Information is being sought from tax and regulatory authorities of countries such as Mauritius, Singapore, Cyprus and New Jersey. According to I-T officials, it is typical for a jewellery company to receive advances from overseas customers against orders placed by them. The jewellery is subsequently manufactured and exported. At times, orders are cancelled. The refunds made to customers result in a foreign exchange loss (owing to currency fluctuations). Such loss is then claimed as a business deduction by the jewellery company.
However, when it comes to firms in which Modi was a partner, the advances received from overseas customers were diverted to him, largely as interest-free loans. Being in the nature of loans, the funds were not taxable in Modi’s hands. If these transactions are found to be a sham (and in the nature of mere accommodation entries), the loans could be treated as unaccounted money in the hands of Nirav Modi, who will be subject to heavy penalties and prosecution.
In November last year, the ITAT disposed of a matter, relating to financial years 2008-09 and 2009-10, during which Diamond “R” Us had given an interest-free loan of Rs 92 crore to Modi. The I-T officials had held that the firm had borrowed funds and at the same time had given interest-free loans to its partner. Borrowed funds, under I-T laws need to be utilised ‘wholly and exclusively’ for the purpose of the business. Thus, a proportionate interest amount of nearly Rs 10 lakh was denied in the hands of the firm. The ITAT in its order of November 17, has asked the I-T officials to re-compute this figure of Rs 10 lakh after looking at various accounting entries such as the opening balance in the partner’s account.
The foreign exchange loss, arising on refunds to customers in these two years was Rs 30.78 lakh and Rs 65 lakh, respectively. The ITAT had to decide on the narrow issue of whether such loss should be allowed as a deduction in the hands of the firm. The tribunal held that the foreign exchange loss is in the course of business operations and not in the nature of cost of funds. Thus, use of such advances by Modi was not relevant to the issue in appeal, and claims made by Diamond “R” U were allowed. However, I-T sleuths are likely to dig deeper into transactions, to determine if the practise of obtaining advances from customers was just a garb to hide money laundering activities.