Income Tax Appellate Tribunal - Hyderabad
K.C.K.A. Gupta vs Asstt. Cit on 31 July, 2003
Equivalent citations: (2004)90TTJ(HYD)555
ORDER
J. Sudraaar Reddy, A.M.:
IT(SS)A Nos. 101/Hyd/2002 and 102/Hyd/2002 are filed by the assessee against separate orders of the Commissioner-4, Hyderabad, dated 8-3-2002, and 22-3-2002, respectively, passed under section 263 of the Income Tax Act, 1961, while IT(SS)A No. 121/Hyd/2002 is filed against the order of the Commissioner-3, Hyderabad, dated 28-3-2002, under section 263 of the Act. As all these appeals belong to the same group and the issues are common, for the sake of convenience, they are heard together and disposed of by way of this common order.
2. Brief facts of the cases are as follows :
3. This group known as the Kawality Group, is engaged in the manufacture and sale of automobile lamps, liquid electronic diodes, display units, two wheeler panel displays and railway signal lamps and is also involved in the business of amusement park as well as in the business of construction. A search and seizure operation was conducted against this group under section 132 of the Act on 24-10-1997. At the time of search the assessee admitted undisclosed income of Rs. 135 lakhs under section 132(4) of the Act. Subsequently, the disclosed income was enhanced to Rs. 1,43,21,000 vide an undated letter filed with the Asstt. Director of Income-tax (ADI) (Inv.), Unit-1(4). Subsequently, at the time of filing returns for the block period, the assessee scaled down the disclosure to Rs. 1,41,02,000 for the entire group. The assessing officer, in the block assessment proceedings for the block period 1-4-1987 to 24-10-1997, accepted the returns filed by the assessee. Subsequently, the internal audit wing of the department raised certain audit objections on these completed assessments. Based on these objections, learned Commissioners, i.e., Commissioner-3 as well as Commissioner-4, issued show-cause notices to three of the assessees from out of this group under section 263 of the Act. The main issue for the internal audit objection as well as the issuance of notice under section 263 was, as to whether in the case of unrecorded sales, the entire sale figure has got to be taxed or whether a percentage of the sale figure is to be brought to tax as undisclosed income. The assessing officer accepted the contentions of the assessee that a percentage of the unrecorded sales as well as a percentage of unrecorded receipts be brought to tax as undisclosed income. Both the Commissioners, after giving an opportunity to the assessee of being theard, cancelled the assessments made by the assessing officer, by invoking their powers under section 263 and directing fresh assessments de novo in these three cases. Aggrieved with these orders under section 263, the assessees are in appeal.
4. Learned counsel for the assessee Shri K.C. Devdas submitted that there are six individuals, six partnership-firms and six companies in this group and the block assessments were framed by keeping in mind the group as a whole. The disclosures, he submitted, were made for the group as a whole, after laborious exercise and taking into account, the totality of the facts and circumstances of the case. Out of the entire group he argued, only three assessment orders have been picked up and cancelled under section 263 of the Act. The sole issue or reason for invoking section 263, he argued, was that, in the opinion of the Commissioner, the entire turnover of unrecorded sales and unrecorded receipts on account of sale of flats should be brought to tax, and not a percentage as accepted as fair, by the assessing officer.
5. He argued the case of Mr. K.C.K.A. Gupta at the first instance and drew the attention of the Bench to page No. 66, page No. 73 as well as page No. 60 of the paper book, filed by him in that case, which runs into pp. 1 to 91 and submitted that the entire assessment is based not only on the assumption of undisclosed income but also the principle of evaluation of undisclosed assets. He vehemently contended that the undisclosed income estimated in the group was matched with undisclosed assets. He referred to p. 59 of the paper book and submitted that the learned Commissioner has given a show-cause notice proposing reopening of assessment under section 263, and submitted that the point in the show-cause notice was limited, but the order of the Commissioner travelled beyond the issue that was raised in the show-cause notice.
6. The learned counsel for the assessee submitted that the ADI (tnv,) who was incharge of the search operations, had made elaborate exercise under the monitoring of the ADI (Inv.) of Unit-1, Hyderabad, and has after considering all the search material, as well as the submissions of the assessee, estimated the undisclosed income at Rs. 1,43,00,000. The assessing officer, he argued, after perusing the appraisall report and the report submitted by the ADI and approved by the ADI (Inv.), as well as the searched material, thought it fair to accept the disclosure made by the assessee-group, and after due approval from the Additional Commissioner had completed the assessments. He argued that four (4) revenue officials have concurrently vetted the disclosure made by the assessee and examined the case and gave their approval. He submitted that this is one of the rarest of the rare cases where in block assessment, the return filed by an assessee was accepted in toto. The monitoring by Additional Commissioner when the assessment proceedings were under progress, he argued, shows that the decision taken in the assessment order was a considered decision and reopening the same under section 263 is bad in law.
7. Arguing on the revision of the assessment order in the case of Aashraya Housing Corporation of Hyderabad, he submitted that as in the earlier case, the oily issue is whether the entire undisclosed turnover should be taken as income or whether a percentage of this undisclosed turnover found during the course of search would be taken as undisclosed income. He submitted that explanations were furnished in a common letter. Out of the undisclosed turnover, he argued that 26.44 per cent was estimated as undisclosed income. He vehemently contended that in the case of contractors under section 44AD, the Act itself prescribes 8 per cent of the turnover as income but in this case, the assessee had offered 26.44 per cent as income and that this is a fair estimate and does not call for interference by the Commissioner. He referred to p. 66 of the paper book filed in the case of Aashraya Housing Corporation (running into 1 to 86 pages) and submitted that the issue was put in detail by the assessee in paras 6(vii) and 6(viii) and a conscious claim was made along with the return of income. As in the earlier case, his argument was that the reason for estimating at 26.44 per cent is to comply with principles of matching undisclosed income with undisclosed assets. He referred to p. 2 of the assessment order, which is at p. 61 of the paper book and took this Bench through paras 2, 3, 4 and 5 and submitted that the assessing officer has stated in para 4 that he has perused the appraisal report and the seized material, and only after examining the unaccounted receipts from the sale of residential flats, a percentage of the same was accepted as income. He again submitted that the group has to be considered as a whole and certain assessment within the group cannot be picked up for revision under section 263, as the entire concept of matching of assets would get disturbed. He submitted that in case the entire unrecorded sales are considered as income, then the profit would jump to 140 per cent which would be totally unrealistic, and not fair.
8. Commencing his argument on the assessment of Kwality Electronic Industries, he drew the attention of the Bench to page No. 22 of the paper book, which consists of a statement indicating the unaccounted turnovers, financial yearwise and the components of undisclosed income arrived. This paper book of Kwality Electronic Industries runs from pp 1 to 101. He took this Bench through p. 22 and submitted that undisclosed income as a percentage of unrealistic sales has been offered to tax and the same was accepted by the assessing officer. He referred to p. 75 of the paper book, which is the second page of the assessment order, which is sought to be revised and drew the attention of the Bench to the fourth para and argued that there is a matching of assets to unaccounted income. He referred again to p. 15 of the paper book, which consists of the letter addressed by Kwality Electronic Industries to the Assistant Commissioner, Circle 6(l), dated 6-2-2003, and submitted that only a portion of the undisclosed turnover would be the undisclosed income of the assessee.
9. The learned counsel vehemently contended that both the investigation wing of the department as well as the assessing officer, have made elaborate enquiries and have given a considered possible decision, thus precluding the Commissioner from interfering by invoking section 263 of the Act. He moved, a motion before this Bench to call for the assessment records and to examine the order sheet and submitted that such an examination would reveal that the ADI(Inv.), who had conducted search operations was consulted by the assessing officer during the course of assessment proceedings. He submitted that as the assessment order was passed after due consultation with the investigation wing of the department, it cannot be said that a bald order is passed without examination of material on record. He filed a paper book (No. III) wherein he relied on 21 judgments for the proposition that the orders under section 263 are not in accordance with law. He filed yet another paper book, consisting copies of eleven (11) judgments for his proposition that only a percentage of undisclosed sales should be taken as income. He prayed that the order under section 263 be vacated and the order of assessment be restored.
10. The learned Departmental Representative on the other hand, vehemently controverted the arguments of the assessee's counsel and submitted that the assessee's case is based on the premise that the assessment order is passed in consultation with the ADI (Inv.) and has been approved by the Additional Commissioner. He submitted that the Hon'ble Andhra Pradesh High Court in the case of Torson Products Ltd. v. CIT (1988) 173 ITR 611 (AP) had held the issue in favour of the revenue. The question whether revision under section 263 lies against an order under section 143(3) read with section 144B, was answered in favour of the revenue. He referred to yet another judgment of the Hon'ble Andhra Pradesh High Court in the case of CIT v. East Coast Marine Products Ltd. & Anr. (1990) 181 ITR 314 (AP) and submitted that the order passed by the assessing officer under the directions from the Deputy Commissioner under section 144B was held as amenable to revision under section 263. Referring to the argument of the learned counsel for the assessee that the assessment order is based on the appraisal report, he submitted that quoting of the appraisal report in the assessment order is itself wrong and submitted that this cannot be taken as a basis to argue that the assessing officer has examined the entire search material. On a query from the Bench as to why the appraisal report which is quoted in the assessment order, cannot be taken as part of assessment records, when in fact, the assessing officer himself has placed reliance on the same in the assessment order itself, the learned Departmental Representative agreed that it is now part of the assessment record. He furnished a copy of the duties of the Additional Commissioner, and also submitted that the Joint Commissioner performs the functions of the Additional Commissioner.
11. He argued that there is no dispute of the fact that the assessee had received payment of money which is not recorded in the books of account on account of sale of flats, and also on account of sales made in the case of K.C.K.A. Gupta and Kwality Electronics Industries. He relied on the judgment of the Hon'ble Supreme Court, in the case of Smt. Tara Deld Aggarwal v. CIT (1973) 88 ITR 323 (SC) and submitted that two conditions are to be satisfied as per this Apex Court decision, for justifying the invocation of section 263 of the Act. He referred to the assessment orders and submitted that the assessing officer has not completed the assessment by examining search material or examining the claim of the assessee that a percentage of the unrecorded receipts and sales has to be taken as undisclosed income. He submitted that there is no application of mind whatsoever by the assessing officer independently, and heavy reliance was placed on the appraisal report and thus the Commissioners were perfectly justified in invoking their powers under section 263. Referring to the argument that order under section 263 travels beyond the show-cause notice, he submitted that when the assessee is given ample opportunity of being heard, the question of order under section 263 becoming bad for the reason that it travels beyond the show-cause notice does not arise. Coming to the argument of the learned counsel for the assessee that the matching concept of undisclosed income with investment has been adopted, he submitted that the investments were only what was stated by the assessee and no independent exercise was done by the assessing officer.
12. He further relied on the following judgments :
(1) CIT v. M.K.E. Memon (2001) 248 ITR 310 (Bom) (2) CIT v. Ampro Foods (1992) 196 ITR 556 (AP).
He submitted that estimation cannot be resorted to in a block assessment. It is his argument that the assessing officer has wrongly applied the law by accepting the estimates and thus the Commisioners were right in invoking section 263 of the Act. He referred to the assessment order in the case of K.C.K.A. Gupta and submitted that a passing remark was made by the assessing officer that seized materials are verified. He vehemently contended that the assessment orders were stereo-typed in nature and that there was no yearwise computation and that there was no enquiry made on the purchasers and that there is no basis whatsoever in estimating the profit at 10 per cent in the case of K.C.K.A. Gupta and that there is no basis whatsoever in estimating the turnover at Rs. 40,00,000. He vehemently contended that the assessing officer has not applied his mind, and completed the assessment in a hurry. It is his argument that the mind of the assessing officer should be independent and should not have been influenced by the ADI (Inv.) or even by the higher authorities. He once again drew the attention of the Bench to the assessment order and submitted that only a passing reference such as "seized material verified" was made by the assessing officer and that the return of income filed by the assessee was accepted by the assessing officer without an enquiry, in haste and without any application of mind. Coming to the merits of the case, he submitted that under section 45(5) additional compensation is taxable and similarly all unrecorded sales and unrecorded receipts have to be taxed. He took this Bench through the orders of the Commissioners under section 263 and relied heavily on the same and submitted that the same should be upheld.
13. Learned counsel for the assessee in his reply submitted that estimation is allowed under block assessment. He once again demanded that the assessment records be summoned and examined by the Tribunal, as it was his case that two to three months' hearing had taken place. He strongly controverted the arguments of the learned Departmental Representative that the assessments were completed in undue haste. He distinguished the judgment of the Hon'ble Supreme Court in the case of Smt. Tara Devi Aggarwal (supra), relied upon by the learned Departmental Representative and also submitted that section 45(5) cannot be applied to the facts of this case. He concluded his arguments by submitting that the block assessment orders are speaking orders.
14. Heard both sides, read all the papers on record and the orders of the authorities below. Though a catena of case-laws has been relied upon by both the parties before us, the principles of law with regard to application of section 263 have been laid down by the Hon'ble Supreme Court in the case of Malabar Industrial Co. Ltd. v. CIT (2000) 243 ITR 83 (SC). The Hon'ble Supreme Court, at p. 83 ibid observed as under :
"A bare reading of section 263 of the Income Tax Act, 1961, makes it clear that the prerequisite for the exercise of jurisdiction by the Commissioner suo motu under it, is that the order of the Income Tax Officer is erroneous insofar as it is prejudicial to the interests of the revenue. The Commissioner has to be satisfied of twin conditions, namely, (i) the order of the assessing officer sought to be revised is erroneous; and (ii) it is prejudicial to the interests of the revenue. If one of them is absent if the order of the Income Tax Officer is erroneous but is not prejudicial to the revenue or if it is not erroneous but is prejudicial to the revenue, recourse cannot be had to section 263(1) of the Act. The provision cannot be invoked to correct each and every type of mistake or error committed by the assessing officer, it is only when an order is erroneous that the section will be attracted. An incorrect assumption of facts or an incorrect application of law will satisfy the requirement of the order being erroneous. In the same category fall orders passed without applying the principles of natural justice or without application of mind. The phrase "prejudicial to the interests of the revenue" is not an expression of art and is not defined in the Act. Understood in its ordinary meaning it is of wide import and is not confined to loss of tax. The scheme of the Act is to levy and collect tax in accordance with the provisions of the Act and this task is entrusted to the revenue. If due to an erroneous order of the Income Tax Officer, the revenue is losing tax lawfully payable by a person, it will certainly be prejudicial to the interests of the revenue. The phrase "prejudicial to the interests of the revenue" has to be read in conjunction with an erroneous order passed by the assessing officer. Every loss of revenue as a consequence of an order of the assessing officer, cannot be treated as prejudicial to the interests of the revenue, for example, when an Income Tax Officer adopted one of the courses permissible in law and it has resulted in loss of revenue, or where two views are possible and the Income Tax Officer has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the revenue unless the view taken by the Income Tax Officer is unsustainable in law.
The principles enunciated in this judgment of the Apex Court are
(a) The Commissioner has to be satisfied of twin conditions, namely,
(i) The order of the assessing officer sought to be revised is erroneous, and
(ii) It is prejudicial to the interests of the revenue.
Both the elements have to be present.
(b) If the order is erroneous, then section will be attracted. The order can be termed as erroneous if there is an incorrect assumption of facts or incorrect application of law by the assessing officer;
(c) The order can be termed erroneous if it is passed without applying the principles of natural justice or without application of mind;
(d) The phrase "prejudicial to the interests of revenue" is not confined to loss of tax and has to be read in conjunction with erroneous order passed by the assessing officer;
(e) If the assessing officer adopted one of the courses permissible in law or where two views are possible and one view has been taken by the assessing officer, and the Commissioner does not agree with him, this cannot be treated as erroneous order prejudicial to the interests of revenue;
(f) When the view taken by the assessing officer is unsustainable in law then it can be considered as erroneous order prejudicial to the interest of revenue.
15. We would apply the above principles laid down by the Apex Court, to the facts of each of these cases and examine whether the Commissioners were right in invoking their powers under section 263 of the Act. The group cases are peculiar for the reason that the returned income had been accepted in toto by the assessing officer. The appraisal report has been made part of the assessment records. The ADI (Inv.) was present during the assessment proceedings and has participated and contributed to the assessment process. Both the DDI and Additional Commissioner approved the views of the ADI (Inv.) as well as the assessing officer. Though it is unusual for the ADI (Inv.) to be present and the appraisal report to be made part of the assessment order, we have no other alternative than to consider these facts while arriving at a decision in this regard as these facts are part of assessment records. The seized material is stated to have been returned by the department to the assessee and the assessees state that they have not preserved the same, as it is not required to be preserved as per the Act. So the Commissioners nor this Tribunal has the benefit of perusing the seized material to come to a definite conclusion in this matter. As the assessee's counsel has moved a motion before us to call for the assessment records and examine the same, we have called for and perused the assessment records. The revenue has submitted the assessment files of an the three assessees. Copies of the appraisal report were called for and the same have been filed by the revenue. We may observe here that only one appraisal report has been prepared by the ADI (Inv.) for the entire group and the disclosures, assessments and appraisals were made keeping the entire group in view. All the revenue authorities have taken an overall view of the assessments of the group.
16. The case of the revenue can be summarised by extracting the following paragraphs from the three orders passed by the Commissioner :
"I Aashraya Housing Corporation 6(iv) In the present case, as stated above, a search was conducted by the department during the course of which evidence was found and also seized, which clearly indicated that the assessee had collected heavy on-money receipts on sale of flats, which had not been accounted for in the books of account of the assessee. Since the on-money sale receipts were over and above the sale receipts reflected in the books of account, the entire on-money sale receipt should have been considered by the assessing officer as "sales". No evidence was also produced before the assessing officer during the course of block assessment proceedings nor any evidence found during the course of search to suggest that the assessee had incurred certain expenditure towards the construction of flats, which had not been reflected in the books of account maintained by the assessee. The assessing officer has also not conducted any enquiry nor discussed in detail in the block assessment as to why he chose to tax only a percentage of the onmoney receipts as the income of the assessee and not the entire on-money receipts, which constitute the sales of the assessee-firm, particularly when the assessee had no evidence to show that there was unaccounted expenditure incurred over and above that accounted for in the books of the assessee on the construction of flats. The assessing officer has further not even bifurcated the on-money receipts and income assessment year-wise with reference to the seized material and the tabulation has been made of the undisclosed and disclosed income at the end of the assessment order without any basis. There is no discussion in the assessment order as to how the tabulation is done. No enquiries have also been conducted regarding the on-money receipts and the payments collected. Further, although there was material with the assessing officer that several flats were taken by the partners at a low value and advances were made towards development of land at Amberpet, the assessing officer has not dealt with these issues also in the body of the assessment.
II. Shri K.C.K.A. Gupta 7(iv) In the present case, as stated above, a search was conducted by the department during the course of which certain material was found and also seized, which clearly indicated that the assessee had made undisclosed transactions outside the books of account. From the order of assessment, it is very clear that the assessing officer has not made further enquiries into the search material gathered and the documents seized from the assessee. Although the assessing officer has estimated the income at 10 per cent of Rs. 40 lakhs, it is not clear as to how the figure of Rs. 40 lakhs has been arrived at and on what basis the income was estimated at 10 per cent of the unaccounted turnover. In fact, the order does not even explain the basis for allowing Rs. 36 lakhs as expenditure out of the unaccounted sales taken at Rs. 40 lakhs, thereby taxing the balance of Rs. 4 lakhs only. On the other hand, the assessee on 24-10-1997, had admitted unaccounted income of Rs. 25 lakhs out of the unaccounted sales, which has also not been taken into account while framing the block assessment. Enquiries have also not been conducted regarding sale of molybdenum outside the books by verification of consignments sent by insured parcels by writing to the postal department. There was also material available with the assessing officer regarding shares sold by the assessee and his wife, record of valuation of property at 3-6-145/9/A belonging to the assessee at Rs. 30.12 lakhs, details of bank accounts of the assessee and his wife, jewellery, etc., which aspects have also not been considered by the assessing officer, while framing the block assessment. In fact, the block assessment return has been accepted in toto. The order framed by the assessing officer was, therefore, erroneous because it is a stereo-typed order which simply accepted what the assessee has stated in the block return and the assessing officer failed to make enquiries which are called for in the circumstances of the case (88 ITR 223 (SC) (sic) and Rampyari Devi Saraogi v. CIT (1968) 67 ITR 84 (SC). The assessing officer has even failed to compute the undisclosed income of the assessee, assessment yearwise by discussing each year's income separately. Telescoping of income has also not been done assessment year-wise, Details of cash and bank balances added back have also not been discussed. Therefore, neither have the undisclosed investments been discussed by the assessing officer in the assessment order nor the undisclosed income. While estimating the business profit also, the assessing officer has not quantified the undisclosed business transactions assessment year-wise on which the profits have been estimated. It is also not clear from the assessment order, whether the cost of sales have been accounted for in the books of account or the purchases have been made outside the books of account. The case laws and the Tribunal decisions cited by the authorised representative of the assessee are distinguishable on facts and in law. Since the assessment order passed by the assessing officer suffers from several infirmities as discussed above, I have reasons to believe that the block assessment order passed by the assessing officer was both erroneous and prejudicial to the interests of revenue. Therefore, to safeguard the interests of revenue, the block assessment order passed by the assessing officer is set aside for making the assessment de novo. The assessing officer is directed to examine the seized material and other documents and material available with him and frame a fresh assessment in accordance with law after giving a fresh opportunity of hearing to the assessee.
III. M/s. Kwality Electronic Industries 4.6.4. In the instant case, being a search case, it is moreso on the part of the assessing officer to make inquiry into the disclosures made by the assessee either during the course of search operations or while filing the return or during the course of assessment proceedings. It is clear that the case calls for inquiry when the assessee did not furnish any particulars or analysis on the basis of which the undisclosed income was admitted. Not even a single instance of examination of the seized material was brought on record. The fact that the assessing officer had merely adopted the undisclosed income admitted by the assessee, which is not supported by any analysis at all, shows that the assessment made by the assessing officer is erroneous. Not even a bit of information, in the nature of explanations reconciliations, etc., has either been called for from the assessee or furnished by the assessee except the return of income and its enclosures, before completion of the assessment proceedings. The assessment made suffers from inadequate examination and enquiry, which makes the assessment erroneous and this would be a valid ground for the Commissioner to interfere under section 263 of the Act.
4.6.5. As has been mentioned earlier at para 4.5, there is information in possession of the assessing officer, with regard to the unaccounted-for sales of molywire, LEDs, etc., and raw materials like Agt paste, etc., to the tune of Rs. 39.38 lakhs, a substantial portion of which would be undisclosed income of the assessee. Non-taxation of such income would certainly mean that legitimate revenue due to the exchequer has not been realised, which makes the assessment erroneous insofar as it is prejudicial to the interests of revenue. It does not appear from the proceedings, that any attempt has been made by the assessing officer, in this direction. Further, there is no information on record, to show that the assessing officer, has examined the seized materials, considered the sworn depositions and declarations made during the course of search proceedings, made proper inquiries to find out the adequacy or inadequacy of the undisclosed income admitted during the course of search proceedings as well as assessment proceedings, verified bank accounts, examined the investments and sources, made inquiries to find out whether there are any further unaccounted for transactions, etc., before determining the undisclosed income for the block period. "
17. The entire thrust of the argument and the findings of the learned Commissioner to our mind, are based on the fact that there is an incorrect application of law and also on the fact that there is an incorrect assumption of facts.
17.1 In all the three cases, there were unaccounted sales. The assessing officer has taken a view in the matter and accepted the contention of the assessee that a percentage of the sales should be considered as undisclosed income. The ADI (Inv.) as well as the Additional Commissioner approved of this view. Now the question is whether this view of the assessing officer is unsustainable in law. If so, then the Commissioner is correct in assuming jurisdiction under section 263 and if not, the order has to be vacated.
18. Before us the learned counsel for the assessee relied on the following judgments :
(a) CIT v. President Industries (2002) 258 ITR 654 (Guj)
(b) V.V.S. Alloys Ltd. v. Asstt. CIT (2000) 68 TTJ (All) 516
(c) Sangeeta Goel v. Asstt. CIT (2002) 122 Taxman 121 (Chd)(Mag)
(d) Agrawal Motors v. Assistant Commissioner (1999) 68 ITD 407 (Jab)
(e) Sunder Agencies v. Dy. CIT (1997) 63 ITD 245 (Mumbai) 18.1 The Hon'ble Gujarat High Court in the case of CIT v. President Industries Ltd. (supra), in its headnote held as follows :
"Undisclosed income-Survey in premises of assessee-Excise records-Undisclosed godown sales found-No finding that investment was made from source outside books in acquiring goods sold-Addition cannot be of entire sale proceeds-Only profits embedded in sale proceeds can be taxed-Income Tax Act, 1961, section 256(2)."
The Allahabad Bench of the Tribunal in the case of VVS Alloys Ltd. v. Asstt. CIT (supra) held as per the head-note, as follows :
"Search and seizureBlock assessment-Computation of undisclosed income-Loose papers marked 'VVS' the name of assessee-company, recovered from the residences of directors, indicating unaccounted sales-None of the directors came forward to own these papers-Ownership of loose papers cannot be denied by the company-Sales recorded on the papers not fully accounted in the books and the shortfall was not explained-Income referable to such sales is covered by the definition of undisclosed income-Though there is no evidence of undisclosed investment, undisclosed income is to be computed equal to 5 per cent of the sale."
The Chandigarh Bench of the Tribunal in the case of Sangeeta Goel v. Asstt. CIT (supra) held (as per headnote) as under :
"Section 158B of the Income Tax Act, 1961-Block assessment in search cases-Undisclosed income-Block period from 1986-87 to 1996-97assessing officer found several documents which revealed unrecorded sales, in search conducted at business and residential premises of assessee-Assessee explained these documents as rough memoranda and pleaded that if these documents were treated as transactions of sales of gold ornaments, only additions by way of profit earned therefrom should be made-assessing officer calculated additions by applying 5 per cent of sales as gross profitWhether assessing officer was justified in treating said documents as transaction of sale of gold ornaments-Held, Yes-Whether, however, percentage of GP was to be taken at 3 per cent instead of 5 per cent taken by the assessing officer-Held, Yes."
The Ahmedabad Bench of the Tribunal in the case of Abhishek Corpn. v. Dy. CIT (1999) 63 TTJ (Ahd) 651 held as under :
"In view of the factual finding in the form of a paper during the course of search of M, which clearly indichted that the assessee was receiving premium/on- money' at the rate of Rs. 190 per sq. ft. in the booking of flats which indicated the price charged by the assessee at Rs. 455 per sq. ft. whereas the documents were executed indicating the rate of Rs. 265 per sq. ft. the assessing officer was justified in rejecting the books of accounts of the assessee for the assessment year included in the block period. Under section 114(d) of the Indian Evidence Act, 1872, there is a presumption that a thing or state of thing which has been shown to be in existence within a period shorter than that within which such thing or state of thing usually ceases to exist, is still in existence, if a thing or state of thing is shown to exist, an inference of its continuity within a reasonably proximate time goes forward and backward and may sometimes be drawn. In the instant case, it is shown that the assessee was charging on-money/premium in relation to booking of flats. However, the entire receipts on account of on-money/premium charged by the assessee on booking of flats cannot be the undisclosed income of the assessee for the block period because the assessing officer had not proved by bringing any material on record that the assessee did make any investment to make the alleged unaccounted receipts/sales of Rs. 1,58,69,400. In this view of the matter only net profit rate can be applied on unaccounted sales/receipts for the purpose of making the addition. Since net profit rate in the assessment years 1995-96 and 1996-97 included in the block assessment comes only to 1.31 per cent as per the figures given by the assessee which has not been disputed by the revenue at the time of hearing, the addition on account of undisclosed income is much less than the undisclosed income of Rs. 30 lakhs offered by the assessee himself in the return filed in response to notice under section 158BC, the assessing officer was not justified in making further addition of Rs. 1,58,59,400 which is directed to be deleted-Income Tax Officer v. Gurubachansingh J. Juneja (1995) 216 ITR 99 (AT)(Ahd)(TM) and CIT v. S.M. Omer (1993) 201 ITR 608 (Cal) relied on.
Conclusion :
Even though it is established from seized documents that assessee was receiving premium/on-money on booking of flats belonging to third parties, entire receipts of on-money/premium cannot be treated as undisclosed income of assessee; only net profit rate can be applied on unaccounted sales/receipts for making addition."
In the case of Income Tax Officer v. Gurubachansingh J Juneja (1996) 54 TTJ (Ahd)(TM) 1 again the Ahmedabad Bench of the Tribunal held (as per head-note) as under :
"Income from undisclosed source-Unaccounted sale-Loose sheets depicting sales found during the course of search-Sales amounting to Rs. 10,85,003 appearing in the loose sheets could not be tallied with the books of account-Whole of the amount of Rs. 10,85,003 added by Income Tax Officer as income-Not justified Sales cannot constitute income, moreso, when Income Tax Officer accepted the genuineness of purchases-Addition by application of GP rate on such sales -can only be made-However, Commissioner (Appeals) not justified in holding that addition should be made by applying GP rate to Rs. 2,43,339, the amount of unaccounted sales admitted by the assessee, and not on the entire unaccounted sales of Rs. 10,85,003."
Similarly, the other cases cited by the learned counsel for the assessee demonstrate that the view taken by the assessing officer that only the percentage of undisclosed sale is to be considered as undisclosed income is a view taken by some of the Courts and Tribunals of this country and hence, it is a permissible view and cannot be termed as unsustainable in law. On this ground, the revisionary orders under section 263 have to fail as the assessing officer has taken one of the permissible views in law.
19. Now coming to the second ground, i.e., this view taken by the assessing officer was based on the incorrect assumption of facts," we examine each of the cases separately. However, before we go into the matter, we deem it appropriate to reproduce the judgment in the case of CIT v. Gabrial Ltd. (1993) 203 ITR 108 (Bom), wherein the law has been enunciated as follows :
"The power of suo motu revision under sub-section (1) of section 263 of the Income Tax Act, 1961, is in the nature of supervisory jurisdiction and can be exercised only if the circumstances specified therein exist. Two circumstances must exist to enable the Commissioner to exercise the power of revision under this sub-section, viz., (i) the order should be erroneous; and (ii) by virtue of the order being erroneous prejudice must have been caused to the interest of the revenue. An order cannot be termed as erroneous unless it is not in accordance with law. If an income tax officer acting in accordance with law makes certain assessment, the same cannot be branded as erroneous by the Commissioner simply because, according to him, the order should have been written more elaborately. This section does not visualise a case of substitution of the judgment of the Commissioner for that of the Income Tax Officer, who passed the order, unless the decision is held to be erroneous. Cases may be visualised where the Income Tax Officer while making the assessment examines the accounts, makes enquiries, applies his mind to the facts and circumstances of the case and determines the income either by accepting the accounts or by making some estimates himself. The Commissioner, on perusal of the records, may be of the opinion that the estimate made by the officer concerned was on the lower side and left to the Commissioner he would have estimated the income at a higher figure than the one determined by the Income Tax Officer. That would not vest the Commissioner with power to re-examine the accounts and determine the income himself at a higher figure. This is because the Income Tax Officer has exercised the quasi-judicial power vested in him in accordance with law and arrived at a conclusion and such a conclusion cannot be termed to be erroneous simply because the Commissioner does not feel satisfied with the conclusion. It may be said in such a case that in the opinion of the Commissioner the order in question is prejudicial to the interests of the revenue. But that by itself would not be enough to vest the Commissioner with the power of suo motu revision because the first requirement, namely, that the order is erroneous, is absent. Similarly, if an order is erroneous but not prejudicial to the interests of the revenue, then the power of suo motu revision cannot be exercised. Any and every erroneous order cannot be the subject-matter of revision because the second requirement must be fulfilled. There must be some prima facie material on record to show that tax which was lawfully exigible has not been imposed or that by the application of the relevant statute, on an incorrect or incomplete interpretation, a lesser tax than what was just, has been imposed. When exercise of statutory power is dependent upon the existence of certain objective facts, the authority before exercising such power must have materials on record to satisfy it in that regard. If the action of the authority is challenged before the Courts, it would be open to the Courts to examine whether the relevant objective factors were available from the records called for and examined by such authority.
Held, that the Income Tax Officer in this case had made enquiries in regard to the nature of the expenditure incurred by the apsessee. The assessee had given a detailed explanation in that regard by a letter in writing. All these were part of the record of the case. Evidently, the claim was allowed by the Income Tax Officer on being satisfied with the explanation of the assessee. This decision of the Income Tax Officer could not be held to be "erroneous" simply because in his order he did not make an elaborate discussion in that regard. Moreover, in the instant case, the Commissioner himself, even after initiating proceedings for revision and hearing the assessee, could not say that the allowance of the claim of the assessee was erroneous and that the expenditure was not revenue expenditure but an expenditure of capital nature. He simply asked the Income Tax Officer to re-examine the matter. That was not permissible. The Tribunal was justified in setting aside the order passed by the Commissioner under section 263.
From this judgment it can be seen that the Commissioner, simply because, according to him the order should have been written very elaborately, or the view of the Commissioner should be substituted for that of the assessing officer, cannot invoke the powers under section 263. So the argument that the issues have not been elaborately discussed in the assessment order, does not appeal to us. The argument of the revenue that there is no application of mind also does not appeal to us, because, more than one revenue official have taken part in the assessment proceeding.
20. It is seen from the assessment records that the assessee M/s. Aashraya Housing Corporation has along with the return of income submitted a covering letter wherein, at p. 4 vide paras (vi), (vii), (viii), (ix), (x), (xi) and (xiii), it was claimed as under :
(vi) In respect of such advances received and not recorded in books, a view-point was expressed that it shall fall for consideration under section 68 of the Income Tax Act, 1961. It is our submission that such a view is not warranted.
(vii) It is not proper to conceive that the unexplained investment of the purchaser becomes the income of the builder. In the case of a builder who carries on the business of construction and sale thereof the construction cost being a revenue expenditure, there shall be no tax advantage in reducing the construction cost and/or project cost.
(viii) It, therefore, follows that from out of the payments received outside books and not recorded in the books of account, insofar as the builder is concerned, it is only the profit element that shall be enjoyed by him and the entire payment by the purchaser and/or investor cannot be considered andior treated as undisclosed income of the builder. Such being the case on a due consideration of the facts as warranted with reference to the seized material and other attendant circumstances obtaining on record, for computing the undisclosed income every nerve was strained and stretched for the possibility and the probability to the maximum in computing the undisclosed income for purposes of block assessment.
(ix) It is for this reason in the initial paragraphs, it has been stated that the ultimate aim is to settle the matter without any dispute for computing the undisclosed income. Further, in computing undisclosed income the objective facts with reference to the documentary evidence of corroborative value already obtaining in the seized records have, therefore, duly been considered in reckoning the undisclosed income, inasmuch as there can be no adverse inference drawn on a presumption when there are facts with documentary evidence of corroborative value available in the seized material.
(x) The venture Sri Balaji Indraprasth was the only venture which this partnership-firm has undertaken and related to the construction and sale of residential flats, during the financial years commencing from 31-3-1993 and continuing as on the date of search. This being the first venture to build goodwill in the line and compete with various other established builders, the project was completed with a very reasonable margin of profit.
(xi) At this distance of time it is not practicable to co-relate the correct details of payment by purchasers outside the books and expenditure incurred from out of such unrecorded receipts. Income has duly been reckoned reasonably taking into account the unrecorded receipts on which the profit element earned by the firm has been estimated at 26.44 per cent, Rs. 42 lakhs as undisclosed income.
(xiii) It may kindly be appreciated that the said undisclosed income earned by the firm and computed for the block period assessment is available to the partners for the subsequent investments in the assets that were possessed by the partners of this firm. The summarised chart with the working how the income of Rs. 42 lakhs is computed in this regard is enclosed in separate annexure. "
21. In the appraisal report, which is already made part of the assessment record by the assessing officer and hence, has to be necessarily taken as part of the assessment record, as it is relied on by the assessing officer, this issue finds mention in p. 34 under the head 'construction of flats and other activity in real estate' which reads as under :
"1. During the course of search proceedings, the contents of Annex. MVR/A/1, ARPL/A-I/1, ARPL/A-I/7 which are the ledgers reflected total of accounted and unaccounted receipts, the computer statement showing total receipts of Rs. 6.06 crores as well as Annex. ARPL/A-I/8 and ARPL/A-I/12 reflecting payments received towards extra works were put forward to the assessee-group, and they were questioned regarding the same. In a response, the assessee-group worked out the details of total payments which are about Rs. 67,137 crore (which is a figure more than that available in the seized ledgers). Unaccounted receipts uptil the date of search of Rs. 148,65,761 have also been worked out by the assessee-group. On this amount profit @ 26.44 per cent has been worked out by the assessee-group. On extra works, a profit of 20 per cent has been offered on the unaccounted receipt of Rs. 13,44,340. After excluding the other receipts, i.e., extra-works, electrical and water connection charges and registration charges, the total receipts work out to be Rs. 5,81,97,416. The firm has already offered about Rs. 22 lakhs as income during the course of normal assessments. Now, an amount of Rs. 39.31 lakhs is offered as income. To both these amounts, if profit @ 10 per cent is added, the total income offered will turn out to be Rs. 66.5 lakhs on a total receipts of Rs. 5.82 crores, i.e., profit @ 11.5 per cent which appears to be on a reasonable footing."
Here the ADI(Inv.) submitted that the assessee has worked out the profit on undisclosed receipts at the rate of 26.44 per cent and profit at 20 per cent on unaccounted receipts for extra works and he also states that the disclosure appears to be on a reasonable footing. He also suggested that apart from taxing this amount of Rs. 148.65 lakhs the same is also liable to be taxed in the hands of the buyers of flats who had made this unaccounted investment. The assessing officer, at para 4 at p. 2 of his assessment order observed as follows :
"In response to the notice issued under section 143(2) of the Income Tax Act, Shri M.V. Purushotham Rao, authorised representative along with Shri M. Venkateswara Rao on behalf of the assessee appeared from time to time and the case was heard. On perusal of the appraisal report and seized material, it is noticed that the income from unaccounted receipts from the sale of residential flats is in consonance with the undisclosed income admitted by Shri K.C.K.A. Gupta on behalf of the assessee."
22. A perusal of the order-sheet in the assessment record shows that the case was taken up for hearing on 8-10-1999, and assessment was completed on 24-12-1999, which proves that the statement of the learned Departmental Representative, that the assessment was completed in one month in undue haste is wrong. A perusal of the appraisal report which is part of the assessment record shows that there is an analysis of the seized material and an impression was formed on the basis of this material. Records reveal that there is a year-wise computation of undisclosed income.
23. On a close examination of these issues we do not think that this is a case of wrong assumption of facts by the assessing officer leading to his decision to accept the contention of the assessee that a percentage of turnover is to be taken as the undisclosed income. The appraisal report, seized material, as well as assessment record are full of information on the fact of receipt of unaccounted money and the assessee has made a conscious claim along with the return of income, offering 26.44 per cent as the undisclosed income on these receipts. As this is not an impossible view to take, we do not propose to go into the merits of the argument of the learned counsel for the assessee that he had offered 26.44 per cent as against 8 per cent prescribed under section 44AD of the Act, as a percentage of profit has no bearing on the principles involved in this issue. The Commissioner has in her order under section 263, termed the on-money receipt as "sales". The other ground on which the Commissioner rests her order is that the assessing officer has not conducted any enquiry or even discussed in detail in the block assessment order as to why he chose to tax only a percentage of the on-money receipts as its income and that the assessee has not shown any unaccounted expenditure over and above that accounted for in the books of the assessees. This again is not correct because the ADI (Inv.) had analysed in the appraisal report, each of the search material and this is made part of the assessment record. The search material was not available before the Commissioner, because the same was returned to the assessee and stated as destroyed for the reasons that there is no legal requirement to preserve the same. The view of the Commissioner, it appears, is that expenditure can be allowed on this receipt to the extent the same is found unaccounted in the books and part of the seized material. It is not the case that no expenditure whatsoever should be allowed. When the seized material is not available before the Commissioner, how can it be assumed that no explanation was available. The assessing officer has in his wisdom allowed 73.56 per cent as expenditure. We do not see any reason why this should be considered as an incorrect assumption of facts. In this group of cases, a perusal of the assessment order does not show that they were stereotyped. In the last page of the assessment order, undisclosed income has been tabulated yearwise and brought to tax. In the letter filed by the assessee along with the return of income, at p. 17, yearwise tabulation of net profit of unrecorded receipts not disclosed in the books is given. The argument that estimation is not permitted in block assessment is against the law laid down by the jurisdictional High Court, in the case of Rajnik & Co. v. Asst. CIT (2001) 251 ITR 561 (AP). For ready reference, the headnote is extracted below :
"Block assessment-Search and seizure-Detection of suppressed sales for 24 days from 28-12-1995 to 27-1-1996 and 15 days from 23-10-1996 to 8-11-1996 not entered in account books-Sworn statement of partner of assessee-firm that assessee practised suppression of sales not only during assessment years 1996-97 and 1997-98 but also earlier assessment years 1986-87 to 1996-96-Estimation of undisclosed income for block period based on material on record and statement of partner-Proper-No substantial question of law arises from order of Tribunal-Income Tax Act, 1961, Chapter XIV-B. "
Thus, the assessing officer has examined the claim of the assessee and has adopted a permissible course of law, which cannot by any stretch of imagination be called untenable. Hence, we have to necessarily cancel the orders of the Commissioner-4, Hyderabad, dated 22-3-2002 under section 263 in the case of Aashraya Housing Corporation and restore the order of the assessing officer.
24. Coming to the case of K.C.K.A. Gupta, the view taken by the assessing officer that a percentage of undisclosed sales should be considered as undisclosed income is not an impossible view as discussed in detail in the case of M/s. Aashraya Housing Corporation and thus cannot be a ground to invoke section 263 of the Act. In this case also, a perusal of the assessment records reveals that the assessee has filed a letter along with the return of income. At p. 4 of this letter, the assessee claims that the information seized during the course of search is truncated and that it cannot be correlated or identified with precision for any conceivable working. At p. 6, the net assets method of computation has been adopted and balance offered for taxation. In the letter filed along with the return of income, the assessee made the following claim :
"(vi) Such being the case the demonstrative value of the notings can only be the circumstantial evidence for purposes of reckoning the undisclosed income for the block period. Further, on the basis of such truncated information, it is not possible to conceive the estimation of any turnover outside books of the profit arising or emanating in respect of such transactions of each concern. Any attempt in this direction could only lead to distorted results and obviously based on estimates without any edifice. It is a case, therefore, more resting on preponderance of probabilities. It is no doubt an admitted fact that undisclosed income earned requires to be computed which in the given facts and circumstances of the case depends upon the appreciation of the totality of facts. The fact remains that the information is truncated and it cannot be correlated and/or identified with precision for any conceivable working. It, therefore, follows that the income from such transactions as far as the business activity of such entities can be computed considering the probabilities with the only consequence that could be the transformation of earnings into the respective assets associated with the group of concerns. The consequence of such analysis would certainly establish the probability that one could be nearer to the truth about the tenability, probability and acceptability of the explanation in arriving at the computation and/or fixation of undisclosed income.
(vii) It is submitted that the information has been grouped for considering matters in totality without being viewed in isolation. It is further submitted that the ultimate analysis of the information is, therefore, the pointer to arrive at the undisclosed income.
(viii) As a consequence, the undisclosed income of the entities and the individual assessees has been computed in the appreciation of the totality of the facts that are obtaining in the business for the reason of the fact that the profits arising out of undisclosed transactions of the entities have been ploughed back and rolled over into the business and investments into which such income ultimately transformed."
This is the claim made before this ADI (Inv.) also.
25. The assessing officer in his order has not in detail discussed the claim of the assessee. Nevertheless at p. 3 of the assessment order, the methodology of arriving at undisclosed income is also based on net assets method. Income is generally arrived at based on 'income method' or 'net asset method'. In this case, the latter method seems to have been applied as the entire information is admittedly not available. The assessing officer has been referring in his order, to the disclosure made by the entire grouo and no specific enquiry seems to have been made on this issue of total undisclosed sales in this assessee's case. But as the methodology of arriving at undisclosed income adopted by the assessing officer being net assets, we feel that the reopening of the assessment on some other ground, i.e., not taking the entire unaccounted sales, as income, does not stand to reason as the assessment was not based only on this. It cannot be said that adoption of net assets method is an impossible view. This is a permissible view. The letter for approval sent by the assessing officer to the Additional Commissioner, Range-2, Hyderabad, demonstrates that the assessing officer applied his mind and took a conscious decision to estimate the undisclosed income based on investments made. Para 2 of this letter, written by the assessing officer to the Additional Commissioner, Range-2, Hyderabad, on 27-10-1999 is reproduced below for ready reference :
"It may be of relevance, to point out herein that during the course of search, the assessee and his associates were found to have invested substantial amounts in various assets. Based on the investment which was found during the course of search, the undisclosed income of the assessee and his associates has been worked out. The process adopted by the assessee in identifying the undisclosed income was verified in detail and the method was found acceptable. This is because of the fact the entire details relating to transaction is not found during the course of search. Based on the bits and pieces of information, the totality of unaccounted investment has been worked out. For the investment so found, books of account have been verified to identify the sources for such investment. To the extent the sources of investment have been identified, the assessee has been given credit for such investment. The balance of the investment has been treated as undisclosed income of the assessee. While doing so, adequate telescoping of the sources have been vetted by the ADI (Inv.)." (Emphasis, italicized in print, supplied).
The Additional Commissioner after discussion had approved the draft order.
26. It was the case of the assessee before the assessing officer that the information seized was truncated and can be only a substantial evidence and that the information seized was in "bits and pieces". The assessing officer also states that the entire details relating to the transaction is not found during the course of search. As in the earlier case, the Commissioner had no chance of verifying the seized material, to hold on facts that the assessing officer was wrong in stating that only bits and pieces of information was available. The view taken by the assessing officer is a possible and permissible view on these facts and the ADI (Inv.) was party to it. The Commissioner cannot substitute her estimate to that of the assessing officer when the admitted position is that the entire material is not available.
27. On these facts and under the circumstances of the case, we are of the considered opinion that the order under section 263 of the Act does not survive in this case also as there is application of mind by more than one revenue official and a permissible and possible view based on the material available was taken by the assessing officer. Thus, we cancel the order of the Commissioner under section 263 and restore the order of the assessing officer.
28. Coming to the case of Kwality Electronic Industries, Hyderabad, in addition to the issue cited in the above two cases, the order under section 263 has to be examined along with one more angle raised by the learned Commissioner -3, i.e., addition under section 69. The learned Commissioner -3, at para 4.5 at p. 6 of his order held as under :
"It cannot be denied that only income arising out of business transactions should be taken for taxation. The assessee has been pointed out with the unaccounted for sales of Rs. 17,93,000 (Molywire and LEDs, etc.), Rs. 21,45,000 (raw materials like Ag Plaste, etc.) The assessee did not deny these transactions. The assessee did not categorically say that the purchases with respect to these unaccounted for sales have been accounted for. The unaccounted for sales comprises of mainly two components, viz., cost of goods including incidental expenditure and profit. No doubt, the element of profit is only to be assessed. But, if the cost of goods including incidental expenditure is met outside the books of account, it becomes an unexplained investment, which is also assessable under section 69 of the Income Tax Act. Hence, the entire sale proceeds are assessable in the instant case. However, this can be done only on due verification which was not done while making the assessment." (Emphasised, italicized in print, supplied).
29. A plain reading of this paragraph reveals that the Commissioner also accepts that only the profit element in the unaccounted turnover has to be brought to tax. His view was that incidental expenditure met outside the books of accounts becomes unexplained investment, which is assessable under section 69 of the Act. The assessee in the covering letter filed along with the return of income in this case, has also made a conscious claim which is as follows :
"(b) There are incomes arising out of trading transactions which are so obtaining in such seized records. The trading relates to purchase and sale of LEDs. Further raw materials were procured from market and supplied to M/s. Kwality Electronic Industries. In the process of the trading of finished goods and the supply of raw material, there were margins which resulted in incomes being earned. It is not uncommon that in any line of business sometimes bills cannot be procured for purchases but at the same time goods are purchased for carrying out the production. To obviate the difficulties arising out of such inconsistent situations in which the business is to be carried on if to be survived in a competitive market, such transactions would arise and emanate. Added to the above, moly wire is purchased from Midhani & Alpex and is used for winding and oven as a heat source in the nature of captive consumption. This has a demand in the market. Therefore at times the group concerns had the occasion to deal in this product. As a point of fact it is to be stated that all the purchases of moly wire are from a government agency. In stray cases very rarely, this raw material could be procured from agents who deal in imports. In the process, all the purchases are met from the identifiable sources but at the same time part of such procured goods have been diverted by M/s. Kwality Electronic Industries for direct sale in the market.
(c) That apart when LEDs are procured in the market, they are sorted and tested and packed with the services of outside contractors and others who have spare capacity, As a consequence there is income by way of processing charges, in respect of this activity. Besides, the transactions also resulted in commission being earned on sales. It is submitted that to cover such inconsistencies and deficiencies duly emanating out of the above nature of transactions in the group concerns, expenses are booked under the head processing charges, commission consurnables and other expenditure.
(d) All the above aspects of the transactions that are obtaining in the seized records pertaining to the group concerns viz., (a) M/s. Kwality Electronic Industries (b) M/s. Kwality Electricals (P) Ltd., (c) M/s. National Sales Corporation (d) M/s. Kalyan Enterprises and (e) M/s. Keletronix have been viewed in totality since they relate to the group of the concerns who are searched and the individuals who have the association with them. On a reasonable analysis of the seized material pertaining to the respective areas and the nexus of the concerns to the transactions based on the probability of the user and the outgo and their impact a further amount of undisclosed income of Rs. 34.12 lakhs had duly been computed for being considered as undisclosed income. The ultimate beneficiary of this undisclosed income is the partnership-firm M/s. Kwality Electronics and therefore, the entire undisclosed income is computed in the hands of the firm M/s. Kwality Electronics.
(e) Thus, the undisclosed income of the firm M/s. Kwality Electronics Industries had duly been reckoned at Rs. 48.40 lakhs.,"
30. The assessing officer at para 3 (at p. 2 of the assessment order) held as follows :
"The material found during the course of search is truncated. In view of the above, it is not possible to make an absolute estimate of the turnover outside the books of account or the profits derived from such transactions. As such the undisclosed income is computed on the basis of totality of facts and evidence. Most of the transactions in this particular concern were done outside the books of account. The profits emanating from such transactions were ploughed back and rolled over in business and the undisclosed incomergenerated from such business got transformed into assets, for which the assessee was not able to explain the sources." (Emphasis, italicized in print, supplied by us).
31. Our observations as in the case of K.C.K.A. Gupta, apply to this case also to the extent of taxability of the entire sales and in fact, they are fortified by the findings of the learned Commissioner -3 that only a percentage is to be taxed. This is in contrast to the opinion of the learned Commissioner-4. In the face of truncated material found during search on a consultation with the ADI (Inv.), the assessing officer has come to a conclusion that a percentage of turnover is to be taken as undisclosed income. This is not an impossible view, given the facts and circumstances of the case. When the assessing officer has in consultation with other revenue officials come to a possible conclusion, it cannot be said that it is a view taken without application of mind. There is no wrong assumption of facts. The Commissioner cannot substitute his estimates to that of the assessing officer when the information available with him is not full and complete.
32. On the finding of the learned Commissioner-3 that the purchases might have been accounted for and that there is no categorical statement from the assessee that there are unaccounted purchases, we are of the opinion that our finding that only net profit has to be taxed cannot be changed, for it would lead to a situation of assessee having "stock deficit". If purchases have been accounted for and sales have not been accounted for, then the situation results in inflated stock figure, i.e., it is a case of "closing stock inflation". If the sales figure is corrected by substituting it with the actual figure then the "closing stock" has to be reduced by also substituting it with the actual figure, i.e., reducing the stock disclosed with the cost of unaccounted sales. If there is no closing stock, it means that all accounted purchases have been sold and such sales are accounted for. Otherwise, the gross profit percentage would be negative. Thus, looking at it from any angle, only "profit" element can be brought to tax and as the Commissioner himself said so in his order, no section 263 order can lie on this ground.
33. Learned counsel for the assessee stated that the entire group was taken as a unit and the disclosures were based on a wholistic view. It was his argument that when a group is considered as a whole, only a few files in the entire group cannot be picked up and assessments set aside. On a verification of the assessment files and the records we find that this claim is true. This factual position is evident from the reports of the investigation wing as well as the assessment wing. The assessing officer's correspondence points to the fact that the entire group was considered as a whole, and that the entire exercise of disclosures and assessments were based on the group- as-a-whole concept. But in taxation laws, each assessment order is a unit by itself and while examining the legality of the same, such considerations, though taken into account by the revenue, cannot be the basis of examining the validity or otherwise of the order under section 263. Thus, we reject this argument of the learned counsel for the assessee.
34. Coming to the argument of the learned counsel for the assessee that the revenue officials have returned the entire seized record and as there was no legal requirement to retain the seized material, the assessee destroyed them and that now the revenue is asking for the impossible act of producing the destroyed seized material to prove expenditure, etc., we agree that there is no requirement legally to retain and preserve seized material for a particular time, but that does not mean that the revenue is prevented from exercising powers under section 263. The seized, material should have been preserved in the assessee's own interest so that it could face such situations. The law does not require them to destroy it. It is for the assessee to produce evidence whenever called for and prove its claim. The choice of destroying the evidence was with assessee and the consequences have to be faced. This cannot be a ground for being taken against the revenue. Thus, this argument is also rejected.
35. Now, we examine the contention of the learned Commissioner that the entire undisclosed sales, has to be taxed under section 69 of the Income Tax Act, 1961, as undisclosed investment. This, in our view, is against the well settled proposition of law, as only peak investment has to be brought to tax. Now we examine whether the assessing officer has considered this aspect, during the assessment proceedings. Learned counsel for the assessee had drawn our attention to pp. 22, 23, 24, 25 and 26 of the assessee's paper book, wherein a statement indicating the unaccounted turnover financial-yearwise and the components of undisclosed income arrived, are stated. At p. 26, a statement to explain availability of source year after year for the investment in purchases and other investments is given. There are 9 columns in this statement and the cumulative undisclosed income, investment in purchases, the realisation of sales and application in assets by the firm and the partners, is clearly given, assessment yearwise. The balances are drawn out in column 9. These statements are so clear that we have to come to an inevitable conclusion that peak investment and its application in assets have been considered and declared by the assessee, while making his disclosures. Coming to the observations of the assessing officer, which are given in para 30 of our order supra, i.e., extract of para 3 of p. 2 of the assessment order, it is specifically stated that "the profit emanating from such transactions were ploughed back and rolled over in business and the undisclosed income generated from such business got transformed into assets, for which the assessee was not able to explain the sources". This clearly indicates that the assessing officer has considered the peak investments and has come to a conclusion after examining the detailed statements submitted by the assessee. Thus, we do not agree with the findings of the learned Commissioner-3 on this count also and, thus, cancel his order under section 263 dated 28-3-2002. We, therefore, set aside the order of the learned Commissioner-3, dated 28-3-2002, made under section 263 of the Act and restore the order of the assessing officer.
36. In the result, all the three appeals of the assessee are allowed.