1988-VIL-75-ITAT-JAI

Equivalent Citation: TTJ 034, 015,

Income Tax Appellate Tribunal JAIPUR

Date: 29.07.1988

M/s RY. DURLABHJI.

Vs

INCOME TAX OFFICER.

BENCH

Member(s)  : Y. R. MEENA., A. KALYANASUNDHARAM.

JUDGMENT

These are two appeals involving common issue of re-opening of assessment, its validity as well as on merits preferred by the assessee for the asst. yrs. 1967-68 and 1968-69 which were assessed originally on 31st March, 1969 and 11th April, 1969 on a total income of Rs. 12,32,429 and Rs. 9,69,936 respectively. The said assessments were proposed for re-opening and re-assessment by the ITO, Central Circle-I, Jaipur, vide his reasons recorded for belief of escapement of income on 8th Dec., 1980. The re-opening was sanctioned by the CBDT on 3rd Feb., 1981 with the words "Yes, the Board is satisfied." The re-opening proposal and its approval was on the basis of complaints made by Mr. John Ashlyn, Prop. of M/s Salas S.A. of Geneva that jewellery exporters in India had been exporting goods at half the price which was subsequently re-exported at double its price to various places, thereby the goods that were exported remain under-invoiced. Consequent to this complaint, the Enforcement Directorate (which was formed to ensure the compliance of Foreign Exchange Regulation Act, 1973) alongwith the IT Department, jointly started their enquiries and the investigative process. The Officers of the Enforcement Directorate and the IT Department went to Sendiago in Sept., 1980 and recorded the statement of Mr. John Ashlyn in the office of the Consulate General of India, San Fransisco, California. Mr. John Ashlyn's statement was duly recorded and he produced certain copies of documents in support of his statement, which were attested and certified by the Consulate General of India, San Fransisco to be true copies of the original documents produced before the Officers. Mr. Hohn Ashlyn had deposed in his statement his dealing with serval leading jewellers of Jaipur, who had been carrying on transactions with and through him and in support thereof, he produced copies of their accounts in his account books, correspondence, copies of invoice received by him as also copies of invoices raised by him subsequently. One of such several jewellers happened to be the assessee. The documents, which were considered to be relevant and important relating to the assessee were—

(a) Letter of Mr. Rashmi K. Jain to Mr. John Ashlyn dt. 4th Jan., 1967 reading:

"In continuation of our conversation I wonder whether it would be possible for you to import the goods by some other name except Salas S.A. This would give it a little more secrecy and this will be used only for imports from us. If it is possible, please let me know the name so that we can start work on the rest of the procedure."

(b) Reply of John Ashlyn to the above letter dt. 9th Jan., 1967 reading:

"I fully approve your suggestion that your consignment of goods should be sent to Geneva to a different name than Salas, as I know that the Customs are not very discreet and that anybody can know at your end to whom the goods are being sent.

From our point of view the matter is very simple. A special account in the name of Veronica is being opened at the bank mentioned hereunder. Parcels should be addressed to the bank as follows:

Banque Libanaise pour le commerce S.A.,

9 Place de la Fusterie,

GENEVA,

Switzerland.

Account: VERONICA

and they will then be automatically delivered to us. You can ship either by air parcel post or air freight."

(c) Acknowledgment of the letter of Mr. John Ashlyn dt. 9th Jan., 1967 reading—

"I thank you for informing me about the different name but please also let me know whether the reshippers would be the same as the receivers or would be it Salas S.A.

I am working out the whole scheme and would finalise it with you when we meet at Bombay in middle of Feb., 1967".

(d) Reply of Mr. John Ashlyn to the acknowledgment (Item 'c' above) reading—

"Regarding your query as to the name under which goods can be exported form Switzerland, it would be more difficult to do this under the same name. Should you definitely not wish the goods to be sent in the name of Salas, we shall just have to create an additional Limited Company for this purpose. The cost of forming a company amounts to approximately £ 200, plus a fixed yearly expenses of about £ 40".

(e) Letter dt. 29th Jan., 1967 from Rashmi K. Jain addressed to Mr. John Ashlyn reading:

"We have two important buyers in New York and their addresses are as below:

2. Considering the above in the reasons recorded it was observed that in order to export the goods at half the price a fictitious party was created by the assessee in the name of M/s Veronica by opening an account by a similar name in Banque Libanaise pour le commerce, Geneva. The goods were got collected by M/s Salas S.A. and were sent to M/s Estrade Inc. and M/s Estrade Emerald Corporation, New York under his invoice. Mr. John Ashlyn had provided the copes of invoices raised by him on the two parties, namely, M/s Estrade Inc. and M/s Estrade Emerald Corpn., New York in support of his complaint that goods were exported at half the price, later were again exported from Geneva at double the price value. The further allegation was that prices were fixed by the New York party at Jaipur but they were routed through M/s Veronica at half the price covered by the assessee's invoice. The invoices that were considered to be relevant are the following:

Asst. yr.: 1967-68

Asst. yr.: 1968-69

3. Comparing the sale shown by the assessee to Veronica and sale as shown by salas to M/s Eastrade Inc. and M/s Eastrade Emerald Corpn., it showed that the invoice raised by Salas was exactly double the value of invoice raised by the assessee. Therefore, considering the allegation and also the sequence of events it was observed in the reasons recorded that the amount of export sale suppressed by the assessee in the five invoices mentioned above was to the tune of 79,509.05 and 42,501.32 US $ (i.e. difference of the five invoices(—) values as Salas's and the invoice raised by the assessee). Converting this into Indian rupees at Rs. 7.50 per US $, the suppression of sale was estimated at Rs. 5,92,250 and Rs. 3,18,760 for asst. yrs. 1967-68 and 1968-69 respectively.

4. It was further recorded that as a consequence of the above, an amount of US $1,10, 000 was transferred to one M/s Gemmes Du Monde as per the instructions of the assessee. In the copy of account of M/s Salas US $ 1,10,000 was debited on 14th Nov., 1967 in the account titled 'Durlabhji Jaipur' (the debit in the account appears in Swiss Francs 4,73,000). Mr John Ashlyn had also provided the copies of Bank Advice of the above transfer in which it is hand-written 'R.Y. Durlabhji'.

5. Shri Rashmi K. Jain partner of the firm had purchased travellers cheque worth 1000 US $ through Banque Libanaise pourle Commerce S.A. on 10th Nov., 1967. The aforesaid reasons recorded for the two assessment years were sent to the Board for its approval and sanction, which was so granted on 3rd Feb., 1981. Soon after the sanction was received, the notices for both the assessment years were issued under s. 148 on 10th Feb., 1981. The assessee filed the returns in response to the aforesaid notice declaring the assessee's income for the two assessment years. The ITO vide his letter of 15th Sept., 1981 referring to the various invoices as mentioned above, asked the assessee that the sale having been made at twice the Invoice value by M/s Salas to Eastrade Inc. and M/s Eastrade Emerald Corpn. why they should not be treated as income of the assessee as the invoices raised by the assessee on Salas did not represent the true value. The assessee replied to this letter of the ITO vide his letter of 22nd Oct., 1981. The assessee denied that there was any agreement between the assessee and Salas for exporting goods under-invoicing them. The assessee in his reply has stated that goods were exported on consignment basis to M/s Veronica an entity of Salas. The assessee also had stated that there was no sale was made by him to Salas was further sold to M/s Eastrade Inc. and M/s Eastrade Emerald Corporation. The sale proceeds were realised by the Bankers. It was also stated that goods which were sent on consignment basis were not accepted in full by Salas and most of it had been returned back. The assessee also had stated that the allegation is baseless as no assessee would export the goods under-invoicing them and subsequently receiving it back unsold at the same value. It was also stated that the assessee had dealt with Salas on Principal to Principal basis and that the assessee had been constantly confronting the said party for reasons returning large percentage of goods sent to him on consignment. The assessee also stated that there was no agreement with Salas for underinvoicing the exports made to them in the name of M/s Veronica, which name was suggested by Sales only. The assessee further had stated that the parties to whom the goods were subsequently sold by Salas was not known to the assessee and that the assessee had received the sale proceeds only from Salas and that there was no receipt of any kind from New York party as was alleged by Salas. The assessee had stated that the various comments incorporated in the books of accounts of Salas, the assessee cannot be subjected to explain this as it was only relevant to Salas and not to the assessee. In connection with the alleged transfer of S.F. 4,73,000 to M/s Gemmes Du Monde, the reply was that assessee had not known this party at all, nor there was any authorisation by the assessee to M/s Salas.

5.1 The assessee in its letter dt. 29th Jan., 1983 to the ITO had stated the following:

"That during the accounting years relevant to the asst. yrs. 1967-68 and 1968-69 we did not maintain any foreign stock register.

Similarly, there was not stock register maintained during the accounting years relevant to the asst. yrs 1967-68 and 1968-69 except that stocks lying abroad as well as in India and the same were incorporated in the books of accounts on that date. Thereafter regular stocks and foreign export registers are being maintained.

That as regards the closing stock as on 31st March, 1967 and also as on 31st March 1968 it is submitted that we have obtained the certificate from the United Commercial Bank giving therein the balance lying abroad at the time of our settlement with the CBDT and upto 31st March, 1968 i.e. upto asst. yr. 1968-69 the matter was entirely covered in the settlement which was arrived at with the CBDT vide its order dt. 24th March, 1969.

It will not be out of place to submit that during the course of the settlement the entire position was checked regarding the closing stock remaining abroad as well as the local stock and on the basis of the same the additions were worked out as mentioned in the Settlement Order.

It is further submitted that since there was no discrepancy as on 31st March, 1967 and 31st March, 1968 there was no addition to the book results disclosed and the position was accepted by the CBDT.

It is, therefore, respectfully submitted that the entire stock position upto and as on 31st March, 1968 is covered in the settlement and no further query in this regard is expected from the department. However, without prejudice to our right and the submissions made in this regard, your goodself can verify the figures of the closing stock in the relevant covers which are duly certified by the bank.

That as regards the proof of the Bombay office expenses, it is submitted that there is no separate set of books maintained by our Bombay office but an imprest account is given to our export manager at Bombay who in turn sends monthly statement of the expenses which are duly incorporated in our books at Jaipur. The details of such expenses are being produced for your verification.

The copy of the settlement order, as desired by your goodself, is also enclosed. As regards the correspondence regarding exports to verify whether the exports were made on consignment basis or sale basis. It is submitted that if the goods are sent on consignment basis then the same fact is marked on the invoice. Similarly, if the goods are exported on sale basis the same is also mentioned in the foreign invoice and the petitioner firm is following consistently the same system of accounting.

That as regards the production of the invoices, it is submitted that the same were seized at the time of the raid conducted under s. 132(1) and the same are still lying with the Department which may kindly be verified from the records.

That as regards the verification of the customs approved invoices in respect of the re-imports, it is submitted that in case the entire invoice is re-imported then only the custom marked invoices are handed over to the parties and in case the goods are re-imported in part then the said invoices remain with the customs or Licensing Authorities. However, since the Invoices are lying with your goodself in the seized material, as stated above, the same can be verified from the records. We would like to bring to your kind notice and in continuation to the statements given by our partner Shri Rashmikant Durlabhji in respect of the allegation that petitioner firm under-invoiced the goods exported to Salas S.A. & Veronica SA, Geneva, then their real export value it is submitted that such an allegation is without any basis and contrary to the facts on record. Your goodself will appreciate that during the course of the hearing we have shown you the insurance policies taken for such export goods to cover the invoice value of the goods and in none of the cases the cover money was more than the invoice value. Had there been a case of under-valuation or under-invoicing and that too continuously for two years we would not have taken a risk of losing the goods in transit and to cover such risk there is always a temptation to insure the goods for their real value by paying a little extra premium which in comparison to the risk involved would have been insignificant. The fact remains that since the goods were exported at real value no such over-coverage under the insurance policy was necessary nor was done. Secondly, as per our information, in Switzerland the import duty is by weight on the imported goods in their country and not on its value and, therefore, as per the information gathered in other cases there is a difference in value as disclosed by the importer while declaring to the local customs but in our case there is not a single instance where there is a difference in value, which supports our contention that the goods were exported at real value. Had the goods been under-invoiced, M/s Salas S.A. or Veronica SA, Geneva were free to disclose their real value to their local customs as has been done in other cases, and therefore, it is wrong to compare our case with any other parties against whom such allegations are there."

6. The assessee vide its letter dt. 4th March, 1983 again reiterated its earlier submissions. It had stated as under:

"3. In paragraph 2 of the show-cause notice it is alleged that the value of goods in the invoices sent from India to Salas/Veronica were shown at half the actual market price. In support of the said allegation, a telegram purported to have been addressed by John Ashlyn to Geneva is referred. Reference is also made in the same paragraph to "some confidential index card" alleged to have been maintained by Mr. John Ashlyn. Neither the alleged 'telegram' nor the alleged 'confidential index cards' are produced in original in the course of recording the statement. Even the photo copies have not been supplied. Besides, we fail to appreciate how the aforesaid documents lead to the conclusion that we had been under-invoicing goods to the extent of half of actual market price or have requested M/s Salas or John Ashlyn to insure them. It is respectfully submitted that we have recorded the actual sales values in our books of accounts in so far as the goods have actually been sold. The goods returned have come back to us from the party at the value indicated in the export invoices. It has been explained by us in support of our submissions that the allegation of under-invoicing of goods is baseless. In Switzerland value of goods has to be disclosed by the importer to the local customs and the importer, we are given to understand, is in difficulty with the local laws if the correct values are not disclosed. The deponent Shri Rashmikant Jain recalls having been shown in the course of recording of statements the customs markings where the invoice value of goods have been disclosed by the importer to the local customs and the same has been taken note of by the Customs Authorities by affixing their seal on the documents. It is particularly relevant in the context of the importer not being liable to any additional import/Custom duty in Switzerland if the alleged real value is declared. We request that if the Department is in possession of records of Salas SA, it will be pertinent to check which values the said party has been declaring to customs in the case of imports from other parties. May be, the said evidence helps the Department to ascertain true facts about the transaction. Kind attention in this connection invited to our letter dt. 29th Jan., 1983.

3.01 We would vehemently insist once again that the vital difference between our case and the case of other assessees in Jaipur, is the price at which the goods were imported into Switzerland and declared to the Swiss Customs. The price at which the goods are imported is the correct price and the whole rigmarole of sending the goods at twice the price to the clients of Salas SA is to avoid their own taxation problems and the whole gimmick is an excellent piece of fabrication to implicate us. We would like to mention here the Civil (sic) filed by John Ashlyn with the District Judge, Jaipur City against Golecha family where our name has been included in para 7 B-3 with the same mala fide effect and this case was not even admitted.

4.0 With reference to para 3 we vehemently deny having any knowledge of the alleged confidential index card allegedly maintained by John Ashlyn and that the same has any bearing on our business with Salas SA, Geneva. We humbly pray for summoning of the supplier of the alleged documents to the Department to enable us to cross examine the said person to enable us to assist the Department in bringing out the true facts of the matter.

5.00 Regarding Paragraph 4 of the show-cause notice it is respectfully submitted that there is no material or evidence to suggest the alleged trans-shipping of goods from Salas SA, Geneva to Eastrade Inc. or Eastrade Emerald Corporation. The photocopies of some alleged invoices by Salas to other parties appear to be fabrication of documents to implicate us. We have no knowledge of the parties to whom the consignees in turn sell goods and we have nothing to do with any arrangement that may subsist between the consignees and his buyers.

6 Regarding paragraph 5 of the notice, it is submitted that since after recording of the statement and receipt of notice we have informally checked with the parties referred in the said paragraph whether the said parties had any dealings with Salas SA. Our fears are that the allegations emanate from malicious intentions of some party fabricating documents and connecting allegations to implicate us are true. The said parties appear to have no knowledge of any transactions with Salas S.A. during the relevant period. In any event, as submitted earlier, the onwards sales of Salas S.A. have no bearing on our assessments.

6.01 As has been pointed out by us during the statements and in the various letters we would humbly submit as to why we would need and trans-shipment through Salas SA. We could have exported the goods directly to Eastrade Emerald Corpn.and in all the relevant years there is more business with Eastrade Emeralds Corpn. and Eastrade Emerald & Eastrade Inc. than Salas SA. Why would we have incurred the unnecessary expenditure of additional insurance and commission as has been alleged by you if we could have done the same with direct exports to Eastrade Emerald Corporation.

6.02 In your letter No. 1144 it was pointed out that there was a telegram from John Ashyln from Hong Kong to his office in Geneva to additionally insure the goods for US $ 80,000. Would you not be having the so-called photocopies for the shipments of 29th April, 2nd Aug., 9th Aug., 23rd Sept., 8th Oct., and 9th Oct., 1967 where this additional insurance had been made by the Salas SA for the so-called difference. On the other hand we have shown you all the insurance cover notes of all the shipments and in those days insurance was in private hands and we could have easily insured the difference, if there was any.

6.03 Without prejudice to anything that has been mentioned and is it not possible that Salas SA were acting on behalf of American parties to increase the cost of the American importers for their book purposes. In other words could not Salas SA have been an agent for the American parties to ship the goods to them at double the price so that the cost to the American importers would increase and retain on their behalf profits in Switzerland. The rate of taxation in USA is higher than in Switzerland.

7.00 Regarding paragraph 6 of the notice, it is respectfully submitted that sales on consignment is not a camouflage in as much as part of the goods sent on consignment have actually been received back. As submitted earlier, nothing whatsoever has been brought to our notice in support of the allegation of under-invoicing the sales. It is not a fact that all the goods sent to Salas SA were on outright sale basis. The same were on consignment basis and only such part of them as has been retained by Salas SA are accounted for in the sales.

8.0 Regarding paragraph 7 it is denied that any account is maintained by us in Swiss Francs or U.S. Dollars. No commission on sales has been paid by us. We do not know and have never dealt with any person or concern by the names M/s Gemmes Du Monde. It is respectfully submitted that in fairness to us the complainant or who ever should be able to produce any independent evidence in support of the allegations rather than relying on his forged and fabricated documents of which he has refrained from supplying the originals. In the event of the original being with the Department, it is respectfully prayed that the same may be produced to enable us to rebut of the allegations made in the said notice. Further as our partner recalls that in alleged photocopy of legalised document 220 (112) 80 of the alleged confidential index the words Gemmes Du Monde are hand-written, obviously an afterthought to implicate us.

9.01 It would not be proper and fair to make any additions on the basis of books of a third party and specially when we have not been given a chance or an opportunity to examine those books and cross examine John Ashlyn.

10.2 I am showing you leg. document No. 220(97) 80, 220(96) 80 photocopies of travellers cheque issued by Bank of America for US $ 500 each to Mr. R.K. Jain. Since of purchase of those may be explained. Kindly identify signature on these. Yours firms accounts with M/s Salas SA shows a debit of SF 2337.50 on 13th Nov., 1967 this shows that the above travellers cheques have been purchased on this said account of your firm with M/s Salas SA shown to you as leg. document No. 220(71) 80, 220(72) 80, 220(73) 80 and 220(74) 80. Please comments?

A. I have nothing to state for source of purchase beyond that given in para 12 of our letter dt. 22nd Oct., 1981 addressed to ITO, C, Circle I. I had earlier purchased on 4th Nov., 1967 travellers cheque of $ 1990 and pound 100 amounting to Rs. 17,478.26 from UCO Bank, Jaipur, for use at abroad.

The so-called account of M/s R.Y. Durlabhji, that Salas SA alleged to have been maintaining appears to be for his own book-keeping and had nothing to do with us. We have never seen it before or checked it before and there is no signature of ours on it.

Q. I am showing you leg. doc. No. 220(98)80 which is photocopy of travellers cheque issued to K.D. Jain for $ 1000 by First National City Bank New York. Please explain source of this purchase. Yours firms account with salas SA shows debit of SF 4343 which is proof that the purchase is out of account. Please comment.

A. My father was never abroad at this time and could not possibly purchase this and so question of debit on this account does not raise. It would be interesting to see the numbers of the these cheques and how they were encashed.

11.00 We are surprised that you propose to value the returned goods at double the price than as is declared in our books because Salas SA have exported certain goods to Estrade Emerald Corpn. to our exports to them at a certain price.

11.01 We would like to draw your attention to our settlement petition dt. 30th Oct., 1968 and the Settlement Order dt. 24th March, 1969 copies of both are on record with you. The settlement is for a period upto 31st March, 1968 covering accounting years 1966-67 and 1968-69 vis-à-vis asst. yrs. 1967-68 and 1968-69. The two years in which you propose to make additions on the basis of some conclusions fabricated, forged and unauthenticated photocopies without showing even one original for hundreds of so-called legalised photocopies referred to in your letters 1144 and 1147 and without giving the opportunity to cross examine the party.

11.02 Your attention is drawn to para 9 of our settlement petition dt. 30th Oct., 1968 and for your immediate reference we would like to quote the same. "In view of the recent changes in the IT Act and the WT Act, and more particularly the drastic penal provisions, we have tried to ascertain the correct stock of our goods. We find that on a proper verification, the stock as on 31st March, 1968 would be Rs. 87,32,778.11. We have already made the necessary adjustments in our books of account for the year ending 31st March, 1968."

11.03 On 31st March, 1968 a thorough assessment of the stock on hand was made and it was on the basis that stock included all the returned goods sent during this assessment year from M/s Salas SA/Veronica. The valuation on 31st March, 1968 was made physically on the goods on hand on that date.

11.04 We would also like to quote Para No. 11 from this letter dt. 30th Oct., 1968 which is relevant:

"The main purpose of approaching your honour, at this stage, is to ensure that by our showing income on the basis of the aforesaid stock valuation, our past assessments are not in any way modified or re-opened and that the Income-tax authorities would complete our pending assessments, as well as that for the asst. yr. 1968-69 on the basis of the returns already filed with them and the returns which we will file for the asst. yr. 1968-69. Your will appreciate, Sir, that by our showing our stock at Rs. 87,32,778.11 as shown above, our income for the year 1968-69 would be approximately Rs. 72,62,825.70 which will be almost six (6) times the net income shown by us for the immediately preceding year. The abnormal increase in the profit shown, as above is the result of proper scrutinising and proper valuation of the stocks. The abnormal increase in the amount can be as a result of past years also and this covers the profits of revaluation of the closing stock figures in the past years as well. In case the closing stock figures of individual year are disturbed, then the same will reflect as the opening stock of subsequent year and the net result on account of the correct valuation of the closing stock under no circumstances will affect the net result shown for the asst. yr. 1968-69. We have no objection if this is assessed for the asst. yr. 1968-69. And, (sic) reason the IT Authorities desire to spread over the abnormal rise in income in the asst. yr. 1968-69 over past assessment years, we would have no objection to their doing so provided we are not in any way subjected to any other penalty or other penal provisions".

11.05 We would like to bring your attention also to letter dt. 27th Dec., 1968, addressed to CIT Central on the basis of discussions with Shri R.N. Jain then Member, Board of Direct Taxes specially deputed to go into the stock position of our goods. We are also enclosing herewith copies of Annexure-I and Annexure-II submitted with the letter dt. 27th Dec., 1968 wherein the addition of Rs. 60,00,000 had been divided proportionally to the stock in the income-tax returns or as per Annexure-II where the stock of Rs. sixty lacs per year. In both ways of calculation you will see that the stock on 31st March, 1967 and 31st March, 1968 is in the tune of Rs. 80 to Rs. 90 lacs covering the returned goods by all proportions.

11.06 Your attention is also drawn to Para 6 of the Settlement Order where the actual physical verification of our local stock is 26.36 lacs has been accepted:

"6. The value of the closing stock as on 31st March, 1968 is taken at 91.70 lacs as detailed below:

7. After considering the various submissions made by the assessee in view of various documents provided by Mr. John Ashlyn, his statement recorded, draft of the assessment was made. As per the draft assessment order to the party already assessed income an addition to the tune of Rs. 5,88,182 and Rs. 3,18,760 were made for asst. yrs. 1967-68 and 1968-69 respectively on account of under-invoicing of exports. For the asst. yr. 1968-69, another addition of Rs. 15,000 was proposed on account of encashment of US $ 1000 and on account of alleged under-valuation of stock of Rs. 6,33,288.

7.1 The assessee filed its objections to the draft assessment order vide its letter of 6th June, 1983. This was followed by another letter to the IAC in the 144B proceedings dt. 30th Oct., 1984. In this letter, it was stated that the goods returned by Salas were re-exported in the same year or in the next year. In support thereof a statement was provided giving re-conciliation, lot-wise of goods sent on consignment, sold and returned back. This was further supported with a statement of goods re-exported to other parties. The IAC issued the following directions under s. 144B:

Assessment year: 1967-68:

"There is every possibility that M/s Salas SA was sending the goods to M/s Eastrade Emerald Corpn. and M/s Eastrade Incorporated at double the cost price to help them increase their cost and reduce the taxation. This was an important claim made by the assessee, and all the legal documents were examined personally to ascertain whether from any of these legalised documents it could be inferred that the cost price was being doubled at the instance of M/s Eastrade Emerald Corporation and M/s Eastrade Incorporated, so that they cold inflate their purchase price and thus reduce taxation. Not even a single document indicated any such possibility. It is clear from the facts discussed above and from the contents of the photocopies of legalised documents, which are being attached with the final assessment order, that the whole system was devised at the instance of the assessee and for the benefit of the assessee, and in order to enable the assessee to reduce its tax, liability in India. For this purpose reference may be made to documents No. 118, 121, 122, 126, 128, 130, 132, 135, 136 and 116, 86 and 143 etc. etc. In fact a plain examination of all the documents available with the ITO clearly indicates that the assessee firm M/s R.Y. Durlabhji approached M/s Salas SA of Geneva for the purpose, and under-invoicing was being done by the assessee in the invoice prepared in the name of Sales SA/Veronica whereas the actual purchasers were M/s Eastrade Emerald Corporation and M/s Eastrade Incorporated and the price had been fixed between the assessee and these two parties at Jaipur (Refer Leg. documents No. 220 (86)-80). M/s Salas SA was merely used as an agency for showing only 50 per cent of the sale price in the books of account kept by the assessee firm. Moreover commission had been charged by Salas SA from M/s R.Y. Durlabhji and not from M/s Eastrade Incorporated and the entire correspondence between the assessee and M/s Salas SA and between Salas SA and J.Dymant of M/s Eastrade Emerald Corpn. and M/s Eastrade Incorporated clearly reveals that arrangements were done at the request of the assessee firm and for the benefit of the assessee firm and not at the instance of these two parties of New York.

Another additional important objection given by the assessee was through para 5 of written submissions dt. 30th Oct., 1984 under which it was claimed that Ets. Gemmes Due Monde, to whom payments had allegedly been made by M/s Salas SA at the instance of the assessee firm, had no connection with the assessee firm. It was also claimed that Ets. Gemmes Due Monde was an independent business house existing in Geneva and they have also been advertising in India in the magazine "Gems & Jewellery". This again was an important objection which was very seriously considered and all the relevant legalised documents were carefully examined to ascertain whether any instruction were actually issued by the assessee firm for transferring the balance which had got accumulated in the account of the assessee firm maintained with M/s Salas SA and represented 40 per cent of the invoice price received from New York parties for and on behalf of the assessee firm in Switzerland. Since the laws of Switzerland do not permit any direct enquiry in the matter, we have to go by circumstantial evidence. It has been noted that 50 per cent of the actual sale price was being sent by Mr. John Ashlyn to the assessee through Irving Trust Company, representative of UCO Bank, and the remaining 50 per cent was getting accumulated in the accounts maintained by the assessee and expenses on account of freight, insurance, etc., for sending these precious stones from Geneva to actual buyers of the USA were being debited to this a/c. Accordingly an amount approximately 1,10,000 US Dollars got accumulated to the account of the assessee firm and a statement of account as on 10th Nov., 1697 was prepared by John Ashlyn and this statement is available under legalised documents No. 79 and 80 (Photocopies to be enclosed with the final assessment order). Below the statement Shri John Ashlyn had written

"Perused and approved by Rashmi on visit to Geneva".

Under instructions from Shri R.K. Jain, partner of the assessee firm entire balance of $ 1,10,000 (equal to 4,73,000 Swiss Francs) was transferred in the name of Gemmes Due Mode. For this purpose reference may be made to the statement given by Shri John Ashlyn r/w legalised documents Nos. 101, 104, 110 and 112. Photocopies of these documents should also be attached alongwith the final assessment order. Shri R.K. Jain had denied having approved the account as per the noting made on legalised document 220(80)-80 and had also denied that he had issued any instructions for transferring the balance in the name of Gemmes Du Monde. However, legalised document Nos. 94 and 96 (photocopies enclosed) which are photocopies of applications made by Shri R.K. Jain for issue of travellers cheque and have duly been signed by Shri R.K. Jain clearly indicate that he had gone to Geneva on 10th to 11th Nov., 1967 for approving the said account and for receiving the balance. The said account was also approved upto 10th Nov., 1967 and obviously on this visit Shri R.K. Jain approved this account and had also directed Shri John Ashlyn to transfer the balancing standing in the account of the assessee firm in the name of Gemmes Du Monde. That Est Gemmes Du Monde was closely connected with the assessee firm is clear from the legalised document No. 112, a photocopy of which has been enclosed.

The other claim made by the assessee that "Gemmes Due Monde" is an established business concern and regularly been giving advertisement in the Indian Magazine "Gems & Jewellery" was examined and the letter was also written to President, Gems & Jewellery Export Promotion Council for supplying the photocopy of applications which were being sent by "Gemmes Due Monde" for giving advertisement in the Magazine "Gems & Jewellery ". Reply was received through letter dt. 3rd Jan., 1984 (photocopy enclosed) and only part information was supplied by stating that full records were not available. In any case advertisement can be given by Gemmes Due Monde in Gems & Jewellery even it is a business concern that is partly or wholly owned/substantially controlled by the partners of assessee firm. Moreover the close connection of the assessee with the business house named as "Gemmes Due Monde" established in Switzerland cannot be ruled out and is in fact very much definite as is evident from the legalised documents.

The assessee had claimed through written submissions dt. 17th Dec., 1984 the invoicing at double the original price was being done by Salas SA to Eastrade Emerald Corporation and Eastrade Inc. New York to help them to inflate their purchase price. But obviously the claim is without any basis and the assessee agreed that he had no evidence whatsoever to prove the claim and that there was no evidence of any instructions ever issued by M/s Eastrade Emerald Corporation to Shri R.K. Jain. Through these written submissions the assessee also tried to give a different meaning to legalised documents 118, 121, 122, 126, 130, 132, and 136 but by any stretch of imagination such inferences could not be drawn from these letters and photocopies of these letters are being attached to the final assessment order. Reference, here is also made to legalised documents No. 220(143)-80 which is a letter addressed by Rashmi Jain P/o the assessee firm to John Ashlyn in which he has referred to the correspondence with J. Dyamant and moneys receivable from him (photocopy to be enclosed). Again the assessee has wrongly said that documents Nos. 121 and 122 are unsigned but they are very much signed and are attested as true copies of the originals by the Consular General of India. In view of all the facts mentioned by the ITO in the draft assessment order and by keeping in view all the legalised documents available with the ITO in the confidential cover the conclusion drawn by the ITO that the assessee had indulged in under-invoicing and the actual price was exactly double the invoice price is approved as correct. It would not be out of place to mention here that for other exporters also. Shri John Ashlyn was keeping the a/c in similar manner. Confidential Index Card Nos. have been given to all such exporters and confidential instructions were being followed by him in other cases also where similar attempted under-invoicing had been made. These facts have duly been accepted by other exporters of Jaipur and they have also accepted that entries made by John Ashlyn in his account books under similar circumstances and in similar manner were correct. For this purpose reference may be made to the statement of Shri Hari Kishan Jajoo recorded by the Asstt. Director on 17th Jan., 1980 and photocopy of this statement should also be enclosed alongwith the final assessment order. In this statement Shri H.K. Jajoo had accepted that they had been sending the invoice from India at 50 per cent of the actual price and that they were paying commission to M/s Salas SA for helping them in this process and that goods were sent to actual buyers at double the invoice price and that statements of account of his firm kept in the books of Salas SA were true and correct and that Salas SA used to give confidential index card number to almost all the exporters.

In the end the assessee claimed that considering, no conceding, that the assessee had indulged in under-invoicing then the commission charged by Sales SA and debited to the accounts of the assessee and the freight expenses and insurance expenses, etc., incurred on reshipping and charged from the assessee should be allowed as deductions. The relevant lists of such expenses under different heads were prepared by the assessee from legalised document No. 71 to 74. Total expenditure under different heads on re-shipping the precious stones, sent by the assessee firm under invoice dt. 18th Feb., 1967, 20th Feb., 1967 and 21st Feb., 1967 to actual buyers in New York incurred by John Ashlyn and charged from the assessee firm has to be allowed as deduction".

Assessment Year: 1968-69

"For this purpose, instance of the very first invoice sent on 29th April, 1967 is being taken from the stage of sending proforma invoice to the stage of final invoice. First of all emeralds were sent by the assessee firm to Veronica through invoice dt. 29th April, 1967 and lot numbers given were 99 to 191. The photocopies of these invoices are available under the legalised document No. 220(7)-80 and 220(6)-80. Under the invoice dt. 12th May 1967 all these lots, after exactly multiplying the price by 2, were sent by M/s Salas SA to M/s Eastrade Emerald Corpn., the lot number were converted into code No. and digits 74 were added before these lot numbers. Thus the goods sent under lot No. 99 to 181 were further transhipped by mentioning code No. 74099 to 74181. This invoice is available in the form of legalised documents Nos. 20,22 and 24. The items which were not accepted by M/s Eastrade Emerald Corpn.were returned by them to M/s Salas SA for being further sent to the assessee firm. The items which were retained by them, were shown as sold by M/s Salas SA under invoice dt. 29th May, 1967 and this document is available in the form of legalised document No. 220(196)-80 and the lot numbers, the numbers of stones and the weight etc., are exactly the same as were mentioned by the assessee firm in the proforma invoice prepared in the name of Veronica and the prices were exactly multiplied by 2. Precious stones were sent back to the assessee firm vide statement of goods returned dt. 27th June, 1968 and final sale invoice for the stones kept by Eastrade Emerald Corpn. was prepared by the assessee for, on July 1967 and the evidence is available as per legalised document No. 220(18)-80. In this sale invoice value of emeralds exported had been shown at $ 4122.67 whereas actual sale price recovered from Eastrade Emerald Corporation was exactly double i.e. $ 8245.33. This amount of $ 8245.33, which is equal to Swiss Francs 35,454.0, was credited to the account of the assessee firm in the books of Salas SA on 29th June, 1967 and the relevant evidence is available as per legalised document No. 220(71)-80. Similar are the facts about all other sale invoices sent during the previous year by the assessee firm. There is no doubt that the exports had actually been made to M/s Eastrade Emerald Corpn. and Eastrade Inc. of New York and account of Veronica/Salas SA was only used for under-invoicing the export sales and this had been done at the request of the assessee firm and in order to help the assessee firm to under-state taxable income in India. For this purpose, reference may also be made to the facts given by the ITO in the draft orders for 1967-68 and 1968-69 and facts given in para 3 above. (ITO should attach the photocopies of all the legalised documents which have been referred to in this para 5 of the directions issued under s. 144B)".

"It has been noted that a statement of account as on 10th Nov., 1967 was prepared by John Ashlyn and this statement is available in the form of legalised document No. 79 and 80 and photocopies of these legalised documents are attached alongwith the order for asst. yr. 1967-68. Below this statement, Shri John Ashlyn had written:

"Perused and approved by Rashmi on visit to Geneva".

The assessee firm had expressed ignorance about this noting but it had been seen that Shri R.K. Jain, partner of the assessee firm had gone to Geneva on that date and he had also made an application to the bank at Geneva for issue of travellers cheques. For this purpose reference may be made to legalised document Nos. 94 &95. which do have the signature of Shri R.K. Jain, partner. Hence it is clear that Shri R.K. Jain had gone to Geneva for approving his account and had actually approved the account. Thereafter under the instructions from Shri R.K. Jain almost the entire balance i.e. $ 1,10,000 equal to 4,73,000 SF which stood to the credit of the assessee firm, was transferred in the name of Gemmes Du Monde. For this purpose reference may be made to the statement made by John Ashlyn r/w legalised document Nos. 102, 104, 110 and 112. The fact that Ets Gemmes du Monde was closely connected with the assessee is clear from the legalised document No. 112, and the fact that there have been advertisements in 'Gems & Jewellery' in the name of Ets Gemmes Du Monde does not in any way established that there was no connection between the assessee firm and Gemmes Du Monde."

The assessee has claimed through written submissions dt. 17th Dec., 1984 that invoicing at double the original price was being done by salas SA to Eastrade Emerald Corporation and Eastrade Inc. New York to help them to inflate their purchase price. But obviously the claim is without any basis and the assessee agreed that he has no evidence whatsoever to prove the claim and that there was no evidence of any instructions ever issued by M/s Eastrade Emerald Corpn. to Shri R.K. Jain. Through these written submissions dt. 17th Dec., 1984 the assessee also tried to give a different meaning to legalised documents 118, 121, 122, 126, 130, 132 and 136 but by any stretch of imagination such inferences could not be drawn from these letters and photocopies of these letters are being attached to the final assessment order. Reference, here is also made to legalised document No. 220(143)-80 which is a letter addressed by Rashmi Jain P/o the assessee firm to John Ashlyn in which he has referred to the correspondence with J. Dyamant and moneys receivable from him. Again the assessee has wrongly said that documents 121 and 122 are unsigned but they are very much signed and are attested as true copies of the originals by the Consul Gen. of India. In view of all the facts mentioned by the ITO in the draft assessment order and by keeping in view all the legalised documents available with the ITO in the confidential cover the conclusion drawn by the ITO that the assessee had indulged in under-invoicing and the actual price was exactly double the invoice price is approved as correct. It would not be out of place to mention here that for other exporters also, Shri John Ashlyn was keeping the account in similar manner. Confidential index card No. had been given to all such exporters and confidential instructions were being followed by him in other cases also where similar attempt at under invoicing had been made. These facts have duly been accepted by other exporters of Jaipur and they have also accepted that entries made by John Ashlyn in his account books under similar circumstances and in similar manner were correct. For this purpose reference may be made to the statement of Shri Hari Krishan Jajoo, recorded by the Asstt. Director on 17th Jan., 1980 and photocopy of this statement should be enclosed alongwith the final assessment order (Annexure F to the final order). In this statement Shri H.K. Jajoo had accepted that they had been sending the invoice from India at 50 per cnet of the actual price and that they are paying commission to Salas SA for helping them in this process and that goods were sent to actual buyers at double the invoice price and that statements of account of his firm kept in the books of Salas SA were true and correct and that Salas SA used to give confidential index Card No. to almost all the exporters.

In the end the assessee claimed that considering, not conceding, that the assessee had indulged in under-invoicing then the commission charged by Salas SA and debited to the account of the assessee and the freight expenses and insurance expenses etc. incurred on reshipping and charged from the assessee should be allowed as deductions."

7.2 On receipt of the directions under s. 144B, the additions that were retained were on account of under-invoicing of exports to the tune of Rs. 5,88,812 and 3,18,760 for asst. yrs. 1967-68 and 1968-69 respectively.

8. The assessee was aggrieved by the order of the ITO and preferred appeals both on legality of re-opening of the assessment as well as on merits. The assessee also had raised the plea of the assessee not being allowed opportunity to cross-examine Mr. John Ashlyn. On the legality of the re-opening, the CIT(A) was of the view that it was validly re-opened and on merits, he agreed with the views of the ITO, he rejected the contentions of the assessee in regard to the invoices bearing the seal of the Customs for the reasons that there was material available, in support of the ITO's findings. He was further of the view that it was for the assessee to produce Mr. John Ashlyn. He confirmed the views of the ITO.

9. The assessee was aggrieved by this order of the CIT(A) and has come up in appeal before us. The assessee had placed or record paper book containing 110 pages comprising of the first re-assessment order dt. 27th March, 1980 for asst. yr. 1967-68, order of CIT(A) dt. 11th June, 1980 setting aside this re-assessment order, copy of notice under s. 148 dt. 10th Feb., 1981, copies of enquiries made by the ITO for both the assessment years, replies, submissions, objections to Draft Assessment Order, chart showing sale of goods to Salas, the returned goods re-exported, the submissions before CIT(A), legal opinion from Switzerland in respect of goods imported into Switzerland, copy of plaint by Mr. John Ashlyn before District Court, Jaipur copy of Dy. Director, Enforcement Directorate's order in the case of Maliram Pooranmal, balance sheet and profit and loss account for the two assessment years. The assessee also filed another paper book running to 49 pages, which represent the copies of Annexures to the assessment order representing the various documents, which were relied on by the Revenue for purposes of making of assessment. i.e., the documents, which were provided by Mr. John Ashlyn. The Revenue also filed paper book of these very documents.

10. The counsel for the assessee Mr. O.P. Vaish referred to his paper book page 1 and submitted that for asst. yr. 1967-68, the assessment was re-opened under s. 147(1) on 30th March, 1976. The assessee filed return under protest to this notice on 14th April, 1976. The re-assessment was made on 27th March, 1980 on a total income of Rs. 12,82,429, making an addition of Rs. 50,000 under s. 69 of the Act. On an appeal filed by the assessee against the said order, the CIT(A) vide his order dt. 11th June, 1980 had set aside the assessment so made. This set aside assessment was pending on the day when the reasons were recorded and also on the day when the fresh re-assessment notice dt. 10th Feb., 1981 was issued on the assessee. He further submitted that the set aside re-assessment is still pending and has been not concluded. His objection was that when the assessment as a consequence of re-assessment notice was still pending, issuing of a second notice under s. 148 was not valid and, therefore, the initiation itself was totally against the very provisions of the IT Act. He further submitted that the Department had preferred appeals against the order of the CIT(A) dt. 11th June, 1980 and the matter was restored to him by the order of the Tribunal dt. 19th March, 1987. He placed reliance on Ghanshyamdas vs. Regional Asst. Commr. of Sales-tax (1964) 51 ITR 557(SC) and submitted that when an earlier assessment is still pending no fresh proceedings can be initiated and initiation of such proceedings are invalid in law. He placed reliance on several decisions and also to the Book on Income-tax by Chaturvedi & Pithisaria, III Edition, Vol. 3, pages 2942 to 2944.

11. The second objection raised by him, which according to him, was common to both the assessment years was that the reasons recorded are mere reasons of suspicion and are not reasons to believe. He submitted that in the reasons recorded it reproduced the various allegations made by Mr. John Ashlyn alongwith the various documents, which are part of his records. These, no doubt, give rise to amount suspicion but they by itself are not sufficient enough for formation of belief that there was an escapement of income. According to him, formation of belief is something more than the reasons for suspicion and, which is the primary requirement for initiation of proceedings under s. 147(a). He placed reliance on Calcutta Discount Co. Ltd. vs. ITO (1961) 41 ITR 191 (SC), Ganag Soran & Sons P. Ltd. vs. ITO & Anr. (1981) 22 CTR (SC) 1 : (1981) 130 ITR 1, Ram Narain Bhojnagarwalla vs. ITO (1970) 77 ITR 653 (Cal). Bhimraj Panna Lal vs. CIT (1961) 41 ITR 221 (SC) as well as pages 2948 to 2951 of Vol. 3 of Chaturvedi Pithisaria. His further objection was that the statutory authority like the CBDT had acted in a mechanical fashion and there was no application of mind as the application of mind would require due verification of various evidences. In support of this submission, he placed reliance on Chaturvedi Pithisaria, Vol. 3 page 2081 and also to Chhugamal Rajpal vs. S.P. Chaliha & Ors (1971) 79 ITR 603 (SC).

12. Coming to the factual aspect of the matter, Mr. O.P. Vaish, the learned counsel for the assessee submitted by referring to the paper book filed by him that the goods, which were sent on consignment on 29th April, 1967, 2nd Aug., 1967 9th Aug., 1967, 23rd Sept., 1967, 8th Oct., 1967, and 9th Oct., 1967 comprised of mainly emeralds. He submitted that the statement at page 52 clearly indicates the description of the goods, the lot Nos., weight in carats, value, exported, actual sales, date of return as well as its value and quantity. This statement is correlated with the statement, which at pages 53 to 57, which give the reference to the lot numbers, No. of stones, weight in carat, rate, value in Dollars as well as Rupees, as was re-imported. (on their rejection by Salas), their subsequent sale to parties in U.K. and other places. Referring to this, the submission was that the value at which it was re-exported was almost at the same value at which it was originally consigned to M/s Salas. The point he was emphasising was that the authorities, i.e., both Enforcement Directorate as well as the IT Department are fully accepting the undisputed fact that the value at which the goods re-exported represent the true and full invoice value of the goods, which were were returned back originally by Salas and there is hardly any difference between the value at which it was re-imported and later re-exported. The point which Mr. Vaish was emphasising was that over 60 per cent of the goods, which were returned back by M/s Salas and exported subsequently at almost the same value, are fully accepted by both the authorities. They are doubting the other part of the consigned sale made to Salas, which M/s Salas alleges to have sold on behalf of the assessee at a much higher value, i.e., almost double the invoice value as raised by the assessee.

12.1 There is no evidence on record to establish that Salas were the agent of the assessee and that there was any agreement between the assessee and Salas in regard to transactions being shown as if it is a sale to him and that he shall subsequently sell the goods at a much higher value to a party identified by the assessee. According to Mr. Vaish, the duty of the assessee stops the moment he makes a sale, which is accepted by Salas at a particular invoice value. This invoice has been checked by the authorities here in India as well as authorities in Switzerland, as both the authorities require that invoice should represent full value of the goods, failing which the assessee would be contravening the provisions of FERA resulting in prosecution, penalty, cancellation of licence as an exporter and the like. Mr. Vaish further submitted that the investigations were simultaneously done by the Enforcement Directorate as well as by the IT Department. The Enforcement Directorate, after considering these very evidences, have not initiated any proceedings for any violation of the FERA provisions. This he submitted for emphasising that an Indian exporter primarily has to comply with the provisions of FERA, which governs the requirements of exporters as well as conditions for exporters. The basic requirement was declaration of the full value of the goods exported and consequently the receipt of such full value of the goods in foreign exchange in India any utilisation of such foreign exchange earning had to be only as allowed by the Reserve Bank of India. In the instant case, in respect of these exports the primary authority after investigation on the allegations had found to their satisfaction that the assessee had not infringed any provisions of the FERA, which clearly goes to establish that the invoice value of the goods exported represented through and full value of the imports and that the foreign exchange in respect of the goods so exported have been duly received in India and fully accounted for. He further submitted that this being so on the very same evidence the view taken by the Department is one of suspicion only. He submitted that the assessee cannot be held responsible for various entries or notings made by Salas in his books or in the various documents produced by him. Referring to the telegram, which was one of the basis for the allegation of Salas that the goods are exported at double the value contains a stamp of the Post Office dt. 21st Nov., 1967 and refers to invoices of the assessee dt. 18, 20, 21 Feb., which had already been sold to him. The emphasis made by the assessee was that almost after 9 months he purported to have sent a telegram to his office from Hong Kong stating that the goods were under-invoiced, which clearly goes to indicate that this document was a fabricated one and the only purpose was to harass the assessee and to malign the assessee. Referring to the copy of the invoice which has been provided by the Department as annexure to the order, the submission was made that the Customs Department at Switzerland had provided its seal on this invoice in satisfaction of reasonability of the invoice. The counsel for the assessee then referred to the complaint filed by Mr. John Ashlyn in Rajasthan in the Court of District Judge, wherein he had implicated several persons that they had been trading with him only for purpose of sending the goods to Switzerland at half the price, to be only subsequently sold to parties at double the invoice value. The assessee's counsel submitted that reviewing the invoice as raised by Salas on various parties clearly go to disprove the allegation made by Salas himself. Referring to these invoices, which are at pages 36 to 43, the plea raised was that it is raised by Salas only in which mention has been made in hand of the name of the assessee. The assessee again emphasised if as was alleged by Salas if the goods could be sent on consignment at half the value and the ultimate parties were in the know of that the goods were of a value much lower than what was being sold by Salas, then the ultimate buyer would have directly dealt with the assessee and paid lesser amount for the same. The counsel for the assessee again stressed that there is no evidence whatsoever available to indicate that the assessee was a party to all this transaction of the alleged under-invoicing and there is absolutely no evidence available on record of the Revenue Department as well as Enforcement Directorate supposedly collected from the two parties, namely M/s Eastrade Inc, and M/s Eastrade Emerald Corporation that they had fixed up the prices with the assessee at Jaipur and that the goods to be routed through Switzerland through M/s Salas. It was again stressed that most of the goods which were returned by Salas and re-sold later to other customers fetched the very same value as was originally indicated in the invoice to Salas, with which fact the Enforcement Directorate as well as the Revenue Department are in total agreement. According to the assessee, all this very clearly goes to indicate that M/s Salas had a specific purpose of maligning, the assessee and to harass. It was also emphasised that the trading operation with Salas started sometime in Feb., 1967 but was discontinued in June, 1968 in view of repeated returning of large quantities of goods by Salas. Referring to page 22, which is supposed to be the confidential index card maintained by Salas the plea was that the assessee cannot be held responsible for whatever notings he makes in his cards as the assessee had never known Gemmes Du Monde or had ever traded with him. Referring to page 23, which is another Confidential Index Card, the learned counsel for the assessee submitted that the mention of the telex No. though represents a correct Telex No. but during the period of trading with Salas, i.e. Feb., 1967 to June, 1968, the assessee never had any telex as the P & T Department provided the telex only in Nov., 1968. This, according to learned counsel, clearly indicates that this card was prepared very much after the transactions were discontinued with him. The other notings in the Index Card, the plea of the assessee was that assessee had never advised Salas or entered into any agreement as is indicated in the Index Card and since it had been very clearly brought out that the Index Card was prepared very much after the transaction was discontinued. Placing on any reliance on the Index Card would not be proper and justified for the reasons that they do not indicate the reality of the situation. It was also argued with relevance to the above Index Card at page 23 that during the period of Feb., 1967 to June, 1968, the telephone Nos. of the assessee were 2757, 5557 and 2318 while this has been mentioned as 72757, 75557 & 72318. The submission of the assessee was that this also clearly goes to establish that there are all fabricated documents only to serve the purpose as John Ashlyn.

12.2 The counsel for the assessee also emphasised that there is not even an iota of evidence available on the record of either the Enforcement Directorate or the Revenue Department collected from the two ultimate parties M/s Eastrade Inc. and M/s Eastrade Emerald Corporation, which could go to establish the alleged conspiracy by the assessee.

12.3 The counsel for the assessee then gave a brief background as to the reason of the allegations made by Mr. John Ashlyn of several Jewellers at Jaipur. Mr. H.C. Golecha had been doing business for Salas and Salas had been selling goods on his behalf but did not return the goods to him. Mr. H.C. Golecha filed his claim in Switzerland and consequently the Switzerland Court had found Salas guilty and had forfeited the citizenship, after which he had moved to New York. Since Mr. H.C. Golecha had preferred to fight for his rights, he disappeared in one of the most suspicious circumstances and is believed to have been kidnapped and killed, and yet neither the body was recovered, not it was established that he has died. It was in retaliation of the above that John Ashlyn had filed the complaint in Jaipur and also had alleged about the male fides of various Jewellers in exporting goods under-invoicing them.

12.4 It was then pleaded that there being no evidence to establish the agreement between the assessee and Sales for sending him the goods at half the value, as in fact, there was never such an agreement, the invoices raised on Sales, most of the goods returned by him, which goods were re-exported to different customers realising almost the same value as was originally indicated in the invoice to Salas, the invoice on the two parties, namely, M/s Eastrade Inc. and M/s Eastrade Emerald Corporation being raised by Salas himself on his invoice clearly go to demolish the allegations made by him, thereby, demolish the entire theory of the Revenue that assessee had any part in alleged transactions. It was therefore pleaded that the entire allegations creates a doubt, which doubt is not sufficient for formation of belief, the re-opening needs to be quashed both on law as well as on facts.

13. The learned Senior Departmental Representative Mr. R.J. Singh laid emphasis on the documents which are part of the order passed by the ITO and laid emphasis on the pages 24, 25, 26, 28, 31, which are correspondence exchanged between Rashmi K. Jain and Shri John Ashlyn, which are all prior to the start of the transactions with John Ashlyn. According to him, these correspondences clearly indicate that, it was at the instance of the assessee that the name Veronica was suggested by John Ashlyn. Referring to page 31 of the Annexure to the order of the ITO, the submission made by Mr. Singh was that the two parties, namely, M/s Eastrade Inc, and M/s Eastrade Emerald Corporation were already known to the assessee. This, according to him, clearly establishes that the assessee having known the two parties, used John Ashlyn as the mediator by which goods were sent to him at half the value, later to be shown as exports made by him to the known parties at double the value and retain the difference out of India. Referring to page 14 of the Annexure to the order of the ITO, the submission made was that this is a letter from M/s Eastrade Emerald Corporation addressed to M/s Salas in which it has been specifically mentioned that the party had inspected the goods in Jaipur and the goods are returned only for the reason that they turned out to be much more expensive than they wanted to pay for it. Referring to pages 12 and 13, he submitted that it is a copy from the books of Salas, which go to indicate that the difference between invoice value raised by the assessee and by Salas had been retained by him for and on behalf of the assessee. Similar is a situation in regard to the various copies at pages 6 to 10, which also goes to establish that the transactions were carried out for and on behalf of the assessee only. Referring to the invoices raised by the assessee and the invoices raised by Salas, he submitted that the quantity remaining the same, the value has just been doubled. He referred to page 33 and submitted that this is a letter by Rashmi K. Jain to John Ashlyn, which goes to establish that the assessee had known the two parties in New York and it is in connection with the reference on account of goods sold to these two parties. He placed reliance on Vimal Chandra Golecha vs. ITO (1981) 25 CTR (Raj) 175 : (1982) 134 ITR 119 (Raj) and submitted all these various facts, which were weighed by the ITO after which only he had come to the conclusion that the assessee was indulged in under-invoicing and escaping the tax net.

14. Mr. Singh further emphasised that the various documents, which were collected, indicated possibilities of income having escaped, which results in the reasons to belief and thereby the re-opening was valid on that count.

15. We have given our very careful considerations to the arguments raised by both the parties and have examined the various materials that have been brought on record, namely, the annexures to the order of the ITO, i.e., the various legalised documents copies duly attested by the Consulate General of India of various copies, statements provided by John Ashlyn and also the assessee's detailed paper book as well as the paper book provided by the Revenue.

15.1 The statement, as was given by Mr. John Ashlyn with regard to the assessee before the Addl. Director of Enforcement and the Dy. Director of Inspection on 11th Sept., 1980 is reproduced below, as this is start of the entire controversy:

"I, John Zegre Ashlyn, son of Jan Zegrze, age 66, at present residing at 16241 Dal Norte, Poway, California, United States of America, voluntarily give the following statement under oath:

My firm, Salas S.A., Geneva, had dealings with M/s R.Y. Durlabhji, Jaipur India for the past 23 years. I met Mr. Rashmi K. Jain and his father, Mr. K.D. Jain, when I visited India in 1957 or 1958. But our business started sometime in 1967, when he approached me with the proposition of transhipping his goods through Geneva to his customer in New York. The essential part of these transactions was to double the price of his invoice, to Salas S.A. and retain the difference with us at his disposal. He did not wish the India Customs or other authorities to known that he is dealing with Salas S.A. The modus operandi we adopted for this was to create a fictitious name of Veronica as on account with the Lebanese Bank in Geneva. The sole purpose of this account was to receive goods from R.Y. Durlabhji, Jaipur, to be reshipped in the name of Salas S.A. to his customer, namely, Eastrade Emerald Corpn., New York. Although M/s Eastrade did not know the arrangement was made with Rashmi Jain, they knew the prices at which they were to receive the goods as these were already selected and prices agreed upon in Jaipur. Salas commission on this business was agreed as 2 1/2 per cent of the sales price in view of the anticipated substantial turnover. This collaboration lasted for about one year, after which Rashmi informed us that he could do this business cheaper through Hong Kong.

(Photocopies of several documents authenticated by Consulate General of India, and numbered Leg. 220 (1 to 204) 80 dt. 14th Aug., 1980 are shown to me. I confirm that these photocopies are true copies of originals from SALAS' files at Geneva).

During the period when this arrangement lasted, there were seven or eight transactions, which resulted in a turnover of approximately US $ 220,000.00. Since the invoice prices to Eastrade, New York, were double the invoices from Jaipur, approximately Us $ 110,000.00 accumulated to the credit of R.Y. Durlabhji in the books of SALAS S.A. On the instructions of Rashmi K. Jain, an amount of $ 110,000.00 was remitted to his nominee M/s Gemmes Du Monde into the latter's account with Credit Suisse in Geneva. Office copy of the instructions dt. 13th Nov., 1967 to our bankers U.B.S., and the U.B.S. advice dt. 16th Nov., 1967 for transfer of the U.S. $ 110,000.00 are available among the authenticated photocopies as documents No. Leg. 22(103-104) 80 and Leg. 220 (101-102) 80. This transfer is also reflected in the photocopy of the transcript of R.Y. Durlabhjis account in SALAS books, authenticated document No. Leg. 229 (67-68) 80. The amount of SF 473,000 equivalent to U.S. $ 110,000.00 can be found debited on 14th Nov., 1967 in this account. The photocopies of the Transcripts of the accounts of R.Y. Durlabhji will show that some sundry payments were also made to R.K. Jain and K.D. Jain as desired by them. Mr. Rashmi K. Jain (R.K. Jain) was the main person with whom I dealt though the firm R.Y. Durlabhji may have other partners. All letters written to us were signed by Rashmi K. Jain. I identify and confirm his signature in the letter and invoices of R.Y. Durlabhji, copies of which are available among these documents. The arrangement with Rashmi K. Jain was recorded by me in Confidential Index Card, photocopy of which is available as authenticated document No. Leg. 220 (115-116) 80 dt. 14th Aug., 1980.

It will be observed, that in this particular case, the imports to Switzerland were declared to the Swiss Customs at the under invoiced half value. At this stage, we had not realised the implications of Swiss Income Tax Regulations. We were advised subsequently that if we declared to the Swiss Customs the lower prices, the difference might be deemed as our profit. Hence in subsequent arrangements, we took care to prepare duplicate invoices for the purpose of Swis Customs.

Sd/- John Zegre Ashlyn)."

In support of the aforesaid statement, Mr. John Ashlyn had provided copies of the Confidential Index Card maintained by him, copies of ledger account in his books, copies of invoices received by him from the assessee, copies of invoices raised by him on Eastrade Inc. and Eastrade Emerald Corporation, copy of telegram dt. 21st Nov., 1967, copies of correspondence between him and Rashmi K. Jain, copy of letter written by Eastrade Emerald Corporation to Mr. John Ashlyn. The correspondences as have been alleged to have been exchanged between assessee and John Ashlyn have already been reproduced in the initial paragraph while bringing out the facts of the case.

15.2 The question as posed by the assessee was (i) whether the various materials are sufficient enough for formation of a belief of escapement of income or these are only in the nature of raising of suspicions? (ii) The second question posed was, if it were in the nature of suspicions only is the initiation of proceedings under s. 147(a) valid? (ii) For asst. yr. 1967-68, since the re-assessment was still pending after the re-assessment was set aside by the CIT(A), issuing of a fresh notice and proceedings with re-assessment was valid or not, as according to the assessee, the re-assessment was void ab initio in view of Supreme Court's decision in the case of Y. Narayana Chetty vs. ITO (1959) 354 ITR 388, (SC), CIT vs. Thayaballi Mulla Jeevaji Kapasi (1967) 66 ITR 147(SC), CIT vs. Kurban Husain Ibrahimji Mithiborwala (1971) 82 ITR 821 (SC), Ghanshyam Das vs. Regional Asstt. Commr. of Sales-Tax.

16. The reason for formation of the belief contemplated by s. 147(a) for the re-opening of an assessment must have a rational connection or relevant bearing on the formation of the belief. Rational connection postulates that there must be a direct nexus or live link between the material coming to notice of the ITO and formation of the belief that there has been escapement of the income of the assessee. It is, therefore, clear that the material, which comes to the notice of the ITO needs to be examined for evaluating it as to whether it has a rational connection or a relevant bearing for formation of the belief or not.

16.1 The statement as was provided by John Ashlyn and supported with various documents had close bearing with that of the assessee and are, therefore, sufficient enough for formation of the belief of escapement of income. Therefore, the basic requirement of s. 147(a) having been duly satisfied, the ground raised by the assessee for both the assessment years as regard the validity or legality of the proceeding fails.

As regards asst. yr. 1967-68, the undisputed fact remains that when the reasons were recorded for re-opening of the assessment as well as, when it was approved for re-opening, the earlier re-assessment order passed on 27th March, 1980, set aside by the CIT(A) vide his order dt. 11th June, 1980 remained pending to be disposed of. The Supreme Court in the case of Ghanshyamdas vs. Regional Asstt. Commr. of Sales Tax observed, "The fact that s. 34 requires a notice to be served calling for a return of income which had escaped assessment strongly suggests that income which has already been duly returned for assessment cannot be said to have 'escaped' assessment within the statutory meaning." They further observed "if a return was duly made, the assessment could be made at any time unless the statute prescribed a time-limit. This can only be for the reason that the proceedings duly initiated in time will be pending and can, therefore, be completed without time limit. A proceeding is said to be pending as soon as it is commenced, and until it is concluded". From the above principle as laid down by their Lordships of the Supreme Court, it is clear that if an assessment proceedings could be said to be pending, no notice for re-assessment could be issued and if it is so issued, then it would be a invalid notice. The undisputed facts as has been brought out earlier is that the re-assessment as per the earlier notice was still pending as a consequence of CIT(A) having set aside the assessment. This being so, during the pendency of such re-assessment proceedings a fresh notice under s. 147(a) could not have been issued and since it has been so issued it would take the colour of an invalid notice. This has been so held by their Lordships of the Supreme Court in the case of CIT vs. Ranchhoddas Karsondas (1959) 36 ITR 569 (SC). Since a notice becomes invalid in view of the Supreme Court's decision in the case of CIT vs. Kurban Hussain Ibrahimji Mithiborwala, the re-assessment would become invalid. Therefore, respectfully placing reliance on the aforesaid Supreme Court decisions, we have to hold that the re-assessment proceedings for 1967-68 are invalid in view of the earlier re-assessment being pending at the time of issue of the notice to the assessee.

17. Coming to that facts of the case, the copies of invoices as have been alleged to have been raised by Salas on Eastrade Inc. and Eastrade Emerald Corpn. are not supported by consignment invoices raised by Salas on the two parties and are also not confirmed by the two parties as the copies raised on him, nor any enquiries were made from the said two parties, as to whether the allegation made by John Ashlyn was a fact, as the parties, according to John Ashlyn happen to be the ultimate parties connected in the said transaction through the mediator John Ashlyn. To our mind, this would be a necessary document in the light of the alleged letter from Eastrade Emerald Corpn. dt. 17th March, 1967 addressed to Salas which reads as under:

"No. 73 was not accepted by the undersigned when examining the goods in Jaipur, whereas 84 was originally quoted at a lower price and several weeks later corrected which turned out to be much more expensive than we would want to pay."

The relevance to our mind can be appreciated when we look to invoice no. G. 67051-dt. 21st March, 1967, which is supposed to be invoice covering the consignment Invoice No. Co-1102 dt. 1st March, 1967, to which reference has been made in the letter from Eastrade Emerald Corpn. about Item No. 73 & 84 returned as the prices quoted were lower in one case while the item itself was not accepted in the other case. In the said revised invoice raised by Salas Item No. 73 & 84 do not figure. If only the consignment invoices had been made available, the prices as raised by the invoices could have been compared, so as to determine about any possibility of there being some factual element in the allegation.

We have also to observe that the so-called revised invoices as raised by Salas on the two parties in New York, are not duly confirmed by these two parties, as the copies of invoices as were raised on them, which could. in our opinion, go to establish whether what John Ashlyn alleged was a mere allegation or a matter of fact.

At pages 3, 4 and 5 is the copy of Invoice No. F. 67098 containing the remark "goods returned and credited (O/CM dt. 31st May, 1967, goods re-invoiced on 29th May, 1967". The amended invoice has been placed at page 40 containing the remark "This invoice cancels the previous one No. F. 67098 of 12th May, 1967." In the invoice, which is at page 3 to 5 there is no mention about the assessee, as is contained in the invoice, which is placed at page 40. As per the invoice at page 3 to 5 most of the goods were returned back to Salas and he had provided the credit by 31st May and has re-invoiced on 29th May. Referring to the copy of the ledger account of the assessee in the book of Salas the entry in regard to the said invoice had been made on 30th June only while the invoice supposed to be dt. 29th May. We may also add that there is no entry regarding the goods sent vide Invoice No. 67098 dt. 12th May, 1967. Similarly, the Invoices No. 67048, 67049, 67050 all dt. 21st March, 1967 have been shown as of 30th June and 9th June respectively in the ledger account of assessee in the books of Salas.

Much reliance has also been placed on the letter of 13th June, 1967 from Rashmi K. Jain to John Ashlyn, which reads as under:

"Dear, John,

I have to acknowledge your letter of the 6th June and thank you very much for the same. I thank you for keeping me informed about the Colombian lot and it is just by luck that somebody also has had a chance to get at it before you could. However, I would request you to be on the look out and if there is anything interesting we would definitely like to buy it.

I hope your business is gong on well but I am worried about the ornaments as Mr. Dymant of M/s Eastrade Emerald Corpn. seems to be a little shy. In his letter of 6th June he writes:

"We have also been in touch with your friends in Geneva and are doing the needful".

and in his subsequent cable he writes whether he should pay by bank transfer or by cheque. I hope you will be able to sort out these finer details and see that we are paid our share of the goods as early as possible, because June is half yearly closing and it is the time when we have to clear a/c with the banks as well as for making the Income-tax payments.

Sd.— R.K. Jain."

The reading of the letter indicates that the assessee has expressed his anxiety about recoveries of his dues of the goods so as to facilitate the operations with the banks and also in connection with the dues to the IT Department. At page 52, the assessee had provided a statement of goods exported to Salas. At pages 53 to 57, 59 to 62 & 64 to 67, the assessee had provided statement showing particulars of lots, which were returned by Salas and which were re-exported, to various parties, these statements proved information of number of stones. weight in carat, rate in Dollars and in Pound as well as the rate in Rupees and in values. This statement indicates that the goods have been re-exported at more or less the same value at which it was originally sent on consignment to Salas. The Revenue Department has accepted as matter of fact that the goods received on it being returned by Salas, and their subsequent export was at its value and that there is no under-invoicing whatsoever.

18.1 The invoices as were raised by the assessee on Salas bear the Switerzland Custom stamp. The submission of the assessee was that this being so stamped by the Switzerland Customs authorities it has to be taken that the invoice represents full value. In support of this submission, the assessee had placed reliance on a letter from MEIER Ltd., Switzerland as also to the legal opinion, which are at pages 74 to 77 and 78 to 80. These two letters indicate that the Switzerland authorities require that the full value of the goods imported needs declaration with the Swiss Custom authorities. In the correspondences exchanged between Rashmi K. Jain and Salas, one important fact emerges out is that the name of Veronica was suggested by Salas so that the other dealers are not in the know of, who was the customer. There is no dispute to the fact that Salas had no agreement with the assessee for allegedly re-exporting the goods for and on behalf of the assessee to the two New York parties. The revenue came to believe of such an agreement only on the statement of Salas but Salas had no documentary proof to establish such an agreement having existed at all. Instead he tried to support his allegation by providing copies of invoices allegedly raised by him on the two parties in New York, but he again withheld the original consignment invoices as were sent by him. It is rather unfortunate that the Revenue Department did not consider its necessary to ask Salas to provide the copies of the consignment invoices as were originally sent to the two parties. The Department also did not feel it necessary to get the invoices counter-checked with the two parties as to whether the invoices as are said to have been raised on them represent the copies of the invoices raised on them. To our mind, these two steps were absolutely essential, which could only have gone to establish whether the allegation as made by Salas is really a fact or a mere allegation. From the records it is also evident that no statements were recorded from the two parties in regard to the allegation referred by Salas, as also no effort was made to obtain copies of invoices raised by Salas on them. If only all these information were available this could have exposed Salas' allegations. So far as the fact remains that the invoices as were raised by the assessee were only on Salas against which assessee had duly received remittances. The further exports were done by Salas. The assessee could not be held responsible for the act of Salas unless there is clear evidence to indicate that it was done at the behest the assessee. As already observed above, the various correspondences do definitely give rise to a serious doubt about a possibility but does not go to establish that it was really the doing of the assessee. The theory of Salas that the goods were under -invoiced also crumbles in the Weight of substantial quantity of goods returned and re-exported at the same value to other parties. This clearly goes also to support the claim made by the assessee that if the goods really could fetch double the value then why part of it only and not the whole of it. It is also rather strange for a man to have kept quiet for nearly 12 years about the said transaction and suddenly to appear in the scene and allege that the assessee had been sending goods to him under-invoicing the same. When we examine this in the light of the general submissions made by the assessee about the suit filed by Shri H.C. Golecha in Switzerland for recovery of various goods and dues from Salas, which as submitted by the assessee was decided in favour of Golecha resulting in substantial loss to Salas and forfeiture of his citizenship. This was perhaps one of the reasons why he had filed the complaint of damages in the District Court in Jaipur and also the complaint.

18.2 At this juncture it would not be out of place to refer to the Foreign Exchange Regulation Act, 1973. This, in our opinion, would be necessary in view of the fact that the investigation in the instant case was carried out jointly by the Enforcement Directorate with the IT Department. On the same set of facts and documents collected and rather the statement of Mr. John Ashlyn is made before both the authorities simultaneously.

18.3 The FERA s. 18 requires that the exporter shall furnish a declaration that the goods, which are exported by him. the invoices raised for them represent the full export value of the goods. The Enforcement Directorate are primarily concerned with the goods exported out of India realised its full market value.

18.4 On the material collected, the Enforcement Directorate apparently has felt itself satisfied that the allegations made by John Ashlyn about the under-invoicing does not stand the test of evidence and, therefore, apparently had not initiated any proceedings against the assessee.

18.5 We may also observe that though the assessee was provided with the copy of statement made by Mr. John Ashlyn assessee never got the opportunity to cross-examine John Ashlyn, as the Revenue was contending that it was for the assessee to produce John Ashlyn.

18.6 We may also observe that there is no evidence available or collected by the Revenue authorities from the Custom Authorities of Switzerland in connection with these invoices, that they they do not represent the correct value.

18.7 The alleged telegram dt. 20th Nov., 1967 stating about additional insurance coverage required in respect of goods covered by invoices dt. 18th, 20th & 21st Feb., 1967 clearly indicates the falsity of the allegation for the reason that the goods having been already sold in Feb., the question of providing additional insurance and its thought in Nov., 1967 is of no avail to the transaction at all.

18.8 We may also observe that the various copies of invoices dt. 12th May, 1967 and ledger accounts, which are at pages 3 to 13 have not been provided or examined by the Investigating Party on 11th Sept., 1980, as these documents were got signed by the Consulate General of India at Geneva. It may be pertinent to observe that the invoice at page 3 to 5 dt. 12th May, 1967 do not contain any noting about the assessee but the noting appears only in the revised invoice at page 40.

19. When we consider the whole of the issue in the light of the observations of the reasons recorded alongwith the various materials collected, we are of the opinion that lot of suspicion is thrown in, which is not sufficient enough to establish that there was any act by the assessee of exporting goods under-invoicing them.

We gather support of our view that there appears no proceedings initiated by Enforcement Directorate for infringement of FERA Regulations for non-disclosure of full value of the exported goods. We may also observe that on an identical allegation made by John Ashlyn in the case of M/s Maliram Pooranmal, which case was also investigated simultaneously with that of the assessee by both the Enforcement Directorate as well as the IT Department for alleged maintenance of foreign account, which was not declared, contravening Foreign Exchange Regulation Act, the Asstt. Director of Enforcement Directorate vide his order dt. 26th Aug., 1985 had categorically observed that the bank accounts maintained belonged to Salas only and that the partner of the firm M/s Maliram Pooranmal had nothing to do with it. They also observed that copies, which were provided by him contained endorsement in the hand of John Ashlyn only and that there was no evidence to establish that the transactions really pertained to the partner of M/s Maliram Pooranmal.

With these observations we are of the view that on facts, the assessee must succeed in view of lack of evidence to establish the suspicion that was in the mind of the Income-tax authorities that it was a transaction in which the assessee had exported goods at a much lower value, resulting in the escapement of income. Accordingly, we quash the re-assessment for both the years. The appeal for asst. yr. 1967-68 succeeds and that of asst. yr. 1968-69 succeeds in part.

 

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