TaxTMI 
TaxTMI 
2016 (4) TMI 511
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 3. That the Ld. CIT(A) is not justified in making new addition of Rs. 3,92,700/- (enhancement) on account of unexplained investment in purchases of raw material during the A.Y. 1998-99. 4. That the Ld. CIT(A) is not justified in enhancing the addition on account of net profit from Rs. 3,55,5811- to Rs. 9,45,485/- for AY 1999-2000 to 2003-04 (up to 16.08.2002) by arbitrarily applying the net profit rate of 10% on total sales. 5. That the Ld. CIT(A) is not justified in upholding the addition of Rs. 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 of the stock found. 9. That the Ld.CIT(A) is not justified in upholding the Various additions as taxation can be of the real income and only to the extent of source of income which could give rise to such income and not beyond that. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....g of the block period from Rs. 1,50,000/- to Rs. 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 Rs. 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 telescoping allowed to the assessee. 5. In ground No. 1 of the appeal, the assessee has agitated the issue of rejecting the books of account under Section 145(3) of the Act by the Assessing Officer and sustained by the ld. CIT(A). 5.1 The Authorized Representative of the assessee filed paper book containing page no. 1 to 302 and submitted that the books of account were prepared on the basis of the documents found and seized in the course of search. He further submitted that the Assessing Officer and 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 book....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ce to support the various entries in books of accounts. All the business transactions are stated to be in cash. There are no business transactions done in bank which could have lent confidence of genuineness to entries. The AO's observations on this aspect were therefore correct. 3. As about the argument that the appellant was not required to 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 to the seized material being kachcha record of business transactions maintained by the appellant who was uneducated & working in unorganized sector. On examination, the seized record was found to be highly casual, unsystematic and haphazard which was in the form of mere rough notings. It is difficult to derive any logical conclusions about ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nal 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 make books is to show highly inflated cash balance which has been done by showing huge creditors. Comparison of creditors, debtors & cash in b/s filed with original returns and now shown in books is as under: 7. The month wise average, maximum & minimum cash balance for entire period is shown as under: Month Minimum Maximum Average Apr-98 142100 150643 145891 May-98 150643 179005 159372 Jun-98 179005 192276 184772 Jul-98 191876 323950 231779 Aug-98 341480 584245 522335 Sep-98 584245 584354 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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....otal 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 (Annexure-A pg 8) as well as final P & L A/c on the basis of books filed as part of paper book (Annexure-B pg 8). This shows that there is no sanctity of either books of accounts or the final accounts made on its basis. They are changed and manipulated at will according to the need & convenience. It may be noted that all these documents are signed by the appellant. 9. It is stated that the appellant's business of making kites is a seasonal business and major sale takes place in the months 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 h....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s in the cash book are made in altogether different manner. A copy of the paper on which some findings of test .check of books of accounts were noted (copy of the same was given to appellant's AR also) is made part of this order as Annexure-E. Hence 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 dates, the books cannot be said to be reliable and conclusions drawn would be erroneous. If it was sufficient to simply include all purchase and sale transactions on any date on whatsoever, there was no purpose of making any books of accounts. Only the P&L a/c could be prepared directly at the end of the year. Moreover if simply the date of cash transaction is changed in any cash business, the final results of accounts may undergo huge chang....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 that the books of account of the assessee were not reliable and cash receipt in the books of account were not appearing in the noting in the seized diary and huge cash sales of more than Rs. 4 lakhs was shown on various dates in the month of August, 2002 without any corresponding evidence in seized papers. The ld. CIT(A) also observed that there were manipulations in the bill books and the assessee had shown unsecured loans of Rs. 2,46,500/- taken in the month of July and August, 2002, just 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 Rs. 1 lakh in normal business and he held the rest cash available of Rs. 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 been placed of books of accounts, The books have already been rejected as ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....7/7/02 Kamal Ahmed 16000 234425 29/7/02 Sarif Mohmad 15000 262375 1/8/02 Parvez Akhtar 15000 291074 5/8/02 Salim Akhtar 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.This further proves that the books are unreliable & entries therein are fabricated with particular motive. 5.3 In the appeal proceedings the appellant's AR filed confirmation letters from various persons who allegedly gave loan to the appellant. The AO in his report dated 3/11/05 specifically mentioned that no confirmation letter either from any persons giving loans or alleged creditors (the cash balance ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ing to the business of the appellant if judicious view of the issue is taken. Considering facts & circumstances sum of Rs. 1 lac is treated as normal business cash of the appellant & hence considered as explained. That leaves only Rs. 9,27,000 as unexplained cash found during the search. The addition of undisclosed income on this a/c is therefore reduced to Rs. 9,27,000." 6.3 In view of above, we find that the findings of the ld. CIT(A) on this issue are well reasoned and no interference is required. Accordingly, we uphold his finding and confirm the addition of Rs. 9,27,000 as unexplained cash. This ground of appeal raised by the assessee is thus stands dismissed. 7.1 In ground No. 3, the assessee has challenged the enhancement of unexplained investment in purchase of raw material from Rs. 1,50,000/- to Rs. 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 assessee would have needed investment for s....
X X X X Extracts X X X X
X X X X Extracts X X X X
....addition of Rs. 3,92,700 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 Rs. 3,92,700/- after allowing the gross profit @ 15% on sales of Rs. 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. Accordingly, this ground of the assessee is dismissed. 8. In ground No. 4, the assessee has challenged the enhancement of addition on account of net profit from Rs. 3,55,581/- to Rs. 9,45,485/- by the ld. CIT(A) applying the net profit rate of 10% on total sales. 8.1 Before us, the ld AR submitted that the CIT(A) has adopted the gross profit rate of 10% on arbitrary basis, without any comparable case. Further, he relied on the submission made before the CIT(A). On the other hand, 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 sei....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n-compliance began & all kind of objections came to be taken. Since the AR had filed written reply but did not attend to produce books & other documents, he was contacted on phone & was requested to attend the hearing to produce books. The hearing was fixed on 31/12/07 with consent of Mr Gurjeet Singh. However even on 31/12/07 there was no compliance. In the interest of justice one more opportunity was given 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 amendment of sec 40A(3) wef 1/4/96 the discretion of the AO has' been taken away & in case of default 20% of the cash payment is to be disallowed straight unless the payment falls in any of the specific exemptions provided in Rule 600. The decisions relied upon by the AR are not relev....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s 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 Rs. 3,55,581 made by the AO is to be replaced by Rs. 9,45,485 which results in enhancement of undisclosed income." 8.3 In view of above, we find that the ld. CIT(A) as taken into consideration all the aspects while arriving at his conclusion including the fact of cash expenditure, the net profit rate declared by the assessee in regular return, net profit rate declared in the books of account prepared subsequently after search and the sales recorded in seized papers as worked out by the assessee including the labour charges. We do 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 Rs. 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 w....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he relevant paragraphs of the order of the ld. CIT(A) are reproduced as under:] "9.1 Ground No 5 is against addition of Rs. 1,54,770 being cash payment for financing the purchase of Santro car on installments. It 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 Rs. 1,54,770 as undisclosed income of the appellant for FY 02-03 . 9.2 In the appeal proceedings again the reliance was placed on the books of account and it was submitted that the payment was duly reflected therein. The payment was made out of business funds and cannot be treated as undisclosed income. The appellant was not having any other source of business except the kite business. 9.3 I have carefully considered the submissions made by the appellant. The rejection of books of account by the AO has been upheld as per discussion ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s were prepared subsequent to the search and manipulated/adjusted with a particular motive to explain the material found during search. If the books were available with the part time accountant they could have been produced before the ADIT immediately after the search. In the earlier part of this order it has also been proved that there are large scale manipulated/adjustments in the books particular regarding dates of transactions which rendered the books of unrealizable. Hence these books can also not be treated as the basis for explaining the stock found during the search. Further it is noted that huge stock in the range of Rs. 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 my view a sum of Rs. 50,952 can be treated as legitimate stock of business and cons....
X X X X Extracts X X X X
X X X X Extracts X X X X
....r unexplained investment/expenditure. 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 not be brought to tax otherwise it will amount to double addition. This is because the income from whatever source & based on whatever document, denotes inflow of funds. On the other hand the investment or expenditure involves outflow or utilization of such funds. If income is earned first, the expenditure/investment can obviously be said to have been made out of such income. In principle the argument of the appellant appears to be quite reasonable & should be accepted. 11.3 However what is 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 be....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e telescopic benefit allowed to the appellant. The AO is directed to compute the tax accordingly." 13.3 In view of above, we do not find any infirmity in the finding of the ld. CIT(A) on the issue in dispute and he has allowed the telescoping after due consideration of the period of investment and income. Accordingly, this ground of the assessee is also dismissed. 14. Ground no. 11 is consequential to the above grounds of appeal and ground of nos. 12 & 13 are general in nature, therefore, not required to adjudicate upon. 15. In the result, the appeal of the assessee is dismissed. IT(SS)A No. 54/ Del/ 2008 16. The grounds of appeal raised in the appeal of the Revenue are as under: "1. The order of the ld. CIT(A) is not correct in law and facts. 2. Whether the Ld. CIT(A)-XI New Delhi is justified in facts and in the law in directing the AO to allow the appellant the benefit of the telescopic method, thereby allowing the assessee to set off his investments against the undisclosed income with establishing the accounting link between the two. 3. The appellant craves leave to add, alter or amend any all of the grounds of appeal before or during t....