1. These are cross-appeals by the Revenue and assessee. These are directed against the order dt. 18th Oct., 2005 of the CIT(A)-I, Hyderabad for the block period from 1997-98 to 2002-03 and upto 21st Jan., 2003. The cross-objection has been filed by the assessee in IT(SS)A No. 3/Hyd/2006.
2. The concise grounds of appeal filed by the assessee are reproduced as below: (1) The order of the learned AO passed for the block period is opposed to law and is against the facts, circumstances and probabilities of the case.
The learned CIT(A) is not justified in sustaining the addition of Rs. 84,07,790 in the facts and circumstances of the case. The orders of the AO and CIT(A) are in violation of the principles of natural justice and also bad in law, because they have estimated the turnover for three earlier years of the block period i.e. from the asst. yr. 2000-01, when the seized material related to 57 days only from 26th Nov., 2002 to 21st Jan., 2003.
(3) The CIT(A) and the AO are not justified in estimating the net profit at 4 per cent as against the disclosed net profit of 3.28 per cent which is based on income-tax records.
The CIT(A) is not justified in estimating the capital required to run the undisclosed portion of business at Rs. 14,86,218 as against Rs. 2,55,378 admitted by the appellant.
(5) Any other ground or grounds of appeal that may be urged at or before hearing.
The learned Authorised Representative submitted that ground Nos. 1 and 5 are general in nature.
3. Brief facts of the case are that the assessee company is engaged in the business of production and sale of Rawa from wheat. Search under Section 132 was conducted at the business premises of the company and residential premises of its directors on 21st Jan., 2003, during which incriminating documents and other evidences showing suppression of sales were found. The directors of the company were examined during the course of search proceedings. During the course of search some bank accounts were found wherein unaccounted sale considerations were deposited. The AO has noted details of bank account at page Nos. 11 and 12 of the assessment order. On the basis of the seized documents, evidences and bank accounts the assessee has admitted having suppressed the sales to the extent of Rs. 1,32,79,680 during the period from 1st April, 2002 to 21st Jan., 2003 (upto the date of search) on which the undisclosed net profit of Rs. 4,35,573 was estimated at the rate of 3.28 per cent. In addition, the assessee company offered for taxation a sum of Rs. 2,55,378 as the undisclosed capital invested to run the undisclosed portion of business. Thereby the assessee disclosed the total amount of Rs. 6,90,951 as undisclosed income in the return filed for the block period. The AO did not accept the above declarations and estimated the undisclosed sales/turnover and the undisclosed profit @ 4 per cent of sales for the entire block period i.e. from 1st April, 1999 to 21st Jan., 2003 as under:Total credits in the bank statement 80,56,175Less : Excess credited on 14-12-2002 7,00,000Cancellation of DD on 11-12-2000 5,00,000 12,00,000 ________Total sales outside books for 39 days 68,56,175deposited in the bank a/c _________Average rate of wheat for the year 10.96 68,56,175/10.96 = 6,25,563 kgs.Sales as per books from 01.04.2002 to =79,85,448 Kgs.20.01.2002 (295 days)Ratio of accounted for sales to =27,069 : 16,040unaccounted for sales = 100 : 59 The same ratio is taken into consideration for working out the suppressed sales for the period 01.04.1999 till date of search i.e. the 21.01.2003.Asst. Yr. Accounted Unaccounted Rate per Value of Profit Undis- sale of sale of Rawa kg.
unaccou- (c) 4% closed Rawa as worked out (average) nted income2000-01 1,45,19,052 85,66,240 10.70 9,16,58,768 36,66,351 36,66,3512001-02 1,30,06,669 76,73,935 10.30 7,90,41,530 31,61,661 31,61,6612002-03 1,16,10,226 68,50,033 11.30 7,74,05,372 30,96,215 30,96,2151.4.2003 79,85,448 47,11,414 11.54 5,43,69,718 21,74,789 21,74,789 The assessee filed appeal before the CIT(A). The first appellate authority confirmed the action of the AO regarding the estimate of sales/turnover, relying on the judgment of the apex Court in the case of CST v. H.M. Esufali H.M. Abdulali and the decision of the jurisdictional High Court in the case of Rajnik & Co. v. Asstt.
CIT (2001) 171 CTR (AP) 117 : (2001) 251 ITR 561 (AP). However, the CIT(A) found that the working of suppressed sales made by the AO was not correct since the undisclosed sale proceeds deposited in the bank account were considered for only 39 days while the actual deposits were more and related to 57 days. The CIT(A) considered the revised working filed by the assessee and found that the ratio of accounted sales to unaccounted sales comes to 100.41 against 100.59 computed by the AO.The CIT(A) applied the ratio to earlier years and calculated the unaccounted turnover during the block period at Rs. 21,01,94,771 on which the unaccounted profits @ 4 per cent come to Rs. 84,07,790 against unaccounted turnover of Rs. 30,24,75,338 and unaccounted profits of Rs. 1,20,99,016 computed by the AO. The CIT(A) accordingly restricted the addition to the extent of Rs. 84,07,790 the details of which are reproduced from the order of the CIT(A), as under:Asst. Yr. Accounted Unaccounted Rate per Value of Profit Undis- sale of sale of Rawa kg.
unaccou- (c) 4% closed Rawa as worked out (average) nted income2000-01 1,45,19,052 59,52,811 10.70 6,36,95,078 25,47,803 25,47,8032001-02 1,30,06,669 53,32,734 10.30 5,49,27,160 21,97,086 21,97,0862002-03 1,16,10,226 47,60,193 11.30 5,37,90,181 21,51,607 21,51,6071.4.2003 79,85,448 32,74,034 11.54 3,77,82,352 15,11,294 15,11,294 The CIT(A) accordingly sustained the addition to the extent of Rs. 84,07,790 as against Rs. 1,20,99,016 made by the AO. The CIT(A) further noticed that the assessee has computed unexplained initial capital invested in unaccounted business at Rs. 2,55,378. The AO omitted to add the amount of initial capital invested in the above turnover in addition to the turnover declared by the assessee. It is also noticed by the CIT(A) that the unaccounted business cannot be run without initial investment of capital which has been accepted by the assessee himself and offered the same for taxation in its return filed for the block period. The only dispute is about quantum of such initial investment. The assessee himself adopted an amount equivalent to seven days' turnover as the basis for estimating initial capital investment in the undisclosed business. Adopting the same basis, the undisclosed turnover for financial year 1999-2000 was computed by the CIT(A) at Rs. 14,86,218. The CIT(A) accordingly directed the AO to make a further addition of Rs. 14,86,218 and accordingly enhanced the addition made by the AO after providing opportunity of hearing to the assessee.
4. The learned Authorised Representative submitted that in short the issue involved in the grounds of appeal is pertaining to sustaining of addition of Rs. 84,07,790 on account of alleged suppression of sales and Rs. 14,86,218 on account of estimation of capital required to run undisclosed portion of the business and net profit rate applied by the AO at 4 per cent against net profit declared by the assessee at 3.28 per cent. The learned Authorised Representative submitted that whatever material was found at the time of search, the assessee himself has calculated undisclosed income and the same was shown in the block return which included unaccounted as well as investment to run the said undisclosed business. The learned Authorised Representative submitted that the unaccounted business was run by the assessee through bank accounts and on the basis of the said bank accounts the assessee has already declared the unaccounted income. Therefore, there is no question of further more income as undisclosed income. It is also the submission of the learned Authorised Representative that the AO calculated the suppressed turnover for the period for which no material was found at the time of search. The AO calculated the turnover merely on the basis of presumptions, surmises and conjectures by applying the ratio of accounted and unaccounted sales which is not permissible in the block assessment. The learned Authorised Representative submitted that in respect of block assessment, the undisclosed income has to be calculated only on the basis of material found at the time of search.
The learned Authorised Representative submitted that neither any material for earlier period was found nor any admission was made by responsible persons either at the time of search or at the time of assessment proceedings. The learned Authorised Representative while distinguishing the judgment of the apex Court in the case of H.M.Esufali (supra) and in the case of Rajnik & Co. (supra) submitted that in the case of H.M. Esufali (supra) the income was estimated for the year only, whereas in the case under consideration, the AO estimated the undisclosed turnover for the earlier years. The learned Authorised Representative submitted that in the case of Rajnik & Co. (supra), the estimation was made on the basis of confession made by the partner admitting suppression on day-to-day basis in earlier year also whereas there is no admission in the case under consideration. The learned Authorised Representative submitted that there was no material found in earlier years, nor was there any admission in the statement that there was suppression of sales in earlier years. In support of this contention, the learned Authorised Representative pointed out various questions and answers in the statement recorded. As regards the addition of Rs. 14,86,218 enhanced by the learned CIT(A), the learned Authorised Representative submitted that since there was no suppression of undisclosed sales in earlier years, there is no question of such investment in undisclosed business. In respect of the net profit rate, the learned Authorised Representative submitted that the AO applied 4 per cent net profit rate without any basis whereas the assessee has declared net profit rate at 3.28 per cent on the basis of books of account and other supporting material.
5. The learned Departmental Representative, on the other hand, relied upon the order of the CIT(A) and also relied upon the judgment of the apex Court in the case of EM. Esufali (supra) and also on the judgment of the jurisdictional High Court in the case of Rajnik & Co. (supra).
The learned Departmental Representative submitted that suppression of sales was the regular practice of business of the assessee and therefore the estimate of suppressed sales and income hereon was rightly estimated for earlier years. The learned Departmental Representative submitted that the estimation made for earlier years is supported by the above judgments. The learned Departmental Representative urged that the order of the CIT(A) may be confirmed.
6. We have heard the learned representatives of the parties and records perused. The admitted facts of the case are that during the search, it was found that the assessee was running unaccounted business through bank accounts which were opened for that specific purpose. There is no dispute on the fact that whatever income from unaccounted turnover through bank account has been calculated and the same was offered by the assessee himself while filing the return of income of the block period. The income on turnover as well as investment in running unaccounted business was also declared by the assessee. It is an admitted fact that there was no material found for the earlier years.
The bank account through which the unaccounted turnover was made pertained to the period 4th Dec, 2002 to 23rd Jan., 2003. As stated above, the assessee has offered for taxation the income which was calculated from the above bank account earlier period related to the accounting year i.e. 1st April, 2002 to 4th Dec, 2002. The Revenue has not controverted the fact that no material was found for earlier years.
There is no admission by the assessee that there was suppression of sales or doing undisclosed business through bank account in earlier year also. In support of this fact, the learned Authorised Representative pointed out following questions and answers thereto from the statement of Shri Divesh Kumar Agarwal recorded on 23rd Dec, 2004: Q.23 The abovementioned account was operated from 4th Dec, 2002 to 23rd Jan., 2003. Have you opened any such accounts in fictitious name earlier to 4th Dec, 2002 and subsequent to 23rd Jan., 2003 Ans. I never opened any account in any fictitious name earlier to 4th Dec, 2002 or after 23rd Jan., 2003.
Q.24 You are mentioning that you operated this bank account in fictitious name due to fear complex of sales-tax authorities. Before 4th Dec, 2002 and after 23rd Jan., 2003 also, the levy of sales-tax is there. Further, since you are carrying on business for so many years, why were you so particular to open bank account in fictitious name and choose to operate it for period of less than one and half a month Ans. I started taking active part in the business of AFIL from July, 2002 onwards. After acquainting myself with the business affairs of the company, I thought of opening this account in the name of Santosh and Anand. Before my joining in the business, all the business affairs were looked after by my father, Sri Gyan Kumar Agarwal. I am not aware whether any such account was operated by him in the business of AFIL.
Q.25 Regarding operating of this account in fictitious name in TNMB, have you ever informed the same to your father, Sri Gyan Kumar Agarwal Ans. Before operating the account, I informed my father Gyan Kumar Agarwal and with his approval only I opened this account in fictitious name and operated the same.
Q.26 From the account it is clear that certain sales and purchases pertaining to AFIL are being effected outside the books of account, for a specific period, i.e. from 4th Dec, 2002 to 23rd Jan., 2003.
Do you mean to say that earlier and after the above period, there were no sales and purchases outside the books of account Ans. Earlier to 4th Dec, 2002, I am new to business, I am not aware of any such bank account operated by any person relating to AFIL.
Subsequent to 23rd Jan., 2003, due to shock because of search and seizure operations by IT authorities, we did not operate any such fictitious account.
6.1 On the basis of the above position of admitted facts, we find that neither any material was found at the time of search nor any admission was made regarding suppression of sales for the earlier years.
6.2 Section 158BB(1) requires that the undisclosed income of the block period shall (be) the aggregate of the total income of the previous year falling within the block period computed in accordance with the provisions of this Act, on the basis of evidence found as a result of search or requisition of books of account or other documents and such other materials or information as are available with the AO and relatable to such evidence. The Tribunal, Mumbai Bench (Third Member) in the case of Morarjee Goculdas Spg. & Wvg. Co. Ltd. v. Dy. CIT (2005) 98 TTJ (Mumbai)(TM) 201 : (2005) 95 ITD 1 (Mumbai)(TM) held as under: 9. Section 158BB provides for computation of undisclosed income to be the aggregate of the total income of the previous falling within the block period computed in accordance with the provisions of this Act, on the basis of evidence found as a result of search or requisition of books of account or other documents and such other materials or information as are available with the AO and relatable to such evidence as reduced by the aggregate of the total income or as the case may be as increased by the aggregate of the losses of such previous years determined and provided in cls. (a) to (f) of Section 158BB(1). What is crucial to be determined is that the undisclosed income which can be assessed under Chapter XIV-B should be that amount which is computed on the basis of evidences found as a result of search and such other material or information as are available with the AO and relatable to such evidence. Core thing to be seen is the evidence found which will be the basis for making the assessment. If there is no evidence or the evidence has already come on record or has been disclosed by the assessee in the assessment proceedings, then that evidence cannot be said to have been found as a result of search and in that case, the material or information available with the AO and relatable to such evidence could also not help in computing undisclosed income.Essem Intra-port Services (P) Ltd. v. Asstt. CIT (2000) 68 TTJ (Hyd) 103 : (2000) 72 ITD 228 (Hyd) has taken similar view on the interpretation of such material by observing that: Chapter XIV-B lays down special procedure for assessment in search cases. The special procedure set out in Chapter XIV-B is a separate set of rules, by itself. For the purposes of this chapter, the term 'undisclosed income' is defined. The definition of the term 'undisclosed income' is given in an 'inclusive' manner, but it is again made clear under Section 158B(b) that 'undisclosed income' includes money, bullion, jewellery etc., only if they represent income or property which has not been or would not have been disclosed for the purposes of this Act. Therefore, we find that even though 'disclosed income' is defined in an 'inclusive' manner, the scope and extent of the term 'undisclosed income' for the purposes of this chapter is contingent upon the fact that the undisclosed income should be borne out of material representing income or property which has not been or would not have been disclosed by the assessee for the purposes of this Act.
7. From the above discussion, we find that if there is no material found as a result of search, the arbitrary estimate cannot be made for the purpose of computation of undisclosed income of the block period.
The legislature in its wisdom has rightly inserted such clauses for computation of undisclosed income of the block period and only the undisclosed income which is to be computed on the basis of evidence and material found as a result of search. The action of search is an extraordinary action under the IT Act. Generally it is taken on the basis of evidence and material under possession of the Department that a person is having undisclosed income. When in such an extraordinary action no material is found at the time of search, we are of the considered view that in those circumstances, if cannot be said that there was undisclosed income. In the case under consideration, whatever undisclosed income on the basis of material is found at the time of search has been offered by the assessee in the return filed for the block period. It is also a fact that in the statement recorded it was admitted that such suppression of income was not there in earlier years. The judgment of the apex Court in the case of H.M. Esufali (supra) has been rightly distinguished by the learned Authorised Representative, firstly on the ground that in the said judgment, the provisions of assessment for the block period have not been considered including Section 158BB of the IT Act. Secondly, the estimation was only for the year and material found was for part of that year. Facts of that case are not that the estimate was made for all the earlier years. Similarly, the judgment of the jurisdictional High Court in the case of Rajnik & Co. (supra) is also distinguishable on facts as in that case the partners had categorically admitted suppression of the income of earlier years whereas in the case under consideration, it is categorically denied while replying to question Nos. 23 and 24 in the statement recorded that there was no suppression of income in the earlier years or subsequent years/period; the accounted turnover is only from 4th Dec., 2002 to 23rd Jan., 2003. Thus both the judgments are distinguishable on facts. In the light of the above discussion, we find that the action of the AO is arbitrary and not based on material found at the time of search nor it is based on the statement recorded at the time of search. Such addition merely on the basis of arbitrary or notional income on the assumption that since there was suppression of turnover for the period 1st April, 2002 to 21st Jan., 2003 and therefore, by same proportion there was suppression of turnover/income for the earlier years and subsequent year/period, is not sustainable.
There is no suppression of turnover or sales or unaccounted business of earlier years; there is no question of making any addition on account of investment for running the unaccounted business for earlier years/subsequent period to search. We, therefore, delete the addition of Rs. 84,07,790 sustained by the CIT(A) on account of suppression of turnover and Rs. 14,86,218 enhanced by the CIT(A) on account of capital employed for running the unaccounted business.
8. So far as the ground regarding net profit rate of 4 per cent is concerned, this ground becomes infructuous as we have held that there was no unaccounted turnover in earlier years. Therefore, the question of applying 4 per cent net profit rate does not arise. The assessee's appeal is allowed.
(ii) The CIT(A) ought to have noticed that the total amount of deposits in the two bank accounts identified during the course of assessment proceedings cover only 47 days period and not 57 days as observed in the appeal order though the period was mentioned as 26th Nov., 2002 to 11th Jan., 2003 in the appeal order itself.
(iii) The CIT(A) ought to have adopted the period of 47 days for working out the average rate of wheat, which ultimately was taken to estimate the sales effected outside the books by the assessee company.
(iv) Any other ground will be raised at the time of hearing of appeal.
10. At the time of hearing, the learned representatives of the parties pointed out that there is a mistake in the order of the CIT(A) at p. 14 in mentioning the date for the period 26th Nov., 2002 to 21st Jan., 2003 which the CIT(A) has written as 11th Jan., 2003 whereas the period was 57 days. Since while deciding IT(SS)A No. 167/Hyd/2006 the addition has been deleted, this mistake is not material. Thus, on merits, after correcting the date as 21st Jan., 2003, the period of 57 days is correct and it is simply a typographical error. This ground of appeal raised has become infructuous and the same is dismissed.
11. The assessee filed this cross-objection against the appeal filed by the Revenue. Since the Revenue's appeal is held to be infructuous, cross-objection filed by the assessee has also become infructuous.
12. In the result, while IT(SS)A No. 167/Hyd/2006 of the assessee is allowed, IT(SS)A No. 3/Hyd/2006 filed by the Revenue and CO No.14/Hyd/2006 filed by the assessee are dismissed.