1. This is an appeal by the assessee against the order dt. 27th Feb., 1998, passed by the AO who is Dy. CIT(A) Special Range-2, Ahmedabad, under Section 158BD r/w Section 158BC(c) of the IT Act, 1961 for the Block Period asst. yrs. 1986-87 to 1995-96 and 1st April, 1995 to 8th Sept., 1995.
2. Briefly the facts are that there was a search in the case of S/Shri Ashwin B. Patel and Naresh B. Patel on 8th Sept., 1995 at their residential premises who are the directors of the assessee-company.
Subsequently a survey under Section 133A was also carried out at the business premises of the assessee-company on 8th Sept., 1995. In the course of survey operation certain books of account were found which pertained to the assessee-company as well as to a sister concern which is a registered firm carrying on the business of manufacturing of textile machinery under the name and style of M/s B & Brothers Engineering Works. The books of account found during the course of survey operation were subsequently impounded by the Departmental authorities and the ADI (Inv) has sent an appraisal report of the entire group to the AO having Jurisdiction over the case of the assessee intimating that the assessee-company as well as the firm M/s B & Brothers Engineering Works have earned unaccounted income by: (1) Under-invoicing of sale-price of machineries manufactured and sold by them; 2.1. On receipt of an appraisal report from the ADI (Inv.), the AO having jurisdiction over the case of S/Shri Ashwin B. Patel and Naresh B. Patel who were being assessed by the Dy. CIT, SR-4, Ahmedabad, sent an intimation to the Asstt. CIT, Co. Circle 7(1), Ahmedabad who has jurisdiction over the case of the assessee-company, who issued and served a notice under Section 158BD r/w Section 158BC on the assessee on 19th Feb., 1997, to file the return of block period asst. yrs.
1986-87 to 1995-96 and from 1st April, 1995 to 8th Sept., 1995. In response to the above notice, the assessee filed the return of income for the block period on 30th Sept., 1997, with the Asstt. CIT, Co.
Circle 7(1), Ahmedabad. The case was subsequently assigned to the Dy.
CIT (Asstt.) SR-2, Ahemdabad who after issuing various notices to the assessee and after examining the books of account completed the assessment of undisclosed income in the case of the assessee at Rs. 15,54,539 by an order, dt. 27th Feb., 1998, as under: Profit on sale due to shortage of stock found in the course of survey on protective basis less : Total returned income (since the assessee has not filed return for asst. yr. 1995-96, the income for this year is taken at NIL) 2.2. While passing the assessment order, the AO took note of the fact that the assessee-company has not been doing any manufacturing and sale business up to 31st March, 1994, and it has been showing income from service charges only whereas the manufacturing and sale transactions of machineries were accounted for in the books of M/s B & Brothers Engineering Works--a registered firm.
3. Aggrieved with the order of the AO, the assessee has filed this appeal before the Tribunal. Shri S.N. Divatia, the learned authorised representative of the assessee pleaded that the AO has computed the alleged undisclosed income in the case of the assessee-company by assuming a net profit of 10 per cent on alleged unaccounted sales of Rs. 1,09,47,397 which has been shown by the assessee in its books of account for the asst. yr. 1995-96 included in the block period.
Similarly, it was submitted that the AO has estimated the profit at the rate of 23 per cent on the alleged unrecorded sales of Rs. 9,61,669 claimed to be made by the assessee to M/s BPR Texprint in the financial year 1995-96 included in the block period asst. yrs. 1996-97 amounting to Rs. 2,21,183. It was pleaded that both these additions were wholly unjustified as these were based on mere presumption and without any material brought on record by the AO. In any case it was pleaded that the sales having been shown by the assessee in the books of account, the same cannot be considered as undisclosed income of the assessee for the purpose of Chapter XIV-B. It was pleaded that the reason for holding that the sales of Rs. 9,61,669 made by the assessee to M/s BPR Texprint was that these were not recorded in the sales register found at the time of survey. It was pleaded that the assessee has duly issued sale invoice in respect of this sale made by it to M/s BPR Texprint; the relevant excise duty was paid on this sale and the payment from M/s BPR Textprint was received by the assessee through cheque and was credited into the regular bank account of the assessee even prior to the search. It was submitted that this sale was included in the computerised record maintained by the assessee but the entry could not be made in the sale register due to delay by the accountant.
Accordingly, it was submitted that this sale cannot be treated as the unaccounted or undisclosed income of the assessee.
3.1. Similarly, with regard to the additions made by the AO on account of sale of scrap outside the books of account on protective basis, it was submitted that the AO himself has made the addition on account of sale of scrap outside the books of account in the case of the sister concern M/s B & Brothers Engineering Works which is a registered firm and it was only in respect of that concern that S/Shri Ashwin B. Patel and Naresh B. Patel have admitted during the course of statements recorded under Section 132(4) that they have not been properly accounting the sale of scrap in the books of account. It was submitted that during the course of search at the residential premises of the directors as well as during the course of survey in the case of the assessee-company no evidence of any sales having made outside the books of account was found by the Departmental authorities and as such there was no justification for making any addition substantive or protective on account of alleged sale of scrap because the assessee-company started manufacturing activity from 1st April, 1994 only. It was further submitted that the AO has estimated the income of the assessee for asst. yrs. 1995-96 by applying 10 per cent net profit on sales and considered that income as undisclosed income only because no regular return for asst. yr. 1995-96 was filed up to the date of search i.e.
8th Sept., 1995, although these sales were duly recorded in the books of account. It was submitted that in view of the decision of the Hon'ble Gujarat High Court in the case of N.R. Paper & Board Ltd. v.Dy. CIT (1998) 234 ITR 733 (Guj) the income which is estimated on the basis of entries recorded in the books of account cannot be considered as the undisclosed income under Chapter XIV-B. Reliance was placed on the decision of the Tribunal in the case of Shambhulal C. Bachkaniwala (Indl) v. Asstt. CIT [ITA No. 22 (Ahd) of 1998 dt. 17th July, 1998] [Reference filed by the Revenue under Section 256(1) against the order of the Tribunal in ITA No. 22/Ahd/1998 was rejected by the Tribunal vide its order dt. 25th Nov., 1998, in RA No. 767/Ahd/l998 and even petition filed by the Revenue under Section 256(2) against the order of the Tribunal was also rejected by the Hon'ble High Court vide its order dt. 28th Sept., 1999, in IT Appln. No. 266 of 1999).
3.2. As regards the addition of Rs. 1,04,420 on account of alleged discrepancy (shortage) in the closing stock, it was pleaded that as per the AO there was shortage/discrepancy of stock of Rs. 9.02 lakhs for both the concerns viz., the assessee as well as M/s B & Brothers Engineering Works and the AO considered 50 per cent of this as relating to the assessee and he has accordingly made an addition of Rs. 1,04,420 calculated at 23 per cent of the shortage of stock of Rs. 4.54 lakhs which according to the AO, the assessee must have sold outside the books of account. It was submitted that this action of the AO is wholly unjustified as the AO has not properly appreciated the cardex system followed by the assessee for getting check on the Quantity of stock. It was submitted that there was no difference in quantity as alleged by the AO and in any case since the assessee has accounted for the purchase and sales in the books of account maintained by it and no discrepancy has been found, there was no justification for making any addition on account of alleged shortage of stock. Accordingly, it was pleaded that the entire assessment framed by the AO under Section 158BD r/w Section 158BC(c) computing the total undisclosed income of the assessee at Rs. 15,54,539 was not sustainable in law as having been made on mere suspicion and presumptions as the same is against the ratio of the decision of the Gujarat High Court in the case of N.R.Paper & Board Ltd. (supra) and the decision of the Tribunal in the case of Shambhulal C. Bachkaniwala (supra) [Reference filed by the Revenue under Section 256(1) against the order of the Tribunal in ITA No.22/Ahd/1998 was rejected by the Tribunal vide its order dt. 25th Nov., 1998, in RA No. 767/Ahd/1998 and even petition filed by the Revenue under Section 256(2) against the order of the Tribunal was also rejected by the Hon'ble High Court vide its order dt. 28th Sept., 1999, in ITA No. 266 of 1999]. Reliance was also placed on the decision reported in V.V.S. Alloys Ltd. v. Asstt. CIT (2000) 68 TTJ (All) 519.
4. The learned Departmental Representative strongly relied on the order of the AO and pleaded that the director Shri Ashwin B. Patel during the course of search at the residential premises has admitted under-invoicing of sales by M/s B & Brothers Engineering Works and as a corollary of that the AO was justified in assuming that the assessee-company was also indulging into under-invoicing of sales. He accordingly submitted that the AO was justified in computing the income of the assessee at Rs. 15,54,539 and his order should be upheld.5. We have considered the rival submissions and have also gone through the order passed by the AO. The undisputed facts are that the assessee-company started its manufacturing activity from 1st April, 1994. Prior to it, it was having income from service charges only and this fact has been admitted by the AO as well because he has computed the undisclosed income only for asst. yr. 1995-96 and 1996-97 included in the block period. For asst. yr. 1995-96 the AO has pcomputed the undisclosed income of the assesses by applying the net profit rate of 10 per cent on sales of Rs. 1,09,47,397. However, as per the P&L a/c and balance-sheet filed by the assessee for asst. yr. 1995-96 the assessee has shown a net profit of Rs. 3,19,043 on sales of Rs. 1,09,47,397. The AO in para 6 of the impugned order has noted that the GP shown in the books is 19.4 per cent whereas the director Shri Ashwin B. Patel whose statement was recorded during the course of search under Section 132(4), has stated that the GP earned is about 23 per cent. The AO accordingly computed the undisclosed income of the assessee by applying a net profit of 10 per cent on total sales shown in the P&L a/c and balance sheet filed by the assessee for asst. yr. 1995-96 during the course of block assessment proceedings. Chapter X3V-B deals with a special procedure for the assessment of search cases and is a code in itself for the computation of undisclosed income. As per Section 158BB(2) in computing undisclosed income for the block period, the provisions of Sections 68, 69, 69A, 69B and 69C may be applied but nowhere it is provided in this Chapter that the provisions of Section 145 would be applicable in computing the undisclosed income in the block assessment and there being no such provisions made, no undisclosed income could be computed on estimate basis by invoking the provisions of Section 145 on the basis of some vague statement made by one of the directors who is also a partner in M/s B & Brothers Engineering Works--a registered firm wherein reference to under-invoicing of machineries manufacturing by M/s B & Brothers Engineering Works was made. Since the sales are accounted for in the books of account found during the survey which were subsequently seized and if the AO is not satisfied with the correctness of the profit shown in those books, the AO is free to make inquiries and on the basis of material found he can make addition while framing the regular assessment in the case of the assessee under Section 143(3) or 144.
However, no addition can be made by invoking the provisions of Section 145 by estimating the undisclosed income which is required to be computed in accordance with the provisions contained in Chapter XIV-B of the Act. The decisions of the Gujarat High Court in the cases of N.R. Paper & Board Ltd. (supra) as well as Shambhulal C. Bachkaniwala (supra) support our above view.
5.1. As regards the amount of rate difference of Rs. 1,667, the same having been shown in the P&L a/c cannot be considered as the undisclosed income. Similarly, there is no justification for making any addition on account of sale of scrap on the basis of findings given in the case of B & Brothers Engineering Works. Accordingly, we are of the opinion that the entire computation of undisclosed income of Rs. 11,15,147 or asst. yr. 1995-96 included in the block period is not justified.
5.2. Coming to asst. yr. 1996-97 included in the block period, it is seen that the AO has computed the profit on alleged unaccounted sales of Rs. 9,61,669 at 23 per cent amounting to Rs. 2,21,183 on the ground that the sales of Rs. 9,61,669 on account of machineries supplied by the assessee to M/s BPR Texprint was not shown in the sale register. In this connection it is seen that the assessee has received the payment in advance from M/s BPR Texprint and the same was credited into the bank account of the assessee. The assessee has prepared the sale invoice in respect of this sale and has also paid the excise duty as per the sale invoice. This sale was included in the computerised record maintained by the assessee but it could not be entered into the sale register due to delay by the accountant and this fact alone cannot make this sale transaction as relating to the undisclosed income of the assessee. Accordingly, we are of the opinion that the alleged undisclosed computation of profit of Rs. 2,21,183 on the alleged unaccounted sales of Rs. 9,61,669 is not at all justified and is, accordingly deleted.
5.3. As regards the addition of Rs. 1,04,420 on account of alleged shortage of stock found during the course of survey, it is seen that the survey party has detected the stock discrepancy of Rs. 9.08 lakhs in relation to the stock of two business concerns viz. the assessee as well as M/s B & Brothers Engineering Works which were lying in the same premises. It was explained by the assessee before the AO during the course of assessment proceedings that the AO has not considered the stock of the assessee lying with other party for which the balance sheet prepared as on 8th Sept., 1995 and the stock reconciliation statement was furnished by the assessee during the course of assessment proceedings which was ignored by the AO. The AO while framing the assessment held that 50 per cent of the alleged shortage of stock relating to the assessee which according to the AO must have been sold by the assessee outside the books of account and he made the addition by applying the rate of 23 per cent on the alleged sale outside the books. However, the fact remains that this alleged discrepancy by the survey party was computed by reference to the stock statement as per the books of account found during the course of survey by the search party. The claim of the assessee is that the AO has not appreciated the cardex system of accounting followed by the assessee since its inception for accounting the stock and in any case no material has been brought on record to prove that the assessee has in fact sold any stock without recording the same in the books of account. In this view of the matter we are of the opinion that even if there is some discrepancy in the stock, the same can be on account of pilferage, shortage/wastage during the manufacturing process and it could not necessarily be on account of sales made by the assessee outside the books for which no material has been brought on record by the AO. As we have held in the earlier part of this order that the provisions of Section 145 cannot be applied while computing/estimating the undisclosed income for the block period, we are of the opinion that the addition of Rs. 1,04,420 on account of alleged stock discrepancy is also not justified in the facts and circumstances of the case. Accordingly, this addition is deleted and the same observations will apply to the further addition of Rs. 1,04,420 made by the AO on protective basis.
5.4. As regards the further addition of Rs. 9,369 on account of sale of scrap, we delete the same relying upon our reasoning given in paras 5 and 5.1 above relating to asst. yr. 1995-96. Accordingly, we will hold that there was no justification for computing the undisclosed income of the assessee for the block period at Rs. 15,54,539. Accordingly, the additions made by the AO for both the asst. yrs. 1995-96 and 1996-97 included in the block period are not justified in the facts and circumstances of the case and are directed to be deleted.
1. I have carefully gone through the order of my learned brother Shri R.K. Ball, AM, I have not been able to persuade myself to agree with the order of my esteemed colleague in relation to additions of Rs. 10,94,740 for asst. yr. 1995-96 and Rs. 2,21,185 for asst. yr. 1996-97.
2. I do not agree with the findings of my esteemed colleague that nowhere it is provided in Chapter XIV-B of the Act that provisions of Section 145 of the IT Act would be applicable in computing undisclosed income in block assessment. Section 158BH states "save as otherwise provided in this Chapter, all provisions of this Act shall apply to assessment made in this Chapter". The application of provisions of Section 145 has not been denied while making block assessment. I also find that the Hon'ble Supreme Court in the case of CST v. H.M. Esufali H.M. Abdulali (1973) 90 ITR 271 (SC), has held that estimate can be made on the basis of certain transactions detected during survey but not disclosed in the books of account. According to the provisions of Sub-section (3) of Section 158BB burden of proving to the satisfaction of the AO that any undisclosed income in any return of income filed by the assesse'e before commencement of search or requisition, shall be on assessee, In case before us, Shri Ashwin B. Patel who is director of assessee-company and partner in a sister concern admitted in his statement under Section 132(4) dt. 8th Sept., 1995, that there was regular practice of receipt of "on money" on all transactions.
Similarly one Shri H.A. Patel, executive director of sister concern has also confirmed the fact of receiving of on-money in his statement. It is pertinent to mention here that above-mentioned sister concern and assessee-company are running business from same premises and mainly controlled and managed by same persons. Moreover, in case of sister concern amount of Rs. 9.77 lacs was also confirmed by my esteemed colleague on account of receipt of on-money on sale of machines. The fact of receiving on-money was also corroborated by the notings on the loose papers seized during search from Shri Ashwin B. Patel-director of assessee-company. Furthermore, few transactions of on-money received on sale of machines by sister concern where corroborated by the purchaser.
Thus the on-money received by the sister concern was neither disclosed in regular books so the addition of Rs. 9.77 lakhs in respect of four machinery was sustained by my esteemed colleague and I have respectfully agreed with the same.
3. I have further passed a dissenting order in the case of the sister concern B. & Bros. Engg. Works v. Dy. CIT [IT(SS)A No. 2 (And) of 1999] in which I have confirmed the additions of Rs. 55,63,025 and Rs. 13,36,982 made by the AO and as referred to in ground Nos. (2) and (3) of the said appeal. Those additions relate to the additions in respect of on-money received by the assessee on sale of machineries estimated by the AO on the basis of proof of receipt of on-money on sale of four Stenter machines gathered during the search, the statements of Shri Ashwin B. Patel, partner of said B & Brothers Engineering Works and director of assessee-company; Shri H.A. Patel, their technical executive and the statement of one of the buyers and notings on loose papers, etc. found and seized during the course of search. The facts relating to the additions of Rs. 10,94,740 for asst. yr. 1995-96 and Rs. 2,21,185 for asst. yr. 1996-97 made by the AO are similar. The addition have been made by the AO on similar set of facts, statements and evidence found during the course of search and in the course of post-search investigation. The addition of Rs. 10,94,740 for asst. yr.
1995-96 and Rs. 2,21,185 for asst. yr. 1996-97 have been made by the AO by applying the profit at the rate of 10 per cent of declared sales of Rs. 1,09,47,397. The aforesaid estimate of profit at the rate of 10 per cent is most reasonable in view of the admission of Shri Ashwin B.Patel vide statement recorded during survey proceedings that the GP rate was 23 per cent and also in view of the admission in the statements of Shri Ashwin B. Patel and Shri H.A. Patel that on money ranging between 10 per cent to 30 per cent was generally received on sale of all machines. Even if 10 per cent is applied on declared sales of Rs, 1,09,47,397 for estimating the on-money received by the assessee, it comes to Rs. 10,94,740. The AO could perhaps make addition of higher amount by estimating on-money received at the rate of 20 per cent as has been done in the case of sister concern which has been confirmed by me by a separate and dissenting order in the case of sister concern. The facts and basis relating to the addition of Rs. 10,94,740 and Rs. 2,21,185 made in the present case are similar as the facts pertaining to ground Nos. (2) and (3) in the appeal of the sister concern B & Bros. Engg. Works case (supra). The basis of additions made by the AO in the present case is that very set of evidence viz. the statements of Shri Ashwin B Patel and Shri H.A. Patel and one of the buyers and also notings on the loose papers, etc, found during the course of search. Therefore, in view of elaborate reasons given in my separate and dissenting order in the case of sister concern B & Bros.
Engg. Works case (supra) and in view of the detailed reasons given in the impugned assessment order, I am of the considered opinion that the addition of Rs. 10,94,740 for asst. yr. 1995-96 deserves to be confirmed and on similar lines addition of Rs. 2,21,185 for asst. yr.
1996-97 is also confirmed. Accordingly, I confirm the said additions.
As there is difference of opinion between the two members who heard the appeal in IT(SS) A No. 45/Ahd./1998 for the block period asst. yrs 1986-87 to 1995-96 and 1st April, 1995 to 8th Sept., 1995, we refer the same to the Hon'ble President, Tribunal for further action as provided under Section 255(4) of IT Act, 1961.
Q. Whether in the facts and circumstances of the case, the view of the AM that addition of Rs. 10,94,740 on account of estimated net profit of 10 per cent on sales disclosed in the books of account and Rs. 2,21,183 on account of profit on alleged unaccounted sales of Rs. 9,61,669 cannot be sustained as undisclosed income of the block period as the disputed sales were recorded in the books of account, is correct? the view of the JM that the AO was justified in making the addition of Rs. 10,94,740 being 10 per cent net profit on sales recorded in the books and 23 per cent on alleged unrecorded sales of Rs. 9,61,669 as undisclosed income of the block period, relying on the statements of Shri Ashwani Patel, Director and Shri H.A. Patel, an employee, is correct? 1. As there is difference of opinion between the two members who heard the appeal in IT(SS) Appeal No. 45/Ahd./1998 for the block period asst.
yrs 1986-87 to 1995-96 and 1st April, 1995 to 8th Sept., 1995, the Hon'ble AM framed point of difference under Section 255(4) of the IT Act, 1961. I find that all the points raised by me in dissenting order regarding sustaining addition in question, have not been incorporated in difference of opinion framed by my esteemed colleague. So I am compelled to frame difference of opinion and referring the same to the Hon'ble President, Tribunal, for further action as provided under Section 255(4) of the IT Act, 1961.
Q. "Whether, on the facts and in the circumstances of the case, the view of JM that AO was justified in computing undisclosed income in block assessment when the falsity of the entries in the books of account was exposed during survey operations, while the addition of Rs. 9,77,000 on similar footings has been sustained by this Bench in the case of sister concern namely--M/s B & Brothers Engineering Works, Chakudia Mahadev, Rakhial, Ahemdabad, run from same premises by same management?" Q. "Whether, in the facts and circumstances of the case, the view of the AM that addition of Rs. 10,94,740 on account of estimated net profit of 10 per cent on sales disclosed in the books of account and Rs. 2,21,183 on account of profit on alleged unaccounted sales of Rs. 9,61,669 cannot be sustained as undisclosed income of the block period as the disputed sales were recorded in the books of account, is correct?" 1. In this matter referred to me under Section 255(4) of the IT Act, 1961 both the learned Members constituting the Division Bench have proposed separate questions on the points of difference but these pertain to two additions made by the AO during the course of an assessment framed under Section 158BD r/w Section 158BC(c) of the IT Act. These are : (1) addition of Rs. 10,94,740 on account of estimated net profit at 10 per cent on sales disclosed in the books of account; (2) addition of Rs. 2,21,183 on account of profit on alleged unaccounted sales of Rs. 9,61,669.
2. In this case, the search took place on 8th Sept., 1995, and the block period for purposes of assessment is asst. yrs, 1986-87 to 1995-96 and 1st April, 1995 to 8th Sept., 1995.
3. In respect of the first point of difference, the facts as noted by the AO are as under: "Undisclosed income for asst. yr. 1995-96.--It may be mentioned that the assessee has not filed its return of income for the asst. yr.
1995-96. However in the course of block assessment proceedings, the assessee has furnished a copy of the balance sheet and P&L a/c for the year ending 31st March, 1995. As per this P&L a/c, net profit shown is Rs. 3,19,043 on a total sales of Rs. 1,09,47,397. On the basis of the P&L a/c submitted in the course of assessment proceedings, the GP is around 19.4 per cent, which is much below what is stated by Shri Ashwin B. Patel in course of search. Shri Ashwin B. Patel had stated that the GP is 23 per cent roughly.
Accordingly, if we take 23 per cent GP, the GP would come to Rs. 25,17,901 on the sales by; of Rs. 1,09,47,397. Accordingly, the difference in GP comes to Rs. 3,85,040 and hence net profit of the assessee would go up to Rs. 7,47,086. But to arrive at the net profit, the examination of the administrative expenses claimed by the assessee is essential which is not possible on the basis of the books of account available with the Department. Hence, the net profit of the assessee out of the manufacturing activities is estimated at 10 per cent of the total sales, which comes to Rs. 10,94,740. To this, the rate difference of Rs. 1,667 as shown by the assessee in the P&L a/c will be further added. Since no return has been filed, the entire profit for asst. yr. 1995-96 along with rate difference as stated above will be treated as undisclosed income for the block assessment period." 4. Before the Division Bench, the learned counsel for the assessee submitted : (i) That sales of Rs. 1,09,47,397 had been shown by the assessee in its books of account for asst. yr. 1995-96 and these could therefore not be treated as unaccounted sales.
(ii) Net profit rate of 10 per cent had been assumed on such alleged unaccounted sales.
(iii) The addition was made on mere presumption and without any material being brought on record by the AO.5. As against this, the learned Departmental Representative on behalf of the Revenue supported the order of the AO and as noted from para 4 of the order of the learned AM, reliance was primarily on the statement of the director Shri Ashwin B. Patel recorded at the time of search wherein he "admitted" under-invoicing of sales by the firm M/s B & Brothers Engineering Works and the corollary of that being that the assessee-company also indulged in such under-invoicing.
6. The learned AM who wrote the initial order noted as a fact that as per the P&L a/c and balance sheet filed for asst. yr. 1995-96, the assessee had shown a net profit of Rs. 3,19,043 on sales of Rs. 1,09,47,397 and as against this, the AO had noted that the GP shown in the books was 19.4 per cent and the director Shri Ashwin B. Patel during the course of search had stated that the GP earned was about 23 per cent. As against the aforesaid, the AO had applied a net profit rate of 10 per cent on the total sales shown in the P&L a/c and worked out the undisclosed income at Rs. 10,94,740.
7. According to the learned AM, Chapter XIV-B dealt with a special procedure for the assessment of search cases and was a code in itself for the computation of undisclosed income. Further, as per Section 158BB(2) in computing undisclosed income for the block period, the provisions of Sections 68, 69, 69A, 69B and 69C could be applied but nowhere in the Chapter it was provided that provisions of Section 145 would be applicable. The view in other words was that no undisclosed income could be computed on estimate basis by invoking the provisions of Section 145 on the basis of a vague statement made by one of the directors of the company, who was also a partner in M/s B & Brothers Engineering Works, a registered firm wherein reference was made to under-invoicing of machineries manufactured by the said firm. According to the learned AM, where sales were accounted for in the books of account found during the survey and which were subsequently seized, in case the AO was not satisfied with the correctness of the profit shown in such books, then he was free to make enquiries and on the basis of the material found, he could make an addition while framing the regular assessment under Section 143(3) or Section 144. According to the learned AM, no addition could be made by invoking the provisions of Section 145. According to him, the decisions of the Hon'ble Gujarat High Court in the cases of N.R. Paper & Board Ltd. and Ors. v. Dy. CIT (1998) 234 ITR 733 (Guj) as also CIT v. Shambhulal C. Bachkaniwala (2000) 245 ITR 488 (Guj) supported the aforesaid view. He ultimately proceeded to delete the addition of Rs. 10,94,740.
8. The learned JM, however, did not subscribe to the view expressed by the learned AM to the effect that provisions of Section 145 of the IT Act would not be applicable in computing undisclosed income in a block assessment, He in turn referred to Section 158BH, which stated, "save as otherwise provided in this chapter, all other provisions of this act shall apply to assessment made under this chapter". He in turn referred to the judgment of the Hon'ble Supreme Court in the case of CST v. H.M.Esufali H.M, Abdulali (1973) 90 ITR 271 (SC) wherein it had been held that an estimate could be made on the basis of certain transactions detected during survey but not disclosed in the books of account. It was noted by the learned JM that Shri Ashwin B. Patel, who was a director of the company and a partner in a sister concern had admitted in his statement recorded under Section 132(4) on 8th Sept., 1995, that there was a regular practice of receipt of "on money" on all transactions. He also referred to a similar acceptance on the part of one Shri H.A. Patel. According to the learned JM, the assesses-company as also the sister concern were operating from the same premises and mainly controlled and managed by the same persons. It was observed by the learned JM that in the case of the sister concern, an addition of Rs. 9.77 lakhs had been confirmed by the learned AM on account of receipt of "on money" on sale of machines and the fact of receiving "on money" was also corroborated by the notings on the loose papers seized during the course of search from Shri Ashwin B. Patel director of the assessee-company. The learned JM referred to his own confirmation of the view expressed by the learned AM in sustaining the addition of Rs. 9.77 lakhs in the case of the sister concern. He also referred to the order passed by him in the case of the sister concern i.e. M/s B & Brothers Engineering Works whereby he had dissented with the view taken by the learned AM and confirmed additions of Rs. 55,63,025 and Rs. 13,36,982. According to the learned JM, the facts relating to the addition of Rs. 10,94,740 were the same as in the case of the sister concern. He also found the applicability of net profit rate of 10 per cent to be reasonable once again in view of the admission of the directors/partners of the sister concern as also with reference to the assessments of some of the buyers and the notings on the loose papers.
The learned JM in fact confirmed the addition of Rs. 10,94,740 entirely on the basis of reasons given by him in the separate dissenting order passed in the case of the sister concern.
9. The learned counsel for the appellant at the outset stated before me that the facts in both the cases i.e., of the present appellant and the sister concern i.e. M/s B & Brothers Engineering Works were quite different and the additions had been made on different grounds. He vehemently supported the view expressed by the learned AM but pressed for consideration the following arguments: " (i) Even if the return of income for asst. yr, 1995-96 was filed belatedly the income on the basis of normal books of account could not be treated as undisclosed income within the meaning of Section 158B(b) of the Act. Reliance was placed on the decisions of Amar Nath Aggarwal v. Dy. CIT (2000) 67 TTJ (Del) 551 and Sitadevi Daga v. Asstt. CIT (1999) 63 TTJ (Ind) 72 : (1998) 67 ITD 151 (Ind).
(ii) It was an undisputed fact that the item considered for the purpose of addition was duly recorded in the normal books of account and further the entire sales of Rs. 1.09 crores were already recorded in the sales registers, which were seized during the course of search.
(iii) When transactions are duly recorded in the regular books of account maintained in the normal course of business, the same could not be held to be undisclosed income within the meaning of Section 158B(b).
(iv) The estimation of income at 10 per cent of the total sales was arbitrary and without any basis, more so, when in a block assessment, undisclosed income had to be determined on the basis of seized material found during the course of search. Reliance was placed on Sunder Agencies v. Dy. CIT (1997) 59 TTJ (Mum) 610 : (1997) 63 ITD 245 (Mum) and P.O. Patel v. Dy. CIT (1997) 58 TTJ (Ahd) 409.
(v) The search had taken place on 8th Sept., 1995, and the due date of the return for asst. yr. 1995-96 was 30th Nov., 1995. That the AO was relying on Clause (c) of Section 158BB whereas the relevant clause applicable was (d).
(vi) That a higher GP rate could only be applied if the sales of Rs. 1.09 crores were treated to be undisclosed." 10. The learned counsel also placed reliance on the decision of the Pune Bench of the Tribunal in the case of Shradha Construction v.Asstt. CIT (2000) 66 TTJ (Pune) 334 : (2001) 76 TTD 85 (Pune) for the proposition that provisions of Section 145 could not be applied in a block assessment and there was no power with the AO to estimate income the material in his possession. Further, reliance was placed on the following decisions : (i) D.N. Kamani (HUF) v. Dy. CIT (1999) 65 TTJ (Pat)(TM) 504 : (1999) 70 TTD 77 (Pat)(TM); (iii) Verma Roadways v. Asstt. CIT (2001) 70 TTJ (All) 728 : (2000) 75 ITD 183 (All); (v) Samiat Beer Bar v. Asstt. CIT (2000) 69 TTJ (Pune)(TM) 113 : (2000) 75 ITD 19 (Pune)(TM); (vi) Hotel Vrindavan v. Asstt. CIT (2000) 67 TTJ (Pune) 139; and (vii) Ravi Kant Jain v. Asstt. CIT (2000) 67 TTJ (Del) 797.
11. The learned counsel also placed reliance on two judgments of the Hon'ble Gujarat High Court for the same very proposition i.e. no addition could be made on account of undisclosed income under Chapter XIV-B unless and until there was material/evidence found during the course of search. These were N.R. Paper & Board Ltd's case (supra) and Shambhulal C. Bachkaniwala's case (supra).
12. The learned Departmental Representative on the other hand vehemently supported the order passed by learned JM confirming the addition of Rs. 10,94,740. His main submissions were as under: "(i) As per provisions of Section 158BH, all provisions of the IT Act including Section 145 were applicable to block assessments.
(ii) The judgment of the Hon'ble Gujarat High Court in the case of N.R. Paper & Board Ltd. (supra) did not anywhere state that provisions of Section 145 were not applicable.
(iii) The term used in Chapter XIV-B was "Block Period" and this included even those assessment years, the return of income in respect of which had not become due. That the provisions of Chapter XIV-B could not be curtailed.
(iv) That it was permissible for the AO to estimate the assessee's income on the basis of the statement made by responsible functionaries of the company and the judgment of the Hon'ble Supreme Court in the case of CST v. H.M. Esufali H.M. Abdulali (supra) was squarely applicable.
(v) The statements of the senior functionaries of the company were not vague in any manner and there were positive assertions on factual aspects, which could not be ignored.
(vi) That statement of an employee came within the term "any other material" and addition could be made on the basis of such statement.
(vii) A distinction had to be drawn between a case where a return had been filed before the date of search although belatedly as against a case where no return had been filed and the situation in the present case was the latter." 13. In support of his arguments, the learned Departmental Representative placed reliance on the decision of the Pune Bench of the Tribunal in the case of the Parakh Foods Ltd. v. Dy. CIT (1998) 64 ITD 396 (Pune) and that of the Calcutta Bench of the Tribunal in the case of Bhag Chand Jain v. Asstt. CIT (1998) 65 ITD H (Cal).
14. In reply, the learned counsel for the appellant contended that Sub-section (3) of Section 158BA was applicable in this case and squarely supported the viewpoint canvassed that the sales having already been recorded in the books of account and other documents could not be treated as undisclosed and no percentage thereof could be brought to tax as undisclosed income in a block assessment. He sought to distinguish the decision of the Calcutta Bench of the Tribunal supra on the ground that return had been filed in that case whereas in the assessee's case the return was not even due on the date of search.
15. As regards the judgment of the Hon'ble Supreme Court in the case of H.M. Esufali H.M. Abdulali (supra) the submission was that in a block assessment an addition had to be made on the basis of material found during the course of search and it was not a case of an estimate in a regular assessment. It was sought to be highlighted by the learned counsel that provisions of the ST Act were under consideration before Their Lordships of the Hon'ble Supreme Court.
16. As regards the applicability of the provisions of Section 145, the learned counsel fairly accepted that the Hon'ble Gujarat High Court was not dealing with the provisions of the said section but what was decided by Their Lordships was that a block assessment could be framed only with reference to the material/evidence unearthed during the course of search and de hois such seized material no assessment could be framed. It was reiterated by the learned counsel that the view of the learned AM being in conformity with the legal position, the same be approved.
17. I have considered the rival submissions and have also perused minutely the orders passed by the learned Members constituting the Division Bench.' The decisions cited at the bar have also been taken into account.
18. In the present case, the search took place on 8th Sept., 1995, and as stated by the learned counsel before us, the due date of filing the return for asst. yr. 1995-96 was 30th Nov., 1995, In other words, Clause (d) of Section 158BB, which reads as under, is applicable : "where the previous year has not ended or the date of filing the return of income under Sub-section (1) of Section 139 has not expired, on the basis of entries relating to such income or transactions as recorded in the books of account and other documents maintained in the normal course on or before the date of the search or requisition relating to such previous year;" 19. Two things emerge from a reading of the aforesaid the previous year under question has not ended, or the date of filing the return of income under Sub-section (1) of Section 139 has not expired. In the present case, the latter condition applies since the previous year has already ended prior to the date of search but the date of filing the return of income under Section 139(1) has not expired. The second thing is that the entries relating to income or transactions are recorded in the books of account and other documents maintained in the normal course. In the present case the Revenue has not proved that the books were being maintained for a purpose other than the provisions of the IT Act and under these circumstances the income on the basis of the books regularly maintained in the normal course of business cannot be treated as undisclosed income. The Indore Bench of the Tribunal in the case of Smt. Sitadevi Daga v. Asstt. CIT (1999) 63 TTJ (Ind) 72 : (1998) 67 TTD 151 (Ind) was considering a case where the assessee filed return for a particular assessment year beyond the period prescribed under Section 139(1) but within the period prescribed under Section 139(4) declaring interest income as per regularly maintained books of account, which were seized. The Department treated such income as undisclosed in framing the block assessment. The Indore Bench in the aforesaid cited case took the view that since the Revenue had not made any efforts to prove that the books were maintained for purposes other than the IT Act and the returned income was income which would not have been disclosed for purposes of the Act, the assessee could be held to have maintained books of account only for purpose of the IT Act and the returned income therefore did not form part of the undisclosed income. The case of the assessee before us is better inasmuch as the return of income as on the date of search was not due for filing.
20. It was an accepted fact between the parties that sales to the tune of Rs. 1,09,47,397 had already been reflected by the assessee in its books of account and it is also an accepted fact that during the course of the block assessment proceedings, the assessee furnished a copy of the balance sheet and P&L a/c for the year ending 31st March, 1995, and which reflected a net profit shown at Rs. 3,19,043 on the sales of Rs. 1,09,47,397. It was noted by the AO that the GP on the basis of the aforesaid figures worked out to 19.4 per cent, which was much below the figure stated by Shri Ashwin B. Patel in the course of search when he had indicated a figure of 23 per cent roughly.
21. In my opinion, the AO could not treat the profit shown by the assessee on the sales aforesaid as undisclosed income since entries were already made in the books of account in respect of such sales and the due date for filing the return had not expired and there is ample case law on. the subject that undisclosed income under Chapter XIV-B can be computed only on the basis of the material found during the course of search and there is no scope for any assumptions and presumptions as these can be better taken care of in the regular income-tax assessments. The AO in fact applied a rate of 10 per cent to the turnover of Rs. 1 crore an odd treating thereby a sum of Rs. 10,94,740 as undisclosed income. It is probably in view of the numerous decisions of the Hon'ble High Courts and various Benches of the Tribunal aforesaid that an argument is raised that provisions of Section 145 are not applicable to block assessments although Section 158BH states as follows : "Save as otherwise provided in this chapter, all other provisions of this Act shall apply to assessment made under this chapter." 22. The learned AM has opined that provisions of Section 145 are not applicable but in my opinion the decisions cited on the subject have to be considered in the larger context since estimates sometimes have to be arrived at even on the basis of the seized material/evidence found during the course of search. No doubt in Section 158BB(2), there is a reference to the provisions of Sections 68, 69, 69A, 69B and 69C but this is for purposes of reference to the term "Financial Year" vis-a-vis the previous years falling in the block period including the previous year ending with the date of search or of the requisition. The learned counsel for the assessee in fact accepted before me that the judgment of the Hon'ble Gujarat High Court in the case of N.R. Paper & Board Ltd. (supra) did not lay down the proposition that provisions of Section 145 were not applicable but I have come across certain decisions of the Tribunal where it has been opined that provisions of Section 145 cannot be applied to a block assessment. One such decision is that of the Patna Bench of the Tribunal in the case of D.N. Kamani (supra). A view was expressed to the effect that where books of account maintained were not found correct and complete, the AO could resort to assessment of income by estimate invoking provisions of Section 145 only in the case of regular assessment and not in the case of block assessment. The learned Third Member has in fact expressed the same view as has been done by the learned AM in the present case whereby he has taken the view that whereas provisions of Sections 68, 69 upto 69C can be applied but provisions of Section 145 cannot be invoked. I have already made an observation in the earlier part of the order with reference to provisions of Section 158BH but inasmuch as I am agreeing with the ultimate conclusion of the learned AM, I do not propose to say anything further on this aspect of the matter.
23. Coming to another decision relied upon by the learned counsel, which is that of the Pune Bench of the Tribunal in the case of Shradha Construction (supra), this is on identical lines as the decision of the Indore Bench of the Tribunal already adverted to earlier viz. Sitadevi Daga. The Pune Bench also took the view that when at the time of raid, the time-limit for filing returns for certain assessment years were not over and the assessee was maintaining proper books of account in the normal course of business then the income pertaining to such assessment years cannot be treated as undisclosed income within the meaning of Chapter XIV-B. In the aforesaid case, the assessment years in respect of which the returns were still to be filed were 1996-97 and 1997-98 and the accounts were being maintained on computer. This decision clearly advances the assessee's case.
24. The Third Member decision of the Pune Bench of the Tribunal in the case of Samrat Beer Bai (supra) has taken the view that even though the AO is empowered to estimate an undisclosed income earned by an assessee, the estimate was possible only when there was material or evidence found during the search to unmistakably show that such income had been earned. The Bench took the view that other than the material or evidence, there could be no presumption and the relevant fact of the case was that during the course of search, a diary was seized and which contained entries showing suppression of sales for a particular period within the block period. There was no indication anywhere in the seized record, which would show that even in respect of other periods, assessee was maintaining such a diary, which for some reason or the other was not found during the course of search. On the question whether the AO was within his rights to make an estimation of income for a period larger than the one indicated in the seized material, the Third Member took the view that he could not. The Third Member did not find it necessary to deal with the question as to whether the provisions of Section 145 could be read into the provisions of Chapter XIV-B. The Third Member also considered the decision of the Hon'ble Supreme Court in the case of H.M. Esufali H.M. Abdulali (supra) in deciding the reference and I am highlighting this because in the present reference the Department has placed reliance on the said decision vis-a-vis the support, which the learned JM has derived from the said judgment.
25. In the case of Parakh Food Ltd. (supra), the Pune Bench of the Tribunal also took the view that where return of income had not become due but the income particulars were duly recorded in the regular books of account then such income could not be treated as undisclosed income.
This part of the decision helps the assessee whereas the learned Departmental Representative has relied upon the said decision to support the order passed by the learned JM, moreso the contention of the assessee in that case before the Tribunal that undisclosed income must be that income, which is detected as a result of the search and which plea came to be rejected. Insofar as the last observation is concerned, there are views to the contrary expressed by certain other Benches of the Tribunal as also Hon'ble High Courts and to my mind comes two decisions of the Hon'ble Gujarat High Court relied upon by the assessee before the Division Bench and which found favour with the learned AM. These are N.R. Paper & Board Ltd.'s case (supra) as also Shambhulal C. Bachkaniwala's case (supra). Their Lordships held in categorical terms that Chapter XIV-B lays down a special procedure for assessment of search cases and provides for assessment of undisclosed income as a result of search. Under Section 158BB(1) r/w Section 158BC of the IT Act, 1961, what is assessed is the undisclosed incomes of the block period and not the total income or loss of the previous year required to be assessed in the normal regular assessment under Section 143(3). It was further observed by Their Lordships that exercise under Sections 143(2) and 143(3) for regular assessment stood in contrast to the exercise of the AO under Section 158BB r/w Section 158BC(b) where he has to assess only the undisclosed income of the block period on the basis of evidence found and material available as a result of the search conducted under Section 132 of the IT Act 26. It is apparent from the aforesaid discussion that the decisions cited by the learned counsel on behalf of the assessee do support the viewpoint canvassed on various aspects of Chapter XIV-B, which are under consideration in the present appeal. I have already dealt with one of the decisions relied upon by the learned Departmental Representative viz., Parakh Food Ltd.'s case (supra) and while considering the Third Member decision of the Pune Bench of the Tribunal in the case of Samrat Beer Bar (supra), which is relied upon by the learned counsel for the assessee, I have adverted to the judgment of the Hon'ble Supreme Court in the case of KM. Esufali H.M. Abdulati (supra) which is another decision relied upon by the learned Departmental Representative in the present reference. This judgment of the Hon'ble Supreme Court is not found to be applicable in the present case, which pertains to a block assessment and which necessary has to be completed on the basis of material and evidence found during the course of search and under normal circumstances estimates are excluded.
The only other decision relied upon by the learned Departmental Representative before me was that of the Calcutta Bench of the Tribunal in the case of Bhag Chand Jain (supra). A reading of the same however shows that this is not at all applicable to the facts of the present case. The issues before the Calcutta Bench were primarily related to deductions under Chapter VI-A and rebate under Section 88 and the other point was the filing of a belated return for one of the assessment years viz., 1992-93 and on the facts of the case, the Tribunal took the view that it could not be said that the assessee would not have shown the aforesaid income but for the search operations and it was a fact that the return was filed much earlier to the date of search. On the ground that why aforesaid income was treated as undisclosed income by the AO and their being nothing spelt out in the assessment order, the Tribunal restored the matter back to the file of the AO.27. In conclusion, I opine that the action of the learned AM in deleting the addition of Rs. 10,94,740 was justified on facts and in law and I, therefore, proceed to agree with him.
28. Coming to the second point of difference, the total sales of the assessee recorded in the assessee's books upto the date of search were to the tune of Rs. 11,60,399 but in the course of the assessment proceedings, the assessee submitted the details of the total sales effected during the financial year 1995-96. On comparison, it was noticed by the AO that the sales made to M/s BPR Text Print (P) Ltd. in the financial year 1995-96 upto the date of search i.e., 8th Sept., 1995, amounting to Rs. 9,61,669 had not been recorded in the sales book marked "X-2". This sale was treated as unaccounted and vis-a-vis the statement of Shri Ashwin B. Patel, director of the assessee-company about the GP rate being at 23 per cent, the AO applied the said percentage to the unrecorded sales and worked out the undisclosed income for the period 1st April, 1995 to 8th Sept., 1995, at Rs. 2,21,183. The matter came before the Division Bench and the learned AM proceeded to delete the addition on the ground that the payment for the sale had been received in advance from M/s BPR Text Print (P) Ltd., and the same was credited in the bank a/c of the assessee, the assessee had prepared the sale invoice in respect of the sale and had also paid excise duty as per the sale invoice and lastly the sale was included in the computerised record maintained by the assessee. The learned AM accepted the assessee's explanation that the entry was not made in the sale register due to the delay on the part of the accountant but this fact alone could not make the sale transaction as the undisclosed income of the assessee.
29. The learned JM, however, did not concur with the view taken by the learned AM on the same line of reasoning as had been expressed by him while dissenting on the earlier addition of Rs. 10,94,740.
30. Before me, the submissions of both the parties were the same as had been raised in the earlier point of reference and I, therefore, do not propose to repeat them. The facts being identical as also the decisions cited, my earlier observations with reference to the addition of Rs. 10,94,740 would be squarely and equally applicable.
31. In conclusion, I uphold the view taken by the learned AM in respect of the second issue as well.
32. The matter may now be placed before the Division Bench for passing an order in conformity with the majority opinion.