L. Suryakantham Visakhapatnam v. Acit, Circle-2, Visakhapatnam .

These cross appeals filed by the two different assessees as well as revenue are directed against the separate, but identical orders of CIT(A)-1, Hyderabad for the assessment years 2004-05 to 2010-11. Since, the facts are identical and issues are common, they are clubbed, heard together and disposed off, by way of this common order for the sake of convenience.

2. The brief facts of the case extracted from ITA No. 309/Vizag/2012 are that the assessee Sri L.G. Trinadha Rao is deriving income from contracts through its proprietary concerns M/s. Ultra Dimensions. The assessee executes works contracts for Defense organizations, such as Ship Building Centre, Visakhapatnam, DGNP, Visakhapatnam, etc. There was a search action u/s 132 of the Income-Tax, 1961 (hereinafter called as ‘the Act’) on 14.7.2009 in the residential and business premises of the assessee. Pursuant to search, the case was centralized with Central Circle-2, Visakhapatnam. Accordingly, notice u/s 153A/153C of the Act was issued calling for the return of income for the assessment years 2004-05 to 2010-11. In response to notice u/s 153A of the Act, the assessee has filed his return of income on 23.3.2011. The case has been selected for scrutiny and accordingly, notice u/s 143(2) & 142(1) of the Act along with detailed questionnaire were issued. In response to notices, the authorized representative of the assessee appeared from time to time and furnished the information called for, however, failed to produce any books of accounts and relevant vouchers.

3. During the course of search proceedings, certain incriminating documents seized reveals that the assessee has inflated 10% labour expense for the assessment year 2008-09 & 2009-10. When these documents were confronted to the assessee while recording a statement u/s 132(4) of the Act, the assessee admitted that the statement's found reffered to the labour, fabrication and welding payments incurred for the period and also represents the actual payment made and inflated expenditure, under each head of expenditure. The assessee further agreed that he has inflated 10% under the head labour payments which he was utilized for investments in unaccounted assets and cash seized during the course of search. With this background, during the course of assessment proceedings, the A.O. asked the assessee to furnish books of accounts and other relevant documents in support of the expenditure claimed. During the course of assessment proceedings, the assessee could not produce any books of accounts and also stated that no books of accounts were available and hence, the same cannot be furnished. However, other information called for was produced. After examining the information so produced, the A.O. has issued a show cause notice and asked to explain in the absence of books of accounts and other details the expenditure claimed shall not be disallowed.

4. In response to show cause notice, the assessee filed his written submission dated 20.12.2011 and submitted that there was no incriminating material seized during the course of search and as such no additions can be made u/s 153A of the Act. It is also stated by the assessee that the incriminating material found and seized during the course of search relating to assessment year 2008-09 & 2009-10, in respect of which disclosure of additional income was made while recording the statement u/s 132(4) of the Act. The assessee further submitted that u/s 153A of the Act, de-novo assessment can be made only in respect of the assessment years for which the assessment proceedings had abated and that in respect of assessment years for which the assessments had already reached the finality, such assessments could not be made u/s 153A of the Act. In other words, the assessee submitted that in the case of assessments, which are abated, the A.O. has jurisdiction to assess or re-assess the total income of those assessment years and in respect of completed assessments, the A.O. has no jurisdiction to re-assess the total income unless there was a seized material. The assessee further submitted that in respect of assessment year 2004-05 to 2007-08, the assessment has been completed and no proceedings were pending before any authorities. The time limit for issue of notice u/s 143(2) of the Act has been expired. Therefore, for these assessment years, the A.O. has no jurisdiction to tinker with the assessment. Similarly, in respect of proposed rejection of books of accounts and estimation of net profit from the business, the assessee submitted that he is into the business of execution of contracts for defence organizations and the net profit from his business is varies from 6 to 8 % which is evident from the previous financial results. Therefore, the proposed action of estimation of net profit of 15% and 10% in respect of contract receipts and trading results is quite high. The assessee further submitted that during the course of search proceedings, he has admitted additional income towards disallowance of 10% labour charges and accordingly disclosed additional income agreed before the search proceedings and paid the taxes. Therefore, the A.O. was not correct in proposed estimation of net profit by rejection of books of accounts.

5. The A.O. after considering the assessee's submissions and also relevant facts available on record, held that there is no limitation or restriction provided in the new procedure of search assessment on the powers of the A.O. for making the assessment/re-assessment and the A.O. is not required to confine his assessment on the material found during the course of search, as was the case in the old procedure of block assessment. The A.O. further held that from the bare reading of the section 153A of the Act and the Board circular no. 7 of 2003 dated 5.9.2003, it is abundantly clear that provisions of section 153A of the Act were introduced to overcome the controversies raised in the old procedure of block assessment with regard to the meaning of undisclosed income and income relatable to material found during the course of search, etc. The present procedure provides that the completed assessment would be resurfaced and the pending assessment or reassessment relating to any assessment year falling within the period of 6 assessment years shall stand abated and reopened. The assessments or the reassessments of all those 6 years, whether completed or abated will be made in accordance with the provisions of section 153A of the Act. Such reopening of completed reassessment u/s 153A of the Act is automatic on the initiation of search and the A.O. is not required as per law to record any reasons that income has escaped assessment. In support of his arguments, he relied upon the judgement of Hon'ble A.P. High Court, in the case of SBH reported in 171 ITR 232. The A.O. has further relied upon the decision of ITAT, Delhi Bench in the case of Shivnath Rai Harnarain (India) Ltd. v. DCIT, (2008) 304 ITR 271 and also Ms. Shyam Latha Kaushik (2008) 306 ITR 117. With these observations, the A.O. has rejected the contention of the assessee that the A.O. has no jurisdiction to reassess the income of completed assessment years unless there was a seized material.

6. The A.O. further held that the assessee has failed to produce books of accounts and other relevant details such as bills & vouchers in respect of expenditure debited in the profit & loss account for all the assessment years. The assessee has claimed huge expenditure under various heads of expenditure such as cost of material, binding charges, AMC expenditure, fabrication and labour charges and sub contract payments, however, failed to substantiate the relevant expenditure with supporting evidences. The A.O. further observed that during the course of search proceedings, the department has gathered information which reveals that the assessee has inflated 10% labour expenditure, which was accepted by the assessee and disclosed additional income before the search party. Therefore, it is very clear that the assessee is habitual of not maintaining any regular books of accounts and also vouchers in support of the expenditure debited in the P & L account. Considering the inability of the assessee to furnish the books of accounts and also the various information called for, it was opined that the book results admitted by the assessee in his returns is not susceptible to verification and as such are not reliable. The A.O. further held that the assessee is duty bound to produce the full details of expenses and all the evidences called for in the course of assessment proceedings, so as to enable the assessing officer to reasonably compute the profit. Since, the assessee has failed to produce books of accounts and other relevant details, rejected the financial results and resorted to estimation of net profit. The A.O. after considering the relevant details available on record estimated the net profit of 10%, in respect of trading business and 15% in respect of gross contract receipts net of all permissible deductions under the Income Tax Act. While doing so, the A.O. has relied upon the decision of Hon'ble A.P. High Court, in the case of Indwell Constructions v. Commissioner Of Income-Tax. reported in 232 ITR 776. Similarly, during the course of assessment proceedings, the A.O. noticed that the assessee has shown income from other sources being miscellaneous receipts, interest on deposits, foreign exchange gain and other miscellaneous receipts. Therefore, the A.O. has made separate additions towards income from other sources, in addition to the estimation of net profit from the business.

7. Aggrieved by the assessment order, the assessee preferred an appeal before the CIT(A). Before the CIT(A), the assessee submitted that the assessment order passed by the A.O. u/s 143(3) r.w.s. 153A of the Act is bad in law, as the same said to have been passed u/s 144 r.w.s. 153A of the Act. The assessee further submitted that the assessing officer is not at all correct in making additions to the returned income as the assessment for the assessment year 2004-05 to 2007-08 is not pending as on the date of search, consequently not abated. More so, the materials relevant to these assessment years have not been found during the course of search. The assessee further submitted that the assessment order passed by the A.O. is void-ab-initio, for the reason that the Additional Commissioner of Income Tax has not afforded the assessee an opportunity of hearing before according approval, which is totally in violation of the principles of natural justice. The assessee further submitted that for the assessment year 2004-05 to 2007-08, there is no material found in the course of search operations so as to attract the provisions of section 153A of the Act. The law mandates the assessing officer to make additions only on the basis of material found during the course of search. Since, there was no seized materials found during the course of search, the A.O. has no jurisdiction to assess or reassess the income of completed assessment, which was not pending as on the date of search. In support of his arguments relied upon plethora of judgements and also the ITAT, Special Bench decision in the case of All Cargo Global Logistics Ltd. v. DCIT, (2012) 33 CCH 294.

8. As regards the estimation of net profit from the business, the assessee submitted that the A.O. is not correct in estimating the income at a very high percentage of 10% of the turnover in respect of trading activity and 15% in respect of contract receipts, without disclosing the basis for arriving at the same and also without disclosing any comparable cases. The assessee further submitted that he is into the business of trading in machinery spare parts and the net profit margin in this line of business is varies from 3 to 5%. As against this, the A.O. has adopted net profit of 10% arbitrarily for all the assessment years without any basis. Similarly, the A.O. has adopted 15% uniform net profit for all the 6 assessment years in respect of contract receipts without any basis. The assessee further submitted that he is into the business of execution of works contract for defence organizations and the profit element in this contract is very less. During the relevant assessment years, he has executed part of works on its own and remaining part was handed over to sub contractors for timely execution of works. In the case of works, where he has allowed other contractors to work, the normal net profit percentage is 4 to 6%. The A.O. without considering all these facts, simply applied 15% uniform net profit on total turnover for all the years.

9. Similarly, it was submitted that the A.O. was erred in making separate additions towards income from other sources, being interest on fixed deposits, miscellaneous income and foreign exchange gain, when the income from the business is estimated on the gross receipts. The assessee further submitted that the interest was earned on the fixed deposits kept in the bank towards bank guarantee. Therefore, the interest earned on fixed deposit should be considered as part of business receipts and no separate additions can be made under the head income from other sources. As regards the foreign exchange gain, the assessee submitted that the foreign exchange gain arises because of fluctuation in foreign currency in the course of import of machinery spare parts. Therefore, it is essentially a part of business operations, therefore, the A.O. was not correct in making separate additions towards these items, when profit is estimated on the gross receipts.

10. The CIT(A) after considering the submissions of the assessee, rejected the legal ground raised by the assessee by holding that there is no such provisions in the Act for the A.O. to confine his reassessment only for the abated assessments and not for the pending assessments. The CIT(A) further held that the assessment for the assessment years 2004-05 to 2007-08 were completed u/s 143(1) of the Act and no regular scrutiny assessment took place before the date of search. For the first time, the scrutiny assessment proceedings have been initiated after search action u/s 132 of the Act. It is an undisputed fact that the assessee could not produce any books of accounts as well as verifiable vouchers at the time of assessment proceedings. It was also an undisputed fact that during the course of search proceedings, for the A.Y. 2008-09 & 2009-10 the department has found inflation of labour expenditure which was accepted by the assessee. Therefore, the contention of the assessee that no material was found in respect of business of the assessee for the above assessment years fails. Besides, the assessee himself has admitted the inflation of labour expenditure and disclosed additional income and further followed by furnishing returns of income. Hence, there is a clear under statement of income particulars relating to the business in the normal course and only after search, the fact of inflation brought in to light. Initiation of action u/s 153 of the Act is a mandatory provision, which does not allow any discretion to the assessing authority. After initiation of such assessment proceedings, the assessing officer is free to examine the facts of the case for the purpose of computing the true income of the assessee. In all these 6 years, there is no original scrutiny assessment completed. Therefore, the A.O. is not forced to confine himself to the material found during the course of search. In the absence of application of mind, the A.O. is free to examine the case afresh. With these observations, the legal ground raised by the assessee has been dismissed.

11. As regards the estimation of net profit from the business, the CIT(A) held that the assessee has failed to produce books of accounts and relevant vouchers in support of financial results declared in the return of income. When assessee has been asked to furnish comparable cases, he could not produce any comparable cases so as to compare the net profit declared from his business. In the absence of specific details and comparisons, there is no other alternative except to go by the normal results obtained in the various spare parts trade business. The assessee does not produced any information about the purchase and sale as well as expenses incurred in the trading business. It is very difficult to accept the contention as well as the profit disclosed by the assessee in the return. The facts of the case deserve estimation of net profit on reasonable basis. Accordingly, the CIT(A) has directed the assessing officer to estimate the net profit of 10% on trading business for the assessment years under appeal i.e. for the assessment year 2004-05, 2005-06, 2007-08 & 2009-10. However, the commission income of Rs. 2,03,780/- for the assessment year 2004-05 and Rs. 84,195/- for the assessment year 2007-08 require to be deleted from the total income, as the same cannot be assessed again after estimating the net profit.

12. As far as contract receipts are concerned, the CIT(A) held that the assessee was subject to survey u/s 133A of the Act for the assessment year 2006-07. During survey, the department has noticed the inflation of labour expenses and assessee has accepted additional income of Rs. 63.12 lakhs for the assessment year 2006-07. Even in the action u/s 132 of the Act, the department has found document reflecting the inflation of labour expenditure. The assessee has admitted the fact of inflation of labour expenses in respect of contract works. It is an undisputed fact that the assessee never produced books of accounts not only for the assessment year under appeal but also for the assessment year 2006-07. The assessee could not adduce proper evidences to substantiate various claims made in the return. Though he has vehemently objected to the estimation of income of 15%, he is unable to produce any comparable cases. It is the case where estimation is the only solution to arrive at the total income of the assessee on contract receipts. The assessee is engaged in the business of execution of works contract for defence organizations. It is very difficult to get comparisons, accordingly, the A.O. has asked assessee to furnish comparable cases in support of its contention. However, the assessee has failed to furnish any comparable cases. On the other hand, the A.O. has brought on record two comparable cases, wherein the net profit from similar business is between 15 to 26%. Therefore, the A.O. has adopted minimum 15% net profit by taking into account the one such comparable case. Since, assessee could not produce any suitable comparables and also failed to produce books of accounts, the A.O. was right in estimating the net profit. Further as contested by the assessee, the A.O. has estimated 15% net profit which is on the higher side. As discussed in the previous paragraphs, for the assessment year 2006-07, the assessee has admitted additional income towards inflation of labour expenses. The net profit declared for the A.Y. 2006-07 after additional income works out to 12.3%. In the absence of independent comparables, it is always preferable to take own comparison of other years. Accordingly, the net profit on contract receipts is required to be estimated at 12.3% on gross contract receipts, which gives reasonable profits which meets the ends of justice. Therefore, the A.O. is directed to estimate net profit of 12.3% on contract receipts for the assessment year 2004-05, 2005-06, 2007-08 & 2009-10.

13. The CIT(A) further held that as far as the assessment year 2010-11 is concerned, the assessee, at the time of search, has disclosed sum of Rs. 1.5 crores towards inflation of labour charges. The said disclosure was given on the expected turnover of Rs. 40 crores. However, at the end of the year, the assessee could achieve the turnover of Rs. 25.75 crores only and incurred labour expenditure of Rs. 3,64,83,127/-. Although, there is a merit in the contention of the assessee about excess disclosure of income towards inflation of labour payments, the same cannot be entertained in view of the fact that the assessee consciously disclosed additional income at the time of search and the same was reiterated by filing returns of income. Having filed the return of income disclosing the income admitted in his statement, the assessee cannot plead for reversal of such disclosure of income. With these observations, the CIT(A) has rejected the contention of the assessee for proportionate reduction of additional income admitted during the course of search and directed the A.O. to accept the return of income filed by the assessee in response to notice u/s 153A of the Act. Therefore, the action of the A.O. in estimating 15% on the total turnover is rejected and the business profit admitted by the assessee is directed to be accepted.

14. As regards the separate additions towards income from other sources being interest income, miscellaneous receipts and foreign exchange gain, the CIT(A) held that the action of the A.O. is proper and does not require to be interfering due to the fact that the interest earned on fixed deposits was on account of other activity incidental to the main activity of the business of the assessee. Accordingly, the action of the A.O. in treating these items such as interest on bank fixed deposits, rental income, NSRO receipts, foreign exchange gain and other miscellaneous receipts as separate addition is sustained in total without any exclusive. As regards the claim of depreciation on assets, the CIT(A) upheld the action of the A.O. and held that in the absence of credible evidence, the claim of the assessee in respect of depreciation cannot be entertained. Similarly, as regards the charging of interest u/s 234A & 234B of the Act, the CIT(A) held that these sections are mandatory as well as consequential in nature. There is no discretion available to the A.O. for levy/non-levy of the interest under these sections, therefore, directed the A.O. to modify the charging of interest consequential to relief given on the main issues. Aggrieved by the CIT(A) order, the assessee as well as revenue are in appeal before us.

15. The assessee has raised common grounds for all the six assessment years. From these grounds, the assessee has agitated five main issues i.e. the validity of assessment proceeding, estimation of net profit, denial of deductions towards depreciation and separate additions towards interest and other income under the head income from other sources and levy of interest u/s 234A & 234B of the Act. Similarly, the revenue has raised common grounds for all the six assessment years and the only issue challenged from these grounds of appeal is lowering the estimation of net profit by the CIT(A). The assessee has challenged the validity of assessment orders by way of ground nos. 1 & 2 and also additional ground for the reason that the A.O. has passed assessment order without furnishing seized documents. The A.O. has passed assessment order u/s 143(3) r.w.s. 153A/153C of the Act, whereas the A.O. ought to have passed the assessment order u/s 144 r.w.s. 153A of the Act. The assessee further challenged the assessment order on the ground that the Additional Commissioner has accorded approval u/s 153D of the Act to the assessment order without giving assessee an opportunity, which vitiated assessment order and also bad in law. But, during the course of hearing, the Ld. A.R. of the assessee submitted that he did not press ground nos. 1 & 2 and additional grounds, challenging the validity of assessment proceedings. Therefore, ground nos. 1 & 2 and additional grounds are dismissed as not pressed for all the assessment years.

16. The next issue came up for our consideration is additions to returned income, where the assessments are not pending as on the date of search. The assessee raised a common ground for all the assessment years, except for the assessment year 2008-09 and agitated the additions made by the A.O. to the returned income, where assessments are not pending and there was no seized materials and also in the cases of abated assessments where no seized materials are available. The Ld. A.R. submitted that for the assessment year 2004-05, 2005-06 & 2007-08, the assessments for those years as on the date of search was not pending. The assessee case was subject to search on 14.7.2009 and as on the date of search, the assessment for the assessment year 2004-05 to 2007-08 are not pending and the time limit for issue of notice u/s 143(2) of the Act has been expired. Therefore, when the assessments are not pending, no additions can be made for the returned income without any seized materials. The department could not found any seized documents to show that there is unaccounted income, assets or money for those assessment years. In the absence of incriminating documents, the return filed by the assessee, which is not pending as on the date of search cannot be tinkered. There is no material found during the course of search and seizure so as to attract the provisions of section 153A of the Act and making arbitrary additions. The law mandates the A.O. to make additions only on the basis of material found during the course of search. In the case of assessee, there is no material found warranting the A.O. to make such arbitrary additions by estimating the income.

17. The Ld. A.R. further submitted that though the amended provisions of new search assessments warrants A.O. to assess or reassess total income of the assessee for a period of six years immediately preceding the year in which search conducted, it is mandatory on the part of the A.O. to reassess the income of completed assessments, only on the basis of material found during the course of search. Unless there is a seized materials, the completed assessments cannot be disturbed. The Ld. A.R. further submitted that the law is very clear that in the cases, where the return of income has been filed by the assessee, whether intimation u/s 143(1) of the Act or assessment u/s 143(3) of the Act was passed or not and the time limit for issue of notice u/s 143(2) of the Act has been expired, then the A.O. losses jurisdiction to verify the return of income as the assessment was not pending and hence, there would be no abatement of any proceedings. Therefore, the A.O. was not correct in making additions to the returned income for the assessment year 2004-05, 2005-06 & 2007-08 in the absence of any seized materials.

18. The Ld. D.R. on the other hand, submitted that the A.O. was correct in making additions to the returned income, as there was a seized material found during the course of search which indicates the inflation of labour expenditure and also unaccounted investment in properties. The Ld. D.R. further submitted that in those assessment years which are under appeal, no regular scrutiny assessment was made before the date of search. It is also an undisputed fact that the assessee could not produce any books of accounts and supporting vouchers for expenditure claimed in the profit & loss account. It is also a fact that in the course of search proceedings, the documents found reveals that the assessee has inflated 10% labour charges for the assessment year 2008-09 & 2009-10. The Ld. D.R. further submitted that the assessee himself has admitted inflation of labour expenditure and disclosed additional income and further followed by furnishing return of income declaring higher income. Therefore, there was a clear under statement of income from business which was invested in the form of landed property and also kept in the form of unaccounted cash which was seized during the course of search. Hence, the assessee cannot claim that there was no seized material so as to reassess the income of those assessment years. The Ld. D.R. further submitted that section 153A of the Act is a mandatory provision, which does not allow any discretion to the assessing officer. The A.O., after search has to reopen the assessment of all the six years and free to examine the facts of the case for the purpose of computing the true income of the assessee. In all those six years, there is no scrutiny assessment. Therefore, the A.O. is not forced to confine himself to the material found in the course of search. In the absence of application of mind on the original returns, the A.O. is free to examine the facts afresh. Therefore, requested to uphold the order of the CIT(A).

19. We have heard both the parties, perused the materials available on record and gone through the orders of the authorities below. The factual matrix of the case is that there was a search action u/s 132 of the Act. During the course of search, incriminating documents found reveals that the assessee has inflated labour charges for the assessment years 2008-09 & 2009-10. Based on the documents found during search, the assessee has accepted that he has inflated 10% labour charges and which is common in this line of business. Consequent to search action u/s 132 of the Act, the assessee case has been centralized and accordingly fresh assessment proceedings have been initiated by issuing notice u/s 153A/153C of the Act for the six assessment years immediately preceding the assessment year in which search was conducted. The assessee has filed revised returns in response to notice u/s 153A of the Act and admitted the additional income disclosed during the course of search. The case has been selected for scrutiny. During the course of assessment proceedings, the assessee was asked to produce books of accounts and relevant bills & vouchers in support of expenditure claimed. In response, the assessee filed written submission and stated that the books of accounts are not available and hence cannot be furnished. Therefore, the A.O. issued a show cause notice and asked to explain why the net profit from the business shall not be estimated. In response to show cause notice, the assessee has filed a written reply and contended that the income for the assessment year 2004-05, 2005-06 and 2007-08 cannot be tinkered with, as there was no incriminating material found during the course of search for the above assessment years and as such no additions can be made to the returned income. It is further submitted that as per sec. 153A of the Act, denovo assessment can be made only in respect of the assessment year for which the assessment proceedings had been abated and that in respect of assessment years for which the assessment had already been reached a finality, such assessment could not be made u/s 153A of the Act unless there was seized materials.

20. The A.O. has passed reassessment orders u/s 153A/153C of the Act for all the six assessment years immediately preceding the year in which search was conducted. According to the A.O., as per the provisions of section 153A of the Act, there is no limitation or restriction provided in the new procedure of search assessments on the powers of A.O. for making assessment/reassessment and the A.O. is not required to confine his assessments on the material found during the course of search as was the case in the old procedure of block assessments. The new procedure of block assessment was explained by way of provisions of section 153A of the Act. As per section 153A of the Act, the A.O. shall assess or reassess the total income of the specified six assessment years irrespective of the fact that the assessment of the said years were completed or pending as on the date of search. Therefore, the A.O. has reassessed the income of six assessment years and recomputed the profits afresh after considering the relevant facts available on record. It was the contention of the assessee that the A.O. cannot disturb the completed assessments unless there was a seized material. The assessee further contended that where assessments are not pending as on the date of search and time limit for issue of notices u/s 143(2) of the Act has been expired, irrespective of the fact that those assessments have been completed u/s 143(1) or 143(3) of the Act, then the A.O. has no power to reassess the income of those completed assessment years.

21. We find force in the arguments of the assessee for the reason that the issue no longer res integra, as the issue has been already decided by the ITAT, special bench and held that where the assessments are not pending as on the date of search, the A.O. losses jurisdiction u/s 153A of the Act to reassess the income of those completed assessments. Though the provisions of section 153A of the Act does not specify abated and completed assessments, the natural meaning assigned to it should be given to interpret the provisions in such a way that which shall not cause undue hardship to the tax payers. The provisions of section 153A of the Act explained the procedure of assessments, abated assessments and the manner in which the assessment should be framed, which was further supported by circular no. 7 of 2003 issued by the CBDT. When the law has explained the position of abated assessments, then the same way the completed assessment should be treated so as to understand that those assessments are reached finality and which cannot be tinkered with unless there was a seized document. Therefore, we are of the considered opinion that where search is initiated, all pending assessments are merge into one and only one assessment for each assessment year shall be made separately on the basis of findings of search and other material existing or brought on record by the A.O. In respect of non abated or completed assessments, the assessment will be made on the basis of books of accounts or other relevant documents found during the course of search, but not produced in the course of original assessment.

22. In the present case on hand, on perusal of the document available on record, we find that the assessment for the assessment year 2004-05 to 2007-08 were not pending as on the date of search. The fact that the assessment has been completed u/s 143(1) & 143(3) of the Act are not material. The time limit for issue of notice u/s 143(2) of the Act has been expired. On further verification of the documents available on record, we find that there was no incriminating documents found during the course of search in respect of assessment year 2004-05 to 2007-08. Therefore, we are of the opinion that the A.O. was not correct in reassessing the total income of the assessment year 2004-05 to 2007-08 in the absence of any seized materials. Accordingly, we direct the A.O. to delete the additions made for the assessment year 2004-05, 2005-06 & 2007-08.

23. It is pertinent to discuss herein the case laws relied upon by the assessee. The assessee has relied upon the ITAT, special bench decision in the case of All Cargo Global Logistics Ltd. v. DCIT, (2012) 137 ITD 287. The coordinate bench of this Tribunal, while deciding the issue in favour of the assessee held as under:

“In assessments that are abated, the AO aretains the original jurisdiction as well as jurisdiction conferred on him u/s 153A for which assessments shall be made for each of the six assessment years separately. In other cases, in addition to the income that has already been assessed, the assessment u/s 153A will be made on the basis of incriminating material, which in the context of relevant provisions means—(i) books of account, other documents, found in the course of search but not produced in the course of original assessment, and (ii) undisclosed income or property discovered in the course of search.”

24. The assessee relied upon, A.P. High Court decision in the case of CIT v. AMR India Ltd. in ITTA No. 354 of 2014 dated 12.6.2014. The Hon'ble High Court held that the A.O. has no jurisdiction to re-agitate the assessments which were already completed and subsiding. The relevant portion is extracted below:

“We have heard Sri J.V. Prasad, learned counsel for the appellant, and gone through the impugned judgement and order of the learned Tribunal.

It appears that the learned Tribunal found on fact that after completion of assessment proceedings and after reaching finality thereon, the Assessing Officer tried to reagitate the assessments. According to us, the learned Tribunal has rightly held that the Assessing Officer has no jurisdiction to reagitate the assessments which were already completed and subsisting. We therefore do not find any element of law to be decided in this appeal.

Hence, the appeal is dismissed. There will be no order as to costs.”

25. The assessee has relied upon the coordinate bench decision of ITAT, Visakhapatnam in the case of A.T. Rayudu in ITA No. 373 to 379/Vizag/2014. The coordinate bench, under similar circumstances held the issue in favour of the assessee. The relevant portion is reproduced hereunder:

“22. In this regard, it is also pertinent to refer to the following observations made by the Special bench in the case of All Cargo Global logistics Ltd. (supra):—

“57 (f) In the case of Parashuram Pottery works co. Ltd. v. ITO (106 JTR 57) (SC), it has been mentioned in the last paragraph of the judgment that the court has to bear in mind that the policy of law is that there must be a point of finality in all legal proceedings, that stale issues should not be reactivated beyond a particular stage and that lapse of time must induce repose in and set at rest judicial and quasi judicial controversies as it must in other spheres of human activity. Our decision is in consonance with this observation”.

The decision rendered by the Special bench that the assessing officer can make additions in the case of concluded assessments on the basis of incriminating materials is also based upon the decision rendered by Honble supreme Court in the case of Parashuram Pottery works Co. Ltd. (supra).

23. We have earlier noticed that the Hon'ble jurisdictional Andhra Pradesh High Court has also upheld by the orders passed by the Tribunal by following the decision rendered by the Special bench in the case of All Cargo Global logistics Ltd. (supra) in the following cases:—

(a) Sree Lalitha Constructions (ITTA No 368 of 2014)

(b) M/s. Hyderabad House Pvt Ltd. (ITTA No. 266 of 2013)

(c) M/s. AMR India ltd (FITA No. 357/v/2014)

Further we agree with the contentions of the assessee that the decision rendered by the jurisdictional High Court in the case of Gopal Das Bhadruka (supra) have been rendered on the facts prevailing in those cases, since the issue relating to concluded assessments and pending assessments was not before the Hon'ble Andhra Pradesh High Court On the contrary, the above said three decisions of the jurisdictional High Court comes to the support of the assessee's contentions with regard to the legal proposition agitated before us, besides the decisions rendered by various other High Courts. Accordingly, we are of the view that the scope of enquiry in the case of unabated assessments, i.e., the assessment years in which proceedings are not pending, is that the undisclosed income should be ascertained only on the basis of materials found during the course of search. If no incriminating material showing any undisclosed income was found in the case of concluded proceedings, then the question of making any addition does not arise. in that case, the assessing officer should complete the assessment of those years by determining the very same total income that was assessed in the earlier proceeding.

24. In view of the above, We are unable to agree with the contentions of Ld Standing Counsel that the assessing officer would get unfettered powers in the case of unabated assessments, once they were reopened us 153A of the Act. In our view, in the case of unabated assessments, the total income should be determined by the assessing officer by combining the income already assessed/disclosed in the return of income and the undisclosed income, if any, found during the course of search proceeding. Even otherwise, it is settled proposition of law that the assessee is entitled to take support of the decision in his favour, when two contradictory views have been expressed by the High Courts. In the instant case the Hon'ble jurisdictional High Court comes to the support of the assessee in respect of the legal proposition in addition to the decision rendered by the Hon'ble Bombay High Court. Accordingly, we find merit in the contentions of the assessee on the legal issue.”

26. Considering the facts and circumstances of the case and also respectfully following the coordinate bench decision in the case of All Cargo Logistics Pvt. Ltd. (supra), we are of the opinion that the A.O. has made reassessment u/s 153A/153C of the Act on the basis of information/material available in the return of income, without referring to any seized material. Therefore, following the special bench decision (supra) we hold that the A.O. had no jurisdiction to make additions u/s 153A of the Act for the assessments which are not pending as on the date of search. In this case, the search was conducted on 14.7.2009. The assessment for the assessment years 2004-05 to 2007-08, were not pending as on the date of search. The time limit for issue of notice under sec. 143(2) has been expired. Therefore, the A.O. has no jurisdiction to reassess the income for the assessment year 2004-05 to 2007-08 in the absence of any incriminating materials. Hence, we delete the additions made by the A.O. for the assessment year 2004-05, 2005-06 & 2007-08. Accordingly, the ground raised by the assessee is allowed.

27. The next issue, came up for our consideration is estimation of net profit from the business. The Ld. A.R. submitted that the A.O. is not correct in estimating the income at a very high percentage of 10% on trading business of machinery spare parts and 15% on contract receipts without disclosing the basis for adopting such rate of net profit. The Ld. A.R. further submitted that the A.O. has estimated the income by applying the net profit rate without bringing any comparable cases and also without any basis. The assessee is into the business of trading in machinery spare parts, wherein the net profit margin is between 5 to 6%. Similarly, the net profit margin in the case of execution of work contract is 7% to 8% which is evident from the financial statements filed for the previous years. The A.R. further submitted that the assessee had admitted additional income during the course of search and filed return of income. However, in the rarest of rare case, the department has retracted the statement recorded u/s 132(4) of the Act and estimated the income by rejecting the explanations offered by the assessee. The Ld. A.R. further submitted that the A.O. has totally ignored the fact that the assessee has given sub contract works to various other contractors which runs into several crores of rupees. It is quite common that the net profit margin in the sub contract works is 4% to 6%. Inspite of explaining the facts before the A.O., he has adopted uniform 15% net profit on total contract receipts which is quite high. Therefore, the A.O. has completely erred in adopting 15% net profit for all the years ignoring the facts of the case. The A.R. further submitted that once the assessee has given a statement u/s 132(4) of the Act and admitted the additional income offered during the course of search and paid the taxes, the department ought to have accepted the additional income declared by the assessee. Instead, the A.O. estimated the net profit by stating that the books of accounts are not produced. The Ld. A.R. further submitted that if the above arguments are not accepted, alternatively the net profit from the business should be estimated @ 8% on the total turnover. The Ld. A.R. further submitted that the ITAT, Chandigarh bench in the case of Sri Ashok Kumar v. ITO in ITA No. 340/CHD/2014, under similar circumstances estimated the net profit at 8%, therefore requested to scale down the estimation of net profit from 12.3% to 8%.

28. On the other hand, the Ld. D.R. submitted that the CIT(A) was erred in scaled down the estimation of net profit from 15% to 12.3%, without appreciating the fact that the assessee could not produce any books of accounts and other relevant documents at the time of assessment. The Ld. D.R. further submitted that it is an undisputed fact that the seized materials found during the course of search reveals that the assessee has inflated labour payments. It is also an undisputed fact that the assessee has not produced any books of accounts to substantiate the financial results declared in the return of income. Under these circumstances, the A.O. has left with no option but, to estimate net profit. The Ld. D.R. further argued that the Ld. CIT (A) was erred in considering the net profit declared by the assessee for the assessment year 2006-07 as the basis for estimation for other years. The CIT(A) ignored the basic fact that the assessee has not produced any books of accounts for any assessment years. When the books of accounts are not produced and expenditure is not substantiated with any documentary evidence, the book results declared by the assessee cannot be accepted. Therefore, the CIT(A) was completely erred in adopting the net profit of the assessee for the earlier assessment year to estimate the net profit for all the assessment years. It was further submitted that when specifically asked by the A.O., the assessee could not produce any comparable cases to support his arguments. The A.O. on the other hand, relied upon various comparable cases, wherein he found that under similar cases, the assessee's have disclosed net profit of 15% to 26%. The A.O. after considering the similar comparable cases has adopted minimum net profit of 15% and applied to the assessee's case. Therefore, the A.O. order should be upheld.

29. We have heard both the parties, perused the materials available on record and gone through the orders of the authorities below. The A.O. estimated net profit of 10% on trading turnover and 15% on contract receipts. The A.O. was of the opinion that the assessee could not produced any books of accounts and bills & vouchers in support of financial results, therefore, held that the financial results declared by the assessee cannot be accepted. The A.O. further held that the seized material found during the course of search reveals that the assessee has inflated labour charges. It was further observed that the assessee himself has admitted the inflation during the course of search. Therefore, it is obvious that this practice of inflation of expenditure persist for other expenditure for all the assessment years. Considering the inability of the assessee to furnish books of accounts and vouchers, it was opined that the book results declared by the assessee cannot be relied upon accordingly, estimated the net profit of 10% on trading receipts and 15% on contract receipts. It was the contention of the assessee that the net profit estimated by the A.O. is arbitrary and quite opposite to the facts of the case. The assessee further contended that the net profit in this line of business is 7% to 8% which is evident from the past history of assessee, therefore, the A.O. was not correct in estimating the uniform net profit rate of 10% and 15% respectively for all the assessment years.

30. The A.O. has estimated net profit of 10% on trading receipts and 15% on contract receipts, however failed to disclose the basis on which such estimation was made. The assessee contended that the net profit estimated by the A.O. is quite high, but failed to furnish any comparable cases to justify his case. It is an admitted fact that the assessee could not produce books of accounts and other relevant documents. It is also an admitted fact that the assessee has inflated the labour expenditure, which was admitted by the assessee and further followed by filing the return of income. Estimation is possible in assessments. There is no hard and fast rule for estimation of income, however, there should be a basis for estimation of income either by comparable cases or assessee's own past results. In the present case on hand, both the parties failed to substantiate their stand by bringing on record any comparable cases. The assessee has filed a paper book containing the working of net profit declared in the original return of income filed u/s 139(1) of the Act and revised return of income filed u/s 153A/153C of the Act. On perusal of working results filed by the assessee, we find that the assessee has declared a net profit of 7.43% to 8.56% in the original return of income. The assessee has filed revised return u/s 153A of the Act disclosing additional income declared during the course of search towards inflation of labour charges. The net profit declared by the assessee as per the revised returns works out to 11.36% to 11.45% for the assessment years 2008-09 to 2009-10. The financial results of assessment year 2010-11 cannot be compared for the reason that the additional income was applied on estimation basis. During the course of search proceedings, which was held on 14.7.2009, the assessee has offered an additional income of Rs. 1.5 crores towards inflated labour charges on the assumption that his estimated turnover would be around Rs. 40 crores. However, at the end of the financial year, the assessee could achieve the turnover of Rs. 25.75 crores only. Therefore, the assessee has contended that though he has admitted additional income of Rs. 1.5 crores and filed the return, the net profit percentage of assessment year 2010-11 cannot be compared, as there was a difference in estimated turnover and actual turnover achieved during the relevant financial year. Therefore, we are of the opinion that the financial results for the assessment year 2010-11 cannot be a basis for estimation of net profit for the previous assessment years.

31. The assessee has declared a net profit of 12.3% for the assessment year 2006-07. It was the contention of the assessee that during the assessment year 2006-07, there was inflation of 10% labour charges. During the course of survey proceedings, the assessee has accepted the inflation of labour charges and admitted additional income and filed the returns. The CIT(A) has given his findings that the assessee has admitted 12.3% net profit for the assessment year 2006-07 and based on assessee's own net profit for the assessment year 2006-07, the net profit estimated by the A.O. for the assessment year 2004-05 to 2009-10 has been reduced to 12.3%. The assessee has accepted the estimation of 12.3% net profit for the assessment year 2006-07 by stating that there was a survey operation and during the course of survey, he has accepted the additional income. Based on such findings, the CIT(A) held that it would meet the ends of justice to estimate the net profit of 12.3% for all the assessment years. The assessee requested for 8% net profit on total turnover. In support of his arguments, relied upon coordinate bench decision of ITAT, Chandigarh Bench in the case of Ashok Kumar (supra). Though, the coordinate bench held that 8% net profit is justified, the facts of the case are different. In the case before ITAT, Chandigarh the assessee has reported net profit of 3.17%. In the present case on hand, the assessee himself has admitted a net profit of 11.36% to 11.47%. Therefore, considering the overall facts and circumstances of this case, we are of the opinion that the CIT(A) has rightly estimated the net profit of 10% in respect of trading business and 12.3% in respect of contract receipts by taking into account the net profit declared by the assessee for the assessment year 2006-07. We do not see any error or infirmity in the order passed by the CIT(A) as far as estimation of net profit for assessment year 2008-09 and 2009-10. Hence, we inclined to uphold the order of the CIT(A) and rejected the ground raised by the assessee as well as revenue for the assessment year 2008-09 & 2009-10.

32. Coming to the assessment year 2010-11. The assessee has declared additional income of Rs. 1.5 crores towards inflation of labour charges at the time of search. During the course of search proceedings, while recording the statement u/s 132(4) of the Act, the assessee has stated that he has expected a turnover of Rs. 40 crores for the assessment year 2010-11, based on such estimation admitted additional income of Rs. 1.5 crores. However, at the end of the year, the assessee could achieve the turnover of Rs. 25.75 crores only. Therefore, the assessee contended that though it had admitted additional income of Rs. 1.5 crores, because of substantial difference in turnover which is the basis of offering additional income, the proportionate additional income should be deleted. The CIT(A) held that though there is a merit in the contention of assessee that there is a substantial reduction in the turnover for the relevant assessment year, the proportionate additional income towards inflated labour charges should be deleted, the fact that the assessee has consciously admitted the additional income during the course of search cannot be ignored. Therefore, the CIT(A) held that the assessing officer is not correct in estimating the net profit of 15%. On over all appreciation of facts, such as disclosure of additional income on estimate basis, actual turnover achieved by the assessee, the disclosure made by the assessee is quite reasonable and do not require any interference. Therefore, the action of the A.O. in estimating the 15% on the total turnover is rejected and business profit admitted by the assessee are directed to be accepted. The facts remains before us. The assessee has not brought on record any evidences to prove that the findings of the fact recorded by the CIT(A) is incorrect. The CIT(A) after considering the relevant facts has directed the A.O. to accept the return filed by the assessee. We do not see any error or infirmity in the order passed by the CIT(A). Hence, we inclined to uphold the order passed by the CIT(A) for the assessment year 2010-11 and reject the ground raised by the assessee as well as revenue.

33. The next issue came for our consideration is separate additions towards interest income, miscellaneous receipts and foreign exchange gains etc. The Ld. A.R. submitted that the A.O. was erred in making separate additions towards income from other sources, being interest on fixed deposits, miscellaneous receipts and foreign exchange gains. The Ld. A.R. further submitted that the assessee has kept fixed deposits in bank for the purpose of obtaining bank guarantee to be given to the principals for obtaining the contracts. Therefore, the interest earned from the fixed deposits should be assessed as business receipts for the purpose of estimation of net profit. When the A.O. has estimated the net profit on gross receipts, separate additions towards income from other sources being interest on fixed deposits is not correct. The Ld. A.R. further submitted that the assessee has earned foreign exchange gain towards fluctuation in foreign currency in the course of import of machinery spare parts. These receipts are essentially a part of business receipts. Unless, goods are imported, he would not have earned the foreign exchange gains. Therefore, the A.O. should have treated the foreign exchange gain as part of business for the purpose of estimation of net profit.

34. The Ld. D.R. on the other hand strongly supported the order of the CIT(A). The Ld. D.R. further submitted that though, assessee kept the fixed deposit for the sake of obtaining bank guarantee, still interest received on fixed deposits is only incidental to the business activity, but not the main activity of the assessee. Therefore, interest on bank deposits and other receipts should be assessed as income from other sources, but not under the head income from business.

35. We have heard both the parties and perused the materials available on record. The A.O. has made separate additions towards income from other sources being, interest on fixed deposits, foreign exchange gain and miscellaneous receipts. It was the contention of the assessee that these receipts are part of business and incidental to the business, therefore, should be considered for the purpose of estimation of income. Once the A.O. has estimated the income from the business on gross receipts, separate additions towards income from other sources being interest on fixed deposits and other receipts is not correct. It was the contention of the A.O. that these receipts are not form part of business activity of the assessee. Whether assessee does business or not the interest on fixed deposits are separate receipts which need to be considered under the head income from other sources. We do not see any merits in the arguments of the assessee, for the reason that just because fixed deposits are kept for the purpose of obtaining bank guarantee, the interest earned on such fixed deposits cannot be held as part of business receipts for the purpose of estimation of net profit. Similarly, in respect of miscellaneous receipts, the assessee has not made out any case by on record that these miscellaneous receipts are part of main business activities of the assessee. In the absence of any records, the A.O. has rightly treated the miscellaneous receipts as income from other sources. Therefore, we are of the opinion that the A.O. has rightly treated the interest on fixed deposits and miscellaneous receipts under the head income from other sources.

36. Coming to the foreign exchange gain. The assessee earned foreign exchange gain in the course of import of machinery spare parts. It was the contention of the assessee that foreign exchange gain is earned because of his main business activity of import of machinery spare parts, therefore, should be considered as part of business turnover for the purpose of estimation of net profit. It was the contention of the A.O. that the assessee has not directly involved in any foreign exchange business. The gain or loss on account of fluctuation in foreign exchange rates has nothing to do with the business of the assessee. We do not see any merits in the arguments of the A.O., for the reason that the foreign exchange gain or loss arises in the course of business of the assessee. The assessee is involved in the business of import of machinery spare parts which resulted in foreign exchange gain. As per the principles of accounting, the assessee at his option can either reduce the cost of materials or shown the gain separately in the financial statements. Though, these items are considered as incidental to the activity of the assessee, the foreign exchange gain is essentially a part of business receipts for the purpose of estimation of net profit. Therefore, we are of the opinion that the A.O. was not correct in making separate additions towards foreign exchange gain, when the net profit is estimated on gross receipts. The CIT(A) without appreciating the facts has upheld the order of the A.O. Therefore, we direct the A.O. to delete the additions made towards foreign exchange gain. Accordingly, the ground raised by the assessee is partly allowed.

37. As regards the claim of depreciation on assets for the assessment year 2007-08 to 2010-11, the Ld. A.R. submitted that the A.O. was erred in not allowing separate deductions towards depreciation, when net profit is estimated from the business. It was the contention of the A.O. that the assessee has not produced any evidence substantiating the claim of depreciation on various assets. During the course of appellate proceedings, the assessee could not produce any evidence substantiating the claim of depreciation. The CIT(A) held that in the absence of credible evidences, the claim of the assessee in respect of depreciation cannot be entertained. The facts are same even before us. The assessee has failed to brought on record any evidences to prove that the findings of the fact recorded by the CIT(A) is incorrect. Therefore, we are of the opinion that the CIT(A) is rightly rejected the claim of the assessee. We do not see any error or infirmity in the order passed by the CIT(A) with regard to the deduction of depreciation. Hence, we inclined to uphold the order of the CIT(A) and reject the ground raised by the assessee.

38. The next issue came up for our consideration is charging of interest u/s 234A & 234B of the Act. The Ld. A.R. submitted that the A.O. was erred in charging interest u/s 234A & 234B of the Act, without adjusting the seized cash towards tax liability for the assessment years 2008-09, 2009-10 & 2010-11. The Ld. A.R. further submitted as per section 234B(2) of the Act, the A.O. has to adjust the seized cash towards the tax liability in the order of preference for the existing tax liability and tax on account of additional income. In case there is no existing tax liability, then seized cash should be adjusted for the tax liability of the assessment years in question. The A.O. is bound to adjust the seized cash and compute the interest, but, A.O. has failed to adjust the seized cash for the tax liability and without adjusting the cash has computed the interest which is not correct. The Ld. D.R. on the other hand, strongly supported the order of the CIT(A).

39. We have heard both the parties, perused the materials available on record and gone through the orders of the authorities below. The A.O. has charged interest u/s 234A & 234B of the Act, without adjusting the seized cash found during the course of search. The A.O. was of the opinion that the charging of interest u/s 234A & 234B of the Act is mandatory and consequential in nature. Therefore, there is no discretion for the A.O. to charge interest and accordingly, computed the interest u/s 234A & 234B of the Act as per the provisions of the Act. It was the contention of the assessee that the A.O. should have adjusted the seized cash to the existing tax liability first, then, computes the interest u/s 234A & 234B of the Act. We find force in the arguments of the assessee for the reason that if any cash found and seized during the course of search, it should be adjusted to the existing liability. In case there is no existing tax liability, then the seized cash should be adjusted to the tax liability arises because of search. In the present case on hand, the assessee has requested the A.O. to adjust the seized cash for the tax liability of the assessment year 2008-09 and to 2010-11. The A.O. without adjusting the seized cash, has computed the interest u/s 234A & 234B of the Act. Though, the assessee claims that the A.O. has not adjusted seized cash for the tax liability, the assessee has not furnished any details with regard to the quantum of amount to be adjusted for each assessment years. In the absence of any details, we are of the opinion that the issue needs to be re-examined by the A.O. in the light of the above discussions. Therefore, we set aside the issue to the file of the A.O. and direct the A.O. to examine the issue in the light of the above discussions and re-compute the interest in accordance with law. Accordingly, this ground raised by the assessee allowed for statistical purpose.

40. In the result, the appeals filed by the assessee in ITA Nos. 300 to 311/Vizag/2012 are partly allowed and the appeals filed by the revenue in ITA Nos. 356 to 366/Vizag/2012 are dismissed.