2011 (12) TMI 677 - AT - Income Tax

Issues Involved:
1. Validity of the order based on the report of Special Auditors appointed u/s 142(2A) of the Income Tax Act, 1961.
2. Extension of time for completion of special audit and its validity.
3. Estimation of undisclosed income and unrecorded sales.
4. Treatment of unrecorded investments and advances.
5. Application of provisions of Section 40A(3) regarding disallowance for cash payments.
6. Treatment of miscellaneous expenses and trading additions.

Summary:

1. Validity of the Order Based on Special Auditors' Report (u/s 142(2A)):
The assessee challenged the validity of the order based on the report of Special Auditors, arguing that the appointment was beyond the provisions of Section 142(2A). The Tribunal upheld the AO's decision, stating that the AO provided adequate opportunity to the assessee and considered the complexity of accounts before referring the matter for special audit. The Tribunal cited the assessee's non-cooperative attitude and evasive replies during the survey and assessment proceedings.

2. Extension of Time for Completion of Special Audit:
The assessee contended that the AO extended the time for special audit beyond the permissible limit. The Tribunal held that the AO had the jurisdiction to extend the time based on sufficient reasons, and the extension did not exceed the 180-day limit as prescribed. The Tribunal referred to the amendment in Section 142(2C) by the Finance Act 2008, which clarified the AO's power to extend the period suo motu.

3. Estimation of Undisclosed Income and Unrecorded Sales:
The Tribunal addressed multiple instances where the AO made additions based on unrecorded sales and undisclosed income. The Tribunal modified the AO's approach by applying a reasonable profit rate on unrecorded sales instead of adding the entire sales amount. For instance, the Tribunal applied a net profit rate of 7.45% before depreciation on unrecorded sales, considering it fair and reasonable.

4. Treatment of Unrecorded Investments and Advances:
The AO made additions for unrecorded investments and advances based on Annexure A-24. The Tribunal deleted these additions, stating that the Annexure belonged to Smt. Meena Somani, and any addition should be made in her hands, not the assessee's. The Tribunal emphasized that the onus was on the revenue to establish the ownership of the documents.

5. Application of Provisions of Section 40A(3):
The AO disallowed cash payments exceeding Rs. 20,000 u/s 40A(3). The Tribunal deleted these disallowances, citing that the books of accounts were rejected, and the income was estimated by applying a profit rate. The Tribunal referred to judicial precedents that disallowances u/s 40A(3) are not justified when income is estimated after rejecting the books of accounts.

6. Treatment of Miscellaneous Expenses and Trading Additions:
The AO made disallowances for miscellaneous expenses and trading additions based on rough papers found during the survey. The Tribunal deleted these disallowances, stating that the AO's approach was not justified as the expenses were reasonable and supported by the books of accounts. The Tribunal also held that the gross profit rate applied by the AO was excessive and directed to apply a reasonable profit rate.

Conclusion:
The Tribunal partly allowed the assessee's appeals and dismissed the revenue's appeals for the assessment years 2003-04 to 2006-07, while partly allowing the revenue's appeals for the assessment years 2007-08 and 2008-09. The Tribunal emphasized the importance of providing adequate opportunity to the assessee and applying reasonable profit rates on unrecorded sales.

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