Income Tax Appellate Tribunal - Jaipur
Vimalchand Jain vs Assistant Commissioner Of Income-Tax on 23 April, 1997
Equivalent citations: [1998]64ITD384(JP)
ORDER
Shri Pradeep Parikh, Accountant Member
1. These two cross-appeals and the cross-objection are directed against the order of the ld. CIT (Appeals) dated 9-1-1995 for assessment year 1989-90. As the issues involved are inter-connected, we find it convenient to dispose off all of them by this combined order. The assessee, in his appeal, has at the outset, challenged the legality of the assessment as a whole on the ground that though no search warrant under section 132(1) or 132(1A) was ever issued in the case of the assessee, and though no proceedings under section 132(5) had taken place in the assessee's case, section 132(7) was made applicable and the entire assessment was accordingly framed on the basis of the search carried out in the case of the assessee's father. Since the legality of the entire assessment is under challenge, it would be proper, first to decide this issue and then, if need be, shall decide the other grounds.
2. Search operations had taken place on 22-12-1988 and 23-12-1988 at the business and residential premises of Shri Parasmal Jain, the father of the assessee. While searching the residential premises, it was noticed that the assessee was running his personal business of gota making (Zari business) in the same premises. The books of account and other documents pertaining to the assessee's business were seized. The assessee's statement was recorded under section 132(4) wherein it was admitted by him of owning and running the zari business. The Assessing Officer, therefore, applied the provisions of section 132(7) and considered the seized documents while framing the assessment. The validity of the assessment was challenged before the CIT (Appeals) who rejected the ground of the assessee and held the assessment to be valid.
3. Shri Lajpat Rai, the ld. counsel for the assessee, submitted that the assessee's father Shri Parasmal Jain is carrying on independent business. A search warrant under section 132(1) was issued in the name of Shri Parasmal Jain to search his business and residential premises. No warrant was ever issued in the name of the assessee. However, while warrant searching the residential premises of Shri Parasmal Jain, the search party also searched the business premises of the assessee which is within the residential premises of Shri Parasmal. On 22-12-1988, the business premises of Shri Vimalchand was sealed and again on 23-12-1988, the search continued without any authorisation. Thus, Shri Lajpat Rai's contention is that the business premises cannot be sealed either under section 133A or under section 132(1) or under any other provisions of the Act. For this, reliance was placed on the decision of the Allahabad High Court in the case of Shyam Jewellers v. Chief Commissioner (Administration) [1992] 196 ITR 243. It was further contended by the ld. counsel that there was no finding to the effect that the seized assets of Shri Parasmal were held by the assessee and hence the provisions of section 132(7) were wrongly applied. For the contention that the provisions relating to search operation should be strictly construed, the ld. counsel also relied on the decisions reported in L. R. Gupta v. Union of India [1992] 194 ITR 32 (Delhi) and Nehmal Shankarlal Parmer v. Asstt. CIT (Investigation) [1992] 195 ITR 582/62 Taxman 529 (Kar.).
4. In his reply, Shri S. S. Rana, the ld. D.R. firstly contended that all the decisions cited by the ld. counsel were distinguishable on facts. As regards the absence of search warrant in the name of the assessee, it was submitted that warrant was necessary to enter the specified premises and search the same. It was not meant for a specified person. As there was only one warrant, only one panchanama was prepared and hence the argument of the ld. counsel that there was no panchanama in the case of the assessee, is not relevant. Out attention was then drawn to the assessment order of Shri Parasmal Jain, where in he was described as proprietor of M/s. Parasmal Vimalchand. The present assessee was also described as proprietor of M/s. Parasmal Vimalchand. Thus, though the father and son both were proprietors of two distinct and separate businesses, the names of both the concerns were identical which could have caused confusion. This confusion was bona fide which should not affect the validity of the assessment. For this proposition reliance was placed on the decision of the Supreme Court in the case of ITO v. Seth Bros. [1969] 74 ITR 836. The ld. D.R. also placed reliance on another decision of the Supreme Court in the case of Pooran Mal v. Director of Inspection [1974] 93 ITR 505. Thus the ld. D.R. strongly urged to uphold the validity of the assessment made in the assessee's case on the basis of the search carried out on his father.
5. We have heard the parties on the issue of the validity of the assessment. We have duly considered the material placed before us. We are of the considered opinion that on the facts as placed before us and in the circumstances of the case, the assessment cannot be held to be invalid or illegal.
6. It is true that the search warrant was not in the name of the assessee. However, what is important is that the search of the premises is valid. If the search party has entered into the premises with proper authorisation, it is not necessary that the search warrant should be in the name of each person who resides in that premises. In the instant case, there is nothing on record to suggest that the assessee was living separately from his father or that his dwelling unit was separate and distinct from his father's dwelling unit. In a joint family, each adult member may have his separate room, but that would not constitute a distinct dwelling unit. What is meant by a distinct dwelling unit is that it has an independent access, it has a separate kitchen and so on and so forth. Nothing has been brought on record to show such distinctiveness.
7. Further, however, in the instant case what has been stressed upon by Shri Lajpat Rai is that the search party entered into that area of the premises in which the assessee was carrying on his zari business with which his father was not concerned and as the search warrant was not in the name of the assessee, the entry of the search party in that area was unauthorised and illegal. This aspect has to be viewed from various angles. Firstly, the business area was a part of the residential area. Since there was a proper authorisation to search the premises, and since the business was run by one of the family members (i.e. the assessee) residing in that very premises, in our opinion, the search party could also search that area in which the business was carried on by the assessee. Secondly, even for a while the contention of the ld. counsel is accepted to the effect that the search party was not authorised to so enter, it is very pertinent to observe that both, father and son (the assessee), though running separate business of their own from separate places, both the businesses had identical name and style, that is, M/s. Parasmal Vimalchand. This could easily lead to confusion and may prompt one to consider that both are parts of the same business, particularly in the heat of the search. An error of judgment of this nature has to be conceded. All throughout his arguments, Shri Lajpatrai kept on repeating that the assessee is a small businessman and that he has unnecessarily been harassed though the search was not directed towards him. A somewhat similar argument was also raised by the petitioners before the Supreme Court in the case of Pooran Mal (supra). The Supreme Court simply said "that cannot be helped. Since the object of the search is to get at concealed incomes, any person, who is in custody without enquiring about its true nature, exposes himself to search". Thus, under the circumstances described above, we do not see anything illegal about the assessee himself or his business premises being searched.
8. We have held the search of the business premises of the assessee to be valid. However, assuming that the search was illegal, the bases on which the assessee has been assessed, are evidences found in the course of such search. The question is, can such evidences, which are obtained in the course of an illegal search, be used against the person from whose custody they were seized. The reply is best provided by the Supreme Court in Pooran Mal's case (supra) :
"It would thus be seen that in India, as in England, where the test of admissibility of evidence lies in relevancy, unless there is an express or necessarily implied prohibition in the constitution or other law of evidence obtained as a result of illegal search or seizure is not liable to be shut out.
In that view, even assuming, as was done by the High Court, that the search and seizure were in contravention of section 132 of the Income-tax Act, still the material seized was liable to be used subject to law before the income-tax authorities against the person from whose custody it was seized and, therefore, no writ of prohibition in restraint of such use could be granted. It must be, therefore, held that the High Court was right in dismissing the two writ petitions. The appeals must also fail and are dismissed with costs."
9. We need not add anything more and accordingly hold the assessment to be valid.
10. In view of what we have discussed and held in the foregoing paras, reference to section 132(7) by the Assessing Officer and the challenge to it by the assessee is redundant. We, therefore, do not deal with the issue relating to section 132(7).
10A. As the assessment has been held to be valid by us, we now proceed to deal with each addition on merits. The first such addition is of Rs. 3,40,830 as unexplained investments made on the basis of Annexure A-3 and A-4 of the seized documents.
11. On scrutiny of the seized books of accounts, viz. cash-book and ledger, marked as Annexure 'A-1' and 'A-2' respectively, and of the seized documents marked as Annexures 'A-3' and 'A-4', the Assessing Officer observed that the latter which were generally purchase bills, were not accounted for in the books. The assessee's explanation in this connection did not satisfy the Assessing Officer. The transactions in Annexure 'A-3' and 'A-4' were, therefore, treated as unaccounted purchases and the sum total of the two annexures amounting to Rs. 3,40,830 was added to the total income as unexplained investment. The CIT (Appeals), in our opinion, passed a non-speaking order as follows :
"I have considered the facts of the case. From all the facts it is clear that the appellant was carrying on large scale business not recording in the books of account. Considering all the facts of the case the Assessing Officer has made out good case, no interference is called for."
12. The contention of the ld. counsel was that the said purchases were wrongly taken as unaccounted purchases. Moreover, it was submitted that the impugned purchases were made on 'C' Form under Sales tax Rules and all the purchases were also accounted for in the books and were shown in the trading account. In support of his submissions, the learned counsel took us through the copies of the purchase bills, related documents evidencing octroi payments, transport bills, railways broker's bills and so on. Thus, contending that all the purchases were genuine and accounted for, the deletion thereof from the total income was urged for.
13. The ld. D.R. was of the view that perhaps the ledger was prepared after the search. The fact that at the time of the search, the impugned purchases were not entered in the books has not been disputed by the ld. counsel. For this submission, the ld. D.R. drew our attention to certain purchase bills which pertained to August, 1988. The same were not entered in the books upto December, 1988, i.e., upto the month in which the search took place and hence there was every reason to believe that the said purchases were unaccounted transactions. Further, according to the ld. D.R., the story that the accountant had left the services of the assessee was evident from a different versions given by the assessee in his statement recorded under section 132(4).
14. After duly considering the rival submissions and the material on record, we do not see any merit in sustaining the addition. The assessee's explanation before the Assessing Officer is very much palatable. It is observed that it has been the consistent practice of the assessee to record the credit purchases directly into the ledger without entering them into any subsidiary books. It is indeed a crude way of writing the books of account, but certainly not unverifiable if the purchase bills are produced. We would have certainly agreed to the Assessing Officer's contention, had the purchase bills not been there on record. Moreover, recording of certain transactions in such a manner is not uncommon among small businessmen. What the Assessing Officer is concerned with is whether he can verify the transactions or not. If he can, then some crudeness in maintaining the books should not come in the way in believing the assessee. Further, in the course of assessment proceeding, the assessee has stated that cash book was being written by him, whereas the ledger was being written by the Accountant. The ledger was not complete as the accountant had left the services. Nothing contrary to disprove this averment of the assessee has been brought on record. Nothing contrary to this was stated by the assessee in his statement under section 132(4) as contended by the ld. D.R. Moreover, merely because the books remain incomplete for some days or even for some months for valid reasons, but are otherwise verifiable at the time of the assessment, it does not mean that the entries which constitute the incomplete portion of the books are transaction outside the books of account. We, therefore, do not see any justification in sustaining the addition and accordingly direct the deletion of the addition of Rs. 3,40,830.
15. The next ground relates to the estimation of sales at Rs. 18,00,000 and the application of G.P. rate at 20 per cent. resulting in an addition of Rs. 1,34,104. The Assessing Officer was not satisfied with the way in which the books were maintained by the assessee. Some bills in the bill-book were also left blank. He further found three sales bills totalling to Rs. 31,874 not recorded. Inference was also drawn from some loose slips seized at the time of search that the assessee was selling goods outside the books. Considering all these aspects and the fact of alleged unaccounted purchases referred to in the previous ground, the Assessing Officer after invoking the provisions of section 145(2), estimated the sales at Rs. 18.00 lacs, applied G.P. rate of 20 per cent. and made an addition of Rs. 1,34,104. This was against the sales of Rs. 12,78,260 declared by the assessee and the G.P. rate of 17.6 per cent. declared thereon.
16. The CIT (Appeals) again made a non-speaking order as follows :
"I have considered the facts of the case. In principal (sic) addition is justified, however the appellant is entitled (sic) to benefit of set-off of Rs. 1,34,104 against the other additions. No separate addition is called for."
17. The assessee has challenged the above order for sustaining the addition in principle, whereas the department has challenged the set-off allowed by the CIT (Appeals) against other additions. The assessee has also filed his cross-objection against the ground raised by the revenue.
18. The ld. D.R. has relied on the order of the Assessing Officer, whereas the main contention of behalf of the assessee is that in the year under appeal the assessee has declared better results showing G.P. at 17.6 per cent. as against 11.9 per cent. in assessment year 1987-88 and 10.5 per cent. in assessment year 1988-89. Therefore, there is no justification to sustain the addition.
19. At the out set, we do not approve of the Assessing Officer's observation regarding non-maintenance of day-to-day consumption register. Though technically speaking the assessee is a manufacturer, the nature of activity carried on by him (gota making) cannot be equated with a sophisticated industry involving complex manufacturing processes. Moreover, the background of the assessee and the volume of the business also need to be kept in mind. In the instant case, the assessee is not expected to keep a day-to-day consumption record of raw materials. Further, we have already held that the purchases of Rs. 3,40,830 are genuine. Hence sales need not be estimated for that reason. There is, therefore, no justification to estimate the sales at Rs. 18.00 lacs. But the assessee has certainly failed to submit any explanation regarding the blank sales bills as also in respect of three sales bills amounting to Rs. 31,874. At the same time we are of the view that addition only to the extent of gross profit earned on the above amount can be made. However, in view of the fact that there is no explanation regarding certain blank bills, we sustain an addition of Rs. 31,874 as trading addition which will cover the gross profit earned on all such bills of doubtful nature including the three bills not accounted for. The balance amount of Rs. 1,02,230 (1,34,104 - 31,874) stands deleted. Further, we see no reason to set-off the same against other additions and hence it is sustained as a separate addition. Summarising the result, this ground in the appeal by the department and in the assessee's appeal as also in his cross-objection, stands partly allowed.
20. The next ground in the assessee's appeal pertains to the estimation of closing stock at Rs. 4,25,000. In the course of search, the stock of raw material and finished goods was inventorised. In the assessment proceedings the assessee submitted its valuation at Rs. 3,92,066. The value of metallic sheets was taken at purchase price whereas in case of finished goods, the same were valued after deducting the general profit margin. The Assessing Officer, however, was not satisfied with the valuation and estimated the same at Rs. 4,25,000. The CIT (Appeals) made a cryptic order on this issue as follows :
"I have considered the facts of the case. In the absence of the proper accounts there is no alternate (sic) but to tax the stock found. No interference is called for."
21. It is submitted by the ld. counsel that there is no reason to treat the stocks as unaccounted when it almost tallies with the stocks shown in the trading account prepared for the period ending on the date of search. Whatever difference is there is due to the fact that some stocks were lying with workers. Moreover, the entire stocks are hypothecated to the bank. Thus there is no reason to treat the stocks as unaccounted. The ld. D.R. relied on the order of the Assessing Officer.
22. After considering the submissions and the material on record, we are of the view that the addition is wholly unjustified. Nothing is brought on record to show that the stocks are not accounted for. That the stocks are hypothecated to the bank is also not disputed. Moreover, when the trading account was recast by the Assessing Officer by enhancing the sales and applying 20 per cent. of G.P. rate, it necessarily means that the trading account did include stocks, or else how could he arrive at or estimate any rate of gross profit. Moreover, when the stocks were inventorised at the time of search, item-wise verification may not have been possible at the time of assessment proceedings, but in a business like this which is more like a home industry, the Assessing Officer could have satisfied himself by tallying the valuation with a reasonable allowance of error on either side. But the Assessing Officer made no effort at all and says the valuation is not verifiable as wages and other expenses are not vouched. The assessee does not belong to that category of organised or professionalised industry or business where a sophisticated system of cost accounting can be expected. Accordingly, we delete the entire addition of Rs. 4,25,000.
23. The next ground relates to the addition of Rs. 3,74,468 in respect of Annexures 'A-21' and 'A-23' of the seized documents. Certain loose papers and slips were seized during the search. These allegedly contained unaccounted sales, purchases, interest etc., the explanation in respect of which was not found to be satisfactory by the Assessing Officer and accordingly an addition of Rs. 3,74,468 was made. The CIT (Appeals) confirmed the same without going into the details. We have heard the ld. counsel in respect of each document on the basis of which the addition was made. We have also verified each document. It is abundantly clear that neither the Assessing Officer nor the CIT (Appeals) have applied their minds. Two slips do not pertain to the year under appeal. Two slips which show receipt of goods, are in fact purchases which are undisputedly accounted for. Rest of the slips show weight of the goods given to workers for preparing gota. The Assessing Officer made the addition simply because the papers were seized during the search and whatever figures were written on slip were treated as unexplained or unaccounted income. The explanation of the assessee was not at all taken into account. The entire addition of Rs. 3,74,468, therefore, being baseless, deleted.
24. Rest of the grounds in the assessee's appeal are general and need not be dealt with. The assessee's appeal is accordingly partly allowed.
25. In the appeal by the department, the first ground pertains to the trading addition of Rs. 1,34,104. This has already been dealt with by us in the assessee's appeal above, whereby an addition of Rs. 31,874 has been sustained.
26. Second ground relates to the deletion of addition of Rs. 10,000 made on account of wages and salary. The assessee has also filed a cross-objection in this respect supporting the order of the CIT (Appeals). The Assessing Officer disallowed Rs. 10,000 out of wages for want of any documentary evidence. Out of salaries, Rs. 8,000 were stated to have been paid to Shri Jeetmal, brother of the assessee. However, Jeetmal has denied having any salary income. On account of this and as no salary register was maintained, the Assessing Officer disallowed Rs. 10,000 out of salaries also. The CIT (Appeals) deleted the addition without assigning any reason. And hence the grievance of the department. The ld. D.R. reiterated the denial of Shri Jeetmal and relied on the order of the Assessing Officer. No reason has been assigned for disallowance of Rs. 10,000 out of wages despite the fact that the Assessing Officer had summoned certain workers whose statements were recorded and are placed before us. They have affirmed having received wages. Thus the disallowance out of wages was uncalled for and hence the deletion thereof by CIT (Appeals) is upheld. However, no satisfactory explanation regarding Jeetmal's denial has been offered. We, therefore, restore the addition to the extent of Rs. 8,000. But as no basis has been given to disallow the balance Rs. 2,000, the deletion to that extent by the CIT (Appeals) is upheld. This also disposes off the cross-objection of the assessee.
27. In the final result, the assessee's as well as the revenue's appeals are partly allowed and the cross-objection by the assessee is also partly allowed.