TMI Blog2013 (8) TMI 964X X X X Extracts X X X X X X X X Extracts X X X X ..... l to 6 at the residence of the Managing Partner of the firm, indicating certain transactions such as trading in coal through e-auction purchases, advances to lorry owners towards freight charges, payments to the staff of Singareni Collieries Co. Ltd (SCCl) and India Cements Ltd (ICL), etc. Further, an amount of ₹ 34,50,000 was seized out of cash of ₹ 34,65,800 found, at the business premises of the assessee. 2.1 The assessee firm constituted with Mr. K.Ch. Subba Rao and Sri C.V. Subramanyam as partners and into the business of transport contract for last several years and filing returns of income, regularly. Books of account stated to have been maintained and revenues for the assessee firm arising from transport business on account of contracts entered with cement companies such as M/s India Cements Ltd etc., for transporting coal from the mines of M/s Singareni Collieries Co. Ltd, to the sites of ICL located at Vishnupuram, Tandur and Erraguntla etc. Major expenses of the assessee are the 'freight charges' paid to truck owners and the same indicated to have constituted 98.50% for A.Y. 2004-05, 97.25% for A.Y. 2009-10, of the total/gross receipts of the busin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e estimation of income from transport business: S. No. Description of Head Amount (Rs.) A.Y. Remarks (basis of addition/ disallowance) 1. Cash found 34,65,800 09-10 Represents the cash found during search has been held unaccounted by the AO relying on some entries indicated in loose sheets of seized material. 2. Profits of the coal business through e-auction. 66,22,467 40,00,000 09-10 08-09 Based on the information available in the seized material, for a broken period, of two months, which was aggregated and extended to the third month in the FY 2008-09. For A.Y. 2008-09, it is estimated @ ₹ 10 lakhs per month, for 4 months. 3. Freight payments 1,00,00,000 1,50,00,000 1,00,00,000 1,00,00,000 90,00,000 09-10 08-09 07-08 06-07 05-06 Estimation basis. 4. Creditors 12,95,53,492 3,98,72,238 2,48,47,434 30, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d money, is sustained. Thus, the CIT(A) dismissed the assessee's ground on this issue. 2.5 Regarding addition towards profit from coal business - ₹ 66,22,467 - A.Y. 2009-10: As c oul d be se en fro m the copies of the seized material relied upon by the Assessing Officer, there is no dispute about the coal business being carried out and profits generated by it. However, the references are also made to few individuals, including the Managing Partner who is associated with such business as per the contents of the seized material. The figures are available, for the months of September, October and November 2008, as referred in assessment order. No efforts have been made by the assessee before the Assessing Officer, to explain the transactions, except to say that said profits do not represent the concealed incomes of firm. In the course of the appellate proceedings also, similar submissions are made by the assessee, without any evidence produced, to rebut the findings made/ conclusions drawn by the Assessing Officer. Hence, the findings of the Assessing Officer as regards to the taxability of the said income in the hands of the assessee firm, is justified and confirmed. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - A.Y. 2008-09: I t is a fact that add iti ons were made based on the notings of the seized material related to the said business falling in few months of the financial year pertaining to the assessment year 2009-10. Since the additions were made based on specific information as revealed through the seized material found during the course of search proceedings, the same was confirmed based on the actual quantifications for the AY 2009-10. The addition was also confirmed in the hands of the firm as against in the hands of Mr. K.Ch. Subba Rao. Coming to the facts for the year under reference, it is revealed that there is no such information available for the Assessing Officer to make the said addition. Accordingly, the additions were made on estimate basis by drawing inferences from the information found for the immediate subsequent year. There was a statement recorded from the Managing Partner of the firm in the earlier part of the search seizure proceedings, indicating the income on such business, which was retracted subsequently, as such the information of the original statement could not have become the ultimate basis for the additions. Further, though the Assessing Officer cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 006-07 (Rs. 1 crore), 2007-08 (Rs. 1 crore), 2008-09 (Rs. 1.5 crores) and 2009-10 (Rs. 1 crore): The CIT(A) observed that the information embedded in the assessment order indicates that the Assessing Officer resorted to additions in round figures and multiples of millions. Indeed the expenses under the referred head are huge, befitting the size and nature of the business and most of such expenses are being paid in cash. Nonetheless, no basic reference was made to the books of account/concerned vouchers/bills with reference to the lapses, if any, in maintenance of them. There is no reference in the assessment order, as to the specific evidence shown to have been found in the search proceedings and no enquiries were carried out, in this regard to arrive at such conclusion. While relying on the books of account, the Assessing Officer resorted to estimations, that too without any basis, for making the disallowances under the head of expenditure under reference. 2.10 The CI T(A ) furt he r obse rve d tha t in the se rie s of the assessment orders passed u/s 153A, related to the search conducted in this group, the Assessing Officer has chosen not to make any disallowances under the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under the head 'freight charges', were made by making a general reference to the search findings, without making out the shortcoming or the defects in accounts. When the accounts are unreliable, the option available for the Assessing Officer would be either to examine the books with reference to particular defects or making the additions on the specific defects pointed out or to resort to estimation of the profit by rejecting the books. However, in this case, the Assessing Officer has chosen to blow hot and cold together. Without rejecting the books and without pointing out any defects, expenses are disallowed on estimation basis. As indicated in the assessment orders for AY 2003-04 2004-05 u/s 143(3} of the IT Act, 1961, estimation of certain expenditures were made based on the specific defects in maintenance of bills such as 'non-vouching of freight expenses' etc., but without rejecting the books. This has been accepted by the Assessing Officer while passing the orders u/s 143(3) r.w.s. 153A, where no disallowances under the head 'Freight Paid' were made. Whereas in the assessment years where books were rejected in the original assessment order, as in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 27.35 16.66 As could be seen from the above, for the assessment year 2003-04 2009-10, the percentage of creditors as well as debtors are on higher side compared to other years as the same are extending for fourth month as per the data submitted by the assessee which is against the normal period of 2-3 months, as submitted by the assessee. 2.14 While completing the assessment and in making the additions under the head 'unexplained credits' on account of the outstanding payments to the truck drivers, the Assessing Officer has arrived at a conclusion that assessee firm itself has admitted that it does not have any documentation of payments made to lorry drivers. However, this conclusion appears to be away from the truth in light of the submissions made by the assessee with reference to the facts of the case, before the Assessing Officer as well as the appellate authority and in a case where books of account were maintained, audited and examined by the department for many years either during the course of the assessment proceedings or survey proceedings or search seizure proceedings. Assessing Officer also referred to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... em as unexplained credits, but only after setting off the same with the opening balances of creditors at the beginning of the year. This practice may not reflect any scientific basis since the creditors are dynamic but not static figures, especially for a running business, as such bundling them together may not be the correct approach in tackling the issue. To illustrate, the creditors standing as opening balance, at the beginning of the year, might have been cleared by the assessee while making the payments subsequently and during the year fresh creditors if any may be getting added, on account of expenses incurred on credit basis, during the year. 2.16 It is further noticed by the CIT(A) that even in presumptions made by the Assessing Officer, there is no consistency. To illustrate, {i} in the assessment year 2009-10, the closing balances of creditors (Rs. 22,17,20,893) has been set-off against the opening balance of creditors for AY 2006-07 (Rs. 9,21,67,401) to arrive at net creditors' figure of (Rs. 12,95,53,492), as against the actual opening balance of the creditors for the assessment year 2009-10 (Rs. 7,37,91,578). (ii) For assessment years 2008-09 2007-08, there is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icer to resort to the estimation. But even in estimation, there is no consistency, as illustrated in the earlier para which was also resorted to without rejecting the books of accounts. It is held all along where estimations are possible and resorted to, such estimation should be reasonable, fair and based on the information either available on record or gathered by the Assessing Officer. It is relevant to referred to the observations of Hon'ble Supreme Court regarding the distinctions between an 'assessment based on accounts' and the 'best judgement assessment' as referred to, in the case of CST vs. H.M. Eusuf Ali H.M. Abdulali (90 ITR 271) (SC) which is reproduced as under: Sometimes there may be innocent or trivial mistake in the accounts maintained by the assessee. There may be even certain unintended or unimportant omissions in those accounts; but yet the accounts may be accepted as genuine and substantially correct. In such cases, the assessments are made on the basis of the accounts maintained even though the Assessing Officer may add back to the accounts, price of items that might have been omitted to be included in the accounts. In such a case, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts paid to the employees of the ICL SCCL, though the assessee is not liable to pay as per the standard business practices. Since this expenditure assumes the nature of disallowable expense and for the reasons that it is not reflected in the books of accounts, the addition made by the Assessing Officer is sustainable. Hence, the addition ₹ 5,00,000 made by the Assessing Officer for the AY 2009-10 is confirmed. Since the amounts were not reflected in the books of accounts, the disallowance is not hit by the estimation of profits of the business, if accepted as per the contention of the assessee. 2.22 Addition towards illegal payments - ₹ 5,00,000 - For A.Ys. 2003-04 to 2008-09: The CIT(A) observed that having held the estimation to be valid, the issue of quantification of the expenditure based on estimation, arises. Holding that such payments are there for all the years and based on the period of payments with reference to the volume of business, the expenses disallowed by the Assessing Officer @ ₹ 5,00,000 per year gets modified and accordingly it is restricted to the disallowance of ₹ 4,00,000 for A.Y. 2007-08, ₹ 3,00,000 each for A.Y. 2005-06 and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not justified. The average rate of net profit for the earlier assessment years is as follows: 2003-04 - 0.96% 2004-05 - 0.80% 2005-06 - 2.00% 2006-07 - 2.00% 3.2 He placed reliance on the order of the Tribunal dated 4.5.2012 in ITA No. 2048/Hyd/2011 for A.Y. 2007-08 in the case of ECI Engineering Construction Co. Ltd. wherein it was held as under: 11. We have heard both the parties and perused the material on record. In this case the assessee in spite of giving sufficient opportunities to produce the books of account could not produce the same before the lower authorities. Being so, having no other option, the Assessing Officer estimated the income of the assessee but while doing so, he has made further additions u/s. 40A(3), 40(a)(ia) of the Act and also towards prior period income. It is admitted fact that the assessee did not produce books of account in support of the claim of expenditure. When the assessee claimed any expenditure, it is mandatory on the part of the assessee to produce books of account supported by proper bills and vouchers. Since the assessee has not produced proper books of account, true profits or loss cannot be ascertained by the Ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... count even after making an estimate. When there are certain other deductions which are to be disallowed as wealth-tax payment in section 40, it cannot be said that after making an estimate the wealth-tax charged in the profit and loss account should again be added back in to the profit. Therefore, it was not correct in law to make the separate addition of ₹ 63,859 representing the interest and remuneration paid to the partners to the income already estimated and assessed from contracts. 13. It is clear from the above judgement that where the books of account have been rejected the revenue cannot rely on the same books of account for making any other addition. It was also held that when an estimate is made towards income of the assessee, it is in substitution of the income that is to be computed u/s. 29 and in other words, all the deductions which are referred to u/s. 29 are deemed to have been taken into account, while making such an estimate. This will also mean that the embargo placed in section 40 is also taken into account. It has been held in the concluding paras of 4 and 5 of the judgement of High Court cited supra, as follows: 4. The pattern of assessment under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (AT) wherein disallowance made in terms of s. 40A(3) has been deleted. 15. In view of the above discussion, there cannot be any further addition u/s. 40A(3), 40(a)(ia) of the act or towards prior period income. However, we make it clear that the income so determined consequent to this order, after considering the above directions, shall not go below the income returned by the assessee for the assessment year under consideration, if so returned income to be considered. 3.3 Thus, he submitted that the rate at which the income is estimated for all these assessment years is at higher side. It should be average rate of net profit for earlier assessment years to be considered to determine the income of the assessee. Further he relied on the judgement in the case of Vishal Infrastructure Ltd. vs. ACIT (104 ITD 537) for the proposition that when the assessee maintained the regular books of account and the Department accepted the method of accounting followed by the assessee in earlier assessment years, the books of account could not be rejected without there being any material change in the facts. More so, when such accounts are duly audited by a chartered accountant and defects wer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reditors is self contradicting and non verifiable, as the assessee himself has not maintained any evidence or record towards payments made to the lorry drivers or for outstanding payments. Thus, the contention that an amount of ₹ 2,43,63,320 is outstanding towards payments to truck drivers is only self serving statement without any basis. 4.2 The DR submitted that during the course of search, three scribbling pads were found and seized as annexure A/KCSR/RES/04-06. These Scribbling pads contain hand written details of daily account of cash received and cash paid. In other words, these pads are the cash books maintained by Sri. K.Ch. Subba Rao for keeping track of the cash transactions. The scribbling pad seized and marked as A/KCSR/RES/05 contains hand writing of Sri. K. Subba Rao, assistant of the Managing Partner, whereas, the other two scribbling pads contain the hand writing of Sri. K. Ch. Subba Rao. These scribbling pads mainly show cash payments made to 'truck procurement agents' for arranging trucks and making cash advances to the truck owners in various places from where coal etc., is to be loaded. There are instances when the truck procurement agents retur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bogus creditors, the Assessing Officer rightly initiated the penalty proceedings u/s. 271(1)(c) of the IT Act, 1961. 4.5 Regarding illegal payments made to the staff of ICL and SCL the DR submitted that during the course of search, certain papers were found and seized as per annexure A/KCSR/ RES/01. Sri K.Ch. Subba Rao, Managing Partner of the firm was asked to explain the nature of the notings found in pages 71 to 73, 83, 85, 87-93. In his statement recorded on 28.01.2009, he stated that, these pages show miscellaneous expenses of the firm M/s. Balaji Transport Agency and that these expenses also included certain illegal payments like kick backs etc., paid to the staff of M/s. India Cements Limited and M/s. Singareni Collieries Limited which amount to roughly ₹ 5,00,000/- in a year. The relevant portion of his statement is as under: Pages 71 to 73, 83 - 85 and 87-93 contain the details of miscellaneous expenses of M/s. Balaji Transport Agency. Page no. 87 contains handwriting of Sri. K. Subba Rao my assistant. The miscellaneous expenses also include certain illegal payments like kick backs etc., paid to the staff of ICL and SCL which amount to roughly ₹ 5,00,00 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as under; The firm M/s Balaji Transport Agency buys coal from M/s Singareni Collieries Ltd., through e- auctioning and this coal is mainly sold to brick manufacturers through agents. This business is the undisclosed business done by M/s Balaji Transport Agency. This is seasonable business and the rate of profit in this business is 7% to 8% of the turnover The total turnover purchased through e-auction has been roughly ₹ 1.25 crores in each of the financial years 2007-08 2008-09 ... 4.10 The DR submitted that such statement was retracted by Mr. K.Ch. Subba Rao vide his subsequent statement dated 5.2.2009, wherein it was stated that they have done this business only during the current financial year (FY 2008-09) with a turnover of ₹ 10 to ₹ 12 lakhs and no profit was made on the said business. The Assessing Officer went on to make the addition of ₹ 40 lakhs being the profit @ ₹ 10 lakhs per month estimated for the months of September to December, 2007 ignoring the subsequent statement of Sri K.Ch. Subba Rao, the Managing Partner. The additions were made by drawing the inference from the assessment year 2009-10. 5. We have heard both the par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... el that it is not part of the assessee's business but it is the business carried on by one of the partners, Mr. K. Ch. Subba Rao. We find no merit in the argument of the assessee's counsel. The seized material reflecting coal business was found during the course of search at the premises of the assessee. Being so, it is to be treated as income of the assessee only. Further in the case of Ahura Holdings vs. DCIT (346 ITR 106) it was held that though the partners received on-money individually on sale of plots owned by the assessee-firm, such on-money receipt by the partners is to be considered as income of the assessee firm only. Further in the case of Sri Jagadmba Pearl Dealers Others in ITA No. 387 -389/Hyd/2012 Ors., the co-ordinate Bench of the Tribunal vide order dated 17.6.2013 held as follows: 26. Being so, if any partner use the property of the assessee firm, benefit derived from that property shall go to the common pool of the assessee firm, which is for the common advantage to all the partners. If any partner un-authorisedly carries on any business by using name and goodwill of the firm, profit derived from that business shall be the income of assessee s fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and not in the individual hands of Shri Ravinder Kumar. Accordingly, this ground of the assessee is dismissed. 5.4 In view of the above discussion, the income from coal business is to be considered as income of the assessee. This ground of the assessee is dismissed. 5.5 The next issue for our consideration is with regard to addition towards unexplained cash. The contention of the assessee is that due telescoping has to be given towards cash found during the course of search action out of the addition made towards undisclosed income of the assessee. We find force in the argument of the assessee's counsel. Once the income is estimated by rejecting books of account and thereafter due telescoping of excess cash/assets found during the course of search action is to be given out of determined undisclosed income, otherwise it amounts to double addition. This ground is allowed. 5.6 The next issue for our consideration is with regard to addition towards freight payment and addition towards sundry creditors. As rightly reliance placed by the learned counsel for the assessee in the case of Indwell Constructions vs. CIT (232 ITR 776) (AP) wherein held that no separate addition s ..... X X X X Extracts X X X X X X X X Extracts X X X X
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