2013 (6) TMI 739 - AT - Income Tax

Income from suppressed sales has to be considered in the hands of Shri Jagadamba Pearl Dealers. Estimation of income - Held that - Comparative income offered to tax to various dealers in this line of business at Monalisa Pearls average @3.61%, Mansarovar Pearls (India) Pvt Ltd , average @ 1.25% Spectrum Pearls, average @ 0.16%. Gifts received by the appellant - Held that - We direct the Assessing Officer to delete the addition placing reliance on the judgment of the Hon ble Supreme Court in the case of CIT vs. K. Mohanakala 2007 (5) TMI 192 - SUPREME Court wherein the Supreme Court has held that in case where the explanation offered by the assessee about the nature and source of the sums found credited in the books is not satisfactory there is, primafacie, evidence against the assessee, viz. the receipt of money. The burden is on the assessee to rebut the same, and, if he fails to rebut it, it can be held against the assessee that it was a receipt of an income nature. Allowance of interest paid by the partner - Addition u/section 14A - Held that - It is noticed that deduction was claimed in respect of interest paid by partner on the capital withdrawn by the assessee for the purpose of investment in another firm. Interest paid to the partner must necessarily be added in the computation of his total business income. There is no provision made in the Act for deduction of interest paid by the partner to the firm. Hence, interest adjusted on the debit balance of the account of the partners in the books of a firm is not deductible while computing the income of the assessee. Interest paid on the debit balance of capital account by partner not for business purpose, cannot be allowed as business expenditure, though, interest income received from firm treated as business income. Further, we make it clear that in view of the judgment of jurisdictional High Court in the case of CIT Vs. T.V. Ramanaiah & Sons (1984 (10) TMI 20 - ANDHRA PRADESH High Court) wherein it was held that interest paid by the partner should be adjusted against the interest credited to the partners in the firm, if any. Accordingly, we direct the AO if there is any interest receipt and interest payment by the assessee to the same firm, to the extent it should be set off and not to be disallowed. Accordingly, this ground is partly allowed and also to that extent, the orders of the lower authorities have been modified. Unaccounted cash - Held that - We remit this issue to the file of Assessing Officer to verify whether the cash balance has been recorded in the books of Sri Jagadamba Pearl Dealers and if so the Assessing Officer cannot add it in the hands of Ravinder Kumar. This ground is allowed for statistical purposes. Unaccounted jewellery - Held that - We gave a finding at para No. 23 to 26 that the income generated from unaccounted sales has to be assessed in the hands of the affirm. Being so, we are of the opinion that the gold jewelry found in the hands of the assessee Shri Ravinder Kumar has to be considered as it is acquired by him out of the drawings from unaccounted income from suppressed sales in the firm. Therefore, in the interest of justice due telescoping to be given otherwise it amounts to double addition viz., once in the firm on account of unaccounted income and another in the firm on account of unaccounted assets found during the course of search. Being so, we allow this ground of appeal Determination of income - undisclosed turnover - Held that - The average G.P. for these years from 2004-05 to 2009-10 worked out at 28.05%. As reasonable expenditure was given in the block period at 4%, in our opinion, it is reasonable to allow the expenditure out of the estimated gross profit at 8.05% considering the inflation theory. Accordingly, out of estimated gross profit rate of 28.05%, we direct the AO to give deduction at 8.05% towards further undisclosed expenditure and limit the undisclosed income at 20% of the undisclosed turnover and determine the income accordingly. This ground raised by the assessee in its appeals is partly allowed. Additions on the basis of planted documents - Held that - No addition can be made solely on the basis of the seized unwritten note book/loose slips, which are dumb documents and the same were disowned by the assessee and there being no other corroborative material to show that the transaction reflected in seized loose slips actually belong to the assessee. Accordingly, deletion of addition by the CIT(A) is justified.

Issues Involved:
1. Treatment of unaccounted turnover and deposits in undisclosed bank accounts.
2. Taxability of such income in the hands of the firm or the individual partner.
3. Estimation of income from undisclosed turnover.
4. Disallowance of interest on housing loan.
5. Addition of gifts received by the appellant.
6. Disallowance of interest paid to the firm.
7. Addition of unaccounted cash and jewelry.
8. Validity of assessment under section 153A.
9. Addition based on seized documents claimed to be planted.

Detailed Analysis:

1. Treatment of Unaccounted Turnover and Deposits in Undisclosed Bank Accounts:
The search operations under section 132 of the Income Tax Act revealed undisclosed bank accounts operated by one of the partners, which were not reflected in the income tax returns. The total deposits amounted to Rs. 9,32,32,836, and the partner admitted an additional income of Rs. 46,61,642 at 5% of the deposits. The department treated these deposits and cash sales as undisclosed sales of the firm, Sri Jagadamba Pearl Dealers, and added the entire turnover as income of the firm, while also making a protective addition in the hands of the partner.

2. Taxability of Such Income in the Hands of the Firm or the Individual Partner:
The CIT(A) upheld the treatment of undisclosed turnover as that of the firm and deleted the addition made in the case of the partner. The assessee argued that the income generated from the suppressed sales should be treated as the income of the partner, citing a similar case previously decided by the ITAT. However, the Tribunal held that the income from suppressed sales should be considered as income of the firm, as the partner was acting in his capacity as a working partner for the benefit of the firm.

3. Estimation of Income from Undisclosed Turnover:
The Tribunal noted that the lower authorities had treated the entire turnover as income without allowing any expenses. It was argued that only the net profit should be taxed, and the Tribunal agreed, directing the AO to estimate the net income from the unaccounted turnover. The Tribunal referred to various case laws where only the profit element was subjected to tax and not the entire sales.

4. Disallowance of Interest on Housing Loan:
The assessee did not press this issue, and it was dismissed as not pressed.

5. Addition of Gifts Received by the Appellant:
The assessee received gifts from relatives, which were added as unexplained credits by the AO. The Tribunal directed the AO to delete the addition, considering the relationship and the occasion of the gift, relying on the judgment of the Supreme Court in CIT vs. K. Mohanakala.

6. Disallowance of Interest Paid to the Firm:
The AO disallowed the interest paid on excess drawings made by the partner, invoking section 14A. The Tribunal held that the interest paid should be adjusted against the interest received from the firm, if any, and directed the AO to set off the interest to the extent possible.

7. Addition of Unaccounted Cash and Jewelry:
The Tribunal remitted the issue of unaccounted cash to the AO to verify if the cash balance was recorded in the books of the firm. Regarding the unaccounted jewelry, the Tribunal allowed telescoping, considering it as acquired from the drawings from unaccounted income.

8. Validity of Assessment Under Section 153A:
The ground was not pressed by the assessee and was dismissed.

9. Addition Based on Seized Documents Claimed to be Planted:
The CIT(A) deleted the addition made on the basis of seized documents, which were claimed to be planted by business rivals. The Tribunal upheld the deletion, noting that the documents were not conclusively linked to the assessee, and there was no corroborative evidence.

Conclusion:
- The appeals filed by the assessee (Ravinder Kumar) for the assessment years 2004-05 to 2006-07 were dismissed, while those for 2007-08 to 2009-10 were partly allowed.
- The departmental appeals in the case of Ravinder Kumar were dismissed.
- The appeals filed by the assessee (Sri Jagadamba Pearl Dealers) were partly allowed.
- The departmental appeals in the case of Sri Jagadamba Pearl Dealers were dismissed.

Pronounced in the open court on 17/06/2013.

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