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Sh. Iftikhar Ali Khan Versus DCIT, Central Circle, New Delhi and Vica-Versa

2016 (4) TMI 511 - ITAT DELHI

Rejection of books of accounts - Held that:- 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 - Decided against assessee

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w material - Held that:- CIT(A), relying on the evidences of sales found during the course of search 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

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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 numbers of ₹ 10,000 each) was made on 29/4/00. It is also noted that the KVPs stand in joint names of appellant & Mrs. Zahida Khan. The first name is that of appellant. If the amount wa .....

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tion for the purchase of Santro Car - Held that:- The fact that the books were manipulated to inflate the cash balance is proved by the results of test check of books conducted by me personally. During test check it was found that entry of cash receipt of ₹ 16,500 on 16/4/02 in the name of Arifbhai was wrong as there was no such noting in seized diary. Similarly cash receipt of ₹ 47,000 is shown on 23/4/02 from Rehanbhai whereas amount noted in seized dairy is only ₹ 7000. Fict .....

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vident that the assessee was engaged in sales and purchases of kites which did not appear in the return of income filed and thus certain amount of stock was not as per the trade figure reported in return of income. We are of the considered opinion that the ld. CIT(A) has allowed a reasonable amount of stock towards legitimate stock of business and the additions sustained by him is reasonable and justified. Accordingly, we uphold the finding of the ld. CIT(A) - Decided against assessee

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d 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 .....

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(A)-II, New Delhi, in respect of block period from 01.04.1996 to 16.08.2002. Both the appeals being connected , are heard together and are being disposed of by this consolidated order. IT(SS)A No. 39/Del/2008 2. The ground of appeal raised by the assessee are as under: l. That the Ld. CIT(A) is not justified in rejecting the books of assessee without appreciating and admitting the additional evidences filed during appellate proceedings. 2. That the Ld. CIT(A) is not justified in making an additi .....

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tal sales. 5. That the Ld. CIT(A) is not justified in upholding the addition of ₹ 40,000/- u/s 69 for the AY 2003-04 on account of purchase of KVP in joint name with wife out of her 'MEHAR' Money. 6. That the Ld. CIT(A) is not justified in making an addition of Rs.l,54,7701- u/s 69 for the A Y 2003-04 on account of cash payment for purchase of Santro car. 7. That the Ld.CIT(A) is not justified in upholding an addition of Rs. l,00,000/- u/s 69 for the A Y 2003-04 for under valuation .....

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e very levy and of interest u/s 158 BF A(1),(2). 12. That the assessee hereby prays for any consequential relief and or legal claim arising out of this appeal before the disposal of the same. 13. That the assessee craves leaves 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 .....

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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 the search action - ₹ 10,27,000/- (ii) Undisclosed income from purchase, sale a .....

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₹ 3,55,581/- to ₹ 9,45,485/- and unexplained investment at the opening of the block period from ₹ 1,50,000/- to ₹ 3,92,7000/-.The ld. CIT(A) also allowed telescoping of the unexplained investment/expenditure against the undisclosed income earned and finally confirmed the addition of ₹ 15,14,470/-. 4. The assessee preferred an appeal against various additions sustained and enhanced by the ld. CIT(A), whereas the Revenue has preferred appeal against the benefit of te .....

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nd ld. CIT(A) has at times relied on the evidence submitted by the assessee. Ld. Authorized Representative further submitted that the Assessing Officer has relied on the books of account submitted by the assessee for the figure of sales and purchase. He further submitted that the books of account were produced before the ld. CIT(A) also and the matter was remanded twice to the Assessing Officer and no adverse view was taken by the Assessing Officer and, therefore, there was no requirement to rej .....

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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 hi .....

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oks of accounts prepared after the search and relied upon by the appellant cannot be treated as reliable. Following points need to be noted: 1. The books were not available at the time of the search. Even subsequently the books of accounts were not produced before the ADIT although five specific notices were issued to the appellant. The question of levy of penalty for non-production of books is a different issue. But such action indicates that the appellant needed time to manipulate the books wi .....

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maintain books as per sec 44AA, it may be mentioned that the provisions does not mandate maintenance of books for certain assessees. However it cannot stop them from doing so. Moreover it is the appellant who has prepared books & is insisting on accepting the same as correct whereas the AO has rejected them. If the appellant does not wish to rely on books he may well not object to their rejection. 4. It was repeatedly stated that the books have been prepared & reconciled with reference t .....

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ture of his business. Large scale discrepancies, inconsistencies and contradictions were found during that check. Some of the points are discussed as follows:- a. There was no consistency in reproducing the notings in seized kachcha dairy to books. Similar type of notings in seized diary were entered differently in books. Like notings on left/right of the diary were sometimes treated as sales / purchase & at others payments. Moreover notings of jama have been somewhere treated as receipt and .....

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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 & .....

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ted as part of this order & as Annexure-A (8 pages). The revised P&L etc & balance sheet made now on the basis of newly prepared books of accounts, and filed as part of paper book before me, are poles apart from the original final account filed with the returns. These are also treated as part of this order as Annexure-B (10 pages). The comparison of sale turnover, NP & stock as per original etc filed with return and revised books of accounts are as follows: 6. The main motive to .....

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54 584248 Oct-98 584354 584993 584374 Nov-98 574777 584993 584358 Dec-98 563759 574427 574082 Jan-99 539950 563759 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 Jan-00 415301 915006 652754 Feb-00 826493 877505 860380 Mar-00 778283 .....

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ct-01 49588 159588 116270 Nov-01 57053 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 appellant has been portr .....

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itors. Thirdly the level of creditors & debtors is highly unbelievable. In many years, the debtors are more than total sales of the year & creditors more than total purchases. 8. For AY 02-03 (FY ending 31/3/02) there was yet another set of balance sheet and P & L A/c which were submitted before the AO along with letter dt.12/7/04. This is made part of this order as Annexure-C (3 pages). It may be seen that P & L A/c is different than the one filed in appeal as original account ( .....

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nths of July-August as the kites flying season is on Rakhi and 15th August. The appellant has also vehemently insisted that the cash found during the search reflected the sale proceeds as the sale was clearly over by 15th of August every year. If that were true there would not have been any stock of goods on 31st March which is no season for kites. The appellant has shown huge stock in revised books (refer to table in clause 5. above) . 10. Further, if the details of month wise sales shown in th .....

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ses 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 9 .....

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n if the rough notings in the seized diary are treated as some basic data of business transactions, the entry in books cannot be treated as reliable. All the transactions are in cash and there is no evidence to the actual date of cash changing hands. Moreover the dates mentioned in dairy have been changed in books. The picture presented in books regarding cash transactions is quite different than the notings in seized papers. Since seized papers are incomplete, the real position of business cann .....

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it may be concluded that there is no primary evidence in support of transactions noted in so called books of accounts. 4.7 When this was pointed out to the AR it was stated that even though the purchase/sale has been shown on different date in books, the total purchase/sale do tally with the seized documents & the annual profit per books of account is correctly stated. However this kind of arguments is quite fallacious because if the transactions are not recorded in the books on correct dat .....

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On the basis of same purchase/sales any number of set of books may be prepared to show huge cash balance/minimum cash balance or even negative cash balance by simply changing the date of cash exchange. Therefore even if the total purchase & sales for different years are accepted as based on noting in seized material, manipulation of date of cash transaction renders the books unreliable as it gives a lot of leeway for adjustment of dates of transaction according to the convenience of the asse .....

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erence 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/- .....

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ugust and the assessee has explained the availability of cash with the help of cash book, which was produced before the Assessing Officer. Accordingly to the said cash book, the cash balance of ₹ 10,37,950/- was available on the date of search and thus the cash found should not be treated as unexplained. 6.1 The ld. CIT(DR), on the other hand, relied on the order of the lower authorities and submitted that the addition upheld by the CIT(A) may be sustained. 6.2 The ld. CIT(A) has observed .....

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ust few days before the search and held that the assessee could not justify taking of such loans despite being availability of cash balance as per the cash book prepared. Considering facts and circumstances, the ld. CIT(A) admitted the availability of cash of ₹ 1 lakh in normal business and he held the rest cash available of ₹ 9,27,000/- as unexplained. The relevant paragraph of the order is reproduced as under: 5.1 Now I come to the explanation about seized cash. Heavy reliance has .....

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77; 7000. Moreover huge cash sales of more than ₹ 4 lacs have been 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 ₹ .....

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sed 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 purchase of raw material or some assets or payment to creditors etc. It is highly absurd that one would take loan to build up only cash balance as is done in the case of appellant. The cash balance on the dates on which alleged loan .....

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r 15000 368181 6/8/02 Ekwal Hasan 15000 393531 7/8/02 Rasid Ali 10000 402881 9/8/02 Wakil Ahmed 12000 497521 11/8/02 Shamim Akhtar 10000 504112 12/8/02 Arsad Ali 10000 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.T .....

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gs. 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 evidence explaining the circumstances as per rule 46A which prevented him from filing them before the AO. In any case since the books of accounts itself have been rejected as unreliable and the claim of taking loan is held to be made up story, the confirmation letters for loans and credits are merely self servicing doc .....

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vidence to support this claim was shown during the search. Even the names of such persons were not given at that time. Subsequently also the appellant did not produce the books or other documents/ evidence in response to the specific notice by the ADIT. This was obviously for the reason that the story to explain the cash was to be made up & evidence was to be created. Time was needed to prepare books so as to be able to show cash balance on specific dates when there was any investment etc. T .....

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cash found during the search. Therefore the AO rightly treated the same as unexplained. However it is to be noted is that fact that the appellant was carrying out business of kite making is undisputed. Even if the books and imaginary huge cash balance built up is rejected as untrue, there has to be some cash belonging to the business of the appellant if judicious view of the issue is taken. Considering facts & circumstances sum of ₹ 1 lac is treated as normal business cash of the appe .....

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ds 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 assesse .....

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the appellate proceedings before the ld. CIT(A), it was submitted by the assessee that the assessee started business in the year 1998 and he invested seed money of ₹ 1,50,000/- which was out of the past savings of the assessee as the assessee was doing some work for other persons on employment basis for past 23 years. The ld. CIT(A) did not accept the plea of the assessee that the investment of ₹ 1,50,000/- was out of the savings of earlier years as the same was not supported by any .....

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naccounted investment in purchases, amounting to ₹ 3,92,700/- instead of ₹ 1,50,000/- estimated by the Assessing Officer. The relevant paragraph of the finding of the CIT(A) is reproduced as under: 7.4 The appellant did not make any submissions regarding point No (ii) of enhancement notice regarding unexplained investment. The issue on which enhancement notice was given is that in the very first year of own business the appellant made sales of ₹ 4,62,000 from April 98 to Aug 98 .....

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is to be made. This again results in enhancement of undisclosed income. 7.6 The ld. CIT(A), relying on the evidences of sales found during the course of search 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 .....

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nd, 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 documents containing purchase and sale of transaction to the assessee and on the basis of which the assessee prepared year-wise lists of sales and purch .....

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orm net profit rate of 10% and issued a notice to the assessee proposing enhancement of the income. After providing opportunity to the assessee and taking into consideration the disallowance for expenses in cash exceeding the limit provided in Section 40A(3) of the Act, ,the net profit rate declared by the assessee in regular return of income and also as per the revised and manipulated books for the block period, , he applied the net profit rate of 10% over the sales and labour charges shown by .....

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ought adjournment on various occasions. But there cannot be denial of justice when appellant is being granted proper opportunity on all issues. Moreover till the appeal order is passed no decision is taken hence there cannot be any injustice. Further when decision has not been taken where is the question of review? The fact is that the appellant's AR was duly conducting hearings till Nov 07 without any objection. Even the books & documents were produced. However it was only when enhancem .....

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iven 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 a .....

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fit specific disallowance u/s 40A(3) is not to be made) is that all factors including cash payments are treated to have been considered while making estimate. Hence separate disallowance is not to be made u/s 40A(3). In effect present sec 40A(3) means that purchases/expenses which have been paid in cash exceeding prescribed limit are to be treated to have been inflated by 20% (since 20% of the amount has to be disallowed). Therefore if the ratio of these decisions is applied, even without accept .....

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t has not made any submissions against this 10% NP rate for estimation of profit except that it should be reasonable & rational. Considering the NP rates in appellant's own accounts filed with original return, NP rate of 10% appears to be quite reasonable. Moreover as discussed in the para 6.6 the fact of cash payments in excess of ₹ 20000 made in contravention of see 40A(3) is also to be considered while estimating net profit. Accordingly considering the fact of cash payments in e .....

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ing loss in the kite business every year. Hence most reasonable way is to treat the labour charges also the turnover for estimation. The profit for various years as per the above estimate is worked out as under: From the estimated profit for various years, the net profit already declared in the accounts filed with original return is excluded to arrive at 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 re .....

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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 addit .....

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er: 8.3 I have carefully considered the submissions made on behalf of appellant. I have seen the copy of KVPs filed in paperbook. It is noted that the investment in KVPs (4 numbers of ₹ 10,000 each) was made on 29/4/00. It is also noted that the KVPs stand in joint names of appellant & Mrs. Zahida Khan. The first name is that of appellant. If the amount was out of Mehar received by Muslim women at the time of marriage, it would have been invested in her individual name. It is a kind of .....

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d a well reasoned order on this issue and we do not find any infirmity in his findings. Accordingly, this ground of the assessee is dismissed. 10. Ground no. 6 is regarding addition of ₹ 1,54,770/- for the purchase of Santro Car. The ld. Authorized Representative explained that the investment on the said car was duly explained on the basis of the availability of cash in the cash book which was produced before the Assessing Officer in the course of assessment proceedings. The ld. CIT(DR), o .....

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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 .....

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er. The books have been proved to be manipulated and prepared with a particular motive to explain where discrepancies found during the search process. The fact that the books were manipulated to inflate the cash balance is proved by the results of test check of books conducted by me personally. During test check it was found that entry of cash receipt of ₹ 16,500 on 16/4/02 in the name of Arifbhai was wrong as there was no such noting in seized diary. Similarly cash receipt of ₹ 47,0 .....

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me for AY 03-04 is confirmed. 10.2 We find that the order of the ld. CIT(A) on the issue in dispute is well reasoned and no interference is required by us in his findings. Accordingly, we uphold the same and dismiss this ground of appeal of the assessee. 11. In ground No. 7, the assessee has challenged the addition of ₹ 1 lakh upheld by the ld. CIT(A) for unexplained investment in the stock. The Assessing Officer held that the stock of ₹ 1,50,962/- during the course of search as unex .....

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have carefully considered the submissions made by the appellant. The appellant's claim that the books of account were maintained on regular basis and were not available at the time of search because they were taken by part time accountant is factually incorrect. It has been proved that the appellant was not maintaining any books of account regularly. The computerized books were prepared subsequent to the search and manipulated/adjusted with a particular motive to explain the material found .....

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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 .....

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that the ld. CIT(A) has allowed a reasonable amount of stock towards legitimate stock of business and the additions sustained by him is reasonable and justified. Accordingly, we uphold the finding of the ld. CIT(A) and dismiss this ground of appeal of the assessee. 12. In ground no. 9, the assessee has raised issue for various additions which can be made of the real income and only to the extent of source of income and not beyond that. 12.1 We have already considered various arguments of the ass .....

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nd, submitted that the ld. CIT(A) has already allowed the benefit of telescoping without establishing the link between the income and the investment. 13.2 We find that the ld. CIT(A) has duly considered the investments which preceded the income for the purpose of telescoping and wherever there is no income to explain the investment, he has held the same as unexplained investment. Accordingly, he has not allowed the set off of undisclosed investment of ₹ 3,92,700/- , however, for the subseq .....

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diture. Addition of both, the income as well as expenditure/investment 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 no .....

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s 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 precedes it then only it can be set off. If the income is earned after a particular investment has been made, it will not be possible to set off the two against each other because there was no inflow of funds before the outflow. Therefore .....

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3. Undisclosed business profit 99-00 2,15,471 - 4. Unaccounted Investment in KVPS 29/4/00 - 40,000 5. Undisclosed business profit 00-01 1,17,503 - 6. Undisclosed business profit 01-02 3,66,854 - 7. Unacocunted cash payment for acquiring Centro car 25/4/02 -1,54,770 8. Undisclosed business profit 1/4/02-16/8/02 2,24,057 - 9. Cash found at the residence during search & seizure 16/08/02 - 9,27,000 10. Unaccounted stock found during search 16/08/02 - 1,00,000 Total 9,45,485 15,14,470 It may be .....

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