Income Tax Appellate Tribunal - Chennai
Shri. C.V. Sunny, Prop. Pavizham ... vs The Asst. Commissioner Of Income-Tax on 23 November, 2007
ORDER
Chandra Poojari, Accountant Member
1. This appeal by the assessee is directed against the order of the Learned Commissioner of Income-tax (Appeals) dated 29.08.2005.
2. Ground Nos. 1 and 2 raised by the assessee are as follows:
Ground No. 1: The CIT(Appeals) is not correct in upholding the assessment order passed Under Section 143(3) r.w. Section 158BC which is opposed to law, facts and circumstances of the case.
Ground No. 2: The CIT(Appeals) is not correct in stating at para 2.6 "The first , third and the fourth grounds are general in nature for which no separate discussion is called for".
Since these two grounds were not pressed at the time of hearing, they are dismissed accordingly and an endorsement has been made in the file by the assessee in this regard.
3. Ground No. 3.1 to 3.5.
The grievance of the assessee vide these grounds is as follows:
(i) The CIT (Appeals) is not correct in coming to the conclusion that AO was justified in resorting to the estimation of undisclosed income for all the years falling in the block period.
(ii)When the assessee himself had already disclosed income prior to search towards profits earned over and above the book profit for assessment years 1997-98 to 2002-03 at Rs. 10059700/-. Without any further material found at the time of search to suggest there was further undisclosed income, the CIT(Appeals) is not correct in stating that the estimation for all the years comprising in the block period can be made on the basis of materials found for broken period and the statements recorded based on the above materials.
(iii) The CIT(Appeals) is not correct in upholding that the Thali sales considered for multiplication factor is correct after giving a clear finding at para 3.53 "I am not very sure how by this statement he(The Officer) comes to the condition that thali sales should definitely be considered for multiplication factoe.
(iv) The CIT(A) is not correct in stating that the Gross profit rates adopted as per regular returns are to be adopted instead of the fact that the sales, purchases and expenses were not correctly recorded in the regular statements filed based on which figures the above gross profit rates were arrived.
(v) The CIT(A) is not correct in giving the finding that the G.P. rates adopted by the officer on unrecorded sales to find undisclosed income is correct after stating "I fully agree with the appellant that it is only net profit which can be treated as undisclosed income and not the gross profit.
4. The brief facts of the issue are that there was a search Under Section 132 of the act at the business and residential premises of the assessee on 26.11.2002 which finally concluded on 16.12.2002. Notice Under Section 158BC was issued by the assessing officer on 3.3.03 and served on the assessee on 4.3.03. In response to this notice, the assessee filed his block return only on 24.9.03 declaring undisclosed income at Rs. 5,00,000/-. The assessing officer completed the assessment Under Section 143(3) r.w.s.l58BC at Rs. 1,56,31,600/. The basis for the determination of undisclosed income is estimation of gross profit on account of sales suppression. During the course of search, while recording statement Under Section 32(4) on 24.1.2003, the assessee has stated that around 60% of the total sales is accounted in respect of jewellery and 100% turnover is accounted in respect of bullion sales. There is a Seized material representing the sales of jewellery for a period of 22 days from 10.10.2002 to 3.11.2002 amounting to Rs. 1.86 Crores as per SKM/B&D/S-178 and 179 dated 13.12.2002 whereas the accounted sales for this period was Rs. 26.66 lakhs. There was one more loose leaf pertaining to 10.6.02 marked as Sl. No. BLN/B&D/S-5 dated 26.11.2002 as per which the cash sales was shown at Rs. 5.81 lakhs as against declared sales of Rs. 1.11 lakhs in the books of accounts. It was stated by Shri. C.V. Sunny on 26.11.2002 that when an ornament is made sold to a customer, the details of such sales namely description of the item, gross weight, net weight and total cost is entered into the computer. A print out is then made and given to the customer. At the end of the day, after closing a print out of the day's sales and stock statement is taken. Then data in the computer is deleted. Sales bills are prepared at the end of the day and up to the required prefixed amount for each day. The sales bills are issued in fictitious names and bears no correlation to the actual sales made in their shops. The assessing officer has discussed the notings in various seized material and after analyzing the same, he had come to the conclusion that recorded sales are generally in the order of 20% of the total sales made. All the details found were pertaining to the financial year 2002-03. No details for earlier years have been found. However, the assessing officer had observed that the assessee is engaged in unaccounted sales in earlier years also which is evidenced by the regular returns filed by the assessee himself, wherein for various years, he has shown income under the head "Income from other sources" or ":Adhayam" as under:
Asst. Year Amount 1997-98 6,50,000 1998-99 20,27,000 1999-00 4,75,000 2000-01 46,67,000 2001-02 11,70,000 2002-03 10,70,200 2003-04 11,56,000
Although the assessee himself had stated that the income represents the profit earned from unrecorded sales made during these years, no basis has been given how this figure has been arrived at. Thus the assessing officer after extensive discussion in the asst. order concluded that the assessee is regularly suppressing its turnover. The assessing officer based on the statement of the assessee as well as the seized material found and seized for 22 days in Financial Year 2002-03 and one or two stray incidents of some other branches again for financial year 2002-03 itself, he came to the conclusion that it will be fair and reasonable to estimate the unrecorded sales being three time of the recorded sales of jewellery excluding bullion for assessment year 1997-98 to 2002-03 and recorded sales in the day book seized up to 25.11.2002 excluding diamond and bullion for asst. year 2003-04 (upto 26.11.2002). The assessing officer had also noted the instances as per which it is established that the assessee is purchasing the gold/jewellery also out of books. Therefore, he proceeded to estimate the GP out of such estimated undisclosed sales for all the years comprised in the block period. He worked out the GP for all these years applying the corresponding rate of GP as shown in the assessee's profit and loss account for the respective years for recorded sales. Based on that, he worked out that gross profit on suppressed sales for the entire period in the block. Then he reduced the income already offered as "Adhayam" which also represents undisclosed income. The balance amount was considered as undisclosed income which comes to Rs. 1,97,88,566/-. Against this income the AO has given credit of unrecorded expenditure of Rs. 41,56,963/- which comprises of two parts:
(a) Rs. 5,96,488/- for which description is given in para 6(e) of the asst. order.
(b) Rs. 35,60,475/- for which description is given in para 6(0 of the asst.order.
Thus the assessing officer, arrived at the net undisclosed income of Rs. 1,56,31,603/- and levied interest Under Section 158BFA as the return was not filed within the time allowed as per 1 58BC notice. Against this action of the AO, the assessee went in appeal before the Learned Commissioner of Income-tax (Appeals).
5. Tne Learned Commissioner of Income-tax (Appeals) has confirmed the findings of the assessing officer since in the statement recorded on 26.11.2004 Under Section 132(4), the assessee has stated that 20% to 25% sales are recorded though he has stated on 24.1.2003 that 60% sales are recorded. According to the CIT(Appeals), there is a corroborating evidence to show that only 20 to 25% of sales are recorded. Hence the CIT(Appeals) confirmed that the estimation of turnover at 300% is valid and also he confirmed the estimation in respect of CP on this turnover on the basis of declared GP in earlier years. However, finally he computed the undisclosed income on this account at Rs. 1,53,30,619/- as against Rs. 1,97,88,566/- made by the assessing officer. Further CIT(A) has given deduction towards expenses at Rs. 96,52,896 over and above what the assessing officer had given and thereafter determined undisclosed income at Rs. 62,77,720/- instead of Rs. 1,56,31,600 as determined by the assessing officer. Against this finding, the assessee is in appeal before us.
6. Learned A.R. submitted that when the assessee himself had already disclosed income prior to search towards profits earned over and above the book profit for assessment years 1997-98 to 2002-03 at Rs. 1,00,59,700/- without any further material found at the time of search to suggest there was further undisclosed income, the CIT(A) is not correct in stating that the estimation for all the years comprising in the block period can be made on the basis of materials found for a few days in the broken period and the statements recorded based on the above materials.
7. Ld A.R. further submitted that the income earned on unaccounted sales were already admitted as other receipts in the regular returns filed before raid and assessed as detailed at page 4 of the order of CIT(A) which is below:
Assessment Year Other Reciepts Paper Book page 1997-98 6,50,000 201 1998-99 20,27,000 210 1999-00 4,75,000 222 2000-01 46,67,000 235 2001-02 11,70,000 258 2002-03 10.70.200 269 ----------- 1,00,59,200 -----------
He also stated that the assessee has been filing regular Income tax returns wherein all the income have been disclosed including the income from unaccounted sales. Also the assessee has been declaring Aadhyam income on the basis of actual income earned resulting in investments, fully included in business accounts and consequently reflected in the returns submitted to the department all these years.
8. He also emphasized the fact that except for statement Under Section l32(4), the Department had no other seized material to in the case of the assessee for the years 1997-98 to 2002-03. Thus he submitted that there were no corroborative evidence with the Department, to conclude that the income earned from undisclosed sales were more than Rs. 1,00,59,200/-admitted in the regular returns.
9. Ld A.R. had submitted extract of Circular No. F.286/2/2003(Inv) dated 10.03.2003 in regard to confession during the course of search wherein the following words appear:
Instances have come to the notice of the Board where assessees have claimed that they have been forced to confess the undisclosed income during the course of search & seizure and survey operations. Such confessions, if not based upon credible evidence, are later retracted by the concerned assessees while filing returns of income. In these circumstances, on confessions during the course of search &seizure and survey operations do not serve any useful purpose. It is therefore advised that there should be focus and concentration on collection of evidence of income which leads to information on what has not been disclosed or is not likely to be disclosed before the Incometax Department. Similarly, while recording statement during the course of search & seizure and survey operations no attempt should be made to obtain confession as to the undisclosed income. Any action on the contrary shall be viewed adversely.
Further, in respect of pending assessment proceedings also, assessing officers should rely upon the evidences/materials gathered during the course of search/survey operations or thereafter while framing the relevant assessment orders.
10. He submitted that Circulars issued by CBDT shall be binding on the officers of the Department. For this proposition he relied on the following case laws:
i) UCO Bank v. CIT 237 ITR 889 : 1 54 CTR (SC) 88
ii) Collector of Central Excise v. Dhiren Chemical Industires (SC) 172 CTR (SC) 670 : 254 ITR 554 (SC) Regarding the assets founds in search on the basis of which UDI was offered, Ld A.R. submitted that the A.O. himself had deleted the most of the items and had submitted a detailed extract of sworn statement and A.O's order which are reproduced below:
The Officer has stated at page 4:
In short vide the above sworn statements recorded Under Section 132(4) of the I.T. act, the assessee has offered for taxation, the following amounts:
1. Rs. 1,25,00,000/- vide sworn statement dated 26.11.2002
2. Rs. 13,18,950/- vide sworn statement dated 29.11.2002
11. The assessee has offered the above income because he was made to believe that there were undisclosed jewellery to the extent of 16 Kgs, Diamonds to the extent of 88.04 carrots and cash of Rs. l,75,000/- and also was under wrong impression that the assets belong to other family members found during search also be offered in his hands.
12. To illustrate we give a few instances from the sworn statement recorded on 26.11.2002.
Q.5: (PB 146) During the search in you premises here, today, gold jewellery weighing 25913.410 gms. was found and inventorised. As per the Stock Register of your company of Pavizham Galaxy Jewellers Pvt. Ltd., the stock of gold jewellery as on date (opening balance) is only 22810.923 gms. Thus there is an excess physical gold jewellery stock of 3102.487 gms. How do you explain this difference?
Ans.5: As already stated, the entire sales are not being accounted. The unaccounted income earned thereon is invested in the business and the excess unaccounted stock represents the unaccounted income. I admit this exess stock of gold jewellery as my undisclosed income.
Q.6(PB 146) In your earlier statement given in the morning that. you have paid Rs. 15 lakhs for the property at 342, Cross Cut Road. It is seen from the books of accounts that this has been registered for Rs. 7.00 lakhs in the names of your sons Lijo and daughter-in-law Pinky. Please explain.
Ans: I admit the payment of Rs. 8 lakhs paid in excess of the registered value of Rs. 7lakhs as having been paid out of my undisclosed income. Ans. 8(PB 148) (5yh line from bottom): Though the receipt shown payment by my daughter Liss Manoj the entire amount was paid by me. So far I have made payment of Rs. 73,50,000/- from out of my undisclosed business income.
Q.9(PB 149) It is found that there is an excess physical stock of gold jewellery of about 3 kgs at Pavizham Jewellers. Further it is noted that there is a stock of about 8 Kgs. At the premises of M/s. Chugath Jewellery. It is learnt that M/s.Chungath Jewellery is only showing coolly receipts. Please explain.
Ans: I admit the unexplained stock of gold jewellery stated above as made out of my undisclosed income.
12. But finally the officer himself had accepted the explanations with regard to most of the items as either to be considered in the hands of others or already disclosed. The details are as below:
(i) Gold jewellery of 1526.35 gms. received from Gurvayur Gold Smiths (page 8 para b(i)) value Rs. 5,64,620/- "It does not belong to the assessee is accepted, keeping in view the transactions recorded in the seized material,"
(ii) 3 Kgs. Seized from Pavizham Galaxy Jewellers lndia (P)Ltd (page 9 para (ii)) value Rs. 11,10,000/- to be considered in the hands of the above company Under Section 158BD.
(iii) 11 kgs of gold ornaments seized (page 9 - para (iii) value Rs. 40,70,000/-. This aspect will be considered in the hands of Lilly Under Section 158BD.
(iv) Cash of Rs. 1,75,000/- seized (page 9 - para © to be considered Under Section 158BD in the hands of Pavizham Jewellrs India (P)Ltd. Pollachi.
(v) Purchase of Pavizham Galaxy Building (Page 10 - para d(i)) value Rs. 15,00,000/- claim appears credible and no UDI.
(vi) Advance given for purchase of property from Kamath (page 10 - para d(ii)) to be considered in the hands of Lizo and Liss Under Section 158BD.
(vii) Construction of residential apartments at Guruvayur Rs. 1,14,62,129/- (page 11 - para d(iii) to be considered in the hands of the firm Pavizham Guruvayur Residential apartments,
(viii) Purchase of property from Kamath (page 11 - para (iv)) Rs. 1,47,78,892/- out of Rs. 1,85,17,485/- is to be considered in the hands of Pinky Lizo, Liss Sunny and Lizo. Out of balance Rs. 37,38,593/- sum of Rs. 16,16,685/- is accounted.
From the above, even the A.O is satisfied that the UDI offered in the sworn statement was not correct.
Only two items the officer has not accepted are as below:
a. 86.77 cts. Of diamond jewellery with gold content of 460.23 gms. received from J.D. gems and jewellery, Madras the value of which as per the approved valuer is Rs. 12,80,202/-(page 2a(ii).
b. Out of purchase consideration of Rs. 37,38,593/- paid for purchase of kamath property, the officer has treated only Rs. 16,16,685/- as accounted and Rs. 21,21,908/- as unaccounted (p 13)
13. In the sworn statement recorded from the assessee on 24.01.03, a specific question was put to him about the investment of unaccounted income (Q. No. 24-PB 162) which is reproduced hereunder:
Q.24: How you have invested the unaccounted income generated by you from the jewellery business during the last 7 years?
Ans: The unaccounted income during the past 7 years earned out of unaccounted sales has been invested in my business assets and stock. The officer says at para 1-page 16 as below: "Perusal of returns filed for the above assessment years indicates that in order to explain away the investment made in respective years, the shortage of capital is declared as income from other sources or adhayam".
Learned A.R. submitted that from the above it is clear that all investments were fully explained and no shortage of funds. There was no material found during search or afterwards to suggest that there was undisclosed income during 1997-98 to 200203 than admitted as above. Only from the above other receipts admitted in the regular returns filed before raid, the officer and CIT(A) came to the conclusion that there were also undisclosed sales. There was no material available with the department to suggest there was more income earned than admitted in the regular returns. It is also submitted that all the assets and investments found during search were duly accounted and found place in the regular returns filed before raid. The officer had not brought forth any material or evidence during search or afterwards to pinpoint any undisclosed income or undisclosed assets or investments.
14. Thus he submitted that there is no further material or direct evidence available with the department to pin point the existence of any undisclosed income over and above admitted already in the regular returns. Regular assessments were also completed based on such returns.
15. The Hon'ble Madras High Court has held in CIT v. P.V. Kalyansundaram 282 ITR 259 mat an addition can not be made on the basis of mere statement but has to be corroborated with other valid evidences.
16. In the present case the assessee had categorically told that the entire income from unaccounted sales were shown under other income and reflected in business accounts (PB 162 Q 24). The officer has not brought forth any material either seized at the time of search or collected during the assessment proceedings to contradict the above fact.
17. The Hon'ble Supreme Court has held in Mahendra Manilal Nanavati v. Sushila Mahendra Nanavati that the admission by a person has to be considered in its entirety.
18. Learned A.R. further submitted that block assessment is a separate scheme by itself in which assessment can be made only on the basis of materials seized and not otherwise. There is no murmur about any seized material showing suppression relating to the assessment years 1996-97 to 2002-03. The returns were filed long back and were accepted by the Department. Since the transactions were disclosed in the return of income and which were subject matter of regular assessment out to be assessed in the regular assessment and not in block.
19. Ld A.R. further relied on the following case laws:
i) Sadasivam v. ACIT
ii) Sundar Agencies v. DOT (1997) 63 ITD 245 (Mumbai)
iii) CIT v. Vikram A Dishi 256 ITR 129 (Bomb)
iv) CIT v. Ravikant Jain (2001) 250 ITR 141 (Del)
v) Sigma Securities v. JC 102 ITD (Mum) (2006) 342
vi) K. Moidu v. ACIT 81 ITD 242 (TN) (Cochi)
vii) P. Ponnuswamy v. ACIT IT (SS)A89/98 'A' Chennai order dated 31.8.04: - There was no evidence available with the department to negate the income returned by the appellant and estimate difference income. Addition on estimate is to be deleted in the absence of materials.
viii) P.K. Ganeshwar v. DOT 80-ITD 429 (Chennai)
20. Ld A.R. further submitted that if such alleged additional income were earned in earlier years(97-98 to 02-03) as alleged by the officer, it should have been manifested in some undisclosed assets or investments for which there was no proof in the seized material.
21. For this proposition he relied on the judgment of Dr. RML Mehotra v. AC (All) 68 ITD 288. At page 304 and 305 of the above judgment it is stated as follows:
If the assessee had actually made a fortune of similar receipts in respect of the remaining part of the year, they must be reflected by certain assets movable or immovable ought to have been found during the course of search. No such assets despite the extreme step of search which amounts to a serious invasion on the rights of subjects and which is perhaps the last weapon in the arsenal of the department were found which could be attributed to any such patently hypothetical receipts. In view of this we are unable to concur with the department to the multiplication formulae adopted by the assessing officer.
22. To sum up, Ld A.R. placed the following submissions before this Bench:
1) Regular returns admitting income of Rs. 1,00,59,700/- from unrecorded sales were filed before raid.
2) No material either during search or afterwards was found to pin point income earned from unrecorded sales were more than the income admitted in the regular returns as above
3) All the assts found during search were accounted in regular returns and no unaccounted assets over and above admitted in the returns were found.
With these submission, Ld A.R. prayed for deletion of the alleged undisclosed income assessed for the assessment years 1997-98 to 2002-03.
23. Learned A.R. relied on the judgment of the Hon'ble Andrapradesh High Court in the case of Andhra Bank v. DOT reported in 255 UR 1(AT) and the judgment of the Delhi High Court in Commissioner of Income-tax v. Ravi Kant Jain reported in 250 ITR 141.
24. He submitted that statement recorded Under Section 132(4) can not be considered as a conclusive evidence and the assesse has filed a letter dated 10.12.2002 i.e. before the search and on the basis of this letter, the assessing officer himself has not considered the various assets deposed by the assessee in the statement Under Section 132(4) as undisclosed assets. He submitted that when the assessing officer has accepted the retraction statement towards undisclosed assets, he can not reject the claim of the assessee that undisclosed income from unaccounted sales which has already been disclosed to the Department can not be treated as undisclosed income. He submitted that the judgment of the Hon'ble Andra Pradesh High Court relied upon by the Learned D.R. in the case of Rajnik and Co. v. ACIT reported in 251 ITR 561 is not applicable to the facts of the case. In that case, there was no retraction statement by the assessee and there was no disclosure of income from unaccounted sales by the assessee in the regular return of income. Moresoever, there was matching assets found by the search party. Learned A.R also relied on the judgment of jurisdictional High court in the case of C.I.T v. J.K Narayanan 293 ITR 179 wherein it is held as follows:
No doubt the impugned assessment order was not at all a speaking order, in as much as how and where from the undisclosed income had been considered in the assessment, had not at all been stated clearly in the assessment order. Only after study of other materials, one could come to the finding that the figures of undisclosed income as considered in the impugned assessment merely represented the income as declared by the assessee itself in the returns of income filed by it in the ordinary course for the different years although in belated and invalid manner.
Apart from the question as to whether the income as considered in the impugned assessment, was not of the nature as specified in the definition of 'undisclosed income' as provided in Section 158B(b), for some income to be undisclosed income it will be required that the said income was not to be undisclosed income it will be required that the said income was not or would not have been disclosed by the assessee to the department. Evidently the search by itself, had not been able to discover or unearth any other income earned by the assessee during the block period. The entire assessment was based on the declaration of income by the assessee itself in the returns filed by it and actually the income declared had been totally accepted by the Assessing Officer. In the face of such facts, it would not be possible to say that what had been considered in the impugned assessment order as 'undisclosed income' of the assessee, really represented the income not disclosed or not mean for the department. Therefore there was no existence of any 'undisclsoed income' at all for the purpose of an assessment to be made under Chapter XIV-B. Finally therefore on account of non-existence of any undisclosed income, the impugned assessment under Chapter XIB B for the block period was liable to be annulled.
25. Further he submitted that the statement recorded Under Section 132(4) was not given out of free will. He relied on the judgment of the Hon'ble Supreme Court in the case of CIT v. P.V. Kalyanasundaram 294 ITR 49. Learned A.R. further submitted that the period for which suppressed sales was estimated by the search party related to the Diwali festive season and that sales can not be taken as the yardstick to determine the suppressed sales of the whole block period. He stated that this gives a distorted picture.
26. Learned D.R. submitted that there were materials collected during the course of search regarding the suppression of sales and there is no provision in the Act that to determine undisclosed income there should be unearthing of undisclosed asset during the course of search action. He submitted that no proof or evidence for investment is required to treat the income as undisclosed income. There is no concept of matching the undisclosed investment and undisclosed income. He further submitted that the assessee himself has stated in the statement Under Section 132(4) that he has been destroying the sales bills regularly and the behaviour of the assessee itself shows that he is dishonest and the assessee himself prefixed the disclosure of turnover in his books of accounts and accordingly he is raising the sales bill in fictitious names. He submitted that human probability shows that what is apparent is not real and the assessee is concealing huge amount of turnover.
He relied on 90 ITR 271 and the judgment of the Andra Pradesh High Court in the case of Rajnik and Co. v. Asst. Commissioner of Incometax 251 ITR 561.
27. We have heard both sides and perused the materials on record. The main controversies before us are as follows:
(i) Whether there is any scope of estimation of undisclosed income under the provisions of Chapter XIV-B on the basis of certain discrepancies noticed by the search party without any seized material for the period other than sales suppression relating to 10.10.02 to 03.11.02 found in the course of search proceedings even though there was disclosure of suppressed sales by the assessee in the regular return of income before the date of search in respect of years in the block period and also there is no matching assets found to suggest any further income.
(ii) If yes, is there any justification for making estimate of the undisclosed income on the facts of the present case?
(iii) If yes, then what should be the quantum of estimation of the undisclosed income, whether on the basis of gross profit or on the basis of net profit?
28. The main crux of the argument of the Learned D.R. is that there is a specific provision in Chapter XIVB that Section 145 is applicable to the block assessment also and there is no requirement of unearthing of matching assets towards undisclosed income during the course of search. This argument of the D.R. is misplaced. The provisions under Chapter XIVB are special provisions. These were brought on the statute book specially and specifically for assessment of undisclosed income detected as a result of search. The assessment made Under Section 158BC has to be distinguished from the assessment in the normal circumstances or regular assessment based on the regular books of accounts produced before the assessing officer. If there is a defect in the books of accounts produced before the assessing officer he can reject the books of accounts and estimate the income. Section 158BA provides for assessment of undisclosed income as a result of search for the block period and computation of income and the computation of undisclosed income for the block period to be made as per the provisions of Section l58BB and the assessment has also to be made Under Section 158BC. The undisclosed income, which can be assessed under Chapter XIV B should be that amount which is computed on the basis of evidence found as a result of search and such other material or information as are available with the Assessing Officer and are relatable to such evidence. The 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 can not be said to have been found as a result of search. Disclosure of income had been made by the assessee in the books and return of income before the date of search. The department had, no doubt, collected certain material consequent to search but that might not be the very material that is relevant for framing the assessment under Chapter XIV B in this case because as per mandate given under Section 158BB, it had to be the income computed on the basis of evidence found and as a result of search and not otherwise. If any material is collected by the revenue during the search, that may not give authority to the department to make the computation of undisclosed income under section 158BB or assessment under Section 158BC unless it has direct link with the determination of undisclosed income. The definition of undisclosed income as laid down in Section 158B(b) is as follows:
158B. In this Chapter, unless the context otherwise requires,-
(b) "undisclosed income" includes any money, bullion, jewellery or other valuable article or thing or any income based on any entry in the books of account or other documents or transactions, where such money, bullion, jewellery, valuable article, thing, entry in the books of account or other document or transaction represents wholly or partly income or property which has not been or would not have been disclosed for the purposes of this Act 21[, or any expense, deduction or allowance claimed under this Act which is found to be false].
It therefore follows that what the assessee had already disclosed or would have disclosed is not to be treated as undisclosed income. The maxim of English law as propounded by Holroyd J. prescribes; "It is better than the guilty men should escape rather than one innocent should suffer:. The principle of justice requires that no one should be punished on the basis of presumption. Addition should not be made merely on surmises. It should be supported by cogent material and evidence.
29. Coming to the facts of the case, the search party found the suppressed sales relating to 22 days cited supra at Rs. 1.86 crores relating to the period 10.10.02 to 3.11.02 as against disclosed sales of Rs. 26.66 lakhs. The assessing officer estimated the sales as follows for the above block period on the basis of the sized material.
30. The profit on suppressed sale is worked out taking the C.P disclosed in the audited accounts filed for the above period which worked out to as under:
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Assessment Year Suppressed sale Cross Profit %age Amount
Rs. Rs.
1997-98 39,606.627 16.74 6,630,150
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1998-99 18,114,165 7.67 1,380,356
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1999-00 33,464,388 15.32 5,126,744
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2000-01 44,614,128 10.78 4,809,402
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2001-02 61,706,982 4.65 2,869,375
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2002-03 90,685,524 5.74 5,205,349
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2003-04 55,204,114 9.01 4,973,890 (26.11.02)
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After this the assessing officer determined the undisclosed income as follows:
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Assessment Year Gross Profit on Income from Balance
Suppressed sale other Aadyayam undisclosed
Rs. delcared income
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1997-98 6,630,150 6,50,000 5,980,150
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1998-99 1,380,356 2,027,500 638,144(-)
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1999-00 5,126,744 475,000 4,651,744
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2000-01 4,809,402 4,667,000 142,402
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2001-02 2,869,375 1,170,000 1,699,375
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2002-03 5,205,349 1,070,200 4,135,149
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2003-04 4,973,890 1,156,000 3,817,890 (26.11.02)
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Total 19,788,566
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31. The Learned Commissioner of Income-tax (Appeals) has given a relief of Rs. 44,57,947/- out of this and has also given deduction towards expenses the extent of Rs. 62,77,720/- We are unable to agree with the arguments of the Learned D.R. The determination of undisclosed income in this case is merely on the basis of presumption and on an estimate basis. We place reliance on the decision of the ITAT, Chennai 'B' Bench in the case of M.M. Financiers (P) Ltd. v. Deputy Commissioner of In come tax 107 TTJ (Chennai) 2000 wherein it was held as follows:
Under Section 158BB, undisclosed income of the assessee for the block period is required to be computed on the basis of evidence found as a result of search or requisition of books of account or documents and such other materials or information as are available with the assessing officer and relatable to such evidence as reduced by the aggregate of the total income, or as the case may be, increased by aggregate of loss of such previous year. Such other materials or information as are available with the AO should be as per this section relatable to such evidence. The word 'such' assumes much significance in this provision as it indicates only the evidence found as a result of search or requisition of books of account or other documents at the time of search. No other material can form basis for computation of undisclosed income of the block period.
32. Block assessment has to be framed on the basis of seized material which in this case are sales particulars relating to 22 days i.e. 10.10.02 to 3.11.02. No other materials or asset details were found during the course of search. The contention of the D.R. is that the assessee is dishonest and on account of human probability it should be estimated. Learned D.R. relied on the judgment of the Hon'ble Supreme Court in the case of Sumathi Dayal v. CIT reported in 214 ITR 801. The human probability also must be based on honest of a person and dishonesty can not be a rule. Learned D.R. placed reliance on the judgment of the Supreme Court in the case of C.S.T. v. H.M. Esufali H.M. Abdul ali reported in 90 ITR271. This was a case where best judgment assessment was permissible under the relevant provisions of Sales-tax Act equivalent to Section 145 of the Income-tax Act. The Hon'ble Surpeme Court in this case held as under:
Some-times there may necessarily or preferably be mistake in the accounts maintained by the assessee. There may be even certain unintended or unimportant omissions in those accounts; but yet the accounts may be accepted as genuine and substantially correct. In such cases, assessments are made on the basis of accounts maintained, even though the assessing officer may add back to the accounts price of the items that might have been omitted to be included in the accounts. In such a case assessment made is not a best judgment assessment. It is primarily made on the basis of the accounts maintained by the assessee. But when the assessing officer comes to the conclusion that no reliance can be placed on the accounts maintained by the assessee, he proceeds to assess the assessee on the basis of his best judgment.
33. Thus, in the context of best judgment we are of the opinion that in the formula adopted by the assessing officer there is no question of such best judgment as the assessee has already disclosed income from unaccounted sales. Some few small mistakes have been pointed out by the Learned D.R which the learned Counsel for the assessee has accepted but there is no material to hold that the books of accounts is unreliable or incomplete. The question of best judgment is ruled out and therefore the application of any formula for estimating income does not arise.
34. This is a block assessment and the assessment should be based on seized materials. The undisclosed income, which can be assessed under Chapter XIVB should be that amount which is computed on the basis of evidence found as a result of search and such other material or information as are available with the Assessing Officer and are relatable to such evidence. The 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 can not be said to have been found as a result of search and in that case, the material or information available with the assessing officer and relatable to such evidence can not also help in computing undisclosed income. In the instant case, search was undertaken 26.11.2002 to 16.12.2002. The statements of the assessee were recorded and in those statements, no incriminating material was there which could be termed as evidence on the basis of which the undisclosed income could be computed. Certain materials relating to sales were found. But there was nothing in those materials relating to sales which could establish that assessee had undisclosed income for this period. On the contrary, disclosure of income had been made by the assessee in the books and return of income pursuant to sales suppression. The department had, no doubt, collected the material consequent to search but that might not be very material that is relevant for determining the income on estimated basis for this period under Chapter XIV B because as per mandate given under Section 1 58BB, it had to be the income computed on the basis of evidence found and as a result of search and not otherwise. If any material is collected by the revenue consequent to the search which is not relating to the period in question, that may not give authority to the department to make the computation of undisclosed income on estimation basis under Section 158BB or assessment under Section 158BC especially when the income relating to unaccounted sales had already been disclosed to the Department.
35. Reliance was placed on the judgment of the A.P. High Court in the case of Rajnik and Co. v. ACIT cited supra by the D.R. In that case, during the course of search in the business premises of group concerns and also the residential premises of the partners of the assessee and residential premises of certain employees of the assessee, the authorities seized materials in the form of loose sheets relating to the suppressed sales for the financial years 1995-96 and 1996-97 which were brought to the books of accounts of the assessee-firm. As a result of search, the assessee was asked to file a return for the block period from April 1, 1985 to November 1 3,1996. The assessee-firm filed its return declaring an undisclosed income of only Rs. 7 lakhs, but the assessing officer determined the undisclosed income at Rs. 63,08,120/-based on the loose sheets representing the unaccounted sales and by estimating such suppressions for the assessment years 1996-97 and 1997-98 till the date of search. In view of eh largeness of the estimated undisclosed income, no separate addition was made on account of the unexplained investments. The Tribunal did not find any defects in the assessment based on the materials seized from the assessee-firm but, however, it felt that the method adopted in estimating a uniform rate of suppressed sales at an average rate of Rs. 1,43,175 per day for the whole period of 279 days in the year was not proper and restricted the addition to six times the actual suppression for the assessment year 1996-97 and made an addition of only three times for the assessment year 1997-98 because the period of business was less than six month by the date of search. On appeal it was held as follows:
Held, that the assessee was not able to dispute the findings of the assessing officer as well as the Tribunal where the seized material had shown that there was suppression for a period of 24 days during the assessment year 1996-97 and 15 days for 1997-98 and also that the suppressions were on a day-to-day basis and the evidence recorded from the partner had shown that the same method was adopted through the assessment years for the entire block period. Where the assessee had carried on the business for the full year, the addition was made at six times the suppression found during that year and for the assessment year 1997-98 the addition was restricted to only three times, as the assessee had carried on the business only for half of the period with reference to the earlier year, where six times addition was made. It was clear from the order of the Tribunal that the estimations of the undisclosed income made were based on relevant material and there was absolutely no unreasonableness or arbitrariness while making such addition. Though there was no material with reference to the addition made for the assessment years 1986-87 to 1995-96, yet it was admitted by the partner of the assessee-firm that the assessee had practiced suppression of sales turnover even in those years and taking the quantum of business the suppression was estimated at 20 per cent and the gross profit rate returned by the assessee was accepted. The Tribunal has rightly found that the estimation of the suppressed turnover as well as undisclosed income by the Assessing Officer was on the higher side and the Tribunals on consideration of the material on record redetermined the suppressed turnover as well as the undisclosed income which reasonable and proper.
36. The facts of the above case are not applicable to the present case before us. In this case there was no undisclosed asset found during the course of search for the period in question and the statement Under Section 132(4) recorded during the search was retracted by the assessee vide letter dated 10.12.02. This letter can not be treated as an after thought and moresoever the assessing officer has not considered the undisclosed assets disclosed in the statement Under Section 132(4) in the block assessment. He has given due weightage to this letter and thereby he has chosen not to make additions on the basis of assets In the present case, it is an admitted fact that the assessee has been disclosing the income from suppressed sales as undisclosed income as a matter of abundant caution in his regular return before search action as follows:
---------------------------------------------------------------
Assessment Year Suppressed sale Amount
Rs. Rs.
---------------------------------------------------------------
1997-98 39,606.627 6,630,150
---------------------------------------------------------------
1998-99 18,114,165 1,380,356
---------------------------------------------------------------
1999-00 33,464,388 5,126,744
---------------------------------------------------------------
2000-01 44,614,128 4,809,402
---------------------------------------------------------------
2001-02 61,706,982 2,869,375
---------------------------------------------------------------
2002-03 90,685,524 5,205,349
---------------------------------------------------------------
2003-04 55,204,114 4,973,890
(26.11.02)
---------------------------------------------------------------
37. As we stated earlier, block assessment and regular assessment are two different assessments and one can not be substituted for the other. In the present case the assessee has disclosed the income from unaccounted sales in the regular return of income as stated above. The adequacy or inadequacy of this income can not be questioned in the block assessment. If the assessee has disclosed insufficient or inadequate income relating to unaccounted sales in the regular return, it can not be questioned in the block assessment. Had he not disclosed income from unaccounted sales in the regular return, then the Department could have estimated the income on the basis of seized material. In the present case, it is not so. The assessee has already declared income from unaccounted sales in the regular return of income. We place reliance on the judgment of the Calcutta High Court in the case of Bhagwati Prasad Kedia v. CIT reported in 248 ITR 562 wherein it is held as below:
Held that the assessing officer was not entitled to question in block assessment the loan which was a subject matter of the regular assessment The assessing officer was wrong in holding that the said sum could be taxed in block assessment although the same featured in the regular books of account When the loan creditor was an assessee and in whose assessment the loan advanced had been accepted by the Revenue, the assessing officer was wrong in holding that the assessee was liable to pay tax on that loan money taken from the assessee.
In the case of CIT v. Ashim Krishna Monda 270 ITR 160 it was held as follows:
The word "computation" has not been defined in the Act. The meaning of the word is to be gathered from the scheme of the Act having regard to its ordinary grammatical meaning. The word "assessment" has been defined to mean reassessment as well. Thus we do not get the meaning from the Act. Again we are to fall back on the ordinary grammatical meaning. In order to give the meaning of the word "computation", as intended by the Legislature, we may note the interconnection, interdependence and interlacing of these two expressions for the purpose of the Act in the context these were used. The Act requires an assessment of the income of the assessee. For the purpose of assessment the income is required to be computed. Upon such computation in the process of assessment the income chargeable to tax is determined and assessed to tax.
The ordinary meaning of the word "assessment" is: "the action of assessing; the amount assessed; the determination of the amount of taxation, the scheme of charge or taxation; valuation of property or income for the purpose of taxation: (see Shorter Oxford Dictionary, (Third edition). In the context of the Act..."an assessment finding its origin in an activity of the Assessing Officer acting as such.... The phrase describes the provenance of the assessment.... The use of the machinery provided by the Act...." Raleigh Investment Co. Ltd. v. Governor-General in Council (1947) 15 ITR 332 at page 337 (PC) followed and quoted in Seth Harish Chandra v. Union of India . The word "assess" is a comprehensive word, and in a taxing statute it often means the computation of the income of the assessee, the determination of the tax payable by him, and the procedure for collecting or recovering the tax. In a case where there is a dispute about the identity of the assessee, the order of assessment serves the purpose of establishing the identity and naming the person from whom the tax has to be recovered. (Bhopal Sugar Industries Ltd. v. State of M.P. . The term assessment is flexible, capable of one of many meanings. It will take its colour from the context in which it occurs J.K. Iron and Steel Co. Ltd. v. Income Tax Officer . The word assessment can bear a very comprehensive meaning, it can comprehend the whole procedure for ascertaining and imposing liability upon the tax payer Kalawati Devi Harlalka v. CIT .
Whereas the word "computation" compared to the word "assessment", bears a narrower meaning. It is the process of computation of the income for assessment of the tax payable. The ordinary grammatical meaning of the word "computation", as given in Shorter Oxford Dictionary, third edition, is: "the action or process of computing; a method of reckoning" and the word "compute" means: "clear or settle (an account) reckon; to determine by calculation; to reckon, count; to take account of". According to Longman Dictionary of Contemporary English, 1982 reprint, the word "compute" means: "to calculate (a result, answer, sum etc.)" and "computation" means: (the result of) the act of calculating."
Thus, in the context of the Act, computation is a calculation, a method of determination by reckoning through calculation. It involves some methodical process with some amount of approximate mathematical precision based on the calculable data available. When used in the context of the Industrial Disputes Act, 1947, it merely means calculation whether simple or otherwise Prop. Lenox Photo Mount Mfg. Co. v. Presiding Officer, Labour Court AIR 1965 Mad 450.
The word "computation" is completely distinct and different from the word "estimate", which means: "the action of valuing or appraising; an approximate calculation based on probabilities." In CIT v. Elgin Mills Co. Ltd. the court held that "underestimate" signifies an estimate which is below the truth or which is at too low a rate. In order to establish that an estimate is not an underestimate proper basis and justification has to be shown. Thus the state of estimation is fluid and not solid. Whereas computation is based on solid methodical process of calculation with some amount of approximate mathematical precision based on the datas and materials available.
On the other hand, the word "appraisal" means: "the act of appraising; the setting of a price;" "appraise" means: to fix a price for; especially, as an official valuer; to estimate the amount, or worth of;" whereas appraisement" means : the action of "appraising"; valuation by an official appraiser; estimated value; estimation of worth generally". (See Shorter Oxford English Dictionary, third edition).
Under the scheme of the Act, the Assessing Officer computes the income in the process of assessment in dealing with income from business; he does not estimate or appraise the income from the business. Therefore, we are supposed to keep the distinction in mind in such cases while approaching a finding of fact found by the learned Tribunal.
Now, we may examine as to whether the finding of the learned Tribunal can be justified in the context of the meaning of "computation" as discussed above vis-a-vis the order passed by the Commissioner of Income Tax (Appeals).
Having gone through the order of the learned Tribunal, we find that the learned Tribunal had recorded its reason and proceeded on the basis of the principle of law enunciated. We do not find that the inference drawn on the established facts are contrary to the principle of law or perverse. This court in appeal can interfere with the findings arrived at by the Tribunal, which is the last court of finding of facts, if perverse or based on no materials or that it was not possible by any reasonable man to arrive at such a conclusion. Where two opinions are possible on the established facts, if the Tribunal has adopted one, this court sitting in appeal under Section 260A is not supposed to substitute its own view unless it is of the opinion that the findings arrived at by the Tribunal cannot be sustained and is on the border line of perversity. The learned Tribunal has rightly found that the Commissioner of Income Tax (Appeals) had appraised instead of assessed; he had attempted to work out the approximate based on probabilities. Having gone through the order of the Commissioner of Income Tax (Appeals), we do not think that the finding of the learned Tribunal in this regard cannot be possible or is perverse or that there was no scope of forming two opinions with regard thereto.
In the case of CIT v. Vikram A Doshi reported in 256 ITR 129, the Hon'ble Bombay High Court held as under:
That the other questions raised by the revenue were based on transactions which could not be said to undisclosed transactions falling under Section 158B of the Incometax Act, 1961, because the transactions in question were disclosed in the returns which were the subject matter of regular assessment. They ought to have been assessed in the regular assessment and not in the block assessment.
The Hon'ble Delhi High Court In the case of CIT v. Mrs. Kumkum Kohli 276 ITR 589 held as under:
Held that the provisions of Section 158B would not be applicable in the case of the assessee in as much as nothing had been recorded in the order of assessment or in any proceeding thereafter that the amount had not been indicated in the books of account or that the assessee had failed to produce the books of account as directed by the assessing officer. The presumption against the assessee could be drawn only if the sums wholly or partly had not been reflected in the books or the assessee had failed to render explanation in terms of the said provisions. Thus no question of law much less a substantial question of law arose from the order of the Tribunal The Hon'ble Rajasthan High Court in the case of CIT v. Rajendra Prasad Gupta reported in 248 ITR 350 held as under:
Held that there was no finding by the assessing officer that the estimate of income was made after consideration of the material that came to light during the course of search and seizure. Accordingly, the Tribunal was justified in setting aside the best judgment assessment made by the assessing officer The Hon'ble Delhi High Court in the case of CIT v. Ravi Kant Jain 250 ITR 141 held as under:
Held, that, admittedly, the undisclosed income was not determined on the basis of any search material and the assessing officer was proceeding within the scope of the assessment and not within the scope of exercising jurisdiction under Chapter XIVOB and Section 158BA. Therefore, Section 158BA of the Act had no application to the facts of the case.
The Hon'ble Jurisdictional High Court in the case of CIT v. G.K. Senniappan reported in 284 ITR 220 held as under:
The expression "such other materials or information as are available with the Assessing Officer" in Section 158BB of the Income-tax Act 1961, can not be bisected or taken in isolation for the purpose of computation. Such other materials or information as are available with the Assessing Officer should be relatable to "such evidence". The word "such" used as a prefix to the word "evidence" assumes much significance in this provision as it indicates only the evidence found as a result of search or requisition of books of account or other documents, at the time of search. Any other material can not form the basis for computation of undisclosed income of the block period.
38. We place reliance on the judgment of the Delhi High Court In the case of CIT v. Anand Kumar Deepak Kumar reported in 294 ITR 497. In this case, as search was carried out in the premises of the assessee on August 9, 2004. As a result of the search, some documents were recovered which led the assessing officer to believe that there were unaccounted sales to the extent of Rs. 19,89,807/- between April 1, 2004 and August 9, 2004. On this basis, he assumed that the unaccounted sales for the entire accounting year are Rs. 55,86,766/-. Feeling aggrieved, the assesse preferred an appeal before the CIT(Appeals) and the CIT(Appeals) found that there were two distinct periods that were involved, namely, the period from August 1, 1994 to August 9, 2004, in which there was definite evidence regarding unaccounted sales and the Section period was from August 10, 2004 to March 31, 2005, when even though the account books were examined, the assessing officer could not find any defect in them. On the basis, the Commissioner was of the view that mere rejection of the books of account, without any basis, for the post search period was not warranted, particularly in the absence of any facts to show unaccounted sales and therefore the assessing officer had wrongly assumed that unaccounted sales would continue even in the post search period. Against the order of the Commissioner, the Revenue preferred an appeal which was dismissed by the Tribunal and that has led to the appeal before the Honorable High Court under Section 260A of the Income-tax Act 1961. Learned Counsel for the Revenue has contended that the books are liable to be rejected for the entire year and this the assessing officer has done and therefore, he was justified in estimating the unaccounted sales on the basis of material that was recovered during the search on August 9, 2004, and by assuming that such unaccounted sales would continue for the entire year.
On appeal, it was held as under:
Held, dismissing the appeal, that the assumption of the Assessing Officer may have perhaps been valid if the assessing officer had found some discrepancy in the books of account or if the search had been conducted after the accounting year and the books of account had brought out some discrepancies. But in the assessees case the assessing officer examined the books of account in the middle of the accounting year. Merely because there were some discrepancies in the pre-search period, it could not lead to any presumption that the discrepancies would have continued in the post-search period particularly when there was factually no evidence at all as found by both the authorities below to support such a view. Therefore the assessing officer could not draw such a presumption.
39. Learned D.R. relied on Sumathi Dayal cited supra for the proposal that apparent must be considered as real unless it is found that there are reasons to believe that apparent is not real and the taxing authorities are entitled to look into circumstances to find out the reality and to apply the test of human probability. The assessee does not dispute the principle laid down by the Supreme Court. In fact the assessee's argument is that by applying the principles of human probability, there was no reason to disbelieve the contention of the assessee that when it had declared in the regular return regarding the income from unaccounted sales, it is unreasonable to presume once again that there is undisclosed income even after disclosing in the regular return of income without any search material to pin point that more income was earned than what was admitted. His contention is in the absence of any evidence other than statement Under Section 132(4) which was retracted by the assessee and considered by the assessing officer. This argument is supported by the judgment of the Gauhati High Court in the case of Green view Restaurant v. ACIT 263 ITR 169. In the assessment once again, estimation is not possible by multiplying suppressed sales. In the present case, when the assessee has disclosed the income from unaccounted sales in the regular return, it will be unreasonable to estimate the suppressed sales on the basis of undisclosed actual sales for 22 days relating to the broken period found during the course of search especially when it was related to the festive season of Diwali by multiplying the sales. In our opinion, sales during the festive season can not be considered as a yardstick to determine the suppressed sales. It can not be said that there is always standardized sales during the block period consisting of 8 years. The decision of the ITAT Mumbai Bench in the case of Sunder Agencies v. DCIT 63 ITD 245, is much relevant wherein it is held as follows:
The head note of Section 158BA is 'Assessment of undisclosed income as a result of search'. It indicates that Section deals only with those assessments which concern with the undisclosed income detected as a result of search. The meaning of head note conveys nothing more nothing less than this. The body of the Section begins with non-obstante clause. It applies for search conducted after 30.6.1995 under Section 132 etc. The total undisclosed income relating to block period is not subject to ordinary rtes of tax. It is subject to the rate specified in Section 113, irrespective of the previous year or the year to which such income relates and irrespective of the fact whether regular assessment for any one or more of the relevant assessment years is pending or not.
In the case of L.R. Gupta v. Union of India the High Court has held that the income which hidden from the department is undisclosed income. The purport of the definition of 'undisclosed income' can not be pressed beyond its true limits. It begins with the words 'undisclosed income' includes-sometimes, some definitions use both words 'mean' and 'include'. There, it may be regarded that an exhaustive explanation of the things intended to be caught in the net of the Section is specified. But where the expression is merely 'include', it does not have a restrictive operation so as to confine the scope of the Section only to those things specified in the words following. When the Legislature wants to enlarge the natural meaning of a word or a phrase it uses the word 'includes' and in such a context, an inclusive definition means that over and above the natural meaning of the word, the specially provided meaning of the word will also have to be attributed for the purpose of interpretation of that particular statute or that particular Chapter. But the word 'include' is susceptible of any other construction, which may be imperative, if the context of the Act is sufficient to show that it was not merely employed for the purpose of adding to the natural significance of the words or expression defined. It may be equivalent to 'mean' and 'include' and in that case it may afford an exhaustive explanation of the meaning which, for the purposes of the Act, must invariably be attached to these words or expressions. Words in a Section are not to be interpreted by having those words in one hand and the dictionary in the other hand. In spelling out the meaning of the words in a section, one must take into consideration the setting in which those terms are used and the purpose they are intended to serve.
The two rules of most general application in construing the meaning of a provision of a statute are first that it shall, if possible, be so interpreted-UT Res Magis Valeat Quam Perfat. The word of statute should be given a sensible meaning so as to make them effective. And secondly, that such a meaning shall be given to it as may carry out and effectuate to the fullest extent the intention of the Legislature. It is to be seen that nebulous concept of the legislative intent be not used to curtain the explicit provisions in a statute. It is of paramount importance that streams of justice be kept clear and pure.
As a matter of fact, search and seizure, is a serious invasion on the rights of the subject. The search and seizure was really not known at early stages to common law. When it was the first time introduced, it was confined only to stolen goods, but its usefulness soon forced its recognition and was, from time to time, extended to suchlike search and seizure. Section 132 is intended to unearth the hidden or undisclosed income or property and bring it to assessment. The objective of the Section is to get hold of evidence bearing from the tax liability of a person which the said person is seeking to withhold from the assessing authority and to get hold of assets representing income believed to be undisclosed income and applying so much of them as may be necessary in discharge of the existing and anticipating tax liability of the person concerned.
There are adequate safeguards present against any possible misuse of the provision of search and seizure. Chapter XIVB was introduced in order to make procedure of assessment of search and for requisition cases more effective. Under the provisions of this Chapter the undisclosed income detected as a result of search initiated or requisition made after 30.6.1995 be assessed separately as income of that block of ten previous years. The provision was introduced to steamline the procedure concerning the search matters. It is abundantly clear from the perusal of the prescription of Section 158BA that within pale of Chapter XIVB assessment could be made only in respect of the undisclosed income and such undisclosed income must come as a result of search. Section 158BA does not provide a licence to revenue for making roving enquiries connected with completed assessment and it is beyond power of the Assessing Officer to review the assessment completed unless some direct evidence comes to the knowledge of the department as a result of search which indicates clearly the factum of undisclosed income. Without such evidence or material the Assessing Officer is not empowered to draw any presumption as to the existence of undisclosed income. A presumption is an inference of fact drawn from other known or proved facts. It is rule of law under which courts are authorized to draw a particular inference from a particular fact, until and unless the truth of such inference is disproved by other evidence. The scheme of Chapter XIVB does not given power to the revenue to draw the presumption in regard to the undisclosed income. The Assessing Officer could proceed on the basis of material detected at the time of search and the evidence gathered. Under Section 132(4, the authorized officer may, during the course of search or seizure, examine on oath any person who is found to be in possession or control of any books of accounts, documents, money, bullion, jewellery or other valuable article or thing and any statement made by such person during such examination may thereafter be used in evidence in any proceeding under the Act.
In the instant case the partners of the firm were examined by the authorized officer. No question apropos sales promotion expenses was put to the partners. There was no enquiry as to this aspect at the time of the search. Nothing incriminating as regards sales promotion expenses was detected when the raid was conducted. From the perusal of the panchnama, it appeared that only one gift book was impounded. That book related to period 1994-95. There was absolutely no evidence and material in regard to the other years of assessment. The book was stated to be incomplete. There were some entries in regard to the gift given. Hence, no conclusion could be drawn on the basis of tat book. All the purchases were found to be fully vouched and verifiable. All the payments were made by account payee cheques. No stock of gift article was found when the search was conducted. Therefore, it could be concluded that the assesee incurred the expenditure for purchasing the gift articles and such articles were distributed to the dealers. There was no evidence that the assessee sold the articles in the market for consideration. There was also no evidence that the assessee used those articles for some other purposes. In these circumstances no adverse presumption could be drawn. Besides, such presumption was beyond the ken of Chapter XIVB. The burden of proof is of importance only where by reason of not discharging the burden which was put upon it, a part must eventually fail. The law of burden is canonized in common law doctrine: Incumbit Probatio Quidiot Non Qui Negat (Burden lies upon one who alleges and not upon one who deny the existence of a fact). In the instant case, there was absolutely no evidence or material on record to justify the addition, whereas it was based solely on presumptions and assumptions. Therefore, the abstract question of burden of proof was only academic.
It was abundantly clear that the A.O had accepted that the gift was given as a normal business practice. He did not reject the amount of sales promotion expenses in toto. He made estimate after comparison with the other traders. It was explained that the other traders were dealing in well known brand of products whereas the assessee was dealing in the less known brand of the product. Therefore, such comparison was not proper. Circular can not override the law, it is true, but how the circular transgressed the boundaries of law was not explained. It was issued just to clarify the provision. It only explained the purport of law- nothing more, nothing less. Addition under Section 158B(b) can not be based on jejune reasonings or guess work. It is imperative that the department must have in its possession cogent material and/or evidence to support the addition. It is not open for the assessing officer to grope in the dark. No attempt was made by the department to examine the evidentiary value of the gift book. Its contents were not discussed in the order. How it proves fact was not known. Its nexus with the undisclosed income was not established. Its relevance in the facts of the instant case was a dark cat. Hence this could not be used a panoply for making the roving enquiries. It appeared that the Assessing Officer looking for a black cat in a dark room which might or might not be there. He transgressed the boundaries of Section 158B(a), while making the addition. Section 158B(b) contemplates 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. It is to be computed in accordance with the provisions of Chapter IV (Sections 14-59). Sun computation should be on the basis of evidence found as a result of search or requisition of the books of account or documents and such other materials or information as are available with the Assessing Officer. The Legislature has used the words 'such other materials' and not 'any other materials'. The word 'such' is defined in Concise Oxford Dictionary, 'Of the kind or degree already described or implied or intelligible from the contest or circumstances. There was absolutely nothing except the gift book (1994-95), which was impounded at the time of search. This was not relevant for making such addition. Therefore, the addition made the Assessing Officer was not justified and was deleted.
40. We also rely on the judgment of the ITAT, Allahabad 'A' Bench in the case of RML Mehrotra 68 ITD 288 wherein it is under as under:
Now passing on the multiplication formula adopted by the AO, we find ourselves unable to accord our nod to it. In the first place, one should not forget that it is a search case in which a search party is supposed and expected to find out all the incriminating documents, material as also undisclosed assets. A search assessment, much less a block assessment, therefore stands on a footing different than a normal assessment much less an assessment based on the best judgment of an Assessing Officer It is for this reason that the ratio of the apex Court decision in the case of H.M. Eusufali H.M. Abdulali (supra) would not come to the rescue of the Department, as there it was a sales tax matter and a best judgment assessment was required to be made. The material that the STO was possessed of was the figure of 19 days sale by the assesee not entered in their books of account. The summit court held that in such situation it was not possible for the officer to find out precisely the turnover suppressed and he could only embark on estimating the suppressed turnover on the basis of the material before him, in which some amount of guess work was inevitable. In contradistinction to these facts, in the present case, the assessee was searched. During this search, firstly, no other diary or other record comparable to the note book marked as "B-1/23" were found by the search party for the remaining period, which normally would have been, were it being maintained and kept. We are conscious that such a record could have been destroyed also from time to time. But in such a situation also, if the assessee had actually made a fortune of similar receipts in respect of the remaining part of the year, they must be reflected by certain assets, movable or immovable ought to have been found during the course of search. No such assets, despite the extreme step of search which amounts to a serious invasion on the rights of subjects and which is perhaps the last weapon in the arsenal of the Department, were found, which could be attributed to any such patently hypothetical receipts. In view of this we are unable to concur with the Department to the multiplication formula adopted by the learned AO.
41. We make it clear that there is no doubt that when the books of accounts and returns are rejected, the assessing officer must make an estimate and to that extent he must make a guess but the estimate must be related to some evidence or material and it must be something more than mere suspicion. To use the words of Lord Russel of Killowen again, "he must make what he honestly believes to be a fair estimate of the proper figure of assessment" and for this purpose he must take into consideration such materials as the assessing officer has before him, including the assessee's circumstances, knowledge of previous returns and all other matters which the assessing officer thinks will assist him in arriving at a fair and proper estimate. But in the present case, the estimation in the block assessment is not possible since the assessee has disclosed income from unaccounted sales in the regular assessment. If at all any estimation has to be made, it can be done in the regular assessment and not in the block assessment.
42. It can not be said that the assessee has undisclosed income from unaccounted sale for this period. In view of the above discussion, we are inclined to accept the contention of the assessee that estimation of undisclosed income under the provisions of Chapter XIVB is not possible in the present case since the assessee has disclosed income from unaccounted sales in the regular return of income. Hence there is no question of answering the quantum estimate in this case. Learned D.R. placed much reliance on the sworn statement recorded on 26.11.01 Under Section 132(4) wherein while answering to question No. 7, the assessee has stated as under:
Yes, I admit that my business income has been understated. For the last five to six years, I would have earned about Rs. 1.25 Crores which has not been disclosed for tax purposes?
In the present case, the issue before us is relating to estimation of income on the basis of multiplication of suppressed turnover found during the course of search and not making addition on the basis of answer to question No. 7. So answer to this question is not relevant before us. There is no question before us to make addition of Rs. 1.25 crores on the basis of answer to this question recorded in the statement Under Section 132(4). The assessing officer has not made any addition on the basis of answer to this question but on the basis of income on estimation of suppressed turnover. This offer of Rs. 1.25 crores was made with reference to certain assets and those assets were found to be not relating to the assessee and the assessing officer has fairly not considered the same to determine the undisclosed income. The assessee also stated in 132(4) statement that whatever was the income from unaccounted transactions had already been reflected in the books of accounts. The assessee in answer to question No. 24 stated as follows:
Q.24: How you have invested the unaccounted income generated by you from the jewellery business during the last 7 years?
Ans: The unaccounted income during the past 7 years earned out of unaccounted sales has been invested in my business assets and stock. The officer says at para 1-page 16 as below: "Perusal of returns filed for the above assessment years indicates that in order to explain away the investment made in respective years, the shortage of capital is declared as income from other sources or adhayam". So from the above it is clear that all investments were fully explained and no shortage of funds. There was no material found during the search or afterwards to suggest that there was undisclosed income during 1997-98 to 2002-03 than admitted as above. Only from the above other receipts admitted in the regular returns filed before raid, the office and CIT(A) came to the conclusion that there were also undisclosed sales. There was no material available with the department to suggest there was more income earned than admitted in the regular returns. It is also submitted that all the assets and investments found during search were duly accounted and found place in the regular returns filed before raid. The officer had not brought forth any material or evidence during search or afterwards to pinpoint any undisclosed income or undisclosed assets or investments.
In the case of Green view Restaurant v. ACIT 263 ITR 169, the Gauhati High Court held as under:
That the admitted case was that the assessment for both the years had been made under Section 143(3) of the Income tax Act 1961 and notice was issued under Section 143(2). It was apparent that the assessing officer added Rs. 4 lakhs as undisclosed income acting on the statements of the assessee's partner made in the course of the search. Though, in the meantime, the statements made in the course of search had been retracted, there was no reference thereto in the orders. There was nothing on record to indicate either that in view of the retraction of the statement, the assessee was provided with any opportunity of explaining the disclosure vis-a-vis its liability in respect thereof. The Tribunal did not address itself to this vital aspect of the matter. The order of the Tribunal restoring the amount of Rs. 4 lakhs as undisclosed income of the assessee for the assessment year in question was liable to be set aside.
We place reliance on 289/510: judgment of jurisdictional High Court in the case of ACIT v. Kences Foundation P Ltd. 289 ITR 509 wherein it is held as under:
At the time of search except the documents seized, there were no other materials or valuables such as cash, bullion, jewellery or other articles or things of value, sized from the premises of the assessee. There is no material to hold that assessee received any cash from any of the purchasers for sale of 85 percent of the built up area. The entire sale consideration was not credited into account by cheque nor there was any material to show that the company accepted cash payment. On the other hand, the explanation offered by the assessee that they received cheques towards sale consideration of 85 percent of the building sold and that was reflected in the IT. returns while paying income-tax for the subsequent years deserves consideration. Therefore, the documents seized from the premises of the assessee at the time of search are not a conclusive proof to arrive at the undisclosed income. The expression 'undisclosed income' has been defined in Section 158B(b) to include income based on entries in the books of account or other materials seized from the premises of the assessee at the time of search. In the instant case, even though the documents seized at the time of search would at best be considered as prima facie material, since except the said documents there was no seizure of money, bullion, jewellery or other articles or things of value during the time of search, the said documents themselves would not be a sole criterion for estimating the undisclosed income in view of the explanation offered by the assessee that they were prepared for the purpose of settling the dues of the outgoing direction who proposed to retire. Both the orders of the assessing officer as well as the Tribunal, therefore, lack specifying finding as to the reliability and relevancy of those documents for arriving at the undisclosed income of the assessee on the date of search or in the light of payment credited to the accounts of the assessee by way of cheques from the purchaser for the sale of 85 per cent of the constructed area only after the date of search and the tax paid thereon as reflected in their return. Hence both the orders of the assessing officer and the Tribunal are set aside and the matter is also remanded back to the assessing officer to compute the correct undisclosed income in accordance with law.
We also place reliance on 68 YTD 288 cited supra wherein it is held as under:
If the assessee had actually made a fortune of similar receipts in respect of the remaining part of the year, they must be reflected by certain assets movable or immovable ought to have been found during the course of search. No such assets despite the extreme step of search which amounts to a serious invasion on the rights of subjects and which is perhaps the last weapon in the arsenal of the department were found which could be attributed to any such patently hypothetical receipts. In view of this we are unable to concur with the department to the multiplication formulae adopted by the assessing officer.
40. In view of the above discussions, in our opinion, what is subject matter of regular assessment can not be the subject matter of block assessment. These are two different methods of assessment under the Income-tax Act. Determination of undisclosed income can not be considered on par with the regular assessment. The block assessment is the determination of undisclosed income which goes to the route of the matter on the basis of search and seized material. The other is on the basis of causes shown by the assessee where the assessing officer is free to accept the justification shown or reject the same. When the assessee has disclosed the income from unaccounted sales as income in the regular assessment proceedings, that suppression of sales can not be considered in the block assessment more specifically, when there was no seized material regarding the suppression in the period covered in the block period. Recent judgment of the Delhi High Court in the case of CIT v. Anand Kumar Deepak Kumar reported cited supra supports our view. Merely because the assessee admitted in the statement Under Section 132(4) regarding suppression of sales, that can not be considered as the basis for addition, though there was no seized material relating to the impugned period. The sworn statement recorded under Section 132(4) is some piece of evidence. The AO has to establish the link with other books of accounts seized. It can not be considered as a conclusive evidence. The words "may be presumed" appear in Section l32(4A). Since the words "may be presumed" are incorporated in the section, it gives option to the authorities concerned to presume the things. But it is rebuttable and it does not give definite authority and not a conclusive one. The assessee has every right to rebut the same by producing evidence in support of its claim. The entire case depends on the rule of evidence. The assessee has every right to shift the burden of proof. The Revenue authorities can not automatically presume things. The actual things depend upon facts and circumstances of each case. Therefore, the authorities concerned should draw the conclusion judicially, depending upon the facts and circumstances of the case. There is no conclusive presumption. While determining the undisclosed income in the block assessment, the AO shall be specific in his statement. He can not draw his inference on the basis of suspicion, conjectures or surmises. Suspicion, however strong can not take place of material in support of findings of the AO. The AO should act in a judicial manner proceeded with judicial spirit and should come to a judicial conclusion. The AO is required to act fairly as a reasonable person and not arbitrarily or capriciously. An assessment made on inadequate material can not stand on its own leg Surjeet Singh Chhabra v. Union of India and Ors. , V. Kunhambu & Sons v. CIT . We also place reliance on the judgment of the Gauhati High Court in the case of Greenview Restaurant v. ACIT 263 ITR 169, cited supra.
41. In our view of the facts and circumstances of this case, we are of the opinion that estimation of income can not be made on the basis of certain discrepancy noticed by the search party in the course search proceedings. In our opinion, there is no justification for making estimation of undisclosed income. Since we have held that there is no justification for estimation of income, there is no question of considering the basis for estimation, whether on Gross profit or Net profit? Without prejudice to this finding, we are of the opinion that if at all the income is to be estimated, it has to be done on the basis of Net Profit only and not on the basis of Gross profit. We place reliance on the decision of the ITAT, Indore Bench in the case of Eagle Seeds & Biotech Ltd. v. ACIT 100 ITD 301 wherein at page 320 it was held the assessing officer was not justified in applying GP rate in the matter and directed the A.O to apply net profit rate as disclosed by the assessee in the books of accounts. Similar decision was taken in the case of Madanlal Narendra Kumar (HUF) v. ACIT 31 TTJ 401. Also we rely on the judgment of the Madya Pradesh High Court in the case of CIT v. Balchand Ajit Kumar reported in 263 ITR 610. The Learned Commissioner of Income-tax (Appeals) himself had observed in para 3.8.1 that only Net profit has to be adopted and agreed with the contention of the assessee. But however in final finding, he has observed that it is to be taken at Gross Profit only. There is a contradiction in his observation and hence we can not confirm this finding of the CIT(Appeals).
42. In view of the facts and circumstances of the case, we direct the assessing officer to confine to determination of undisclosed income only on "net asset" basis based on the materials and evidences found during the course of search, if it is not reflected in the regular books of accounts. Further we make it clear that undisclosed income has to be determined in accordance with law since the assessee is liable to pay tax only upon such income which is includible in total income as per law and which can be lawfully assessed in the hands of assessee. The Law empowers the Incometax officer to assess the income of an assessee according to law and determine the tax payable thereon. In doing so he can not assess an assessee on an amount, which is not taxable in law, even if the same is shown by an assessee. There is no estoppel by conduct against law nor is there any waiver of the legal right as much as the legal liability to be assessed otherwise than according to the mandate of the law. It is always open to an assessee to take the plea that the figure, though shown in his return of total income is not taxable in law. We placed reliance on the judgment of the Calcutta High Court in the case Maynak Poddar (HUF) v. WTO (Cal) 262 ITR 633. Further in the case of National Thermal Power Co. Ltd. v. CIT it was held that the purpose of an assessment proceeding before the taxing authority is to assess correctly the tax liability of the assessee in accordance with law. This ground of appeal of the assessee is allowed.
43. Ground No. 4: The grievance of the assessee vide this ground is that the CIT(A) is not justified in stating that the undisclosed income estimated by the officer for the broken period (for which the previous year was not over and the due date for filing the return was not over on the date of raid) was correct.
44. This issue is covered by the discussions we have put forth while dealing with Ground Nos. 3.1 to 3.5. Hence we set aside this issue to the file of assessing officer to determine the undisclosed income only on the basis of net asset method i.e. (excess of assets over known sources of income, capital and liabilities) based on the materials and evidences found during the course of search and to consider the judgment of the jurisdictional High Court in the case of A.R. Enterprises 274 ITR 110 to give proportionate credit to income towards advance tax paid by the assessee before the date of search.
45. Regarding assets relating to M/s. J.D. Gems and Jewellery, M/s. J.D. Gems & Jewellery is an Income-tax assessee P.A. No. AADPE2079C/ITO/W X(2) Chennai and had confirmed the same. He was asked to be produced by the officer along with their books of account including stock register vide his letter dated 28.10.04 and the same was done and enquiries were conducted. Their books of accounts, stock books were perused by the officer.
46. The reasons of the officer that the J.D. Gems and Jewellers have not participated in any other diamond exhibition, that this is a solitary transaction for the assessee with JD Gems & Jewelers and no other party has also participated in the diamond exhibition are alone not sufficient to clothe the transactions as sham and brought into the net of block assessment.
47. Since the diamond given for display in exhibition was seized by the Incometax Department they might have thought it not to continue such sort of display in exhibitions for some time. Since the items were seized and could be got back only on 6.5.03 i.e. after more than 6 months that too after so much strenuous efforts they are not ready to participate with the assessee any more., coming to know that the assessee was raided and jewellery and diamonds of J.D. Gems & Jewellers, who participated in the programme was seized by the Incometax Department, no other party was ready to participate.
48. The fact that the diamonds belong to M/s. J.D. Gems & Jewellery was brought to the knowledge of the department first on 26.11.02 and again on 10.12.02 well before the completion of the raid.
49. The search was concluded only on 16.12.02 (page 1 of the assessment order). The receipt voucher from the party, though was produced to the search officers, it was omitted to be considered. Since the letter was filed on 26.11.02 and 10.12.02 explaining the details it also forms part of the materials found during search. When there was no contradictory material or evidence available rejecting the above explanation, is bereft of merit. The party was identified, he has confirmed the transaction, he is assessed to Income tax. Without any contradictory material, treating the same as undisclosed income is against the spirit of the provisions of the Act. In similar circumstances, our own Madras 'D' Bench has in the case of S.V. Sreenivasan v. ACIT IT(SS)A No. 98/04 has deleted the additions at para 53 in its order dated 03.01.05, the concluding part of which is reproduced below:
Even not satisfied by both the confirmations, the assessing officer again verified from the accountant of M/s. Golden Jewellers on 22.09.03 along with the books of account. On verification from the books of account it was found that on 17.07.2001 gold of 815.550 gms. And 05/08/2001 gold of 1166.500 gms was issued to M/s. R.K.R Jewelers by M/s. Golden Jewellers. Despite all these the assessing officer rejected the claim of the assessee only the ground that this claim was not made by the assessee either at the time of search or at the time of investigation before the DDIT. The assessee has properly and beyond doubt proved that this stock was received from M/s. Golden jewelers and confirmed even by the Addl.CIT, Bangalore. In view of this we see no reason in upholding this addition and accordingly this addition is deleted.
50. In the circumstances, in our opinion, the above gems and jewellery does not belong to the assessee.
51. Regarding purchase consideration paid for building accounted but treated as unaccounted Rs. 21,21,908/-(PB 298), the payment towards purchase was made and the entire amounts were accounted and submitted in the Income-tax returns filed, for the broken period (copy enclosed) under block assessment also in regular assessment. At PB 298 the purchase of land is shown at Rs. 37,38,593/-. The assessee had not stated anywhere that the consideration paid was less. The Officer had not found out any deficiency in the sources explained. The previous year was not over and the time for filing the return has not expired. There is no material to suggest that the assessee would not have disclosed the income to the Department. The Income can not be treated as undisclosed.
52. In view of the above discussion, in our opinion, the above transactions can not be treated as undisclosed transaction of the assessee and there is no question of undisclosed income on these transactions.
53. Further we make it clear that the addition shall not be made towards the assets that are reflected in the regular books of accounts maintained by the assessee, since it would be subject matter of regular assessment only in view of the judgment of the Calcutta High Court in the case of Bhagwati Prasad Kedia v. CIT cited supra.
54. This ground of the assessee is partly allowed.
55. Ground No. 5.1:
56. The grievance of the assessee vide this ground is that the Learned Commissioner of Income-tax (Appeals) is not correct in allowing expenses of Rs. 9,17,422/- only as against Rs. 12,63,780/- found as per seized records.
Ground No. 5.2:
57. The grievance of the assessee vide this ground is that the CIT(A) is not correct in allowing expenses of Rs. 10,14,524/- only as against Rs. 20,96,470/- recorded as per seized materials.
58. For both the grounds 5.2 and 5.2, the assessee has not produced any evidences in support of the claim. Hence we decline to interfere with the order of the CIT(A) and confirm the findings of the CIT(A). Accordingly both these grounds are dismissed.
59. Ground No. 5.3 is that the CIT(A) is not correct in not appreciating that the same yard stick of multiplying the unrecorded expenses by 3 times to be adopted as in the case of unrecorded sales arrived.
60. We have already held in the foregoing paragraphs that estimation of income is not possible by placing reliance on the judgment of the Delhi High Court In the case of CIT v. Anand Kumar Deepak Kumar reported in 294 ITR 497. Applying the same, we hold that estimation of expenses is also not possible. Accordingly this ground of appeal by the assessee is rejected.
Ground Nos. 6 and 7 are general in nature and accordingly both the grounds are dismissed.
61. The assessee has raised additional ground during the course of hearing which are not in conformity with the ITAT Rules 1963 and hence the additional grounds are accordingly dismissed.
In the result the appeal of the assessee is partly allowed.