TMI Blog2003 (7) TMI 284X X X X Extracts X X X X X X X X Extracts X X X X ..... ch the assessee admitted undisclosed income of Rs. 135 lakhs under s. 132(4) of the Act. Subsequently, the disclosed income was enhanced to Rs. 1,43,21,000 vide an undated letter filed with the Asstt. Director of Income-tax (ADI) (Inv.), Unit-1(4). Subsequently, at the time of filing returns for the block period, the assessee scaled down the disclosure to Rs. 1,41,02,000 for the entire group. The AO, in the block assessment proceedings for the block period 1st April, 1987 to 24th Oct., 1997, accepted the returns filed by the assessee. Subsequently, the internal audit wing of the Department raised certain audit objections on these completed assessments. Based on these objections, learned CITs, i.e., CIT-3 as well as CIT-4, issued show-cause notices to three of the assessees from out of this group under s. 263 of the Act. The main issue for the internal audit objection as well as the issuance of notice under s. 263 was, as to whether in the case of unrecorded sales, the entire sale figure has got to be taxed or whether a percentage of the sale figure is to be brought to tax as undisclosed income. The AO accepted the contentions of the assessee that a percentage of the unrecorded sale ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... port submitted by the ADI and approved by the ADI (Inv.), as well as the searched material, thought it fair to accept the disclosure made by the assessee-group, and after due approval from the Addl. CIT had completed the assessments. He argued that four (4) Revenue officials have concurrently vetted the disclosure made by the assessee and examined the case and gave their approval. He submitted that this is one of the rarest of the rare cases where in block assessment, the return filed by an assessee was accepted in toto. The monitoring by Addl. CIT when the assessment proceedings were under progress, he argued, shows that the decision taken in the assessment order was a considered decision and reopening the same under s. 263 is bad in law. 7. Arguing on the revision of the assessment order in the case of Aashraya Housing Corporation of Hyderabad, he submitted that as in the earlier case, the only issue is whether the entire undisclosed turnover should be taken as income or whether a percentage of this undisclosed turnover found during the course of search would be taken as undisclosed income. He submitted that explanations were furnished in a common letter. Out of the undisclosed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... consists of the letter addressed by Kwality Electronic Industries to the Asstt. CIT, Circle 6(1), dt. 6th Feb., 2003, and submitted that only a portion of the undisclosed turnover would be the undisclosed income of the assessee. 9. The learned counsel vehemently contended that both the investigation wing of the Department as well as the AO, have made elaborate enquiries and have given a considered possible decision, thus precluding the CIT from interfering by invoking s. 263 of the Act. He moved, a motion before this Bench to call for the assessment records and to examine the order sheet and submitted that such an examination would reveal that the ADI(Inv.), who had conducted search operations was consulted by the AO during the course of assessment proceedings. He submitted that as the assessment order was passed after due consultation with the investigation wing of the Department, it cannot be said that a bald order is passed without examination of material on record. He filed a paper book (No. III) wherein he relied on 21 judgments for the proposition that the orders under s. 263 are not in accordance with law. He filed yet another paper book, consisting copies of eleven (11) j ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re to be satisfied as per this apex Court decision, for justifying the invocation of s. 263 of the Act. He referred to the assessment orders and submitted that the AO has not completed the assessment by examining search material or examining the claim of the assessee that a percentage of the unrecorded receipts and sales has to be taken as undisclosed income. He submitted that there is no application of mind whatsoever by the AO independently, and heavy reliance was placed on the appraisal report and thus the CITs were perfectly justified in invoking their powers under s. 263. Referring to the argument that order under s. 263 travels beyond the show-cause notice, he submitted that when the assessee is given ample opportunity of being heard, the question of order under s. 263 becoming bad for the reason that it travels beyond the show-cause notice does not arise. Coming to the argument of the learned counsel for the assessee that the matching concept of undisclosed income with investment has been adopted, he submitted that the investments were only what was stated by the assessee and no independent exercise was done by the AO. 12. He further relied on the following judgments: (1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . He concluded his arguments by submitting that the block assessment orders are speaking orders. 14. Heard both sides, read all the papers on record and the orders of the authorities below. Though a catena of case-laws has been relied upon by both the parties before us, the principles of law with regard to application of s. 263 have been laid down by the Hon ble Supreme Court in the case of Malabar Industrial Co. Ltd. vs. CIT (2000) 159 CTR (SC) 1 : (2000) 243 ITR 83 (SC). The Hon ble Supreme Court, at p. 83 ibid observed as under: "A bare reading of s. 263 of the IT Act, 1961, makes it clear that the prerequisite for the exercise of jurisdiction by the CIT suo motu under it, is that the order of the ITO is erroneous insofar as it is prejudicial to the interests of the Revenue. The CIT has to be satisfied of twin conditions, namely, (i) the order of the AO sought to be revised is erroneous; and (ii) it is prejudicial to the interests of the Revenue. If one of them is absent if the order of the ITO is erroneous but is not prejudicial to the Revenue or if it is not erroneous but is prejudicial to the Revenue, recourse cannot be had to s. 263(1) of the Act. The provision cannot be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble and one view has been taken by the AO, and the CIT does not agree with him, this cannot be treated as erroneous order prejudicial to the interests of Revenue; (f) When the view taken by the AO is unsustainable in law then it can be considered as erroneous order prejudicial to the interest of Revenue. 15. We would apply the above principles laid down by the apex Court, to the facts of each of these cases and examine whether the CITs were right in invoking their powers under s. 263 of the Act. The group cases are peculiar for the reason that the returned income had been accepted in toto by the AO. The appraisal report has been made part of the assessment records. The ADI (Inv.) was present during the assessment proceedings and has participated and contributed to the assessment process. Both the DDI and Addl. CIT approved the views of the ADI (Inv.) as well as the AO. Though it is unusual for the ADI (Inv.) to be present and the appraisal report to be made part of the assessment order, we have no other alternative than to consider these facts while arriving at a decision in this regard as these facts are part of assessment records. The seized material is stated to have been re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t even bifurcated the on-money receipts and income assessment year-wise with reference to the seized material and the tabulation has been made of the undisclosed and disclosed income at the end of the assessment order without any basis. There is no discussion in the assessment order as to how the tabulation is done. No enquiries have also been conducted regarding the on-money receipts and the payments collected. Further, although there was material with the AO that several flats were taken by the partners at a low value and advances were made towards development of land at Amberpet, the AO has not dealt with these issues also in the body of the assessment. II. Shri K.C.K.A. Gupta 7(iv) In the present case, as stated above, a search was conducted by the Department during the course of which certain material was found and also seized, which clearly indicated that the assessee had made undisclosed transactions outside the books of account. From the order of assessment, it is very clear that the AO has not made further enquiries into the search material gathered and the documents seized from the assessee. Although the AO has estimated the income at 10 per cent of Rs. 40 lakhs, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessment order passed by the AO suffers from several infirmities as discussed above, I have reasons to believe that the block assessment order passed by the AO was both erroneous and prejudicial to the interests of Revenue. Therefore, to safeguard the interests of Revenue, the block assessment order passed by the AO is set aside for making the assessment de novo. The AO is directed to examine the seized material and other documents and material available with him and frame a fresh assessment in accordance with law after giving a fresh opportunity of hearing to the assessee. III. M/s Kwality Electronic Industries 4.6.4. In the instant case, being a search case, it is moreso on the part of the AO to make inquiry into the disclosures made by the assessee either during the course of search operations or while filing the return or during the course of assessment proceedings. It is clear that the case calls for inquiry when the assessee did not furnish any particulars or analysis on the basis of which the undisclosed income was admitted. Not even a single instance of examination of the seized material was brought on record. The fact that the AO had merely adopted the undisclosed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t in assuming jurisdiction under s. 263 and if not, the order has to be vacated. 18. Before us the learned counsel for the assessee relied on the following judgments: (a) CIT vs. President Industries (2000) 158 CTR (Guj) 372 : (2002) 258 ITR 654 (Guj) (b) V.V.S. Alloys Ltd. vs. Asstt. CIT (2000) 68 TTJ (All) 516 (c) Smt. Sangeeta Goel vs. Asstt. CIT (2002) 122 Taxman 121 (Chd)(Mag) (d) Agrawal Motors vs. Asstt. CIT (2000) 66 TTJ (Jab) 130 : (1999) 68 ITD 407 (Jab) (e) Sunder Agencies vs. Dy. CIT (1997) 59 TTJ (Mumbai) 610 : (1997) 63 ITD 245 (Mumbai) 18.1 The Hon ble Gujarat High Court in the case of CIT vs. President Industries Ltd., in its headnote held as follows: "Undisclosed income Survey in premises of assessee Excise records Undisclosed godown sales found No finding that investment was made from source outside books in acquiring goods sold Addition cannot be of entire sale proceeds Only profits embedded in sale proceeds can be taxed IT Act, 1961, s. 256(2)." The Allahabad Bench of the Tribunal in the case of VVS Alloys Ltd. vs. Asstt. CIT held as per the head-note, as follows: "Search and seizure Block assessment Computation of undisclosed income Loose pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oes forward and backward and may sometimes be drawn. In the instant case, it is shown that the assessee was charging on-money/premium in relation to booking of flats. However, the entire receipts on account of on-money/premium charged by the assessee on booking of flats cannot be the undisclosed income of the assessee for the block period because the AO had not proved by bringing any material on record that the assessee did make any investment to make the alleged unaccounted receipts/sales of Rs. 1,58,59,400. In this view of the matter only net profit rate can be applied on unaccounted sales/receipts for the purpose of making the addition. Since net profit rate in the asst. yrs. 1995-96 and 1996-97 included in the block assessment comes only to 1.31 per cent as per the figures given by the assessee which has not been disputed by the Revenue at the time of hearing, the addition on account of undisclosed income is much less than the undisclosed income of Rs. 30 lakhs offered by the assessee himself in the return filed in response to notice under s. 158BC, the AO was not justified in making further addition of Rs. 1,58,59,400 which is directed to be deleted ITO vs. Gurubachansingh J. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the CIT to exercise the power of revision under this sub-section, viz., (i) the order should be erroneous; and (ii) by virtue of the order being erroneous prejudice must have been caused to the interest of the Revenue. An order cannot be termed as erroneous unless it is not in accordance with law. If an ITO acting in accordance with law makes certain assessment, the same cannot be branded as erroneous by the CIT simply because, according to him, the order should have been written more elaborately. This section does not visualise a case of substitution of the judgment of the CIT for that of the ITO, who passed the order, unless the decision is held to be erroneous. Cases may be visualised where the ITO while making the assessment examines the accounts, makes enquiries, applies his mind to the facts and circumstances of the case and determines the income either by accepting the accounts or by making some estimates himself. The CIT, on perusal of the records, may be of the opinion that the estimate made by the officer concerned was on the lower side and left to the CIT he would have estimated the income at a higher figure than the one determined by the ITO. That would not vest the CI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ITO to re-examine the matter. That was not permissible. The Tribunal was justified in setting aside the order passed by the CIT under s. 263." From this judgment it can be seen that the CIT, simply because, according to him the order should have been written very elaborately, or the view of the CIT should be substituted for that of the AO, cannot invoke the powers under s. 263. So the argument that the issues have not been elaborately discussed in the assessment order, does not appeal to us. The argument of the Revenue that there is no application of mind also does not appeal to us, because, more than one Revenue official have taken part in the assessment proceeding. 20. It is seen from the assessment records that the assessee M/s Aashraya Housing Corporation has along with the return of income submitted a covering letter wherein, at p. 4 vide paras (vi), (vii), (viii), (ix), (x), (xi) and (xiii), it was claimed as under: (vi) In respect of such advances received and not recorded in books, a view- point was expressed that it shall fall for consideration under s. 68 of the IT Act, 1961. It is our submission that such a view is not warranted. (vii) It is not proper to concei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... estimated at 26.44 per cent, Rs. 42 lakhs as undisclosed income. (xiii) It may kindly be appreciated that the said undisclosed income earned by the firm and computed for the block period assessment is available to the partners for the subsequent investments in the assets that were possessed by the partners of this firm. The summarised chart with the working how the income of Rs. 42 lakhs is computed in this regard is enclosed in separate annexure." 21. In the appraisal report, which is already made part of the assessment record by the AO and hence has to be necessarily taken as part of the assessment record, as it is relied on by the AO, this issue finds mention in p. 34 under the head construction of flats and other activity in real estate which reads as under: "1. During the course of search proceedings, the contents of Annex. MVR/A/1, ARPL/A-I/1, ARPL/A-I/7 which are the ledgers reflected total of accounted and unaccounted receipts, the computer statement showing total receipts of Rs. 6.06 crores as well as Annex. ARPL/A-I/8 and ARPL/A-I/12 reflecting payments received towards extra works were put forward to the assessee-group and they were questioned regarding the same ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eport which is part of the assessment record shows that there is an analysis of the seized material and an impression was formed on the basis of this material. Records reveal that there is a year-wise computation of undisclosed income. 23. On a close examination of these issues we do not think that this is a case of wrong assumption of facts by the AO leading to his decision to accept the contention of the assessee that a percentage of turnover is to be taken as the undisclosed income. The appraisal report, seized material, as well as assessment record are full of information on the fact of receipt of unaccounted money and the assessee has made a conscious claim along with the return of income, offering 26.44 per cent as the undisclosed income on these receipts. As this is not an impossible view to take, we do not propose to go into the merits of the argument of the learned counsel for the assessee that he had offered 26.44 per cent as against 8 per cent prescribed under s. 44AD of the Act, as a percentage of profit has no bearing on the principles involved in this issue. The CIT has in her order under s. 263, termed the on-money receipt as "sales". The other ground on which the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from order of Tribunal IT Act, 1961, Chapter XIV-B." Thus, the AO has examined the claim of the assessee and has adopted a permissible course of law, which cannot by any stretch of imagination be called untenable. Hence, we have to necessarily cancel the orders of the CIT-4, Hyderabad, dt. 22nd March, 2002 under s. 263 in the case of Aashraya Housing Corporation and restore the order of the AO. 24. Coming to the case of K.C.K.A. Gupta, the view taken by the AO that a percentage of undisclosed sales should be considered as undisclosed income is not an impossible view as discussed in detail in the case of M/s Aashraya Housing Corporation and thus cannot be a ground to invoke s. 263 of the Act. In this case also, a perusal of the assessment records reveals that the assessee has filed a letter along with the return of income. At p. 4 of this letter, the assessee claims that the information seized during the course of search is truncated and that it cannot be correlated or identified with precision for any conceivable working. At p. 6, the net assets method of computation has been adopted and balance offered for taxation. In the letter filed along with the return of income, the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t undisclosed income is also based on net assets method. Income is generally arrived at based on income method or net asset method . In this case, the latter method seems to have been applied as the entire information is admittedly not available. The AO has been referring in his order, to the disclosure made by the entire group and no specific enquiry seems to have been made on this issue of total undisclosed sales in this assessee s case. But as the methodology of arriving at undisclosed income adopted by the AO being net assets, we feel that the reopening of the assessment on some other ground, i.e., not taking the entire unaccounted sales, as income, does not stand to reason as the assessment was not based only on this. It cannot be said that adoption of net assets method is an impossible view. This is a permissible view. The letter for approval sent by the AO to the Addl. CIT, Range-2, Hyderabad, demonstrates that the AO applied his mind and took a conscious decision to estimate the undisclosed income based on investments made. Para 2 of this letter, written by the AO to the Addl. CIT, Range-2, Hyderabad, on 27th Oct., 1999 is reproduced below for ready reference: "It may ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he order under s. 263 has to be examined along with one more angle raised by the learned CIT-3, i.e., addition under s. 69. The learned CIT-3, at para 4.5 at p. 6 of his order held as under: "It cannot be denied that only income arising out of business transactions should be taken for taxation. The assessee has been pointed out with the unaccounted for sales of Rs. 17,93,000 (Molywire and LEDs, etc.), Rs. 21,45,000 (raw materials like Ag Plaste, etc.) The assessee did not deny these transactions. The assessee did not categorically say that the purchases with respect to these unaccounted for sales have been accounted for. The unaccounted for sales comprises of mainly two components, viz., cost of goods including incidental expenditure and profit. No doubt, the element of profit is only to be assessed. But, if the cost of goods including incidental expenditure is met outside the books of account, it becomes an unexplained investment, which is also assessable under s. 69 of the IT Act. Hence the entire sale proceeds are assessable in the instant case. However, this can be done only on due verification which was not done while making the assessment." 29. A plain reading of this par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mission consumables and other expenditure. (d) All the above aspects of the transactions that are obtaining in the seized records pertaining to the group concerns viz., (a) M/s Kwality Electronic Industries (b) M/s Kwality Electricals (P) Ltd., (c) M/s National Sales Corporation (d) M/s Kalyan Enterprises and (e) M/s Keletronix have been viewed in totality since they relate to the group of the concerns who are searched and the individuals who have the association with them. On a reasonable analysis of the seized material pertaining to the respective areas and the nexus of the concerns to the transactions based on the probability of the user and the outgo and their impact a further amount of undisclosed income of Rs. 34.12 lakhs had duly been computed for being considered as undisclosed income. The ultimate beneficiary of this undisclosed income is the partnership-firm M/s Kwality Electronics and therefore, the entire undisclosed income is computed in the hands of the firm M/s Kwality Electronics. (e) Thus, the undisclosed income of the firm M/s Kwality Electronics Industries had duly been reckoned at Rs. 48.40 lakhs." 30. The AO at para 3 held as follows: "The material foun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for. Otherwise, the gross profit percentage would be negative. Thus, looking at it from any angle, only "profit" element can be brought to tax and as the CIT himself said so in his order, no s. 263 order can lie on this ground. 33. Learned counsel for the assessee stated that the entire group was taken as a unit and the disclosures were based on a wholistic view. It was his argument that when a group is considered as a whole, only a few files in the entire group cannot be picked up and assessments set aside. On a verification of the assessment files and the records we find that this claim is true. This factual position is evident from the reports of the investigation wing as well as the assessment wing. The AO s correspondence points to the fact that the entire group was considered as a whole, and that the entire exercise of disclosures and assessments were based on the group-as-a-whole concept. But in taxation laws, each assessment order is a unit by itself and while examining the legality of the same, such considerations, though taken into account by the Revenue, cannot be the basis of examining the validity or otherwise of the order under s. 263. Thus, we reject this argument ..... X X X X Extracts X X X X X X X X Extracts X X X X
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