Audit Reports

Direct Tax

Overview

The Gems and Jewellery sector is one of the fastest growing sectors and it is extremely export oriented and labour intensive. The industry has a primary position in economic activities and has tremendous potential for growth. Given the high value of the transactions and foreign exchange involvement due to large amount of diamond and gold imports, the Gems and Jewellery sector is susceptible to misuse and money laundering. various irregularities reported from time to time in respect of Gems and Jewellery sector. This Performance Audit on the ‘Assessment of assessees in Gems and Jewellery Sector’ was taken up for examination from the perspective of the assessment of direct taxes.

The Performance Audit covered the assessments completed during the financial years 2015-16 to 2018-19.

Audit noticed irregular trends in growth of quantity and value of imports and exports of rough diamonds during 2010 to 2020.  Audit noticed unusual trend in import of pearls into India.

Audit observed that no time limit is prescribed under the Income Tax Act, 1961 for timely remittance of export proceeds in the country for claiming deduction under section 10AA.  No Standard Operating Procedure or instructions/ guidelines has been prescribed by the CBDT for assessment of assessees of assessment of assessees specific to Gems and Jewellery Sector.

While examining cases in respect of seven assessees under 360-degree analysis, Audit observed various irregularities like non-examination of suspicious business activities; unexplained excess output, short accounting of stocks, and non-verification of differences in claims made by assessee as per records of the assessee vis-a-vis the records of the related party in 33 significant issues involving tax effect of ₹ 37,909.38 crore.  Such irregularities had the underlying risk of tax evasion that require further probing and detailed examination.

Audit noticed instances of incorrect allowance of business expenditure in 40 cases involving tax effect of ₹188.40 crore, failure to consider various provisions under the Income tax Act in 34 cases involving tax effect of ₹58.86 crore and mistakes in computation of tax, surcharge, interest etc. in 58 cases involving tax effect of ₹112.31 crore.

There was no uniformity or consistency across assessments in additions made towards bogus entries and purchases despite there being similar grounds of additions.  Audit noted that there is no guidelines/SOP for disallowances of accommodation entries/ bogus purchases.

Audit noticed issues indicative of weak monitoring mechanism in the ITD with respect to the Gems and Jewellery sector.  The areas included non-verification of correctness of business codes filled in by the assessees in the ITRs, non-verification of quantitative disclosure of inventory in ITR and TAR during scrutiny assessment and lack of SOP or instructions/ Guidelines for assessment of assessees specific to the Gems and Jewellery sector.  These areas require stricter monitoring as Gems and Jewellery sector involves significant risk of money laundering, round tripping, mis-invoicing, and risk of routing of black money in the garb of transactions and claims.

Download Audit Report

• Report No. 6 of 2022- Performance Audit on Assessment of Assessees of Gems and Jewellery Sector, Union Government Department of Revenue - Direct Taxes .
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