9911796707
TMI Blog2013 (10) TMI 1576X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee's appeal bearing ITA No.236, 237, 238/Ahd/2011 were admitted after condoning the delay. Accordingly, these appeals are hereby adjudicated upon hereunder: A. Assessee's Appeal (For A.Y. 2004-05, 2005-06 and 200607)(IT(SS) 236,237&238/Ahd/2011) 2. Ground raised by the assessee for these three years, emanating from three separate orders of CIT(A) all dated 31.3.2009, now under appeal, are identically worded, hence, reproduced below: "1. The Ld. Commissioner of Income Tax (Appeals)-IV, Ahmedabad has erred in law and in facts in not appreciating the contentions and submissions of the appellant that the unaccounted business of money lending and finance carried out by it along with various persons was to be assessed to tax in the case of Association of Persons (AOP) and not in the case of the appellant firm. Ld. CIT(A) ought to have held that the income of the unaccounted business could not have been taxed in the case of the appellant and the assessment made in taxing the income from unaccounted business deserves deletion. 2. The Ld. CIT(A)-IV, Ahmedabad further erred in law and in facts in confirming the action of the Ld. A.O. in holding that the status of AOP as claime ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he AOP? How the profit and loss of the alleged AOP was distributed among it's members? What was the instrument or document or any deed establishing the creation of the AOP?. Those were the questions raised by the A.O. There was no explanation by the assessee about the arrangement of the finance. According to AO, it was merely a statement by the assessee without supporting evidence, hence the claim was rejected. In the assessment order, there was a mention of 'reference' to Special Audit u/s.142(2A) of IT Act. However, the Special Auditor has informed that the assessee had not produced the books of account, hence, the Special Audit could not be conducted. They had expressed, therefore, regret in not furnishing the report u/s. 142(2A) being unable to conduct the audit. For the said default on the part of the assessee, the AO had initiated penal provisions. 5. During the course of survey at the office premises of the assessee certain promissory notes totaling Rs.74,60,550/- were found and impounded. There was a list in the assessment order as follows :- "..Annexure - a/17 - Page No.1 to 268, found from the office premises and it contains the number of promissory notes signed by va ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt of Rs.3,70,000/- was given on 13.06.2003 to Sri Nirav Kumar Somayo; hence, taxed in the A.Y. 2004-05. The matter was carried before the First Appellate Authority. 6. The main contention of the assessee was that the AO was not justified in making the assessment in the status of partnership firm. According to the assessee, the assessment was to be made on AOP. It was contended that few persons related to each other have joined together and conducted the business of money lending jointly. Hence, the assessment ought to have been made on AOP. It was also mentioned that the said business was started as per an oral understanding amongst the members. Learned CIT(A) was not convinced and held as under: "I have carefully considered the contentions of learned counsel as well as gone through the records. ON perusal of assessment order, it has been noticed that the Assessing Officer had be adopted the status of the Partnership Firm as declared in the Return of Income by the Appellant. The Appellant has not claimed status of Association of Persons (AOP) in the return of income filed in response to the notice issued u/s 153A on 20.07.2007 in consequence to the search conducted in M/s. Jaye ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red to him of Partnership Firm M/s. Jayesh Finance only w.e.f. 01.07.2006 (and not of Association of Persons as now claimed by the Appellant since the residuary jurisdiction lies with territorial Assessing Officer). Hence, the Appellant has failed to prove that it has filed any Return in the status of AOP with the territorial Assessing Officer having normal residual jurisdiction. Further, it was pleaded by Learned Counsel that there was oral understanding among the members of AOP for which no evidence whatsoever was produced by the Appellant either at the assessment stage or at the Appellate stage to substantiate the existence of the AOP since the same status was not claimed in the return of income. It was held by Hon'ble Bombay High Court in case of CIT v/s. Associated Cement and Steel Agencies (147 ITR 776) that where a return was submitted in the status of a Firm, the assessment in the status of an Association of Persons (AOP) was not permissible. Similar view was also held by Hon'ble Rajasthan High Court in case of CWT v/s. Jagdish Puri (163 ITR 458). In the present case, the Appellant has failed to claim the existence of the status Association of Persons (AOP) in the r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nds with the intention to earn profit, therefore, the activity of the financing was required to be assessed in the status of the AOP. Few case laws relied upon were : "1. ITO Vs. Ch. Atchiah 218 ITR 239 (SC) 2. M.V. Valliappan & Ors. Vs. CIT 170 ITR 238 (Mad) 3. ACIT Vs. Minor Janak Patel 80 TTJ (Ahd) 756 4. ITO Vs. K. Venkatesh Dutt 87 TTJ (Bang) 494 5. CIT Vs. Sriram Jagannath 250 ITr 689 (Raj) (HC)" Learned AR has informed that certain documents were seized from the residence of Sri Nikul C. Patel such as balance sheet as on 30th of May, 2004, 30th of September, 2004, etc. Those Balance- Sheets have disclosed assets and liabilities in respect of the money lending business. Those papers did not belong to the Firm and Mr. Nikul C. Patel being the main person managing the affairs of the AOP, therefore, those assets and liabilities were connected with the AOP business. In respect of the arrangement of the finance, learned AR has drawn our attention at page 22 of the paper book consisting the names of 17 persons from whom a finance of Rs.3,57,67,032/- was stated to be arranged by the alleged AOP. On that page there was a list of the persons to whom the loan was advance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... kul C. Patel, and the seized material recovered from the residence of Mr. Mukesh Patel and Mr Nikul C. Patel. 9) We have heard the submissions of both the sides at some length. We have examined the facts of the case. The undisputed fact is that the Revenue Department had carried out the search operation in the name of the assessee, a Registered Firm, on 19.01.2006. Revenue has informed that the entire search related proceedings/ authorizations etc. were in the name of the said Registered Firm. Thereafter all the proceedings, in consequence thereupon, were started in the name of the Firm. As far as the initiation of the search proceedings in the name of the Firm by the Revenue Department was concerned, the same was started on the basis of the information related to the Firm. Revenue Department even did not have the iota of information about the existence of alleged AOP or that there was an AOP of the said members. In the absence of any information about the existence of the AOP, the Revenue Department was justified in implementing the search proceedings on the Firm. We have examined the statements and the relevant seized material to know as to whether the same belonged to the AOP a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mbers. In such a situation those family members do not run the business in their individual capacity but they definitely run the business in the name of the Firm; as if representing the affairs of the Firm. In all respect such persons who have dealt with business, were not in the capacity of a member of an association of persons, but represent the business of the Firm. If the AOP was in existence then the same could have been informed to the Revenue Department at the time of the search. In support of this finding we place reliance on Associated Cement and Steel Agencies 147 ITR 776 (Bom.). 9.1) Under the section of "definitions" the Act prescribes that "person" includes an 'Association of Person' or body of individuals, whether incorporated or not as per Section 2(31) of IT Act. We have examined this section in some detail below. 9.2) As far as the assessment of an AOP is concerned, the law is absolutely clear that the status of AOP must exist perfectly in the eyes of law. Under the definition of 'persons' under Section 2(31) an AOP is a judicial entity, therefore, its existence should be recognized by a judicial authority. Such judicial entity is therefore required to be formed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nces of the case, grounds being identical for all the three years, are hereby rejected. B. Revenues's Appeal (For A.Ys. 2005-06 and 2006-07) (ITA No. 2691 & 2692/Ahd/2009) 11. Revenue's appeals are arising from the orders of learned CIT(A)-IV both dated 31st March, 2009. For these two years Revenue has raised almost identically worded grounds of appeal, reproduced from the lead year, i.e., A.Y. 2005-06 as under: The Ld. CIT(A) has erred in law and on facts and circumstances of the case in directing AO to allow the telescoping of addition of Rs.3,60,38,841/- (1,15,49,288/- for A.Y. 2006-07) on account of unexplained loans received by the assessee against income of AOP after verifying from the seized material available, when assessee has not filed return of AOP. 2. The Ld. CIT(A) has erred in law and on facts and circumstances of the case in directing AO to allow the telescoping of addition of Rs.31,73,559/- on account of profit earned as per seized Annexure A-9 assessee against income of AOP after verifying from the seized material available, when assessee has not filed return of AOP. 3. The Ld. CIT(A) has erred in law and on facts and circumstances of the case in directi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... book prepared on the basis of seized material copy of which were supplied by the Department to the Appellant. All the transactions should have been considered jointly. So, the addition of Rs.1,04,490/- in respect of interest income relatable to advance given to Shri S.K. Setia on the basis of Annexure - A/19 (Page No. 114 & 115) seized from the residence of Shri Nikul C.Patel, Partner of the Firm, is covered by undisclosed income which is contended to be reflected in the consolidated cash flow statement of the Firm. 17.1 Learned Counsel pleaded that the peak or highest of all the transactions taken together during the financial year relevant to the Assessment Year under consideration is the method adopted by the Assessing Officer for calculation of undisclosed income on the basis of peak credit worked out in the cash flow statement prepared after search in the form of cash book prepared on the basis of seized material copy of which were supplied by the Department to the Appellant. All the transactions should have been considered jointly. So, addition made is covered/undisclosed income which is contended to be reflected in the consolidated cash flow statement of the Firm. On the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lar or proper books of account are maintained by the assessee then a cash flow statement is generally prepared. The department then makes an addition on the basis of the peak credit, as appearing in the cashflow-statement, if there is recycling of cash. That peak credit is thus treated as an unexplained income of the assessee. But that working ought not to be final. Certain other factors are also required to be taken into account, as suggested in the Grounds of Appeal by the Revenue. As far as the assessee is concerned, the undisputed fact is that on the basis of the seized material a cash follow statement was prepared which was supplied to the AO. After the search, the working of the said cash flow statement was, therefore, required to be examined by the AO, that too after due verification from the seized material. We are of the view that a cash flow statement which was prepared on the basis of the seized material must not be ignored. Once the assessee is in the business of finance then the assessee is required to furnish the cash flow statement, so as to arrive at the figure of the incremental book credit, as per the prevalent practice. We are taking this view on the basis of dec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wo is required to be worked out from the cash flow statement. In the back-ground of the above observations it can finally be summarized that the procedure to be followed by the A.O. ought to be to first work-out the interest income generated from the finance business, on one hand, and the interest paid to the parties as per seized material, so as to arrive at the net figure of interest earned from the finance business. Thereupon, the net investment is to be worked out, which shall be the difference between the borrowings from the parties and the loans advanced to the parties. The third figure is the incremental peak as computed on the basis of the cash flow. Then the A.O. is required to decide whether the net undisclosed investment in the finance business is to be taxed or the net undisclosed finance business income is to be assessed. In any case the telescoping amongst these two computations are permissible in such type of working. These suggestions are not exhaustive so the A.O. is directed to finalize the correct figure of net addition as per law and as per the accounting principles. We hold accordingly. 15.1 During the course of hearing, when this question of working of the in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 32 was carried out on the assessee on 19th of January, 2006. The assessee was found to be in the business of money lending. For A.Y. 2004-05, the assessment was made u/s.143(3) r.w.s. 153A of the IT Act and the total income was determined at Rs.4,96,645/-. For A.Y. 2005-06, the total income was determined at Rs.4,11,01,180/- and for A.Y. 2006-07, the total income was determined at Rs.1,29,06,408/-. For these years, the assessee preferred an appeal and learned CIT(A) has recorded the contention of the assessee in respect of assessment in the status of AOP, however, a direction was given that all the transactions were required to be considered jointly on the basis of the peak credit reflected in the cash flow statement to be prepared on the basis of the seized documents. The AO was directed to verify from the seized material available whether all the entries are reflected to arrive at the incremental peak. Side by side it was also to find out the unaccounted business profit earned to be telescoped against the unaccounted money lending business investment of the assessee. The AO had worked out the alleged unexplained peak credit and that was made the basis for levy of impugned penalty ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as well as working out of addition on the basis of incremental peak credit. At this place the point to be noted is that in the case of appellant order u/s. 143(3) r.w.s, 153A of the IT Act have been passed for the year under consideration as well as for A.Y. 2005-06 and 2006-07. The very fact is that in all these three assessment years, the. additions have been made in the case of appellant on the basis of incriminating documents impounded /seized during the course of survey and search action and such additions have duly been confirmed by the CIT(A) by dismissing the appeals of the appellant. Thus, the very basis of addition is not altered at all. The only thing is that the Id. CIT(A) has directed the AO to considered all the transactions jointly on the basis of peak credit as reflected in the cash flow statement on the basis of seized documents. Thus, the Ld. CIT(A) has asked the AO to follow certain method of working the quantum additions and that too only on request of appellant which was made before him during the course of appellate proceedings. The additions in the case of appellant have mainly been made on the basis of incriminating documents, but the ld. CIT(A) wanted to en ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ition as per the direction hereinabove. Since, the quantum of appeals are restored back for re-adjudication to the file of the AO, therefore, the very basis of levy of concealment penalties are simultaneously to be decided afresh along with the assessment order. 21. In the result, these appeals are allowed for statistical purposes only. C. Revenue's Appeal (ITA No.2689 & 2690/Ahd/2009) (A.Y.2005-06 & 2006-07) 22. These two appeals have been filed by the Revenue arising from the order of learned CIT(A)-IV, Ahmedabad, both dated 31st of March, 2009. From the side of the respondent a legal heir, namely, Smt. Meenaben Mukesh Patel (wife) is brought on record. For both the years, Revenue has raised the grounds as under:- "The Ld. CIT(A) has erred in law and on facts and circumstances of the case in deleting addition of Rs.16,46,300/- on account of short term capital gain on account of sale of land. On the facts and in the circumstances of the case, the Ld. CIT(A) ought to have upheld the order of the Assessing Officer on the above points." 23. Facts in brief as emerged from the corresponding orders for A.Y. 2005-06 and 2006-07, respectively, passed u/s. 143(3) read with secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see was asked to explain these transactions. In response thereto, the assessee repeats the story of AOP. Therefore, it is held that the assessee failed to submit valid reply. For want of valid reply, I have no any other alternative but to add Rs.14,37,300/- (Rs.1,59,700x 9 plots). Similarly, out of these nine plot a plot No.19 was sold at the consideration of Rs.3,70,000/- on 10/11/2004 by the assessee. Since an amount of Rs.1,59,700/- has already been covered in Rs.14,37,300 the difference i.e., Rs.2,09,300/- (Rs.3,70,000 minus Rs.1,59,700) has been added to the total income of the assessee as short term capital gain on account of sale of land. Since, the assessee is benami of M/s. Jayesh Finance, addition to the extent of Rs.16,46,600/- is made on protective basis in the hands of the assessee. Penal proceedings u/s. 271(1)(c) of the Act are initiated." 24. When the matter was carried before learned CIT(A), it was held that the AO is to verify from the cash flow statement that the amount of profit earned from the sale transaction of those plots is covered in the incremental peal and the assessment is to be made in the hands of the firm on substantive basis. The directions of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llant. Therefore, Assessing Officer is directed to verify from seized material available in this possession whether this income is covered in the cash flow statement the amount of profit earned from unaccounted sale transactions of plots to various persons on the basis of incremental peak credit in case of the Partnership Firm where it was added on substantive basis. Further, the addition on protective basis in case of the Appellant is hereby deleted with the directions to the Assessing Officer to consider this amount of addition in case of the partnership Firm on substantive basis of cash flow statement and incremental peak credit in case of the Firm. Hence, the single ground of appeal is allowed." 25. After hearing both the sides, we are of the view that there was no fallacy in the directions of learned CIT(A). The case of M/s. Jayesh Finance has already been discussed in details in above paragraphs. In those paragraphs, we have directed the AO to compute the unaccounted income from Finance business, on one hand and on the other hand, the AO is directed to determine the incremental peak credit on the basis of the cash flow statement and then the unexplained investment in the fi ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
