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. -------------------------------------------- I. T. A. No. 1765 OF 2009 -------------------------------------------- Dated this the 12th day of January, 2010 JUDGMENT Ramachandran Nair, J. Appellant-assessee is engaged in manufacture/processing of cashew kernel and sale of the same exclusively to it's sister concerns which are fully engaged in exports. While scrutinizing income tax return of the appellant filed for the assessment year 2004-05, the assessing officer noticed that inspite of huge turnover the assessee had, assessee returned an income of only Rs. 4,21,882/-. On scrutiny of the accounts, it was noticed that assessee was selling cashew kernel produced in it's factory to the sister concerns at much below even the cost of production, leave alone profit. In fact the assessee's accounts disclosed that the production cost is Rs. 174 per Kg, whereas average price at which cashew kernel sold by the appellant to sister concerns was at the rate of 139 per Kg. The difference between the cost of production and sale price realized itself was Rs. 40,73,446.30. The assessee credited this amount in the trading account towards under 2 recovery. In other words, short recovery of cost of production was offered for tax. The assessing officer on enquiry found that the purpose was to defraud the revenue by permitting sister concerns to claim ineligible export profit under Section 80 HHC of the I.T. Act because when the export firms account low purchase price they can inflate the tax exemption under Section 80HHC of the Act. Since the sale price realized by the assessee was not genuine or real, the assessing officer made addition of a further sum of Rs. 40,73,446.30, being the difference between the cost of production and the sale price realized. The assessee filed appeal against assessment before the CIT (Appeals) who held that the purpose of addition is to cover up ineligible tax benefit obtained by sister concerns of the assessee in the form of artificial export profit eligible for deduction under Section 80HHC of the Act. However, the CIT (Appeals) held that if the export firms which purchased cashew kernel from the appellant had debited the differential amount in the purchase account, in the same way the assessee credited the trading account, then there was no need for further addition. The first appellate authority therefore granted conditional relief to the appellant so that if tax fraud is not perpetuated 3 by the sister concerns by claiming ineligible tax exemption on exports, then then there was no need for a further addition in appellant's assessment. However, the assessee challenged the order in appeal before the Tribunal which found that the appellate order is sustainable in as much as it's purpose was only to set right a tax evasion scheme practised by the assessee with export firms under it's control. It is against this order of the Tribunal the assessee has filed this appeal. We have heard senior counsel, Sri. Sarangan appearing for the appellant- assessee and Sri. P.K.R. Menon senior counsel appearing for the revenue. 2. During initial hearing held on 30.11.2009 we felt that clarification should be sought for from the department as to whether by purchase of cashew kernel from the appellant, sister concerns, which are nothing but related firms of the appellant, have got ineligible claim of exemption under Section 80HHC of the Act and therefore we directed the department to report about the claim made and allowed at the hands of the sister concerns. We are informed that all the sister concerns which purchased cashew kernel from the appellant claimed exemption under Section 80HHC and the same was allowed treating 4 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. 174 per KG and therefore appellant and sister concerns have derived undue tax exemption on account of manipulation by the appellant. 3. Senior counsel appearing for the appellant-assessee contended that when the assessee credited in the trading account the difference between the cost of production and sale price realized, the department cannot have any grievance and therefore the addition of the very same amount once again is unreasonable and arbitrary. Senior standing counsel appearing for the department contended that the whole transaction is a tax evasion scheme and since the assessee's purpose to evade tax through sister concerns is achieved because the sister concerns obtained tax exemption, the addition made to make up the loss caused to the revenue should not be interfered with in appeal filed before this Court. The further contention raised by the revenue is that the issue raised is purely a question of fact, that is about the quantum of addition to be sustained in a proved case of concerted tax evasion scheme practised by the appellant with his sister concerns. Senior counsel has relied on the decision of the Madras High Court in 5 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 of the lower authorities, we find that the assessee has made concerted effort to evade payment of tax through sister concerns. When the beneficiaries of the assessee's transactions are sister concerns of the assessee, we have to take it that assessee is the main beneficiary of the illegitimate tax benefits obtained by the sister concerns. The assessee has no explanation as to why cashew kernels produced were sold at far below the market price and even below the cost of production. So much so, the department's argument that the purpose is to inflate tax exemption for the sister concerns to which entire cashew kernels were sold by the appellant, stands substantiated. If the assessee had sold cashew kernels at market value or even at the cost of production then the purchasing firms which exported the same and claimed exemption on export profit under Section 80HHC would not have derived undue tax exemption. In fact in the proved circumstances the assessing officer would have been within his powers to reject the sale value as 6 bogus and could have estimated the profit treating the market price as sale price at the hands of the assessee. However, on the other hand, the assessing officer has made only one addition of difference between the cost of production and sale price realized only to neutralise the wrong tax exemption received by the sister concerns whose assessments were reportedly completed without taking into account the tax evasion scheme practised by them with the assistance of the appellant. We are of the view that the order of the first appellate authority which is confirmed by the Tribunal is quite a reasonable one because assessee itself by crediting the trading account with the differential amount between the cost of production and sale price realized admitted that sales at the value stated are not genuine sales. Since the appellant is admittedly a partner of the sister concerns, he should have seen that corresponding debit was made in the purchase account of the export firms so that ineligible benefit of tax exemption is not claimed by them under Section 80HHC of the Act. So much so CIT (Appeals) directed verification of purchase account of the sister concerns and if they have debited the purchase account with the same amount credited in the trading account by the assessee, the appellate authority directed 7 deletion of the addition made in the assessment. The very fact that the appellant has contested the appellate order of the CIT (Appeals) proves beyond all reasonable doubt that sister concerns got ineligible tax exemption under Section 80HHC which is only on account of assessee's manipulation in accounting the sale price at below even the cost of production. We therefore find no merit in the appeal, and in our view, this Court should not encourage tax evasion of the kind practised by the appellant under any circumstance. We therefore dismiss the appeal as devoid of any merit. (C.N.RAMACHANDRAN NAIR) Judge. (V.K. MOHANAN) Judge. kk 8