2015 (12) TMI 766 - AT - Income Tax

Income from unaccounted bank accounts and other material found during the course of survey - whether to be assessed in the hands of Shri S.N. Rathi, individual or in the hands of Shri S.N. Rathi, AOP? - Held that - The concurrent finding of fact recorded by the revenues authorities below on this issue are to the effect that the said benami accounts were neither in the name of AOP nor in the name of any alleged member of the AOP. The Ld. First Appellate Authority has specifically observed that from the material collected during the course of survey and in the post survey inquiry, it emerges out that said accounts have been operated by Shri S.N. Rathi. The specimen signatures are similar in all the accounts. The handwriting in respect of documents also resemble with writing of Shri S.N. Rathi. During the course of survey, Shri S.N. Rathi or any other member of AOP had not disclosed to the survey party about the existence of any AOP. They could not produce any evidence to demonstrate that profit was distributed in a definite ratio among alleged members of AOP. Therefore, taking into consideration the specific objections pointed out by the Assessing Officer (extracted supra) as well as finding of the Commissioner of Income Tax(A), we are of the view that assessee failed to establish the existence of AOP. This line of argument has been taken after the survey during the assessment proceeding. Thus, the income from the 25 benami unaccounted accounts is to be assessed in the hands of Shri S.N. Rathi, individual. - Decided against assessee. Computation of profit from the benami bank account - Held that - In assessment order relates to the issue, as to why alleged books of accounts should not be rejected. But after rejection of the books, the ld. Assessing Officer failed to substantiate his conclusion for computing the profit at @ 10% of the turnover. Taking into consideration the finding of the Commissioner of Income Tax(A), we do not see any reason to interfere in his orders in all the assessment years. Thus, grounds of appeal of the assessee as well as by the revenue on this issue, in all these assessment years are rejected. The Ld. Assessing Officer shall compute the profit from the benami bank accounts @ 2.45% of the turnover and assessed it in the hands of Shri S.N. Rathi individual. Suppression of sales/turnover - contentions of the assessee is that except one sale vide BF3/43 for a sum of ₹ 4,335/- all other sales are to its associate concerns - Held that - The amounts collected from these sales were taken to the bank accounts and have been considered in the total turnover. In our opinion, Ld. First Appellate Authority has appreciated the controversy in right perspective. The Assessing Officer could not establish that these independent transactions have no connection with the total turnover computed on the basis of bank account. Ld. First Appellate Authority has rightly observed that notings of the sales on the loose papers were ultimately travelled to bank accounts of the benami concerns. Thus, it will amount a double addition. As far as addition of ₹ 16,09,314/- in Assessment Year 2005-06 is concerned, it ought to have been deleted on the same analogy. Ld. Commissioner of Income Tax(A), somehow, failed to record any finding on this issue. We find that, foundation of addition is similar, thus, this addition is not sustainable. - Decided in favour of assessee. Peak investment for seed capital - addition account of peak investment for seed capital in achieving the unaccounted turnover is to be made or not? - Held that - It is an admitted fact that assessee has been doing business without disclosing it to the income tax authority. The bank accounts are benami of the assessee. For starting any business, some seed capital will always be required. The assessee has not disclosed initial capital in these accounts. He is bound to disclose the source of initial capital. Ld. Assessing Officer has worked the initial capital by taking a peak deposit and, therefore, to our mind ld. Assessing Officer has rightly made the addition for Assessment Year 2003-04. As far as Assessment Year 2004-05 is concerned, initial investment of ₹ 1,30,720/- has been worked out. To our mind, no addition can be made in this year because assesse has the benefit of availability of unexplained capital added in Assessment Year 2003-04 at ₹ 4,64,196/- unexplained income from the benami account at ₹ 3,41,942/-. These two amounts can take care of the alleged unexplained investment at ₹ 1,30,720/-, therefore no addition is to be made in Assessment Year 2004-05. As far as Assessment Year 2005-06 is concerned, ld. Assessing Officer has worked unexplained investment of ₹ 28,57,013/-. In principle, we agree with the Assessing Officer that addition on account of unexplained investment for initiating the business has to be made but the telescoping of the unexplained income assessed in the hands of assesse for Assessment Year 2003-04, 2004-05 additions made on account unexplained investment initially made in Assessment Year 2003-04 has to be granted. Ld. Assessing Officer shall give credit of ₹ 4,64,196/- ₹ 3,41,942/- i.e. the peak investment and income for Assessment Year 2003-04. He shall further give credit of ₹ 14,53,727/- i.e. the income assessed for Assessment Year 2004-05. After setting these amounts against ₹ 28,57,013/-, he shall make addition of remaining amount in this Assessment Year on account of peak investment. In Assessment Year 2006-07, Assessing Officer has made addition at ₹ 27,37,624/-. Ld. First Appellate Authority has confirmed this addition. The assessee is in appeal. We agree in principle with the Commissioner of Income Tax(A) that initial investment made by the assessee has to be added as unexplained investment of the assesse. because assessee failed to establish the source of investment. But over a period of time, the assessee has accumulated sufficient capital which can take care of this investment. In the immediately preceding year, we have noticed the investment of ₹ 28,57,013/-. The benefit of telescoping of this amount will be available to the assessee in Assessment Year 2006-07. This amount is more than the alleged peak investment worked out in this year, therefore, in this year no addition can be upheld GP addition - CIT(A) deleted the addition - Held that - No error in the order of Commissioner of Income Tax (Appeals), because the Assessing Officer failed to point the defects in the regular books of accounts maintained by the assessee. He simply compared the GP to ealier assessment year and then made the addition. This is not the right course provided u/s. 145(3)/144 of the income tax act. The Assessing Officer can estimate the GP only when it was not possible for him to deduce true income from the accounts of the assessee. He has not pointed out any such impossibility in the assessment order. - Decided in favour of assessee Addition u/s 68 - CIT(A) deleted the addition - Held that - It emerges from the record that Assessing Officer has taken wrong figure of ₹ 2,50,000/- as credit appearing against the name of Shri Ruresh Paliwal (HUF). From the copy of affidavit considered by Commissioner of Income Tax (Appeals) and copies of the accounts, it reveals that amounts were only 20,000/-. With regard to Shri Om Textile, assessee has filed confirmation and PAN. Thus, he has explained cash credits appearing in his books of accounts. He has given the name, address of the creditor and also proved the genuineness of the transaction. The creditors are income tax assessee, therefore, their creditworthiness for small amount cannot be doubted. We do not find any error in the finding of Commissioner of Income Tax (Appeals) - Decided in favour of assessee Disallowance out of interest expenses - CIT(A) deleted the addition - Held that - On due consideration of facts and circumstances, we do not find any error in the order of Ld. Commissioner of Income Tax (Appeals) because this year assessee has not taken fresh loan from the member of Joshi and Paliwal family. The genuineness of the loans was not doubted in earlier years and expenses were allowed. Therefore, no disallowance can be made in this year. - Decided in favour of assessee Charging interest u/s. 234B and 234C for the fault of advance tax - Held that - The moment Assessing Officer has changed status of taxability, then, the credit of taxes paid in one entity ought to be given to the entity in whose hand income is ultimately taxed, we have upheld the action of Assessing Officer that income from unaccounted transaction ought to be assessed in the hands of Shri S. N. Rathi (individual) because assessee failed to establish the existence of any AOP. In these circumstances, the credit of taxes paid in the status of AOP deserves to be given to the assessee. Therefore, we set aside this issue to the Assessing Officer with direction that ld. Assessing Officer shall re- examine this issue after hearing the assessee. This ground of appeal is allowed for statistical purposes in all the assessment years.

Summary

Issues Involved:
1. Existence of Association of Persons (AOP).
2. Assessment of income from unaccounted bank accounts.
3. Rate of profit to be applied on unaccounted turnover.
4. Addition on account of suppressed sales/turnover.
5. Addition on account of initial investment for achieving unaccounted turnover.
6. Deletion of Gross Profit (GP) additions.
7. Deletion of additions under Section 68 of the Income Tax Act.
8. Credit for taxes paid in the case of AOP.
9. Consequential appeals regarding the existence of AOP.

Detailed Analysis:

1. Existence of Association of Persons (AOP):
The primary issue was whether the income from unaccounted bank accounts and other material found during the survey should be assessed in the hands of Shri S.N. Rathi (individual) or Shri S.N. Rathi (AOP). The assessee contended that the business was run by an AOP consisting of three brothers. However, the AO and CIT(A) rejected this claim, citing a lack of evidence regarding the existence of the AOP. The tribunal upheld this view, noting that the benami accounts were neither in the name of the AOP nor any alleged member of the AOP. The tribunal concluded that the income from the 25 benami unaccounted accounts should be assessed in the hands of Shri S.N. Rathi (individual).

2. Assessment of Income from Unaccounted Bank Accounts:
The AO assessed the income from the unaccounted bank accounts in the hands of Shri S.N. Rathi (individual) for the assessment years 2003-04 to 2006-07. The CIT(A) partially accepted the assessee's contention and deleted some additions. The tribunal upheld the AO's decision to assess the income in the hands of Shri S.N. Rathi (individual) and rejected the existence of AOP.

3. Rate of Profit to be Applied on Unaccounted Turnover:
The AO applied a 10% profit rate on the unaccounted turnover, while the CIT(A) upheld a 2.45% rate based on the special auditor's report. The tribunal found that the AO's reasoning for a 10% rate was not substantiated and upheld the CIT(A)'s application of a 2.45% profit rate, considering comparable cases and the special auditor's opinion.

4. Addition on Account of Suppressed Sales/Turnover:
The AO made additions based on suppressed sales/turnover found in loose papers during the survey. The CIT(A) deleted these additions, noting that the sales were already included in the turnover of the benami accounts. The tribunal upheld the CIT(A)'s decision, agreeing that the AO could not establish that these were independent transactions separate from the total turnover.

5. Addition on Account of Initial Investment for Achieving Unaccounted Turnover:
The AO made additions for initial investment based on peak deposits in the benami accounts. The CIT(A) deleted these additions, but the tribunal restored the addition for the assessment year 2003-04, agreeing that some seed capital was required. For subsequent years, the tribunal allowed for the telescoping of the unexplained income and investment from previous years, reducing the additions accordingly.

6. Deletion of Gross Profit (GP) Additions:
The AO made GP additions by comparing the GP rate to previous years. The CIT(A) deleted these additions, noting that the AO failed to point out any defects in the regular books of accounts. The tribunal upheld the CIT(A)'s decision, agreeing that the AO did not follow the proper course under Section 145(3)/144 of the Income Tax Act.

7. Deletion of Additions under Section 68 of the Income Tax Act:
The AO made additions under Section 68 for unexplained cash credits. The CIT(A) deleted these additions, accepting the assessee's explanations and confirmations from creditors. The tribunal upheld the CIT(A)'s decision, finding no error in the deletion of these additions.

8. Credit for Taxes Paid in the Case of AOP:
The assessee argued for credit for taxes paid in the status of AOP when the income was assessed in the hands of the individual. The tribunal agreed that credit for taxes paid should be given to the entity in whose hands the income is ultimately taxed and directed the AO to re-examine this issue.

9. Consequential Appeals Regarding the Existence of AOP:
Since the tribunal held that no AOP existed, the assessment orders in the hands of Shri S.N. Rathi & others (AOP) were quashed. The tribunal directed that credits for taxes paid by the AOP should be given to Shri S.N. Rathi (individual).

Conclusion:
The appeals filed by the assessee and revenue for assessment years 2003-04 to 2006-07 in respect of Shri S.N. Rathi (individual) were partly allowed. The appeals filed by the assessee for assessment years 2003-04 to 2005-06 in respect of Shri S.N. Rathi & others (AOP) were allowed, and the appeals filed by the revenue for these years were dismissed. The tribunal directed the AO to re-examine the issue of credit for taxes paid by the AOP.