2007 (8) TMI 750 - HC - Income Tax

Block Assessment - Unexplained Payment Of Commission - search and seizure operation u/s 132(1) - Excess stock of goods found - HELD THAT - In the present case, nothing was found during the search which would suggest that the books maintained by the assessee were unreliable. It is only subsequent to the search and with a view to verify the correctness of the books that the Deputy Director of Income-tax recorded the statement of V.P. Jain. Whatever be the merits or demerits of both statements of V.P. Jain, unless they could be directly connected with the recovery of any incriminating material during the search, they cannot be used against the assessee. The view expressed by this Court in Ravi Kant Jain 2001 (3) TMI 52 - DELHI HIGH COURT is, of course, binding on us and we have also followed the view expressed by the Rajasthan High Court in Elegant Homes 2002 (8) TMI 38 - RAJASTHAN HIGH COURT . In CIT v. Jupiter Builders (P.) Ltd. 2006 (9) TMI 127 - DELHI HIGH COURT , this Court reiterated the law that the undisclosed income must be unearthed as a result of the search. We are clearly of the opinion that in the absence of any incriminating material found during the search conducted on 11/12-9-2001 in the premises of the Bansal Group, the statement of V.P. Jain recorded on 25-9-2001 and on 14-12-2001 could not be used for proceedings under Chapter XIV-B of the Act. We also find that the statement of V.P. Jain was recorded behind the back of the assessee. When the assessee was in fact allowed to cross-examine V.P. Jain, after his second statement was recorded on 14-12-2001, V.P. Jain had retracted from his earlier statement. The Assessing Officer, nevertheless, relied upon the statement given by V.P. Jain on 25-9-2001 completely disregarding his subsequent statement. Thus, we are of the view that the revenue has not been able to raise any substantial question of law which would necessitate admission of this appeal. Excess stock - It was contended by the assessee that different bundles have a different weight and it cannot be said with any degree of certainty that the average weight of the goods was 65 kg. per bundle. That the entire exercise was an estimate is confirmed by the CIT(A) who arrived at an average weight at 60 kg per bundle. Similarly, in respect of the fine wire products, the Assessing Officer took the average weight at 20 kg. per bundle and this was reduced by the CIT(A) to 16 kg. per bundle. The mere fact that some employees of the assessee signed the panchnama does not mean that they certified the correctness of the number of bundles or the average weight of each bundle. They only certified that they were witnesses to the proceedings. What conclusions have to be drawn from the panchnama is of no concern to those employees. Of course, the best method of determining the number of bundles and their average weight would be to actually count the bundles and use machines/cranes for weighing each bundle. This is no doubt a tedious exercise but where a liability is sought to be foisted upon an assessee, the revenue has to be a little more serious while exercising powers conferred upon it under the Act. Mere guess work or an estimate cannot be an adequate substitute for a scientific investigation or carrying out some empirical study. The officers who conducted the search did not want to take the necessary trouble which, of course, would have been time consuming, but the impact of making a guesstimate can be quite damaging insofar as the assessee is concerned. The assessee cannot be made to suffer the consequences of lethargy on the part of the officers of the revenue. Thus, we are of the opinion that the Tribunal rightly came to the conclusion that the alleged excess stock calculated by the revenue needs to be deleted. It is, of course, not possible today to redetermine the stock so the question of any remand does not arise. In our view, no substantial question of law arises. Dismissed.

Summary

Issues:
1. Unexplained payment of commission
2. Excess stock of goods found in the searched premises

Issue 1: Unexplained payment of commission

The case involved a group of assessees called the Bansal Group, on whom search and seizure operations were conducted under section 132(1) of the Income-tax Act, 1961. The Assessing Officer added amounts in the accounts of the assessee based on the belief that one V.P. Jain was preparing false bills for the Bansal Group and receiving a commission for it. The Tribunal set aside the orders of the Commissioner of Income-tax (Appeals) as the statements of V.P. Jain were post-search statements and had no direct nexus with the search, making the provisions of Chapter XIV-B of the Act inapplicable. The High Court emphasized that undisclosed income for block assessment must be based on evidence found during the search or directly related to it. Since no incriminating material was found during the search to suggest the unreliability of the assessee's books, V.P. Jain's statements could not be used against the assessee for proceedings under Chapter XIV-B of the Act.

Issue 2: Excess stock of goods found in the searched premises

The second issue revolved around the excess stock of goods found during the search, particularly in the context of mild steel galvanized iron wires manufactured by the assessee. The search party estimated the stock visually without physically counting or weighing the bundles, leading to a discrepancy between the inventory in the books and the inventory found during the search. The Tribunal agreed that the estimation method was inadequate and should have been based on empirical evidence rather than guesswork. It highlighted that a shortcut in assessment can be erroneous and emphasized the need for a more serious approach by the revenue officers. The High Court concurred with the Tribunal's decision to delete the alleged excess stock calculated by the revenue, stressing that mere guesswork cannot substitute for a scientific investigation. The Court concluded that the revenue's estimation needed to be disregarded, as the search party did not undertake a thorough assessment, and upheld the Tribunal's decision without the need for remand.

In conclusion, the High Court dismissed the appeal, stating that no substantial question of law arose in the case. The judgment underscored the importance of evidence found during searches for block assessments and the necessity of a meticulous approach in determining discrepancies such as excess stock, emphasizing the need for empirical evidence over mere estimations.