2010 (2) TMI 909 - AT - Income Tax

Search and seizure - amount of 7 lacs seized from the employee of the assesseewho was carrying the same to Mumbai - Held that - As per the paper found during the course of search, there was much more amount available at Hyderabad office; therefore, it can be easily presumed that this amount pertains to the amount remained at Hyderabad office out of sale transactions. From the paper seized an amount of Rs. 8.96 crores was receivable on account of sales. Out of the amount of Rs. 8.96 crores a sum of Rs.8.31 crores only was remitted to Mumbai office as per the paper found. there was no need to make a separate addition of Rs. 7 lacs for AY 2004-05 as it can easily be said that this amount was out of the remaining amount available at Hyderabad office, appeals of the department are dismissed and the appeals of the assessee are allowed in part Bifurcation of transaction of jewellery and bullion - AO has not allowed any bifurcation as the total turnover estimated by him was treated as of jewellery transaction. However, the CIT(A) found that there is evidence showing sale of jewellery and bullion; therefore, he directed the AO to treat 25% of turnover of bullion transaction and 75% of turnover as jewellery transaction - reconciliation chart was prepared on the basis of loose paper found recording the transaction of sales during the course of search - reconciliation indicates 53.64% of jewellery transaction and 46.34% of bullion transactions Held that - Once the ascertained percentage is found in the paper seized then, there is no point not to bifurcate the transaction at the end of the AO or to bifurcate at the ratio of 25% and 75% of bullion transaction and jewellery transaction respectively at the end of the CIT(A). There was no other material before the AO or before the CIT(A) to hold that this reconciliation filed by the assessee was not correct. Accordingly AO directed to treat 54% of jewellery transaction and 46% of bullion transaction and then recalculate the profit accordingly GP profit - AO has applied 13.8% GP on the basis of GP ratio shown at Mumbai office but the CIT(A) has reduced the GP at 3% of jewellery and 0.4% of bullion on the basis of net profit rate of 3.69% shown at Mumbai office. During the search period one of the partners at the time of statement recorded has stated that there is 1% profit in jewellery transaction and 0.02% of bullion transaction. However, these contentions were not accepted by the CIT(A). The net profit shown by the assessee here at Mumbai relates to wholesale business and retail business; however, in Hyderabad, where the unrecorded sales were made relate to only wholesale transaction. It is also a fact that in wholesale transactions there is less margin of profit as compared to retail business Held that - If 2 % rate of profit is applied on jewellery transactions and 0.4% is applied on bullion transaction then it will meet the end of justice to both sides. AO directed to recalculate the profit for two years Addition on account of investment in sale transactions - As per paper found, there was an opening balance of 4 lacs and the ld counsel of the assessee stated that the amount of opening balance shown in the paper can be treated as unexplained investment Held that - AO directed to take the opening balance shown in the paper as the amount of undisclosed investment. This direction is given on the basis that in case of search, addition can only be made on the basis of material found and in the material found the opening balance is shown at Rs. 4,43,793/-. Accordingly, this amount has to be treated as investment from undisclosed sources

Summary

Issues Involved:
1. Period of extrapolation.
2. Estimation of turnover.
3. Bifurcation of transactions between jewellery and bullion.
4. Gross Profit (GP) ratio.

Detailed Analysis:

1. Period of Extrapolation:

Summary:
The Appellate Tribunal examined whether the extrapolation of unrecorded transactions beyond the period documented in the seized records was justified. The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] inferred that transactions must have occurred before 1.1.2002 and after 11.8.2002, relying on the Supreme Court decision in H.M. Esufali. However, the Tribunal found no justification for extrapolation since the search revealed transactions only between 1.1.2002 and 11.8.2002, and no intervening period was unaccounted for. It was concluded that additions in search cases should be based solely on material found during the search.

Original Text:
"In this case, search was conducted. It has been held by various High Courts that in the case of search any addition can be made only on the basis of material found during the course of search... Therefore, in our view, the decision of the Hon'ble Supreme Court in the case of H.M. Esufali (supra) is not applicable on the facts of the present case."

Conclusion:
The Tribunal decided in favor of the assessee, holding that there was no scope for extrapolation for estimating turnover.

2. Estimation of Turnover:

Summary:
The Tribunal addressed the estimation of turnover, emphasizing that additions in search cases should be based on material found during the search. The seized records indicated total transactions of Rs. 8,96,98,496 from 1.1.2002 to 11.8.2002. The AO estimated a turnover of Rs. 1 crore per month, but the Tribunal directed that the actual turnover recorded in the seized documents should be considered. For AY 2002-03, the turnover was Rs. 3,24,40,335, and for AY 2003-04, it was Rs. 5,72,58,161. No turnover was to be estimated for AY 2004-05 as no details were found beyond 11.8.2002.

Original Text:
"Therefore, in our view, there is no question of estimating the turnover as on the paper itself found during the course of search the turnover is shown at Rs.8,96,98,496/-... Accordingly, we direct the AO to take the turnover at Rs. 5,72,58,161/- for AY 2003-04."

Conclusion:
The Tribunal directed the AO to use the turnover figures from the seized documents and not to estimate beyond the recorded period.

3. Bifurcation of Transactions Between Jewellery and Bullion:

Summary:
The Tribunal reviewed the bifurcation of transactions between jewellery and bullion. The AO did not bifurcate the turnover, treating it all as jewellery transactions. The CIT(A) found evidence of both jewellery and bullion sales and directed a bifurcation of 75% jewellery and 25% bullion. The Tribunal, however, noted that the seized documents indicated a bifurcation of 54% jewellery and 46% bullion. It directed the AO to use these percentages for recalculating the profit.

Original Text:
"Accordingly, we direct the AO to treat 54% of jewellery transaction and 46% of bullion transaction and then recalculate the profit accordingly."

Conclusion:
The Tribunal directed the AO to bifurcate the transactions as per the seized documents, with 54% attributed to jewellery and 46% to bullion.

4. Gross Profit (GP) Ratio:

Summary:
The Tribunal examined the GP ratio applied by the AO, who used a 13.8% GP based on the Mumbai office's average. The CIT(A) reduced it to 3% for jewellery and 0.4% for bullion. The Tribunal acknowledged the lower profit margins in wholesale transactions and directed a GP ratio of 2% for jewellery and 0.4% for bullion.

Original Text:
"Therefore, keeping in view of these facts and circumstances, we are of the view that if 2 % rate of profit is applied on jewellery transactions and 0.4% is applied on bullion transaction then it will meet the end of justice to both sides."

Conclusion:
The Tribunal directed the AO to apply a GP ratio of 2% for jewellery and 0.4% for bullion transactions.

Additional Issues:

Investment in Business:
The Tribunal directed the AO to consider the opening balance of Rs. 4,43,793 as unexplained investment based on the seized documents.

Cash Seized:
The Tribunal held that the Rs. 7 lakhs seized from the employee should not be separately added, as it was part of the unaccounted sales proceeds.

Original Text:
"Accordingly, we hold that there was no need to make a separate addition of Rs. 7 lacs for AY 2004-05 as it can easily be said that this amount was out of the remaining amount available at Hyderabad office."

Conclusion:
The Tribunal provided specific directions for recalculating the turnover, bifurcation, GP ratio, and treatment of seized cash and investment.

Final Judgment:
The appeals of the department were dismissed. The appeals of the assessee for AY 2002-03 and 2003-04 were allowed in part, and the appeal for AY 2004-05 was allowed in full.