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Case Number

I.T(SS)A. No. 67.DEL/2009, Block Asstt. (Block Period 20.5.1998 to 12.3.1999)

Advocates

Department by: Sh. Ramesh Chandra, CIT(DR)
Assessee by: Sh. Ashwani Taneja, Adv. & Sh. Tarun Adv.

Judges

A.D Jain, J.M
Shamim Yahya, A.M

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Smart Summary

Summary of the Opinion: Shamim Yahya, A.M.

Factual and Procedural Background

This appeal by the Revenue is directed against the order of the Learned Commissioner of Income Tax (Appeals), Faridabad dated 22.8.2009 in respect of the block period 20.5.1998 to 12.3.1999. The original assessment under sections 158BC and 143(3) was completed on 31.3.2001 determining total income at Rs. 14,57,544/-. The Commissioner of Income Tax (CIT), Faridabad set aside that assessment under section 263 by order dated 2.11.2001 on several grounds, including alleged failures to account for income from seized documents (chits and lucky car draw scheme), insufficient enquiries for unrecorded sales and cash, inadequate verification of seized documents, and omission of an amount of Rs. 8,56,931/- credited to the bank account of Sh. Ashok Kumar (alleged benami).

Following the sec. 263 order, the Assessing Officer (AO) reexamined the assessment, purportedly verified seized documents, and made additions — in particular adding Rs. 8,56,931/-, leading to a computed total income of Rs. 25,05,001/-. The assessee appealed to the CIT(A). The CIT(A) deleted the addition of Rs. 8,56,931/-, deleted an addition of Rs. 6,40,896/- made on account of alleged unexplained stocks, and restricted the AO's estimation of undisclosed sales and applied section 44AF (five percent rate) to arrive at business profits of Rs. 1,78,953/-. The Revenue appealed to the tribunal against the CIT(A)'s order. The tribunal heard the parties and rendered the decision summarized below.

Legal Issues Presented

Whether the AO was justified in treating Rs. 8,56,931/- credited in the bank account of Sh. Ashok Kumar as a benami transaction of the assessee and adding that sum to the assessee's income.
Whether the AO's addition of Rs. 6,40,896/- as unexplained investment in closing stock (based on purchase/sales figures, cost of furniture and fixtures and estimated cash in hand) was supported by evidence or was based on surmise and conjecture.
Whether the AO's estimation of undisclosed sales (resulting in gross turnover estimated at Rs. 1,00,71,689/- and an addition of Rs. 8,28,216/- on account of undisclosed sales/profit at 10%) was justified, and whether the CIT(A)'s restriction of additions to amounts supported by seized documents and application of section 44AF (5% profit) was correct.
Whether the assessee's appeal before the CIT(A) was maintainable in the absence of a statement of facts before the CIT(A) (an objection raised by the Departmental Representative).

Arguments of the Parties

Appellant (Revenue) / Departmental Representative (Ld. DR)

Contended that the assessee had not filed the statement of facts before the CIT(A), which, according to the Ld. DR, rendered the assessee's appeal before the CIT(A) invalid.
Contended that the AO was bound to make the addition of Rs. 8,56,931/- because the CIT in the section 263 order had referred to this addition and concluded it was a benami transaction.
Argued that the CIT should have refrained from reversing the AO because the CIT under section 263 (an officer of equivalent rank) had taken a view that the sum was a benami transaction.

Respondent (Assessee / Assessee's Representative)

Denied that the assessee was in the business of chit and lucky car draw scheme (letter dated 17.3.2003 filed by assessee's representative).
Denied that Mr. Ashok Kumar was a benami of the assessee.
Contended that the AO failed to supply information and material collected from the Sales Tax Department despite requests.
Contended that the AO wrongly presumed that the entire purchases of Rs. 23,84,524/- were paid in cash; purchases may have been on credit.
Contended that cash and bank balance was estimated without basis at Rs. 1,00,000/-; and that the AO mis-stated the value of furniture and fixtures (AO took Rs. 2,52,240/- whereas balance sheet showed Rs. 25,240/- as on 8.8.1998).
Challenged the AO's extrapolation of sales for an entire year on the basis of seized documents covering a small period, and argued the first year of business (commenced 20.5.1998) made such uniform extrapolation untenable.

Table of Precedents Cited

No precedents were cited in the provided opinion.

Court's Reasoning and Analysis

The tribunal heard counsel and examined the record. Its analysis proceeded issue by issue and also addressed the maintainability objection raised by the Ld. DR.

Maintainability Objection: The Ld. DR argued that the assessee's appeal before the CIT(A) was invalid for lack of a statement of facts. The tribunal reviewed the CIT(A)'s order and the record and observed that the CIT(A) did not take the ground that the appeal was not maintainable on that basis, and the Revenue did not pursue that ground before the tribunal. The tribunal therefore found the objection devoid of cogency and dismissed it.

Issue 1 — Rs. 8,56,931/- (Alleged Benami):

The AO purported to treat the sum credited to Ashok Kumar's bank account as pertaining to the firm and added Rs. 8,56,931/- to the firm's income. The AO's order asserted seized documents clearly established the firm’s connection to that sum.
The CIT(A) found that there was no basis in the AO's order or the assessment records to treat Ashok Kumar as a benami and that the AO did not articulate the nature or content of seized material to justify the conclusion.
The tribunal agreed with the CIT(A): the AO neither dealt with the nature of the seized material nor showed how those materials established a benami transaction. The tribunal also rejected the Revenue's contention that the section 263 order compelled the AO to make the addition, noting absence of material in the section 263 order or assessment order to show the sum was a benami transaction.
Conclusion: No infirmity in the CIT(A)'s deletion of the addition of Rs. 8,56,931/-.

Issue 2 — Rs. 6,40,896/- (Alleged Unexplained Stock):

The AO computed closing stock and net investible capital from purchases and sales figures, cost of furniture and fixtures and an estimated cash-in-hand figure, concluding unexplained closing stock of Rs. 6,40,896/- for the block period.
The assessee maintained that the AO failed to supply sales-tax documents, wrongly presumed purchases were entirely paid, estimated cash in hand without basis, and mis-stated furniture/fixture values.
The CIT(A) held the AO's exercise was based on surmise and conjecture and not supported by evidence; the tribunal agreed, finding the AO's order did not cogently prove the addition was warranted.
Conclusion: The tribunal upheld the CIT(A)'s deletion of Rs. 6,40,896/-.

Issue 3 — Rs. 8,28,216/- (Undisclosed Sales / Estimation):

The AO estimated total sales at Rs. 1,00,71,689/- by extrapolating amounts from seized documents (parallel/duplicate sales book Document A-7 and pad No. 8) observed for limited periods to the full relevant period, and estimated net profit at 10% to arrive at business income.
The CIT(A) examined seized document A-7 and pad No. 8. He concluded that document A-7 represented unaccounted sale bills totalling Rs. 7,37,675/- (and not the extrapolated Rs. 28,36,500/- estimated by the AO) because the documents themselves bore particulars such as "cash" or "bill", item sold and dates. The CIT(A) found that extrapolating short-period seized data uniformly over the entire period was inappropriate in proceedings under section 158BC, which must be framed strictly on the basis of material found in the search. The CIT(A) sustained the AO's figure for pad No. 8 at Rs. 15,19,350/-, rejecting the AO's higher extrapolation.
On the basis of sales figures the CIT(A) computed total sales at Rs. 35,79,069/-. Because sales/receipts were under Rs. 40 lakhs, CIT(A) applied section 44AF and estimated profits at 5% (the maximum prescribed under that section), arriving at business profits of Rs. 1,78,953/-, instead of the Rs. 10,07,169/- estimated by the AO.
The tribunal found the CIT(A)'s reasoning cogent: the AO's year-long extrapolation was not supported by adequate basis; CIT(A)'s approach confined additions to amounts supported by the seized material and applied the statutory provision (section 44AF) appropriately. The tribunal found no reason to interfere with the CIT(A)'s order.

Overall Analytical Approach of the Tribunal: The tribunal reviewed the AO's findings for evidential support and logical basis. Where the AO's findings were based on seized documents, the tribunal scrutinized whether the AO had explained how those documents supported extrapolations or benami conclusions. Where the CIT(A) limited additions to figures directly supported by seized documents or applied the relevant statutory estimation provision (section 44AF), the tribunal accepted those conclusions as cogent and supported by record. The tribunal repeatedly emphasized that unsupported surmise and conjecture cannot sustain additions.

Holding and Implications

HOLDING: APPEAL DISMISSED. The tribunal affirmed the order of the CIT(A) dated 22.8.2009.

Implications and direct consequences:

The addition of Rs. 8,56,931/- (alleged benami amount credited in Sh. Ashok Kumar's bank account) is deleted and the CIT(A)'s deletion is affirmed.
The addition of Rs. 6,40,896/- as unexplained investment in stock is deleted and the CIT(A)'s deletion is affirmed.
The AO's larger extrapolation of undisclosed sales (and resulting profit estimate) is disallowed to the extent it was not supported by seized material; the CIT(A)'s computation of total sales at Rs. 35,79,069/- and treatment of profits at 5% under section 44AF (Rs. 1,78,953/-) is upheld.
The Revenue's procedural objection regarding the absence of a statement of facts before the CIT(A) was dismissed as lacking cogency; the tribunal did not find maintainability defect in the record before it.
No new binding precedent was laid down by this decision; the tribunal affirmed the CIT(A)'s factual and evidential scrutiny and refused to interfere where additions lacked cogent evidential foundation.

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Asstt. Commissioner Of Income Tax, Circle-Ii, B-Block, Cgo Complex, Nh-Iv, Faridabad v. M/S. Sabharwal International, Shop No. 31-32, Near Hanuman Mandir, Main Market No. 1, Nit Faridabad .

Shamim Yahya, A.M:— This appeal by the Revenue is directed against the order of the Ld. Commissioner of Income Tax (Appeals), Faridabad dated 22.8.2009 pertaining to Block Period 20.5.1998 to 12.3.1999

2. In this case original assessment was completed u/s. 158BC/143(3) on the total income of Rs. 14,57,544/- on 31.3.2001 This assessment was set aside u/s. 263 by the CIT, Faridabad vide order dated 2.11.2001 on the following points:—

(a) Not adding income from seized documents relating to business of chits and lucky car draw scheme without assigning any reasons.

(b) Income taken on account of unrecorded sales and cash on estimated basis. No enquiries, examinations and verifications were made by the AO on these accounts.

(c) Seized documents were not verified properly and without collecting sufficient information and without examining them additions were made without assigning any reasons.

(d) A sum of Rs. 8,56,931/- credited in the bank account of Sh. Ashok Kumar who was a benami of the assessee has been treated as income from undisclosed sources, but no addition of this account has been made in the total income of the assessee.

2.1 Consequent upon the aforesaid order u/s. 263 the assessment was taken up by the AO. AO observed the points mentioned by the Ld. CIT in its order u/s. 263 are dealt with as under:—

(a) The assessee's representative has filed a letter dated 17.3.2003 wherein it has been contended that the assessee was not in any business of chit and lucky car draw scheme. It is observed from the records that the income from chit and lucky car draw scheme has been taken in the hands of its partners namely Sh. Bahadur Singh Sabharwal, Sh. Harjeet Singh, Sh. Surjeet Singh and Sh. Joginder Singh.

(b) As per the trade practice and the records of other assesses profit estimated 10% on the sales is found to be reasonable.

(c) The seized documents have again been verified properly and correlations with the additions made have been cross checked.

The assessee has denied that Mr. Ashok Kumar was benami of the assessee. However, as per seized documents it is clearly established that the sum of Rs. 8,56,931/- credited in the bank account of Sh. Ashok Kumar pertains to the firm. Therefore, the same amount of Rs. 8,56,931/- may be added back to the income of the assessee.

2.2 Thereafter, the AO reproduced the original order u/s. 158 BC/143(3). Thereafter, AO computed the income as under:—

Income as per original order Rs. 16,48,070/ Add:— As discussed above in para 4 Rs. 8,56,931/ Total Income Rs. 25,05,001/-

3. Upon assessee's appeal Ld. CIT(A) dealt with the AO's order as under:—

I. Addition of Rs. 8,56,931/-

3.1 In this regard, Ld. CIT(A) observed that there is no basis for AO to treat the amount credited in the bank account of Sh. Ashok Kumar as the benami of the assessee. That how Ashok Kumar has been treated as the benami of the assessee is neither coming out from the impugned order of the AO nor from the assessment records examined by him. Ld. CIT(A) held that there was no basis for the AO to conclude that as per the seized documents the amount credited in the bank account of Sh. Ashok Kumar was to be treated as benami of the assessee. Accordingly, Ld. CIT(A) deleted the addition of Rs. 8,56,931/-.

II. Deletion of Addition of Rs. 6,40,896/-

3.2 On this issue AO made the addition of Rs. 6,40,896/- on account of alleged stocks which was worked out on the basis of figures of purchase and sales returned by the assessee and the cost of furniture and fixture and cash in hand. The AO on this issue in his original order has observed that as per show cause notice dated 23.3.2001 closing stock as on 31.12.1998 was worked at Rs. 11,86,544/- and net investible capital available with the assessee for the purchase of stock was Rs. 5,45,648/-. Thus, AO held that unexplained closing stock as on 31.12.1998 remains at Rs. 6,40,896/-. This was held to be unexplained income for the block period. The basis of making the above additions as submitted by the Ld. Counsel of the assessee to the Ld. CIT(A) were as under:—

“The basis for making addition is given in show cause notice dated 23.3.2001 according to which purchases shown by the assessee upto 31.12.98 was Rs. 23,84,524/- whereas the sales were shown at Rs. 1197980/-. Thus according to AO there was closing stock of Rs. 1186544/-. As per the Ld. AO after reducing the cost of furniture and fixture of Rs. 252240/- and estimated cash in hand of Rs. 1 lakh balance capital value for investment in purchase of stock comes to Rs. 545648/-. Since closing stock of was Rs. 1186544/-, a sum of Rs. 640986/- remain unexplainedasperthe working of the Ld. AO.

It was further submitted before the Ld. CIT(A) that AO has not supplied the assessee information and material collected from Sales Tax Department which was requested to him. It was submitted that AO has wrongly presumed that entire purchases of Rs. 2384524/- is paid stock. That cash and bank balance has been estimated without any basis to Rs. 1 lakh. It was further submitted that as per the AO the furniture was of Rs. 2,52,240/- whereas as per balance sheet as on 8.8.98 it was of Rs. 25240/-. Considering the above, Ld. CIT(A) held that the entire exercise of the AO in concluding the investment in excess stock was based on surmises and conjectures and was not supported by the evidence or material on record. Ld. CIT(A) concluded as under:—

“The purchase of the assessee upto 31.12.98 taken at Rs. 23,84,524/- by the AO is not backed up by any evidence. So much so that despite repeated requests by the assessee, as per Para 3 of its letter dated 14.3.2001, the copy of the document furnished to the sales tax department showing these purchases, was never furnished to the assessee. Then again, no basis has been forwarded by the AO for estimating cash in hand at Rs. 1 lac. The AO has also not given credence to the fact that certain purchase may have been made on credit also which is quite normal in this trade. Further, the investment in furniture and fixture has been wrongly taken by the AO at Rs. 2,52,240/- while the same actually was as per the balance sheet submitted at Rs. 25,240/- as evident from the said balance sheet as on 8.8.1998

The total sales of the assessee thus work out to Rs. 35,79,069/- as per calculation below:—

Sales as per regular sales book Rs. 13,22,044/- Sales as per document No. A-7 Rs. 7,37,675/- Sales as per Pad No. 8 Rs. 15,19,350/- Rs. 35,79,069/

The sale/receipts being less than 40 lacs, the provisions of section 44AF get attracted and profits, estimated as per this section at the rate of 5% (which is the maximum prescribed rate under that section), come to Rs. 1,78,953/-, which are directed to be treated as the profits of the assessee from business as against Rs. 10,07,169/- estimated by the AO. Therefore, the addition of Rs. 6,40,896/- on account of unexplained investment in stock is deleted.”

III. Deletion of Addition of Rs. 8,28,216/- made by the AO on account of undisclosed sales.

3.3 On this issue of undisclosed sales, the AO estimated the sale of the assessee as under:—

1. Sales as per regular bill books 13,22,044/- 2. Sales estimated on the basis of sales declared parallel/duplicate sales book (CD No. A-7), 7,09,225/×4 = for 71 days proportionate 288 days during the firm did work. 28,36,500/- 3. Unrecorded cash sales 28.12.98 to 12.3.99 as per slip pad no. 8 for 74 days in respect of which no bill regular or duplicate was issued proportionate sales for 288 days i.e 59,13,145/- cash 59,13,145/- Total GTO 1,00,71,689/- Net profit is estimated at 10% since the assessee making accounted/recorded sales saving on Oct. charges Central Sales Tax and earning of interest by selling of hire purchase system.

Accordingly, business income of Rs. 1,00,71,689/- was estimated.

4. Ld. CIT(A) in this regard considered the issue and held as under:—

“As regards the estimation of sales at Rs. 28,36,500/- by the AO, I hold as follows:—

As per the assessment order, the sales as per parallel sales books, document no. A-7 come to Rs. 7,37,675/-. The AR's contention that document no. A-7 was, in fact, the copies of Performa invoices issued by the assessee to various prospective customers does not hold ground, since there is nothing on the documents prove likewise. In fact, the words cash or bill is clearly mentioned on the document as also the item sold, the date on which it was sold and in some cases, the person also to whom it was sold. The seized document A-7, therefore, is clearly unaccounted sale bills of the assessee and ought to be added to the total sales returned by the assessee. As for estimation/extrapolation resorted to by the AO, thereby calculating the sales for the entire year on the basis of documents seized relating to a small period of time under consideration, the same cannot be resorted to by the AO, in view of the fact that firstly estimation, that too without any basis, cannot be resorted to in the proceedings u/s. 158BC of the I.T Act, 1961. The assessment u/s. 158BC has to be framed strictly on the basis of material found as a result of search. Moreover, the fact that the assessee had commenced business only on 20.5.1998, this being the first year of the working of the firm, the presumption that there ought to have been uniform sales during the year is quite untenable. Therefore, the addition on account of undisclosed sale is restricted to Rs. 7,37,675/- as against Rs. 28,36,500/- estimated by the AO.

As regards sales as per Pad No. 8, I hold that I have gone through the seized document and find that the estimation made by the AO at the total of Rs. 15,19,350/- is correct. The narration in the paid and the figures mentioned against it lead to believe that only 1/100th of the actual sales was mentioned in the pad. As for estimating the sales for 288 days uniformly on the basis of seized data for 74 days, I hold the same as uncalled for on the basis of my discussion in the proceeding paragraphs. Therefore, the amount of sales of Rs. 15,19,350/- is sustained as against the amount of Rs. 59,13,145/- estimated/held by the AO.”

Ld. CIT(A) worked out the total sales of the assessee as under:—

Sales as per regular sales book Rs. 13,22,044/- Sales as per document No. A-7 Rs. 7,37,675/- Sales as per Pad No. 8 Rs. 15,19,350/- Rs. 35,79,069/-

4.1 Ld. CIT(A) further held that the sales/receipts is less than Rs. 40 lacs, the provisions of section 44AF get attracted and profits, estimated as per this section at the rate of 5% comes to Rs. 1,78,953/-. Accordingly, Ld. CIT(A) directed that this sum be treated as profit of the assessee from the business as against Rs. 10,07,169/- estimated by the AO.

5. Against the above order the Revenue is in appeal before us.

6. We have heard both the counsel and perused the records.

6.1 At the outset, Ld. DR submitted that assessee has not filed the statement of facts before the Ld. CIT(A). He observed that this makes the assessee's appeal before the Ld. CIT(A) invalid. Upon careful consideration, we find that Ld. CIT(A) in his appellate order has not taken any such ground that assessee's appeal was not maintainable on the ground that the statement of facts was not there. We find that before us no such ground has also been raised by the Revenue that assessee's appeal before the CIT(A) was not maintainable. In these circumstances, we are of the considered opinion that the objections raised by the Ld. DR is devoid of cogency. Hence, the same is dismissed as such.

7. As regards issue of deletion of addition of Rs. 8,56,931/-.

We agree with the Ld. CIT(A) that there is no basis for the AO to treat the amount credited in the bank account of Sh. Ashok Kumar as the benami transaction. AO in his order has mentioned that as per the seized documents it is clearly established that the said sum credited in the bank account of Sh. Ashok Kumar pertains to assessee's firm, but the AO has not at all deal with the nature of the seized material and what was the content thereof. Ld. CIT(A) has given a finding that, how Sh. Ashok Kumar has been treated as the benami of the assessee is neither coming out from the impugned order of the AO nor from the assessment records examined by Ld. CIT(A). Under the circumstances, we are of the considered opinion, that there is no infirmity in the order of the Ld. CIT(A) in this regard. Ld. DR's contention that since in the order under section 263, Ld. CIT has referred to this addition and the AO was bound to make the addition cannot be said to be a ground for sustaining the order of the AO. Another plea of the Ld. DR is that Ld. CIT should have refrained from reversing the order of the AO in this respect as in the order under section 263, the Ld. CIT who is an officer of the equivalent rank has given a finding that the said sum was benami transaction of the assessee. We find that these submissions do not serve any purpose as neither in the order of the Ld. CIT u/s. 263 nor in the assessment order any material is there to show that the impugned sum credited in the bank account of Sh. Ashok Kumar was the benami transaction of the assessee firm. Ld. CIT(A) has every right to adjudicate upon the order of the AO appealed before him judiciously. In these circumstances, we do not find any infirmity in the order of the Ld. CIT(A). Accordingly, we affirm the same.

8. As regards the second issue regarding deletion of addition of Rs. 6,40,896/-.

In this regard, we note that AO has made the addition claiming that the same was worked out on the basis of figures of purchase and sale returned by the assessee and the cost of furniture and fixtures and cash in hand of the assessee. However, Ld. CIT(A) has given a finding that the above addition was based on surmises and conjectures and was not at all supported by the evidences or the material on record. We agree with this finding of the Ld. CIT(A); AO's order does not cogently prove that addition of Rs. 6,40,896/- is warranted for amount of alleged unexplained stock. In these circumstances, we do not find any infirmity in the order of the Ld. CIT(A), accordingly, we uphold the same.

9. As regards the last issue regarding deletion of addition of Rs. 8,28,216/-.

We find that AO has made the addition by estimating the net profit @ 10% on the basis of figures of sales culled out by him at Rs. 1,00,71,689/-. Ld. CIT(A) has examined the addition and estimation of sales by the AO after duly elaborating upon the issues. Ld. CIT(A) has given a finding that the estimate of sales as computed by the AO is not supported by cogent basis. Ld. CIT(A) has finally computed the total sales figures of the assessee at the figures of Rs. 35,79,069/-. Thereafter, Ld. CIT(A) has applied 5% rate of profit. In our considered opinion, the order of the Ld. CIT(A) is a cogent order and the same does not need any interference on our part. Accordingly, we uphold the same.

10. In the result, the Appeal filed by the Revenue stands dismissed.

Asstt. Commissioner ... v. M/S. Sabharwal Inter...