CAG Exposes I-T Department's Weak Monitoring Mechanism Resulting in Losses of Rs38,449 Crore in Gems & Jewellery Sector
Moneylife Digital Team 19 August 2022
While finding out weak monitoring mechanism in the income-tax (I-T) department for the gems and jewellery sector, the comptroller and auditor general of India (CAG) noticed 230 instances of non-compliance to the provisions of the I-T Act involving potential tax effect Rs38,449.59 crore. 
In its performance audit (PA) report, CAG says it observed various irregularities like non-examination of suspicious business activities, unexplained excess output, short accounting of stocks, and non-verification of difference in claims made by the assessee as per records of the assessee vis-à-vis the records of the related party in these cases. 
"Audit (CAG) raised a total of 134 audit observations with potential tax effect of Rs37,948.16 crore in respect of cases selected for 360-degree analysis and 32 audit observations having tax effect of Rs142.85 crore in respect of related parties. Out of these observations, 33 significant issues noticed in respect of seven assessees involving a tax effect of Rs37,909.38 crore. Such irregularities were indicative of the risk of tax evasion due to non-verification and risk of suspicious business activities that require detailed examination and verification by the ITD," it says. 
CAG says, during its audit of assessees from the gems and jewellery sector, it noticed 230 instances of non-compliance to the provisions of the I-T Act involving a potential tax effect of Rs38,449.59 crore as per the quantitative details and other related information in the records furnished by the I-T department and the probable revenue implication as computed by it. (see table below)
The PA report also found 33 assessment cases with a sales turnover of Rs30,560.46 crore pertaining to 19 assessees with the unique permanent account number (PAN) where income-tax returns (ITRs) had not been filed in all four assessment years (AYs). "...the system was not effectively monitored as timely sharing of information within the department was also not being ensured for initiating the remedial action against the nonfilers by the concerned assessing officers (AOs)," it says.
CAG also observed that in 346 instances, the assessees had not disclosed the quantitative details of inventory in ITRs and/ or in tax audit reports (TARs). In 362 instances, there was a mismatch in quantitative details as per the ITRs vis-à-vis the disclosures through TARs. In 330 cases, there were discrepancies in TARs, such as incorrect carry forward of closing stock, and mistakes in various disclosures required under the I-T Act. 
"The discrepancies were indicative of the fact that the ITD systems were deficient in detecting discrepancies and gaps at the ITR processing stage through central processing centre (CPC) Bengaluru in such cases. Further, Audit observed from the available records that the department did not examine these discrepancies. The non-verification of such discrepancies further entailed a risk of income escaping assessment," the report says. 
During the performance audit, CAG observed issues related to non-disclosure or wrong disclosure of quantitative details in ITR and TAR, mistakes in carrying forward of closing stocks, and shortages of stocks. It also observed instances where the assessees had claimed very nominal business expenditure like rent, power and fuel against huge turnover. Further, in some cases, the assessees had declared excess output and shown sales or purchases of goods at much below the market rate. However, these issues were not examined by CAG during the scrutiny assessment. 
CAG examined 44 assessments of 11 assessees belonging to two groups of companies of the M group and the N group to ascertain the profile of such entities engaged in the business of gems and jewellery. It examined 35 cases of entities operating as group companies of M group with a sales turnover of Rs64,041.79 crore and nine cases of entities operating as group companies of N group with a turnover of Rs20,953.25 crore.
In the case of entities of the M group, the report says, "...out of 35 cases, there were instances of non-verification of significant details such as unsecured loans, and yield, in 19 cases with a turnover of Rs39,922.45 crore, discrepancies in disclosure of quantitative details of items traded and manufactured in 16 cases with a turnover of Rs40,414.59 crore, instances of data mismatch as per ITR vis-à-vis form 3CD in 10 cases with a turnover of Rs20,736.24 crore, instances of inconsistent additions on account of bogus transactions in seven cases with a turnover of Rs18,581.17 crore and instances of delayed or non-filing of ITRs in six cases with a turnover of Rs16,472.57 crore."
For the N group, CAG says in seven cases involving sales turnover of Rs13,072.22 crore, nil additions or disallowances were made. "Of seven cases where nil additions were made, in two cases income of Rs5.87 crore was returned as well as assessed whereas, in the remaining five cases, nil income was returned as well as assessed. In two cases with gross turnover of Rs7,881.04 crore, additions of Rs97.76 lakh were made, which was around 0.01% of the sales turnover."
The report also observed that the majority of the imports of pearls and exports of pearl studded jewellery made by five entities of the N group were from their group companies or related parties set up in Hong Kong and United Arab Emirates (UAE) only. 
"As per the assessment records, the enforcement directorate (ED) had conducted investigations in the N Group of cases in May 2018 and found that 20 entities based in the UAE and Hong Kong controlled by N group... were created in order to facilitate layers and laundering of funds from Punjab National Bank (PNB) to camouflage the real intention and identity of beneficiaries of the funds siphoned off from PNB," the report says. 
According to CAG, as the parties with whom five entities of N group undertook exports and imports were created for laundering of funds, there was a significantly high risk that the imports and exports of pearls or pearl jewellery were not genuine. Further, it noted that all the imports and exports of pearls or pearls jewellery were made from a single port, S Special Economic Zone in Gujarat.
"The ITD may examine the feasibility of identification of entities involved in the import and export of pearls and pearl studded jewellery during the period from FY13-14 to FY17-18 for further investigation of the genuineness of transactions," CAG recommends. 
The report also found that the I-T department failed to levy a penalty on three companies from the N group under section 271BA of the I-T Act for non-furnishing of form 3CEB for three years despite high-value international transactions. 
In the case of one assessee, DF, assessed under the Mumbai circle of the I-T department, the PA report pointed out that the power consumed by the company for running a gold refinery and an SEZ unit and an office in Mumbai was 'negligible and appeared unrealistic'. "Although the total turnover of the assessee ranged from Rs1,896.63 crore to Rs4,449.31 crore during these years, electricity expenses of only Rs0.98 lakh to Rs4.67 lakh were incurred." 
"This does not appear to be realistic as trading activity during AY13-14 and AY14-15 and manufacturing activity during AY15-16 and AY16-17 of such a large business requires substantial electricity expenses. From FY15-16 onwards, the assessee added one refinery at Rudrapur and had an existing unit at Surat SEZ, and one office in Mumbai. If the assessee was actually involved in such a large business, there must have been substantial electricity expenses for achieving such a huge turnover," CAG says.
Despite similar grounds, the report also observed no uniformity or consistency across assessments in additions made towards bogus entries and purchases. It noted that there are no guidelines or SOP for disallowances of accommodation entries or bogus purchases. The additions were made in an arbitrary or discretionary manner and without recording proper justification in the assessment order, with an inherent risk of non-sustainability of additions at the appellate stage, it says.
"All the issues mentioned (in the performance audit report) indicate that due importance to this sector is required to given; and the ITD needs to streamline the systems and strengthen its monitoring mechanism in respect of assesses of gems and jewellery sector given the high risks of money laundering, round tripping, mis-invoicing, potential to generate and consume black money, also highlighted by various committees of the government of India and Financial Action Task Force (FATF)," CAG says.
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weak monitoring mechanism means leakage is flowing in to the pockets of agency executives
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Is it impossible for CAG to give its report within one year? And do these delayed reports really result in any improvements?
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