The ACIT, Cent, Circle-2, Surat V. M/s. M. Kantilal Exports, Surat

ITA 3862/AHD/2004

• Counselvise Citation: [2009] 114 COUNSELVISE.COM (IT) 9075 (ITAT-AHMEDABAD)
• Duration Of Justice: 4 year(s) 8 month(s) 14 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 11-09-2009
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: D
• Next Hearing Date: 28-05-2009
• Assessment Year: 2001-2002
• Appeal Filed On: 28-12-2004
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: B S SANDHU
• Assessee Lawyers: ASHWIN PAREKH
• Keywords: Unexplained expenditure; Opportunity of being heard; Additional evidence; Cost of acquisition; Corroborative evidences; Revised return; Capital expenditure
• Section: 69C; 142(1); 139(5); 80HH; 131; 145; 37; 144

Judgement Text

1 IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH 'D' (BEFORE S/SHRI P K BANSAL AND MAHAVIR SINGH) ITA NO.3862/AHD/2004 (ASSESSMENT YEAR: 2001-02) THE ASSISTANT COMMISSIONER OF INCOME- TAX, CENTRAL CIRCLE-2, ROOM NO.504, AAYAKAR BHAVAN, MAJURA GATE, SURAT V/S M/S M KANTILAL EXPORTS, AMBIKA-NIWAS, MOHAN-NI CHAWL, VARACHHA ROAD, SURAT [APPELLANT] [RESPONDENT] PAN NO.: AAAFM 4325 L APPELLANT BY :- SHRI B S SANDHU, CIT DR RESPONDENT BY:- SHRI ASHWIN PAREKH O R D E R PER P K BANSAL (ACCOUNTANT MEMBER): THIS APPEAL HAS BEEN FILED BY THE REVENUE AGAINST THE ORDER OF THE CIT(A ) DATED 19 TH OCTOBER, 2004 FOR ASSESSMENT YEAR (AY) 2001-02, BY TAKING THE FOLLOWING EFFECTIVE GROUNDS OF APPEAL: 1 THE CIT(A) HAS ERRED IN LAW AND ON FACTS IN DIRECTI NG THE AO TO DELETE THE ADDITION OF RS.17,50,00,000/- MADE ON AC COUNT OF UNEXPLAINED EXPENDITURE U/S 69C OF THE I.T. ACT. 2 THE CIT(A) HAS ALSO ERRED IN LAW AND ON FACTS IN OP INING THAT THE AO SHOULD NOT HAVE PASSED THE ORDER U/S 144 OF THE I.T. ACT WITHOUT ALLOWING ADEQUATE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE, IGNORING THE FACT THAT THE CASE WAS HEARD BY THE AO ON 16 (SIXTEEN) 2 OCCASIONS BETWEEN 2.7.2003 AND 29.3.2004 AS IS EVID ENT FROM THE ORDER-SHEET OF THE ASSESSMENT ORDER. 2 THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSE E IS A PARTNERSHIP FIRM ENGAGED IN THE BUSINESS OF IMPORT OF ROUGH DIAMONDS, MANUFACTURING AND EXPORT OF POLISHED DIAM ONDS. THE AO NOTED IN THE ASSESSMENT ORDER THAT DURING THE CO URSE OF HEARING, IT WAS NOTICED THAT AS PER ANNEXURE D TO F ORM NO.3CD TOTAL RAW MATERIAL OF ROUGH DIAMOND AVAILABLE TO CO NSUMPTION, WAS AS UNDER:- OP. STOCK 1,01,995.17 CTS. ADD: PURCHASE DURING THE YEAR 2,40,066.36 CTS. ------------------ TOTAL 3,42,061.53 CTS. ============ THE AO FURTHER NOTED THAT AGAINST THIS AVAILABILITY , ROUGH DIAMOND FOR DISPOSAL, CONSUMPTION DURING THE YEAR W AS SHOWN AT 4,30,701.14 CTS. AND REJECTION WAS SHOWN AT 26,555 CTS., AND THE TOTAL CLOSING STOCK OF ROUGH DIAMOND WAS SHOWN AT 2 4,805.39 CTS. THEREFORE, THE TOTAL ROUGH DIAMOND AVAILABLE FOR DI SPOSAL ON THE BASIS OF CONSUMPTION, REJECTION AND CLOSING STOCK W AS AS UNDER:- CONSUMPTION 4,30,701.14 CTS. REJECTION 26,555.00 CTS. CL. STOCK 24,805.39 CTS. -------------------- TOTAL 4,82,061.53 CTS. ============= 3 THE AO COMPARED RAW MATERIAL OF ROUGH DIAMOND AVAIL ABLE FOR DISPOSAL, ON THE BASIS OF OPENING STOCK AND PURCHAS ES AND NOTED THAT THERE WAS EXCESS ROUGH DIAMOND CONSUMPTION / R EJECTED. THE ASSESSEE WAS ASKED TO EXPLAIN THE SAME. A SHOW CAUS E NOTICE U/S 142(1) OF THE INCOME-TAX ACT, 1961 [THE ACT FOR S HORT] WAS ISSUED TO THE ASSESSEE VIDE LETTER DATED 15-12-2003 IN RESPONSE TO WHICH THE ASSESSEE STATED VIDE ITS LETTER DATED 31- 12-2003 THAT IN THE AUDIT REPORT THE CONSUMPTION OF ROUGH DIAMONDS HAS BEEN SHOWN AT 4,30,701.14 CTS. DUE TO A TYPING MISTAKE I N FORM NO.3CD. AS PER THE STOCK RECORDS OF ROUGH DIAMONDS, MANUFACTURING RECORDS OF CONSUMPTION OF ROUGH DIAMO NDS AND JOB WORK BILLS AND REGISTERS, THE CONSUMPTION OF TO TAL ROUGH DIAMONDS IS 2,90,701.14 CTS. THE AUDITOR HAD WRONGL Y SIGNED THE INCORRECT TYPED FIGURE. THE ASSESSEE ALSO SUBMITTED VIDE LETTER DATED 31-12-2003 THAT THEY HAVE WRITTEN A LETTER TO THE AUDITOR BRINGING THE SAID MISTAKE TO THE NOTICE OF THE AUDI TOR AND A CERTIFICATE ISSUED BY THE AUDITOR WAS ALSO SUBMITTE D BEFORE THE AO. THE AO OBSERVED THAT THERE IS NO PROVISION FOR FILING REVISED CERTIFICATE FROM AUDITOR U/S 44AB OF THE ACT AND SU CH REVISED CERTIFICATE IS BASELESS AS HOW THE AUDITOR COULD RE MEMBER THE STATE-OF-AFFAIRS OF THE AUDIT REPORT, SIGNED TWO YE ARS BACK. THEREAFTER, ANOTHER NOTICE U/S 142(1) DATED 10-02-0 4 WAS ISSUED TO THE ASSESSEE STATING THAT THE FIGURE OF CONSUMPT ION OF 4,30,701.14 CTS. AND THE FIGURE QUOTED BY THE ASSES SEE FIRM OF 2,90,701.14 CTS. WAS QUITE DIFFERENT. THE ASSESSEE FIRM WAS ASKED TO PRODUCE SHRI UMESH SHAH, AUDITOR AND SHRI HIMMAT BHAI KHENI, PARTNER FOR VERIFICATION ALONG WITH NECESSAR Y RECORDS. SHRI UMESH SHAH, AUDITOR STATED THAT THE MISTAKE WAS DUE TO THE 4 TYPOGRAPHICAL ERROR. SIMILARLY, SHRI HIMMATBHAI KHE NI, PARTNER OF THE FIRM ALSO STATED THAT THE FIGURE OF 4,30,701 .14 CTS WAS A TYPING MISTAKE. ULTIMATELY THE AO MADE THE ADDITION OF EXCESS CONSUMPTION OF ROUGH DIAMONDS AS UNEXPLAINED EXPEND ITURE U/S 69C BY OBSERVING AS UNDER:- IT CAN BE SEEN FROM THE ABOVE THAT THE ASSESSEE IS RELYING UPON THE FIGURE OF YIELD AT 24.61% TO JUSTIFY THE CONSUMPTIO N FIGURE OF 2,90,701.14 CARATS HOWEVER, IT IS SEEN THAT ALONG WITH THE FIGURE OF CONSUMPTION, IF WE CONSIDER THE FIGURE OF REJECTION OF ROUGH, THE ACTUAL SITUATION REGARDING YIELD EMERGES. THIS IS NECESSAR Y TO GET A REAL PICTURE AS THE REJECTION COMES OUT OF ROUGH DIAMOND S USED FOR CONSUMPTION. FOR AY 1990-00, THE FIGURE OF CONSUMPT ION WAS 3,36,684.09 CARATS THE FIGURE OF REJECTION IS 1,03 ,898.49 CARATS THE QUANTITY OF MANUFACTURED DIAMONDS COMES TO 69,443.6 0 CARATS THE YIELD COMES TO 15.76%. FOR AY 2000-01, THE CONSUMPT ION FIGURE IS 5,64,211.36 CARATS THE REJECTION FIGURE IS 25,364. 98 CTS. FOR THE AY 2001-02, IF WE TAKE THE CONSUMPTION FIGURE AT 430,7 01.14, AS PER THE AUDIT REPORT AND THE REJECTION FIGURE AT 26,555 CAR ATS AND THE MANUFACTURED POLISHED DIAMONDS AT 71,529.17 CARATS, THE YIELD COMES TO 15.64%. FOR AY 2002-03, AS PER THE AUDIT REPORT, THE CONSUMPTION IS 3,20,088.22 CARATS AND THE REJECTION FIGURE OF 4,8 6,067.33 CARATS THE MANUFACTURED POLISHED DIAMONDS ARE 95,987.34 CARATS AND THE YIELD COMES TO 11.89%. THEREFORE, WE CAN SEE THAT THE GRO SS YIELD HAS VARIED BETWEEN 10% TO 18%. AT NO TIME, THE SAME HAS EXCEED ED 20%, AS CLAIMED BY THE ASSESSEE IN ITS EXPLANATION. SR. NO. AY YIELD COST OF ROUGH (RS.) PER CARAT 1 1999-00 15.76% 1,122.67 2 2000-01 18.98% 1,369.63 3 2001-02 15.64% 1,962 4 2002-03 11.89% 672.41 5 2003-04 16.27% 1,120.04 9 FROM THE ABOVE CHART, IT IS CLEARLY ESTABLISHED T HAT THE YIELD RATIO IS DECREASING YEAR BY YEAR, GENERALLY. IF WE TAKE C ONSUMPTION AS PER THE ASSESSEES CLAIM FOR THE YEAR UNDER CONSIDERATI ON AT 290,701.14 CARATS, IT WILL TO GIVE RISE TO YIELD, WHICH IS CON TRARY TO THE TREND OF THE YIELD OF THE ASSESSEE, OVER THE YEARS, AS DISCUSSED ABOVE. THEREFORE, 5 THE CORRECT FIGURE OF CONSUMPTION MENTIONED IN ANNE XURE D OF THE FORM NO.3CD AT 4,30,701.14 CARATS APPEARS TO BE COR RECT AND THE HYPOTHETICAL CONSUMPTION OR THE CONSUMPTION CALCULA TED ON BACKWARD CALCULATION FROM POLISHED DIAMONDS, OPENING STOCK A ND CLOSING STOCK, MEASURING 2,90,701.14 CARATS AS CLAIMED BY THE ASSE SSEE IS NOT CORRECT. IN FACT, THE ASSESSEE HAS PREPARED DUPLICATE BOOKS OF ACCOUNTS TO SUIT THE CONSUMPTION MEASURING 2,90,701.14 CARATS OF ROU GH DIAMONDS, TO THE EXTENT OF ACCOUNTED PURCHASES IN THE BOOKS OF A CCOUNTS AND HAS SUPPRESSED ACTUAL CONSUMPTION FIGURE. 10 IF WE COMPARE THE FIGURE OF LABOUR CHARGES PAID / PAYABLE VIS-- VIS, THE FIGURE OF CONSUMPTION OF ROUGH, IT IS SEEN THAT FOR AY 1999-00, THE LABOUR CHARGES DEBITED TO THE TRADING AND PROFI T & LOSS A/C WERE RS.7,49,98,425/-. THE FIGURE OF ROUGH CONSUMPTION W AS 336684.09 WHICH GIVES A LABOUR CHARGES RATE OF RS.222 PER CAR ATS ROUGH. IF WE SEEN TRADING AND PROFIT & LOSS A/C OF AY 2001-02, T HE LABOUR CHARGES DEBITED ARE RS.13,51,28,577/-. THE ROUGH CO NSUMPTION AS PER THE AUDIT REPORT IS 5,64,211.36 CARATS, WHICH GIVES A LABOUR RATE OF RS.239/- PER CARAT OF ROUGHT. FOR AY 2001-02, THE L ABOUR CHARGES DEBITED TO TRADING AND PROFIT & LOSS A/C, ARE RS.7, 89,28,551/-. IF WE ADOPT THE FIGURE OF ROUGH CONSUMPTION AT 2,90,701.1 4 CARATS AS CLAIMED BY THE ASSESSEE, RATE OF LABOUR CHARGES COM ES TO RS.271/- PER CARAT OF ROUGHT, WHICH IS QUITE HIGH AND SHOWS THAT THE CLAIM OF THE ASSESSEE IS NOT CORRECT. LOOKING TO THE ABOVE FACTO RS AND ALSO TO THE FACTS THAT THE CONSUMPTION OF 4,30,701.14 CARATS AS MENTIONED IN THE AUDIT REPORT U/S 44AB OF THE ACT. THE BOOKS OF ACCO UNTS PRODUCED BEFORE ME ARE NOT RELIABLE AND ARE NOT THE SAME BOO KS WHICH MUST HAVE BEEN PRESENT AT THE TIME OF PREPARING THE AUDI T REPORT. HENCE, THE SAME ARE REJECTED U/S 145 OF THE ACT. ACCORDINGLY T HE ACTUAL EXCESS CONSUMPTION OF ROUGHS OF 140,000 CARATS IS TAKEN AS UNEXPLAINED EXPENDITURE OF THE ASSESSEE FIRM. 11 FROM THE CHART, AS DISCUSSED IN EARLIER PARA, GI VING THE YIELD AND THE COST OF THE ROUGH PER CARATS AS PER PROFIT & LO SS A/C IT IS APPARENT THAT THE % OF YIELD IS DEFINITELY AFFECTED BY THE Q UALITY OF ROUGH DIAMONDS. DURING THE YEAR UNDER CONSIDERATION, AVER AGE YIELD ON THE BASIS OF CONSUMPTION, AS PER ANNEXURE D IN FORM N O.3CD, COMES TO 15.64%, WHICH IS IN THE RANGE OF 15.76% THAT FOR THE AY 1999-00. FOR COMPUTING UNEXPLAINED PURCHASE COST, IT WOULD B E PROPER TO AVERAGE OUT THE COST OF ROUGH DIAMOND PURCHASE FOR FIVE YEARS, AS DISCUSSED ABOVE. THE AVERAGE COST OF ROUGH DIAMONDS PER CARATS, AS PER PROFIT & LOSS A/C FOR THE FIVE ASSESSMENT YEARS , AS DISCUSSED 6 ABOVE, COMES TO RS.1250/- PER CARATS. BY ADOPTING T HE VALUE OF RS.1250/- PER CARATS FOR THE EXCESS ROUGH DIAMOND O F 1,40,000 CARATS, THE UNEXPLAINED EXPENDITURE COMES TO RS.17,50,00,00 0/-. AS PER THE PROVISIONS OF SECTION 69C OF THE ACT WHERE IN ANY FINANCIAL YEAR AN ASSESSEE HAS INCURRED ANY EXPENDITURE AND HE OFFERS NO EXPLANATION ABOUT THE SOURCE OF SUCH EXPENDITURE OR PART THEREO F, OR THE EXPLANATION, IF ANY, OFFERED BY HIM IS NOT, IN THE OPINION OF THE AO, SATISFACTORY, THE AMOUNT COVERED BY SUCH EXPENDITUR E OR PART THEREOF, AS THE CASE MAY BE, MAY BE DEEMED TO BE THE INCOME OF THE ASSESSEE FOR SUCH FINANCIAL YEAR: PROVIDED THAT, NOTWITHSTANDING ANYTHING CONTAINED I N ANY OTHER PROVISION OF THIS ACT, SUCH UNEXPLAINED EXPENDITURE WHICH IS DEEMED TO BE THE INCOME OF THE ASSESSEE SHALL NOT BE ALLOW ED AS A DEDUCTION UNDER ANY HEAD OF INCOME. 12 THEREFORE, IT CAN BE SEEN THAT THE ASSESSEE IS NOT ENTITLED TO SET OFF HIS UNEXPLAINED EXPENDITURE AGAINST ANY INCOME. MOREOVER THE UNEXPLAINED EXPENDITURE IS INCOME FROM OTHER SOURCE S AND, THEREFORE, THE ASSESSEE IS NOT ENTITLED FOR DEDUCTION U/S 80HH C, AGAINST THE SAME. 3 WHEN THE MATTER WENT IN APPEAL BEFORE THE CIT(A) , THE CIT(A) DELETED THE ADDITION BY OBSERVING AS UNDER:- 05 I HAVE PERUSED THE CONTENTIONS RAISED BY THE A PPELLANT AND ALSO GONE THROUGH THE ASSESSMENT ORDER. A REMAND REPORT WAS CALLED FOR AND THE AO SUBMITTED THE SAME ON 29-04-2004. A COPY OF THE REMAND REPORT WAS GIVEN TO THE APPELLANT FOR NECESSARY COM MENTS AND THE REPLY WAS RECEIVED DURING THE COURSE OF HEARING. I HAVE CAREFULLY GONE THROUGH THE SAME. IN MY OPINION THE AO SHOULD NOT H AVE PASSED ORDER UNDER SECTION 144 OF THE ACT WITHOUT ALLOWING ADEQU ATE OPPORTUNITY OF BEING HEARD ESPECIALLY WHEN SUCH A HUGE ADDITION OF RS.17,50,00,000/- WAS BEING CONTEMPLATED. THE AO WAS NOT JUSTIFIED IN MAKING PRESUMPTION OR ESTIMATION OF SUCH A HIGH MAGNITUDE ON THE BACK OF THE APPELLANT ESPECIALLY WHEN DAY-TO-DAY HEARINGS WERE CONDUCTED IN THE REGULAR COURSE OF ASSESSMENT PROCEEDINGS. THE AO WA S ALSO NOT JUSTIFIED IN IGNORING THE EVIDENCES AND EXPLANATION S WITH REGARD TO THE TYPING MISTAKE IN THE AUDIT REPORT. THE AO HAS SEEN THE BOOKS OF ACCOUNT THEN WHY FIGURES REGARDING OPENING STOCK, C LOSING STOCK AND 7 RELEVANT CONSEQUENTIAL FIGURES OF SALE, PURCHASE OR CONSUMPTION SHOULD NOT BE ACCEPTED. THE ASSESSING OFFICERS FINDING TH AT THE APPELLANT MIGHT BE HAVING OTHER BOOKS OF ACCOUNT IS A WILD GUESS AND NO ACTION IS REQUIRED TO BE TAKEN UNLESS ADVERSE EVIDENCE OTH ER THAN EVIDENCE RECORDED IN THE BOOKS OF ACCOUNT IS DETECTED OR FOU ND. SUBMISSIONS OF THE APPELLANT DISCUSSED ABOVE APPEARS TO BE IN ACCO RDANCE WITH THE CORRECT STATE OF AFFAIRS AND LAW. THE ASSESSING OFF ICERS INVOKING PROVISIONS OF SECTION 69C IS NOT IN ACCORDANCE WITH LAW AS PER WRITTEN SUBMISSIONS AND SUPPORTING EVIDENCE FILED BEFORE ME . THE METHOD AND MANNER UNDER WHICH THE ASSESSING OFFICER HAS WORKED OUT THE YIELD IS FAR AWAY FROM REALITY AND PRACTICE ADOPTED BY THE A PPELLANT. THE ESTIMATION OF HIGHER YIELD IF ANY CAN NOT BE MADE W ITHOUT CORROBORATIVE EVIDENCE IN THE FORM OF SALES OR CLOS ING STOCK OF FINISHED GOODS. THE ENTIRE ADDITION IS BASED ON A TYPOGRAPHI CAL ERROR THAT CREPT INTO WHILE TYPING OUT THE CONSUMPTION FIGURE WHICH IS TYPED AS 403701.14 CARAT INSTEAD OF CORRECT CONSUMPTION OF 2 90701.14 CARAT AS PER BOOKS OF ACCOUNT. THE ASSESSING OFFICERS PRESU MPTION AND BELIEF IS UNFOUNDED WHEREAS HE WAS SUPPOSED TO TAKE INTO A CCOUNT THE OTHER OPENING AND CLOSING FIGURES. THUS, IN VIEW OF THE F ACTS OF THIS CASE ADDITION OF RS.17,50,00,000/ UNDER SECTION 69C OF T HE ACT IS DELETED. 4 THE LEARNED DR BEFORE US VEHEMENTLY CONTENDED TH AT THE CIT(A) WAS NOT CORRECT IN LAW IN DELETING THE A DDITION MERELY ON THE BASIS THAT THE ADDITION HAS BEEN MADE BY THE ASSESSING OFFICER ON THE BASIS OF THE PRESUMPTION OR ESTIMATI ON WHILE IN FACT THE ADDITION HAS BEEN MADE BY THE ASSESSING OF FICER ON THE BASIS OF THE AUDIT REPORT IN FORM NO.3CD DULY GIVEN BY THE CHARTERED ACCOUNTANT AS POINTED OUT BY THE ASSESSEE . THE AO HAS TO RELY ON THE AUDIT REPORT OTHERWISE THE PROVISION S OF SECTION 44AB WILL BECOME OTIOSE. REFERRING TO THE AUDIT REP ORT IN FORM NO.3CD AT PAGE-31, IT WAS POINTED OUT THAT IN ANNEX URE-D TO FORM NO.3CD WHICH CONTAINS QUANTITATIVE DETAILS OF THE PRINCIPAL ITEMS OF RAW MATERIALS AND FINISHED PRODUCTS, THE C ONSUMPTION OF RAW MATERIALS DURING THE YEAR HAS BEEN CERTIFIED AT 430701.14 CTS. 8 THERE IS NO MISTAKE WHILE WORKING OUT THIS FIGURE. HAD THERE BEEN A MISTAKE, THE ASSESSEE WOULD HAVE POINTED OUT THE SAME IMMEDIATELY AFTER FILING THE RETURN. THE REVISED RE TURN CAN BE FILED BY THE ASSESSEE U/S 139(5) BEFORE EXPIRY OF O NE YEAR FROM THE END OF THE RELEVANT ASSESSMENT YEAR. THE ASSESS EE HAS NOT FILED ANY REVISED RETURN UPTO 31-03-2003. IT IS ONL Y WHEN THE ASSESSING OFFICER ISSUED NOTICE U/S 142(1) ON 15-12 -2003 AND HAS MADE SPECIFIC QUERY ABOUT THE EXCESS DIAMOND CONSUM PTION AND ALSO ASKED THE ASSESSEE TO RECONCILE THE SAME, THE ASSESSEE VIDE LETTER DATED 31-12-2003 TOOK THE PLEA THAT THE AUDI TOR WRONGLY SIGNED THE INCORRECT FIGURE AND THE ACTUAL CONSUMPT ION OF THE ROUGH DIAMOND IS 290701.14 CTS AND NOT 430701.14 CT S. AND ENCLOSED A CERTIFICATE FROM THE CHARTERED ACCOUNTAN T TO THAT EFFECT. IN THE SAME VERY NOTICE THE ASSESSING OFFIC ER HAS ASKED THE ASSESSEE TO FURNISH THE PERCENTAGE OF THE YIELD ON THE BASIS OF CONSUMPTION FOR THE LAST YEAR. THE YIELD OF THE ASS ESSEE IN THE EARLIER ASSESSMENT YEARS IS AS UNDER:- AY 1999-00 15.76 % AY 2000-01 18.98 % AY 2001-02 15.64 % AY 2002-03 11.89 % AY 2003-04 16.27 % THE YIELD IN THE ASSESSMENT YEAR COMES TO 15.64% ON LY IF THE CONSUMPTION FIGURE IS TAKEN AT 430701.14 CTS. IF T HE CONSUMPTION IS TAKEN AT 290701.14 CTS., THE YIELD WILL BE MORE THAN 24%. THE YIELD AT THE RATE OF 16.4% IS NEARER TO THE AVERAGE YIELD. THEREFORE, THE FIGURE AT 430701.14 CTS., AS PER THE AUDIT REPORT IS CORRECT. HE HAS ALSO DRAWN OUR ATTENTION TOWARDS PE CULIAR FACTS IN 9 THIS CASE POINTING OUT THE CONDUCT OF THE ASSESSEE AND SUBMITTED THAT THERE HAD BEEN SEARCH IN THE CASE OF THE ASSES SEE AND OTHER GROUP CONCERNS ON 7-1-1999 WHICH WAS CONCLUDED ON 2 3-3-1999. DURING THE COURSE OF SEARCH CASH BOOK, LEDGER AND O THER BOOKS WERE FOUND SHOWING THE UNACCOUNTED MANUFACTURING AN D TRADING CARRIED OUT BY THE ASSESSEE IN DIAMOND. MOST OF THE ENTRIES IN THESE BOOKS WERE NOT RECORDED IN THE REGULAR BOOKS AND HUGE ADDITION HAS BEEN MADE TO THE EXTENT OF RS.2,59,22, 64,015/- TOWARDS THE UNDISCLOSED INCOME ON THE BASIS OF SUCH BOOKS OF ACCOUNTS. A COPY OF THE ASSESSMENT ORDER IN THE CAS E OF THE COMPANY BELONGING TO THE ASSESSEE-GROUP WAS FILED B EFORE US. OUR ATTENTION WAS ALSO DRAWN TOWARDS VARIOUS BOOKS OF ACCOUNTS, ETC. BEING SEIZED DURING THE COURSE OF SEARCH. REFE RRING TO THE ASSESSMENT ORDER PARA-16.2 IN THE CASE OF M/S KANTI LAL & CO. LTD. IT WAS ALSO POINTED OUT THAT DURING THE COURSE OF E XAMINATION BEFORE THE DDIT ONE SHRI K B PATEL RAN OUT OF THE R OOM OF DDIT (INV.)-1, SURAT AND AS SOON AS HE GOT THE POSSESSIO N OF THE SEALED FLOPPY BOX, OUT OF WHICH THE DEPARTMENT WAS EXTRACT ING THE DATA AND THREW IT OUT OF THE WINDOW AT THE END OF THE CO RRIDOR. FLOPPY BOX WAS TAKEN AWAY BY A SCOOTER RIDER WHO WAS STAND ING UNDER THE WINDOW AND COULD NOT BE TRACED. CRIMINAL COMPLA INT WAS FILED BY THE INCOME-TAX DEPARTMENT. THE CASE IS UND ER INVESTIGATION. IT WAS POINTED OUT THAT THIS CLEARLY SHOWS THAT THE ASSESSEE WAS HABITUAL IN THE BUSINESS OF MANUFACTUR ING AND SALE OF DIAMOND OUT OF THE BOOKS. OUR ATTENTION WAS ALSO DRAWN TOWARDS PARA-10 OF THE ASSESSMENT ORDER AND IT WAS POINTED OUT THAT THE ACTUAL CONSUMPTION WAS 430701.14 CTS. IS A LSO DULY SUPPORTED BY THE FACT THAT IF THE LABOUR CHARGES AR E COMPARED 10 WITH LABOUR CHARGES INCURRED DURING AY 1999-2000, T HE LABOUR CHARGES AS DEBITED IN THE P&L ACCOUNT WERE RS.222 P ER CTS. DURING THE AYS 2000-01 AND 2001-02, THESE WERE RS.2 39 PER CTS. IF THE CLAIM OF THE ASSESSEE THAT THE CORRECT CONSU MPTION WAS 290701.14 CTS., THE RATE OF LABOUR CHARGES WILL COM E TO RS.271 PER CTS. THIS CLEARLY SHOWS THAT THE ASSESSEE WAS M AINTAINING DIFFERENT BOOKS AND THE AUDITOR HAS TAKEN THE CORRE CT FIGURE OF THE CONSUMPTION OF 430701.14 CTS. ON THE BASIS OF THESE BOOKS. SINCE THE ASSESSEE FAILED TO RECONCILE THE FIGURE, THEREF ORE, THE ASSESSEE HAS COME WITH THE VERSION THAT THERE HAD BEEN A TYP ING ERROR. THE CASE WAS SELECTED FOR SAMPLE SCRUTINY AND THE NOTIC E WAS ISSUED BUT THE ASSESSEE DID NOT BOTHER TO POINT OUT ANY SU CH MISTAKE. IT IS ONLY WHEN THE ASSESSING OFFICER MADE A SPECIFIC QUERY, THE ASSESSEE CAME WITH THE VERSION THAT THERE HAD BEEN A MISTAKE IN THE FIGURES GIVEN IN THE AUDIT REPORT. EVEN THE TAX AUDIT REPORT FOR THE NEXT YEAR WAS ALSO FINALIZED PRIOR TO THE ISSUE OF QUERY LETTER BY THE AO BUT NO SUCH MISTAKE WAS POINTED OUT. OUR ATTENTION WAS DRAWN TOWARDS PARA-4 OF FORM NO.3CB AND IT WAS POINTED OUT THAT THE PARTICULARS GIVEN IN FORM NO.3CD HAVE BEEN CERTIFIED BY THE CHARTERED ACCOUNTANT AS TRUE AND C ORRECT. IT IS NOT A CASE WHERE THE CHARTERED ACCOUNTANT HAS EXPRE SSED HIS OPINION. REFERRING TO ITEM NO.9 AT PAGE-30 OF THE P APER BOOK IT WAS POINTED OUT THAT THE AUDITOR HAS ALSO CERTIFIED THAT HE HAS EXAMINED THE CASH BOOK, BANK BOOK, PURCHASE REGISTE R, SALES REGISTER, LEDGER, STOCK REGISTER, ETC. AND THE INFO RMATION HAD BEEN GIVEN BY HIM ON THE BASIS OF EXAMINATION OF THESE B OOKS OF ACCOUNTS. THE STATEMENT OF THE AUDITOR RECORDED U/S 131 ALONG WITH THE AFFIDAVIT CANNOT BE ACCEPTED. THE ASSESSME NT IN THIS CASE 11 HAS BEEN FRAMED ON 31-03-2004 WHILE THE AFFIDAVIT O F THE AUDITOR IS DATED 10-04-2004 I.E. AFTER THE DATE OF THE ASSE SSMENT ORDER. FOR THIS ATTENTION IS DRAWN TO PAGES 20 TO 28 OF TH E PAPER BOOK FILED BY THE ASSESSEE. SIMILARLY THE AFFIDAVIT OF THE COMPUTER TYPIST IS ALSO DATED 10-04-2004. THESE AFFIDAVITS W ERE NOT BEFORE THE ASSESSING OFFICER AND CANNOT BE ACCEPTED AS PIE CE OF EVIDENCE. HE ALSO VEHEMENTLY STATED THAT THE CERTIF ICATE GIVEN BELOW THE INDEX TO THE PAPER BOOK FILED BY THE ASSE SSEE IS FALSE. IN THE CERTIFICATE IT IS STATEDTHAT PAGE NO. 17 TO 183 WERE PRODUCED BEFORE THE AO AND CIT(A). THE AFFIDAVITS A PPEARING AT PAGES 20 TO 28 ARE DATED 10-04-2004. HOW THESE CAN BE FILED BEFORE THE AO WHEN THE ASSESSMENT ORDER HAS BEEN PA SSED ON 31- 03-2004. THIS ALSO REFLECTS THE CONDUCT OF THE ASSE SSEE. REFERRING TO THE ORDER OF THE CIT(A) IT WAS POINTED OUT THAT THE CIT(A) HAS MERELY RELIED ON THE SUBMISSIONS OF THE ASSESSEE AN D HAS WRONGLY OBSERVED THAT THE ASSESSING OFFICER HAS MADE THE AD DITION ON THE BASIS OF PRESUMPTIONS AND ESTIMATION IGNORING THE F ACT THAT THE ADDITION HAS BEEN MADE ON THE BASIS OF CONSUMPTION SHOWN BY THE ASSESSEE IN THE CERTIFICATE GIVEN BY THE CHARTERED ACCOUNTANT AS PER THE PROVISIONS OF SECTION 44AB OF THE ACT. THE ASSESSING OFFICER HAS RIGHTLY MADE THE ADDITION. 5 THE LEARNED AR, ON THE OTHER HAND, SUPPORTED THE ORDER OF THE CIT(A). HE DREW OUR ATTENTION TOWARDS THE AUDIT REPORT U/S 44AB PAGE-31 AND POINTED OUT THAT NO DOU BT IN THE AUDIT REPORT IN FORM NO.3CD THE CONSUMPTION HAS BEE N SHOWN AT 430701.14 CTS. BUT THIS HAS HAPPENED DUE TO THE CLE RICAL MISTAKE. THE CORRECT CONSUMPTION IS 290701.14 CTS. WHEN THE AO ASKED 12 FOR THE DIFFERENCE THE ASSESSEE HAS SUBMITTED ALL T HE FOLLOWING EVIDENCES TO PROVE THAT A MISTAKE HAS OCCURRED:- - AFFIDAVIT OF SHRI SURESH KHETANI TYPIST - AFFIDAVIT OF THE AUDITOR - COPY OF AUDIT REPORT OF ANJAN EXPORTS - DETAILS OF MANUFACTURING OF ROUGH DIAMOND - DETAILS OF THE JOB WORKER-WISE OF MANUFACTURING OF ROUGH DIAMOND. THE ASSESSEE HAS NOT PURCHASED THE ROUGH DIAMOND OF 380066.36 CTS. AS ALLEGED BY THE ASSESSING OFFICER. THE OPENI NG STOCK AND PURCHASES TOTALED AT 342066.53 CTS. IF THE CONSUMPT ION OF 430701.14 CTS. IS CONSIDERED, THE CONSUMPTION WILL BE NEGATIVE WHICH IS NOT POSSIBLE. THE AUDITOR HAS SUBMITTED TH E CORRECT CERTIFICATE ON 31-12-2003 WHICH IS EXPLANATORY EVID ENCE UNDER THE EVIDENCE ACT. THE ENTRIES IN THE BOOKS OF ACCOU NTS ARE FINAL EVIDENCE AND THIS PROVES THAT THERE WAS ERROR IN TH E CONSUMPTION OF RAW MATERIAL SHOWN BY THE ASSESSEE. ALTERNATIVEL Y IT WAS CONTENDED THAT THE ASSESSEE SHOULD BE ALLOWED DEDUC TION FOR THE ALLEGED EXPENDITURE OF RS.17,50,00,000/- IF THE ADD ITION IS SUSTAINED ON ACCOUNT OF UNEXPLAINED EXPENDITURE TOW ARDS EXCESS CONSUMPTION OUTSIDE THE BOOKS OF ACCOUNTS. 6 WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIO NS AND, PERUSED THE MATERIAL ON RECORD ALONG WITH THE ORDER OF THE TAX AUTHORITIES BELOW. WE HAVE ALSO GONE THROUGH TH E PAPER BOOK. WE HAVE NOTED THAT IN THIS CASE THE TAX AUDIT HAS D ULY BEEN CARRIED OUT BY A CHARTERED ACCOUNTANT U/S 44AB. ANN EXURE-D TO FORM NO.3CD STATES THE QUANTITATIVE DETAILS OF RAW MATERIALS AS 13 REQUIRED TO BE CERTIFIED BY THE CHARTERED ACCOUNTAN T AS PER CLAUSE 28(B) OF THE SAID REPORT, WHICH ARE AS UNDE R:- PARTICULARS QUANTITY (IN CTS) (A) RAW MATERIALS ROUGH DIAMONDS 1 OPENING STOCK 101995.17 2 ADD:- PURCHASE DURING THE YEAR 240066.36 342061.53 3 LESS: 1.CONSUMPTION DURING THE YEAR 430701.14 2.REJECTION 26555.00 24805.39 4 LESS: SALES DURING THE YEAR 0.00 5 CLOSING STOCK 24805.39 THIS AUDIT REPORT HAS BEEN FILED BY THE ASSESSEE AL ONG WITH THE INCOME-TAX RETURN. THE AUDIT REPORT IS DATED 8-6-20 01. THE INCOME-TAX RETURN WAS FILED BY THE ASSESSEE ON 29-1 0-2001. THE ASSESSEE IS ENGAGED IN THE BUSINESS OF PROCESSING A ND EXPORTING OF DIAMONDS. NOTICE U/S 143(2)(II) WAS ISSUED WITHI N 12 MONTHS FROM THE END OF THE MONTH IN WHICH THE RETURN WAS F ILED. THIS FACT HAS NOT BEEN DISPUTED BY THE ASSESSEE. NOTICE U/S 1 42(1) WAS ALSO ISSUED WHICH WAS ALSO NOT CHALLENGED. SUBSEQUENTLY, THE ASSESSING OFFICER DURING THE COURSE OF HEARING THRO UGH THE NOTICE U/S 142(1) DATED 15-12-2003 MADE THE FOLLOWING QUER IES FROM THE ASSESSEE: SUB:- NOTICE U/S 142(1) OF THE I.T. ACT REGARDI NG PLEASE REFER TO THE ABOVE. 2 THE ASSESSMENT PROCEEDINGS FOR THE AY 2001-02 ARE IN PROGRESS AND WITH REFERENCE TO THE SAME, I WOULD LI KE TO HAVE FURTHER INFORMATION AS FOLLOWS:- 14 [A] AS PER ANNEXURE D TO FORM NO.3CD WHERE TOTAL RA W MATERIAL OF ROUGH DIAMOND AVAILABLE TO CONSUMPTION, WHICH IS AS UNDER:- OP. STOCK 1,01,995.17 CTS. ADD: PURCHASE DURING THE YR. 2,40,066.36 CTS. ------------------- TOTAL 3,42,061.53 CTS. ============ AGAINST THIS AVAILABILITY, ROUGH DIAMOND FOR DISPOS AL, CONSUMPTION DURING THE YEAR HAS SHOWN AT 4,30,701.1 4 CTS. AND REJECTION HAS BEEN SHOWN AT 26,555 CTS. THEREFO RE, THE TOTAL CLOSING STOCK OF ROUGH DIAMOND HAS BEEN SHOWN AT 24,805.39 CTS. THEREFORE, THE TOTAL ROUGH DIAMOND AVAILABLE FOR DISPOSAL ON THE BASIS OF CONSUMPTION, REJECTION AND CLOSING STOCK ARE AS UNDER:- CONSUMPTION 4,30,701.14 CTS. REJECTION 26,555.00 CTS. CL STOCK 24,805.39 CTS. ------------------- TOTAL 4,82,061.53 CTS. ============ THEREFORE, COMPARED TO RAW MATERIAL OF ROUGH DIAMON D AVAILABLE FOR DISPOSAL, ON THE BASIS OF OPENING STO CK AND PURCHASES, THERE WAS EXCESS ROUGH DIAMOND CONSUMPTI ON / REJECTED, YOU ARE REQUESTED TO RECONCILE THE SAME. [B] YOU ARE REQUESTED TO FURNISH PERCENTAGE OF YIEL D, ON THE BASIS OF CONSUMPTION FOR THE LAST AY. IN REPLY TO THIS NOTICE, VIDE LETTER DATED 31-12-20 03 THE ASSESSEE POINTED OUT TO THE ASSESSING OFFICER THAT THERE IS A TYPING MISTAKE IN FORM NO.3CD AS PER THE STOCK RECORD OF T HE ROUGH DIAMONDS MANUFACTURING, RECORD OF CONSUMPTION OR RO UGH DIAMONDS AND JOB WORK BILLS AND REGISTERS. THE CORR ECT 15 CONSUMPTION OF TOTAL ROUGH DIAMONDS IS 290701.14 CA RATS. THE AUDITOR HAD WRONGLY SIGNED THE INCORRECT TYPED FIGU RES. IT WAS ALSO STATED IN THIS LETTER THAT THIS FACT WAS BROUG HT TO THE NOTICE OF THE AUDITOR AFTER THE RECEIPT OF THE LETTER OF THE ASSESSING OFFICER. THE ASSESSEE ALSO ENCLOSED A CERTIFICATE FROM THE A UDITOR IN THIS REGARD, THE COPY OF WHICH WAS NOT FILED BEFORE US. 7 WE ALSO NOTED THAT THE TAX AUDIT FOR THE AY 2002 -03 WAS ALSO COMPLETED BEFORE THE ISSUE OF THE LETTER D ATED 15-12- 2003 BY THE ASSESSING OFFICER. THE ASSESSEE HIMSELF ACCEPTED IN ITS LETTER DATED 31-12-2003 THAT THEY CAME TO KNOW FOR THE FIRST TIME ABOUT THE CONSUMPTION OF THE RAW MATERIALS BEI NG SHOWN IN THE AUDIT REPORT AT A WRONG FIGURE. IN OUR OPINION, IT CAN NOT BE BELIEVED THAT THE AUDIT FOR THE SUCCEEDING YEAR WAS COMPLETED AND THE RETURN FOR THE SUCCEEDING YEAR WAS FILED BY THE ASSESSEE AND THE ASSESSEE WOULD NOT COME ACROSS WITH THE MISTAKE BEING COMMITTED IN THE AUDIT REPORT. IT IS ONLY WHEN THE ASSESSING OFFICER DETECTED THAT THE CONSUMPTION IN THE AUDIT REPORT HAS BEEN CERTIFIED BY THE CHARTERED ACCOUNTANT AT 430701.14 CARATS, AND WHEN HE ASKED FOR THE RECONCILIATION, THE ASSESSEE CAME OUT WITH THE VERSION THAT THERE HAD BEEN A TYPING ERROR. 8 SECTION 139(5) OF THE INCOME-TAX ACT ALLOWS AN ASSESSEE TO RECTIFY, IN CASE THERE IS A MISTAKE BEI NG FOUND IN THE RETURN SUBMITTED BY HIM BY FILING A REVISED RETURN AT ANY TIME BEFORE THE EXPIRY OF ONE YEAR FROM THE END OF THE R ELEVANT ASSESSMENT YEAR OR BEFORE COMPLETION OF THE ASSESSM ENT WHICHEVER IS EARLIER. THIS IS AN ADMITTED FACT THAT THE ASSESSEE HAS NOT SUBMITTED ANY REVISED RETURN IN ACCORDANCE WITH THE 16 PROVISIONS OF SECTION 139(5) POINTING OUT THE OMISS ION IN THE ORIGINAL RETURN. UNDER SECTION 139(9) OF THE INCOME -TAX ACT, 1961 IF RETURN FILED BY THE ASSESSEE IS NOT ACCOMPANIED BY AUDIT REPORT REFERRED TO IN SECTION 44AB, THE RETURN WILL BE REG ARDED TO BE DEFECTIVE ONE. IT IS ONLY WHEN THE ASSESSING OFFICE R HAS ASKED FOR THE EXPLANATION ON THE CONSUMPTION OF RAW MATERIALS , THE ASSESSEE CAME UP WITH THE SUBMISSION THAT THERE WAS A MISTAK E ON THE PART OF THE AUDITOR, I.E., ONLY AFTER THE EXPIRY OF MORE THAN 2 YEARS WHEN THE TAX AUDIT FOR THE SUCCEEDING ASSESSMENT YE AR ALSO WAS COMPLETED BY THE CHARTERED ACCOUNTANT. 9 THE PROVISIONS OF SECTION 44AB WERE INSERTED BY THE FINANCE ACT, 1984 WITH EFFECT FROM 01-04-1985. THE SCOPE AND EFFECT OF THESE PROVISIONS AT THE TIME OF INSERTION WAS EXPLAINED BY THE BOARD IN A CIRCULAR NO.387, DATED 06-07-1984 [152 ITR (ST) 11], AS UNDER:- 17.1 ACCOUNTS MAINTAINED BY COMPANIES ARE REQUIRE D TO BE AUDITED UNDER THE COMPANIES ACT, 1956. ACCOUNTS MAI NTAINED BY CO- OPERATIVE SOCIETIES ARE ALSO REQUIRED TO BE AUDITED UNDER THE CO- OPERATIVE SOCIETIES ACT, 1912. THERE IS, HOWEVER, N O OBLIGATION ON OTHER CATEGORIES OF TAXPAYERS TO GET THEIR ACCOUNTS AUDITED. 17.2 A PROPER AUDIT FOR TAX PURPOSES WOULD ENSURE THAT THE BOOKS OF ACCOUNTS AND OTHER RECORDS ARE PROPERLY MA INTAINED, THAT THEY FAITHFULLY REFLECT THE INCOME OF THE TAXPAYER AND C LAIMS FOR DEDUCTION ARE CORRECTLY MADE BY HIM. SUCH AUDIT WOULD ALSO HE LP IN CHECKING FRAUDULENT PRACTICES. IT CAN ALSO FACILITATE THE AD MINISTRATION OF TAX LAWS BY A PROPER PRESENTATION OF THE ACCOUNTS BEFOR E THE TAX AUTHORITIES AND CONSIDERABLY SAVING THE TIME OF ASSESSING OFFIC ERS IN CARRYING OUT ROUTINE VERIFICATIONS, LIKE CHECKING CORRECTNESS OF TOTALS AND VERIFYING WHETHER PURCHASES AND SALES ARE PROPERLY VOUCHED OR NOT. THE TIME OF THE ASSESSING OFFICERS THUS SAVED COULD BE UTILIZED FOR ATTENDING TO MORE IMPORTANT INVESTIGATIONAL ASPECTS OF A CASE. 17 FROM THIS IT IS APPARENT THAT THE OBJECTIVE OF MAKI NG THE TAX AUDIT COMPULSORY WAS TO HELP THE ASSESSING OFFICER IN CHE CKING FRAUDULENT PRACTICES. THE ASSESSING OFFICER, THEREF ORE, HAS TO RELY ON THE FIGURES CERTIFIED BY THE CHARTERED ACCOUNTAN T AS DEFINED U/S 288(2) OF THE ACT. THE CHARTERED ACCOUNTANT CER TIFIED THE FIGURES AS GIVEN IN FORM NO.3CE WHICH IS CLEAR FROM THE AUDIT REPORT AS REQUIRED TO BE GIVEN U/S 44AB. PARA-4 OF FORM NO.3CB RELATING TO THE AUDIT REPORT STATES AS UNDER:- 4 THE STATEMENT OF PARTICULARS REQUIRED TO BE FURN ISHED UNDER SECTION 44AB IS ANNEXED HEREWITH IN FORM NO.3CD. IN MY / OUR OPINION AND THE BEST OF MY / OUR INFORMATION AND AC CORDING TO THE EXPLANATIONS GIVEN TO ME / US, THE PARTICULARS GIVE N IN THE SAID FORM NO.3CD ARE TRUE AND CORRECT. FROM THE AFORESAID PARAGRAPH IT IS APPARENT THAT TH E AUDITOR HAS TO CERTIFY THE PARTICULARS GIVEN IN FORM NO.3CD AS TRU E AND CORRECT. IT IS NOT A CASE WHERE THE AUDITOR HAS TO EXPRESS A N OPINION. THERE IS DIFFERENCE IN THE CERTIFICATE AS WELL AS IN THE REPORT. WHEN THE LEGISLATURE DESIRES THE CHARTERED ACCOUNTANT TO CER TIFY THE FIGURES AS TRUE AND CORRECT, THE CHARTERED ACCOUNTA NT IS BOUND TO LOOK INTO THE FIGURES AND CERTIFY THE CORRECTNESS T HEREOF. 10 WE HAVE ALSO NOTED THAT THERE HAD BEEN SEARCH I N THE CASE OF THE ASSESSEE AND ITS GROUP CONCERN ON 7-1-1 999 WHICH WAS CONCLUDED ON 23-3-1999. DURING THE COURSE OF SE ARCH DUPLICATE CASH BOOK, LEDGER AND OTHER BOOKS SHOWING THE UNACCOUNTED MANUFACTURING AND TRADING CARRIED OUT B Y THE ASSESSEE IN DIAMONDS WERE FOUND. THE HUGE ADDITION HAS BEEN 18 MADE IN THE CASE OF THE ASSESSEES GROUP IN THE BLO CK ASSESSMENT ON THE BASIS OF THE BOOKS SO FOUND. THIS PROVES THA T THE ASSESSEE WAS MAINTAINING THE BOOKS OF ACCOUNTS OUTSIDE THE R EGULAR BOOKS. 11 WE HAVE ALSO GONE THROUGH PARA-16.2 OF THE ASSESSMENT ORDER IN THE CASE OF M/S M KANTILAL & CO . LTD. THIS PARAGRAPH EXPLAINS THE CONDUCT OF THE ASSESSEE WHIC H ITSELF IS EXPLANATORY. THIS PARAGRAPH IS REPRODUCED FOR READY REFERENCE AS UNDER:- 16.2 APART FROM THE STATEMENT ON OATH, THE FOLLOW ING INCIDENT ALSO REVEALS THAT THESE FLOPPIES WERE VERY IMPORTAN T AND BELONGED TO THE ASSESSEE GROUP ONLY. AS PER THE PANCHNAMA PREPARED BY DDIT(INV.)-I, SURA T, ON 26.2.99. SHRI HIMMATBHAI M KHENI, ONE OF THE DIRECTORS OF TH E ASSESSEE COMPANY WAS ASKED TO REMAIN PRESENT IN THE I.T. OFF ICE OF DDIT (INV.)-I, SURAT ALONG WITH SHRI AMBALAL H DESAI, SH RI UDAY SINGH, COMPUTER OPERATOR AND TWO PANCHAS FOR THE PURPOSE O F EXTRACTING DATA FROM THESE FLOPPIES. THE BOX OF THREE FLOPPIES WERE GIVEN FOR INSPECTION OF SEALS TO THE AUTHORISED OFFICERS, SHR I AMBALAL H DESAI AND TWO PANCHAS. ONE OF THE PANCHAS, SHRI KANTI B P ATEL RAN OUT OF THE ROOM OF THE DDIT (INV.)-I, SURAT, AS SOON AS HE GOT THE POSSESSION OF THE SEALED FLOPPY BOX AND THREW IT OUT OF THE WINDO W AT THE END OF THE CORRIDOR. THE FLOPPY BOX WAS TAKEN AWAY BY A SCOOTE R RIDER WHO WAS STANDING UNDER THE WINDOW AND COULD NOT BE TRACED. LATER A CRIMINAL COMPLAINT WAS FILED BY THE I.T. DE PARTMENT AGAINST FOUR PERSONS INCLUDING SHRI HIMMATBHAI M KHENI, DIR ECTOR OF M KANTILAL & CO. LTD. & THE UNKNOWN SCOOTER RIDER FOR STEALING THESE FLOPPIES AND OBSTRUCTING THE WORK OF GOVT. OFFICIAL S BEFORE UMRA POLICE STATION (FIR NO.1/191/99). SHRI HIMMATBHAI M KHENI, DIRECTOR OF THE ASSESSEE COMPANY AND TWO OTHER PERSONS WERE TAKEN INTO POLICE CUSTODY AND KEPT IN JAIL ON REMAND FOR 5 DAYS. TILL THE PASSING OF THIS ORDER, THE POLICE IS STILL INVESTIGATING THE CASE. 16.3 THE ABOVE INCIDENT CLEARLY SHOWS THAT THE THRE E FLOPPIES WERE TOO IMPORTANT TO THE ASSESSEE COMPANY GROUP AND MUS T BE CONTAINING 19 VALUABLES INFORMATION RELATED TO ITS UNACCOUNTED AC TIVITIES, WHICH PROMOTED THE ASSESSEE TO TAKE SUCH DARING STEPS. THIS ALSO SUBSTANTIATE THE FACT THAT THE GROUP WAS IN THE HABIT OF HIDING DOCUMENTS RELATED TO THEIR UNACCOUNTED ACTIVITIES W ITH THEIR EMPLOYEES AND OTHER PERSONS. NO ASSESSEE WOULD LIKE TO SNATCH AWAY THE SEALED FL OPPY BOX FROM THE DEPARTMENT. THIS, IN OUR OPINION, CLEARLY PROVES THAT THE ASSESSEE WAS HABITUAL IN CARRYING ON THE BUSINESS O F MANUFACTURE AND SALE OF DIAMONDS OUTSIDE THE BOOKS OF ACCOUNT. HAD THE ASSESSEE HAD ANY EXPLANATION, THE ASSESSEE WOULD HA VE NEVER SNATCHED AWAY THE FLOPPY BOX FROM THE REVENUE. SIMI LARLY IN THIS CASE THE CHARTERED ACCOUNTANT CARRIED OUT THE AUDIT AND CERTIFIED THE ACTUAL CONSUMPTION ON THE BASIS OF THE BOOKS OF ACCOUNT PRODUCED BEFORE HIM WHICH CAN BE DIFFERENT FROM THE ONE PRODUCED SUBSEQUENTLY. WHEN THE ASSESSING OFFICER E XAMINED THE DETAILS, HE NOTED THE DISCREPANCIES AND, THEREF ORE, ASKED FOR THE EXPLANATION OF THE ASSESSEE. THE ASSESSEE INSTE AD OF RECONCILING THE FIGURES, MADE THE SUBMISSION THAT T HERE WAS AN ERROR COMMITTED BY THE CHARTERED ACCOUNTANT WHILE C ERTIFYING THE QUANTITATIVE FIGURES IN THE AUDIT REPORT. IN OUR O PINION, WHEN THE ASSESSEE DID NOT HAVE ANY EXPLANATION AND WAS CAUGH T BY THE ASSESSING OFFICER ABOUT THE ACTUAL CONSUMPTION OF T HE ROUGH DIAMONDS, THE ASSESSEE CAME FORWARD WITH THE CONTEN TION THAT A TYPING ERROR WAS COMMITTED BY THE CHARTERED ACCOUNT ANT. IT IS UNBELIEVABLE THAT THE AUDIT FOR THE SUCCEEDING ASSE SSMENT YEAR HAS BEEN CARRIED OUT. THE AUDIT REPORT FOR THE SUCC EEDING ASSESSMENT YEAR HAS BEEN SIGNED BY THE SAME CHARTER ED ACCOUNTANT BUT HE COULD NOT COME ACROSS THAT ANY TY PING ERROR 20 WAS COMMITTED IN THE AUDIT REPORT FOR THE IMPUGNED ASSESSMENT YEAR. HAD THERE BEEN AN ERROR, THE ASSESSEE COULD H AVE RECTIFIED IT EVEN AT THE TIME OF FILING THE RETURN FOR THE SUBSE QUENT ASSESSMENT YEAR. THIS HAS NOT BEEN DONE BY THE ASSE SSEE. IT IS ONLY WHEN THE REVENUE DETECTED THAT THE ASSESSEE HA S CONSUMED THE ROUGH DIAMONDS BY NOT RECORDING THE PURCHASES I N THE BOOKS OF ACCOUNT, THE ASSESSEE SUBMITTED THE CERTIFICATE OF THE CHARTERED ACCOUNTANT THAT A TYPING ERROR HAD BEEN COMMITTED. NEGLIGENCE TO SUCH HIGH ATTITUDE CAN NOT BE EXPECTED FROM A ME MBER OF THE INSTITUTE OF CHARTERED ACCOUNTANT, IN OUR OPINION, WHICH MAINTAINS HIGH PROFESSIONAL ETHICS AND STANDARDS. E VEN THERE IS NO EVIDENCE ON RECORD WHAT ACTION HAS BEEN TAKEN BY THE ASSESSEE AGAINST SUCH CHARTERED ACCOUNTANT; WHETHER ANY COMP LAINT HAS BEEN LODGED BEFORE THE INSTITUTE OF CHARTERED ACCOU NTANTS SO THAT THE INSTITUTE MAY TAKE ACTION AGAINST THE CHARTERED ACCOUNTANT. WHEN A QUERY WAS RAISED DURING THE COURSE OF HEARIN G, THE LEARNED AR WAS FAIR ENOUGH TO CONCEDE THAT NO SUCH ACTION HAS BEEN CARRIED OUT. THIS PROVES THAT THE ASSESSEE HAS TAKEN THE CONTENTION THAT A MISTAKE HAS OCCURRED IN THE AUDIT REPORT WHILE CERTIFYING THE CONSUMPTION OF ROUGH DIAMONDS, IS AN AFTER- THOUGHT. THIS CONTENTION CANNOT BE ACCEPTED. 12 THE LEARNED AR SUBMITTED THE PAPER BOOK BEFORE US IN WHICH HE HAS FILED THE COPIES OF AFFIDAVITS OF THE TYPIST SURESH KHETANI AND SHRI UMESH J SHAH, CA, APPEARING AT PAG ES 20 TO 23 AND 24 TO 28 OF THE PAPER BOOK RESPECTIVELY. THESE AFFIDAVITS ARE DATED 10-04-2004. A CERTIFICATE HAS BEEN APPENDED TO THE PAPER BOOK CERTIFYING THAT PAGE NO. 17 TO 183 WERE PRODU CED BEFORE 21 THE ASSESSING OFFICER AND THE CIT(A). NO ADDITIONAL EVIDENCE IS PLACED BEFORE THE BENCH. THE ASSESSMENT ORDER IN T HE CASE OF THE ASSESSEE HAS BEEN PASSED ON 31-03-2004. APPARENTLY THE CERTIFICATE ISSUED BY THE ASSESSEE IS INCORRECT AS THE AFFIDAVITS WHICH WERE GIVEN ON OATH ON 10-04-2004 CANNOT BE FI LED BEFORE THE AUTHORITY WHO COMPLETED THE ASSESSMENT PROCEEDI NGS ON 31- 03-2004. THESE AFFIDAVITS CANNOT BE ACCEPTED. THE S UBMISSION OF SUCH CERTIFICATE BY THE ASSESSEE ITSELF PROVES THE CONDUCT OF THE ASSESSEE THAT HE DID NOT BOTHER TO GIVE INCORRECT C ERTIFICATE EVEN BEFORE US, THE FORUM OF FINAL FACT FINDING AUTHORIT Y. 13 THE HON'BLE SUPREME COURT IN THE CASE OF CST V ESUFALI (H M ) ABDULALI (H M) (1973) 90 ITR 271 (SC ) TOOK THE VIEW THAT THE ASSESSEE CAN NOT BE PERMITTED TO TAKE ADVANTAGE OF HIS OWN ILLEGAL ACTS AND THAT IT WAS HIS DUTY TO PL ACE ALL THE FACTS TRUTHFULLY BEFORE THE AO. IF HE FAILS TO DO HIS DUT Y, HE CANNOT BE ALLOWED TO CALL UPON THE ASSESSING AUTHORITY TO PRO VE CONCLUSIVELY WHAT TURNOVER HE HAD SUPPRESSED. THAT FACT MUST BE WITHIN HIS PERSONAL KNOWLEDGE AND THE BURDEN OF PRO VING THAT FACT IS ON HIM. IN THIS CASE IT IS APPARENT THAT TH E ASSESSEE EVEN DURING THE COURSE OF INVESTIGATION CARRIED OUT BY T HE REVENUE INSTEAD OF COOPERATING THE REVENUE, SNATCHED AWAY T HE EVIDENCES SO THAT THE REVENUE MAY NOT BRING CONTRARY EVIDENCE ON RECORD; ALTHOUGH THE FLOPPIES MIGHT HAVE RELATED TO THE PER IOD UP TO THE DATE OF SEARCH BUT IT MAY CONTAIN MATERIAL EVIDENCE S AGAINST THE ASSESSEE DUE TO WHICH HE SNATCHED AWAY THE FLOPPIES SEIZED BY THE REVENUE. THE ASSESSEE CANNOT BE PERMITTED TO GO SCOT FREE BY SNATCHING AWAY FLOPPIES SEIZED FROM HIS POSSESSION FROM THE 22 REVENUE. IF THIS THING IS ALLOWED TO BE PERPETUATED , THE ASSESSEE WILL CONTINUE TO APPLY SUCH ILLEGAL MEANS AND TACTI CS AND THERE WILL NOT BE ANY MACHINERY TO CHECK THE TAX EVASION BEING CARRIED OUT BY THE ASSESSEE. THE DATA IN SEIZED FLOPPY WOUL D HAVE DEPICTED THE CONDUCT OF THE ASSESSEE WHETHER THE AS SESSEE IS CARRYING OUT MANUFACTURING AND SALES OUTSIDE THE BO OKS OF ACCOUNT; WHETHER THE ASSESSEE HAS INCURRED ANY EXPE NDITURE ON THE PURCHASE OF ROUGH DIAMONDS OUTSIDE THE BOOKS IN EARLIER YEARS. THE ASSESSEE SINCE DESTROYED THE EVIDENCE, T HIS ITSELF PROVES THAT THE ASSESSEE CONTINUED TO MAINTAIN DUPL ICATE BOOKS OF ACCOUNT DURING THE YEAR UNDER CONSIDERATION. THE DE STRUCTION OF THE EVIDENCE BY THE ASSESSEE WILL DRAW AN INFERENCE AGAINST THE ASSESSEE. NO PERSON CAN BE PERMITTED TO SNATCH AWAY THE EVIDENCES FROM AN AUTHORITY WHICH HAS BEEN LEGALLY CONSTITUTED UNDER THE CONSTITUTION OF INDIA. IF THAT IS PERMITT ED, THE AUTHORITY WILL NOT BE ABLE TO CARRY OUT THE FUNCTION ENTRUSTE D TO IT UNDER THE IT ACT. IN THAT CASE, WE WILL BE TURNING THE SOCIET Y LIVING IN AN ERA IN WHICH IF ANY EVIDENCE IS FOUND BY THE DEPART MENT AGAINST THE ASSESSEE, THE ASSESSEE WILL TAKE THE LAW INTO I TS HANDS. INCOME-TAX PROCEEDINGS AND CRIMINAL PROCEEDINGS BOT H ARE DIFFERENT. IN INCOME-TAX PROCEEDINGS THE INCOME HAS TO BE COMPUTED AND DETERMINED ON THE BASIS OF EVIDENCE FO UND AND BROUGHT ON RECORD WHILE IN CRIMINAL PROCEEDINGS ORA L EVIDENCE ALSO HAVE EVIDENTIARY VALUE. UNDER THESE CIRCUMSTAN CES WE ARE OF THE VIEW THAT SINCE THE ASSESSEE DID NOT HAVE ANY A NSWER TO THE EXPLANATION ASKED FOR BY THE AO WITH REGARD TO OVER CONSUMPTION OF THE ROUGH DIAMONDS, HE CAME OUT WITH AN AFTER-TH OUGHT THEORY THAT A MISTAKE HAS CREPT IN THE AUDIT REPORT OF THE CHARTERED 23 ACCOUNTANT. KEEPING IN VIEW THE OVER ALL FACTS AND CIRCUMSTANCES OF THE CASE AND THE CONDUCT OF THE ASSESSEE, WE ARE , THEREFORE, OF THE VIEW THAT THE CIT(A) WAS NOT CORRECT IN DELETIN G THE ADDITION MADE BY THE AO. THE EXCESS CONSUMPTION OF THE ROUGH DIAMONDS REPRESENTS ONLY THE PURCHASE OF THE ROUGH DIAMONDS OUTSIDE THE BOOKS OF ACCOUNT OF THE ASSESSEE. 14 NOW COMING TO THE ALTERNATE CLAIM OF THE ASSESS EE THAT IF AN ADDITION IS MADE THAT THE ASSESSEE HAS INCURR ED THE EXPENDITURE OUTSIDE THE BOOKS OF ACCOUNT IN ROUGH D IAMONDS, THE ASSESSEE SHOULD BE ALLOWED DEDUCTION AS THIS EXPEND ITURE HAS BEEN INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOS E OF BUSINESS OF THE ASSESSEE. NO DOUBT, SECTION 37 OF THE ACT AL LOWS DEDUCTION TO THE ASSESSEE IN RESPECT OF AN EXPENDITURE NOT BE ING EXPENDITURE OF THE NATURE DESCRIBED IN SECTIONS 30 TO 36 AND NO T BEING IN THE NATURE OF CAPITAL EXPENDITURE OR PERSONAL EXPENSES OF THE ASSESSEE INCURRED OR EXPENDED BY THE ASSESSEE WHOLLY AND EXC LUSIVELY FOR THE PURPOSE OF THE BUSINESS. PROVISO TO SECTION 69C WHICH WAS INSERTED BY THE FINANCE ACT, 1998 WITH EFFECT FROM 1-4-99 PUTS AN EMBARGO IN RESPECT OF AN EXPENDITURE WHICH HAS BEEN INCURRED OUTSIDE THE BOOKS OF ACCOUNT AND HAS BEEN ADDED U/S 69C, AS UNDER:- PROVIDED THAT, NOTWITHSTANDING ANYTHING CONTAINED IN ANY OTHER PROVISION OF THIS ACT, SUCH UNEXPLAINED EXPENDITURE WHICH IS DEEMED TO BE THE INCOME OF THE ASSESSEE SHALL NOT BE ALLOW ED AS A DEDUCTION UNDER ANY HEAD OF INCOME. FROM THE PERUSAL OF THE SAID PROVISO IT IS APPARENT THAT THIS PROVISO OVERRIDES ALL OTHER PROVISIONS OF THE I.T. ACT AND 24 PROHIBITS THE DEDUCTION OF SUCH UNEXPLAINED EXPENDI TURE WHILE COMPUTING THE TOTAL INCOME OF THE ASSESSEE UNDER AN Y HEAD OF INCOME. THIS PROVISO IS APPLICABLE TO THE ASSESSMEN T YEAR UNDER CONSIDERATION. WHEN A QUERY WAS RAISED TO THE LEARN ED AR DURING THE COURSE OF HEARING, HE COULD NOT EXPLAIN HOW THI S PROVISO TO SECTION 69C WILL NOT APPLY IN THE CASE OF THE ASSES SEE. WE, THEREFORE, SET-ASIDE THE ORDER OF THE CIT(A) AND RE STORE THE ORDER OF THE AO ON THIS ISSUE. 15 IN THE RESULT, THE APPEAL FILED BY THE REVENUE IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT TODAY ON 11-09-2 009 SD/- SD/- (MAHAVIR SINGH) JUDICIAL MEMBER (P K BANSAL) ACCOUNTANT MEMBER DATE : 11-09-2009 COPY OF THE ORDER FORWARDED TO : 1. M/S M KANTILAL EXPORTS, AMBIKA-NIWAS, MOHAN-NI CHAWL, VARACHHA ROAD, SURAT 2. THE ASSISTANT COMMISSIONER OF INCOME-TAX, CENTRA L CIRCLE-2, ROOM NO.504, AAYAKAR BHAVAN, MAJURA GATE, SURAT 3. CIT CONCERNED 4. CIT(A)-II, AHMEDABAD 5. THE DR, ITAT, AHMEDABAD 6. GUARD FILE