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Smart Summary

Tribunal Summary: M/s. Bhogilal Mulchand Kandoi & Shri K. B. Kandoi — Selected Issues (Search under s.132)

Factual and Procedural Background

The taxpayer is a partnership firm manufacturing and selling sweets (M/s. Bhogilal Mulchand Kandoi). The firm comprised three partners with the following profit‑sharing: Shri Kamleshbhai B. Kandoi (45%), Shri Nitinbhai S. Kandoi (45%) and Shri Sureshbhai S. Kandoi (10%).

Search and seizure action under section 132 of the Income‑tax Act took place on 5‑11‑1992 at the residence‑cum‑shop premises at 26, Suhasnagar Society, Ashram Road, Ahmedabad. Simultaneous survey operations under section 133A were carried out at the firm's shop (Maneck Chowk) and manufacturing place (Golwad, Ratanpole). During continuation of the search on 6‑11‑1992, the statement of partner Shri Kamleshkumar B. Kandoi (Shri K.B. Kandoi) was recorded under section 132(4), in which he disclosed unrecorded income of Rs. 24,00,000 and itemised alleged utilizations of that sum.

The Assessing Officer (AO) added Rs. 24,00,000 to the firm's income on the basis of that disclosure. Shri K.B. Kandoi in his return disclosed additional income of Rs. 6,15,800; the AO assessed that amount on a protective basis (treating it as part of the Rs. 24 lakhs). On appeal, the Commissioner (Appeals) (CIT(A)) reduced the firm addition to Rs. 3,37,700 (being 25% of unrecorded sales of Rs. 13,50,799) and directed that the Rs. 6,15,800 be assessed in the hands of Shri K.B. Kandoi substantively. The Revenue and the assessee filed cross appeals to the Tribunal challenging various aspects of these determinations. Additional proceedings concerned a separate GP estimation dispute for assessment year 1992‑93.

Legal Issues Presented

  1. Whether the addition of Rs. 24,00,000 made by the Assessing Officer to the partnership firm's income—based on the statement recorded under section 132(4) by Shri K.B. Kandoi—was sustainable despite a subsequent retraction (affidavit) by the declarant.
  2. Whether the sum of Rs. 6,15,800 (disclosed by Shri K.B. Kandoi in his return) should be assessed in his personal hands or treated as part of the firm’s undisclosed income already assessed.
  3. Whether an addition on account of low gross profit (GP) computed by the AO (including a specific GP addition of Rs. 7,22,770 and other GP estimations) was justified, and if so at what rate (including the question whether income should be taxed as full unrecorded sales or only net profit thereon).
  4. Whether the CIT(A)'s direction to assess 25% of unrecorded sales (Rs. 3,37,700) should stand in addition to the Rs. 24,00,000 already assessed by the AO.
  5. Relief and consequential directions relating to smaller disallowances (telephone and vehicle expenses) and charging of interest under section 234.
  6. For assessment year 1992‑93: whether the AO's rejection of books and application of a GP rate (24%) producing an addition of Rs. 2,13,941 should be restored or deleted.

Arguments of the Parties

Revenue's Arguments (CIT-DR)

  • The statement recorded from Shri K.B. Kandoi under section 132(4) admitted low gross profit in books and admitted unrecorded sales; cash found at his residence was admitted to be from unrecorded sales.
  • The disclosure was specific and itemised (including utilization of Rs. 24 lakhs) and was supported by loose papers and other material found during the search, hence corroborated and reliable.
  • The retraction (affidavit dated 23‑2‑1993) was an afterthought made months later and did not negate the original voluntary and corroborated disclosure; AO was therefore justified in rejecting the retraction.
  • Relied on precedents (Manharlal Kasturchand Chokshi and Hotel Kiran) to support the view that statements under section 132(4) are important evidence and may be relied upon when corroborated.

Assessee's Arguments

  • The addition of Rs. 24,00,000 to the firm was unjustified; the CIT(A) should have deleted the entire addition rather than sustaining part (Rs. 3,37,700).
  • Shri K.B. Kandoi retracted his statement by affidavit dated 23‑2‑1993, explaining the circumstances of coercion, harassment and persuasion during the search that induced the disclosure; the disclosure was therefore not voluntary.
  • The items identified as investments/utilisations (cash, shares, jewellery, renovation, loans to relatives, etc.) were explainable as personal assets or otherwise not unexplained; in particular Rs. 6,15,800 was disclosed in K.B. Kandoi’s return as his own income.
  • Even if there were unrecorded sales, the correct tax consequence is to compute net profit on such unrecorded sales (apply an appropriate net profit rate) rather than treat the entire sale consideration as income; relied upon various authorities (Ranjanben Shah, Pullangode Rubber, Abdul Quyume, President Industries, S.M. Omer, Gurubachansingh Juneja) to support this principle.

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
Manharlal Kasturchand Chokshi v. Asstt. CIT [1997] 61 ITD 55 (Ahd.) Supports the proposition that statements recorded during search under section 132(4) are important evidence (not necessarily conclusive) and may be relied upon with corroboration. The Tribunal cited this decision as supportive of the proposition that a 132(4) statement is an important piece of evidence and applied it in holding the statement voluntary and corroborated.
Hotel Kiran v. Asstt. CIT [1971] 82 ITR 453 (Pune) Authority regarding evidentiary value of statements given during searches (supporting the weight to be given to such statements when corroborated). The Tribunal relied on this decision along with Manharlal to support reliance on the recorded statement where corroboration existed.
Smt. Ranjanben Mansukhlal Shah v. Asstt. CIT [2004] 83 TTJ (Rajkot) 369 Holds that additions made only on the basis of disclosure statements, without corroboration, are generally unsafe and may be deleted where retraction was accepted due to lack of supporting evidence. The Tribunal distinguished this decision: Ranjanben was applicable where no corroborative material was found at the time of search, but in the present case corroborative loose papers and assets were found, so Ranjanben did not apply.
Pullangode Rubber & Produce Co. Ltd. v. State of Kerala [1973] 91 ITR 18 (SC) An admission is important evidence but not necessarily conclusive; the person making the admission may show it is incorrect and should be given opportunity to do so. The Tribunal noted the principle but observed that facts in Pullangode differed from the present case and used it only as general guidance about admissions not being conclusive.
Abdul Quyume v. CIT [1990] 184 ITR 404 (All.) Holds that an admission/acquiescence based on an erroneous impression of law cannot be the foundation for assessment; taxpayer may demonstrate the income is not taxable. The Tribunal cited the principle but found it inapplicable because the declarant here admitted facts (unrecorded sales, cash, assets) rather than making an admission based on legal misconception.
CIT v. President Industries [2002] 258 ITR 654 (Guj.) In context: High Court refused to admit a s.256(2) application — the court's refusal to entertain s.256(2) was not a decision on merits on the legal issue about applying net profit rates. The Tribunal observed that President Industries did not decide the substantive legal question relied upon by the assessee (i.e., that only net profit should be taxed) and hence could not be treated as an authoritative merit decision for the assessee's contention.
Commissioner of Income-Tax v. S.M. Omer [1993] 201 ITR 608 (Cal.) Held that when goods are supplied after incurring manufacturing expenditure, the receipt may represent gross receipts (including expenditure) and the net profit rate may be applied; section 69 not applicable in that case. The Tribunal distinguished S.M. Omer: that case involved evidence of manufacturing expenditure and therefore justified applying a net profit rate; the facts in the present case were different.
ITO v. Gurubachansingh J. Juneja [1995] 216 ITR 99 (Ahd.) (AT) Authority where the Third Member of the Tribunal directed application of net profit rate on unrecorded sales. The Tribunal noted this authority but held that whether net profit or full sale is taxed depends on facts; in the present case the facts showed unrecorded sales produced cash on hand and recorded expenditures, leading to taxing full unrecorded sales.

Court's Reasoning and Analysis

The Tribunal analysed the evidentiary weight of the statement recorded under section 132(4) and the subsequent retraction. It proceeded step‑by‑step as follows:

  1. Statutory framework and evidentiary principle: section 132(4) authorises examination on oath during search and permits use of such statements in proceedings under the Income‑tax Act. Such statements constitute important evidence though not conclusive; retraction is possible where statement was obtained under coercion/threat/undue influence or was made under mistaken belief, but the burden to establish coercion or mistake lies on the person retracting.
  2. Examination of the recorded answers: the Tribunal reproduced and considered specific question‑answer portions of the recorded statement (questions Nos. 5, 6, 11, 14, 18, 22, 23 and 33–38). The declarant admitted (a) low gross profit in books compared to actual (30–40% admitted), (b) making sales outside books (about 35%), (c) cash of Rs. 3,95,000 found at residence belonging to the firm and derived from unrecorded Diwali sales, and (d) detailed identifications of how Rs. 24 lakhs had been invested or expended.
  3. Corroboration and timing of retraction: the Tribunal found corroborative material (loose papers found at search evidencing sales outside books, unexplained assets, stock, renovation, etc.) which supported the disclosure. The retraction affidavit was filed about three and a half months later; the Tribunal found no direct or circumstantial evidence proving the original statement was obtained by coercion or threat. The delay in retracting and lack of evidential support for coercion weighed against acceptance of the retraction.
  4. Application of precedent: the Tribunal treated authorities showing that statements under section 132(4) are important evidence (Manharlal; Hotel Kiran), and distinguished decisions where retractions were accepted because no corroboration existed (Ranjanben). It also noted that cases applying net profit rates (S.M. Omer; Gurubachansingh) depend on whether relevant expenditure was recorded; where purchases/expenditure are recorded and only sales are not, full unrecorded sales may represent income.
  5. Conclusion on the core factual question: given the admissions in the statement, corroborative material found at search, and the lack of proof of coercion, the Tribunal held the disclosure of Rs. 24,00,000 by Shri K.B. Kandoi to be voluntary and corroborated; the AO’s addition of Rs. 24,00,000 to the firm's income was therefore upheld.
  6. Consequential and related analyses:
    • Because the firm was held to have undisclosed income of Rs. 24,00,000, there was no basis to make a separate substantive addition of Rs. 6,15,800 in the hands of Shri K.B. Kandoi (the protective assessment in his hands was deleted).
    • The GP addition of Rs. 7,22,770 (based on rejecting books and applying 30% GP) was deleted because after holding the Rs. 24 lakhs as undisclosed income the firm’s GP would be much higher (over 50%), leaving no justification for that GP addition.
    • The CIT(A)'s limited addition of Rs. 3,37,700 (25% of certain unrecorded sales) was rendered unnecessary because the Tribunal sustained the larger Rs. 24,00,000 addition; accordingly, the CIT(A)'s direction on that point was effectively superseded.
    • Smaller grounds (telephone and vehicle disallowances) were not pressed and rejected. Interest under section 234 was treated as consequential and the AO was directed to recompute interest after income determination.
    • For assessment year 1992‑93, the Tribunal found the AO's rejection of books and adoption of a GP rate (24%) reasonable in the light of absence of quantitative records, prior year GP history (25% accepted previously) and evidence of sales outside books; it therefore restored the AO's order and reversed CIT(A) on that point.

Holding and Implications

Core holding: The Tribunal upheld the Assessing Officer's addition of Rs. 24,00,000 to the partnership firm's income (made on the basis of the statement recorded under section 132(4) by Shri K.B. Kandoi), finding the disclosure voluntary and corroborated; consequential assessments and deletions were determined as below.

Direct consequences and orders made by the Tribunal:

  • The addition of Rs. 24,00,000 made by the AO to the firm is sustained.
  • No separate substantive addition of Rs. 6,15,800 is required to be made in the hands of Shri K.B. Kandoi—the protective addition in his hands was deleted.
  • The GP addition of Rs. 7,22,770 (assessed by applying a higher GP rate after rejecting books) was deleted because the sustained Rs. 24 lakhs renders any separate GP addition unjustified.
  • The CIT(A)'s direction to add Rs. 3,37,700 (25% of unrecorded sales of Rs. 13,50,799) is unnecessary in view of the sustained Rs. 24,00,000; hence the CIT(A)'s order on that point was effectively superseded.
  • The small disallowances (telephone Rs. 6,000; vehicle Rs. 10,494) were not pressed before the Tribunal and were rejected.
  • Interest under section 234 was to be recalculated by the AO consequential to the Tribunal's determination of income.
  • For assessment year 1992‑93, the Tribunal restored the AO's order applying a GP rate of 24% and allowed the Revenue's appeal on that point.

Outcome of specified appeals as recorded in the opinion:

  • Revenue’s appeal - ITA No. 51/Ahd./97: Partly allowed.
  • Revenue’s appeal - ITA No. 2455/Ahd./99: Allowed.
  • Revenue’s appeal - ITA No. 960/Ahd./97: Allowed.
  • Assessee’s appeal - ITA No. 4780/Ahd./96: Deemed to be partly allowed for statistical purpose.

The Tribunal's conclusions rest on its factual findings (admissions in the 132(4) statement, corroborative material found during search, timing and content of retraction) and application of existing authorities. The opinion does not announce a novel legal principle beyond application of settled rules about evidentiary weight of statements under section 132(4), corroboration, and fact‑sensitive application of net profit versus gross receipt approaches to unrecorded sales.

Show full summary ...

    Deputy Commissioner of Income-tax, Circle-2(1) v. Bhogilal Mulchand

    Per G.D. Agarwal, Accountant Member. - All these appeals are directed against the orders of the CIT(A) for assessment years 1992-93 and 1993-94. They are disposed of by this common order for the sake of convenience.

    2. ITA No. 4780/Ahd./96-for assessment year 1993-94 - By assessee M/s. Bhogilal Mulchand Kandoi and ITA No. 51/Ahd./97 - assessment year 1993-94 - By the Revenue in the case of M/s. Bhogilal Mulchand Kandoi:

    In the assessee’s appeal the following grounds were raised :

    "The following grounds are without prejudice to each other. In view of the facts of the case as well as law. Learned CIT(A) erred :

    (1)In making out new case of addition by applying gross profit rate of 25 per cent upon so-called unaccounted sales of Rs. 13,50,799 thereby making gross profit addition of Rs. 3,37,700 which is a new source of addition not made by the Assessing Officer and no particular show-cause notice was given, hence, prayed that this addition is to be deleted which is decided as per the CIT(A)’s order page 28 para 11.

    (2)In not appreciating the facts that no specific defect has been pointed out in books itself and the appellant has already reconciles Annexure - Assessment order 24 with Annexure - A/51 and as such there is no case of any unaccounted sales nor there is any supporting evidence of unaccounted sales was found, hence, CIT(A) has erred in confirming so-called unaccounted sales of Rs. 13,50,799 for the purpose of making gross profit addition.

    (3)In confirming the disallowance of Rs. 6,000 out of telephone expenditure.

    (4)In confirming disallowance of Rs. 10,494 in respect of vehicle expenditure, inter alia, depreciation. It is said that there is no such personal use as far as the expenditure is concerned and because of the block system introduced, there is no case of any personal use by the partner.

    (5)In not appreciating the facts that the appellant totally denies liabilities to pay interest under section 234 of the Act, and as such he ought to have decided the issue on facts as well as in law, which he fails when he gives consequential direction as per order’s page 35 para 20."

    In the revenue’s appeal the following grounds are raised :

    (1)The ld. CIT(A) has erred in law and on facts in deleting the addition of Rs. 24 lakhs.

    (2)The ld. CIT(A) has erred in law and on facts in holding that a sum of Rs. 6,15,800 out of Rs. 24 lakhs belongs to Shri Kamleshkumar B. Kandoi.

    (3)The ld. CIT(A) has erred in deleting the addition of Rs. 7,22,770.

    (4)The ld. CIT(A) has erred in law and on facts in directing to tax only on Rs. 3,37,700 being 25 per cent profit of unrecorded sales of Rs. 13,50,799 as against addition of Rs. 24 lakhs and further trading addition of Rs. 7,22,770 referred in ground Nos. 1 and 3.

    3. Ground Nos. 1, 2 and 4 of revenue’s appeal and Ground Nos. 1 and 2 of the assessee’s appeal are inter-related. The facts of the case are that the assessee is a partnership Firm which derives income from manufacturing and sale of sweets. The firm is consisting of following partners :

    (i)Shri Kamleshbhai B. Kandoi-45 per cent

    (ii)Shri Nitinbhai S. Kandoi-45 per cent

    (iii)Shri Sureshbhai S. Kandoi-10 per cent

    Action under section 132 of the Income-tax Act, 1961 ("the Act" in short) was conducted on 5-11-1992 at the residence-cum-shop premises at 26, Suhasnagar Society, Ashram Road, Ahmedabad, where Shri Kamleshbhai and Shri Nitinbhai were residing. Simultaneously survey operations under section 133A of the Act were carried out at the shop of the assessee at Maneck Chowk, Ahmedabad and also at manufacturing place at Golwad, Ratanpole, Ahmedabad. During the course of search operations, statement of Shri Kamleshbhai B. Kandoi (Shri K.B. Kandoi) - a partner of the assessee-firm was recorded under section 132(4) of the Act on 6-11-1992. In his statement recorded under section 132(4), Shri K.B. Kandoi disclosed an additional income of Rs. 24 lakhs for taxation. He has also specified the assets acquired and the expenses incurred out of the above income of Rs. 24 lakhs. However, in the return of income the amount of Rs. 24 lakhs which was disclosed under section 132(4) was not shown as income. The Assessing Officer after seeking explanation of the assessee in this regard made an addition of Rs. 24 lakhs. Shri K.B. Kandoi in his return of income has offered an additional income of Rs. 6,15,800 to explain the unexplained cash, bank deposits and investment in shares, etc. However, the Assessing Officer was of the opinion that the above cash, bank deposits, investment in shares, etc., were part of the disclosure of Rs. 24 lakhs by the assessee-firm. Therefore, the Assessing Officer assessed the sum of Rs. 6,15,800 in the hands of Shri K.B. Kandoi on protective basis.

    4. On appeal, the CIT(A) was of the view that in the case of the firm only unrecorded sale of Rs. 13,50,799 was found and therefore 25 per cent of such unrecorded sale, i.e., Rs. 3,37,700 is to be added as against the sum of Rs. 24 lakhs added by the Assessing Officer. He therefore restricted the addition of Rs. 24 lakhs made by the Assessing Officer to Rs. 3,37,700. He has also held that the sum of Rs. 6,15,800 disclosed by Shri K.B. Kandoi should be assessed on substantive basis in his hands. The revenue has challenged the above finding of the CIT(A) vide ground Nos. 1, 2 and 4 of its appeal in the case of the assessee-firm and also by filing separate appeal in the case of Shri K.B. Kandoi. The assessee has also challenged the finding of the CIT(A) with regard to sustenance of addition for unrecorded sales at Rs. 3,37,700 vide Ground Nos. 1 and 2 of the assessee’s appeal.

    5. At the time of hearing before us, the learned CIT-DR argued at length. He submitted that during the course of search the statement of the partner Shri K.B. Kandoi was recorded and he has admitted the low gross profit disclosed in the accounts and also unrecorded sales. He has also admitted that the cash found from his residence is out of unrecorded sale. After admitting the unrecorded sale, he has declared the income of Rs. 24 lakhs as unrecorded income of the assessee-firm for the current year, i.e., the year of search. He has also stated the investment of above undisclosed income of Rs. 24 lakhs. The learned DR contended that the disclosure of the assessee was specific, item-wise disclosure without any coercion or undue pressure. The assessee retracted the above disclosure vide affidavit dated 23-2-1993. However, the retraction was an afterthought and since the disclosure was very specific and based on the material found at the time of search, the Assessing Officer was justified in making the addition on the basis of disclosure and rejecting the retraction by the assessee. He has also stated that apart from the statement of the assessee, the loose papers were found at the time of search which prove the sale outside the books. Thus, the disclosure by the assessee was duly corroborated with the evidence found at the time of search. In support of his contentions, the learned DR has relied upon the following decisions :

    (i) Manharlal Kasturchand Chokshi v. Asstt. CIT [1997] 61 ITD 55 (Ahd.),

    (ii) Hotel Kiran v. Asstt. CIT [1971] 82 ITR 453 (Pune).

    6. On the other hand, the learned counsel for the assessee argued at length and contended that the addition of Rs. 24 lakhs made by the Assessing Officer was not at all justified. He submitted that the CIT(A) ought to have deleted the entire addition of Rs. 24 lakhs, rather than sustaining a part of the addition, i.e., Rs. 3,37,700. He heavily relied upon the retraction made by Shri K.B. Kandoi in the form of affidavit dated 23-2-1993. He pointed out that the affidavit dated 23-2-1993 Shri K.B. Kandoi has explained the circumstances under which the disclosure was extracted from him. In the affidavit he has clarified that he was only looking after the purchase and sale and he did not know the production of sweets. The search has started on 5-11-1992 at about 6.30 in the morning and the statement was concluded on 6-11-1992 at 12.30 noon. Shri K.B. Kandoi was fully fired and he gave the statement as was persuaded by the search party. He has also stated that the search party had stated to Shri K.B. Kandoi that unless the sum of Rs. 24 lakhs is declared, harassment will follow. In the above circumstances the disclosure was made. The learned counsel further submitted that the investment of Rs. 24 lakhs as recorded in reply to question No. 38 is fully explainable. He submitted that some cash, investment in shares and bank accounts which belonged to Shri K.B. Kandoi have been separately disclosed by him in his income-tax return. The gold ornaments belonged to the assessee’s mother and other lady members and there was no unexplained investments in renovation of furniture. There were no unrecorded trade debtors or other debtors as stated by Shri K.B. Kandoi. Therefore, except the cash and investment in shares, there was no unexplained investment. The learned counsel has also vehemently contended that there was no sale outside the books of account and even if there is any sale outside the books of account, then entire sale consideration outside the books is not the income but it is only net profit on such unrecorded sale, which can be added to the total income of the assessee. In support of its contentions, he has relied upon the following decisions:

    (i) Smt. Ranjanben Mansukhlal Shah v. Asstt. CIT [2004] 83 TTJ (Rajkot) 369,

    (ii) Pullangode Rubber & Produce Co. Ltd. v. State of Kerala [1973] 91 ITR 18 (SC),

    (iii) Abdul Quyume v. CIT [1990] 184 ITR 4041 (All.),

    (iv) CIT v. President Industries [2002] 258 ITR 6542 (Guj.),

    (v) Commissioner Of Income-Tax v. S.M Omer. [1993] 201 ITR 6083 (Cal.)

    (vi) ITO v. Gurubachansingh J. Juneja [1995] 216 ITR 99 (Ahd.) (AT).

    7. We have carefully considered the arguments of both the sides and perused the material placed before us. We find that on 5-11-1992 search has taken place at the premises of the assessee at 26, Suhasnagar Society, Ashram Road, Ahmedabad. During the continuation of search, i.e., on 6-11-1992 the statement of the partner Shri K.B. Kandoi was recorded in which he declared an income of Rs. 24 lakhs. Question Nos. 5, 6, 11, 14, 18, 22, 23 and 33 to 38 which are relevant with regard to disclosure of Rs. 24 lakhs by Shri K.B. Kandoi are as under :—

    Q. 5Please give the information on manufacturing cost of Kaju Katri in your firm ?

    Ans. In 8.5 Kaju Kesar Katri 6 kilo Kaju (Cashew nut)Rs.700

    2.25 kilo sugarRs.20

    50 gm. ElaichiRs.20

    11 gm. kesarRs.112

    100 gm. gheeRs.25

    70Rs.84

    Rs.961

    Labour Rs.80

    Rs.1041

    Q. 6 Keeping in mind your answers to question Nos. 4 and 5, you have informed that your gross profit is 30% to 40%. Is this profit correct?

    Ans. Yes. This ratio of profit is correct.

    Q. 11 During the search of your house cash of about Rs. 3,95,000 is found. You inform as to whom this cash belongs ?

    Ans. This is my own cash.

    Q. 14 Who is looking after sales in your shop ?

    Ans. I am looking after the sales of Manekchock shop and my younger brother Nitin is looking after the sales of Ashramroad shop.

    Q. 18 Today during search cash of Rs. 68,990 is found from your shop whereas as per the cash book it is Rs. 66,196. Give information for the excess cash of Rs. 2,794.

    Q. 22 To whom the cash of Rs. 3,95,000 found from your residence belong to ?

    Ans. Yes, it is my cash. It belongs to my firm.

    Q. 23 From where you have received this cash ?

    Ans. This is the income of the sales made during Diwali which is not recorded in the books of account. This entire Rs. 3,95,000 are not recorded in the books.

    Q. 33 What is your daily expenses and what kind of it is ?

    Ans. I daily eat five (pan) masala. At present I have reduced it. One masala costs rupees five thus the expense on masala is Rs. 25.

    Q. 34 Do you agree that during the course of search books of account and other papers found it is proved that you make sales out of books ?

    Ans. Yes, I fully agree, I do not record all the sales in the books and effect sales outside the books.

    Q. 35 Give information as to how many percentage of sales is not shown in the books of account of both the branches of your M/s. Kandoi Bhogilal Mulchand.

    Ans. In both the branches of my M/s. Kandoi Bhogilal Mulchand, we do not show about 35% sales in the books of account. Last year we have shown total sale in the books because last year there was more competition and new was started. We commenced not recording in the books only from the current year.

    Q. 36 Give information of income of the current year recorded and not recorded in the books.

    Ans. The unrecorded income of both the branches of our firm is approximately Rs. 24,00,000 which I want to declare.

    Q. 37 Give complete information of the income of Rs. 24,00,000 which you want declare as not recorded in the books of account.

    Ans. We have made sales of approximately 35% which is outside the books that is not recorded in the books. The details of this unrecorded sales are mentioned in the different papers found from our house. The amount of Rs. 24,00,000 which we want to declare is completely available in these papers.

    Q. 38 Give information as to how have you invested the unrecorded and earned income of Rs. 24,00,000 which you want to declare.

    Ans. This unrecorded income of Rs. 24,00,000 is invested as follows :

    (i)Cash of about of Rs. 6,00,000 to Rs. 6,25,000 is lying in our house. One cup-board which you have opened Rs. 3,96,015 is found. This cash is unrecorded income. The remaining Rs. 2,00,000 to Rs. 2,25,000 are in another cup-board, the key of which is not with us at present. By evening we will engage the ksarigars and find it out. You will get the same after opening this cup-board.

    (ii)During the survey of our shop cash of Rs. 68,990 is found out of which Rs. 66,196 is in the books. The remaining Rs. 2,794 is concealed income as stated above.

    (iii)We both brothers have invested Rs. 43,600 in the names of our sons Akash Kamleshbhai and Harsh Nitinbhai with "Vallabh Sanchit Nidhi Yojna" which is out of our concealed income.

    (iv)In the names of our wives and we two brothers have invested about Rs. 25,000 in shares which is our unrecorded income. These shares are kept with our relation. His name is Rameshbhai. I have no knowledge of his address.

    (v)The gold ornaments worth Rs. 3,80,000 and silver utensils and ornaments worth Rs. 45,500 found that seized by you during the search of our house are purchased out of unrecorded income. The remaining jewellery (ornaments) which is 380 gms. found during the search is received during marriages of my brother and myself. Also the ornaments of diamond worth Rs. 50,000 are received at the time of marriage.

    (vi)During the course of search of our house valuable articles as per Annexure P are found. Out of these only Maruti Van valued at Rs. 55,000 is recorded in the books of account of the remaining are purchased out of unrecorded income. The total value of the same is Rs. 1,01,200.

    (vii)I declare unrecorded stock worth Rs. 2,00,000 found during the search of our house, shop and factory.

    (viii)I declare Rs. 3,00,000 spent in renovation and furniture of our house which is out of unrecorded income.

    (ix)I further declare Rs. 3,50,000 which is not recorded in our books of account which comprises of sweets supplied to our various customers during Diwali and Rakshabandhan.

    (x)I further declare Rs. 3,00,000 given over to our various relatives and friends during some occasion or as loans which is out of unrecorded income.

    (xi)Over and above this about Rs. 56,000 are expended towards different occasions in our house which is also out of unrecorded income of the current year.

    8. The above statement was retracted by the assessee vide affidavit dated 23-2-1993, i.e., after three and half months of the disclosure. The Assessing Officer has not accepted the retraction and relying upon the statement given at the time of search he made the addition of Rs. 24 lakhs. Therefore, now the question is whether the disclosure by the assessee is to be believed or the retraction is to be believed. Section 132(4) provides as under :

    "(4) The authorised officer may, during the course of the search or seizure, examine on oath any person who is found to be in possession or control of any books of account, documents, money, bullion, jewellery or other valuable article or thing and any statement made by such person during such examination may thereafter be used in evidence in any proceeding under the Indian Income-tax Act, 1922 (11 of 1922), or under this Act.

    [Explanation.—For the removal of doubts, it is hereby declared that the examination of any person under this sub-section may be not merely in respect of any books of account, other documents or assets found as a result of the search, but also in respect of all matters relevant for the purposes of any investigation connected with any proceeding under the Indian Income-tax Act, 1922 (11 of 1922), or under this Act.]"

    9. Thus the above sub-section empowers the Authorised Officer to examine on oath any person during the course of search provided such person is found in possession of any books of account, documents or any valuable article or thing. The above statement can be used against the assessee in the proceedings under the Income-tax Act. It is a settled law that admission by a person is good piece of evidence though not conclusive and the same can be used against the person who makes it. The reason behind this is a person making a statement stops the opposite party from making further investigation. More over under the Income-tax Act the Legislature itself has provided that the statement given under section 132(4) can be used against the person giving such statement. Therefore, the statement under section 132(4) is an important piece of evidence against the assessee. However, the statement is not conclusive and the person giving the statement can retract the same under certain circumstances (i) The first circumstance is where the statement is not given voluntarily but it was obtained under coercion, threat or undue influence. But the burden is upon the person making the statement to prove that the statement given by him was not voluntary. The assessee can discharge this burden by giving a direct evidence of coercion or threat by the Authorised Officer or by circumstantial evidence in this regard. The time gap between the statement and the retraction of statement would also one of the important points to be taken into account while deciding whether the statement was voluntary or not. (ii) The other circumstance is where the statement was given under the mistaken belief of either fact or law. Here again the burden is upon the person giving the statement to prove that the statement given by him was factually incorrect or was untenable in law.

    10. This view of ours is supported by the decision of the Tribunal Ahmedabad Bench in the case of Manharlal Kasturchand Chokshi (supra) and Hotel Kiran’s case (supra).

    11. The learned counsel for the assessee has relied upon several decisions to support his contention that the addition cannot be made on the basis of statement only. However, we find that the facts in all those cases were different than the facts in the case of assessee. In the case of Pullangode Rubber & Produce Co. Ltd. (supra) the assessee has recorded the expenditure towards immature plants as capital expenditure but for the purpose of Kerala Agricultural Income-tax Act, 1950, claimed the same as revenue expenditure. On the above facts, their Lordships of the Hon’ble Apex Court held "such admission is an extremely important piece of evidence but it cannot be said that it is conclusive. It is open to the assessee who made the admission to show that it is incorrect and the assessee should be given a proper opportunity to show that the books of account do not disclose the correct state of facts."

    12. In the case of Abdul Quyume (supra), the Hon’ble Allahabad High Court held as under :—

    "An admission or an acquiescence cannot be the foundation for an assessment, where the income is returned under an erroneous impression or misconception of law. It is always open to an assessee to demonstrate and satisfy the authority concerned that a particular income was not taxable in his hands and that it was returned under an erroneous impression of law. Each assessment year is an independent year and it is always open to the taxpayer to contend that he had wrongly been assessed in the past."

    13. The learned counsel for the assessee has also heavily relied upon the decision of the ITAT Rajkot Bench in the case of Smt. Ranjnaben M. Shah (supra), wherein the Tribunal held as under :

    "However, during the proceedings of section 132(5) the assessee have retracted from their statements. The retraction had not been accepted by the Revenue on the ground that no evidence has been shown by the assessee in support of the retraction. It is true that the simple denial cannot be considered as a denial in the eyes of law. But when no activity has been undertaken by the assessee, how it can be provided by way of evidence that such activity has ever been undertaken by the assessee except simple denial what other evidence can be produced by the assessee. The evidence ought to have been collected by the Revenue during the search in support of the disclosure statement. Had the Revenue found any material and then obtained a disclosure from the assessee, then the assessee might not have been able to retract from their disclosure statements. But additions made only on the basis of disclosure statements normally should not be confirmed in the absence of corroboration. In the eyes of law the general rule of practice is that it is unsafe to rely upon a confession only without any corroboration. Hence, the revenue ought not to have made the additions. The additions are deleted."

    14. Let us examine the facts of the case in the light of the legal provisions as enumerated above. From question Nos. 5 and 6 of the statement it is evident that Shri K.B. Kandoi admitted that the correct gross profit should be 30% to 40%. It is not in dispute that the gross profit disclosed in the books of account was even less than 25%. Therefore, Shri K.B. Kandoi was aware that the gross profit disclosed by the assessee in the books was less. With regard to question No. 18, Shri K.B. Kandoi admitted that the assessee did not show small sale in the books. From question Nos. 22 and 23, it is clear that the cash of Rs. 3,95,000 was found from the assessee with Shri K.B. Kandoi has admitted to be unrecorded cash and he has also admitted that it is from the unrecorded sale made during Diwali period. With regard to question No. 33 he admitted that his personal expenditure on eating Pan Masala is Rs. 25 per day. With regard to question No. 34, he reiterated that the assessee did not record all the sales in the books of account and effect the sales outside the books. Thus it was found and admitted that the assessee was suppressing the sales. Similarly it was also found and admitted that the gross profit disclosed in the books of account was low than the actual gross profit. Unexplained assets were also found. After admitting the unrecorded sales, low gross profit, unexplained assets, etc., Shri K.B. Kandoi admitted the unrecorded income of the assessee-firm at Rs. 24 lakhs. He has also explained the utilization of the above income of Rs. 24 lakhs, which are given in detail in reply to question No. 38. The retraction of the statement is made after three and half months. If the above statement was extracted under coercion and/or threat, what prevented the assessee to retract the statement soon after the conclusion of the search. Moreover except the allegations in the affidavit, there is no direct or circumstantial evidence brought on record by the assessee to prove that the statement was taken under coercion or threat. Several loose papers were found at the time of search which prove the sale outside the books. Shri K.B. Kandoi himself in his statement has admitted the unrecorded sale. These evidences corroborate the genuineness of the statement given at the time of search. No iota of evidence is given by the assessee in support of retraction. The ITAT Rajkot Bench in the case of Smt. Ranjnaben M. Shah (supra) accepted the retraction because no evidence was found at the time of search in support of the disclosure of income made in the statement. However, in the case under consideration before us we find that the Revenue has found evidence of suppression of sale, suppression of gross profit and also the unrecorded assets. Therefore, the above decision of the ITAT Rajkot Bench relied upon by the assessee would not be applicable to the facts of the assessee’s case.

    15. At the time of hearing before us, the learned counsel for the assessee tried to explain each and every item relating to the utilization of Rs. 24 lakhs stated by Shri K.B. Kandoi in reply to question No. 38. He submitted that the unexplained cash, deposits in the investment in the names of minor children of the partners and the investments in valuables found from the residence which in total amounts to Rs. 6,15,800 were disclosed by Shri K.B. Kandoi as his personal income in his return of income. However, when a specific query was raised at the time of hearing whether Shri K.B. Kandoi has any independent source of income, the learned counsel fairly admitted that the only source of income of Shri K.B. Kandoi is the share income from the firm. Moreover we also find that in reply question Nos. 22 and 23 Shri K.B. Kandoi has clearly admitted that unrecorded cash is out of unrecorded sale of the assessee-firm.

    16. In the above circumstances the contention of the assessee that there was no undisclosed income of the assessee-firm but there was undisclosed income of the partner Shri K.B. Kandoi, cannot be accepted. The learned counsel for the assessee has also contended that there was no unexplained investment in gold ornaments, stock, furniture/renovation. He also contended that there were no loan and advances to the friends and no money was recoverable from the customers. However, we find that the Revenue has made the addition of Rs. 24 lakhs as the income disclosed by Shri K.B. Kandoi in his statement recorded at the time of search. No separate addition has been made for unexplained investment in gold ornaments, unaccounted stock, renovation and furniture and for sundry debtors or for loan and advances to the relatives. The unexplained assets were only a corroborative evidence to examine whether the statement of Shri K.B. Kandoi was voluntary or not.

    17. After considering the facts of the case and arguments of both the sides, we have already held that the statement given by Shri K.B. Kandoi was voluntary and there were corroborative evidences to support such statement, therefore, how the above sum of Rs. 24 lakhs was utilised or invested by the partners of the firm, is irrelevant and since no separate addition has been made for any such investment in gold ornaments, stock, furniture, renovation, sundry debtors, loans and advances to relatives, etc., we do not find it necessary to examine the assessee’s contention with regard to the above investments/expenditure.

    18. It was also vehemently contended by the learned counsel that the sum of Rs. 24 lakhs was unrecorded sale and therefore only the net profit on such unrecorded sale can be estimated. He has mentioned that the net profit of the assessee is only 1.08% and therefore only 1.08% of the sum of Rs. 24 lakhs can be added. In support of this contention he has heavily relied upon the decision of the Hon’ble Jurisdictional High Court in the case of President Industries (supra). We find that in the above decision the Hon’ble Jurisdictional High Court refused to admit the Revenue’s application under section 256(2) holding that no question of law which required to be referred to the High Court, arises out of the order of the Tribunal. In that case the Tribunal has decided the issue in favour of the assessee. The Revenue filed an application under section 256(1) requiring the Tribunal to refer the question of law to the Hon’ble Jurisdictional High Court. The Tribunal rejected the Revenue’s application under section 256(1). Thereafter, the Revenue moved to the High Court under section 256(2) seeking direction to the Tribunal for referring the question of law to the Hon’ble Jurisdictional High Court. However, such application under section 256(2) was rejected by the Hon’ble Jurisdictional High Court. Therefore, when a High Court rejects the application under section 256(2) it cannot be said that it was a decision of the High Court on merits. The High Court has only declined to entertain the Revenue’s application under section 256(2) whereby the Revenue has requested the High Court to direct the Tribunal to refer the question of law.

    19. The learned counsel for the assessee has also relied upon the decision of the Hon’ble Calcutta High Court in the case of S.M. Omer (supra). However, we find that in the case of S.M. Omer, the assessee has received a cheque of Rs. 1,13,603 from the Controller of Defence Accounts (Navy). The Assessing Officer treated the entire sum as income of the assessee. On appeal, the CIT(A) directed to apply the net profit rate on the above receipt. The decision was upheld by the Tribunal. On a reference by the Revenue, the Hon’ble Calcutta High Court has held —

    "that section 69 of the Income-tax Act, 1961, was not applicable in the instant case. The assessee supplied the goods after incurring certain cost and after manufacturing the goods and the amount that was received from the Defence Department could not represent the net income but it was the sum received including the profit and expenditure. The Tribunal was justified in upholding the deletion of Rs. 1,01,649."

    20. Thus in the case of S.M. Omer there was evidence that the assessee incurred certain expenditure for manufacturing of goods which were supplied to the Defence Department and therefore the net profit rate was applied. The learned counsel for the assessee has also relied upon the decision of the ITAT Ahmedabad Bench in the case of Gurubachansingh J. Juneja (supra), wherein the Third Member of Tribunal directed to apply the net profit rate on the unrecorded sales.

    21. Whether unrecorded sale itself is income or only a net profit on such unrecorded sale is the income, would depend upon the facts of each case. Where an assessee made purchases outside the books and also sells goods outside the books, naturally the profit, i.e., the difference between the sale price and the expenditure incurred by the assessee, is the income from unrecorded sale. However where the assessee records all the expenditure in the books of account but part of the sale consideration is not recorded in the books of account, then the unrecorded sale itself would be the income of the assessee. In the case under consideration before us it is nowhere the claim of the assessee that any purchase or expenditure was not recorded in the books of account. The cash found at the time of search at Rs. 3,95,000 was explained to be out of unrecorded sale. This clearly shows that the entire unrecorded sale was income of the assessee because had part of the unrecorded sale been utilised for incurring any expenditure, the cash would not have been available. Moreover in the case under consideration before us the addition of Rs. 24 lakhs by the Assessing Officer is not made for unrecorded sale but the addition is made of the amount disclosed by Shri K.B. Kandoi at the time of search.

    22. In para 15 we have held that the disclosure was voluntary and it is also corroborated with the evidence found at the time of search. We therefore reverse the order of the CIT(A) on this point and uphold the addition of Rs. 24 lakhs.

    23. Shri K.B. Kandoi has disclosed in the return of income an additional income of Rs. 6,15,800 as against the income of Rs. 24 lakhs disclose by him in the hands of the assessee-firm in his statement under section 132(4). Since the Assessing Officer made the addition of Rs. 24 lakhs in the hands of the assessee-firm, he has assessed the sum of Rs. 6,15,800 in the hands of Shri K.B. Kandoi on protective basis. The CIT(A) did not uphold the finding of the Assessing Officer with regard to the addition of Rs. 24 lakhs in the hands of the assessee-firm. Therefore, he had directed the Assessing Officer to assess the sum of Rs. 6,15,800 in the hands of Shri K.B. Kandoi on substantive basis. However, while disposing of Ground No. 1of Revenue’s appeal, we have upheld the order of the Assessing Officer with regard to the addition of Rs. 24 lakhs which was made by him on the basis of disclosure made by Shri K.B. Kandoi in the case of the assessee-firm, therefore, no addition of Rs. 6,15,800 is required to be made in the hands of Shri K.B. Kandoi. We therefore allow Ground No. 2 of Revenue’s appeal.

    24. Ground No. 3 of Revenue’s appeal is against deletion of GP addition of Rs. 7,22,770. We have heard both the sides and perused the material placed before us. The assessee has disclosed the Gross Profit of Rs. 14,86,871 on the turn over of Rs. 73,65,473. The GP rate works out to 20.18%. The Assessing Officer rejected the books of account and applied GP rate of 30% which resulted in the addition of Rs. 7,22,770. The CIT(A) deleted the addition. Hence the Revenue was in appeal. While disposing of Ground No. 1 of Revenue’s appeal we have sustained the addition of Rs. 24 lakhs made by the Assessing Officer on the basis of statement of Shri K.B. Kandoi. After considering the above sum of Rs. 24 lakhs the GP of the assessee would be more than 50% which is much more than the GP rate applied by the Assessing Officer. Therefore, there is no justification for sustaining any addition on account of low GP. We therefore reject Ground No. 3 of Revenue’s appeal.

    25. Ground No. 4 of Revenue’s appeal and Ground Nos. 1 and 2 of assessee’s appeal are against the direction of the CIT(A) to make the addition of Rs. 3,37,700 being 25% of unrecorded sales of Rs. 13,50,799. As against the addition of Rs. 24 lakhs made by the Assessing Officer on the basis of statement of Shri K.B. Kandoi, the CIT(A) has directed the Assessing Officer to sustain the addition of Rs. 3,37,700 only on the basis of 25% of the unrecorded sales worked out by him at Rs. 13,50,799. However while disposing of Ground No. 1 of Revenue’s appeal we have sustained the addition of Rs. 24 lakhs and therefore no separate addition of Rs. 3,37,700 is required to be sustained. Accordingly, Ground Nos. 1 and 2 of assessee’s appeal and Ground No. 4 of Revenue’s appeal are deemed to be allowed.

    26. Ground Nos. 3 and 4 of assessee’s appeal are against the disallowance of Rs. 6,000 out of telephone expenses and Rs. 10,494 out of vehicle expenses. The same were not pressed at the time of hearing. Accordingly, Ground Nos. 3 and 4 of assessee’s appeal are rejected.

    27. Ground No. 5 of assessee’s appeal is against charging of interest under section 234. At the time of hearing before us both the parties admitted that charging of interest is consequential. We, therefore, direct the Assessing Officer to recalculate the interest after determination of income as per this order.

    ITA No. 960/Ahd./97 - Assessment year 1993-94 - Revenue’s appeal in the case of Shri K.B. Kandoi—

    28. The only ground raised in this appeal by the Revenue reads as under:—

    "The ld. CIT(A) has erred in law and on facts in holding that a sum of Rs. 6,15,800 out of Rs. 24,00,000 disclosed under section 132(4) of the Income-tax Act in the case of the firm belong to Shri Kamleshkumar B. Kandoi in his individual capacity."

    29. An identical ground was raised by the Revenue vide Ground No. 2 in the case of M/s. Kandoi Bhogilal Mulchand wherein Shri K.B. Kandoi is partner. For the detailed discussion in para 24 we hold that no separate addition of Rs. 6,15,800 is required to be made in the case of Shri K.B. Kandoi. Accordingly, the addition made by the Assessing Officer on protective basis and which was directed to be made on substantive basis by the CIT(A), is deleted.

    ITA No. 2455/Ahd./99 - Assessment year 1992-93 - Revenue’s appeal in the case of M/s. Bhogilal Mulchand Kandoi—

    30. The only ground raised in this appeal by the Revenue reads as under:—

    "The ld. CIT(A) has erred in law and on facts in deleting the addition made by the Assessing Officer for the amount of Rs. 2,13,941 on the ground of estimation of GP at the rate of 24%."

    31. We have heard both the parties and perused the material placed before us. For the year under consideration the assessee has disclosed the sales of Rs. 65,62,616 on which gross profit of Rs. 13,61,123 was disclosed. The Assessing Officer rejected the books of account and applied the GP rate of 24% which resulted in the addition of Rs. 2,13,941. The same is deleted by the CIT(A). Hence this appeal by the Revenue.

    32. We have heard both the parties and perused the material placed before us. The assessee has filed the comparative chart of sale and gross profit of various years. From the said chart we find that in the immediately preceding year, i.e., 1991-92 the assessee disclosed GP rate of 22.13% on sales of Rs. 41,03,964. The Assessing Officer rejected the books of account and applied the GP rate of 30%. On appeal, the CIT(A) reduced the rate of GP from 30% to 25%. The assessee filed the appeal before the Tribunal against the order of the CIT(A). However later on the assessee settled the dispute under KVSS. Thus the fact remains in the preceding year, the assessee accepted the GP rate of 25% applied by the CIT(A). We also find that during the course of search on 6-11-1992 the statement of Shri K.B. Kandoi partner of the assessee-firm was recorded in which he has admitted the GP rate of 30% to 40%. The Assessing Officer has also recorded the finding that the assessee has not maintained the stock records. In the absence of quantitative records for consumption of raw material & production of finished goods, correctness of the sale cannot be verified. During the course of search evidence of sale outside books was found. Considering totality of the entire facts, we uphold the rejection of books of account. The GP rate of 24% applied by the Assessing Officer cannot be said to be unreasonable or excessive. We, therefore, reverse the order of the CIT(A) on this point and restore that of the Assessing Officer.

    33. In the result,

    (i)Revenue’s appeal - ITA No. 51/Ahd./97 is partly allowed.

    (ii)Revenue’s appeal - ITA No. 2455/Ahd./99 is allowed.

    (iii)Revenue’s appeal - ITA No. 960/Ahd./97 is allowed.

    (iv)Assessee’s appeal - ITA No. 4780/Ahd./96 is deemed to be partly allowed for statistical purpose.

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    Deputy Commissioner of Income-tax, Circle-2(1) v. Bhogilal Mulchand
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