TaxTMI 
TaxTMI 
2013 (8) TMI 964
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....nts/loose sheets/scribbling pads were found and seized and marked as annexures A/KCH/RES/l to 6 at the residence of the Managing Partner of the firm, indicating certain transactions such as trading in coal through e-auction purchases, advances to lorry owners towards freight charges, payments to the staff of Singareni Collieries Co. Ltd (SCCl) and India Cements Ltd (ICL), etc. Further, an amount of Rs. 34,50,000 was seized out of cash of Rs. 34,65,800 found, at the business premises of the assessee. 2.1 The assessee firm constituted with Mr. K.Ch. Subba Rao and Sri C.V. Subramanyam as partners and into the business of transport contract for last several years and filing returns of income, regularly. Books of account stated to have been maintained and revenues for the assessee firm arising from transport business on account of contracts entered with cement companies such as M/s India Cements Ltd etc., for transporting coal from the mines of M/s Singareni Collieries Co. Ltd, to the sites of ICL located at Vishnupuram, Tandur and Erraguntla etc. Major expenses of the assessee are the 'freight charges' paid to truck owners and the same indicated to have constituted 98.50% fo....
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....aggregated and extended to the third month in the FY 2008-09. For A.Y. 2008-09, it is estimated @ Rs. 10 lakhs per month, for 4 months. 3. Freight payments 1,00,00,000 1,50,00,000 1,00,00,000 1,00,00,000 90,00,000 09-10 08-09 07-08 06-07 05-06 Estimation basis. 4. Creditors 12,95,53,492 3,98,72,238 2,48,47,434 30,84,519 2,43,63,210 09-10 06-07 05-06 04-05 03-04 Treated the sundry creditors as unexplained for want of information such as name & address of the creditors. Quantification is net of closing balance and opening balance of creditors of respective financial year. For A.Y. 2009-10, closing balance of the year is netted against opening balance of A.Y. 2006-07 and in the case of A.Y. 03-04, entire closing balance of sundry creditors taken as unexplained. 5. Illegal payments 5,00,000 5,00,000 5,00,000 5,00,000 5,00,000 5,00,000 5,00,000 09-10 08-09 07-08 06-07 05-06 04-05 03-04 For A.Y. 2009-10, the addition is based on entries in loose sheets of seized material. For balance of years, the information was presumed based on the statement and extrapolated, based on ratio of decisions in case laws of: a) Rajnik & Co. vs. ACIT (AP) (251 IT....
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....but the findings made/ conclusions drawn by the Assessing Officer. Hence, the findings of the Assessing Officer as regards to the taxability of the said income in the hands of the assessee firm, is justified and confirmed. The income generated need to be offered for tax in the hands of the person who earns it. But no such compliance seems to have been made by the assessee in this regard. However, keeping the applicability of the provisions of sec. 132(4A) of the IT Act, 1961, such income is taxable in the hands of the firm, in whose case the incriminating material was found, which stood unexplained. In the instant case, the information found in the possession of the assessee as such onus lies on it. Further, no such incomes have been offered for tax in any other hands including the managing partner Mr. K.Ch. Subba Rao. Hence, the CIT(A) confirmed the addition in the hands of the assessee firm. 2.6 Howe ver , whi le quan tif yin g suc h incom e, th e Assessing Officer made on estimation, instead of considering the actual information related to the profits of coal business as indicated in the seized material, specific for each of the month. There is no reason or basis for the m....
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....me on such business, which was retracted subsequently, as such the information of the original statement could not have become the ultimate basis for the additions. Further, though the Assessing Officer could not rebut the retracted statement of the Managing Partner, it is not denied that the seized material indicate the sporadic information as regard to the earnings of business of coal trading. Though such information is not enough to arrive at the exact figure of income, as arrived by the Assessing Officer in the assessment order, there is an indication of such business carried for two years as per the initial statement of the Managing Partner. The said initial statement was also indicating the quantum of turnover and percentage of income on it. Keeping all the facts of the case that have emerged in the course of search proceedings and subsequent proceedings, the CIT(A) concluded that such trading activity was carried for two years i.e. A.Ys. 2008-09 & 2009-10. However, no specific information is available that can help in quantification of the income for AY 2008-09. Accordingly, the conclusion as regards to the quantum of profit of the said business is derived from the origin....
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....e r obse rve d tha t in the se rie s of the assessment orders passed u/s 153A, related to the search conducted in this group, the Assessing Officer has chosen not to make any disallowances under the said head of expenses, for the A.Y. 2004-05 and A.Y. 2003-04, though similar facts were prevailing for the said years. In the original assessment order u/s 143(3) passed on 1.12.2005, both in the case of AY 2004-05 and AY 2003-04, certain disallowances were made, under the head 'freight charges', observing that 'freight payment not vouched properly' and the amounts of disallowances were Rs. 6,01,221 and Rs. 8,98,364 for AY 2003-04 and AY 2004-05, respectively. While making the disallowances, the Assessing Officer referred to certain defects in maintenance of bills/vouchers and books of accounts. Similarly, in passing the assessment orders related to AY 2005-06 and AY 2006-07, the Assessing Officer disallowed portion of 'freight charges' while giving specific findings that the entries were not explained or proved by corresponding vouchers/trip sheets, before Assessing Officer, the books of account are to be reported u/s 145 of the IT Act, 1961. In various judgemen....
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....3(3) r.w.s. 153A, where no disallowances under the head 'Freight Paid' were made. Whereas in the assessment years where books were rejected in the original assessment order, as in the case of AY 2005- 06 and 2006-07 for the purpose of estimating the profit were refused to be considered by the Assessing Officer, while continued to make disallowances of expenses on estimation basis. Absence of information or defects in maintenance of particular bills or vouchers, will certainly lead to estimation. However, the disallowances made on mere estimations, that too in round sum figures without any basis whatsoever do not help the additions to be sustained. In completing the assessment for all the years under reference which happened to be on the same date, the Assessing Officer seems to have adopted the different yardstick for different assessment years while quantifying the disallowance under the same heading in the case of the same assessee which indicate that the additions were made without nay basis or defects pointed out, as such the additions made under the head 'freight charges' merely on estimation are not sustainable. Hence, the CIT(A) deleted the same. 2.13 Addi....
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....referred to the statements recorded from the Managing Partner and the Accountant of the firm to arrive at the conclusion that there is no scope for existence of the creditors where cash has been used for payment to the truck drivers. However, on close examination of the replies given by the Managing Partner and the accountant of the firm, vide their sworn statements reveal that at no point of time, the assessee shown to have admitted that these creditors are bogus or non- existing. Vide the statements, all along it was tried to explain the transactions involving the payments to the truck drivers which has some obvious difficulties in maintenance of accounts. This fact was also noticed and appreciated by the Assessing Officer while completing the scrutiny proceedings in the original assessment. It appears that no such hint was given by the assessee represented through its Managing Partner to indicate that the entire creditors are bogus and non-existent. Hence, the conclusions drawn by the Assessing Officer based on few general references in the seized material and statements recorded are only hypothetical and not on sound footing. Accordingly, on this issue also, the stand taken by ....
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....-08, there is no such adjustment and accordingly no additions on account of the unexplained creditors for the two assessment years (iii) For assessment year 2003-04, while computing the unexplained creditors, the Assessing Officer has taken entire closing balance of the creditors (i.e. Rs. 2,43,63,210) without considering the opening balances of creditors for the year. 2.17 Further, it was observed by the CIT(A) that the addition on account of creditors along with the disallowance of freight charges amounted to double disallowance. The creditors being the sundry creditors and directly arisen out of the expenses, more particularly the freight charges in this case, if disallowed without pointing out to a particular transaction or party, there is every possibility of duplication of addition/disallowance, since additions/ disallowances also made for freight paid. 2.18 It appears from the record and history of the assessee, that though the books were maintained and audited, there were certain deficiencies, as pointed out on earlier occasions, with few questions raised and the said accounts subjected to detailed scrutiny. There were also occasions where specific deficiencies were p....
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....ase, the assessment made is not a best judgement assessment. It is primarily made on the basis of the accounts maintained by the assessee. But, when the Assessing Officer comes to the conclusion that no reliance can be placed on the accounts maintained by the assessee, he proceeds to assess the assessee on the basis of his best judgement. In doing so, he may take such assistance as the assessee's accounts may afford; he may also rely on other information gathered by as well as surrounding circumstances of the case. The assessments made on the basis of assessees accounts and those made on best judgement basis are totally different types of assessments." 2.20 The CIT(A) further observed that in this case, the additions made by the Assessing Officer on account of treating the sundry creditors, related to the outstanding payments to truck drivers as unexplained credits, reveal that the Assessing Officer neither based his additions on the best judgement or based on the accounts of the assessee. Even in the best judgement, the scope for the Assessing Officer is limited and as it was observed in many judicial decisions, the estimation should be bona-fide estimate and based on a rat....
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....,00,000 each for A.Ys. 2003-04 and 2004-05. The disallowance of Rs. 5,00,000 made for AY 2008-09 gets confirmed. Accordingly, the assessee got a relief of Rs. 10,00,000 for the seven years under reference out of the total disallowance of Rs. 30,00,000 made for seven years. 2.23 Addition towards estimation of profit for A.Ys. 2005-06 and 2006-07: The CIT(A) rejected the books of account and directed the Assessing Officer to estimate income of the assessee at 2% of the gross receipts. He also relied on the judgement of jurisdictional High Court in the case of Maddi Sudarsnam Oil Mills Co. vs. CIT (37 ITR 359) (AP). 2.24 Addition towards estimation of profit for A.Ys. 2003-04, 2004-05, 2007-08, 2008-09 and 2009-10: The CIT(A) rejected the books of account and directed the Assessing Officer to estimate income of the assessee at 2% of the gross receipts on the basis of finding of the CIT(A) for A.Y. 2005-06 at 2% of the gross receipts. Against giving relief the Revenue is in appeal and for sustaining additions the assessee is in appeal before us. For clarity we tabulate the grounds of Revenue as well as the assessee as in the following: Assessee's appeals 3. The AR submitte....
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....having no other option has to estimate the income on the basis of the available record. In these circumstances, rejection of books of account and estimation of income of the assessee is justified. In our opinion, estimation of income in this case has to be made. However, the estimation of income cannot be made at 8% of the gross receipts because the assessee has borrowed huge amount and was paying interest. Considering the facts and circumstances of the case, income of the assessee has to be estimated at an average rate of assessed income before depreciation and interest to gross receipts for the last three preceding assessment years and thereafter deduction towards interest and depreciation has to be allowed. We are considering the last three years average rate of assessed income before depreciation and Interest to gross receipts as basis for determining the income of the present assessment year as the past history of the assessee itself is the best yardstick to assess the income of the assessee instead of applying 8% on gross receipt. The assessing officer while determining the gross receipts, he has to consider entire contract receipts. Regarding insurance receipts, it is to be ....
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....ch states that the income from profits and gains of business shall be computed in accordance with the provisions contained in ss. 30 to 43D. Sec. 40 provides for certain disallowances in certain cases notwithstanding that those amounts are allowed generally under other sections. The computation under s. 29 is to be made under s. 145 on the basis of the books regularly maintained by the assessee. If those books are not correct or complete, the Income tax Officer may reject those books and estimate the income to the best of his judgement. When such an estimate is made it is in substitution of the income that is to be computed under s. 29. In other words, all the deductions which are referred to under s. 29 are deemed to have been taken into account while making such an estimate. This will also mean that the embargo placed in s. 40 is also taken into account. 5. No doubt there is big difference between profit earned with own capital and profit earned with borrowed capital and such a difference could have been taken into account by the Income tax Officer while making an estimate. If the CIT had set aside the estimate on the ground that the vital fact that the business was carr....
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....sessing Officer. He also submitted that there cannot be any addition like illegal payments as there is no conclusive material other than the loose slips. According to him, the reliance placed by the lower authorities is on dumb documents and is incorrect. He also submitted that coal business was done by one of the partners, Mr. K. Ch. Subba Rao and that income from coal business cannot be considered in the hands of the assessee. He also submitted that once the income is estimated by rejecting books of account the Assessing Officer cannot rely on the same books of account so as to treat the creditors as unexplained credits. Further he submitted that the cash found during the course of search action is income from business. The Department has not accepted the books of account and estimated the income and making further addition towards cash found and the cash found was nothing but income generated from the business of the assessee and due telescoping is to be given out of the addition made towards income of the assessee. Otherwise it amounts to double addition. 4. On the other hand, the learned DR submitted that during the course of search, Sri. K. Ch. Subba Rao and the accountant....
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....y the partners of the firm. The entries in the seized documents clearly indicate that the assessee is pooling in cash from all the available sources to make advance payments to the truck procurement agents, who in turn make cash payments to the truck drivers. These entries further substantiate the statement given by Sri. K.Ch. Subba Rao explaining the modus operandi of the assessee firm. 4.3 Further, in view of the fact that, the assessee is drawing huge cash on regular basis and sending the same to its truck procurement agents for payment of cash advance, this theory of assessee of outstanding creditors represented by truck drivers is not acceptable and it only represents its own unaccounted investment which the assessee is trying to give the colour of outstanding creditors represented by truck drivers. From the modus operandi of the assessee as explained by the managing partner and the accountant, it is amply clear that the entire business is run on cash basis only. During the assessment proceedings to verify the contention of the assessee, the assessee was asked to submit the details of the creditors for the year under consideration as no list of creditors was filed. The asse....
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.... can be seen from the evidence found during the course of the search and as deposed by the Managing Partner of the firm, these payments are illegal payments like kick backs which are paid to the staff of ICL and SCL and on an average an amount of Rs. 5,00,000 is paid every year. 4.7 The DR submitted that the assessee is into the same line of business since the year 1995 and has been dealing with the same companies. During the course of assessment proceedings, the assessee retracted from his statement vide reply dated 01.09.2010 and stated that these amounts are pertaining to the expenditure of the firm. But in view of the clear evidence found in the seized documents and assessee's own admission during the course of search, the reply of the assessee is not at all acceptable. 4.8 The learned DR submitted that in the light of the evidence found regarding the illegal payments during the course of search and seizure operations and the confession of the same by the managing partner in his statement recorded during the course of search with regard to its practise of illegal payments and relying on the judgement of the Hon'ble A.P. High Court in the case of Rajnik & Co vs. AC....
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.... appeal of both the parties in a cumulative manner, instead of adjudicating the same in seriatim. In these cases, there was search action on the assessee. The assessee has not maintained proper books of account. The business of the assessee was unorganised. The assessee itself has admitted that it has not maintained proper records and documents for payments made by it to drivers. Huge amount is shown as receivable as well as payable. There was seized material which was found and seized marked as A/KCSR/RES/04-06, A/KCSR/RES/05 and A/KCSR/RES/01. The assessee was not able give satisfactory explanation. When books of account did not reflect the true and correct picture of the assessee's business, it is incumbent upon the Assessing Officer to determine the income by indulging into estimation of income. Being so, the Assessing Officer has no other option but to estimate income of the assessee on the basis of available material. In these circumstances, estimation of income by the Assessing Officer is justified. 5.1 The Assessing Officer estimated the income of the assessee at 3%. However, the CIT(A) considered the income at 2%. This is based on the rate of net profit accepted by ....
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....f competing with the business of the assessee firm. The partners are jointly and severally responsible for any acts done by them though individually and jointly. If the partners carry on any business contrary to the provisions of partnership deed or partnership Act, they are not entitled to that profit or loss derived from such transactions it does not belong to individual partners and on the other hand it belongs to the firm as a whole. The learned counsel submitted that partners have confirmed that they are not aware of the undisclosed business carried on by Shri Ravinder Kumar. In our opinion, the affidavit filed by the assessee is a self-serving document and the act done contrary to the partnership Act cannot be considered as valid and has no legal sanctity. Sri Ravinder Kumar is working partner of the firm and he has to act for the best advantage of the assessee firm. He cannot carryon anything against the interest of the assessee firm and he shall use the property of the assessee firm for the mutual benefit of partners and act done contrary to the provisions of the partnership Act cannot support the plea of the assessee's counsel. In this connection, we refer to the decision ....
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....ss income by rejecting the books of account. Being so, placing reliance on the judgement of jurisdictional High Court (cited supra), we confirm the order of the CIT(A) on this issue. 5.7 The assessee also challenged initiation of penalty proceedings by the Assessing Officer u/s. 271(1)(c) of the Act in the assessment order. This ground by the assessee is misconceived and preposterous and requires no adjudication as the assessee is at liberty to challenge penalty order independently. Accordingly, this ground is dismissed. 6. In the result, all the assessee's appeals are partly allowed and all the Revenue appeals are dismissed. Order pronounced in the open court on 2nd August, 2013. ============= Document 1 SE SI. No. ITA No. 899/H/12 ITA No. 900/H/12 ITA No. 901/H/12 ITA No. 902/H/12 ITA No. 903/H/12 ITA No. 904/H/12 ITA No. 905/H/12 Ground of appeal A.Y. A.Y. A.Y. A.Y. A.Y. A.Y. A.Y. 03-04 04-05 05-06 06-07 07-08 08-09 09-10 1. Gr. 1. CIT(A) erred in confirming the rejection of books made by the AO. AO Yes Yes Yes Yes Yes Yes Yes cannot ....