the Commissioner (Appeals) partly allowed relief to the assessee. The Commissioner held that where corresponding sales arising from unrecorded purchases were not disputed, the entire purchase amount could not be added again under Section 69C. The Commissioner observed that in cases involving unrecorded trading transactions, only gross profit embedded in such transactions should be taxed. Accordingly, the gross profit addition of Rs. 31.34 lakh was sustained.
The Commissioner further held that peak investment involved in unrecorded purchases amounting to Rs. 11.95 lakh could also be added. In addition, customs duty of Rs. 39.74 lakh paid on such unrecorded transactions was treated as unexplained expenditure under Section 69C. While granting partial relief, the Commissioner relied upon the Gujarat High Court ruling in M/s Hytaisun Magnetics Ltd. v. Joint Commissioner of Income Tax.
Before the Tribunal, the Revenue challenged deletion of the full addition under Section 69C and objected to restriction of additions to gross profit and peak amount. The assessee, through cross-objections, challenged sustenance of the peak addition and customs duty addition.
The Tribunal observed that both the Assessing Officer and the Commissioner (Appeals) had overlooked an important aspect relating to customs valuation. It noted that customs records contained both invoice values and assessable values for customs duty purposes, and assessable values were higher than invoice values in each case. The Tribunal held that differences between invoice value and assessable value could arise under customs law and such differences alone could not automatically establish out-of-book purchases.
The Tribunal further observed that import transactions necessarily involve banking channels for payment of purchase consideration and customs duty. It held that the assessee could not avoid reconciliation merely by claiming inability to reconcile the differences. At the same time, the Tribunal found that the Commissioner (Appeals) had deleted additions without adequate verification regarding quantitative stock details and corresponding sales.
The Tribunal stated that addition could be restricted to gross profit only if it was established that imported goods had entered stock records and corresponding sales had been made. In absence of such verification, deletion of additions was not justified. The Tribunal also expressed inability to understand the basis for working out the peak amount without proper examination.
Accordingly, the Tribunal set aside the entire issue to the file of the Assessing Officer for fresh examination. The assessee was directed to reconcile purchase invoices with customs records, produce invoices and evidence of customs duty payments, and explain any remaining discrepancies. The Assessing Officer was directed to grant opportunity of hearing and decide the issue afresh on merits.
The Revenue’s appeal and the assessee’s cross-objections were both allowed for statistical purposes with the above directions.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
01. This appeal is filed by the Asst. Commissioner of income– tax 18(3), Mumbai against the order passed by Commissioner of Income-tax (Appeals)–29, Mumbai [the learned CIT(A)] dated 28th March, 2019 for A.Y. 2015–16 .
02. Assessee has also filed a cross objections against the part addition confirmed by the ld CIT (A) .
03. Ld AO has raised following grounds of appeal.:-
“1. Whether on the facts and circumstances of the case and in law, the ld. CIT(A) justified in deleting the addition of Rs.2,78,98,766/-made by the AO, ignoring the fact that a difference of Rs. 2,78,98,766/- on account of imports purchase was detected during the assessment proceedings on reconciliation of the data provided by the Customs Authority with the assessee’s submission and found to be the purchases made out of the books?
2. Whether on the facts and circumstances of the case and in law, the ld. CIT(A) justified in deleting the addition of Rs.2,78,98,766/- made by the AO by arriving at the peak amount of Rs.11,95,963/-in respect of the import purchases, ignoring the fact that for estimating peak details such as source of amount in Indian currency, its conversion in foreign currency, details of sales, details of receipt of payment of sales were required and the Ld. CIT(A) should have verified by way of remand report from AO on the said transactions?
3. Whether on the facts and circumstances of the case and in law, the ld. CIT(A) justified in deleting the addition of Rs.2,78,98,766/- made by the AO, ignoring the fact that the assessee’s in his own submission dated 21.12.2017 admitted that he was not in a position to reconcile the discrepancy pointed out and offered the alleged purchase amounting to Rs.2,78,98,766/ together with custom duty paid thereon of Rs.39,74,452/-as undisclosed turnover and without any remand report from the AO?
4. The appellant prays that the order of the ld. CIT(A) on the above grounds be set aside and that of AO be restored.
5. The appellant craves leave to amend or alter any ground or add a new ground which may be necessary.”
04. The issue involved in this appeal is that the assessee is an individual engaged in the business of trading in Yarn and Fabrics. He filed the return of income on 28th September, 2015, at Rs. 25,74,120/–. Return was picked up for scrutiny. The assessee is carrying on the business in proprietary concern of Chandak Expo International. He imports the Yarn. The learned Assessing Officer examined the custom duty payments, he found that assessee has claimed custom duty of Rs. 2,11,16,502/ in the books of account, however according to ITS details custom duty paid by assessee was Rs. 2,50,90,954/–. There was discrepancy of Rs. 39,74,452/–. The learned Assessing Officer requested details from custom authorities. As per the information received, assessee has imported goods worth Rs. 10,71,83,467/– and paid custom duty of Rs. 2,50,90,954-/– . However, the books of accounts shows the purchase of only Rs. 7,92,84,701/– and custom duty payment of Rs. 2,11,16,502/–. The assessee was questioned vide show cause notice dated 18th December, 2017, which was replied on 21st December, 2017. Assessee submitted that due to multiple transactions he is not in a position to reconcile discrepancy and agreed that an amount of Rs. 3,18,73,218/– may be taken as his undisclosed turnover and on which gross profit rate of 9.836 percentage may be applied as addition. The learned Assessing Officer considered the explanation. Accordingly, he made an addition of Rs. 31,34,731/– on account of undisclosed sales of imported goods. The learned Assessing Officer further made an addition of unexplained expenditure under section 69C of the Act of Rs. 3,18,73,218/– being difference in import of goods and amount of imports recorded in books of accounts. Accordingly, the assessment order under section 143(3) of the Act was passed on 26th December, 2017 determining the total income of the assessee at Rs. 3,75,82,070/–.
05. Assessee aggrieved with the order preferred the appeal before the learned CIT(A), who allowed the appeal of the assessee partly, deleting the addition under section 69C of the Act but confirming the addition of Rs. 31,34,731/– on account of gross profit. The addition under section 69 of the Act was deleted holding that once the correspondent sales have not been disputed the unaccounted purchase cannot be added. Further, he considered the peak amount of Rs. 11,95,963/– which was confirmed as addition u/s 69C of the act. His findings are as under:–
“4. I have carefully considered the submissions and arguments of A.R of the appellant. have carefully gone through assessment order and basis of rejection of appellant’s argument by the A.O. in the assessment order.
4.1. Ground No. 1 to 4 These Grounds of the appeal relates to addition made by the A.O not considering that assessee was not entitled to invoke section 69C once the GP ratio for computing income on account of out of books purchases were made and hence such addition amounting to Rs.3,18,73,218/- is not justified.
4.1.2 From the undisputed fact it is clear that the appellant has paid excess custom duty of Rs.39.74,452 and has neither disclosed corresponding purchases and corresponding sales. The A.O. has not questioned sales out of such unrecorded purchases. Thus it is a case of unrecorded purchase and sale transactions. In such a situation a Gross profit has to be estimated out of such unrecorded trading transaction which in this case has been estimated by the A.O. at 9.835% on Rs.3,18,73,218/- Le. Rs.31,34,751/. For the unrecorded purchases, concept of peak Investment comes into the picture. This means highest amount of purchase in the unrecorded Trading transactions which in this case is Rs.11,95,963/ has to be taken into consideration for addition. In addition to the above it is also noted that appellant has also not disclosed custom duty paid on unrecorded transactions to the extent of Rs.39,74,452/- This amount needs to be added as unexplained expenditure u/s.69C on the Income Tax Act. The conclusion is supported by recent judgement of the Hon’ble Gujarat High Court in case of M/s. Hytaisun Magnetics Ltd vs. Jt. Commissioner of Income (2018) 95 taxmann.com248(Gujarat). It is held as under:–
The Assessing Officer after declaring that the return was invalid proceeded to frame best judgment assessemtn. In the process, he noticed that the assessee had made unrecorded purchases for a total consideration of rs.5.01 crores (rounded off) during the year under consideration. He estimated the excise duty of such purchases at rs.1.25 crores(rounded off). To the total of two i.e. rs.6.26 crores(rounded off), he estimated the assessee’s profit at the rate of 10 percent and added Rs.62.65 lakhs (rounded off) by the way of additional income. He also added excise duty of R.1.25 crores which the assessee had evaded to come to total addition of Rs.1.88 crores(para 11)
The Tribunal gave partial relief to the assessee by applying 10 percent profit rate on the basic unrecorded purchases of Rs.5.01 crores eliminating the excise duty component therefrom. However, the tribunal did not make any change insofar as the addition of entire excise duty evasion by way of income in the hands of the assessee observing inter alia that no cogent material was brought on record by the assessee to prove that it had not excise duty from the parties to whom the material was sold. Resultantly, Tribunal confirmed the addition of rs.1.75 crores (Para 12)
The factum of outside book purchases of TR.5.01 crores is not in dispute. As noted, the Tribunal had deleted the excise duty component from the estimate of the assessee’s general profit. The assessee however, strongly opposed the addition of entire excise duty component by way of assessee’s additional undisclosed income (para 13)
Two things are fairly well settled. Firstly even in case of clandestine sales or purchases of goods, the courts approve not entire amount necessarily but the profit element embedded therein unless of course, it can be shown that the sales of purchases were totally bogus and therefore, would have the propensity to suppress the assessee’s disclosed income. Second in such clandestine sales, the profit element is likely to be somewhat higher thatn the disclosed sales. Essentially, it would be question of estimation permitting certain degree of leeway to the A.O. and consequently to the tribunal. When the assessee evades payment of excise duty, undoubtedly, the same would be an additional element of profit on the product as compared to the one which has suffered the excise duty. This excise duty component which should have gone to the state exchequer would be an additional margin which may be shared by the purchaser and seller. In a given case, therefore, the assessee’s contention that entire addition of excise duty element was not justified, may require closer examination. However, going by the total addition and the turnover through such clandestine sales, there is no reason to disturb the tribunal’s ultimate conclusions. Subject to above observations, this issue is also decided against the revenue.(para 14).”
From the above discussed facts it is clear that the addition of difference in purchase i.e. Rs.2,78,98,766/- is not justified once the corresponding sales have not been disputed. The additions should be limited to G/P which A.O. himself have calculated at Rs.31,34,731/-. Addition of this G/P on unrecorded transaction is therefore confirmed. The Peak amount of Rs.11,95,9637- as discussed above is also to be added in addition to G/P. The custom duty paid for unrecorded purchases i.e. Rs.39,74,452/ due should be added as unexplained expenditure u/s.69C of the act. The additions is confirmed to the extent as discussed above. The ground of appeal are therefore Partly allowed.”
06. Therefore, both the parties are aggrieved and are in appeal before us.
07. The learned Departmental Representative reiterated the facts and supported the order of the learned Assessing Officer.
08. The learned Authorised Representative for deleting of addition under section 69C of the Act supported the order of the learned CIT(A) however, with respect to the addition of peak u/s 69C of the Act submitted that when section 69C of the Act has been deleted there is no reason to uphold the addition on account of custom duty and on account of peak amount.
09. We have carefully considered the rival contentions and perused the orders of the lower authorities. We find that the assessee is in business of import of Yarn. According to the information gathered from the customs department, it was found that there is a shortfall as per the details provided by the customs authority in amount of import shown by the assessee of `2,78,98,766/– and consequent to that custom duty payment of `39,74,452/–. It is an accepted fact that assessee has failed to reconcile the above details and also could not show that there is an error in the details submitted by the customs department. On looking at the details of the custom department it has given details of complete imports made by the assessee, the details are date of invoices, invoice number, name of party, country, description of item, invoice value in US dollar, invoice value in rupees, assessable value for customs and duty paid hereon. On the verification of the detail it is found that there is difference between the invoice value in rupees and assessable value for customs. Assessable value for custom is on higher side in each of the invoices than the invoice value. The learned Assessing Officer as well as the learned CIT (A) both has overlooked the fact that there can be difference between the invoice value and the assessable value of goods imported as per the Customs Act. Therefore, unless that is reconciled it cannot be said that assessee has purchased goods out of books of account. Further, the mere difference between the invoice value and the assessable value cannot result into an addition. Further, when there is an import of goods the payment is required to be made from one of the bank accounts of the assessee. Therefore, assessee cannot say that he is not in a position to reconcile the difference. The learned Assessing Officer has also taken this explanation in a casual manner without looking to the bank account from which the import price is paid and custom duty is also deposited. The learned CIT (A) has deleted the addition stating that the addition could not have been made once the corresponding sales have not been disputed. In this case, there is no material available with the learned CIT (A) to state so. Such a direction can only be valid when there is an import of goods, which has resulted into purchase debited in the profit and loss account, the quantity of the purchases have entered into the stock details [ quantitative details] and from such quantitative details, the sales have been made of the similar quantity during the year, then only the addition could have been restricted to G P . Otherwise, without that examination probably addition could not have been deleted. There is no material available with the learned CIT (A) to hold so. We also failed to understand that in such circumstances how the peak amount can be worked out and addition can be restricted to that extent. In view of this the order of the learned CIT (A) is not sustainable in law. In view of the above findings, we set aside the whole issue back to the file of the learned Assessing Officer with a direction to the assessee to reconcile the purchases with the invoices value stated by customs authority from the books of account of the assessee. The relevance to the assessable value is not the reason to make an addition as it is value only for the purposes of levy of customs duty. Assessee is directed to produce all the invoices mentioned in the information received from customs authority and also the respective custom duty paid against each of the invoices. The learned Assessing Officer is directed to examine the same and if still a different arises, the assessee may be given opportunity of hearing to explain the same and thereafter the issue may be decided on the merits of the case. Thus we allow the Grounds raised by the ld AO accordingly. Similar direction also apply to appeal of the assessee.
010. In the result, the appeal of the learned Assessing Officer, as well as the Cross Objection of the assessee are allowed with above directions.
Order pronounced in the open court on 13.05.2022.
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