TMI Blog2016 (4) TMI 511X X X X Extracts X X X X X X X X Extracts X X X X ..... h and inability of the assessee to explain the corresponding purchases, logically held the amount of ₹ 3,92,700/- after allowing the gross profit @ 15% on sales of ₹ 4,62,000/- as unexplained investment. We find that the decision of the ld. CIT(A) on the issue in dispute is well reasoned and we do not find any infirmity in his findings.- Decided against assessee Enhancement of addition on account of net profit - CIT(A) applying the net profit rate of 10% on total sales - Held that:- CIT(A) as taken into consideration all the aspects while arriving at his conclusion including the fact of cash expenditure, the net profit rate declared by the assessee in regular return, net profit rate declared in the books of account prepared subsequently after search and the sales recorded in seized papers as worked out by the assessee including the labour charges. We do not find any infirmity in the order of the ld. CIT(A) and the finding are well reasoned, thus, we uphold the same - Decided against assessee Addition under Section 69 on account of purchase of Kisan Vikas Patra in the joint name of wife of the assessee - Held that:- It is noted that the investment in KVPs (4 numbe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3,92,700. Therefore this amount cannot be set off with any income. Thereafter there is sufficient income before any other undisclosed investment shown in the table. Therefore income (inflow) and expenditure/investment (outflow) can be set off against each other and only higher of the two is to be taxed. The inflow is ₹ 9,45,485 whereas outflow is ₹ 11,21,770 (Rs 15,14,470 - 3,92,700). Hence investment to the extent of ₹ 9,45,485 can be treated to have been made out of income earned. Hence both income & investment may not be taxed. Investment being higher of the two is only brought to tax. Therefore the total undisclosed income to be taxed therefore works out to ₹ 15,14,470 (Rs 3,92,700 +11,21,770) in view of the telescopic benefit allowed to the appellant. The AO is directed to compute the tax accordingly - Decided against assessee - IT(SS)A No. 39/Del/2008, IT(SS)A No. 54/Del/2008 - - - Dated:- 9-3-2016 - SH. I.C. SUDHIR, JUDICIAL MEMBER AND SH. O.P. KANT, ACCOUNTANT MEMBER For The Appellant : Sh. Vinod Kumar Garg, CA Sh. R.S. Negi, Adv. For The Respondent : Sh. A.K. Saroha, CIT(DR) ORDER PER O.P. KANT, A.M.: These cross appea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s leave for any addition, deletion, Amendment, modification, rectification in the grounds of appeal before the disposal of the same. 2. The facts in brief are that the assessee was engaged in the business of kites in the name of proprietary concern M/s Lalu Kites Centre in relevant period. A search and seizure action under Section 132 of the Income-tax Act, 1961 (for short the Act ) was conducted at the premises of the assessee on 16th August, 2002. In search action cash of ₹ 10,27,000/- alongwith incriminating documents indicating sale and purchase of kites were found and seized. . Consequent to the search, a notice under Section 158 BC of the Act was issued for filing return of its undisclosed income for the block period from 01.04.1996 to 16.08.2002. The assessee filed its return declaring undisclosed income of ₹ 29,666/- on 09.01.2003. The case was taken up for scrutiny by way of issue of notice under Section 143(2) of the Act. The Assessing Officer did not accept the books of account produced by the assessee in the course of the assessment proceedings, and he made the following additions: (i) On account of cash found and seized from the residents during th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... used the material on record. In the case of the assessee, in the course of search action few documents indicating sales/purchase, cash vouchers etc. were found and no books of account were found. During the course of search, the assessee stated that the persons who used to write the books of account of the assessee was not in Delhi and, therefore, he could not show the books of account and he sought more time to produce the books of account. However, it has been noticed by the Assessing Officer that despite providing five opportunities between 26.08.2002 to 20.09.2002 by the Deputy Director of Income Tax (Investigation) in post search proceedings, the assessee failed to produce books of account before him. The ld. CIT(A) has also observed that though the books of account were prepared partly on the basis of the documents and evidences found during the course of search, however, the all the entries made in the books of account could not be substantiated by the vouchers or other evidences found during the course of search. The ld. CIT(A) has given detailed finding in respect of the defects noticed in the books of account from para 4.5 to 4.6 of his order, which are reproduced as unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sometimes treated as sales / purchase at others payments. Moreover notings of jama have been somewhere treated as receipt and at other payment. Some jama notings were not entered in books at all. b. No purchase bills were seized. Sales bills seized are also not complete. Therefore all purchase sale entries cannot be treated as authentic. Moreover there is not evidence to prove that the purchase / sale was cash or credit. It was interpreted from notings in seized diary only, which were not clear consistent/systematic. c. Even if the purchase/sale was treated as credit, there is hardly any basis for the date of actual cash transaction (payment or receipt). It was found that the date of transaction mentioned in the books at many instances was different than the date noted on the seized diary or the sale/ purchase bills. At many places entries in different dates in seized dairy were clubbed together noted on one date. d. Many notings in seized diaries and their corresponding entry in books could not be explained. Some findings as a result of test check of books were noted on separate paper a copy of the same was given to the AR also. e. From the list ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 557525 Feb-99 525766 539950 539029 Mar-99 505235 525766 522567 Apr-99 446610 505235 478521 May-99 428200 447610 443864 Jun-99 306868 428200 371488 Jul-99 203301 306868 254135 Aug-99 174986 216071 207320 Sep-99 174986 234986 202427 Oct-99 168353 293353 238775 Nov-99 256848 637173 468278 Dec-99 325296 687173 514617 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 169228 99249 Dec-01 132955 393555 275499 Jan-02 1035 272535 217021 Feb-02 76734 242310 215434 Mar-02 61646 91468 68286 Apr-02 16072 165276 88103 May-02 19365 49285 34347 Jun-02 498 61034 27969 Jul-02 17819 266649 144432 Aug-02 291074 1037950 781227 As can be seen firstly huge cash balance on continuous basis shown in the books is unbelievable and not commensurate to the nature of business or the kind of assessee (economic level) the appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... repancies and contradictions can be observed form the look at month wise purchases. It was contended that the purchases are made in the lean season when the goods could be obtained at lower price. The season for sale is stated to be July, August and therefore the purchase season for raw material should be from April to June. According to the explanation regarding the nature of appellant's business the months of purchases and sales should have been similar in a years. There should be a clear pattern commensurate to the explanation which is absent in this case. It is found that major purchases in FY 99-00 and 01-02 are shown in the months of Sept to Dec. In FY 00-01 and part period in 02-03 the purchases are from April to August. 12. From the details 'of month wise purchase and sale for FY 98-99 it is seen that the appellant had made sale of ₹ 4,62,000 from the months of April to August but there are no purchases in those months. The purchases are shown only in the months of Oct, Nov Feb March of the Financial Year. 4.6 In view of the above discussion it may be noted that even if the rough notings in the seized diary are treated as some basic data of busi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee to build up cash balance to explain cash investments etc. The books cannot be said to be correct in terms of section 145(3). Accordingly the AO's action to reject the books of accounts is confirmed. 5.4 In view of the defects pointed out by the Assessing Officer and ld. CIT(A) in the books of account, we are of considered opinion that the books of account cannot be said to be correct in terms of Section 145(3) of the Act and we find the order of the ld CIT as well reasoned and no interference is required by us, accordingly, we uphold the finding of ld. CIT(A) on this issue in dispute. This ground of the assessee is accordingly dismissed. 6. In ground no. 2, the assessee is contesting the addition of ₹ 9,27,000/- as unexplained cash. The AO had made addition of entire cash found of Rs. ₹ 10,27,000/-, however, the ld CIT(A) allowed relief of ₹ 1,00,000/- as cash as corresponding to regular business activity and sustained the balance amount of ₹ 9,27,000/- , against which the assessee is in appeal. The ld. Authorized Representative referring to the statement of the assessee at page 84 of the paper book submitted that the money found d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en shown on various dates of August 02. It may be pertinent to note that there was no evidence to this effect in seized papers. A bill book was produced to show cash sales but it cannot be treated as reliable evidence because nothing is mentioned on the bills as to the nature of sale. In books some items are treated as cash others as credit. Normally cash sale is of small amounts, but in bill book single bills of ₹ 62000 66,000 were made on 15/8/02 itself which appeared to be manipulated. This was done obviously to inflate cash balance as on the date of search. 5.2 Further from the balance sheet as on 16/8/02 (date of search) it is seen that the appellant has shown unsecured loans of ₹ 2,46,500. The loan was shown to have been taken in the months of July and Aug 02. It is noted that that cash balance according to the books of appellant as on 1/7/02 was ₹ 17,819 and it continuously increased thereafter to become more than ₹ 10 lac as on 16/8/02. A copy of statement showing date wise cash balance in July-Aug 02 is made part of this order as Annexure-F. Loan is normally taken by a person if he needs funds. A businessman may need funds for making purch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 681155 13/8/02 Achhe Miyan 15000 751065 Total 246500 This shows that the story of taking loan is part of exercise of fabricating books of accounts to build up imaginary cash balance. It may be pertinent to note that none of the loan entry was found recorded in the seized diary. These entries were merely made in books of accounts.This further proves that the books are unreliable entries therein are fabricated with particular motive. 5.3 In the appeal proceedings the appellant's AR filed confirmation letters from various persons who allegedly gave loan to the appellant. The AO in his report dated 3/11/05 specifically mentioned that no confirmation letter either from any persons giving loans or alleged creditors (the cash balance was inflated on the basis of these two) was submitted during the assessment proceedings. Hence the confirmation letters from loans parties creditors are in the nature of additional evidence. The appellant has not made any specific request to admit additional evid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned cash found during the search. The addition of undisclosed income on this a/c is therefore reduced to ₹ 9,27,000. 6.3 In view of above, we find that the findings of the ld. CIT(A) on this issue are well reasoned and no interference is required. Accordingly, we uphold his finding and confirm the addition of ₹ 9,27,000 as unexplained cash. This ground of appeal raised by the assessee is thus stands dismissed. 7.1 In ground No. 3, the assessee has challenged the enhancement of unexplained investment in purchase of raw material from ₹ 1,50,000/- to ₹ 3,92,700/-. 7.2 The ld AR submitted that no addition was justified in the case of the assessee as the assessee was having enough saving of the past period which explain the initial investment in the business. The ld CIT DR on the other hand relied on orders of the lower authorities. 7.3 The Assessing Officer noted that the assessee would have needed investment for setting up the unaccounted business. He further noted that the assessee was having stock worth of ₹ 1,50,962/- after maximum sale of Kites for the relevant year upto 15th August, 2002, therefore, he estimated a sum of ₹ 1,50,0 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and inability of the assessee to explain the corresponding purchases , logically held the amount of ₹ 3,92,700/- after allowing the gross profit @ 15% on sales of ₹ 4,62,000/- as unexplained investment. We find that the decision of the ld. CIT(A) on the issue in dispute is well reasoned and we do not find any infirmity in his findings. Accordingly, this ground of the assessee is dismissed. 8. In ground No. 4, the assessee has challenged the enhancement of addition on account of net profit from ₹ 3,55,581/- to ₹ 9,45,485/- by the ld. CIT(A) applying the net profit rate of 10% on total sales. 8.1 Before us, the ld AR submitted that the CIT(A) has adopted the gross profit rate of 10% on arbitrary basis, without any comparable case. Further, he relied on the submission made before the CIT(A). On the other hand, the ld CIT DR relied on the order of the CIT(A). 8.2 The Assessing Officer and ld. CIT(A) have noticed that the sales and purchases recorded in diaries and other documents seized during the course of search are more than the sales and purchases shown by the assessee in the regular return filed. The Assessing Officer confronted all the seized doc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acted on phone was requested to attend the hearing to produce books. The hearing was fixed on 31/12/07 with consent of Mr Gurjeet Singh. However even on 31/12/07 there was no compliance. In the interest of justice one more opportunity was given by letter dtd 31/12/07 to produce books of accounts. In response to that Mr. R S Negi Adv another AR attended produced books of accounts. 6.6 I shall first take up third issue of disallowance u/s 40A(3). In old provisions entire payment exceeding the prescribed limit was disallowed. However there was Rule 6DD(j) which specified certain circumstances needing cash payment by assessee. The AO then had discretion not to invoke sec 40A(3) if those conditions were fulfilled. However after amendment of sec 40A(3) wef 1/4/96 the discretion of the AO has' been taken away in case of default 20% of the cash payment is to be disallowed straight unless the payment falls in any of the specific exemptions provided in Rule 600. The decisions relied upon by the AR are not relevant and not applicable to this case because in all cases the old provisions of sec 40A(3) were applicable when rule 600(j) was in existence. Moreover the basis of the d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the undisclosed income from business in last column of the above table. Accordingly the addition of ₹ 3,55,581 made by the AO is to be replaced by ₹ 9,45,485 which results in enhancement of undisclosed income. 8.3 In view of above, we find that the ld. CIT(A) as taken into consideration all the aspects while arriving at his conclusion including the fact of cash expenditure, the net profit rate declared by the assessee in regular return, net profit rate declared in the books of account prepared subsequently after search and the sales recorded in seized papers as worked out by the assessee including the labour charges. We do not find any infirmity in the order of the ld. CIT(A) and the finding are well reasoned, thus, we uphold the same. Accordingly, this ground of the assessee is dismissed. 9. Ground no. 5 is regarding addition of ₹ 40,000/- under Section 69 on account of purchase of Kisan Vikas Patra in the joint name of wife of the assessee. 9.1 The ld. Authorized Representative submitted that the money was invested out of the Mehar money of the wife and thus the investment duly stood explained and no addition was required to be made in the hands ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eing cash payment for financing the purchase of Santro car on installments. It was found by the AO that the appellant had made this payment to M/s Orien Automobiles Delhi Pvt Ltd on 25/4/02 for acquisition of Santro car. When asked to explain the source of payment it was stated that the payment was made out of cash available in business and the same was reflected in the cash book. The AO did not accept the explanation since the books of account had been rejected. He therefore, treated the sum of ₹ 1,54,770 as undisclosed income of the appellant for FY 02-03 . 9.2 In the appeal proceedings again the reliance was placed on the books of account and it was submitted that the payment was duly reflected therein. The payment was made out of business funds and cannot be treated as undisclosed income. The appellant was not having any other source of business except the kite business. 9.3 I have carefully considered the submissions made by the appellant. The rejection of books of account by the AO has been upheld as per discussion in the earlier paragraphs of the order. The books have been proved to be manipulated and prepared with a particular motive to explain where discr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ound during search. If the books were available with the part time accountant they could have been produced before the ADIT immediately after the search. In the earlier part of this order it has also been proved that there are large scale manipulated/adjustments in the books particular regarding dates of transactions which rendered the books of unrealizable. Hence these books can also not be treated as the basis for explaining the stock found during the search. Further it is noted that huge stock in the range of ₹ 16 lacs was shown in books which proves that the books are manipulated. The stock at the end of accounting year has to be put after physical verification and cannot be balancing figure as claimed by the appellant. Therefore appellant's explanation regarding the stock found during the search is not acceptable. However even if books are rejected as unreliable, it cannot be said that no stock in any business would be available, even though the peak sale season was over. In my view a sum of ₹ 50,952 can be treated as legitimate stock of business and considered as explained. The addition of undisclosed income on this count is reduced to ₹ 1,00,000 only. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is not justified because the investment has been made out of income itself. Therefore only higher of the two should be taxed. Even in the last reply to the enhancement notice this plea was repeated. 11.2 I have considered the alternative plea of the appellant. The contention is based on the logic that any investment or expenditure is made out of income earned. Therefore both the income and the investment/expenditure should not be brought to tax otherwise it will amount to double addition. This is because the income from whatever source based on whatever document, denotes inflow of funds. On the other hand the investment or expenditure involves outflow or utilization of such funds. If income is earned first, the expenditure/investment can obviously be said to have been made out of such income. In principle the argument of the appellant appears to be quite reasonable should be accepted. 11.3 However what is to be noted is that the set off or telescoping of income with expenditure can be allowed only if it can be shown prima-facie that the investment could have been made out of income. In other words if the income which is claimed to be source of some investment prec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It may be noted that there is no income (inflow of funds) before the undisclosed investment of ₹ 3,92,700. Therefore this amount cannot be set off with any income. Thereafter there is sufficient income before any other undisclosed investment shown in the table. Therefore income (inflow) and expenditure/investment (outflow) can be set off against each other and only higher of the two is to be taxed. The inflow is ₹ 9,45,485 whereas outflow is ₹ 11,21,770 (Rs 15,14,470 - 3,92,700). Hence investment to the extent of ₹ 9,45,485 can be treated to have been made out of income earned. Hence both income investment may not be taxed. Investment being higher of the two is only brought to tax. Therefore the total undisclosed income to be taxed therefore works out to ₹ 15,14,470 (Rs 3,92,700 +11,21,770) in view of the telescopic benefit allowed to the appellant. The AO is directed to compute the tax accordingly. 13.3 In view of above, we do not find any infirmity in the finding of the ld. CIT(A) on the issue in dispute and he has allowed the telescoping after due consideration of the period of investment and income. Accordingly, this ground ..... X X X X Extracts X X X X X X X X Extracts X X X X
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