TMI Blog2014 (8) TMI 63X X X X Extracts X X X X X X X X Extracts X X X X ..... l the years by adopting rate at 5%, for the AY 2001- 02, 2002-03, 2003-04, the profit is to be calculated by adopting net profit rate at 5.2% - Decided partly in favour of Revenue. Unaccounted transactions of cash purchases Disallowance u/s 40A(3) Held that:- The transaction being not a purchase and sale of the assessee in his own rights, there was no question of disallowance of any expenditure because the profit was declared on estimation - hence, the provisions of Section 40A(3) was not to be attracted relying upon Commissioner of Income-Tax Versus Hynoup Food And Oil Ind. P. Limited [2005 (2) TMI 99 - GUJARAT High Court] the issue of the applicability of the provisions of Section 40A(3) is to be decided on the merits and facts of this case only - even after the search was carried out there were no evidence of expenditure and the AO was not able to lay hands on unaccounted purchases - Because the evidence of total expenditure or purchases was not available to the Revenue, the assessee as well as the AO, both have decided to determine the income by applying a reasonable estimate of profit the estimation was very close to the income offered by the assessee Decided aga ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sequence upon a search four kaccha note books marked as Annexure A/2, A/3, A/5 and A/8 were seized. It was found that the assessee was daily recording cash transactions which were stated to be as follows: (i) Accounted purchases (ii) Accounted sales, (iii) Accounted expenses, (iv) Unaccounted purchases, (v) Unaccounted sales, (vi) Unaccounted expenses. 2.1 According to AO, in those kaccha note books the assessee had shown the accounted transactions, which were duly found recorded as per the original return filed. However, it was also noted that there were certain unaccounted transactions which were not recorded in the regular books of account. Therefore, after the search in addition to the income as per original return, the return filed in compliance of notice u/s.153A the unaccounted transaction was also offered of ₹ 14,85,000/-. The assessee had adopted an estimation of profit @ 5% on the unaccounted cash sales of ₹ 2,96,89,000/-. Those accounted cash sales were also found recorded in the seized kaccha note book . The AO was not in agreement with the estimation of income @ 5% applied on the unaccounted cash sales. The AO has given the follow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The submissions of the assessee in that regard were accepted. There was one more observation of the learned CIT(A) that during the course of search there were no evidence of unaccounted sale invoices, purchase bills, stock register, creditor/debtor register. Even no excess stock of coal was found at the time of search. For the said reason, the explanation of the assessee was that there was unaccounted commission income only because the assessee has also earned commission income as a commission agent. Further more learned CIT(A) has also referred few findings on facts as under: 9B. The appellant has pointed out that the method adopted by the AO to determine profits / income from the entries in the seized diaries was inherently defective and unscientific, in absence of vital details. Thus, going by the AO's computation, the profit ratio has plummeted from 5.44% in A.Y. 2001-02 to the negative figure of (-)2.87% in A.Y. 2002-03. Further the positive income, as per the AO, during the entire period, pertaining to A.Y. 2001-02 to A.Y. 2007-08, on the basis of these seized diaries, comes to a total of ₹ 63,20,466/-, whereas the appellant in the statements / returns had disc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t would be appropriate to confirm the income for these assessment years as disclosed by the appellant. In respect of A.Y. 2001-02, A.Y. 2002-03, A.Y. 2003-04 and A.Y. 2007-08, it would be appropriate to compute income at the G.P. rate of the appellant, on regular sales in these assessment years. Accordingly, the income for these years is worked out as under:- 4. From the side of the Revenue, learned CIT-DR, Mr. Subhash Bains has appeared and pleaded that this issue is to be decided along with the issue as raised by the Revenue Department in ground no.1, related to disallowance by invoking the provision of Section 40A(3) of IT Act. His vehement contention was that the AO himself has taken a very reasonable approach in determining the year-wise profit of the assessee. This action of the AO was basically because of a reason that he was keeping in mind the other substantive addition to be made under section 40A(3) of IT Act. He has, therefore, pleaded that in a situation when the AO himself has adopted a reasonable working of profit, then there was no justification to disturb the same by learned CIT(A). 5. From the side of the respondent-assessee, learned AR, Mr. Tushar P. H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ay wagons has directly been purchased and also delivered to the buyers and on such direct sales the assessee received only 5% commission offered on estimation. To corroborate the correctness of the disclosure of 5% income, the assessee has also raised two pleas to substantiate the claim. One plea of the assessee was in respect of matching the application of unaccounted income towards purchase of domestic articles, etc. The same had tallied with the said disclosed amount. The other plea of the assessee was that the total of the peak credit in those diaries had tallied with the total unaccounted income of the group, declared by the assessee. There is no dispute that through these methods in cases of search an unaccounted income can be determined by applying these two theories, i.e., peak theory or investment theory . These methods are to be applied in a situation when the details of the unaccounted income are incomplete, however, the corresponding investment is available in the seized material. But in the present case, the situation is otherwise because of the primary reason that the seized diaries have not contained the complete details of the unaccounted purchases of coal but si ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d coal stock was unearthed, no assets beyond the income offered was seized and the application of unaccounted income has matched with the assets/expenditure hence the income so offered by and large appears to be reasonable. Still to cover up the difference between the disclosure of 1.07crore and income offered for all the years at ₹ 96,09,883/- by adopting rate at 5%; we hereby hold that for the Assessment Year 2001- 02, 2002-03, 2003-04, the profit is to be calculated by adopting net profit rate at 5.2%. We direct accordingly. In this manner, the Ground No.1 of the Revenue Department and the Cross Objection of the Assessee are hereby partly allowed. 7. Ground No.1 raised by the Revenue for A.Y. 2001-02 to 2007-08 is as under: 1) The ld. CIT(A) has erred in law and on facts and in circumstances of the case in deleting the disallowance of (Rs.55,13,155/- for A.Y.2001-02), (Rs.7,85,099/ for A.Y.2002-03), (Rs.52,65,814/- for A.Y.2003-04) (Rs.44,25,760/- for A.Y.2004-05), (Rs.12,04,180/- for A.Y.2005-06) u/s. 40A(3) of the IT Act made by the Assessing Officer after considering the unaccounted transactions of cash purchases and on relying on directly related judgments referr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T Act. Even, though the profit on such transaction was much less than the percentage offered. It was further submitted as follows: The appellant had acted only as a commission agent / intermediary / facilitator, in respect of the transactions entered in the seized note books. The appellant had not claimed any such expenses / purchases. This aspect was brought out in the note filed with the returns u/s. 153A. The decision reported in 177 Taxman 450, in case of Anand Swarup Khandelwal, was cited to state that once the appellant acted as a bailee of goods/commission agent, the provisions of section 40A(3) would not be attracted. It was also argued that as per judicial decision(s), the provisions of section 40A(3) even otherwise, cannot be considered in assessments u/s. 153A. The decision reported in case of CIT vs. Banwarilal Bansidhar, 229 ITR 229 was also referred to state that once it was considered prudent to estimate profits there was no need to invoke provisions of section 40A(3)/Rule 6DD(j). The other decisions reported in 229 ITR 229 (AIL), 296 ITR 324(P H), 301 ITR 171, 43 TTJ 508 (ABD), 87 ITD 607(Mum.), etc. were also cited. Similarly the jurisdictional High Court in ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs.15,53,775 2007-08 Rs. (-) 21,12,276 Rs.36,083 9. From the side of the Revenue, learned CIT-DR, Mr. Subhash Bains has placed reliance upon the decision of Hon ble Gujarat High Court in the case of Hynoup Food and Oil Industries (supra) and stated that even in the case where unaccounted and undisclosed income was came to the notice of the Revenue Department consequence upon a search, then also the provisions of Section 40A(3) can be applied. Learned DR has also placed reliance upon the decision of Hon ble Apex Court in the case of Attar Singh Gurmukh Singh Vs. ITO, 191 ITR 667 (SC) for the legal proposition that even after the payment were proved to be genuine still it can come under mischief of Section 40(3). Mandatory contravention of Rule 6DD is not explained satisfactorily to the AO. 10. On the other hand from the side of the assessee, learned AR, Mr. Tushar P. Hemani appeared and pleaded that where the income is determined on estimation then no disallowance can be made u/s.40A(3). Case laws cited are as follows: (i) CIT Vs. Banwarlal Bansidhar, 229 ITR 229 (All) (ii) CIT Vs. Smt. Santosh Jain, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r sell data in particular. Details provided in particular format during the search operation was only on the request of the authorized persons. The ld. Assessing Officer had never issued a show cause notice seeking any clarification regarding disallowances being made u/s 40A(3) of the Act, otherwise during the course of assessment proceedings itself, business modus operandi could have been \ explained. Your Honours would also appreciate that even in appraisal report at para 7(iii) while discussing about business modus operandi of the Appellant, it has been categorically mentioned that the Appellant is procuring /wagonloads of coals and the wagonloads are sold directly to many parties at a good commission. Copy of the relevant extract of the appraisal report is annexed hereto and marked as Annexure A to this additional submission. 11.1 In those circumstances, we have examined the case laws referred by both the sides. In one of the decision cited as Anand Swaroop Khandelwal, 171 Taxman 450 (Del.), it was found that the assessee had acted as a bailee and at no point of time found the bullion was passed over to the assessee. In that case, the Revenue Department was not in a positio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sing stock added by the Assessing Officer after considering the seized documents pertaining to assessment year under consideration. Grounds for A.Y.2007-08 raised by the Assessee. 1. Ld. CIT has erred in law and on facts in confirming the estimated total unaccounted income at ₹ 36,083/- for the year under consideration. 2. Ld. C1T(A) has erred in law and on facts in confirming the action of learned AO in levying interest under Sec.234A/B/C/D of the Act. 3. Ld. CI'I'(A) has erred in law and on facts in confirming the action of learned AO in initiating penalty under section 271(l)(c) of the Act without recording mandatory satisfaction as contemplated under the Act. 14. In respect of the closing stock AO in the Assessment Year for A.Y. 2007-08 dated 29.12.2008 passed u/s.143(3) has held that since most of the purchases were made in the month of June and July and there was no sales recorded; hence, according to him the good purchased must be lying in assessee s godown. The AO was of the view that the purchases (- minus) sales was the closing stock must be lying with the assessee. He has computed the value of the closing stock at ₹ 20,02,602/- and t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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