TMI Blog2008 (2) TMI 883X X X X Extracts X X X X X X X X Extracts X X X X ..... n that at one place, the AO proposed the estimation at ₹ 90 lakhs i.e. ₹ 10 lakhs per month for a period of nine months and at the other place, proposed ₹ 1.48 crores which shows that the AO was not certain in regard to the addition to be made on account of unaccounted sales for the period of nine months. In our opinion, the addition of ₹ 58 lakhs (corrected figure is ₹ 38 lakhs) made by the AO is arbitrary and unwarranted on the facts and in the circumstances of the case. We, therefore, hold that the no details were available to the AO to arrive at such figure. Had there been any concealed sales for nine months, it could have been detected by the Central Excise authority during their search operation. We are therefore of the considered opinion that the addition made by the AO is purely based on guesswork, presumption and surmises and not on the basis of any material found during the course of search operation by the Central Excise authority. The learned CIT(A) completely failed to appreciate the facts of the case. In our view, such additions based on hypothetical calculation of turnover and estimation of GP on presumption and surmises are not susta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ;ble Gujrat High Court in case of Hasanand Pinjomal vs. CIT [ 1977 (7) TMI 32 - GUJARAT HIGH COURT] . It was held that 40A(3) has been enacted with objective of checking tax evasion and to know whether the transactions are genuine and has been made out of the income from disclosed sources . In the present case, the disallowance under s. 40A(3) has been made by the learned AO out of unrecorded purchases therefore it is not accordingly to law and judicial decisions as stated. In our considered view, the learned CIT(A) has very correctly and judiciously deleted the addition. No interference is called for in the order of the learned CIT(A) in deleting the disallowance made by the AO under s. 40A(3) of the Act. The order of the learned CIT(A) is confirmed and the ground of appeal of the Revenue is dismissed. In the result, the appeal of the Revenue is dismissed. In the result, the appeal of the assessee is partly allowed whereas the appeal of the Revenue is dismissed. - K. S. S. PRASAD RAO J.M. and JUGAL KISHORE A.M. R. S. Khemka D. L. Goenka, for the Appellant. S. C. Baberia, for the Respondent. ORDER K.S.S. Prasad Rao, J.M. : These appeals are f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6. The facts, in brief, relating to this ground of appeal are as under : 6.1 The assessee is a private limited company engaged in the business of running a steel re-rolling mill, trading of iron and steel etc. It came into existence in the year 1989. The assessee filed the return of income on 1st Nov., 2004 declaring total income of ₹ 22,46,038. The assessee maintained the regular books of account and the same were audited under s. 44AB of the IT Act, 1961. The factory premises of the assessee was searched by the Central Excise Department on 10th March, 2004 wherein documents relating to avoidance of excise duty were found, as the concern is engaged in clandestine removal of M.S. ingot and hot re-rolled products as well as non-alloy steel. Consequentially excise duty of ₹ 25 lakhs has also been paid by the concern. On the perusal of the copies of seized documents it was seen that from January, 2004 to March, 2004, the assessee has purchased 346.850 MT of raw material and sold 1133.195 MT of finished products out of books. 6.2 In the return of income filed for the asst. yr. 2004-05, the assessee has shown an amount of ₹ 50 lakhs under the head other income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the fact that unaccounted sales for more than two months detected combined with the possibility that expenses incurred against unaccounted sales have been debited in the P L a/c indicate that the assessee has indulged in such activities in the earlier periods also. The inference from the impounded documents and the time span involved forces one to ponder whether the activities have continued for the period for which the papers have been found or the activities have continued for a longer span. Though at the time of action only papers relating to transactions detailing two months of activities were found. It is beyond the comprehension of human probabilities that the assessee had not engaged itself in out of books trade when a lucrative option of saving both indirect taxes and direct taxes existed. The length of time to which the paper relates also strengthens this assumption. 6.5 The AO relied upon the judgment of Hon'ble Supreme Court in the case of CST vs. H.M. Esufali H.M. Abdulali 1973 CTR (SC) 317: (1973) 90 ITR 271(SC). On this basis as also taking the recording on p. 81 of the seized materials (by the Customs and Central Excise Department) that there was an o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 56 days as detected by another Government Department or else he could have estimated the gross turnover and thereafter applying the GP ratio he can arrive at the figure. The AO has resorted to the later option. I could find in the later option, the AO had both the figures of gross suppressed turnover for 56 days and the ratio as taken by the appellant for the relevant period. I could further observe that the estimation made by the AO is as per the provision of the law. There is no evidence on record to suggest that he has acted capriciously or in a biased manner. So long the estimation is based on material evidence and without any bias, such estimation cannot be questioned. The fact remains that appellant had suppressed its sales for which it has to pay the Central Excise duty. The fact further remains that it has admitted that it has made a concealment for which it has prayed before the adjudicating authority for exoneration from penalty and prosecution. It is also a fact that there was an opening entry by way of old balance, hence, the AO is very much in his jurisdiction to make a reasonable estimate, which he has done in the instant case. On proportionate basis, the suppress ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ied based on GP rate in regular accounts. Further peak investment was also worked out. This total amount estimated with the surplus fund of the company. Therefore, the assessee accounted for the amount of ₹ 50 lakhs as other income. Therefore, it is not correct to conclude that the opening balance was due to unaccounted sale made earlier. He submitted that the Excise Department has estimated unaccounted sales as per loose papers only and have not extrapolated sales beyond that period. He submitted that even the opening balance was not treated as sales by the Excise Department. 8.1 He further submitted that learned AO has estimated the turnover for 9 months (April to December, 2003) at ₹ 9.50 crores based on the turnover of 2.21 crores for two months but adopted ₹ 8 crores on which applied the GP @ 16 per cent on the turnover and worked out income at ₹ 1.48 crores the correct figure comes to ₹ 1.28 crores i.e. ₹ 8 crores @ 16 per cent, which is not correct. 9. Referring to p. 6 of the assessment order, it was further submitted that the AO, at one place proposed the estimation at ₹ 90 lacs (Rs. 10 lacs per month for the period from Marc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee has failed to file return. (b) If the assessee has failed to comply with notice under s. 142. (c) If having made a return fails to comply with all the terms of a notice issued under s. 143(2). He submitted that in assessee's case, return was filed under s. 139(1) and all the compliances were made in terms of ss. 142(1) and 143(2). Therefore the provisions of best judgment defer in sales-tax and income-tax proceedings. 11.2 He submitted that in case of Esufali (supra) it was estimation of turnover whereas in assessee's case it is proposed to go further by estimating income also and that too without any material on records to suggest/estimate any escaped sale or any income resulting from escaped turnover. 11.3 He further submitted that in search conducted by Excise Department, no other loose papers were found to suggest that there was any escaped production or sale before that period i.e. 1st Jan., 2004. He stressed the point that the entire stocks were found in order. 11.4 Arguing further he submitted that if the assessee had made any unaccounted sales before that period the excise authorities would have got some or other materials from assessee's ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... State of Kerala vs. K.T. Shaduli Yusuf 39 STC 478(SC). In view of above facts, circumstances and judicial decisions, he prayed to kindly delete the addition of ₹ 38 lakhs made by the learned AO under presumptions and surmises to the income returned by the assessee. 11.8 He further submitted that the Courts are the guardian of citizens in democratic set up, therefore justice be rendered. 12. On the other hand, the learned Departmental Representative strongly supported the orders of the Revenue authorities. 13. We have considered the rival submissions in the light of the facts and circumstances of the case. We have gone through the records as well as the paper books filed by the assessee. We have also deliberated upon the case law cited on behalf of both the parties. On careful consideration of the facts and circumstances, we find that the action of the AO is based purely on guesswork without any basis. The assessee is in the business of running of steel re-rolling mill and trading of iron and steel etc. since 1989. Regular books are maintained and audited under s. 44AB of the IT Act. Quantitative details are also maintained. A search was conducted on 10th March, 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accept the above explanation. There is no material on record to prove that the assessee has indulged in out of books sales. This assumption is purely based on suspicion without there being any basis. Although the assessee has admitted that it has suppressed sales to the extent of ₹ 2.21 crores only for 56 days during the course of search by the Central Excise Department but there was no such unrecorded transactions prior to 1st Jan., 2004. The learned AO issued a show-cause notice dt. 13th Dec., 2006 asking the assessee to explain as to why a lump sum addition by extrapolation of income for unaccounted sales for the months April, 2003 to December, 2003 be not made and added to the total income of the assessee. In compliance to the notice, the assessee filed reply dt. 18th Dec., 2004 on 22nd Dec., 2006 and extract of its reply has also been incorporated on pp. 6 and 7 of the assessment order. However, the learned AO recorded his finding on p. 8 of his order which reads as under : The turnover out of books for two months stood at ₹ 2.21 crores. For 9 months (April to December, 2003) this would stand at a figure of about ₹ 9.50 crores. Let me take this at ₹ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yond the period i.e. January, 2004 to March, 2004 for which the documents were seized by the Central Excise authority particularly when the assessee himself has declared a sum of ₹ 50 lakhs as income on account of unaccounted sales and peak investment. 14.1 In our opinion, the learned counsel for the assessee has rightly distinguished the judgment of the Hon'ble Supreme Court in the case of Esufali (supra) because the said judgment is distinguishable on the facts of the present case. The case of H.M. Esufali (supra) was related to sales-tax and Central Sales-tax and where the assessment was done under best judgment which is not in the present case. 14.2 It is also seen from the records that the assessee has made an application to the Settlement Commission, Mumbai Bench and vide order dt. 18th May, 2005, immunity from prosecution and penalty was granted to the assessee after due consideration of the co-operation extended, full and true disclosure of unrecorded transactions and payment of excise duty. 14.3 We are of the considered opinion that hypothetical calculation of turnover and estimation of GP merely on guesswork and presumption is not sustainable in law. We ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eturned income Asst. yr. 2004-05 Sub Computing (P) Ltd. 2-Jogendra Kaviraj Raw, Kolkata 2,00,000 8,00,000 10 lakhs ₹ 4,450 Alexcy Tracon (P) Ltd. 2-Jogendra Kaviraj Raw, Kolkata 1,00,000 4,00,000 5 lakhs ₹ 7,622 Nandan Mercantiles (P) Ltd. 2-Jogendra Kaviraj Raw, Kolkata 9,00,000 36,00,000 45 lakhs ₹ 10,154 Trident Lame Pack (P) Ltd. HC/10, Ram Krishna Sarani, Baguati, Kolkata 6,00,000 24,00,000 30 lakhs ₹ 7,945 (ii) It is evident that the quantum of capital introduced by these companies is not commensurate with the IT returns filed by them. Introduction of huge share premium by them in the assessee company was very awkward and beyond comprehension. The assessee was asked to produce balance sheets of these companies and to produce the directors of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... harge the primary onus and made addition of ₹ 90 lakhs under s. 68 of IT Act, 1961. 19. On appeal, the learned CIT(A) confirmed the addition with the following observations : Considering the matter in totality, I am of the considered opinion that the AO was able to make out a case that the genuineness of the creditor was not proved. It is to be borne in mind that in case of establishing the fact to be considered under s. 68, not one criterion but all the creiteria are to be established simultaneously and with this, the ground of the appellant is not sustainable and the action of the AO is upheld. 20. Aggrieved by the order of the learned CIT(A), the assessee has filed the present appeal before the Tribunal. 21. The learned counsel for the assessee made the elaborate submissions which are summarized as under : (1) It is submitted that after the search by the Central Excise Department, the assessee paid ₹ 25 lakhs to the Excise Department and thereafter due to need of fund for the business, the assessee sold its shares on premium to the abovementioned four companies of Kolkata, by the end of the March, 2004. These companies are duly registered with the R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on about the nature and source thereof or the explanation offered by the assessee is not satisfactory in the opinion of the AO, then the sum so credited may be charged to income-tax as the income of the assessee of that previous year. In the present case, the assessee has issued shares only against crossed cheques/drafts given by the shares subscribers. The transaction relating to issue of shares and receipt of subscription and premium has been made through banking channel. In CIT vs. Steller Investment Ltd. (1991) 99 CTR (Del) 40 : (1991) 192 ITR 287 (Del), it was held as below : It is evident that even if it is assumed that the subscribers to the increased share capital were not genuine, nevertheless, under no circumstances, can the amount of share capital be regarded as undisclosed income of the assessee. It may be that there are some bogus shareholders in whose names shares had been issued and the money may have been provided by some other persons. If the assessment of the persons who are alleged to have really advanced the money is sought to be reopened, that would have made some sense but we fail to understand as to how this amount of increased share capital can be asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... als before the AO it is for the AO to test and establish whether there is a case for an addition under s. 68. Even where the assessee has given details of the income-tax numbers of the subscribers along with cheque or draft numbers, the AO can test the genuineness of the transaction. (vii) The contention of the assessee that the decision of CIT vs. Steller Investment Ltd. (2000) 164 CTR (SC) 287: (2001) 251 ITR 263(SC), that the AO should not enquire into public subscription was negatived by the Court on the reasoning that the Supreme Court dismissed the appeal of the Revenue on the ground that the finding of the Tribunal was on facts and hence no interference was called for. The Court hence held that the Supreme Court has not laid any proposition on the issue and has declined interference on the ground that the issue was decided by the High Court on facts only. (viii) The decision in CIT vs. Sophia Finance Ltd. (supra), is still valid and applicable. In this case the Court held in page No. 105 as under : It is neither necessary nor desirable to give examples to indicate under what circumstance s. 68 of the Act can or cannot be invoked. What is clear, however, is that s. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cation money of ₹ 62 lacks. Confirmations of the persons in whose favour the shares were issued were also filed, apart from evidence to show that the share capital was paid by cheques in all the cases. The AO, all the same, asked for certain further information and not being satisfied made addition of the sum as cash credits. The Tribunal, however, accepted the assessee's explanation and deleted the addition. Held that the Delhi High Court in CIT vs. Stellar Investment Ltd. (supra) held that even if the subscribers to the increased share capital were on inquiry by the AO found to be not genuine, nevertheless the amount of share capital could in no circumstances be regarded as undisclosed income of the assessee. An ITO is indeed entitled to examine the truthfulness of the explanation. In cases where the credit entry relates to the issue of share capital, the ITO is also entitled to examine whether the alleged shareholders do in fact exist or not. Such an inquiry was conducted by the AO in the present case. In the course of the said inquiry, the assessee had disclosed to the AO not only the names and the particulars of the subscribers of the shares but also their bank ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Benami owner of the investment made by the existing person. Thus, the addition on account of share capital was not justified. Pran Land Housing Finance Ltd. vs. ITO (sic) It is primarily the duty of the assessee to establish the identity of the shareholders. Onus under s. 68 is on the assessee to prove the identity of the shareholders. (v) Uma Polymers (P) Ltd. vs. Dy. CIT (2006) 101 TTJ (Jd)(TM) 124 : (2006) 100 ITD 1 (Jd)(TM); In respect of share application money from investors, the assessee company has to prove only the existence of persons in whose name share application is received. No further burden is cast on the assessee to prove whether that person himself has invested said money or some other person made investment in his name. Further, distinction between a public and a private limited company is not very material, so far as introduction of share capital money is concerned. Thus, where not only identity of the creditor but even capacity to advance funds had been proved on record, the creditors were also found to be assessed to tax, further investigation of the matter was not necessary; if any shareholder was found to have made unexplained investment, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r an individual, then the responsibility of the assessee is over. Whether that person is an income-tax payer or not and where he had brought this money from, is not the responsibility of the firm . (x) Dy. CIT vs. Rohini Builders (2003) 182 CTR (Guj) 373 : (2002) 256 ITR 360 (Guj); Facts of the case : The assessee was a firm engaged in the business of dealings in land. During the assessment year under consideration the assessee had taken loans from various parties and during the course of assessment proceedings, the assessee had furnished the loan confirming giving full addresses, GIR numbers/PANs, etc. of all the depositors. The AO however issued summons to some of the creditors and also conducted inquiries into the genuineness or otherwise of the loans taken by the assessee. After considering the evidence, the AO made an addition of ₹ 12,85,000 to the returned income of the assessee. This was confirmed by the CIT(A). On further appeal to the Tribunal the Tribunal held that the phraseology of s. 68 of the IT Act 1961, was clear, that the legislature has laid down that in the absence of a satisfactory explanation, the unexplained cash credit may be charged to income-ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the creditors by filing relevant documents. But on dissatisfaction the learned AO failed to make necessary enquiries and relied on the reports of the Inspectors thereby rejecting the explanation of the appellant arbitrarily for making the addition under s. 68 without having any positive and definite evidences to show that the explanation is false'Sriram Jhabarmull (Kalimpong) Ltd. vs. CIT (1967) 64 ITR 314(Cal). 28. The learned counsel for the assessee further submitted that inspite of proving the identity, creditworthiness of the companies who have subscribed to share capital with premium and rotation of amount through banking channel, the learned AO and the CIT(A) discarding judicial pronouncements made and confirmed the addition under s. 68 of the Act which is highly unjustified and unwarranted. He strongly placed his reliance on the decisions reported in (1991) 99 CTR (Del) 40: (1991) 192 ITR 287(Del) (supra), (1993) 113 CTR (Del)(FB) 472: (1994) 205 ITR 98(Del)(FB) (supra), (2003) 182 CTR (Cal) 585: (2003) 263 ITR 289(Cal) (supra), Barkha Synthetics Ltd. vs. Asstt. CIT (supra) and (2006) 206 CTR (Raj) 626: (2006) 286 ITR 477(Raj) (supra), Jaya Securities Ltd. vs. CIT ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er of assessment. It is well settled that the AO should not base his decision merely on suspicion however it may be strong. 31. Under s. 68 of the Act, it is provided that where any sum found credited in the books of account of an assessee and the assessee offers no explanation about the nature and source thereof or the explanation offered by the assessee is not satisfactory in the opinion of the AO, then the sum so credited may be charged to income-tax as the income of the assessee of that previous year. In the present case, the assessee has offered the explanation explaining that the assessee has issued shares only against crossed cheques/drafts given by the shares subscribers and the transactions relating to the issue of shares and receipt of subscription and premium has been made through banking channel. 32. In the present case, it is an admitted fact that the assessee has filed the details of the shareholders, their addresses, bank draft/cheque numbers for the subscription and premium received along with their income-tax file numbers. The assessee has filed the details of all the four companies. The assessee also filed the audited accounts of all the four companies. It i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by you that you have indulged in cash purchases violating the provisions of s. 40A(3) of the IT Act, 1961 to the tune of ₹ 88,51,203. You are hereby afforded an opportunity to provide complete postal addresses of the persons from whom you have made such purchases/made payments. If you fail to give complete addresses of such concerns it is to be assumed that your are not willing to allow the undersigned to determine whether these sellers come under the relief criterion provided by r. 6DD of the IT Act, 1961 (sic'Rules, 1962). In addition, you are also afforded final opportunity to explain as to why disallowance to the tune of 20 per cent of the said expense be not made and penalty provisions initiated suitably. 36.1 In response to aforesaid memo, a reply dt. 18th Dec., 2006 was filed which reads as under : 1. That the expenditures/payments made as per seized records have not been actually claimed by the assessee. No manufacturing or P L a/cs have been prepared to derive the profit or loss. Instead of that a flat rate of profit of about 16 per cent has been estimated on unaccounted sales and the same has been accounted and offered for taxation. 2. Since ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , in reality, the learned AO has taken a very peculiar stand. He has accepted the expenditure and thereafter he has applied s. 40A(3) on such cases where it is in violation of r. 6DD. The fact remains that once the right side of the figure of the seized document is accepted by the Department, there is no option for the Department to reject the left side of the figure of the same seized material. The seized document indicates suppression of sales and suppression expenses to arrive at such sales. Once a consolidated figure by applying the GP ratio of total concealment was arrived at ₹ 38 lakhs by the AO, there is no further option left to him to invoke s. 40A(3) on such alleged unexplained expenditure. It is admitted that the AO has applied s. 40A(3) only on such expenditures which were noted in the seized document and not on other expenses figured in regular books of accounts. I find force in the submission of the learned Authorised Representative and action of the AO is reversed. 37. Aggrieved by the order of the learned CIT(A), the Department has come up in appeal before the Tribunal. 38. The learned Departmental Representative vehemently argued that the expenditur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... frustrating proper investigation by the Department as to the identity of the payee and reasonableness of the payment. In the present case, the disallowance under s. 40A(3) has been made by the AO out of unrecorded purchases from the records seized by excise authorities. Such records are not at all a part of the regular books of accounts therefore a lump sum of ₹ 50 lacs as income was surrendered on account of unrecorded transactions discovered during raid by the Excise Department. As observed by the AO that the books of account have not been rejected. This observation of the AO is also immaterial as there are no instances of payments exceeding ₹ 20,000 in violation of s. 40A(3) in the regular books of accounts kept and maintained by the appellant. The violation of s. 40A(3) comes out of loose papers seized by the Excise Department forming part of unrecorded transaction therefore the ratio of judgments of Hon'ble Allahabad High Court in case of Banwarilal Banshidhar (supra) Hon'ble P H High Court in case of Santosh Jain (supra) and Hon'ble Madhya Pradesh High Court in case of Purushottamlal Tamrakar (supra) are directly applicable to the present case. 41. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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