Income Tax Appellate Tribunal - Chandigarh
The A.C.I.T. vs Sweety Traders on 4 January, 2007
Equivalent citations: [2007]105ITD45(CHD)
ORDER
Vimal Gandhi, President
1. On account of difference between the two Hon'ble Members of Income-tax Appellate Tribunal, Chandigarh, B-Bench, the matter has been referred to me Under Section 255(4) for resolving the difference between the learned Members.
2. According to the learned Judicial Member, the following question reflects the controversy:
Whether on the facts and circumstances of the case, the learned Commissioner of Income-tax (Appeals) is justified in deleting the addition of Rs. 26,24,981/- made on account of payment of unexplained fabrication charges and unexplained investment in the purchase of yarn in the absence of non-production of books of account and other relevant material by the assessee.
3. According to the learned Accountant Member the controversy is covered by the following question:
Whether on the facts and in the circumstances of the case, the Assessing Officer was justified in making the addition in the block assessment on the basis of presumption that the assessee had made investment in purchases when no suppressed sale was found, and that the assessee incurred expenses out of the books of account when the expenses debited in the Profit & Loss Account were more than the expenses found recorded on the documents seized during the course of search.
4. In my considered opinion, the following question would cover the controversy:
Whether on the facts and in the circumstances of the case the addition of Rs. 26,24,981/- made in proceedings under Chapter-XIVB of the Income-tax Act is to be deleted or the matter should be remitted hack for re-examination of the case.
5. I proceed to examine above controversy as per rules. Brief facts of the case are that the assessee concern was carrying on the business of sale of fabricated yarn. It claimed to have stopped its business on 30.11.1997. The assessee filed its returns for the assessment years 1996-97 and 1997-98 and those were accepted. Income-tax authorities carried a search in the premises of the assessee and those controlling its business, on 23.2.2002. Search party found two challans showing fabrication of 10586.680 kgs of yarn got done from M/s Virka Textiles Pvt. Ltd. Similarly, second challan found showed 4104.664 kgs of yarn was got fabricated in financial years 1995-96 and 1996-97. There is some controversy whether challans record fabrication charges @ Rs. 16/- per kg. According to the assessee, no such charges are recorded. The D.R. on the other hand contended that rate of Rs 16/- per k.g. is recorded. At any rate, the Assessing Officer worked out fabrication charges @ Rs. 16/- per kg and made addition of Rs. 2,35,062/- (Rs. 1,69,387 + Rs. 65,675) in the assessment for expenses incurred towards fabrications as per the above detail and not proved to be disclosed in the regular books of account and, therefore, represented assessee's income from "undisclosed sources".
6. The Assessing Officer also inferred that yarn found fabricated as per challans was not shown to be accounted in purchases in the books of account for the relevant period as regularly maintained. These books were neither found by the search party, nor were produced during the course of the reassessment proceedings and were claimed to be not traceable by the assessee. As books of account were not produced, the Assessing Officer took purchase of 14,691.344 kgs. of yarn @ Rs 165 per k.g. as income of "undisclosed sources" assessable under Chapter-XIVB of the Income-tax Act. It was held that the assessee had failed to discharge onus that lay down on it by showing that purchase of yarn in question was duly accounted for in the books of account. In the assessment order for the block period, the Assessing Officer made assessment of undisclosed income at Rs. 26,24,961/- as per the following details:
(a) Unexplained expenditure as per para 5 Rs. 1,69,387
(b) Unexplained expenditure as per para 6 Rs. 39,284
(c) Unexplained expenditure as per para 7 Rs. 65,675
(d) Unexplained expenditure as per para 8 Rs. 23,50,615
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Rs. 26,24,961
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Total undisclosed income Rs. 26,24960
7. The assessee impugned above addition in appeal before the learned Commissioner of Income-tax (Appeals) (CIT (Appeals) in short) and contended that no addition was sustainable as there was no evidence to show that the assessee had incurred any unexplained expenditure either on fabrication of yarn or on purchase of yarn. The addition was made without any seized material and purely on surmises and conjectures. In view of definition of "undisclosed income" Under Section 158B (b) of I.T. Act and other relevant provisions, the Assessing Officer could not have made addition on estimate basis and on presumptions alone. Undisclosed income can be assessed on the basis of documents found in search. In the present case, no document was found in search. It was further contended that the assessee had filed returns in the assessment years ending 31.3.1996 and 31.3.1997 and fully disclosed fabrication charges incurred by the assessee, yarn consumed and goods sold. Those returns were supported by audited accounts and were accepted by the Revenue. As per the above accounts, the assessee had shown expenses on fabrication of yarn at Rs. 2,26,441/- and Rs. 2,05,610/- respectively for the assessment years ending on 31.3.1996 and 31.3.1997. Fabrication charges paid to M/s Virka Textiles Pvt. Ltd. and M/s Shivam Knitting Works, Ludhiana were duly reflected in the books of account and, therefore, the question of drawing any adverse inference against the assessee did not arise.
8. The learned Commissioner of Income-tax (Appeals), after considering facts and circumstances of the case, accepted the appeal of the assessee and deleted the addition made with the following observations:
I have considered the rival positions and I find force in the averments of the learned Authorised Representative for the following reasons :
(i) As explained by the learned A.R., the expenditure claimed under the head fabrication charges paid to M/s Virka Textiles Pvt. Ltd. and M/s Shivam Knitting Works is much less than the fabrication charges debited to the Trading Account. The mere fact that books could not be found during the search would not warrant disallowance of the expenditure in its entirely.
(ii Law is well settled, (Pooja Bhatt v. ACIT 73 ITD 205 (Mum),Dr.R.M.L.Mmehrotra v. ACIT 68 ITD 288 (All), and David Dhawan v. ACIT 71 ITD 1 (Mum), that no arbitrary formula can be applied in block assessment proceedings as the same has to be based with reference to the incriminating materials found during the search. There is no scope for assumptions and surmises in block assessment proceedings.
(iii) Law is also quite clear on the issue that the evidence, findings pertaining to a particular period cannot be telescoped or transported into other periods without cogent reasons or tangible evidence. (CIT v. J. Shah & Co. 246 ITR 671 (Bom), Jaya S. Shetty v. ACIT ITAT D Bench, Mumbai) and Samrat Beer Bar v. ACIT 75 ITD 19 (Pune)
(iv) It has been held in the following cases that in assessment proceedings suspicion, however, be strong it may be cannot take the place of evidence:
a) Monga Metals (P) Ltd. v. ACIT 67 TTJ 248 (All)
b) Elite Developers v. Dy. CIT 73 ITD 379(Nag.)
c) Dy. CIT v. D.N. Kamani (HUF) 70 ITD 77 (Pat.) Even otherwise, law is well settled that the purpose of making additions during the course of search assessments, additions can be made only on behalf of evidences found during the course of search, and if no material has been found during the course of search, then no addition can be made on presumptions. In this regard, I am reminded of the following judgments:
a) Dy. CIT v. Dolly Farms & Resorts (P) Ltd. (2001) 15 I.T. REP. 159 (ITAT, Del)
b) CIT v. Ravi Kant Jain (2001) 15 I.T. REP. 539 (Del)
c) Dy.CIT v. Elite Developers (2000) 73 ITD 379 (Nag.Trib)
d) Dy.CIT v. Sunder Agencies (1997) 63 ITD 245 (Mum.Trib)
e) ACIT v. Harakchand N. Jain (1998) 61 TTJ 223 (Mum.Trib.)
3. Similarly, the assumption of the Assessing Officer that Rs. 23,50,615/- would be the appellant's undisclosed investment in yarn is also presumptuous as it is based on pure guesswork. Since no evidence to this effect has found during the search, the mischief of Section 158B(b) is not attracted. As submitted by the learned A.R., when the sales have been accepted, how could the purchases be held to be non-genuine ?
In the light of the above, since 'undisclosed income' has to be based on any entry or evidence found as a result of search, and also because no estimation or arbitrary formula can be applied in a block assessment, the additions made by the Assessing Officer are directed to be deleted hereby.
In the result, the appeal is allowed.
9. The Revenue, being aggrieved, brought the matter in further appeal before the I.T.A.T. After hearing and while disposing the appeal, a difference arose between the two learned Members of the Bench. According to the learned Judicial Member, the Commissioner of Income-tax (Appeals) was not justified in deleting the addition. He was of the view that in the interest of justice the matter should be remitted back to the revenue authorities for re-determination of the issue.
9.1 The learned Accountant Member, on the other hand, agreed with the learned Commissioner of Income-tax (Appeals) and upheld his order. He held that addition made by the revenue authorities, was based on surmises and conjectures. No evidence was found by the Revenue during the course of search to show that the assessee had "undisclosed income" in the shape of unexplained purchase of yarn and fabrication charges He further pointed out that trading account and sales disclosed by the assessee for the relevant periods were accepted. The addition in the present case was made on conjectures. He, therefore, upheld the order of the learned Commissioner of Income-tax (Appeals).
10. The matter, as a third member case, was fixed for hearing and both the parties have been heard. Dr. Rajiv Harit, the learned Departmental Representative argued for the Revenue and Shri A.K. Bansal argued for the assessee.
10.1 Dr. Harit, the learned Departmental Representative pointed out that incriminating documents were found to show that the assessee had got fabrication of yarn done from M/s Virka Textiles Pvt. Ltd. and M/s Shivam Knitting Works. Therefore, it was for the assessee to show that entries relating to fabrication were duly accounted for in the regular books of account. However, the assessee never produced relevant books to show that fabrication charges were incurred and duly disclosed. The assessee further did not file any supporting evidence relating to purchases. In the absence of any evidence, the Assessing Officer had no alternative but to draw an inference that purchase and fabrication of yarn were met out of undisclosed sources. Production of audited accounts was not sufficient. Books of account, as primary evidence, should have been produced. No detail on record was available to show that purchases and fabrication charges represented disclosed income. The learned Departmental Representative placed reliance on the following authorities:
i) Ved Prakash v. CIT 265 ITR 642 (P&H)
ii) Spectrum Construction Co. v. ACIT 77 ITD 153(Ahd)
iii) Surendra M. Khandhar v. ACIT. 76 ITD 121 (Mum)
iv) CIT v. Dr.T.K. Jairaj 256 ITR 252(Ker) V) CIT v. P.R. Metrani (HUF), 251 ITR 244 (Kar)
11. Sh Ashwani Kumar Bansal fully supported the order of the learned Commissioner of Income-tax (Appeals) and the proposed order of the learned Accountant Member. He relied upon the following decisions:
i) CIT v. Faqir Chand Chaman Lal 262 ITR 295 (P&H)
ii) 114 Taxman 635
iii) CIT v. Ravi Kant Jain 250 ITR 141 (Del)
12. I have given careful thought to rival submissions of parties and examined material available on record. The learned CIT (Appeals) has deleted the addition in question by holding the same to be based on surmises and conjectures and not on any evidence found during the course of search. Addition could not be made on pure guess work as was done in this case. It has been held that in above circumstances, provisions of Section 158B(b) are not attracted. Addition has been deleted. Therefore, the question before me is whether above order is required to be upheld or matter is to be remanded for further examination, as directed by the learned Judicial Member.
13. It is no doubt true that incriminating documents in the shape of challans were found in search which showed that assessee got its yarn fabrication from M/s Virka Textiles Pvt. Ltd. and M/s Shivam Knitting Works in the period relevant to financial year 1995-96 and 1996-97. This fact is not disputed by the assessee. Its assessee's case that aforesaid fabrication charges were duly disclosed in the returns filed for assessment years 1996-97 and 1997-98. As per record, assessee claimed deduction of fabrication charges at Rs 2,26,441/- and Rs 2,05,610/- in the periods ending 31.3.1996 and 31.3.1997 respectively in the returns filed by the assessee. Assessee further showed purchases of yarn in the two relevant periods at Rs 3,45,71,659/- and Rs 4,07,94,318/- respectively. So the facts of and consumption of yarn is also an admitted fact. As books of accounts of the relevant period were neither found during the course of search nor were produced by the assessee in proceedings under Chapter XIVB of Income-tax Act, the Assessing Officer drew an inference that neither fabrication charges nor the purchase of yarn was reflected in the regular books of account. He, therefore, concluded that above expenses i.e. purchase and fabrication charges were met by the assessee out of undisclosed sources and was "undisclosed income" assessable under Chapter XIVB of the Income-tax Act. The learned CIT (Appeals) did not accept above conclusion of the Assessing Officer and deleted the addition.
14. In proceedings before me, learned departmental authority relied upon certain decisions. However, in my opinion, none of the decisions cited by the learned Departmental Representative is applicable to the facts of the case. In the case of Spectrum Construction Co. 77 ITD 153, Ahmedabad B-Bench of Tribunal was concerned with question whether levy of penalty Under Section 271(l)(c) and drawing of presumption of ownership on the basis of unexplained cash found during search operation as well as noting made on lose seized papers without any rebuttal of ownership was justified. The Hon'ble High Court held that in view of Section 132(4A), Explanation 1 to Section 271(l)(c) of Income-tax Act, the presumption drawn by the Tribunal was justified. Facts involved in the above case are quite distinguishable and said decision has no application.
Likewise in the case of CIT v. P.R. Metrani (HUF) 251 ITR 244, their Lordship of Kerala High Court held that on the basis of seized material, the revenue discharge initial onus of proving that amount found and added in the assessment belonged to the assessee. Addition was based on the material found and, therefore, order of assessment was valid. Here again facts involved were quite different.
In the other case of CIT v. Dr.T.K.Jairaj 256 ITR 252(Ker.), the assessee during the course of search had admitted on oath that certain investment in the name of his minor son was made by the assessee. There was no other material to show that investment was made out of accumulation of income of minor son. Their Lordships held that in the above circumstances, remand of the matter for investigation of sources of minor son was unjustified. Facts involved in the above case are also distinguishable.
The main decision on which strong reliance was placed by the learned Departmental Representative is the decision of the Hon'ble Punjab and Haryana High Court in the case of Ved Prakash v. CIT 265 ITR 642. In the said case, their Lordship have held as under:
We have perused the order of the Tribunal and are of the view that the findings recorded by it are pure findings of facts and do not give rise to any substantial question of law for consideration by this Court. During the course of search under Section 132 of the Income-tax Act, 1961, certain incriminating material had been recovered from the residential and business premises of the assessee and its partners and the assessment has been framed on the basis of such material. The assessee was also found to have purchased substantial quantity of sarson outside the books of account. Since the books of account maintained by the assessee were not reliable, the assessment had to be made in the light of the material recovered during the search. In this process, some element of estimate was unavoidable. In the appellate jurisdiction under Section 260A of the Act, this Court normally does not interfere by substituting its own estimate in place of the one of the Tribunal unless it is shown that the estimate of the Tribunal could not possibly be reached.
On the basis of above authority, it has been contended that estimate of income in a search case is permissible where the books of account of the assessee are found to be unreliable by the Revenue. So facts in the two cases were claimed to be parallel. In my considered opinion, above decision is also distinguishable and not applicable to facts and circumstances of the case. Their Lordship has recorded a clear finding that assessee was found to have, "purchased substantial quantity of sarson outside the books of account." So in the cited case, material was available to show substantial unaccounted purchases. There is no such material in the case to hold that assessee had made purchase and fabrication of yarn out of undisclosed income. Here no question of estimate of income is involved. The question is whether there is any seized or requisitioned material to hold that the assessee had income from undisclosed sources assessable under Chapter XIVB of the Income-tax Act.
As already noted there is no dispute that assessee got fabrication of yarn from M/s Virka Textiles Pvt. Ltd. and from M/s Shivam Knitting Works, Ludhiana. Expenditure on fabrication were shown in the books of account of the relevant period and figure shown is more than expenditure found to have been incurred by the assessee. Further, in the audited accounts submitted for the relevant period to the Revenue authorities, purchases of yarn have been reflected at Rs 3,45,71,659 & Rs 4,07,94,318 respectively.
In the light of above disclosed purchases and without any other material, how inference of undisclosed purchases could be drawn, stains one's imagination. Further in my considered opinion, it was for the Revenue to establish that fabrication charges in respect of two parties referred to above, were not accounted for in the regular books of account maintained by the assessee. Above finding could not be recorded without detail of fabrication charges shown by the assessee in its regular accounts. Two challans were found in search by the revenue authorities. Without the above detail, these challans could not advance the case of the Revenue of undisclosed income. It was insufficient evidence. In this case, authorities have used longest arm of search of premises but did not find books of account regularly maintained by the assessee. There was no justification to draw any adverse inference against the assessee for not producing books of accounts when through search, no books were found. The claim that books were misplaced was corroborated from the result of search carried by the revenue authorities. No case of undisclosed income was made against the assessee under Chapter XIVB of the Income-tax Act. Addition was made on surmises.
This is clear from the definition of "undisclosed income" contained in Section 158B(b), which is as under:
158B. In this Chapter, unless the context otherwise requires, -
(a) x x x x x x
(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,[or any expense, deduction or allowance claimed under this Act which is found to be false].
It is further clear from the computing provision contained in Sub-section (1) of Section 158BB which is to the following effect;
158BB(1) The undisclosed income of the block period shall be the aggregate of the total income of the previous years falling within the block period computed, [in accordance with the provisions of this Act, on the basis of evidence found as a result of search or requisition of books of account or other documents and such other materials or information as are available with the Assessing Officer and relatable to such evidence], as reduced by the aggregate of the total income, or as the case may be, as increased by the aggregate of the losses of such previous years, determined,-
It is evident from above that undisclosed income is to be computed on the basis of evidence found as a result of search or requisition of books of account or other documents and other material or information as is available with the Assessing Officer. If we keep in mind definition of "undisclosed income" and consider it conjunctively with provision relating to computation of undisclosed income noted above, it is clear that revenue authorities have to find undisclosed income or material as a result of search or requisition of books, document or information to justify assessment of undisclosed income. If above exercise of search and requisition does not lead to acquisition of relevant material to establish undisclosed income, the case must fail. Without material as above and information to compute undisclosed income, assessment cannot be made. It is not permissible to make assessment purely on guess work and on surmises and conjectures.
15. The aforesaid legal inference on consideration of relevant provision was drawn by the Hon'ble Gujarat High Court in the case of N.R. Paper Board v. DCIT (1999) 234 ITR 733, as also in the case of CIT v. N.R. Papers and Boards Ltd. (2001) 248 ITR 526 and CIT v. Shambhulal C. Bachkaniwala (2000) 108 Taxman 515 (Guj.) The Rajasthan High Court in CIT v. Rajendera Prasad Gupta has held as under:
However, under the scheme of the provisions for block assessment, it is apparent that it relates to assessment of 'undisclosed income' of the assessee excluding the income subjected to regular assessment in pursuance of the returns filed by the assessee for such period. It is also apparent from the perusal of Section 158BB that the returns are also required to be filed in pursuance of the notice under Section 158BC(a) and the assessment is to be framed on that basis in the light of material that has come into possession of the assessing authority during the course of search which is the foundation of the proceedings. That being so, the correctness or otherwise of the returns filed in pursuance of the notice under Section 158BC(a) has to be examined with reference to the material in the possession of the assessing authority having nexus to assessment of 'undisclosed income' which is with the assessing authority, and premise of such proceedings. If the returns filed by the assessee do not accord with the materials which are already in possession of the authority, it can be estimated to the best judgment by the assessing authority on the basis of the material in his possession. However, the assessing authority is not conferred with power to make estimation of income de hors the material in his possession, while making regular assessment order under Section 158BB. It has to be borne in mind that proceedings under Sections 158BB and 158BC are that of undisclosed income. Therefore, the proceedings carries with it a presumption that returns filed in pursuance of such proceedings are of undisclosed income and not necessarily in accordance with the books of account. Its verification has to be searched outside regular books with reference to material that has been found during search. That makes it imperative to adjudicate the return with reference to material that has come in the possession of the assessing authority during the course of search proceedings and on which basis the belief about the existence of undisclosed income is entertained by the assessing authority inviting invocation of Sections 158BB and 158BC. The enquiry into the correctness of such returns with reference to material so found has nexus with the object of the special provisions, to adjudge whether the Assessee is still honestly disclosing his income correctly after incriminating material has been found in the possession of the Revenue authority before such returns can be rejected and thereafter to frame assessment estimating the income liable to tax to the bet of judgment on the basis of the material that is available with him.
(underlined by me to emphasise) Hon'ble Kerala High Court in the case of Malayali Bankers v. Asstt. CIT and N.T. John v. C.I.T. and Anr. (1999) 228 ITR 314 held the same view.
Hon'ble Guwahati High Court in the case of Dr. Mrs. Alaka Goswami and Dr. Anil Kumar Goswami v. CIT has held as under:
Chapter XIVB of the Act lays down the special procedure for assessment of search cases and provides for assessment of undisclosed income as a result of search. Under Section 158BB(1) read with Section 158BC of the Act, what is assessed is the undisclosed income of the block period and not the total income or loss of the previous year required to be assessed in the normal regular assessment under Section 143(3) of the act. The exercise under Section 143(2) and (3) for regular assessment stands on a different footing than the exercise undertaken by the Assessing Officer under Section 158BB read with Section 158BC(b), where the Assessing Officer has to assess only the undisclosed income of the block period on the basis of the evidence found and material available as a result of the search conducted under Section 132 of the Act. The regular assessment is to assess the total income or loss of the previous year where a return is filed under Section 139 and the Assessing Officer considers it necessary or expedient under Section 143(2) to ensure that the Assessee had not understated the income or has not computed excessive loss or has not underpaid tax in any manner. The proceedings under the regular assessment and the assessment for the block period stand to operate on different fields. Therefore, the considerations which would be attracted while making the assessment in exercise of the powers under Section 143(2) and (3) for the regular assessment would stand on a different footing and will be governed by different provisions of the Act whereas the assessment for the block period as a result of the search and seizure would be governed by different provisions of the Act and would be made by the Assessing Officer in accordance therewith.
Hon'ble Delhi High Court in the case of CIT v. Jupiter Builders Pvt. Ltd. (ITA No. 273/2005) has fully agreed with the above cited decisions.
16. In the light of facts and circumstances of the case and when no material has been found during the course of search or during the course of requisition proceedings to show that assessee had any undisclosed income, or had incurred undisclosed or false expenses, the addition in dispute was rightly deleted by the learned CIT (Appeals). For the aforesaid reasons, I fully agree with the view taken by the learned Accountant Member.
17. The matter would now be placed before regular Bench for decision in accordance with majority opinion.
Joginder Singh, Judicial Member
1. Since there is a difference of opinion between the Members of the bench in the above mentioned case, we state the following point of difference and refer the same to the Hon'ble President, income Tax Appellate Tribunal for further necessary action as envisaged Under Section 255(4) of IT Act.
Whether on the facts and circumstances of the case, the ld CIT (A) is justified in deleting the penalty of Rs. 26,24,981/- made on account of payment of unexplained fabrication charges and unexplained investment in the purchase of yarn in the absence of non- production of books of accounts and other relevant material by the assessee.