High Court Of Bombay
Director Of Income-Tax (International Taxation) Vs. Income Tax Settlement Commissioner
Assessment Year 1989-90
Mohit S. Shah And M.S. Sanklecha, JJ.
Writ Petition No. 559 Of 2008
February 28, 2014
Akil Kureshi, J – Assessee has challenged judgment of the Income Tax Appellate Tribunal Ahmedabad (“Tribunal” for short) dated 7th August 2000. Tax Appeal was admitted for consideration of following substantial questions of law :-
(1) “Whether the Authorities of the Department were right in raising inference on fact and in law that the alleged excess consumption of gold of the value of Rs. 21,31,418/= in manufacture of gold ornaments through various artisans, were suppressed sales within the country and liable to be treated as the income of the assessee. ?”
(2) “Whether the Tribunal in raising inference of suppressed sales against the assessee to have been made within the country, ignored the settled trade practice relied by the assessee by producing certificate issued by the Gems & Jewellery Export Promotion Council and the receipts from the artisans ?”
2. In Question No. 1 referred to above, though the figure is Rs. 21,31,418/=, counsel for both the sides pointed out that the correct figure is Rs. 28,31,418/=. We would, therefore, refer to such correct figure in consideration of the said question.
3. Briefly stated, the facts are that the appellant-assessee was in the business of manufacturing and export of gold ornaments. For the A.Y 1989-90, return filed by the assessee came up for scrutiny before the Assessing Officer.
The Assessing Officer noticed discrepancy in the weight of gold consumed by the assessee in preparation of the gold ornaments as compared to the weight of gold recorded at the time of export of such ornaments. In the nutshell, it appeared that the assessee was manufacturing and exporting gold ornaments of 22 Carat purity. In the documenting manufacture of such ornaments, after they were received from karighars, the percentage or fineness of the gold recorded was 93.37%. In the export documents as well as in the certificate by the Customs authorities, the ornaments were shown to be carrying gold purity less than the said percentage and in many cases of 91.66%. The assessee had also, during the same period, manufactured gold ornaments with 20, 18, 14 Carat gold. In all such categories also, similar discrepancies were noticed. The Assessing Officer, therefore, called upon the assessee to explain such discrepancies. The assessee contended that the actual export of gold ornaments was of higher’ purity but declaration was for the standard minimum percentage required for specified carat of gold ornaments which were being exported. This was done to ensure that the stringent international standards of purity were not breached even accidentally or erroneously in order to avoid rejection of the export consignment. The importer would, however, pay only for the purity of gold agreed upon. The difference would be recovered by the assessee through higher labour charges.
4. The Assessing Officer painstakingly recorded the discrepancies, traced the manufacturing process and the export procedure and concluded that,”…Thus, the scrutiny of all these facts and figures shows that the purity of 22 Carat recorded in the books of account actually mean 0.917 fineness. Thus, a gold mass which is described as 0.917 fineness actually means that it contains impurity to the extent of 0.083 per 1000. This proves that the quantity of alloy mixed in the particular gold mass is only 0.083 per 1000. Thus, the basic fact is proved that the purity of the ornaments which have been exported are not higher than what has been shown by the assessee in the export voucher. What the assessee has termed 22 carat in the books of account really means gold of 0.917 purity in the export voucher.”
4.1 The Assessing Officer also recorded in detail, the discrepancies in gold ornaments of 22, 18 and 14 carat gold in different consignments. One such sample of his observations read as under:-
“14. It is worthwhile to take for example, the export Invoice No. 8 and Bill No. 8 which is enclosed as Annexure No. A to this order. Here, the following facts are to be analyzed critically.
|For ornaments of 22 carat purity as shown in the assessee’s books.||Weight in Grams|
|(i)||Weight of ornaments exported||10870.000|
|(ii)||Fineness of the Items exported as per declaration given and finally approved by the Joint Chief Controller of Imports & Exports||0.917|
|(iii)||Fineness on conversion into 0.999||9978.593|
|(iv)||Replenishment of gold in terms of 0.999 fineness by the Government of India through the SBI||9978.593|
|(v)||Additional replenishment in view of the Government’s Export Import Policy @ 2% in terms of fineness of 0.999 fineness||199.571|
|(vi)||Additional replenishment of 199.571 when converted into fineness of 0.917||217.170|
|(vii)||% of gold exported [9978.593/10870×100]||91.79%|
|(viii)||% of gold content in the finished product as per entries passed in the assessee’s books [100/107.100×100]||93.37%|
|(ix)||Replenishment by the Government||91.79%|
|(x)||% of additional replenishment @ 2% of the original but treated as purchase vide Export invoice||2.00%|
4.2 The details of export of 18 carat purity ornaments are also examined as under :-
For ornaments of 18 carat purity as shown in the assessee’s books Weight in Grams
(i) Weight of ornaments exported 16.700
(ii) Fineness of items exported 0.750
(iii) Fineness on conversion into 0.999 fineness 12.537
(iv) Replenishment of gold in terms of 0.999 fineness by the Government of India through the SBI. 12.537
(v) Additional replenishment in view of the Government’s Export-Import policy @ 10% in terms of fineness of 0.999 1.253
(vi) % of gold exported[12.537/16.700 × 100) 75.07%
(vii) % of gold content in the finished product as per entries passed in the assessee’s books 80%
(viii) Replenishment by the Govt, of India 75.07%
(ix) % of additional replenishment @ 10% on the original replenishment but treated as purchase vide export invoice. 10%
For ornaments of 14 carat purity as shown in the assessee’s books Weight in Grams
(i) Weight of ornaments exported 2.800
(ii) Fineness of items exported 0.5834
(iii) Fineness on conversion into 0.999 fineness 1.636
(iv) Replenishment of gold in terms of 0.999 fineness by the Government of India through the SBI. 1.636
(v) Additional replenishment in view of the Government’s Export-Import policy @ 10% in terms of fineness of 0.999 0.636
(vi) % of gold exported [1.636/2.800 × 100] 58.42%
(vii) % of gold content in the finished product as per entries passed in the assessee’s books 62.5%
(viii) Replenishment by the Govt. of India 58.42%
(ix) % of additional replenishment the original replenishment but treated as purchase vide export invoice.@ 10% on 10%
4.3 On the basis of such detailed analysis, the Assessing Officer held and observed as under :-
“Thus, the factual analysis shows that on every consumption of 100 grams of standard gold in the manufacture of ornaments of different purities, the percentage of gold content in the final product should be as given below. But the assessee’s contention is proved wrong when the purity is determined at the time of export.
|Sr No||Purity recored in books of ornaments manufactured||% of gold content of finished produce d as shown in the books||% of alloy contents as shown in the books||As per export vouchers & as certified by controller of Imports & Exports||% of excess consumption of gold not explained [3-5]||% of alloy content in the ornaments exported actually under stated by the assessee to the counter value unexplained consumption of gold [6-4]|
|% of gold % of contents alloy|
|3||18 Carat||80.00%||20.00%||75.07%||24.92%||4.93%||4.92% ie. 4.93%|
|4||14 Carat||62.50%||37.50%||58.42%||41.57%||4.1 ie. 4%||4.00%|
Thus, the above factual analysis shows that the assessee has been showing excess consumption of standard gold than what is actually required. In fact, the excess consumption of standard gold is counter balanced by showing proportionately low consumption ratio of alloys. ”
17. Further, it is also apparently clear that the assessee has not suffered any manufacturing loss or wastage of gold in the process of manufacture. Had it been so the composition of gold and alloy would not have been 100 : 7.100 in 22 carat purity account. As per the assessee’s contention, the issue of gold with every 7.100 grams of alloy is 100 grams for manufacture of 22 carat ornaments. As per the assessee, the weight of the finished product in 22 Carat is 107.100 grams. Had there been any manufacturing loss, the weight of finished product would have been less than 107.100 grams say 106.100 grams or so. This phenomenon is not observed even in the manufacture of ornaments with the purity of 20 carat, 18 carat and 14 carat. In the 20 carat, 18 carat and 14 carat accounts the assessee shows production of 118.500 grams, 125 grams and 160 grams on every 100 grams of consumption of standard gold. Had there been any loss or wastage, the weight of the finished product would have been lesser than what is actually shown. This proves that there is no wastage or loss. The scrutiny of the earlier and subsequent records also shows that the assessee has never claimed manufacturing loss in any of the assessment years.”
4.4 He thereupon proceeded to compute the quantity of gold unaccounted for in the manner noted above and came to the following figures :-
“Thus, if the ornaments manufactured by the assessee are converted in terms of fineness of 0.999, consumption of standard gold will be as under :-
Weight in Grams
|22 Carat purity as per Books|
|912080.050||=||8,37,214.620||912080.050 × 0.917|
|20 Carat purity as per Books|
|29294.300||=||24,426.578||29294.300 × 0.833|
|18 Carat purity as per Books|
|3656.000||=||2,742.744||3656.000 × 0.750|
|14 Carat Purity as per Books|
|62.300||=||36.367||62.500 × 0.583|
However, as per the books of account the total consumption of standard gold in terms of 0.999 fineness is shown at 281910.488 grams. Thus, the excess consumption of gold shown by the assessee is computed as under :-
|Weight in Grams|
|Consumption of gold as per book ie., [881910.488 – 5380 being recorded local sales]||8,76,610.488|
|Less : Actual utilization in the manufacture of ornaments of different purities||8,64,420.299|
|Balance stock not accounted for treated as unrecorded local sales||12,910.189|
During the year under reference, the assessee has made local sales of 5300 grams at Rs. 15,72,150/= as against
During the year under reference, the assessee has made local sales of 5300 grams at Rs. 15,72,150/= as against this there are unrecorded local sale worth 12,190.189 grams. Thus, 12,910.189 grams is treated as locally sold for Rs. 38,46,004.62 ie., at the average sale price of standard gold of 5300 grams. Thus, the assessee is finally held not have recorded the local sales worth Rs. 38,46,004/= which is added to the total income for the year under reference. The assessee has concealed the particulars of income to the above extent for which penal proceedings u/s. 271 (1)(c) of the Act is initiated separately.
5. Dissatisfied by the order of the Assessing Officer, the assessee approached the Commissioner of Income-tax [Appeals]. CIT (A) once again appreciated the evidence on record and observed, inter alia, as under :-
“2.14 I have carefully considered the facts of the case and submissions of the learned counsel of the appellant. The undisputed fact is that while in the books of account the percentage of gold content in the gold ornaments and jewellery is shown at 93.37% as per the export invoice and Customs Certification, it is 91.7% only. In other words, it is even admitted by the appellant firm that the gold content in reality is more than shown in the export invoice. The reason given for such difference is that the appellant firm being an exporter has to meet stringent quality standard of foreign countries to which it is exporting its ornaments. In order to avoid the risk of goods being rejected on account of not being according to the prescribed hall-mark, it is making its ornaments of a slightly higher purity than required. It is also contended that loss on account of such extra gold put in is made up by charging higher labour charges. It is also argued that the appellant is maintaining regular books of account and also statutory registers under the Gold Control Act meticulously and the Assessing Officer has not found any defect in the same. Now, so far as the argument of keeping the books of account and statutory registers is concerned, it cannot be of much help to the appellant firm because the accounts can always be written in a fashion which suits the purpose of an assessee. The mathematical accuracy of accounts cannot lead to the conclusion that income shown as per such accounts is the real and true income of an assessee. Obviously, such a conclusion will be justifiable in a case where certain abnormalities are observed. In the present case, it is seen that the purity of gold content in the ornaments exported is lesser than shown in the books of account. It is a matter of common knowledge that where a standard prescribed for any item a business men will either make the item of the same standard or slightly more than the prescribed standard to cover up the mistake of weighing and calculation. In the present case, the difference is not negligible. According to the working of the Assessing Officer the difference in 22 carat ornaments is 1.58%; in 20 carat is 1%; in 16 Carat 4.93% and in 14 carat 4%. The difference is definitely excessive and unjustifiable looking to the fact that the metal in which the appellant is dealing is a costly one. Therefore, the contention that ornaments of higher purities are manufactured in order to meet the stringent quality standard of foreign countries is not very convincing. When the required standard is 91.7%, the appellant could have made the ornaments of 91.80 or at the most of 92% purity to cover up the risk of goods being rejected by the foreign buyers. Still more important fact which negate the contention of the appellant is available from its own record. If the ornaments exported were really of 93.37% purity than atleast in the documents prepared by it, it could have mentioned the correct percentage of gold content and fineness. On going through the documents I have found that in each and every document, the fineness shown is 91.67%. To start with the order placed by M/s. Bhindi Jewellers USA Limited, it is seen that they have placed order for ornaments of 0.9167 fineness [page 259 of paper-book]. In the shipping bill prepared by the ‘appellant firm under the signature o f its partner, the fine ness of gold shown is 0.9167 [page 260 of the paper book] in the form G.R issued by the Exchange Control and appraised by the Customs Authority, the fineness of gold is again shown at 0.9167. In the export invoice at page 262 of paper-book, the fineness is again shown at 0.9167. In the bill issued to Bindhi Jewellers USA Limited, the purity of gold is not mentioned, even though there is a column for the same. In the bank certificate of export, page 268 of the paper book, fineness of gold is again mentioned at 0.9167. Thus, there is not a single document in which appellant has mentioned the fineness or purity of gold in accordance with the books of account. If the percentage of purity of gold in the ornaments exported was higher than the one required under the international standard, the appellant-firm would have lost nothing by mentioning the correct percentage of purity because in so far as the purity was above 91.67%, it has nothing to worry about. On the other hand, by showing higher content of gold, it would have benefited by becoming entitled for importing more gold. I am, therefore, inclined to agree with the finding of the Assessing Officer that excessive consumption of gold has been shown in the books of account and such excess consumption of gold has been utilized for making unaccounted sales of gold. Therefore, the addition made on account of excessive consumption of gold deserve to be sustained. Now coming to the quantum of addition, it is seen that while the I.T.O has worked out the difference at 12910.199 grams as per the re-working of the appellant firm, it is 89 74.581 grams only. The difference is on account of percentage of purity of gold bars purchased from State Bank of India or Government of India mint. According to the appellant, while the Assessing Officer has taken the purity of standard gold bar at 100% as a matter of fact the purity comes to 99.53% only, and therefore, the working for 22 carat gold ornaments will give a percentage of 92.93% against 93.37 taken by the I.T.O. I am inclined to agree with the contention of the learned counsel of the appellant that the purity of standard gold bar manufactured by Government of India mint and supplied by the State Bank of India against export is 99.53% only and therefore, the Assessing Officer erred in taking the purity at 100% to that extent the working of the Assessing Officer needs to be reviewed. On the basis of purity of standard gold bar being 99.53%, the value of excess gold consumption will come to Rs. 28,31,480/= as per the working given by the appellant, which prima facie appears to be correct. Therefore, the addition on account of unaccounted sale of gold will be Rs. 28,41,480/= only against Rs. 38,46,004/= made by the Assessing Officer. To that extent, the appellant will get relief. In result, the addition out of total addition of Rs. 38,46,004/=, addition of Rs. 28,31,480/= is confirmed.”
6. It can thus be seen that the CIT (A) gave partial relief to the assessee and corrected computation of excess gold to Rs. 28,31,480/= from Rs. 38,46,004/= adopted by the Assessing Officer. The assessee still however was not satisfied. He thereupon approached the Tribunal. The Tribunal, in the impugned judgment, confirmed the view of the revenue authorities. The Tribunal referred to the exercise undertaken by the Assessing Officer to detect the difference in quantity of gold between that declared at the stage of preparation of the ornaments and which was ultimately exported, as could be established from the assessee’s own export documents and the Customs certifications. The Tribunal thereupon observed as under :-
“..We also find that in paragraph 2.14 of the order of the CIT [A] (which we have quoted earlier) he has applied his mind to this issue and found that invariably in each and every export document prepared by the assessee the fineness is shown as 91.67% (0.9167). The assessee has miserably failed to explain the difference between 93.37% as shown in its books of account and the above mentioned figure of 91.67% shown in the export document. The ons is on the assessee to show how the excess consumption of gold has taken place. The difference is so substantial that it cannot be claimed as wastage in the manufacturing process. In view of the fact that the assessee has received the gold ornaments of the prescribed quality from the Karigars and such final product has been exported as per the export documents. We are of the view that the cast on the assessee by the finding of the Assessing Officer has not been discharged. The only inference is that the excess gold shown as consumed in the manufacturing has been sold locally by the assessee outside its books of account. This is because as far as the export sales are concern ed, the quantity and purity of the gold ornaments exported have been certified by the Customs authorities and sub-judiced to the hall-marking in the importing countries. It is pertinent to observe in this connection that neither the Assessing Officer not the CIT (A) has doubted the genuineness of the export as certified in the export documents and subjudiced to the Hall marking in the imported countries. The only disputes here centers around the discrepancy in the purity shown in the books of account of the assessee and the fineness are certified in the export documents. In this connection, it is also pertinent to observe that the learned CIT (A) has given partial relief to the assessee on account of the fact that the standard gold as manufactured by the Government of India and supplied by the State Bank of India against export is of the purity of 99.53% as against 100% purity as assumed by the Assessing Officer. The assessee itself has given a revised working in Annexure-A of the paper book submitted before the CIT (A), copy of which is available at page 353 to 366 of the paper book submitted before us. If the purity of the standard gold given by the Mint through State Bank of India is taken at 99.53%, the excess gold utilized for producing export quality ornaments according to the revised computation made by the assessee would come to 8974.581 grams, which is valued at Rs. 3155/= per 10 grams would come to Rs. 28,31,480/= as against 12,190.180 grams valued at Rs. 38,46,004/= by the Assessing Officer at the above rate. In this view of the matter, the learned CIT (A) confirmed the addition to the extent of Rs. 28,31,480/=. After consideration of the entire evidence on record, we do not find any reason to interfere with the order of the CIT (A) as it is based on the date furnished by the assessee itself and also based on the inference drawn from the books of account maintained by the assessee and the export documents. In this view of the matter, we uphold the impugned order of the CIT (A ).”
7. As can be seen from the questions framed, there are two main elements of assessee’s contentions. Learned counsel Shri J.P Shah’s first contention [relatable to Question No.2 framed above] was that the entire procedure of manufacturing ornaments was controlled by the State authorities under the Gold Control Act. Raw gold supplied to the karigars for preparation of ornaments was recorded in the books of the assessee. To such gold, the karigars would add alloy @ 7.100 grams per 100 grams of gold to achieve desired purity of gold of 22 carat. Even when such ornaments were received back after preparation, they were tested, certified and recorded in the assessee’s records. It was thereafter not possible for any mischief or modification, particularly looking to the certificate issued by he Gems & Jewellery Export Promotion Council. Counsel pointed out that 22 carat of gold or for that matter any other carats would not have precise purity and would have a range of fineness of gold. He drew our attention to the specifications laid down by the Bureau of Standards, which provides as under:-
“1. 22.3 Carat gold : It shall be of fineness not less than 970.
2. 22 Carat gold l: It shall be of fineness not less than 916.6.
3. 21 Carat gold : It shall be of fineness not less than 875.
4. 18 Carat gold : It shall be of fineness not less than 750.
5. 14 Carat gold : It shall be of fineness not less than 583.3.
6. 12 Carat gold : It shall be of fineness not less than 500.
7. Carat gold : It shall be of fineness not less than 375.”
7.1 Counsel therefore urged that the gold ornaments manufactured and exported by the assessee retained the same purity of 22 Carat [or other specifications as the case may be] irrespective of whether it had purity standard of 93.37% or 91.66%.
7.2 Counsel contended that as per the importers’ requirements, the assessee would export ornaments of 22, 20, 18 or 14 carats and charge the importers according to the agreed percentage of gold for such ornaments.
However, in order not to breach the stringent requirement of international standards of purity of gold, the assessee would prepare ornaments with slightly higher purity then what was the minimum standard asked for by the importers. The value of difference of gold was recovered in the form of higher labour charges.
7.3 Referring the first question of law framed, counsel contended that in any case there was no proof that the excess gold was sold in the local market. The same must therefore be considered as the assessee’s additional export sale, which as per the tax policies of the Government was in any case exempt from payment of income-tax.
7.4 As against that learned counsel Shri M.R Bhatt for the Department took us through the evidence on record to contend that the revenue authorities and the Tribunal had concurrently come to the conclusion that there was sizeable discrepancy in the consumption of gold reflected by the assessee in its own books of account. The assessee was unable to explain such discrepancies. The assessee’s explanation that it exported gold of greater purity and thereby greater quantity than what was reflected in the assessee’s documents cannot be believed, and therefore, rightly not accepted by the authorities below. Counsel submitted that the onus was on the assessee to explain such discrepancies.
8. Having thus heard learned counsel for the parties and having perused the documents on record, it emerges that the revenue authorities as well as the Tribunal came to conclusion that there was considerable discrepancy in the quantity of gold recorded in the assessee’s books at the time when the ornaments were manufactured and received from the artisans, as compared to the gold actually exported by the assessee to its foreign importers.
8.1 This is not even seriously disputed by the assessee. If we take as sample of such discrepancy that emerges in the category of 22 Carat gold ornaments, after supplying raw gold to the artisans and the artisans preparing gold ornaments after adding alloy in the specified quantity, the assessee received gold ornaments, according to the assessee’s records having purity of 93.37%. The very same ornaments when were exported, the assessee recorded its purity as 91.66%. Some of these ornaments also were subject to actual test by the Customs authorities. The result also matches the assessee’s claim of gold purity of 91.66%. thus, in fact, there was considerable discrepancy between the two sets of documents pertaining to the same set of gold ornaments is undeniable. The assessee owed an explanation and had a duty to reconcile this discrepancy. The authorities found that the assessee failed in doing so. This was on the premise that the assessee’s explanation was found unacceptable and inadequate. The assessee’s only explanation was that the ornaments actually carried purity of 93.37% but were reflected in the export documents having purity of 91.66%. This according to the assessee was done because the importers had desired such level of purity whereas the assessee to err on safer side, used more gold so that the stringent international standards were not even unintentionally breached, which would incur liability of rejection of the consignment.
8.2 Such explanation of the assessee was rejected by the three authorities below. We are also unable to fathum why an exporter would declare lesser purity of gold than what was being actually exported. As rightly observed by the CIT [A], if the gold ornaments were carrying greater purity value, and therefore, greater content of gold, the assessee had no reason to make a mis-declaration. In either case, assessee was meeting with the minimum standard of 22 carat gold. What the assessee had to charge from its importers had nothing to do with what the assessee may declare in the export documents regarding the purity of gold. As per the by-lateral understanding, even if the importers would have paid the assessee for the gold purity at 91.66%, there was no reason why the assessee should shy away from declaring that the correct purity of the gold ornaments is 93.37%, if that was the real case. The CIT [A] also made a significant point in observing that the assessee could import only that much quantity of gold that was exported. By making mis-declaration therefore, the assessee was seriously reducing quantity of gold that would be available for import against the export undertaken by it. The analysis made by the Customs authorities also matched with that of the assessee’s own declaration regarding purity of gold.
9. Had the revenue relied solely on the Customs analysis, we would have further examined the assessee’s contention that such analysis was based on the touch-stone method which may not yield highly accurate results. In the present case, however, assessee itself declared certain purity of gold which also co-insided with the random testing carried out by the Customs authorities.
10. 4The difference between the two sets of declarations was not minor or insignificant. It could not have been passed off as mixing of impurity or error in measuring standards. It was simply a case where the assessee utterly failed to explain the considerable difference in the gold quantity in two sets of documents maintained by itself.
10.1 It can therefore not be stated that the finding of the authorities below, as confirmed by the Tribunal, are per verse It is also not true that in coming to such conclusions, the Revenue authorities ignored the presence of the certificate of the Gems & Jewellery Export Promotion Council. The contention that in absence of proof of local sale, it must be presumed to have been exported, in our opinion, is fallacious. It is not even the case of the assessee, barring his explanation about the higher purity of gold being exported when lower purity gold is declared in the export documents, that such gold was in some form or the other, separately or independently exported. When the authorities did not accept the assessee’s explanation, it comes to a situation where such differential quantity of gold did not form part of the assessee’s exports. The only conclusion, therefore, available to the authorities and therefore rightly reached at was that the gold was subjected to local sale. All in all, the issues considered by the Revenue authorities at a greater length, referring to and analyzing the evidence on record and once which were confirmed by the Tribunal by giving cogent and detailed reasons, in our opinion, do not suffer from any perversity. In the result, the questions are decided in negative – against the assessee. The appeal is, therefore, dismissed.
[Citation :365 ITR 108]