Income Tax Appellate Tribunal - Delhi
M.S.Associates, vs Assessee
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH 'H' : NEW DELHI
BEFORE SHRI RAJPAL YADAV, JM AND SHRI R.C.SHARMA, AM
IT(SS) A.No.228/Del/2006
Block Period : 1.4.1989 to 23.6.1999
M/s M.S.Associates, Vs. Dy.Commissioner of Income
87-A, Adhichini, Tax,
Arbindo Marg, Central Circle-4,
New Delhi. New Delhi.
PAN No.AABFM1714A.
(Appellant) (Respondent)
Appellant by : Shri R.S.Singhvi and Shri S.K.Verma,
CAs.
Respondent by : Shri V.K.Tiwari, CIT-DR.
ORDER
PER R.C.SHARMA, AM :
This is an appeal filed by the assessee against the order of CIT(A) dated 6.10.2006 in the matter of order passed u/s 158BC(c) of I.T.Act for the block period 1.4.1989 to 23.6.1999.
2. Rival contentions have been heard and record perused. Facts in brief are that the assessee is a partnership firm doing business of sole distributor of Nagaland State Lotteries. There was a search and seizure operation u/s 132(1) of the IT Act on 23.6.1999 at the residential premises of the partners of the assessee firm and its business premises. The AO has made various additions and disallowances by making reference to the search material which were found during the course of search. The CIT(A) dealt some of the additions and deleted some of them. Both Revenue and assessee filed appeal before the Tribunal. The appeal of the revenue having independent issue was disposed off by Hon'ble tribunal vide order dated 31.8.2008,wherein appeal of the revenue was dismissed. In 2 IT(SS)-228/Del/2006 respect of the addition sustained by the CIT(A), the assessee is in further appeal before us and following grounds have been taken:-
1. That there was no valid search in terms of provisions of sec.
132(1) of the Income Tax Act in the absence of satisfaction of requisite condition and proper authorization and consequential jurisdiction assumed by the Assessing Officer is illegal and invalid.
2. That having to the facts and circumstances of the case , the CIT(A) is not justified in confirming the impugned asst. order as the A.O. has erred in law and on facts in assuming jurisdiction to frame the impugned assessment u/s. 158BC and has further erred in framing the impugned assessment.
3. That having regard to the facts and circumstances of the case, the CIT(A) is not justified in confirming the impugned assessment order as the AO has erred in law and on facts in passing the impugned order not in accordance with the law and in not computing the alleged undisclosed income in terms of the provisions of sec. 158BB.
4. That having regard to the facts and circumstances of the case, the CIT(A) has erred in law and on facts in confirming addition of Rs. 90,077/- vide para 9 to 9.4 of A.O.'s order on account of unexplained expenditure.
5. That having regard to the facts and circumstances of the case, the CIT(A) has erred in law and on facts in confirming addition of Rs. 65,979/- vide para 10 to vide para 10 to 10.4 of A.O.'s order on account of unexplained expenditure.
6. That having regard to the facts and circumstances of the case, CIT(A) has erred in law and on facts in confirming addition of Rs. 8,000/- vide para 11 to 11.4 of A.O.'s order on account of unexplained receipts.
7. That having regard to the facts and circumstances of the case, CIT(A) has erred in law and on facts in confirming addition of Rs. 15,00,000/- vide para 12 to 12.6 of A.O.'s order on account of unexplained receipts.
8. That having regard to the facts and circumstances of the case, CIT(A) has erred in law and on facts in confirming addition of Rs.
3 IT(SS)-228/Del/2006 1,84,735/- vide para 13 to 13.5 of A.O.'s order on account of unexplained receipts.
9. That having regard to the facts and circumstances of the case, CIT(A) has erred in law and on facts in confirming addition of Rs. 1,42,956/- vide para 14 to 14.4 of A.O.'s order on account of unexplained expenditure.
10. That having regard to the facts and circumstances of the case, CIT(A) has erred in law and on facts in confirming addition of Rs. 1,60,000/- vide para 15 to 15.4 of A.O.'s order on account of unexplained expenditure.
11. That having regard to the facts and circumstances of the case, CIT(A) has erred in law and on facts in confirming addition of Rs. 58,574/- vide para 16 to 16.4 of A.O.'s order on account of unexplained expenditure.
12. That having regard to the facts and circumstances of the case, CIT(A) has erred in law and on facts in confirming addition of Rs. 25,67,467/- in respect of the profits earned by M/s. Guwahati Agency owned by Sri. M.P. Limboo, vide para 17 to 17.6 of A.O.'s order as undisclosed profit of the assessee.
13. That the addition of Rs. 24,80,000/- based on page No. 108 and 111 of seized Annexure A-58 from the office of M.S. Associates, 267 Udai Park, New Delhi, maintained as some Memoranda by the employees of the firm for their personal use, as made by the CIT(A) is wrong and opposed to evidences admissible under the law.
14. That without prejudice to ground No. 1 to 14 above, the determination of undisclosed income as made by the authorities below is arbitrary & wrong in the absence of any undisclosed asset physically found at the time of search.
15. That the determination of undisclosed income as made by the authorities below are very excessive, and the various additions as made ought to have been telescoped and only the net addition should be made.
16. That the various additions as sustained by the CIT(A) based on provisions of sec. 132(4A) is wrong and bad in Law.
4 IT(SS)-228/Del/2006
17. That having regard to the facts and circumstances of the case, CIT(A) has erred in law and on facts in confirming the action of the A.O. in charging interest u/s. 158BFA(1).
18. That having regard to the facts and circumstances of the case, CIT(A) has erred in law and on facts in confirming the action of the A.O. in levying surcharge on Income Tax on the alleged undisclosed income fir the Block period which is illegal and invalid.
19. That the appellant craves leave to add, modify amend or delete any of the grounds of appeal at the time of hearing and all the above grounds are without prejudice to each other.
20. That the orders of the lower authorities are not justified on facts and same are bad in law.
3. First grievance of the assessee relates to assumption of jurisdiction by the AO u/s 158BC of the IT Act. An additional ground was also taken by the learned AR on the plea that it was purely a legal ground challenging the jurisdiction of the AO. It was contended that notice issued u/s 158BC was for filing the block return within less than 15 days which is contrary to the provisions of Section 158BC(a)(i). In view of the fact that notice was for filing the return within less than 15 days from the service of this notice, the assumption of jurisdiction by AO and consequent block assessment order so framed was alleged to be illegal. The learned DR opposed the admission of additional ground.
4. We have considered the rival contentions and found from the record that assessee has filed return in response to notice and also complied with various other notices during the block assessment proceedings. No objection was raised during assessment of appellate proceedings before CIT(A) for such defective notice, and as such the legal objection raised now is without any justification. The issue has 5 IT(SS)-228/Del/2006 been dealt with by the ITAT Special Bench in the case of Krishna Verma wherein it was held that issue of notice u/s 158BC(a) for filing return within less than 15 days is procedural and will not invalidate the jurisdiction of the AO to frame the assessment. Recently, Bombay High Court in the case of Shrish Madhokar Dalvi 287 ITR 242 dealt with a similar issue and it was observed that the default in issue of notice of less than 15 days is only procedural, and since the assessee has acted on the basis of notice assessment was completed on proper enquiry and investigation, no prejudice is caused to the assessee. Respectfully following the verdict of Special Bench and Bombay High Court, we do not find any merit in the legal ground taken by the assessee.
5. Ground No.4 to 11 relate to addition made on account of undisclosed income and undisclosed expenses based on the seized material.
6. Rival contentions have been heard and record perused. In this regard, by referring to various pages in the seized document, the AO stated that these represent various bills and challans showing the expenses paid by the assessee firm. Similarly, by referring to the seized document, the AO observed that this document mentioned cash receipt from such persons of Moradabad and of Dimapur which has not been recorded in the regular books of account. There were various other receipts from S.Kumar of Dimapur which were not found recorded in the regular books of account maintained by the assessee. The AO had made addition both with regard to income found recorded in the seized paper as well as expenditure found recorded therein. Contention of the learned AR was that provisions of Section 132(4A) are relevant only to the retention of seized annexures and cannot be 6 IT(SS)-228/Del/2006 considered as conclusive and binding on the assessment proceedings, for this proposition, reliance was placed on the decision of Hon'ble Supreme Court in the case of P.R.Methrani - 157 Taxman 325. It was also contention of the learned AR that in respect of sole selling agency business of lottery which is governed by the state authorities, the correctness of income has been considered and accepted by the AO during the regular assessment proceedings. It was also pleaded that since the partner of the assessee firm was having political importance, various documents were planted by some disgruntled rival for political reasons, as the husband of the partner was an MP for four consecutive terms, in the absence of any corroborative material no reliance could be placed on such documents.
7. As per learned DR, the documents so indicated by the AO pertain to various entries in respect of income and expenditure, part of which were recorded in the regular books of account and as such, genuineness of such documents cannot be disputed.
8. We have considered the rival contentions and also perused the relevant material on record on which the lower authorities have placed reliance and made the addition. All these documents as found during the course of search are required to be considered for the purpose of determination of undisclosed income, since these documents were found in the possession of the assessee at the time of search and contained specific details of transactions recorded partly in the regular books. As per provisions of Section 292C, the lower authorities have correctly applied the provisions of Section 132(4A). In the light of amended provisions, the decision of Hon'ble Supreme Court in the case of P.R.Metrani as cited by learned AR is not relevant. At the very same time, we found that both on account of income and expenditure 7 IT(SS)-228/Del/2006 the AO had made the addition. Since addition is to be made on the basis of documents found during the course of search and which undisputedly relate to the income and expenditure the net income is required to be added. Both the income and expenditure cannot be added in assessee's hands. Since nature and genuineness of expenditure was not doubted by any of the lower authorities, the payments shown in respect of expenses cannot be brushed aside. Documents so found during course of search indicated not only receipt of money but also payment of expenses. For this purpose, learned AR was directed to furnish detailed statement with regard to income and expenditure and the resultant income which is required to be considered on the basis of principle of telescoping. Copy of such details of income and expenditure was placed on record, copy of which was also handed over to the learned DR. We have carefully gone through these documents and found that various grounds have been taken by the assessee with respect to the additions made on account of this income/expenses, which are as under:-
Receipt Expenses Ground No. 4 -A.O. Para 9- 9.4, CIT(A) page 29 para 5 90,077/-
Ground No. 5 -A.O. Para 10-10.4, CIT(A) page 29 para 5 65,979/-
Ground No. 7 -A.O. Para 11-11.4, CIT(A) page 32 para 6 8,000/-
Ground No. 8 -A.O. Para 12-12.6, CIT(A) page 32 para 6 15,00,000/-
Ground No. 9 -A.O. Para 13-13.5, CIT(A) page 32 para 6 1,84,735/-
8 IT(SS)-228/Del/2006 Ground No. 10 -A.O. Para 14-14.4, CIT(A) page 33 para 7 1,42,956/-
Ground No. 11-A.O. Para 15-15.4, CIT(A) page 33 para 7 1,60,000/-
Ground No. 12-A.O. Para 16-16.5, CIT(A) page 33 para 7 58,574/-
-----------------
---------------
Total 16,92,735/-
5,17,586/-
========
=======
Excess Receipt 11,75,149/-
9. We have carefully verified the correctness of the statement with reference to the grounds raised by the assessee vis-à-vis the nature of the expenditure shown therein, as per our considered view even in the block assessment addition is required to be made in respect of net income. Total of documents so seized indicate income of Rs.16,92,735/-, whereas the documents indicating expenditure amounts to Rs.5,17,586/-. Since both the income and expenditure are of revenue nature, by accepting the principle of telescoping, we confirm the addition to the extent of Rs.11,75,149/- (Rs.16,92,735 (income) - Rs.5,17,586 (expenses)). Thus, the addition of Rs.11,75,149/- will cover the assessee's grounds 4 to 11.
10. Next grievance of the assessee relates to addition of Rs.25,67,467/- in respect of profit belonging to M/s Guwahati Agencies, being one of the stockists of the assessee.
11. In this regard, the AO observed that during the course of search of assessee firm there were number of documents specified in the 9 IT(SS)-228/Del/2006 chart prepared of pages 51 7 52, which were in the name of M/s Guwahati Agencies. The AO further observed that during the course of search the statement of Shri M.P.Limboo was recorded who has stated that he was selling the lottery tickets for M.S.Associates and earned 3 to 4 paise per ticket. The AO has worked out gross profit in the name of M/s Guwahati Agencies by taking into consideration the expenditure details for the business done in the name of M/s Guwahati Agencies. By considering some of the portion of statement of Shri M.P.Limboo, the AO made addition in the hands of the assessee firm. By the impugned order, CIT(A) confirmed the action of the AO.
12. Contention of the learned AR was that in terms of various questions asked to Mr.M.P.Limboo by DDIT (Inv.), Unit-1, Guwahati, there is no reason to doubt that Mr.M.P.Limboo was owner of M/s Guwahati Agencies and M.S.Associates was having only business connection with it. Our attention was specifically invited to the question Nos.5, 6, 9 and 21 and the answer thereof to highlight that in none of these questions, any conclusion can be drawn that M/s Guwahati Agencies was associate concern of M.S.Associates or anyhow controlled by M.S.Associates. As per learned AR, the answer to these questions clearly show that M.P.Limboo was running his own agency under the name and style of M/s Guwahati Agencies which was purchasing tickets not only from M.S.Associates but also from two other concerns Jyoti & Co. and Marwah Agencies. It was also contended that the same AO has completed the block assessment in the case of Jyoti & Co. also but in that case no income of M/s Guwahati Agencies was considered as part of Jyoti & Co. or that of Marwah Agencies. He contended that conclusion arrived at by the AO was based on no evidence but was merely based on surmises and conjectures. He contended that dealing of M/s Guwahati Agencies with 10 IT(SS)-228/Del/2006 the assessee firm M.S.Associates was on principle to principle and that M/s Guwahati Agencies like various other agencies were purchasing lottery tickets from M.S.Associates in the regular course of its business and that all the transactions with reference to M/s Guwahati Agencies are part of record, forming part of the audited balance sheets of the earlier years filed with the department. Our attention was drawn to the copy of account of M/s Guwahati Agencies in the books of M.S.Associates placed at pages 161 to 172 of the paper book and it was submitted that all the transactions regarding purchase of tickets and sale consideration have been recorded in the regular books of account and resultant profit is already part of the record. He contended that correctness of the income in the case of M.S.Associates with reference to regular transactions were not in dispute and the same have been accepted in the regular assessment and also there is no dispute with reference to the same even in the block assessment.
13. On the other hand, contention of learned DR was that as per the statement of Shri M.P.Limboo during the course of search, the conclusion arrived at by the AO was correct and the income of M/s Guwahati Agencies was to be assessed in the hands of the assessee firm only.
14. We have considered the rival contentions, carefully gone through the statement of Shri M.P.Limboo recorded by the Investigation Officer. We have also verified the account statement of M/s Guwahati Agencies in the books of the assessee firm. We found that in reply to question No.5 Shri M.P.Limboo had specifically stated that "I am proprietor of M/s Guwahati Agencies which is in the business of running lottery." In reply to question No. 6, he has submitted that my agency M/s. Guwahati Agency is getting commission on sale of lottery 11 IT(SS)-228/Del/2006 tickets. In reference to question No. 9, he has mentioned that M/s. M.S. Associates was sole distributor of Nagaland lotteries and that we use to purchase tickets from M/s. M.S. Associates and for last 5 months or so, we are not purchasing any tickets from M.S. Associates.
15. In reference to question No. 21 he has stated that I am purchasing lottery tickets from the following agencies.
1. M/s. Jyoti and Co.
2. M/s. M.S. Associates
3. M/s. Marwah Agencies.
16. It is clear from the above questions and their respective answers that there was no reference of ownership of M/s M.S.Associates or that he was working on behalf of M/s M.S.Associates. As per material on record, Shri M.P.Limboo was running his own agency under the name and style of M/s Guwahati Agencies which was doing lottery business by purchasing tickets not only from M/s M.S.Associates but also from other firms like M/s Jyoti & Co. and M/s Marwah Agencies. We also found that same AO had completed the block assessment in the case of Jyoti & Co. also, but in that case, the income of M/s Guwahati Agencies was not considered as part of Jyoti & Co. or that of M/s M.S.Associates. The assessee M/s M.S.Associates is the sole stockiest of Nagaland Lotteries and various sub-agents are appointed for marketing the tickets and to organize the lottery business. It is required to maintain complete record of tickets purchased, tickets sold and details of prize winning tickets. After sale of tickets, all the remaining tickets are required to be returned and destroyed in the presence of Director General of State Lotteries. The nature of assessee's business being distributor of lottery tickets has been examined by the CIT(A) and ITAT in the AY 2000-01, wherein it was 12 IT(SS)-228/Del/2006 observed that complete details of each and every ticket is required to be maintained and reconciled and requisite certificate from state authorities is required to be obtained. We found that M/s Guwahati Agencies was maintaining regular books of account and profit arising out of the same has been duly recorded and properly accounted for. The correctness of profit earned by assessee firm out of sale of tickets to M/s Guwahati Agencies was not in dispute either in the regular assessment proceedings or in the block assessment proceedings. In the statement so recorded, Shri M.P.Limboo has nowhere mentioned that M/s Guwahati Agencies was part of M/s M.S.Associates. On the other hand, the various questions and answers of Shri M.P.Limboo, as recorded by the Investigation Officer supports the contention that Shri M.P.Limboo was owner of M/s Guwahati Agencies and independently carrying on the business of lottery as sub-agent. The fact that M/s Guwahati Agencies was also purchasing lottery tickets from Jyoti & Co. and Marwah Agencies itself establish that M/s Guwahati Agencies was independently engaged in the business of selling the lottery tickets of different agencies and was independent and distinct entity. Merely because M/s Guwahati Agencies was also purchasing tickets from the assessee M/s M.S.Associates, it cannot be presumed that M/s Guwahati Agencies was owned by M/s M.S.Associates or that its ownership and profit was enjoyed by M/s M.S.Associates. In view of the propsotiion of law laid down by the Hon'ble Supreme Court in the case of Dakeshwari Cotton Mills - 226 ITR 736, no addition should be made on the basis of surmises and conjectures. In the instant case before us, the addition is not on the basis of any seized material but merely on the basis of wrong inference drawn from the statement of Shri M.P.Limboo. More particularly the provisions of Chapter XIV-B according to which undisclosed income is required to be computed on the basis of seized material, we do not find any justification in the 13 IT(SS)-228/Del/2006 action of the lower authorities for presuming M/s Guwahati Agencies as owned by the assessee M/s M.S.Associates. Taking into account the totality of facts and circumstances of the case, there is no factual or legal justification for presuming that M/s Guwahati Agencies was carrying on business activity on behalf of the M/s M.S.Associates and as such whole basis of addition is misconceived. As per material placed on record, the independent existence of M/s Guwahati Agencies was not in dispute even during the various regular assessment of assessee firm comprising in the block period and the business dealing with M/s Guwahati Agencies was accepted in regular assessment also. We therefore direct the AO to delete the addition made in the hands of the assessee firm by adding the income of M/s Guwahati Agencies in its hands.
17. The next grievance of the assessee relates to addition based on Annexure A-58 page 108 to 111. From the record, we found that initially the AO has made addition in the case of Shri M.K.Subba. At the appellate stage, the CIT(A) was of the opinion that addition is required to be considered in the case of M/s M.S.Associates and during the course of appellate proceedings issued notice for enhancement which reads as under:-
14 IT(SS)-228/Del/2006 F.No. CIT(A)-III/2006-07/425 Office of the Commissioner of Income Tax (Appeals)-III, Mayur Bhawan, New Delhi Dated :
29.09.2006 M/s. M.S. Associates 87-A, Adchini Aurbindo Marg, New Delhi-17 Sub: Enhancement notice in connection with appeal No. 72/06-07-reg.
Please refer to seized material in your case at Annexure A-58, B-13, B-15 on the basis of which in the block assessment proceedings of Sh. M.K. Subha as per detailed discussion from page No. 16 to 26 of the block assessment order, the inference was drawn that there were unexplained deposits in the name of Sh. M.K. Subha since aforesaid documents were found and seized during the course of search in your case, therefore, for the similar reasonings, I propose the enhancement of Rs. 24,80,000/- in your case. You are, therefore, requested to please make your submission with supporting evidence against the proposed enhancement which should be sent to this office on 10.10.2006. You are requested to please produce necessary books of account and other documents in support of your contention on the aforesaid date at 11.00 A.M. (O.P. Jain) Commissioner of Income Tax (Appeals)-III, New Delhi.
Encl: as above.
18. In view of the above letter and after recording his observation, the CIT(A) added this amount in the hands of the assessee firm. Contention of the learned AR was that as per the seized material addition was pertaining to FY 1991-92, whereas the assessee firm 15 IT(SS)-228/Del/2006 itself came into existence only from AY 1995-96. Our attention was drawn to the various annexures referred by the AO in his order dated2.1.2006 in case of M.K.Subba, partnership deed placed in the record and copy of assessment order in case of assessee firm starting from AY 1995-96. In view of the fact that assessee firm itself was not in existence during the relevant financial years to which various annexures referred by the AO pertains, addition made in the hands of the assessee firm was argued to be not sustainable. On the other hand, learned DR relied on the observation of the CIT(A).
19. We have considered the rival contentions and gone through the orders of the authorities below and the relevant materials placed on record. The AO at para 9.4 of the assessment order dated 2.1.2006 in case of Shri M.K.Subba has recorded his observation for making addition of this amount in the case of Shri M.K.Subba. The analysis of seized documents on the basis of which addition was proposed pertains to the FY 1991-92. As per the partnership deed dated 24.3.1994 as placed at page 189 to 194 of the paper book, the assessee firm came into effect from 1.4.1994 for which the relevant AY is 1995-96. As per the assessment order of M.K.Subba dated 2.1.2006, the AO at para 9.3 page 19 to 24 has clearly mentioned different annexures A-58, B-13 & B-15 on the basis of which addition was made and all of these pertain to date of entry from 4.4.1991 to 11.5.1991 falling within the financial year 1991-92 relevant to AY 1992-93. In all these entries, transaction is through cheque or DD. The AO has clearly mentioned the cheque number/DD number alongwith the date of entry and respective amount. Thus, there is no dispute regarding the period during which such cheques/DDs falls and the respective additions made. As per the partnership deed of assessee firm M.K.Associates and its respective assessment order, 16 IT(SS)-228/Del/2006 since the assessee firm itself was not in existence during the period to which the entries of the seized documents pertains i.e. FY 1991-92 and since the assessee firm was not in existence during the FY 1991- 92 relevant to AY 1992-93, there is no reason for making addition of these entries in the hands of the assessee firm. This factual position has not been disputed by the learned DR. We therefore do not find any justification in the order of CIT(A) for adding the impugned amount in the hands of the assessee firm.
20. Other grounds of appeal are either general in nature or not pressed by learned AR.
21. In the result, the appeal of the assessee is allowed in part, in terms indicated hereinabove.
Decision pronounced in the open Court on 6th November, 2009.
Sd/- Sd/-
(RAJPAL YADAV) (R.C.SHARMA)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated :06.11.2009.
VK.
Copy forwarded to: -
1. Appellant
2. Respondent
3. CIT
4. CIT(A)
5. DR, ITAT
Deputy Registrar
17 IT(SS)-228/Del/2006