TMI Blog1997 (5) TMI 82X X X X Extracts X X X X X X X X Extracts X X X X ..... nvestigation Wing of the IT Department made certain investigations, as a result of which, they collected certain information from the various transport firms/companies indicating that the various dealers of cloth carrying on their business at Rohtak received consignment of several bales of cloth from Ahmedabad, Surat and Amritsar. On the basis of such material obtained as a result of investigation made by the Investigation Wing, the AO's made addition on account of unexplained investment made for making such unrecorded purchases as well as in respect of unaccounted profit derived on such suppressed sales. 3(b). The learned representatives of both sides submitted that it will be sufficient to examine the facts of the main case of Ram Piyare Satish Kumar for asst. yrs. 1990-91 to 1992-93 as the entire facts and basis of additions made in all other cases are similar, except that the number of unrecorded purchases of bales of cloth and the consequent amount of additions based thereon are different. 3(c). It will, therefore, be imperative to reproduce hereunder the facts and findings given by the AO in the assessment orders in case of Ram Piyare Satish Kumar for asst. yrs. 1990-91 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 38 7. The assessee was confronted with the findings as above with regard to the unrecorded purchases and his statement was recorded on15th March, 1993. In his deposition Shri Satish Kumar, partner has confirmed and affirmed that the firm had purchased the above mentioned bales of cloth and that the above purchases were not recorded in the books of account. He was asked to state from whom the goods have been purchased. It was replied that the goods had been purchased fromBombay,Surat, and Ahmedabad and since the parties did not give him the bills, the names and addresses of the seller parties cannot be made available and further that he is unable to recollect the names of these parties. The assessee was further asked to mention the quality of the cloth and then it was stated that the quality of cloth was that of inferior type of terrycot, silk and that the purchase price of bales varied from Rs. 5,500 to Rs. 6,000 per bale. The assessee was asked to state as to whether he was in possession of any evidence whereby the cost of any/each bale could be specifically determined. It was stated that the basis for estimating the cost of the goods was the purchase price of the g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w the date of payment made to the seller which has never been done by the assessee. Furthermore, these transactions were entered into in the normal course of business as is evident from the fact that the goods consigned from the same station and through the same transporter have partly been recorded and partly unrecorded by the assessee in his books of accounts. The goods that were purchased on credit, the assessee would have to show that the date of payment made to the seller which has never been done by the assessee. Furthermore, these transactions were entered into in the normal course of business as is evident from the fact that the goods consigned from the same station and from the very transporter have partly been recorded and partly been unrecorded by the assessee in his books of accounts. The goods that were not recorded would normally be paid in cash. Furthermore, the assessee is not in a position to submit even a single scrap of paper to show that the goods were purchased on credit basis and from whom such goods were purchased. This fact is only in the knowledge of the assessee and it is not possible for me to exactly draw any conclusion except that the purchases were mad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nts, value of one bale taken by the assessee in his revised return of income, further the value of such bale admitted by the other assessee and considering all factors being judicious and fair to the assessee, I am adopting the cost of one bale at Rs. 3500. 13. Now the question which arises is as to what is total undisclosed investments made in the purchases. In view of the fact that the assessee has not led any evidence so as to throw any light on the transactions and since the transactions entered into by the assessee are in the knowledge of the assessee and fair adoption has to be relied upon. It is normal pattern of any trade that goods are purchased and sold after a certain period of time and out of sale proceeds, expenses are accounted for and as such capital keeps on circulating. The assessee was also confronted vide this office letter dt.22nd Jan., 1993to show cause as to why the entire cost of purchases of bales be not included as undisclosed investment of the assessee in his hand. The assessee vide its reply dt.25th Feb., 1993, has contended as under: (i) that the goods were purchased on credit basis and hence there is no investment made by the assessee in the purchas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l, 1989of 5 bales of cloth and by applying an average value of one bale at Rs. 8,500, the undisclosed investment in the 5 bales comes out to Rs. 42,500 added after treating income from undisclosed sources under s. 69 of IT Act, 1961 42,500 (b) The assessee has shown a profit on the unrecorded goods at Rs. 15,000 on 38 bales of cloth by taking the cost of one bale at Rs. 7500 @ 5.5 per cent. I am not disturbing the rate of profit as shown by the assessee itself. During the year he has purchased 38 bales of cloth, hence profit comes to Rs. 38 x 8500 x 5.5 per cent = 17,765 17,765 (c) Hence total addition to extent of Rs. 42,500 + 17,765 = 60,265 treating the sale to the undisclosed income of the assessee will be made to the other income of the assessee 60,265 The AO thus made an addition of Rs. 60,265 as assessee's income from undisclosed sources. However, while computing the taxable income, the AO deducted the amount of Rs. 15,000 being profit on unrecorded goods shown by the assessee in the revised return." 3(e). The AO in the case of Ram Piyare Satish Kumar made addition on similar basis in asst. yr. 1991-92 as under: Re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs. 17,400 in this case. Assessment for asst. yr. 1991-92 was completed on8th Dec., 1993, and addition of Rs. 81,983 was made. By adjusting this amount the unexplained investment from undisclosed sources comes to Nil. Hence, I am not making any addition in this year as unexplained investment." The assessee had surrendered/declared extra income of Rs. 12,000 as unrecorded goods, which was included in the assessed income as income from undisclosed sources. 4(a) The CIT(A) considered the submissions made on behalf of the assessee as well as by the AO. The AO highlighted the relevant facts and findings given by him in the assessment order. The gist of arguments advanced on behalf of the assessee and the findings given by the CIT(A) in paras 15 and 16 of his order for asst. yr. 1990-91 in the case of aforesaid assessee are reproduced hereunder: "15. At the time of hearing of the appeal, learned counsel Shri Jain submitted that for years together, assessee has been purchasing materials fromBombay,Surat,Amritsarand Ahmedabad and other places. These four cities are pioneer in textile manufacturing and business. Assessee is at mercy of the manufacturers and wholesale commission agents ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Learned AO computed investment of Rs. 42,500 in the initial purchases of the merchandise. Learned counsel Shri Jain submitted that there is no initial investment inasmuch as the lots were received on credits. Payments were made after the sale of produce. It was also contended that their practice of credit purchases is proved by assessee account which reflected that it has been transacting this business in similar manner along with other parties. Learned AO proceeded in a presumptive manner. At the same time, it is difficult to accept the contention of the learned counsel that there was no basic investment. Even if the assessee did not pay to the seller, it had to undertake transport charges, payment of octroi, etc. from its own coffer. Considering the entire gamut of case, I am of the opinion that estimate of investment @ 2 per cent on total unrecorded purchases were Rs. 6,460 (3,23,000 x 2/100). Learned AO has made addition of Rs. 42,500. Appellant gets a relief of Rs. 36,040. This ground is partly allowed." 4(b). The CIT gave the following findings in relation to addition made on account of profit on unaccounted sales of the unrecorded bales of cloth in asst. yr. 1990-91: "1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A) has erred in confirming the price of unrecorded bale of cloth as determined by the AO as against the estimate of purchase price submitted by the assessee for the purpose of working out the addition on account of unexplained investment made for purchasing the unrecorded bale of cloth [such as the CIT(A) has erred in confirming the price at Rs. 8,500 instead of Rs. 6,500 of each unrecorded bale in asst. yr. 1990-91 in the case of Ram Piyare Satish Kumar]. Gist of various grounds raised by the Revenue in the cross-appeals relating to main issue in cases of these assessees 7. The grounds raised by the Revenue in their appeals in the cases of these assessees for the various years in relation to the aforestated main issue can be briefly stated as under: (a) The CIT has erred in deleting a substantial part of the addition made by the AO in respect of unexplained investment made for unrecorded purchases [such as the CIT(A) has erred in deleting the addition of Rs. 36,040 out of addition of Rs. 42,050 made by the AO in the case of Ram Piyare Satish Kumar in asst. yr. 1990-91] by directing the AO to restrict such addition only to the extent of only 2 per cent of the total amount of un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... common practice prevailing in the entire market and is also against the observation made in para 14 of the assessment order, where the AO has observed that assessee makes the payment roughly after a period of 7 to 10 days. The addition made by the AO was, therefore, wrong and unjustified. 8.2. The learned counsel further submitted that the representatives of the Rohtak Wholesale Cloth Mercantile Association and the assessee dealers discussed the matter with the AO, CIT, Chief CIT and Member, CBDT on several occasions. After discussions, all the concerned dealers (appellants/Respondents) submitted their revised returns in which reasonable and adequate amount of profit on such unrecorded transactions were included in conformity with such discussions. The AO, therefore, ought to have accepted the income shown in the returns/revised returns submitted pursuant to such discussions. The learned counsel also submitted copies of letters dt.22nd Feb., 1993, and28th Dec., 1992, submitted by the Association to the CBDT. 8.3. The learned counsel placed reliance on the judgment of Hon'ble Allahabad High Court in the case of Ashok Kumar Rastogi vs. CIT (1992) 106 Taxation 30 (All) to support ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ition of unexplained capital made by the AO. In the present case, the AO has given the datewise details of unrecorded purchases in the respective assessment orders. The assessee have admitted the fact of making such unrecorded purchases. He further submitted that all payments for such unrecorded purchases have been made in cash in violation of the provisions of s. 40A(3). The AO could make addition of entire amount of unrecorded purchases. But he has been extremely fair and reasonable in making addition of the purchase price of peak purchase made on any one day. The CIT(A) ought to have confirmed the entire addition made in respect of unexplained investment for purchase of unrecorded cloth bales and he also ought to have confirmed the addition made in respect of profit on such unrecorded turnover. 10(a). We have carefully considered the submissions made by the learned representatives of both sides. We have also gone through the orders of the learned Departmental authorities and have also perused all other documents to which our attention was drawn during the course of hearing. (b) It was the common contention of the learned representatives of both sides that it will be sufficie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yr. 1990-91 has inter alia given the following findings; "on the whole my impression is that the assessee makes a payment roughly after a period of 7 to 10 days for the purchases so made by him". The AO has further observed in the same para that circulation of the unrecorded stock would be faster. Keeping these facts in view, the AOs has taken the peak quantity of unrecorded bales of cloth purchased on any one day for working out the amount of unexplained investment made for such unrecorded purchases. 22.3 It may be relevant and imperative to examine the ratio of capital employed on the recorded turnover accounted for in the books of accounts. A perusal of the balance sheet of Ram Piyare Satish Kumar as on31st March, 1990reveals the following position of capital employed by the partners in the said firm: Name of the Partner Opening Capital Share of Profit Withdrawals Closing Balance(2+3 - 4) 1 2 3 4 5 Satish Kumar 82,075 29,363 18,430 93,008 Harish Kumar 91,235 29,363 13,490 1,07,108 Smt. Vidyawanti 97,950 20, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the ratio of capital required for unrecorded purchases may be lower as compared to ratio of capital employed on the recorded turnover. The argument of the learned counsel that CIT(A) by sustaining the addition to 2 per cent of the total unrecorded turnover by way of unexplained investment has disallowed the entire expenses for freight and octroi, is also not tenable, as such an addition has been sustained by the CIT(A) in respect of unexplained investment required for making such unrecorded purchases and direct expenses like freight and octroi, etc. incurred in relation to such purchases. (g) In view of the aforesaid facts and discussions and in view of the elaborate reasons given in the orders of the CIT(A), we are of the considered opinion that the CIT(A) has rightly directed the AO to sustain the addition in respect of unexplained investment at 2 per cent of the total value of unrecorded sales of the unrecorded goods purchased by the assessee. We do not find any justification in interfering with the finding given by the CIT(A) in this regard. (h) The next submission made on behalf of the assessee is that the CIT(A) has erred in confirming the price of unrecorded cloth bale @ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs. 8,500 per bale. Thus net addition of Rs. 2,765 was made under this head. The CIT(A) has observed that the assessee disclosed profit of Rs. 15,000 on unrecorded sales. It was argued on behalf of the assessee that AO has adopted higher G.P. rate of 5.5 per cent. This shows that it was incorrect on the part of the AO to state that the assessee had himself declared the profit of Rs. 15,000 on the basis of profit rate of 5.5 per cent on 38 bales valued @ Rs. 7,500 per bale. The profit of Rs. 15,000 appears to have been shown on an ad hoc basis. The CIT(A) deleted the said addition of Rs. 2,765 (17,765 - 15,000). We have considered the submissions made by the learned representative of the parties. The sale value of 38 bales @ Rs. 8,500 per bale comes to Rs. 3,23,000. The profit of Rs. 15,000 declared by the assessee works out to 4.6 per cent. The assessee has declared G.P. rate of 4.01 per cent on the recorded sales. In our view, the CIT(A) has, therefore, rightly deleted the addition made in the declared profit on suppressed sales amounting to Rs. 2,765. The facts in all other cases are stated to be almost similar. Therefore, we are of the view that in all cases, where the CIT(A) ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ustained an addition of Rs. 9,367 in the case of Harbans Lal Harminder Pal (ITA No. 459/Del/94) for asst. yr. 1990-91. In this case also, the CIT(A) has sustained the same, as the AO has worked out the addition on the basis of G.P. rate declared by the assessee on recorded turnover, which, in our view, is justified. We are, therefore, of the opinion that the CIT(A) has sustained such part amount of addition in such cases after a very careful consideration of all the relevant facts and circumstances. We do not find any justification in interfering with the view taken by him in relation to such grounds raised in various appeals by the assessee. (k) In some of the appeals, the assessees have raised some more grounds relating to the main issue relating to unrecorded purchases of cloth bales. It has been mentioned that the AO has erred in determining the total number of unrecorded bales. The AO has not confronted the assessee with the material gathered behind the back of the assessee. There is no evidence on record to prove that the assessee made such unrecorded purchases as alleged in the assessment order. Mr. Sharma, the learned counsel for the assessee did not dispute the factual ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenses 17,669 3,000 1,000 2,000 .It was contended by the learned representatives that petty disallowances in similar manner were made in few other cases. The CIT(A) after considering relevant facts and details of each such disallowances has decided such grounds by granting relief in respect of some disallowances and confirming the remaining disallowances. (b) After considering the submissions made by the learned representatives of the parties and after going through the orders of the learned Departmental authorities. We are of the considered opinion that the CIT(A) after a careful consideration of the relevant facts, details, nature and quantum of disallowances made out of various expenses, has arrived at a proper and justified conclusion. We do not find any justification in interfering with the view taken by the CIT in relation to such disallowances out of expenses in all relevant appeals under consideration. The various grounds raised in the appeals by the assessee and by the Revenue in all the concerned cases with regard to disallowances out of various expenses have no merit and are accordingly rejected. 12(a) The next common ground raised ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tional Forest Co. vs. CIT 1975 CTR (J K) 88 :(1975) 101 ITR 721 (J K); (b) J.A. Trivedi Bros. vs. CIT (1985) 47 CTR (MP) 48 : (1986) 158 ITR 705 (MP); (c) Umer (Md.) vs. CIT 1975 CTR (Pat) 13 : (1975) 101 ITR 525 (Pat) and (d) B.F. Verghese (No. 2) vs. State ofKerala(1969) 72 ITR 726 (Ker). After considering the facts and circumstances and the settled legal position, the addition is deleted. Appellant gets a relief of Rs. 5,000. This ground is allowed." In asst. yr. 1991-92 and asst. yr. 1992-93, the CIT(A) deleted the said additions of Rs. 5,000 and Rs. 27,580 by following his order in assessee's case for asst. yr. 1990-91. (e) The learned Departmental Representative relied upon the reasons mentioned in the assessment orders and submitted that the CIT(A) ought to have confirmed the trading additions made by the AO in all the cases. The learned counsel submitted that all these dealers have maintained proper books of account. The entire purchases and sales are supported by vouchers. The assessees had also maintained quantitative details. It was not possible to maintain qualitywise day-to-day stock records. He submitted that assessees have surrendered profit on suppressed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er s. 234B/234C. The CIT(A) has directed the AO to grant consequent relief. No arguments were advanced by the learned counsel for the assessee in relation to such grounds. Even on merits, the grounds so raised by the assessees have no merit. The provisions of s. 246 do not provide for any appeal against levy of interest under s. 234B, 234C, etc. The appellants have not shown as to how can they deny their liability to be assessed in respect of such interest in toto. Therefore, in our view, such grounds raised by assessees in the concerned appeals have no merit and the same are accordingly rejected. 14. In the case of Rampal Richhpal Kashmiri Lal for asst. yr. 1991-92 (ITA No. 4142/Del/94), the assessee has inter alia, raised a ground that the CIT(A) has erred in giving direction to add Rs. 28,000 as surrendered income which is already included as per income computed in para No. 12 of the assessment order. After going through the orders of the learned Departmental authorities, we consider it just and proper to direct the AO to verify this fact and give credit of the said sum of Rs. 28,000 shown as extra income (profit) on suppressed sales, by the assessee himself, if such credit ha ..... 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