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2019 (6) TMI 650

..... f completed assessments. Accordingly, the additions made by the AO for the A. Y. 2004-05 to 2008-09 relating to the interest disallowance, cash credits, estimation of undisclosed business income, disallowance u/s 40(ia) and the addition towards suppression of sales are unsustainable and accordingly deleted. Interest on loan used for purchase of property - allowable business expenditure - use for the purpose of business - CIT(A) confirmed the addition - HELD THAT:- During the appeal hearing, the Ld. AR did not furnish any evidence to support the claim that the site was used for the purpose of business. Therefore we do not find any reason to interfere with the order of the Ld. CIT(A) and the same is upheld. Addition of cash credits u/s 68 - HELD THAT:- Department has not made any enquiry and did not shift the burden to the assessee. Therefore, merely scrutinizing the confirmation letter, the AO cannot conclude that the loan is not genuine and credit worthiness is not proved. CIT(A) is also incorrect in holding that mere submission of PAN and confirmation letter is not sufficient to hold that the loan is genuine. Once the confirmation letters are placed before the AO, it is for the AO .....

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..... rsquo;s premises with regard to unaccounted production of finished goods. The Income Tax Department has resorted for the ultimate action of search in the assessee’s case and did not find any evidence to show that the assessee has either resorted for unaccounted sales or inflation of purchases etc. AO also did not bring any evidence to show that the gross profit of the assessee is lesser than the comparable cases. In the absence of any such evidence, we hold that the addition made by the AO is purely based on guess work and the CIT(A) also confirmed the addition merely believing the presumption and assumptions of the AO. Therefore, we are unable to uphold the order of the Ld. CIT(A) and accordingly set aside the orders of the lower authorities and delete the additions made by the AO for the A. Y. 2009-10 and 2010-11 on account of undisclosed business income and allow the appeals of the assessee Unexplained investment in jewellery and silver articles - Addition of cash credit - CIT(A) allowed telescopic benefit which was admitted by the assessee under the head ‘unaccounted income’ on account of business gifts being gold and silver items and sustained the addition as .....

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..... rch action, the AO issued notice u/s 153A of the Act and completed the assessments u/s 143(3) r. w. s. 153A of the Act on total income as under : A. Y. Total Income Declared u/s 153A of the Act (Rs. ) Total income assessed by the AO (Rs. ) 2004-05 9,19,520 36,92,753 2005-06 81,44,910 97,94,846 2006-07 1,21,31,540 1,49,00,948 2007-08 2,10,19,910 2,51,73,613 2008-09 3,82,99,530 5,83,09,459 2009-10 4,85,01,045 7,48,30,872 2010-11 9,49,98,660 25,06,85,958 Subsequent to the completion of assessments, the assessee went on appeal before the CIT(A) and the Ld. CIT(A) allowed the appeals partly. Against the order of the CIT(A), the assessee filed the appeals before the Tribunal. I. T. A. Nos. 168-172/Viz/2014, A. Y. 2004-05 to 2008-09 The assessee filed the appeals challenging the additions sustained by the Ld. CIT(A) assessment year wise as under : A. Y. Addition Sustained (Rs. ) 2004-05 23,91,927 2005-06 11,74,444 2006-07 23,41,116 2007-08 10,57,169 2008-09 53,85,012 2009-10 73,19,009 2010-11 82,32,726 3. During the appeal proceedings, the assessee filed a petition for admission of additional ground. The Additional ground raised by the assessee for the A. Ys 2004-05 reads as under : On th .....

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..... addition made in each A. Y. from the A. Ys. 2004-05 to 2008-09 without having seized material is summarized as under : A. Y. Addition (Rs.) 2004-05 27,73,233 2005-06 16,30,835 2006-07 26,69,408 2007-08 41,53,703 2008-09 2,04,25,430 6. 1. The Ld. AR argued that in the above assessments for the A. Y. 2004-05 to 2008-09, the additions were made either from the information already available in the assessment record or by assumptions and presumptions. The Ld. AR further argued that in respect of interest disallowance and the cash credits, the expenditure is debited to the P&L a/c and the information is available in the books of accounts. Estimation of undisclosed business income was also not based on any seized material and it is pure assumption and presumption of the AO or the guess work. With regard to the disallowance made u/s 40(a)(ia) also, the Ld. AR submitted that the information is accounted in the books of accounts and available in the assessment record and no incriminating material was found during the course of search supporting the addition. With regard to suppression of sales for the A. Y. 2005-06, it was the enhancement of sales made by Sales Tax Department without an .....

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..... e of undisclosed sales. Therefore, the Ld. DR argued that undisclosed income estimated by the AO required to be upheld as the same was made on the basis of incriminating material or information available at the time of search. 8. We have heard both the parties and perused the material placed on record. At the outset, the issue relating to undisclosed business income which is heavily pressed by the Ld. DR required to be examined to find out whether the addition is based on incriminating material or not? The facts of the case as available from the Ld. CIT(A) s order in para No. 8. 7. 1. are as under: The appellant through its proprietary concern M/s Bharathi Soap Works produces soaps, washing powders etc. under the brand name "XXX" as well as other names like Blue Diamond, Saregama, Bhavani etc. The appellant is also a major partner in the firm M/s. Annam Traders with a 75% share. This firm is engaged in the business of trading in chemicals and soups and has given its address as the factory premises of M/s. Bharathi Soap Works. The Assessing Officer noted that the entire, sales made by M/s. Annam Traders is in, cash, moreover, this firm could not furnish critical informatio .....

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..... the trading activity in the name of M/s Meenambal Agencies is a mere façade and the raw material traded in the name was utilized by Bharathi Soap Works for unaccounted manufacture and sale of soaps. No other evidence or the incriminating material was available during the course of search indicating the sales outside the books of accounts. In the case of Annam Traders and M/s Meenambal Agencies, no defects were noticed either by the AO of the assessee or the concerned AO in the books of accounts maintained by the Annam Traders and Meenambal Agencies. No material was found during the search evidencing the suppression of sales or inflation of purchases. The Ld. CIT(A) also in his order in para No. 8. 7. 6. observed that the search and seizure operations took place in the factory of M/s Bharathi Soap Works did not yield any conclusive documentary evidence of unaccounted production of the finished goods. Only certain discrepancies such as discrepancies in the stock of raw materials as well as finished goods, cash sales of Annam Traders and Meenambal Agencies were found. Unawareness of the fact regarding existence of Annam Traders and Meenambal Agencies by the Manager of the asses .....

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..... )(ia), addition towards suppression of sales and agreed additions are not based on the incriminating material found during the course of search. 9. The next issue is whether the AO is permitted to make the addition u/s 153A without the basis of incriminating material in the case of completed assessments. As already discussed earlier in this case, search was conducted u/s 132 on 15. 10. 2009 for the A. Y. 2004-05 to 2008-09. The assessee filed the return of income and the time limit for issue of notice u/s 143(2) are as under : A. Y. Date of Filing the return of income Time limit for issue of notice u/s 143(2) 2004-05 01. 11. 2004 By 01. 05. 2005 2005-06 01. 11. 2005 By 01. 05. 2006 2006-07 31. 10. 2006 By 30. 04. 2007 2007-08 16. 06. 2010 By 15. 12. 2006 2008-09 07. 10. 2008 By 06. 04. 2009 As per the above information, the time limit for issue of notice u/s 143(2) was barred by limitation on 30. 09. 2009 for all the impugned assessment years including 2008-09 as mentioned above. Therefore, assessments for the A. Y. 2004-05 to 2008-09 stands concluded and in case of completed assessments as held by this Tribunal in the case of P. Ramaraju vide I. T. A. No. 424-426/Viz/2013 dated 31 .....

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..... 143(1)of the Act is issued nor a notice u/s. 143(2) of the Act is issued within the time limit laid down in the proviso to Secc. 143(2) of the Act, the proceedings initiated by filing the return are closed. In the present case, the period for issuing the notice u/s 143(2) elapsed. Therefore the process has attained the finality which can only be assailed u/s 148 or 263 of the Act. It can thus be concluded that making of an addition in an assessment under section 153A of the Act, without the backing of incriminating material, is unsustainable even in a case where the original assessment on the date of search stood completed by absence of issue of intimation under section 143(1) of the Act or by not issuing notice u/s. 143(2) of the Act within the time limit laid down in the proviso to Sec. 143(2) of the Act, results in an assessment proceedings and where such assessment proceedings are completed prior to the date of search then they do not abate in terms of the Second Proviso to section 153A(1) of the Act. The decision of the ITAT Kolkata Bench rendered in the case of Shri Bishwanath Garodia (supra) on identical facts of the case as that of the Assessee in the present case, clearly .....

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..... ase of property admeasuring 703 sq. yds at Brodipet, Guntur for a sum of ₹ 30,52,000/-. The AO asked the assessee as to why the expenditure of ₹ 32,379/- should not be disallowed and in response, the assessee submitted that the said site was used as parking place for vehicles, stock boxes, scrap etc. , hence, argued that the expenditure is allowable as business expenditure. The AO observed that the factory premises located at Gorantla village which is 8 km away from the vacant site purchased by the assessee, hence, the explanation of the assessee was unbelievable and no supporting evidence was furnished by the assessee. Therefore, the AO disallowed the interest of ₹ 32,379/- and added back to the income. Against the order of the AO, the assessee went on appeal before the CIT(A) and the Ld. CIT(A) confirmed the addition. 11. Against the order of the Ld. CIT(A), the assessee is in appeal before us. During the appeal hearing, the Ld. AR did not furnish any evidence to support the claim that the site was used for the purpose of business. Therefore we do not find any reason to interfere with the order of the Ld. CIT(A) and the same is upheld. 12. Ground No. 2 is relate .....

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..... e appeal of the assessee on this ground is allowed. 14. The next issue is the addition u/s 68 relating to loans taken from the following creditors. S. No Date Cash/DD/Cheque Name of Creditor Amount Rs. 1 16. 05. 2008 Cheque Chakka Chalamaiah 100000 2. 09. 04. 2008 Cheque Sri Balaji Marketing Services 1,00,000 3. 30. 05. 2008 Cheque Sri Venkateswara Agencies 1,00,000 Total ₹ 3,00,000 During the course of assessment proceedings, the AO has asked the assessee to prove the genuineness of the cash credits, but the assessee failed to furnish the evidence to prove the identity of the creditor, credit worthiness and genuineness of the transaction, therefore, the AO made the addition of ₹ 3 lakhs as unexplained cash credits u/s 68 of the Act. 15. The assessee went on appeal before the CIT(A) and the Ld. CIT(A) called for the remand report. The AO conducted necessary enquiries in the appeal proceedings and submitted the remand report. On the basis of the remand report the Ld. CIT(A) deleted the addition relating to Shri Chakka Chalamaiah and confirmed the addition in respect of Sri Balaji Marketing Services and Sri Venkateswara Agencies treating the same as unexplained cash credi .....

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..... viewed that the assessee is indulging in sales outside the books of accounts, the AO called for the explanation by issue of show cause notice as to why the income on sales outside the books of accounts should not be estimated and the assessee filed the reply objecting for the addition on account of unaccounted sales and submitted that no unaccounted sales were made by the assessee. Disbelieving the reply filed by the assessee, the AO held that the raw material and the chemicals traded by Annam Traders and Meenambal Agencies were used by the assessee and the resultant finished product was sold outside the books of accounts. The AO computed the chemicals traded by Annam Traders and Meenambal Agencies to the estimated amount of ₹ 3,93,33,219/- for the A. Y. 2009-10 and inferred that said material was utilized by the assessee for its own production for sales outside the books of accounts. The AO estimated 50% of the estimated material of ₹ 1,84,86,613/- utilized by the assessee as profit and the same was brought to tax in the hands of the assessee. For the sake of clarity and convenience, we extract relevant part of the order of the AO in para No. 8. 29 of the assessment o .....

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..... has made the unaccounted sales, manufactured the unaccounted production out of the purchases made from the Annam Traders and Meenambal Agencies. However, the CIT(A) reduced the estimated profit at ₹ 55,86,630/- for the A. Y. 2009-10 and ₹ 32,13,706/- for the A. Y. 2010-11. For the sake of clarity and convenience, we extract relevant part of the order of the Ld. CIT(A) which reads as under : para 6. 6 to 6. 7 6. 6. I have perused the assessment order as well as the submissions made by the appellant. It is true that the search and seizure action at the premises of the appellant including the factory of M/s. Bharathi Soap Works did not yield conclusive documentary evidence of unaccounted production of finished goods. However, discrepancies were noticed both in the stock of raw materials as well as in the stock of finished goods This could not have been possible in case the production was entirely as per the figures recorded in the books of accounts including stock registers, Secondly, all the attendant facts and circumstances regarding the trading activities of M/s Annam Traders and M/s Meenambal Agencies raise suspicion regarding the genuineness of the business activity .....

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..... ed. iv) M/s Annam Traders have filed returns of income and shown net profit of over 1% in various years. No credit for the same has been given. v) Finally, the appellant has stated that while admitting undisclosed income during his statement u/s 13(4), the appellant offered ₹ 1. 97 crores as undisclosed income from his business (M/s Bharathi Soap Works) for various years and this undisclosed income was on account of manufacture of soaps and was related to the discrepancies in power consumption, deficit stock of raw material and excess quantity of finished goods detected during the course of search. 6. 7. Thus, I am in agreement with the Assessing Officer that the attendant facts and circumstances of the case indicate strong probabilities that chemicals purportedly used by M/s Annam Traders and M/s Meenambal Agencies have been utilized by the appellant s business entity namely M/s Bharathi Soap Works. However, the Assessing Officer has adopted the gross profit rate via-â-vis raw materials consumed as appearing in the appellant's books to estimate the profit earned in respect of the value of chemicals purchased by M/s Annam Traders and M/s Meenambal Agencies. While th .....

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..... te that chemicals shown as purchased by M/s. Annam Traders and M/s. Meenambal Agencies have actually been utilized by M/s Bharathi Soap Works, whether for production or otherwise, Hence, income on account of such additional chemicals purchased should be taxed in the hands of M/s Bharathi Soap Works. However, while determining income from unaccounted production, credit for such income already offered in the return shall have to be given. For the present assessment year, the chemical purchases in the books of M/s Annam Traders and M/s Meenambal Agencies were ₹ 2,11,82,075/- The Assessing Officer has adopted G P rate at 50% of the same in view of the fact that the G P rate in the books of M/s Bharathi Soap Works was 50% of purchases. However, as discussed above, this G. P. rate of 50% was arrived at after CENVAT credit of 12%. Further giving credit of 2% on account of sales expenditure and 1% on account of net profit already declared by M/s Annam Traders and M/s Meenam Agencies, the gross profit on purchases being adopted is 35%. This works out to ₹ 74,13,726/-. Further, the appellant has already offered ₹ 42 lakhs as undisclosed income from business of M/s Bharathi .....

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..... ap Works godowns are situated in the far behind area of the shed, the observation of the AO that the goods relating to Annam Traders and Meenambal Agencies were delivered at the premises of the assessee of M/s Bharati Soap Works is incorrect. Merely because of some cash credits, non maintenance of daily stock register, lack of uniformity in consumption of electricity, excess cash balance, shortage of raw material and excess finished goods does not lead to unaccounted sales in the hands of the assessee. The Ld. AR argued that the entire addition made by the AO is pure guess work and unsustainable, hence requested to set aside the order of the Ld. CIT(A) and delete the addition. 20. On the other hand, the Ld. DR supported the orders of the lower authorities and reiterated the observations made by the AO and the Ld. CIT(A). 21. We have heard both the parties and perused the material placed on record. In this case, the AO made the addition of gross profits estimating the unaccounted sales in the hands of the assessee for non furnishing the names of the customers, delivery challans etc. . , relating to Annam traders and Meenambal agencies. The suspicion of the AO is that the Annam Trade .....

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..... not uncommon since the raw material is used for finished product. Since the assessee is not maintaining the day to day stock register, shortage of raw material leads to excess quantity of finished goods. Shortage of raw material and excess quantity of finished goods should have been addressed by the AO independently in the hands of the assessee for the respective assessment years. Similarly, non-maintenance of day to day stock register and packing material should have been a good reason for rejection of books of accounts and estimation of income. The AO did not bring on record any case which is having more profit than the assessee and the AO has not rejected the books of accounts in the assessee s case. The Ld. CIT(A) also in his order observed that there is no complete documentary evidence available in the assessee s premises with regard to unaccounted production of finished goods. The Income Tax Department has resorted for the ultimate action of search in the assessee s case and did not find any evidence to show that the assessee has either resorted for unaccounted sales or inflation of purchases etc. In the absence of any such evidence, there is no case for making the addition o .....

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..... ties Ltd. and ₹ 11,00,000/- received from M/s Sri Venkateswara Agencies, M/s Sreedhar Agences, Smt. K. Ammani, M/s Sarveshwara Agencies and M/s Kalyanaram Agencies since the assessee failed to furnish the strong evidence to support the credits which is agitated in this appeal. 26. During the appeal hearing, the Ld. AR submitted that during the search and seizure action conducted by the department, the assessee has admitted additional income of ₹ 13. 21 crores to cover the cash found during the course of search. Actual cash found was ₹ 11,12,89,350/- and out of the balance amount of ₹ 2. 09 crores, the Ld. CIT(A) allowed telescopic benefit of ₹ 1. 10 crores relating to the investments in gold and silver items. Still there is balance of ₹ 99. 00 lakhs out of additional income to cover the investments or the sources for cash credits and loans and the assessee is entitled for telescopic benefit. The Ld. AR argued that the Ld. CIT(A) sustained the additions of ₹ 26 lakhs relating to unexplained cash credits and a sum of ₹ 24,19,000/- relating to unexplained investment in jewellery should be given telescopic benefit and additions be deleted .....

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..... . AR s argument cannot be rejected since the assessee has raised a general ground also stating that any other ground may be urged at the time of hearing. Therefore, the argument made by the assessee required to be addressed. In the instant case, the Ld. CIT(A) sustained the addition of ₹ 26 lakhs representing cash credits and ₹ 24,19,000/- relating to unexplained investment in jewellery and silver articles. The assessee had admitted the additional income of ₹ 13. 21 crores and the Ld. CIT(A) has allowed the telescopic benefit for cash found and seized amounting to ₹ 11. 12 crores and gold and silver items for 1. 12 crores leaving the balance of ₹ 98 lakhs. On close scrutiny of the Ld. CIT(A) order it is observed that the additional income admitted by the assessee was towards generation of income, but it is not linked to application of income towards the investments and expenditure. During the appeal hearing, the Ld. DR also could not make any submission or argument to support that the balance amount of ₹ 98 lakhs was already allowed the telescopic benefit in respect of any other asset or application of income towards expenditure or any other asse .....

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