TaxTMI 
TaxTMI 
2009 (8) TMI 122
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....ock period. During the assessment proceedings, the assessee filed a statement of cash flow for the block period. The AO made adjustments in the statement of cash flow filed by the assessee in regard to the opening cash balance as on 1st April, 1989, agricultural income and personal expenses etc. 3. The only issue raised by the Revenue before the Tribunal is as in ground No. 2 which is reproduced below: "2. The CIT(A) erred in holding that the undisclosed income from toddy and arrack business is not includible in assessee's total income. The CIT(A) failed to note that assessee has not produced details like PAN, name and designation of AO of M/s Malabar Associates, though it was promised to do so at the time of assessment. The CIT(A) ought to have verified whether the income from toddy and arrack business was actually included in the income-tax assessment of Malabar Associates." 4. The reproduction of the ground is more important as the ground is argumentative and surrounded on facts. The CIT(A) failed to note that the assessee had not produced details like PAN, name and designation of the AO of the Malabar Associates. In our humble opinion, this kind of ground of appeal wil....
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.... in the case of Shri K.K. Sasi, a third party, there is no s. 158BD proceedings in respect of M/s Malabar Associates, the so-called AOP. The seized documents as mentioned in assessee's paper book page No. 34 are capital and liabilities as in the balance sheet, assets as shown in assessee's paper book page No. 35, trading and P&L a/e as in assessee's paper book page No. 36, P&L a/c for the year ended on 31st March, 1995 as in page No. 37 of the assessee's paper book and page Nos. 38, 39 and 40 show the expenses statement. These are all the seized materials at the residence of Shri K.K. Sasi. These seized materials, as rightly contended by the learned counsel for the assessee, reflect and prove that these are all profit sharing documents of the partners including the assessee in respect of Malabar Associates as well as M/s Associated Liquors. M/s Associated Liquors was not agitated by the Department only M/s Malabar Associates is being agitated against the order of the CIT(A). The learned counsel for the assessee contended that as far as M/s Malabar Associates is concerned, it is not the income of the assessee. If at all, it is the profit ratio by the assessee in the firm, as he cont....
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....he hands of the assessee as it is not the undisclosed income of the assessee. Therefore, we confirm the order of the CIT(A) by dismissing the ground of the Revenue as devoid of merits. 11. In the result, the appeal filed by the Revenue is dismissed. DR. O.K. NARAYANAN, A.M.: 2nd June, 2009 I have had the privilege of going through the order proposed by, the learned JM. I am unable to agree with the findings arrived at by the learned JM and his consequential order dismissing the appeal filed by the Revenue. Hence, this dissenting order. 2. I have to state in brief the facts of the case and the arguments advanced from either side. 3. The assessee, Shri K.T. Joseph, is a partner in the firm, M/s Hotel Amrutha & Bar and also in various other firms belonging to Amrutha Group of concerns. The business of the group is liquor, bar hotels and restaurants. The group is carrying on business from North to South of Kerala in different places from Iritty to Thiruvalla. 4. A search under s. 132 was conducted in the residential premises of the assessee on 29th July, 1999. This search was conducted in combination with the search carried out in various busin....
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....he asst. yr. 1995-96. For the asst. yr. 1996-97, from the same Tiruvambadi arrack Group a total income of Rs. 30,31,484 has been worked out by the assessing authority. The share of the assessee for the said asst. yr. 1996-97 was 70 per cent and accordingly an amount of Rs. 21,25,539 has been allocated to the assessee. In respect of Calicut IVth Group (Arrack) share of the assessee was 50 per cent and an income of Rs. 8,54,817 has been added in the hands of the assessee. Again, for the asst. yr. 1996-97, the income from Tiruvambadi toddy shop Nos. 68, 69 and 70 and shop No. 78, was worked out at Rs. 2,62,098. 6. On the basis of the above items of income computed by the AO in respect of toddy and arrack business, the cash flow statement filed by the assessee was recast. The AO observed that cash deficiency existed for the asst. yrs. 1990-91, 1991-92, 1992-93, 1993-94 and 1997-98. Those cash deficiencies have been treated as undisclosed income of the assessee. For the asst. yrs. 1995-96 and 1996-97. the AO has added the actual share of the assessee as a partner in arrack and toddy business. Altogether, the total undisclosed income of the assessee has been determined at Rs. 50,40,49....
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....essee. In the light of the above details, the CIT(A) deleted the additions made by the assessing authority in the hands of the assessee as income from toddy and arrack business for the asst. yrs. 1995-96 and 1996-97. According to the CIT(A) all these facts are to be considered in the hands of M/s Malabar Associates and not in the hands of the assessee who is only a partner. 8.4 Regarding the income from Calicut IVth Group (arrack), the CIT(A) deleted the addition on the ground that the said business was carried on by the firm M/s Associated Liquors and the assessee was only a partner in the said firm having a share of 5 per cent. 50 per cent of the income was added by the AO in the hands of the assessee and 50 per cent was assessed in the case of the other partner, one Shri D. Rajkumar, Quilon. The CIT(A) found that the additions made in the hands of Shri D. Rajkumar have been deleted by the CIT(A), Trivandrum, holding that the business was carried on by the partnership firm, M/s Associated Liquors. On the above grounds, the CIT(A) deleted the addition of Rs. 8,48,817 in the hands of the assessee as well. 8.5 In respect of the additions made by the AO towards income from todd....
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....d the contents of the partnership deeds. The real state of affairs of the business carried on by the assessee is reflected in the seized materials. This crucial fact has been overlooked by the CIT(A). 11. The learned CIT continued to argue that the additions have been deleted by the CIT(A) on the ground that the arrack and toddy business was carried on by the firms, viz. M/s Malabar Associates and M/s Associated Liquors and those firms have already filed returns of income and therefore these items cannot be considered as undisclosed income in the hands of the assessee. The CIT(A) has overlooked the important fact that these firms have filed untrue returns and they have produced fabricated accounts and the income returned by those firms is not the correct income and as a partner of those firms, the assessee has also responsibility and the same has not been discharged by the assessee. The CIT(A) has deleted the additions made in the hands of the assessee on a feeble technical ground that these firms, which carried on arrack and toddy business, have filed their own returns of income. The CIT(A) has overlooked all other relevant evidences available on record and he accepted the cont....
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....spect of the order of the CIT(A) deleting the additions made in the hands of the assessee in respect of arrack and toddy business which was in fact carried on by two different firms, viz., M/s Malabar Associates and M/s Associated Liquors. 15. The Revenue is aggrieved by the order of the CIT(A) deleting the additions made by the AO in the hands of the assessee in respect of Tiruvambadi arrack Group business for the asst. yrs. 1995-96 and 1996697 and the business of Calicut IVth Group (arrack) for the asst. yr. 1996-97. In respect of the above two firms, all the necessary details were furnished before the AO which included the copies of the returns filed by those firms, partnership deeds, books of accounts etc. All these particulars were furnished before the AO in the proceedings arising out of the search conducted in the premises of Shri K.K. Sasi. The details and documents furnished before the AO clearly showed that those firms have already filed their returns of income in which the income from the business of arrack and toddy has already been disclosed and the share attributable to the assessee has been disclosed. When all these matters were disclosed before the AO, he should ....
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....that the CIT(A) has rightly cancelled the income from arrack and toddy business imputed in the hands of the assessee. Similar orders have already been passed by the CIT(A) in the case of M/s Associated Liquors as well. As the assessments of the alleged income of Malabar Associates and Associated Liquors and Shri K.K. Sasi are all cancelled by the CIT(A) on similar grounds, the order of the CIT(A) should prevail in the present case as well. 19. The facts of the case as briefly narrated in the above paras when examined in the light of the rival contentions, it is seen that the CIT(A) has deleted the undisclosed profits added in the hands of the assessee arising from carrying of the business of dealing in arrack and toddy, on the ground that the income whether disclosed or undisclosed related to those firms and if a step further gone to Shri K.K. Sasi. According to the CIT(A), there is no personal accountability cast on the assessee in the case of any income earned by the firms, viz. M/s Malabar Associates and M/s Associated Liquors. 20. Before going to the correctness of the above conclusion arrived at by the CIT(A), it is necessary to go through the details available from the ....
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....the firms in which he was a partner always understated the income in the returns of income filed by those firms. The assessee has stated that all the firms in which he was a partner always manipulated the accounts so as to understate the sales of arrack and other items. It is clear that all the firms earned unaccounted income by way of sales suppression at different rates depending upon the situations as decided then and thereby the partners who were in-charge of those firms. The assessee has also stated that unaccounted profit generated by the partnership firms were periodically quantified by the partners and shared in cash. There were periodical settlements of undisclosed accounts by the partners. 22. It is also clear from the seized records that the profit sharing ratio of the assessee reflected in the partnership deeds filed along with the returns of income was not the correct and actual share. The apparent profit sharing ratio reflected in the partnership deed ranged from 5 per cent to 10 per cent in favour of the assessee. But that is not real. The seized records have shown the actual profit sharing ratio and the quantum of profit enjoyed by the assessee. The actual share ....
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....tion of undisclosed income. The undisclosed income has to be assessed in the hands of the person who received it. In the present case, even though the partnership firms have generated the undisclosed income in the business of liquor carried on by them, the partners of the firm have directly received the undisclosed income before touching the coffers of the firms. We have already seen the relationship of the firm and its partners. In such a case, where the undisclosed income has been distributed to the partners without bringing into the accounts of the firm, the partners are liable for answering the undisclosed income, as they are the recipients of that undisclosed income. The unaccounted profits have reached the partners directly from the business and not through the allocation of account maintained by the firm. As per the materials collected in the course of search the partners have received their shares of undisclosed income from time to time. As the unaccounted profits have been shared by the partners outside the partnerships, the partners are liable to account for the said shares of unaccounted profits siphoned by them. 28. Therefore, in law as well as in facts, as far as th....
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....re of unaccounted profit from the two firms, M/s Malabar Associates and Associated Liquors. These shares of unaccounted profits have not been disclosed either in the hands of the respective firms or in the hands of the assessee. The share of unaccounted income has not been disclosed so far. They came to light only because of the search. The firm is answerable to the share of profit allotted to a partner in its accounts. A firm has to state in its accounts the allocation of profit or loss to the accounts of the partners in the profit sharing ratio. The share of profit or loss attributable to a partner stands disclosed and explained only to the extent of the allocation made in the accounts of the firms. Where allocation of any profit is not reflected in the accounts of a firm, the partner cannot plead the alibi that he only being a partner of the firm, his share of accounted profits as well as unaccounted profits should be considered only in the hands of the firm. The firm is answerable only to the extent of the profits reflected in its allocation account. The firm is not answerable to that share of profit attributable to a partner but not reflected in its allocation account. Therefo....
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....ithin the four corners of "undisclosed income" defined in s. 158B(b). 34. Therefore, I am of the view that the share of income received by the assessee from the unaccounted profit of the firms is in the nature of undisclosed income in the hands of the assessee. This undisclosed income in the hands of the assessee does not become disclosed income only for the reason that these two firms have filed the returns. What is disclosed in the returns filed by those firms is only a part of that income. The unaccounted income always remained undisclosed. So, the filing of the returns by the two firms has no bearing in deciding the question whether the share of the assessee in the unaccounted income of these firms is disclosed or undisclosed. Needless to say it is undisclosed. 35. Therefore, in my view, the assessing authority is justified in adding the proportionate unaccounted income of the firms in the hands of the assessee as part of his undisclosed income. The CIT(A) is not justified in deleting those additions only on the ground that the two firms have filed their returns of income. The filing of returns by those two firms has not made the entire income disclosed. Therefore, the or....
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....n the Members who heard the appeal, the following question is referred to the Hon'ble President, Tribunal: "Whether, in the facts and circumstances of the case, the CIT(A) is justified in holding that no addition can be made in the hands of the assessee towards undisclosed income from the liquor business carried on by the firms M/s Malabar Associates and M/s Associated Liquors?" RECTIFIED REFERENCE UNDER S. 255(4) R/W S. 254(2) OF THE IT ACT, 1961 13th Aug., 2009 As there is a difference of opinion between the Members who heard the appeal, the following question is referred to the Hon'ble President, Tribunal: "Whether in the fact and circumstances of the case, the CIT(A) is justified in holding that no addition can be made in the hands of the assessee towards undisclosed income from the liquor business carried on by the firm M/s Malabar Associates?" VIMAL GANDHI, PRESIDENT (AS THIRD MEMBER): 14th Aug., 2009 On account of difference of opinion between the learned Members of Tribunal, Cochin Bench, the following question has been referred to me: "Whether, in the facts and circumstances of the case, the CIT(A) is justified in holding that no addition can be ....
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.... not concerned with those additions in the reference. I am concerned with the income from toddy and arrack business, which was treated as undisclosed income on the basis of certain documents found from the premises of Sri K.K. Sasi, who was admittedly the accountant of the firms. Assessee contended before the AO that income shown in the seized document was undisclosed income of M/s Malabar Associates. The AO did not accept the same in the assessment order. He assessed the share of undisclosed income on the basis of seized documents in the hands of the assessee. 5. On appeal, learned CIT(A) deleted the addition with the following observations: "Income from toddy and arrack business: The appellant is a partner with 10 per cent share in a partnership concern Malabar Associates with 11 partners including the appellant. This partnership is consisting of partners who are not in any way related to the appellant. The license for doing business in arrack is in the name of a partner other than the appellant and the firm Malabar Associates was carrying on the business for the asst. yrs. 1995-96 and 1996-97. The firm Malabar Associates is preparing P&L a/c and balance sheet of the fir....
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....re for the assessment of such a case and computation of undisclosed income for the block period. Under the above circumstances, we find that this cannot be undisclosed income in the hands of the assessee, which the assessee would have been or ought to have been disclosed for the purpose of this Act. The assessee is not under any obligation to disclose this income and if at all, it should be in the hands of M/s Malabar Associates, that too by way of s. 158BD assessment as the search was not in the case of M/s Malabar Associates and the material seized is also not from the residential premises of the assessee. It is only from the residential premises of Shri K.K. Sasi on the very same day. Further, the question and answer, which we have reproduced, clearly negatives the addition made by the AO and the CIT(A) is perfectly justified in deleting the addition in the hands of the assessee as it is not the undisclosed income of the assessee. Therefore, we confirm the order of the CIT(A) by dismissing the ground of the Revenue as devoid of merits." 7. The learned AM did not agree with the above conclusion. He allowed the appeal of the Revenue. He, however, made pertinent observations in ....
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....., M/s Malabar Associates and M/s Associated Liquors (answer to question No. 2). (ii) The firms in which the assessee was a partner have not maintained the books of accounts correctly. The accounts did not reflect the actual profit earned by the firms. The firms purchased liquors from Kerala State Beverage Corporation and purchase prices were accounted properly. But sales were understated in the books of accounts. A substantial part of the sales turnover did not reflect in the accounts. Likewise certain expenditure, which cannot be claimed as deductions in the returns of income were also not entered in the accounts (answer to question Nos. 5 and 6). (iii) Different ratio of sales suppressions is adopted in different firms. In the case of M/s Hotel Amrutha, sales suppression was to the extent of 25 per cent. There are no fixed parameters for deciding the quantum of suppression to be made in the sales of individual firms. The decisions are taken by those persons, who are in-charge of those firms. Sales suppression took place not only in liquor but also in respect of the sales of food items, soda, snacks, etc. The rate of suppression in the sales of such other items is 33 per ce....
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....g the undisclosed income, as they are the recipients of that undisclosed income. The unaccounted profits have reached the partners directly from the business and not through the allocation account maintained by the firm. As per the materials collected in the course of search the partners have received their share of undisclosed income from time to time. As the unaccounted profits have been shared by the partners outside the partnerships, the partners are liable to account for the said shares of unaccounted profits siphoned by them." For the aforesaid reasons, the learned AM allowed the appeal of the Revenue. 8. The case, to resolve the difference, was fixed for hearing. I have heard both parties. With the help of the learned representatives of the parties, I have also examined the materials available on record. As noted earlier, in the present appeal I am only concerned with the income, which has been held to be undisclosed income of the firm, M/s Malabar Associates, in which the assessee was a partner. The income of other 21 concerns is not the subject-matter of dispute before me. 9. The learned CIT(A) has recorded that the firm, M/s Malabar Associates, filed its return f....