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2015 (5) TMI 849

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..... orded during the course of search and post-search was not sufficient to draw an inference about the alleged undisclosed sales dehors corroborative evidence supporting the third party statements and the entries recorded in the diary found from the possession of the third party during the course of search. - Decided in favour of the assessee. Whether a profit can be estimated without rejecting books of account with this finding that on the basis of the said books of account, proper income cannot be adduced? - Held that:- It is a settled position of law that estimation of profit by applying a reasonable g.p. rate can be adopted and applied only when it is not possible for the Assessing Officer to deduce the profit of the assessee on the basis of books of accounts produced by the assessee. In such a situation, the Assessing Officer will have to afford opportunity of being heard to the assessee to meet out the defects pointed out by the Assessing Officer in the books of account and if the Assessing Officer is not satisfied with the explanation of the assessee to those defects pointed out by the Assessing Officer, then the Assessing Officer will reject the books of account by invoking .....

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..... ially when the closing stock of that assessment year was accepted. In this regard, we find support from the cited decision of Hon'ble Delhi High Court in the case of CIT vs. Om Prakash Mahajan (supra) and in the case of J.M. Wire Industries vs. CIT (supra). The addition of ₹ 6,62,35,000 sustained by the Learned CIT(Appeals) is thus not tenable. The same is directed to be deleted - Decided in favour of assesse. Undisclosed investment - assessee company had paid balance amount to the seller in cash outside the books of account by utilizing unaccounted income - held that:- provisions laid down under sec. 50C of the Act are not applicable in the case of buyer and the valuation report in absence of corroborative evidence in support cannot be the sole basis to arrive at a conclusion beyond doubt that the value shown therein was invested by the assessee to purchase the property in question. It is also an established position of law that a document is reliable or unreliable in its entirety. The Learned CIT(Appeals) was thus not justified in relying upon the valuation report only for the purpose of the value of construction raised on the property shown in the said valuation report. .....

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..... he Learned CIT(Appeals)-XXXI, New Delhi has failed to appreciate that diary marked as Annexure A-I found adnd seized from residential premises of Shri Salek Chand Garg and the statement recorded Shri Salek Chand Garg neither in law and nor on fact could be made a basis to assume that appellant had made undisclosed sales and as such, addition made on the basis of irrelevant and inadmissible evidence is illegal, invalid and unsustainable. 1.2 That the Learned CIT(Appeals)-XXXI, New Delhi has further erred both in law and on facts in upholding the addition without appreciating that trading addition made without rejecting the books of account u/s. 145(3) of the Act is illegal, invalid and therefore, wholly untenable. 1.3 That the Learned CIT(Appeals)-XXXI, New Delhi has failed to appreciate that seized diary from Shri Salek Chand Garg pertains to his own transactions and not to the appellant company and therefore, addition sustained is wholly unsustainable. 1.4 The finding of the Learned CIT(Appeals) that the subsequent statement of Shri Salek Chand Garg recorded in response to summons u/s. 1341 of the Act creates doubts in the mind that .....

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..... the addition made on account of alleged undisclosed profit with alleged unexplained investment and hence the addition so sustained is otherwise too unjustified and, not sustainable. 5. That the Learned CIT(Appeals) has erred both in law and on facts in upholding the levy of interest under sec. 234B of the Act which is not leviable on the facts and circumstances of the case of the appellant company. 4. Ground No.1 of the appeal preferred by the Revenue is general in nature, hence, does not need independent adjudication. 5. Ground No.2 (Revenue ) Ground Nos. 1, 1.1 to 1.5(Assessee): The issue involved in the grounds is as to whether the Learned CIT(Appeals) was justified in restricting the addition of ₹ 4,18,80,000 out of the addition of ₹ 8,37,60,000 made by the Assessing Officer by applying g.p. rate of 5% on the alleged suppressed sales assumed on the basis of a diary seized from third party. 6. The relevant facts are that the assessment order has been framed in pursuance to search carried out at the premises of the assessee company and others on 07.01.2010. The Assessing Officer on the basis of the diary found at the premises of Shri Salek .....

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..... wise details is placed at pages 29 and 30 of Paper Book which have been accepted as such; h) That the sales have been made to the identifiable and verifiable parties and no evidence has been gathered post search to allege unaccounted sales; i) That not a single party has been examined or even attempted to be examined before drawing adverse inference of such a magnitude fastening a heavy demand on the assessee company; j) That books of accounts as maintained by the asessee company stands accepted as such; 7.2 The Learned AR submitted mere substitution of rate based on the diary of third party so as to assume undisclosed sales of the appellant company and as such the figures of ₹ 44.94 crores is undisclosed sales is entirely misconceived, misplaced and untenable. 8. The Learned AR submitted that even the figure of ₹ 38.82 crores is based on hypothetical assumption and presumption. 8.1 It was submitted that the said figure has been arrived by aggregating the figures stated at pages 179 to 183 of Annexure A-I i.e. diary seized from the premises of Shri Salek Chang Garg. 8.2 It was submitted that the revenue before making the impugned addition has not es .....

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..... or sustaining the addition. 8.8 It was thus submitted that the assumption that ₹ 83.76 crores represents undisclosed sales is not in accordance with law and therefore untenable. 8.9 The learned DR in the course of his submission has placed on record tables stating the various figures from the diary if are analyzed then they all indicate that there was unaccounted sales of approximated ₹ 38.82 cores. 9. It was submitted by the assessee that mere inferences cannot be a ground to overlook, reject and discard tangible documentary evidence. It was also submitted that the said inferences are also being drawn on the basis of record of a third party whose testimony was unbelievable as he has himself adopted shifting stands. Reliance was placed on the judgment of Hon ble Apex Court in the case of CIT vs. P.V. Kalynsundaram reported in 294 ITR 49 holding that in which allegations of on money transaction on the basis on non convincing loose sheets found during the course of search and conflicting statement of the seller was there, the addition was rightly deleted by the Tribunal and affirmed by the Hon ble High Court. Moreover it was also submitted that Hon ble Apex Cour .....

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..... 1.2010 is behind the back of assesee and therefore perse the same cannot be relied upon as has been held in the following cases: i) 125 ITR 713 (SC) Kishni Chand Chella Ram v CIT (pages 944-948 of JPB) ii) 288 ITR 345 (Del) CIT vs. SMC Share Stock Brokers iii) 293 ITR 43 (Del) CIT vs S M Aggarwal (pages 896-898 of JPB) iv) 295 ITR 105 (Del) CIT vs. Dharam Pal Prem Chand Ltd v) 303 ITR 95 (Del) CIT vs. Pradeep Kumar Gupta vi) 315 ITR 265 (Del) CIT vs. M/s Jindal Vegetables Products Limited vii) 306 ITR 227 (Del) CIT vs. Rajesh Kumar 9.3 The Learned AR further submitted that, the aforesaid material even otherwise and, in absence of any corroborative evidence found from the possession of the assessee company, cannot form basis for making any addition. In support to its contention, the Learned AR places reliance on the following judicial pronouncements: i) 72 ITD 340 (Mum) D.A. Patel vs. DCIT ii) 40 TTJ 668 (Ind) Brij Lal Rupchand vs. ITO iii) 63 TTJ 532 at 535 (Delhi) S K Gupta vs. DCIT 9.4 The Learned AR humbly submitted further that no evidence has been brought on record by learned Assessing Officer to connect the seized documents with the assesse .....

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..... eported in 37 ITR 271. It has been further held in the following cases that suspicion howsoever strong cannot take the place of proof: a) 37 ITR 151(SC) Omar Salay Mohammad Sait vs. CIT b) 26 ITR 736 (SC) Dhirajlal Girdharilal vs. CIT c) 26 ITR 775 (SC) Dhakeshwari Cotton Mills Ltd. vs. CIT (pages 875-879 of JPB) d) 37 ITR 288 (SC) Lal Chand Bhagat Ambica Ram vs. CIT Learned AR also placed reliance on the judgment delivered by Hon ble Supreme Court in the case of CBI vs. V.C. Shukla and Others reported in 3 SCC 410 (SC) (pages 537-550 of JPB) (arising out of SLP Crl. Nos. 1716 of 1997); wherein it was held that evidence to be used against accused should be evidence acceptable to process of law. An evidence, which is not found in possession of a person, cannot be used against him unless the evidence being used is supported by other concrete evidence. 11. Apart from the above it was submitted that even the gross profit rate adopted at 10% by the learned Assessing Officer and 5% by the learned CIT(A) is without any basis and therefore not tenable. 12. The Learned AR submitted that the declared profit in the instant year as manufacture sales alone is 1.24% (page .....

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..... disclosed sales. 16. Considering the above submissions, we find that the addition of ₹ 8,37,60,000 was made by the Assessing Officer on account of profit on alleged undisclosed sales made by the assessee on the basis of Annexure-A1, a diary containing pages 1 to 191 seized from the premises of Shri Salek Chand Garg at Pitampura, Delhi. The Assessing Officer has also referred statement of Shri Salek Chand Garg recorded on 07.01.2010 i.e. the date of search. The Assessing Officer on the basis of the diary seized from the premises of Salek Chand Garg computed the sales outside the books of account and he noted that profit on sale of the aforesaid amount has not been accounted for in the books of accounts, he estimated the profit by applying gross profit rate at 10% of the sales amount. The Learned CIT(Appeals) has held that the statement of Shri Salek Chand Garg recorded at the time of search was spontaneous, hence, is more reliable and as such transaction recorded in diary belong to the assessee. He, however, held that gross profit rate applied by the Assessing Officer at 10% is excessive and he took the gross profit of assessee @ 5% and deleted the addition of ₹ 4,18, .....

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..... s thereof were not possible as the persons who transact in cash, particulars of that person are not recorded as the same are not required to be recorded. We thus find that in his statement recorded under sec. 131 of the Act Shri Salek Chand Garg has not stated that he has any business connection with the assessee. He stated that transaction recorded in the diary belongs to him and were cash transactions entered with different entities/businessman. He also stated during the assessment proceedings that he never stated that he worked as commission agent for the assessee and transaction recorded in the diary pertained to sale and purchase made on behalf of the assessee. Shri Vijay Pal Garg, director of the assessee in his statement recorded on 16.3.2010 has stated that he does not have any business relation with Shri Salek Chand Garg, however, assessee has business relation with Shri Sawar Mal Goel who sells the goods of the assessee in Bhiwani on commission. It was specifically stated by him that Shri Sawmar Mal Goel collects the payment from the parties and sends the cheques to the assessee and in consideration to the aforesaid, commission was paid to Shri Sawmar Mal Goel by cheques .....

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..... by the assessee. It is also worth noting that the sale is always made between the two parties and once there is no evidence either seized or gathered from the two parties then it would not only be highly improper but also unjust and arbitrary to assume undisclosed sales between the said parties. We are thus of the view that the seized diary during the course of search and the statements of Shri Salek Chand Garg recorded during the course of search and post-search was not sufficient to draw an inference about the alleged undisclosed sales dehors corroborative evidence supporting the third party statements and the entries recorded in the diary found from the possession of the third party during the course of search. The sub-issue No. (i) is accordingly decided in favour of the assessee. 20. Sub-issue No. (ii): The contention of the Learned AR remained that the entire addition is based on presumption. The assessee has maintained complete books of account, which are audited, the goods manufactured and sold by the assessee are excisable and no defects has even been found by Excise Authority. The VAT Authorities have accepted the turnover declared by the assessee. The entire stock fo .....

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..... e addition even by restricting it by applying g.p. rate at 5% against 10% applied by the Assessing Officer. We thus while setting aside orders of the authorities below in this regard direct the Assessing Officer to delete the addition of ₹ 4,18,80,000 sustained by the Learned CIT(Appeals). The ground Nos. 1, 1.1 to 1.5 of the appeal preferred by the assessee on the issue are thus allowed and ground No. 2 of the appeal preferred by the Revenue is thus rejected. 24. Ground Nos. 2, 2.1 to 2.4 (Assessee ) Ground No.3 (Revenue): The Assessing Officer made addition of ₹ 17,69,98,750 on account of unexplained investment in stock. The Learned CIT(Appeals) has sustained the addition to the extent of ₹ 6,62,35,000, thus the parties are in appeals. 25. In support of the ground of the Revenue, the Learned CIT(DR) placed reliance on the assessment order with this contention that the Assessing Officer was justified in making the addition in question on account of unexplained investment in stock with this observation that there was difference of ₹ 17,69,98,750 in the valuation of stock as per bank statement furnished to the bank and the stock as per stock register .....

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..... riminating material has been detected during the course of search to show unexplained investment in stock and the physical stock found during the course of search has been duly tallied with the stock record of the assessee. He submitted that the closing stock as on 31.3.2010 has been accepted as such. The Excise Authorities and VAT Authorities have accepted the stock declared by the assessee company. The books of third party alone cannot be a basis to presume that there was unexplained investment in stocks, particularly when nature of stock was also not known, where it was kept. It is also contrary to the statements of the persons from whose possession diary had been seized by the Revenue. He had also not alleged that he was in possession of any stock of the assessee. 28 The Learned AR submitted further that the Learned CIT(Appeals) was not justified in sustaining the addition of ₹ 6,62,35,000 out of the addition of ₹ 17,69,98,650 made on account of unexplained investment in stock. He submitted that the Learned CIT(Appeals) has held that the stocks as on 1.4.2009 of 1324.70 MT is unexplained investment, which perse is a misnomer. It was submitted that this conclusion .....

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..... exure A-35 9,73,35,111 (page 19 of order) Addition 17,69,98,750- 30. The Learned CIT(Appeals) has dealt with the issue in para Nos. 6.5.1 to 6.5.4 at page No. 30 to 34 of the First Appellate Order while deleting the addition of ₹ 11,69,98,750 out of ₹ 17,69,98,750 made by the Assessing Officer on account of unexplained investment. The Learned CIT(Appeals) has noted the break up of the stocks as declared to the bank and stock register as under: Sr. No. Particulars Amount (Rs.) Stock Register Difference i) Finished goods 1,10,95,230 1,10,95,230 Nil ii) Raw Materials 24,29,50,221 6,59,51,471 17,59,98,750 iii) Stores Spares 2,02,88,410 2,02,88,410 Nil Total 27,43,33,861 9,73,35,111 .....

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..... iii) Ferro Maganese 1 45250 896.00 43.00 853 3,85,98,250 iv) Ferro Silicon-NE 56000 1140.00 140.00 1000 5,60,00,000 v) Copper 278810 68.365 18.365 50 1,39,40,500 vi) Nickle 716000 21.00 11.00 10 71,60,000 Sub Total (B) 17,69,98,750 GRAND TOTAL (A+B) 17,69,98,750 32. The Learned CIT(Appeals) thereafter has held that variation in quantity of raw material of six items was imaginary to obtain credit facility from bank on account of accounts financial crises. He also held that there was no difference in stock on the date of searc .....

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..... e-2 as peak investment in stock worth ₹ 6,62,35,000. The Learned CIT(Appeals) was thus of the view that no addition is called for on the basis of imaginary figure of stock given to the bank where there was no difference found in stock at the time of search, however, peak investment in stock for ₹ 6,62,35,000 is liable for addition. The Learned CIT(Appeals) observed further that the two tables show variation in rates over a period of time. The rates for arriving at peak figure have thus been taken of as of the date on which maximum stock was available. He, therefore, restricted the addition of ₹ 17,69,98,750 on account of undisclosed stock to the amount of peak investment of ₹ 6,62,35,000. We, however, find substance in the contention of the Learned AR against the sustenance of the addition of ₹ 6,62,35,000 made by the Learned CIT(Appeals) that once closing stock as on 31.3.2009 has been accepted in the assessment order framed under sec. 143(3) of the Act, there cannot be unexplained investment in opening stock. In support, the assessee has furnished audited financial statement as on 31.3.2009 as well as assessment order for the assessment year 2009-10. .....

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..... ide the books of account by utilizing unaccounted income for the assessment year under consideration and held the investment as undisclosed investment within the provisions of sec. 69 of the Income-tax Act, 1961. 35. The assessee contended above action of the Assessing Officer with this submission that the Assessing Officer has applied the provisions of sec. 50C of the Act on the buyer, whereas the said provisions will always be applicable on the seller of the property and that of the report shown by the valuer found during the course of search which was meant for submission to the bank to avail the credit facility and without any corroboration. The Learned CIT(Appeals) accepted the contention of the assessee that the valuation report found during the course of search meant for submission to the consortium of banks to avail the credit facilities showing the value of the property at ₹ 2,33,16,750 as on 28.7.2009, cannot be a basis to accept the said value of the property in absence of finding of incriminating papers relating to the transaction of cash or otherwise or any other corroborative evidence to support. The Learned CIT(Appeals) has, however, adopted the cost of cons .....

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..... ; e) 138 ITD 255 (Ahd) DCIT v. Virjibhai Kalyanbhai Kukadia; f) 38 SOT 486 (Ahd.) ITO v. Harley Street Pharmaceuticals Ltd. 38. The Learned AR contended further that valuation report dated 28.7.2009 also cannot be relied upon as admittedly it was for bank purpose and is prior to sale dated 17.12.2009. The fact that the report mentioned that property was under sale ownership is also incorrect, as the property had not vested with the assessee and payment of ₹ 20 lacs was outstanding. The Learned CIT(Appeals) has also noted that the rate of land adopted for valuation at ₹ 90,000 per sq. yd. is not even the rate as per A category whereas property is in D/E Category . Even otherwise, valuation report cannot be made the basis of addition, particularly when books have been accepted and there is no material to disbelieve the sale deed. He placed reliance on the following decision in support: a) 328 ITR 516 (Del) CIT v. Naveen Gera; b) 328 ITR 604 (Del) CIT v. Smt. Suraj Devi; c) 338 ITR 485 (Del) CIT v. Puneet Sabharwal; d) 328 ITR 7 (Del) CIT v. I.P. Chaudhari e) 294 ITR 143 (Del) CIT v. Ashok Khetrapal f) 196 Taxman 415 (Del) CIT v Mahesh Kumar .....

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