Ita/1765/2009 Of Rajasree Prathap Nair,Kollam v. The Dy.commissioner Of Income Tax,Kollam

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HONOURABLE MR. JUSTICE C.N.RAMACHANDRAN NAIR & THE HONOURABLE MR. JUSTICE V.K.MOHANAN TUESDAY, THE 12TH JANUARY 2010 / 22TH POUSHA 1931 ITA.No. 1765 of 2009() ---------------------- ITA.534/COCH/2008 of I.T.A.TRIBUNAL,COCHIN BENCH .................... APPELLANT/APPELLANT/APPELLANT ------------------------------------------------- RAJASREE PRATHAP NAIR, KOLLAM, PA NO.AAWWPP 4670P. BY ADV. SRI.K.VINOD CHANDRAN RESPONDENT(S): RESPONDENT/DEPARTMENT ------------------------------------ THE DY.COMMISSIONER OF INCOME-TAX, CENTRAL CIRCLE, KOLLAM. ADV. SRI.JOSE JOSEPH, SC, FOR INCOME TAX THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 12/01/2010 THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: C.R. C .N. RAMACHANDRAN NAIR & V.K. MOHANAN, JJ. -------------------------------------------- -------------------------------------------- Dated this the 12th day of January, 2010 JUDGMENT Ramachandran Nair, J. Appellant-assessee is engaged in manufacture/processing ofcashew kernel and sale of the same exclusively to it's sister concernswhich are fully engaged in exports. While scrutinizing income taxreturn of the appellant filed for the assessment year 2004-05, theassessing officer noticed that inspite of huge turnover the assessee had,assessee returned an income of only Rs. 4,21,882/-. On scrutiny of theaccounts, it was noticed that assessee was selling cashew kernelproduced in it's factory to the sister concerns at much below even thecost of production, leave alone profit. In fact the assessee's accountsdisclosed that the production cost is Rs. 174 per Kg, whereas averageprice at which cashew kernel sold by the appellant to sister concernswas at the rate of 139 per Kg. The difference between the cost ofproduction and sale price realized itself was Rs. 40,73,446.30. Theassessee credited this amount in the trading account towards under recovery. In other words, short recovery of cost of production wasoffered for tax. The assessing officer on enquiry found that thepurpose was to defraud the revenue by permitting sister concerns toclaim ineligible export profit under Section 80 HHC of the I.T. Actbecause when the export firms account low purchase price they caninflate the tax exemption under Section 80HHC of the Act. Since thesale price realized by the assessee was not genuine or real, theassessing officer made addition of a further sum of Rs. 40,73,446.30,being the difference between the cost of production and the sale pricerealized. The assessee filed appeal against assessment before the CIT(Appeals) who held that the purpose of addition is to cover upineligible tax benefit obtained by sister concerns of the assessee in theform of artificial export profit eligible for deduction under Section80HHC of the Act. However, the CIT (Appeals) held that if the exportfirms which purchased cashew kernel from the appellant had debitedthe differential amount in the purchase account, in the same way theassessee credited the trading account, then there was no need forfurther addition. The first appellate authority therefore grantedconditional relief to the appellant so that if tax fraud is not perpetuated by the sister concerns by claiming ineligible tax exemption on exports,then then there was no need for a further addition in appellant'sassessment. However, the assessee challenged the order in appealbefore the Tribunal which found that the appellate order is sustainablein as much as it's purpose was only to set right a tax evasion schemepractised by the assessee with export firms under it's control. It isagainst this order of the Tribunal the assessee has filed this appeal. Wehave heard senior counsel, Sri. Sarangan appearing for the appellant-assessee and Sri. P.K.R. Menon senior counsel appearing for therevenue. by the sister concerns by claiming ineligible tax exemption on exports,then then there was no need for a further addition in appellant'sassessment. However, the assessee challenged the order in appealbefore the Tribunal which found that the appellate order is sustainablein as much as it's purpose was only to set right a tax evasion schemepractised by the assessee with export firms under it's control. It isagainst this order of the Tribunal the assessee has filed this appeal. Wehave heard senior counsel, Sri. Sarangan appearing for the appellant-assessee and Sri. P.K.R. Menon senior counsel appearing for therevenue. 2. During initial hearing held on 30.11.2009 we felt thatclarification should be sought for from the department as to whether bypurchase of cashew kernel from the appellant, sister concerns, whichare nothing but related firms of the appellant, have got ineligible claimof exemption under Section 80HHC of the Act and therefore wedirected the department to report about the claim made and allowed atthe hands of the sister concerns. We are informed that all the sisterconcerns which purchased cashew kernel from the appellant claimedexemption under Section 80HHC and the same was allowed treating the sale price accounted by the appellant as actual cost of purchase, that is at the rate of Rs. 139 per KG as against cost of production at Rs. 174per KG and therefore appellant and sister concerns have derived unduetax exemption on account of manipulation by the appellant. 3. Senior counsel appearing for the appellant-assesseecontended that when the assessee credited in the trading account thedifference between the cost of production and sale price realized, thedepartment cannot have any grievance and therefore the addition of thevery same amount once again is unreasonable and arbitrary. Seniorstanding counsel appearing for the department contended that thewhole transaction is a tax evasion scheme and since the assessee'spurpose to evade tax through sister concerns is achieved because thesister concerns obtained tax exemption, the addition made to make upthe loss caused to the revenue should not be interfered with in appealfiled before this Court. The further contention raised by the revenue isthat the issue raised is purely a question of fact, that is about thequantum of addition to be sustained in a proved case of concerted taxevasion scheme practised by the appellant with his sister concerns.Senior counsel has relied on the decision of the Madras High Court in SRI RAMALINGA CHOODAMBIKAI MILLS LTD. V. CIT, (1955)28 I.T.R. 952 and that of the Supreme Court in UNION OF INDIA V.AZADI BACHAO ANDOLAN, (2004) 10 SCC 1. 4. After hearing both sides and after going through the orders ofthe lower authorities, we find that the assessee has made concertedeffort to evade payment of tax through sister concerns. When thebeneficiaries of the assessee's transactions are sister concerns of theassessee, we have to take it that assessee is the main beneficiary of theillegitimate tax benefits obtained by the sister concerns. The assesseehas no explanation as to why cashew kernels produced were sold at farbelow the market price and even below the cost of production. Somuch so, the department's argument that the purpose is to inflate taxexemption for the sister concerns to which entire cashew kernels weresold by the appellant, stands substantiated. If the assessee had soldcashew kernels at market value or even at the cost of production thenthe purchasing firms which exported the same and claimed exemptionon export profit under Section 80HHC would not have derived unduetax exemption. In fact in the proved circumstances the assessingofficer would have been within his powers to reject the sale value as bogus and could have estimated the profit treating the market price assale price at the hands of the assessee. However, on the other hand, theassessing officer has made only one addition of difference between thecost of production and sale price realized only to neutralise the wrongtax exemption received by the sister concerns whose assessments werereportedly completed without taking into account the tax evasionscheme practised by them with the assistance of the appellant. We areof the view that the order of the first appellate authority which isconfirmed by the Tribunal is quite a reasonable one because assesseeitself by crediting the trading account with the differential amountbetween the cost of production and sale price realized admitted thatsales at the value stated are not genuine sales. Since the appellant isadmittedly a partner of the sister concerns, he should have seen thatcorresponding debit was made in the purchase account of the exportfirms so that ineligible benefit of tax exemption is not claimed by themunder Section 80HHC of the Act. So much so CIT (Appeals) directedverification of purchase account of the sister concerns and if they havedebited the purchase account with the same amount credited in thetrading account by the assessee, the appellate authority directed deletion of the addition made in the assessment. The very fact that theappellant has contested the appellate order of the CIT (Appeals) provesbeyond all reasonable doubt that sister concerns got ineligible taxexemption under Section 80HHC which is only on account ofassessee's manipulation in accounting the sale price at below even thecost of production. We therefore find no merit in the appeal, and in ourview, this Court should not encourage tax evasion of the kind practisedby the appellant under any circumstance. We therefore dismiss theappeal as devoid of any merit. (C.N.RAMACHANDRAN NAIR)Judge.Judge. (V.K. MOHANAN) Judge. kk