High Sea Sales Cannot Be Treated as Bogus Merely on Cash Receipt or Unserved Notices: ITAT Delhi
Overview of the Case
The Income Tax Appellate Tribunal, Delhi Bench, delivered a significant ruling in Singhal Exim Pvt. Ltd. Vs ITO (ITAT Delhi) concerning Assessment Year 2014-15. The case revolved around three principal disputes: whether high sea sales aggregating to a substantial amount could be dismissed as non-genuine, whether unsecured loans from director-creditors warranted addition under Section 68, and whether disallowance of miscellaneous expenses under Section 69C was legally sustainable. The Tribunal's findings carry considerable weight for importers engaged in high sea sale transactions, particularly those operating in the mobile phone trading sector.
Background and Business Profile of the Assessee
The assessee company was engaged in importing mobile phones from China and selling them within India. During the relevant financial year corresponding to Assessment Year 2014-15, the assessee reported aggregate sales of ₹62.91 crore. Of this, a dominant share amounting to ₹59.11 crore constituted high sea sales, while the remaining ₹3.80 crore represented domestic sales.
The business model operated by the assessee involved entering into agreements for procurement of mobile phones on credit from Chinese suppliers. In the majority of transactions, the shipment itself was sold while still in transit through high sea sale arrangements. The assessee would collect the sale proceeds from Indian buyers and subsequently discharge its payment obligations to the Chinese suppliers. Since urgency was inherent in this model, the assessee frequently received the sale consideration in cash.
Issue 1: Addition of ₹59.11 Crore — Alleged Non-Genuine High Sea Sales
Grounds of the Assessee's Appeal
The assessee contested the confirmation of an addition of ₹59,51,29,517/- on the ground that the Assessing Officer had erroneously concluded that high sea sales to four parties — M/s System Telco, M/s Blues and Jacks Overseas, M/s VKS Concepts, and M/s Scum Trading — were not genuine, and consequently made additions either under Section 68 or Section 69C of the Income Tax Act, 1961.
The assessee argued that all purchases of mobile phones and corresponding imports were fully documented and legitimate. The following documentation was placed on record:
- High sea sale agreements executed on stamp paper and duly notarized
- Approval of each high sea sale agreement by the office of the Commissioner of Customs
- Importer-Exporter Code (IEC) details of all four buyers
- Documents confirming that buyers had taken delivery of goods from customs
- Evidence of import duty payment made by the respective buyers
Stand of the Assessing Officer
The Assessing Officer rested his adverse conclusion primarily on two grounds:
- Notices issued under
Section 133(6)to the four buyers were returned unserved by postal authorities - A substantial portion of the sale proceeds — totalling ₹49,67,99,207/- in cash deposits — was received in cash
On this basis, the Assessing Officer held the high sea sales to be non-genuine and made an addition of ₹59,11,29,517/- under Section 68. Alternatively, an addition of the same amount was made under Section 69C on the premise that cash deposits represented unexplained expenditure.
The relevant finding recorded in the assessment order read as follows:
"Therefore keeping in view of the above facts and material on record and I am satisfied that the cash deposits amounting Rs.59,11,29,517/- credited on the books of the assessee are not genuine and I also rely upon the judgment of Hon'ble Supreme Court of India in the case of Sumati Dayal the amount of Rs.59,11,29,517/- is hereby disallowed u/s 68 of the Act and added back to the total income of the assessee company."
Revenue's Contentions Before the Tribunal
The Departmental Representative contended that Section 68 is a deeming provision. Given that notices to buyers remained unserved despite those buyers allegedly having transacted in crores of rupees, the Revenue argued they could not be treated as obscure or unlocatable parties. The absence of updated addresses from the assessee compounded the issue. Reliance was placed on several decisions including: