TaxTMI 
TaxTMI 
2007 (11) TMI 650
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....(i) The CIT(A) is not correct in coming to the conclusion that AO was justified in resorting to the estimation of undisclosed income for all the years falling in the block period. (ii) When the assessee himself had already disclosed income prior to search towards profits earned over and above the book profit for asst. yrs. 1997-98 to 2002-03 at ₹ 1,00,59,700. Without any further material found at the time of search to suggest there was further undisclosed income, the CIT(A) is not correct in stating that the estimation for all the years comprising in the block period can be made on the basis of materials found for broken period and the statements recorded based on the above materials. (iii) The CIT(A) is not correct in upholding that the Thali sales considered for multiplication factor is correct after giving a clear finding at para 3.53 'I am not very sure how by this statement he (the officer) comes to the condition that Thali sales should definitely be considered for multiplication factor.' (iv) The CIT(A) is not correct in stating that the GP rates adopted as per regular returns are to be adopted instead of the fact that the sales, purchases and expenses ....
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....itious names and bear no correlation to the actual sales made in their shops. The AO has discussed the notings in various seized material and after analyzing the same, he had come to the conclusion that recorded sales are generally in the order of 20 per cent of the total sales made. All the details found were pertaining to the financial year 2002-03. No details for earlier years have been found. However, the AO had observed that the assessee is engaged in unaccounted sales in earlier years also which is evidenced by the regular returns filed by the assessee himself, wherein for various years, he has shown income under the head "Income from other sources" or "Adhayam" as under : Asst. yr. Amount (Rs.) 1997-98 6,50,000 1998-99 20,27,000 1999-2000 4,75,000 2000-01 46,67,000 2001-02 11,70,000 2002-03 10,70,200 2003-04 11,56,000 Although the assessee himself had stated that the income represents the profit earned from unrecorded sales made during these years, no basis has been given how this figure has been arrived at. Thus the AO after extensive discussion in the assessment order concluded that the assessee is regularly suppressing its turnover. Th....
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....spect of GP on this turnover on the basis of declared GP in earlier years. However, finally he computed the undisclosed income on this account at ₹ 1,53,30,619 as against ₹ 1,97,88,566 made by the AO. Further CIT(A) has given deduction towards expenses at ₹ 96,52,896 over and above what the AO had given and thereafter determined undisclosed income at ₹ 62,77,720 instead of ₹ 1,56,31,600 as determined by the AO. Against this finding, the assessee is in appeal before us. 6. Learned Authorised Representative submitted that when the assessee himself had already disclosed income prior to search towards profits earned over and above the book profit for asst. yrs. 1997-98 to 2002-03 at ₹ 1,00,59,700 without any further material found at the time of search to suggest there was further undisclosed income, the CIT(A) is not correct in stating that the estimation for all the years comprising in the block period can be made on the basis of materials found for a few days in the broken period and the statements recorded based on the above materials. 7. Learned Authorised Representative further submitted that the income earned on unaccounted sales was already....
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....f search/survey operations or thereafter while framing the relevant assessment orders." 10. He submitted that circulars issued by CBDT shall be binding on the officers of the Department. For this proposition he relied on the following case law : (i) UCO Bank vs. CIT (1999) 154 CTR (SC) 88 : (1999) 237 ITR 889 (SC); (ii) CCE vs. Dhiren Chemical Industries (2002) 172 CTR (SC) 670: (2002) 254 ITR 554(SC). Regarding the assets founds in search on the basis of which undisclosed income was offered, learned Authorised Representative submitted that the AO himself had deleted the most of the items and had submitted a detailed extract of sworn statement and AO's order which are reproduced below : "The officer has stated at p. 4 : In short vide the above sworn statements recorded under s. 132(4) of the IT Act, the assessee has offered for taxation, the following amounts : 1. ₹ 1,25,00,000 vide sworn statement dt. 26th Nov., 2002 2. ₹ 13,18,950 vide sworn statement dt. 29th Nov., 2002." 11. The assessee has offered the above income because he was made to believe that there were undisclosed jewellery to the extent of 16 kgs, diamonds to the exten....
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....b(i)] value ₹ 5,64,620. 'It does not belong to the assessee is accepted, keeping in view the transactions recorded in the seized material'. (ii) 3 kgs. seized from Pavizham Galaxy Jewellers India (P) Ltd [p. 9 para (ii)] value ₹ 11,10,000 to be considered in the hands of the above company under s. 158BD. (iii) 11 kgs. of gold ornaments seized [p. 9'para (iii)] value ₹ 40,70,000. This aspect will be considered in the hands of Lilly under s. 158BD. (iv) Cash of ₹ 1,75,000 seized [p. 9'para (c)] to be considered under s. 158BD in the hands of Pavizham Jewellers India (P) Ltd. Pollachi. (v) Purchase of Pavizham Galaxy Building [p. 10'para d(i)] value ₹ 15,00,000 claim appears credible and no undisclosed income. (vi) Advance given for purchase of property from Kamath [p. 10'para d(ii)] to be considered in the hands of Lizo and Liss under s. 158BD. (vii) Construction of residential apartments at Guruvayur ₹ 1,14,62,129 [p. 11'para d(iii)] to be considered in the hands of the firm Pavizham Guruvayur Residential apartments. (viii) Purchase of property from Kamath [p. 11'para (iv)] ₹ 1,47,78,892 out of &....
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....nts. 14. Thus he submitted that there is no further material or direct evidence available with the Department to pinpoint the existence of any undisclosed income over and above admitted already in the regular returns. Regular assessments were also completed based on such returns 15. The Hon'ble Madras High Court has held in CIT vs. P.V. Kalyanasundaram (2006) 203 CTR (Mad) 449: (2006) 282 ITR 259(Mad) that an addition cannot be made on the basis of mere statement but has to be corroborated with other valid evidences. 16. In the present case the assessee had categorically told that the entire income from unaccounted sales was shown under other income and reflected in business accounts (paper book 162 Q. 24). The officer has not brought forth any material either seized at the time of search or collected during the assessment proceedings to contradict the above fact. 17. The Hon'ble Supreme Court has held in Mahendra Manilal Nanavati vs. Sushila Mahendra Nanavati AIR 1965 SC 364 that the admission by a person has to be considered in its entirety. 18. Learned Authorised Representative further submitted that block assessment is a separate scheme by itself in which assessme....
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....atently hypothetical receipts. In view of this we are unable to concur with the Department to the multiplication formulae adopted by the AO." 22. To sum up, learned Authorised Representative placed the following submissions before this Bench : (1) Regular returns admitting income of ₹ 1,00,59,700 from unrecorded sales were filed before raid. (2) No material either during search or afterwards was found to pinpoint income earned from unrecorded sales was more than the income admitted in the regular returns as above. (3) All the assets found during search were accounted in regular returns and no unaccounted assets over and above admitted in the returns were found. With these submission, learned Authorised Representative prayed for deletion of the alleged undisclosed income assessed for the asst. yrs. 1997-98 to 2002-03. 23. Learned Authorised Representative relied on the judgment of the Hon'ble Andra Pradesh High Court in the case of Andhra Bank vs. Dy. CIT (2002) 175 CTR (AP) 29: (2002) 255 ITR 1(AP) and the judgment of the Delhi High Court in CIT vs. Ravi Kant Jain (supra). 24. He submitted that statement recorded under s. 132(4) cannot be considered as a c....
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....was based on the declaration of income by the assessee itself in the returns filed by it and actually the income declared had been totally accepted by the AO. In the face of such facts, it would not be possible to say that what had been considered in the impugned assessment order as 'undisclosed income' of the assessee, really represented the income not disclosed or not mean for the Department. Therefore there was no existence of any 'undisclosed income' at all for the purpose of an assessment to be made under Chapter XIV-B. Finally therefore on account of non-existence of any undisclosed income, the impugned assessment under Chapter XIBB for the block period was liable to be annulled." 25. Further he submitted that the statement recorded under s. 132(4) was not given out of free will. He relied on the judgment of the Hon'ble Supreme Court in the case of CIT vs. P.V. Kalyanasundaram (2007) 212 CTR (SC) 97: (2007) 294 ITR 49(SC). Learned Authorised Representative further submitted that the period for which suppressed sales was estimated by the search party related to the Diwali festive season and that sales cannot be taken as the yardstick to determine the....
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.... to the block assessment also and there is no requirement of unearthing of matching assets towards undisclosed income during the course of search. This argument of the Departmental Representative is misplaced. The provisions under Chapter XIV-B are special provisions. These were brought on the statute book specially and specifically for assessment of undisclosed income detected as a result of search. The assessment made under s. 158BC has to be distinguished from the assessment in the normal circumstances or regular assessment based on the regular books of accounts produced before the AO. If there is a defect in the books of accounts produced before the AO he can reject the books of accounts and estimate the income. Sec. 158BA provides for assessment of undisclosed income as a result of search for the block period and computation of income and the computation of undisclosed income for the block period to be made as per the provisions of s. 158BB and the assessment has also to be made under s. 158BC. The undisclosed income, which can be assessed under Chapter XIV-B should be that amount which is computed on the basis of evidence found as a result of search and such other material or....
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....sales relating to 22 days cited supra at ₹ 1.86 crores relating to the period 10th Oct., 2002 to 3rd Nov., 2002 as against disclosed sales of ₹ 26.66 lakhs. The AO estimated the sales as follows for the above block period on the basis of the seized material. 30. The profit on suppressed sale is worked out taking the GP disclosed in the audited accounts filed for the above period which worked out to as under : Asst. year Suppressed sale GP % Amount 1997-98 3,96,06,627 16.74 6,630,150 1998-99 1,81,14,165 7.67 1,380,356 1999-2000 3,34,64,388 15.32 5,126,744 2000-01 4,46,14,128 10.78 4,809,402 2001-02 6,17,06,982 4.65 2,869,375 2002-03 9,06,85,524 5.74 5,205,349 2003-04 (26.11.02) 5,52,04,114 9.01 4,973,890 After this the AO determined the undisclosed income as follows : Asst. year Gross profit on suppressed sale Income from other Aadyayam delacred Balance undisclosed income 1997-98 6,630,150 6,50,000 5,980,150 1998-99 1,380,356 2,027,500 638,144(-) 1999-2000 5,126,744 475,000 4,651,744 2000-01 4,809,402 4,667,000 142,402 2001-02 2,869,375 1,170,000 1,699,375 2002-03 5,205,349 1,070,200 4,135,149 2003-04 (26.11.....
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....uivalent to s. 145 of the IT Act. The Hon'ble Supreme Court in this case held as under : "Sometimes there may necessarily or preferably be mistake in the accounts maintained by the assessee. There may be even certain unintended or unimportant omissions in those accounts; but yet the accounts may be accepted as genuine and substantially correct. In such cases, assessments are made on the basis of accounts maintained, even though the AO may add back to the accounts price of the items that might have been omitted to be included in the accounts. In such a case assessment made is not a best judgment assessment. It is primarily made on the basis of the accounts maintained by the assessee. But when the AO 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 judgment." 33. Thus, in the context of best judgment we are of the opinion that in the formula adopted by the AO there is no question of such best judgment as the assessee has already disclosed income from unaccounted sales. Some few small mistakes have been pointed out by the learned Departmental Representative w....
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....isclosed to the Department. 35. Reliance was placed on the judgment of the Andra Pradesh High Court in the case of Rajnik & Co. vs. Asstt. CIT cited supra by the Departmental Representative. In that case, during the course of search in the business premises of group concerns and also the residential premises of the partners of the assessee and residential premises of certain employees of the assessee, the authorities seized materials in the form of loose sheets relating to the suppressed sales for the financial years 1995-96 and 1996-97 which were brought to the books of accounts of the assessee firm. As a result of search, the assessee was asked to file a return for the block period from 1st April, 1985 to 13th Nov., 1996. The assessee-firm filed its return declaring an undisclosed income of only ₹ 7 lakhs, but the AO determined the undisclosed income at ₹ 63,08,120 based on the loose sheets representing the unaccounted sales and by estimating such suppressions for the asst. yrs. 1996-97 and 1997-98 till the date of search. In view of the largeness of the estimated undisclosed income, no separate addition was made on account of the unexplained investments. The Tribuna....
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.... asset found during the course of search for the period in question and the statement under s. 132(4) recorded during the search was retracted by the assessee vide letter dt. 10th Dec., 2002. This letter cannot be treated as an afterthought and moresoever the AO has not considered the undisclosed assets disclosed in the statement under s. 132(4) in the block assessment. He has given due weightage to this letter and thereby he has chosen not to make additions on the basis of assets. In the present case, it is an admitted fact that the assessee has been disclosing the income from suppressed sales as undisclosed income as a matter of abundant caution in his regular return before search action as follows : Assessment year Suppressed sale Amount 1997-98 39,606.627 6,630,150 1998-99 18,114,165 1,380,356 1999-2000 33,464,388 5,126,744 2000-01 44,614,128 4,809,402 2001-02 61,706,982 2,869,375 2002-03 90,685,524 5,205,349 2003-04 (26.11.02) 55,204,114 4,973,890 37. As we stated earlier, block assessment and regular assessment are two different assessments and one cannot be substituted for the other. In the present case the assessee has disclosed the income from unac....
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.... assessed; the determination of the amount of taxation, the scheme of charge or taxation; valuation of property or income for the purpose of taxation : see Shorter Oxford Dictionary, (third Edn.). In the context of the Act ... 'an assessment finding its origin in an activity of the AO acting as such... The phrase describes the provenance of the assessment... The use of the machinery provided by the Act ..." Raleigh Investment Co. Ltd. vs. Governor General in Council (1947) 15 ITR 332(PC), at p. 337 followed and quoted in Seth Harish Chandra vs. Union of India (1962) 46 ITR 442(Punj), at p. 446. The word "assess" is a comprehensive word, and in a taxing statute it often means the computation of the income of the assessee, the determination of the tax payable by him, and the procedure for collecting or recovering the tax. In a case where there is a dispute about the identity of the assessee, the order of assessment serves the purpose of establishing the identity and naming the person from whom the tax has to be recovered [Bhopal Sugar Industries Ltd. vs. State of M.P. (1979) 3 SCC 792, at p. 796]. The term assessment is flexible, capable of one of many meanings. It....
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....ord 'appraisal' means : 'the act of appraising; the setting of a price'; 'appraise' means : to fix a price for; especially, as an official valuer; to estimate the amount, or worth of; 'whereas appraisement' means : the action of 'appraising'; valuation by an official appraiser; estimated value; estimation of worth generally. (See Shorter Oxford English Dictionary, third Edition). Under the scheme of the Act, the AO computes the income in the process of assessment in dealing with income from business; he does not estimate or appraise the income from the business. Therefore, we are supposed to keep the distinction in mind in such cases while approaching a finding of fact found by the learned Tribunal. Now, we may examine as to whether the finding of the learned Tribunal can be justified in the context of the meaning of 'computation' as discussed above vis-a-vis the order passed by the CIT(A). Having gone through the order of the learned Tribunal, we find that the learned Tribunal had recorded its reason and proceeded on the basis of the principle of law enunciated. We do not find that the inference drawn on the established fact....
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.... : (2001) 248 ITR 350 (Raj) held as under : "Held that there was no finding by the AO that the estimate of income was made after consideration of the material that came to light during the course of search and seizure. Accordingly, the Tribunal was justified in setting aside the best judgment assessment made by the AO." The Hon'ble Delhi High Court in the case of CIT vs. Ravi Kant Jain (supra) held as under : "Held, that, admittedly, the undisclosed income was not determined on the basis of any search material and the AO was proceeding within the scope of the assessment and not within the scope of exercising jurisdiction under Chapter XIV-B and s. 158BA. Therefore, s. 158BA of the Act had no application to the facts of the case." The Hon'ble jurisdictional High Court in the case of CIT vs. G.K. Senniappan (2006) 203 CTR (Mad) 447 : (2006) 284 ITR 220 (Mad) held as under : "The expression 'such other materials or information as are available with the AO' in s. 158BB of the IT Act, 1961, cannot be bisected or taken in isolation for the purpose of computation. Such other materials or information as are available with the AO should be ....
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....me discrepancy in the books of account or if the search had been conducted after the accounting year and the books of account had brought out some discrepancies. But in the assessee's case the AO examined the books of account in the middle of the accounting year. Merely because there were some discrepancies in the pre-search period, it could not lead to any presumption that the discrepancies would have continued in the post-search period particularly when there was factually no evidence at all as found by both the authorities below to support such a view. Therefore the AO could not draw such a presumption." 39. Learned Departmental Representative. relied on Sumati Dayal cited supra for the proposition that apparent must be considered as real unless it is found that there are reasons to believe that apparent is not real and the taxing authorities are entitled to look into circumstances to find out the reality and to apply the test of human probability. The assessee does not dispute the principle laid down by the Supreme Court. In fact the assessee's argument is that by applying the principles of human probability, there was no reason to disbelieve the contention of th....
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....idden from the Department is undisclosed income. The purport of the definition of 'undisclosed income' cannot be pressed beyond its true limits. It begins with the words 'undisclosed income' includes'sometimes, some definitions use both words 'mean' and 'include'. There, it may be regarded that an exhaustive explanation of the things intended to be caught in the net of the section is specified. But where the expression is merely 'include', it does not have a restrictive operation so as to confine the scope of the section only to those things specified in the words following. When the legislature wants to enlarge the natural meaning of a word or a phrase it uses the word 'includes' and in such a context, an inclusive definition means that over and above the natural meaning of the word, the specially provided meaning of the word will also have to be attributed for the purpose of interpretation of that particular statute or that particular Chapter. But the word 'include' is susceptible of any other construction, which may be imperative, if the context of the Act is sufficient to show that it was not merely employed for the pu....
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.... initiated or requisition made after 30th June, 1995 be assessed separately as income of that block of ten previous years. The provision was introduced to steamline the procedure concerning the search matters. It is abundantly clear from the perusal of the prescription of s. 158BA that within pale of Chapter XIV-B assessment could be made only in respect of the undisclosed income and such undisclosed income must come as a result of search. Sec. 158BA does not provide a licence to Revenue for making roving enquiries connected with completed assessment and it is beyond power of the AO to review the assessment completed unless some direct evidence comes to the knowledge of the Department as a result of search which indicates clearly the factum of undisclosed income. Without such evidence or material the AO is not empowered to draw any presumption as to the existence of undisclosed income. A presumption is an inference of fact drawn from other known or proved facts. It is rule of law under which Courts are authorized to draw a particular inference from a particular fact, until and unless the truth of such inference is disproved by other evidence. The scheme of Chapter XIV-B does not gi....
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....s. Therefore, the abstract question of burden of proof was only academic. It was abundantly clear that the AO had accepted that the gift was given as a normal business practice. He did not reject the amount of sales promotion expenses in toto. He made estimate after comparison with the other traders. It was explained that the other traders were dealing in well known brand of products whereas the assessee was dealing in the less known brand of the product. Therefore, such comparison was not proper. Circular cannot override the law, it is true, but how the circular transgressed the boundaries of law was not explained. It was issued just to clarify the provision. It only explained the purport of law nothing more, nothing less. Addition under s. 158B(b) cannot be based on jejune reasonings or guesswork. It is imperative that the Department must have in its possession cogent material and/or evidence to support the addition. It is not open for the AO to grope in the dark. No attempt was made by the Department to examine the evidentiary value of the gift book. Its contents were not discussed in the order. How it proves fact was not known. Its nexus with the undisclosed income was not e....
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....t precisely the turnover suppressed and he could only embark on estimating the suppressed turnover on the basis of the material before him, in which some amount of guesswork was inevitable. In contradistinction to these facts, in the present case, the assessee was searched. During this search, firstly, no other diary or other record comparable to the note book marked as 'B-1/23' was found by the search party for the remaining period, which normally would have been, were it being maintained and kept. We are conscious that such a record could have been destroyed also from time to time. But in such a situation also, if the assessee had actually made a fortune of similar receipts in respect of the remaining part of the year, they must be reflected by certain assets, movable or immovable ought to have been found during the course of search. No such assets, despite the extreme step of search which amounts to a serious invasion on the rights of subjects and which is perhaps the last weapon in the arsenal of the Department, were found, which could be attributed to any such patently hypothetical receipts. In view of this we are unable to concur with the Department to the multiplicat....
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.... the basis of answer to this question but on the basis of income on estimation of suppressed turnover. This offer of ₹ 1.25 crores was made with reference to certain assets and those assets were found to be not relating to the assessee and the AO has fairly not considered the same to determine the undisclosed income. The assessee also stated in s. 132(4) statement that whatever was the income from unaccounted transactions had already been reflected in the books of accounts. The assessee in answer to question No. 24 stated as follows : "Q. 24 : How you have invested the unaccounted income generated by you from the jewellery business during the last 7 years ? Ans : The unaccounted income during the past 7 years earned out of unaccounted sales has been invested in my business assets and stock. The officer says at para 1 p. 16 as below : "Perusal of returns filed for the above assessment years indicates that in order to explain away the investment made in respective years, the shortage of capital is declared as income from other sources or Adhayam". So from the above it is clear that all investments were fully explained and no shortage of funds. There was no m....
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....by cheque nor there was any material to show that the company accepted cash payment. On the other hand, the explanation offered by the assessee that they received cheques towards sale consideration of 85 per cent of the building sold and that was reflected in the IT returns while paying income-tax for the subsequent years deserves consideration. Therefore, the documents seized from the premises of the assessee at the time of search are not a conclusive proof to arrive at the undisclosed income. The expression 'undisclosed income' has been defined in s. 158B(b) to include income based on entries in the books of account or other materials seized from the premises of the assessee at the time of search. In the instant case, even though the documents seized at the time of search would at best be considered as prima facie material, since except the said documents there was no seizure of money, bullion, jewellery or other articles or things of value during the time of search, the said documents themselves would not be a sole criterion for estimating the undisclosed income in view of the explanation offered by the assessee that they were prepared for the purpose of settling the due....
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....pak Kumar cited supra supports our view. Merely because the assessee admitted in the statement under s. 132(4) regarding suppression of sales, that cannot be considered as the basis for addition, though there was no seized material relating to the impugned period. The sworn statement recorded under s. 132(4) is some piece of evidence. The AO has to establish the link with other books of accounts seized. It cannot be considered as a conclusive evidence. The words "may be presumed" appear in s. 132(4A). Since the words "may be presumed" are incorporated in the section, it gives option to the authorities concerned to presume the things. But it is rebuttable and it does not give definite authority and not a conclusive one. The assessee has every right to rebut the same by producing evidence in support of its claim. The entire case depends on the rule of evidence. The assessee has every right to shift the burden of proof. The Revenue authorities cannot automatically presume things The actual things depend upon facts and circumstances of each case. Therefore, the authorities concerned should draw the conclusion judicially, depending upon the facts and circumstances of....
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....adiction in his observation and hence we cannot confirm this finding of the CIT(A). 45. In view of the facts and circumstances of the case, we direct the AO to confine to determination of undisclosed income only on "net asset" basis based on the materials and evidences found during the course of search, if it is not reflected in the regular books of accounts. Further we make it clear that undisclosed income has to be determined in accordance with law since the assessee is liable to pay tax only upon such income which is includible in total income as per law and which can be lawfully assessed in the hands of assessee. The law empowers the ITO to assess the income of an assessee according to law and determine the tax payable thereon. In doing so he cannot assess an assessee on an amount, which is not taxable in law, even if the same is shown by an assessee. There is no estoppel by conduct against law nor is there any waiver of the legal right as much as the legal liability to be assessed otherwise than according to the mandate of the law. It is always open to an assessee to take the plea that the figure, though shown in his return of total income is not taxable in law. We ....
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....y in exhibitions for sometime. Since the items were seized and could be got back only on 6th May, 2003 i.e. after more than 6 months that too after so much strenuous efforts they are not ready to participate with the assessee any more coming to know that the assessee was raided and jewellery and diamonds of J.D. Gems & Jewellers, who participated in the programme were seized by the IT Department, no other party was ready to participate. 51. The fact that the diamonds belong to M/s J.D. Gems & Jewellery was brought to the knowledge of the Department first on 26th Nov., 2002 and again on 10th Dec., 2002 well before the completion of the raid. 52. The search was concluded only on 16th Dec., 2002 (p. 1 of the assessment order). The receipt voucher from the party, though was produced to the search officers, it was omitted to be considered. Since the letter was filed on 26th Nov., 2002 and 10th Dec., 2002 explaining the details it also forms part of the materials found during search. When there was no contradictory material or evidence available rejecting the above explanation, is bereft of merit. The party was identified, he has confirmed the transaction, he is assessed to income-tax.....