1. Both the cross appeals and the cross objection by the assessee are directed against the order of the CIT (A) dated 16-12-2004 for the block period 1-4-1996 to 5-6-2002.
2. Since the cross appeals and the cross objection arise out of the same order of the CIT (A) and pertain to the same assessee, the same are disposed of by this common order.
3. The facts are that the assessee is a closely held company engaged in production, processing and marketing of different types of seeds like soyabean seeds, wheat seeds, etc. Its plant is situated at Kshipra and godowns at Kshipra, Rakhodiwala Compound and Harda. An operation under Section 132(1) of the Income-tax Act was carried out at the business and residential premises belonging to the assessee company, its Directors and their family members on 5-6-2002. In the course of search, various variables and other incriminating documents were found and seized. The details regarding valuables found during search and seizure are as under- Office Premises Rs. 9,60,430 9,40,000 Locker of Shri R.K. Jain, members Rs. 97,850 58,350 _______________ __________ Total Rs. 10,58,280 9,98,350 _______________ __________ Members gms 1,825,270 1625.270 _______________ __________ Total 1,825,270 1625.270 _______________ __________ 4. Upon issue of notice, the assessee filed a block return of income under Section 158BC of the ILT Act on 18-7-2003 showing an undisclosed income of Rs. 52,00,000 the details of which are as under- The assessment was completed under Section 158BC at a total undisclosed income of Rs. 1,25,75,650. In doing so, the learned Assessing Officer made the following additions- (1) Unaccounted income of Rs. 57,88,943 from transactions with Shri Rajendra Agrawal of Dewas; (2) Unaccounted income of Rs. 23,76,570 from unaccounted purchases as per seized material, namely, RKJ/RES/LPS 3 to 6 ESBT/RNT/LPS-1.
(3) Unaccounted income of Rs. 30,000 on account of repayment of loan to Smt. Sudha Jain.
5. These additions were challenged before the CIT (A). The CIT (A) on consideration of the submissions of the assessee and the material available on record deleted the addition of Rs. 57,88,943 on which the revenue is in appeal. The remaining additions were, however, confirmed by the CIT (A) upon which the assessee is in appeal. The assessee has also filed cross objection in support of the finding of the CIT (A) with regard to the deletion of addition on which the revenue is in appeal. All the remaining grounds of the cross objection are same as have been taken by the assessee in its appeal. Therefore, the grounds upon which the cross objections have been filed are entirely dependent upon the findings of the cross appeals filed by the revenue and the assessee.
6. We have heard the learned representatives of the parties and have gone through the material available on record and the findings of the authorities below.
7. Now, we take up the cross appeals as under for the purpose of disposal.
8. The revenue has challenged the deletion of the addition of Rs. 57,88,943. The assessee has challenged this addition before the CIT (A) on account of unaccounted transactions with Shri Rajendra Agrawal.
Action under Section 132 of the Income-tax Act was carried out by the Income-tax Department in the case of Rajendra Agrawal of Dewas on 5-12-2001. During search in his case certain incriminating documents showing payments amounting to Rs. 7,41,17,337 received from assessee on various dates in cash or bearer cheques were found and seized.
Subsequently search and seizure operations were carried out in the assessee's case on 5-6-2002. During these operations Shri R.K. Jain, Director of the assessee company, was confronted with the alleged transactions of the assessee company with M/s. Ramlal Chironjilal, R.R.Agro Industries and Shri Rajendra Agrawal, Dewas and alleged payment of Rs. 7.41 crores to them. In his statement recorded under Section 132(4) Shri R.K. Jain categorically denied of having any transaction except sale of wheat to R.R. Agro Industries relating to purchase and sale of seeds with the impugned parties. As regards instances of few bearer cheque payments bearing the signature of Sitaram Mittal or Ram or Rajendra on the reverse, Shri R.K. Jain explained that as per trade practice, payment was made by the assessee to the parties who produced "Beej Prapti Receipt". During block assessment proceedings, the assessee reiterated the above explanation. However, the Assessing Officer did not accept the above explanation of the assessee and held that - A. The impugned payments made to Shri Rajendra Agrawal represented payments for purchase of 'soyabean' by the assessee; B. The Department was not required to establish each and every transaction of the assessee with Shri Rajendra Agrawal and the few instances of bearer cheques be signature of Sitaram or Rajendra or Raju established the factum of purchase and computed undisclosed income of the assessee from the impugned transactions of Rs. 57,88,943 as under - Assessment Purchases Profit Undisclosed Year (Rs.) margin income (Rs. ) 9. The addition was challenged before the CIT (A) and it was submitted that the entire case of the Assessing Officer is based upon entries recorded in the books of third party. It is a settled legal position that the entries found recorded in the books of account of the third party or statement recorded under Section 132(1) or 131 of the Act of a third party are binding upon him in his own case only and the same cannot be foisted upon the other parties in the absence of sufficient corroboratory material. In support of the same, reliance has been placed on the following judgments :Chiranjilal Steel Rolling Mills v. CIT It was submitted that it is open for Assessing Officer to collect evidence from any source but it is his duty to put it to the assessee before making it the basis of his assessment. If the assessee denies the information collected by the Assessing Officer, the Assessing Officer has to satisfy himself by making independent enquiry from source considered reliable by him and decide whether information passed on to him is true or not. If as a result of his own independent enquiry he comes to the conclusion that the information received by him is true, he is at liberty to act thereupon after disclosing it to the assessee and affording him a reasonable opportunity of rebutting it.
But he has no right to burden the assessee with an extra amount of tax on vague information given to him without himself verifying its truthfulness or reliability. Following decisions were relied upon- (3) ITO v. Balaprasad R. Lokmanyawar [1984] 18 TTJ (Pune) 167 (Bench) It was also contended that the statement of Shri Rajendra Agrawal in whose case search was carried out by the Income-tax Department and to whom the entire seized material pertained on which material reliance was placed by the Assessing Officer, has not been recorded till date and if recorded, copy thereof has not been provided to the assessee. In the absence of his statement, the statement of Shri Sitaram Mittal cannot be relied upon. Therefore, the inference drawn by the Department about the entries recorded in the impugned seized material belonging to Shri Rajendra Agrawal representing unaccounted seeds purchases of the assessee, is merely a figment of its imagination and is without any basis. It was also submitted that interestingly, the copies of incriminating documents found by the Department during search in the case of Shri Rajendra Agrawal were given to the assessee at the fag end of the block assessment proceedings thereby leaving very little time and opportunity to explain them and cross examine him. It was also submitted that as far as the statement of Shri Sitaram Mittal, accountant of Shri Rajendra Agrawal about the payment having been received from Eagle Seeds & Biotech Limited against the supply of soyabean and wheat, it is submitted that the impugned statement can be neither relied upon nor given any credence because the crucial and material statement of Shri Rajendra Agrawal in respect of the seized material found and seized during search in his case and on which material reliance was placed by the Assessing Officer, has not been recorded till date and if recorded, copy thereof has not been provided to the assessee till date. Shri Rajendra Agrawal never stated that the entries in the seized material represented unaccounted purchases of seeds by the assessee. Some of the entries recorded in the books of account found and seized during search in the case of Shri Rajendra Agrawal showed cash received from assessee but no evidence or incriminating document was found during search either in the case of the assessee or in the case of Shri Rajendra Agrawal suggesting supply of soyabean and wheat to the assessee. This fact clearly proves that cash was paid to Shri Rajendra Agrawal for making payment to farmers and not against purchases of soyabean. The only entries which were found during search in the assessee's case as well as in the case of Shri Rajendra Agrawal were related to the payments made against Beej Prapti Receipts. If the above crucial fact is considered in the light of the statement of Shri R.K. Jain recorded on 12-9-2002, it is quite manifest that the payment was made to him on behalf of farmers towards Beej Prapti Receipt and not against sale of seeds. It was also submitted that the assessee is prohibited from purchasing material from any person other than the farmers and seed companies under M.P. Seed Control Act. It was further submitted that if the assessee was engaged in making unaccounted purchases in soyabean from Rajendra Agrawal, it would not have made payment thereof by way of bearer cheques. It is highly unlikely and absolutely illogical that the assessee would use its unaccounted cash for making payment of accounted purchases and would make payment of unaccounted purchases by bearer cheque. As regards the contention of the Assessing Officer about the assessee having been given opportunity to cross examine Shri Sitaram Mittal, it was submitted that the impugned opportunity of cross examination to the assessee by the Investigation Wing of the Income-tax Department was merely an eyewash and cover up because the statement of Shri Rajendra Agrawal in whose case search was carried out by the Income-tax Department and to whom the entire seized material pertained, on which material reliance was placed by the Assessing Officer, has not been recorded till date and if it had been recorded, copy thereof has not been provided to the assessee. It was also contended that prior to grant of opportunity of cross-examination to the assessee, the copies of incriminating documents and material seized in the case of Shri Rajendra Agrawal were not made available to the assessee. As regards the contention of the Assessing Officer about evidences collected by the Department in the form of bearer cheques of the assessee encashed by Shri Sitaram Mittal amounting to Rs. 41,95,000 are sufficient to establish payment to Shri Rajendra Agrawal towards unaccounted purchases of soyabean and wheat, it was submitted that while encashed cheques to the extent of evidences brought on record by the Department established payment to the persons whose signatures appeared on the reverse side of the cheques, that did not establish unaccounted purchases of soyabean and wheat from Shri Rajendra Agrawal. The Investigation Wing of the Income-tax Department as well as the Assessing Officer utterly failed to bring any evidence in the form of bills, challans, transporters receipt, etc. on record to show that the cheques encashed by Shri Sitaram Mittal were towards unaccounted purchases of soyabean and wheat. In the absence of the above, it is clear that the payments were made by the assessee to the parties who produced 'Beej Prapti Receipt' as per trade practice. The decision in the case of CIT v. Rameshwar Prasad Bagla [1968] 68 ITR 653 (AP) was relied on. As regards the payment towards Beej Prapti Receipt it was submitted that the factum of cheques having been encashed by Shri Sitaram Mittal or Raju or Rajendra as evident from endorsement on the reverse side of the cheques and no evidence regarding unaccounted purchases having been found during search either in the case of Shri Rajendra Agrawal or the assessee, establish that the payments to Shri Rajendra Agrawal and/or his agents were against Beej Prapti Receipt.
The recording of purchases from farmers in the books of account of the assessee further established the assessee's explanation. Had the impugned payments been towards unaccounted purchases, some evidences in the form of bills, freight payment, delivery notices, etc. would have been found during search. It was also submitted that the observation of the Assessing Officer is an unsubstantiated general observation. Many a times farmers supply goods to the assessee but do not finalise the rates in their quest for better realization. Moreover, there are many financers like Shri Rajendra Agrawal who bridge the gap and temporarily finance the farmers. As regards the contention of the Assessing Officer that bearer cheques bearing the signature of Sitaram Mittal, Raju or Rajendra on the reverse side were sufficient to establish unaccounted purchases of the assessee, it was submitted that the same was explained by Shri R.K. Jain in the course of recording of his statement under Section 132(4) before the authorized Officers. It was explained in the statement that the payments were not made for the purchase of seeds from Rajendra Agrawal. It was also submitted that the Assessing Officer has not brought any evidence on record that the payments have been made by the assessee towards unaccounted purchases. Even the entries in the books seized from Rajendra Agrawal could not be co-related with the impugned bearer cheques. It was, therefore, submitted that the Department has not proved that each and every payment was made for making unaccounted purchases. It was also submitted that the inference drawn by the Assessing Officer is purely based on conjectures, surmises and suspicion and does not have sanction of law as held by the Hon'ble Supreme Court in the cases of Dhirajlal Girdharilal v. CIT ; Dhakeswari Cotton Mills Ltd v. CIT [1954] 26 ITR 775; Lalchand Bhagat Ambica Ram v. CIT ; Umacharan Shaw & Bros. v. CIT and Umar Salay Mohamed Salt v.CIT . The CIT (A) considering the material on record and the submissions of the assessee, deleted the entire addition. His findings in paras 3.3 and 3.4 are reproduced below- 3.3 I have considered the submissions made by the appellant and gone through the contents of the assessment order. I have also carefully gone through the case-laws referred to. First of all, it will be pertinent to describe in brief the modus operandi of the appellant's business. The assessee procures seeds from farmers and issues 'Beej Prapti Receipt' to them. The samples of seeds are processed and the samples are sent to Seed Testing laboratories. Upon their testing and meeting the requisite standards, the assessee is issued tags for putting them on the bags of processed seeds. The assessee is prohibited from purchasing seed from traders or any other person.
These receipts are prepared in duplicate. The original receipt is given to the farmer and the copy is kept at godown. The godown issues a Beej Prapti and Payment Receipt and send it to the Head Office. It bears the Beej Prapti Receipts number along with the other relevant details like name of farmers, address, quantity etc.
Sometimes, the farmers supply seeds on approval but finalise the rates subsequently with an intention of taking benefit of market fluctuations. The head office releases the payment, after finalization of rates, against Beej Prapti Receipts after matching its contents with the Beej Prapti and Payment Receipt. The Beej Prapti Receipt is a blanket permit for release of payment and any person who produces it at head office receives payment against it.
Normally, the Head Office releases payment against it within a period of 15 days. Due to time taken in payment, many times, these receipts are discounted by farmers with financers for early payment.
In such cases, the financer produces the receipt, collects payment voucher from Head Office, gets it signed by farmers and collects payment from the head office. The payment may be made either through bearer cheque or in cash. However, in the books of the assessee, the payment is entered in the name of the farmer only from whom seeds were purchased.
3.4 Now coming to the issue at hand, the basis of addition is either the incriminating documents seized during search in the case of Sh.
Rajendra Agrawal or bearer cheques bearing signatures of Sitaram Mittal, Raju or Rajendra on the reverse side. So far as the incriminating documents seized in the search of Sh. Rajendra Agrawal are concerned, there is nothing on record including the statement from Sh. Rajendra Agrawal to show that the impugned payments were made towards unaccounted purchases of seeds by the assessee. Shri Rajendra Agrawal never stated that the payments were received from the assessee on account of sale of the seeds. Even during search in the case of the assessee, no material was found suggesting unaccounted purchases of seeds from Sh. Rajendra Agrawal. Further the assessee was not given opportunity to cross examine Sh. Rajendra Agrawal despite the request made by the appellant. Similarly, the entries relating to the bearer cheques were duly recorded in the regular books of account of the assessee which were seized by the Department during the search operation and are in its custody. In view of the above facts, it cannot be said that unaccounted income was computed by the Assessing Officer on the basis of evidences found as a result of search. Therefore, the computation of undisclosed income of Rs. 57,88,943 by the Assessing Officer was factually as well as legally unjustified. The investigation wing of the Department as well as the Assessing Officer could not bring any material on record to controvert the assessee's explanation. The above facts clearly establish that the payments made to Sh. Rajendra Agrawal and his employees through self-bearer cheques, were payments made against Beej Prapti Receipts issued to farmers and not towards any unaccounted purchases. Therefore, the addition of undisclosed income of Rs. 57,88,943 on account of undisclosed purchases is deleted.
11. The Learned DR relied on the order of the Assessing Officer and submitted that the Assessing Officer on the basis of material on record was justified in making the aforesaid addition. The Learned DR further submits that the assessee was allowed opportunity to cross-examine Sitaram, Accountant/employee of Rajendra Agrawal and as such the Assessing Officer was justified in making the addition.
12. On the other hand, the learned Counsel for the assessee reiterated the submissions made before the CIT (A) and submitted that no material evidence is available on record to connect the assessee with the alleged purchases. The learned Counsel for the assessee took us through pages 3 to 17 of the paper book and submitted that the details of purchases mentioned by the Assessing Officer in the assessment order upon which the undisclosed income is computed have already been recorded by the assessee in the books of account. Therefore, the whole basis of the Assessing Officer in making the addition is unjustified.
13. We have considered the rival submissions and the material available on record. The CIT (A) in his finding has given a categorically finding with regard to the modus operandi of the assessee's business. The CIT (A) has very clearly mentioned as to how the assessee procured seeds from farmers and issued Beej Prapti Receipt. The CIT (A) further mentioned that the original receipt is given to the farmers at the time of purchase and the godown issue a Beej Prapti Receipt and payment receipt and the same is sent to the Head Office. The CIT (A) further observed that the same bears Beej Prapti Receipt number along with other relevant details like the name of the farmer, address, quality, etc. The CIT (A) further mentioned that sometimes the farmer supplies seeds on approval but finalise the rate subsequently with the intention of taking benefit of the market fluctuation. The CIT (A) observed that Beej Prapti Receipt is a blanket permit for release of payment and any person who purchases it, receive the payment against it. The findings of the CIT (A) suggest as to how the assessee has been working. The findings of the CIT (A) and the observations have not been challenged by the revenue. This itself shows that the assessee had procured seeds from farmers and issued Beej Prapti Receipt to them and against the same payments are released. Therefore, it is probable that sometimes payments are made through bearer cheques and the payments might have been received by certain persons on behalf of the farmers. Such persons or agents could be Rajendra Agrawal or his accountant Sitaram or any other person who got payment on discounting the receipt. However, payment given to the bearer would not make any difference in the system of the business of the assessee. The assessee had recorded all the payments and purchases in his books of account. During the course of search, no material was brought on record to show if any material was recovered to connect the assessee with unaccounted purchases made by the assessee from Rajendra Agrawal. Therefore, we take that there was no material available on record which is recovered during the course of search in the case of the assessee to prove that the assessee has made unaccounted for purchases. The CIT (A) was, therefore, justified in holding that the payment may be made through bearer cheques or cash.
However, in the books of account the payment is entered in the name of the farmer only from whom seeds were purchased. Since these findings of the CIT (A) have not been challenged before us, the revenue had miserably failed to prove anything wrong in the findings of the CIT (A). The CIT (A) has also given a clear finding that even in the search of Rajendra Agrawal, no incriminating document was seized to show that the payments were made towards unaccounted purchases of seed by the assessee through Shri Rajendra Agrawal. Therefore, there is no question of giving any opportunity to the assessee to cross-examine Rajendra Agrawal. The CIT (A) has also given a finding that the entries relating to bearer cheques were duly recorded in the regular books of account of the assessee which were seized by the Department. The CIT (A) in view of the above fact was of the view that unaccounted income so computed by the Assessing Officer is not based upon any evidence found as a result of search. The assessee has very clearly submitted before the CIT (A) that there is no evidence on record to prove that the assessee made unaccounted purchases of the seeds from Rajendra Agrawal. The assessee time and again submitted that the payments have been made on behalf of the farmers towards Beej Prapti Receipt and not against sale of seeds. This goes without saying that the Assessing Officer has not produced any material on record to justify his version. The learned Counsel for the assessee from the material on record from pages 3 to 17 of the paper book has been able to prove that the Assessing Officer has computed undisclosed income on the purchases which have been recorded in the books of account of assessee. Therefore, if the Assessing Officer wanted to use any material of third party, then such incriminating material should have been brought to the notice of the assessee before the same is being used as evidence against the assessee. Neither any material is confronted to the assessee nor any statement of Shri Rajendra Agrawal was confronted to the assessee for making any addition under this head. The Hon'ble Supreme Court in the case of Kishinchand Chellaram v. CIT , held that "in the income-tax proceedings evidence could be used against the assessee by giving opportunity to controvert the same material. If no opportunity is given to the assessee to rebut such material then the same would not be admissible in evidence against the assessee. The Hon'ble Punjab & Haryana High Court in the case of Chiranji Lal Steel Rolling Mills (supra) held that the ITO has power to collect evidence from any source but it is his duty to put it to the assessee before making it the basis of his assessment. If the assessee denies the information collected by the ITO, it is the duty of the ITO to satisfy himself by making independent enquiry from sources considered reliable by him and decide whether the information passed on to him is true or not. If as a result of his own independent enquiry he comes to the conclusion that the information received by him is true, he is at liberty to act thereon after disclosing it to the assessee and affording him a reasonable opportunity or rebutting it. The CIT (A) was, therefore, justified in holding that no proper opportunity is given to the assessee to cross-examine Shri Rajendra Agrawal despite request made by the assessee. Similarly, no incriminating material was confronted to the assessee. The Assessing Officer tried to make out a case by showing that the assessee was allowed to cross examine Sitaram, accountant of Rajendra Agrawal but Sitaram is not connected in any way with the recovery from the possession of Rajendra Agrawal. Sitaram is not accountable in case recovery is not made from him. Since recovery is stated to have been effected from Rajendra Agrawal, he should comment upon the same as to how it was connected with the assessee.
Since nothing specified by the learned DR whether Rajendra Agrawal was examined or not and that if opportunity is given to the assessee to cross-examine Rajendra Agrawal, no material collected during the course of search in case of Rajendra Agrawal would be admissible in evidence against the present assessee. Therefore, the CIT (A) was justified in deleting the addition on this issue.
14. We may also mention that this is a case of block assessment in the case of the assessee and the assessment is framed under Section 158BC of the Act. The same falls under Chapter XIV-B of the Income-tax Act which is a special provision for computing the income of the assessee.
The block assessment could be made in respect of undisclosed income of during the block period undisclosed income is recovered as a result of evidence found during the course of search and not as a result of other document or material which came in possession of the Assessing Officer subsequent to the search operation unless and until such material or document is relatable to such evidence recovered during the course of search. The amended definition of Section 158BB clearly suggests that some evidence is to be found as a result of search operation and it is only thereafter that the remaining part of the provisions come into play and that too that evidence must be relatable to the evidence recovered during the course of search. In this case the Assessing Officer has not pointed out any recovery of incriminating evidence in the course of search in the case of the assessee. The entire addition was based upon the alleged material recovered in the case of search of Rajendra Agrawal. No evidence is produced to show that the assessee made payments for unaccounted purchases. The assessee made payments against Beej Prapti Receipts only which are entered into books of account of the assessee. Therefore, the Assessing Officer should have made out a case that the evidence recovered during the course of search in the case of the assessee was connected with the material recovered in the case of Rajendra Agrawal. However, no such attempt has been made to make out a case against the assessee. In this view of the matter and considering the material on record, we are of the view that the Commissioner of Income-tax (Appeals) was justified in deleting the entire addition. As a result, the revenue's appeal fails to make out a case against the assessee. The revenue's appeal is, therefore, dismissed.
15. The assessee has challenged the addition of Rs. 23,76,570 on account of unaccounted purchases. In the course of search at the premises of the assessee certain incriminating documents marked as RKJ/RES/LPS 3 to 6 ESBT/RNT/LPS-1 found and seized. During the block assessment proceedings the assessee explained that most of the documents contained in the impugned annexure represented unaccounted purchases of soyabean or wheat, etc. relating to its grain business and offered profit margin thereon for taxation as undisclosed income for the block period. The Assessing Officer did not accept the above contention of the assessee and held that impugned purchases of soyabean, wheat, etc. as per the seized material represented unaccounted for purchases of seeds. He has estimated the trade cycle of 5 days and applied gross profit margin applicable to the assessee's seed business to determine undisclosed income of the assessee resulting into the addition of Rs. 23,76,570. It was submitted before the CIT (A) that there is no dispute about the fact that purchases as per the seized material were not recorded in the books of account. The only grievance of the assessee was about trade cycle of 5 days instead of 2 days and the application of gross profit margin or the net profit margin. It was submitted that the Assessing Officer ignored the judgment of the Hon'ble jurisdictional High Court in the case of CIT v.Balchand Ajit Kumar in which it was held that the total sale could not be regarded as the profit of the assessee and the undisclosed income could be estimated at net profit rate. The CIT (A), however, did not find any force in the same. The CIT (A) was of the view that the quantum of purchases made outside the books of account is not in dispute and that the Assessing Officer has rightly applied the GP rate in the matter instead of NP rate. The CIT (A) also did not accept the set off of the undisclosed income declared by the assessee against the undisclosed income because according to the CIT (A) the assessee had disowned the transactions. The CIT (A), accordingly, confirmed the addition. The assessee is in appeal for deletion of the addition of Rs. 23,76,570.
16. The learned Counsel for the assessee did not dispute the quantum of undisclosed and unaccounted purchases. He submits that the Assessing Officer should have applied net profit rate instead of GP rate in the matter. He has filed a chart of the net profit rate in the case of the same assessee in the year under consideration at page 18 of the paper book. He submits that the Hon'ble M.P. High Court in the case of Balchand Ajit Kumar (supra) directed to apply net profit. He submits that the same view is taken by the Income-tax Appellate Tribunal, Indore Bench, in the case of Madanlal Narendra Kumar (HUF) v. Asstt.
CIT [2003] 131 Taxman 41 (Mag.) and Som Distilleries (P.) Ltd 31 TTJ 401 (sic). The learned Counsel submitted a computation of income of undisclosed purchases as per the NP rate disclosed by the assessee and submitted that at the most if net profit is applied then the undisclosed income should be worked out to Rs. 3,89,700. The learned Counsel further submitted that since the assessee has declared undisclosed income in the block returns in a sum of Rs. 52 lakhs, the assessee should have been given set off of the income declared in the return for block period.
17. On the other hand, the learned DR submitted that the Assessing Officer has rightly applied the GP rate in the matter because GP rate is exclusive of administrative cost, interest and depreciation. He justifies the findings of the authorities below and submits that the addition may be confirmed. He relied on the decision of the Hon'ble Supreme Court in the case of CST v. H.M. Esufali H.M. Abdulali .
18. We have considered the rival submissions and the material available on record. It is not in dispute that the assessee has filed the return of income showing undisclosed income of Rs. 52 lakhs on the basis of material recovered during the course of search in the case of the assessee in different years as mentioned above in this year. The Assessing Officer has made addition of Rs. 23,76,570 by applying GP rate. The Hon'ble M.P. High Court in the case of Balchand Ajit Kumar (supra) considering a case of search and seizure operation, held "that the total sale could not be regarded as the profit of the assessee. The net profit rate had to be adopted and once it was adopted it could not be said that there was perversity of approach. Whether rate was low or high would depend upon the facts of each case". The Hon'ble Gujarat High Court in the case of CIT v. President Industries [2002] 258 ITR 654 : 124 Taxman 654 held "dismissing the application for reference, that the amount of sales could not represent the income of the assessee who had not disclosed the sales. The sales only represented the price received by the seller of the goods; only the realisation of the excess over the cost incurred could form part of the profit included in the consideration for the sales. Since there was no finding to the effect that investment by way of incurring the cost in acquiring the goods which were sold had been made by the assessee and that the investment was also not disclosed, only the excess over the cost incurred could be treated as profit. The Hon'ble Calcutta High Court in the case of CIT v. S.M. Omer , held that Section 69 of the IT Act, 1961 was not applicable in the instant case. The assessee supplied the goods after incurring certain cost and after manufacturing the goods and the amount that was received from the Defence Department could not represent the net income but it was the sum received including the profit and expenditure. The Tribunal was justified in upholding the deletion of Rs. 1,01,649. The Income-tax Appellate Tribunal, Indore Bench in the case of Som Distilleries (P.)Ltd. (supra) and Madanlal Narendra Kumar (HUF) (supra) has already applied net profit as per the books on unaccounted sales to determine the undisclosed income of the assessee.
19. Considering the above decisions, the Assessing Officer was not justified in applying GP rate in the matter. We, accordingly, set aside the orders of the authorities below on this issue and direct the Assessing Officer to apply net profit rate as disclosed by the assessee in the books of account because it seems to be reasonable and appropriate in the facts of the case. There is no hard and fast rule as to which NP rate is to be applied. It depend upon the facts of each case. The assessee has filed a chart at page 18 of the paper book showing that in the assessment year 2002-03 the assessee has shown net profit rate as per audited books of account in 0.96 per cent and in the assessment year 2003-04 net profit rate of 1.12 per cent has been shown. The Assessing Officer has made addition with regard to the undisclosed income only in these years. If such net profit rate is applied then the addition would be worked out to Rs. 3,89,700 as has been calculated by the assessee and the copy of the same has been filed in the written submissions at page 23 of the paper book. The huge addition is, therefore, unjustified and the Assessing Officer should adopt the addition, if any, on undisclosed income at Rs. 3,89,700, however, subject to verification. Even if slight higher NP rate is applied the additions made by the Assessing Officer would be excessive.
We may mention that it is not the end of the matter because the assessee has claimed set off of the undisclosed income already declared in the return of income in a sum of Rs. 52 lakhs. It is a settled law that the undisclosed income declared by the assessee and accepted by the authorities below is available to the assessee for the purpose of explaining the other additions/investments and the same would also be available to the assessee for set off purposes in respect of the agreed or other additions. We are fortified in our view by the following decisions: (4) CIT v. Tyaryamal Balchand [l987] 165 ITR 453 : 32 Taxman 64 (Raj.) Income in a sum of Rs. 52 lakhs. It is a settled law that the undisclosed income declared by the assessee and computed by the authorities below is available to the assessee for the purpose of explaining the other additions/investments and the same would also be available to the assessee for set off purposes in respect of the agreed or other additions.
(1) In the Madras High Court in S. Kuppuswami Mudaliar's case (supra) Where the income-tax authorities make an addition to the income of the assessee over and above the income as disclosed by the assessee, on an estimate basis, the amount so added must be treated as the real income of the assessee. It basis, the amount so added must be treated as the real income of the assessee. It is not open to the authorities to take the view that the addition was only for purposes of taxation and that it should not be regarded as the true income of the assessee.
(2) In the Supreme Court of India in Anantharam, Veerasinghaiah & Co. 's case (supra) When an "intangible" addition is made to the book profits during an assessment proceeding, it is on the basis that the amount represented by that addition constitutes the undisclosed income of the assessee. That income, although commonly described as "intangible" is as much a part of his real income as that disclosed by his account books. It has the same concrete existence. It could be available to the assessee as the book profits could be.
(3) In the Punjab and Haryana High Court in Premchand Jain's case (supra) Held, that the Tribunal was right in law in holding that past intangible additions made in the case of the firm and allocated to the assessee's share could be taken into account in considering the unexplained investments of the assessee and these would also be available for set off purposes in respect of the agreed additions for low household expenses made in the five years under consideration, and remanding the case to the Appellate Assistant Commissioner.
(4) In the Rajasthan High Court - Jaipur Bench Tyaryamal Balchand's case (supra) Held, that the Appellate Assistant Commissioner and the Tribunal had committed no error of law in holding that the unproved cash credit of Rs. 16,950 should be taken to have come out of intangible additions as substantial additions had been made even in the earlier years. It had also been rightly held by the Tribunal that even during the present assessment, an addition of Rs. 18,117 had been made, which would sufficiently cover any unexplained income to the extent of Rs. 16,950 could not, therefore, be added as income from undisclosed sources.
Considering the above decisions, the undisclosed income declared by the assessee in a sum of Rs. 52 lakhs in the return of block period on the basis of calculation of the seized material is available to the assessee for the purpose of explaining other additions/investments.
Since the addition on account of undisclosed income on account of undisclosed purchases is less than the amount of returned income of Rs. 52 lakhs, no separate addition is liable to be made. As a result, the entire addition of Rs. 23,76,570 is deleted. As a result, this ground of appeal of the assessee is allowed. In this view of the matter, the decision cited by the learned DR is not applicable.
20. The other ground of appeal raised in the assessee's appeal is challenging the addition of Rs. 39,000 made by the Assessing Officer on account of repayment to Smt. Sudha Jain. This ground relates to addition of Rs. 39,000 representing payment to Smt. Sudha Jain. As per annexure seized during the course of search, certain payments made to Smt. Sudha Jain were found from 21st August, 1996 to 14th April, 1997 in a sum of Rs. 39,000 on different dates. The Assessing Officer made the addition. The CIT (A) confirmed the same.
21. The learned Counsel for the assessee referred to page 32 of the paper book to show that the loan was taken prior to the block period of 31st March, 1996. He has also stated that on the same set off, separate addition of Rs. 39,000 is unwarranted. The learned DR, however, relied on the orders of the authorities below.
22. On consideration of the above facts and our findings above, we are of the view that no separate addition is warranted because of the amount already offered by the assessee on account of undisclosed income in the return filed for the block assessment is available to the assessee to explain addition. In this view of the matter, it is unnecessary to record further finding of facts. As a result, the addition is deleted.
23. No other point is argued or pressed in the departmental appeal or in the assessee's appeal. As a result, the assessee's appeal is allowed.
24. In the result, the revenue's appeal is dismissed, the appeal of the assessee is allowed and the cross objection becomes in-fructuous.