2022 (4) TMI 1642 - AT - Income Tax

Special audit u/s. 142(2A) - addition on account of share of assessee in undisclosed income of some syndicates, share in inadmissible expenses incurred by such syndicates and some undisclosed capital invested by the assessee in various syndicates - Undisclosed income from liquor trade business through Syndicates - HELD THAT - We find that the Special Auditors appointed u/s. 142(2A) of the Act, have made a very detailed working in which they have determined various inadmissible expenses incurred by such syndicates and have also worked out the assessee's share in profit as well as in inadmissible expenditure incurred by each of the syndicates. Before us, the counsel of the assessee could not establish that the seized material relied upon by the AO was not belonging to the syndicates in which he was clearly stated to be one of the members. No substance in the assessee's ground that he had not formed any syndicate. We also do not find any merit in the assessee's ground to the effect that corresponding to the quantum of share of profit of the assessee in various syndicates, as determined by the AO, no corresponding asset or expenditure was found. We find that first of all, this assertion itself is factually incorrect and contrary to the assessee's own submissions before us in respect of other grounds of appeals through which it is stated that for explaining the sources of undisclosed investment/expenditure the assessee has claimed that the source is from the share of profit from the said syndicates. Even otherwise, not finding any corresponding asset/expenditure, ipso facto, cannot be a ground for presuming that the assessee had not derived undisclosed income, especially in a circumstance when such undisclosed income is evident from ample of documentary evidences found during the course of search. Decided against assessee. Undisclosed income from liquor trade business - We find that while computing the income of the assessee from such syndicates, the AO at para (14.11) of her Assessment Order has taken into consideration the assessment year wise aggregate amount of share of profit/(loss) of the assessee from the syndicates and has also taken into consideration the assessee's share in inadmissible expenses found incurred by such syndicates. We find that while making the assessment year wise additions in the assessee's income, the AO has taken the sum of both the figures after giving set-off for share of loss in syndicates for each year. We are of the view that that having given a finding to the effect that the assessee had formed the syndicates and such syndicates had carried out the liquor business as separate entities there was absolutely no justification for the AO to subject the assessee in respect of profit of such syndicates which in the legal phraseology are nothing but Association of Persons/Body of Individuals. In the instant case, as per the findings given by the AO himself, the share of the assessee as a member of the syndicates (AOPs) was determinate and therefore, the assessee s case would not fall under the provisions of sub-section (1) to section 167B of the Act. On the other hand, the case of the assessee would fall under the provisions of sub-section (2) to section 167B of the Act. In such a situation, the entire income of the syndicates, of which the assessee was found to be a member, would be chargeable to maximum marginal rate in accordance with clause (i) of subsection (2) to section 167B of the Act in the hands of such syndicates only. Income of all the syndicates, as determined by the AO, can be assessed in the hands of the respective syndicates only as these syndicates, being AOPs are classified as separate persons and tax entity u/s. 2(31) of the Act, but, in any circumstance, in the present case, any share of profit from such syndicates cannot be added as income chargeable to tax in the hands of any of its members. We find that, as per the findings given by the ld. CIT(A) as remained uncontroverted by the Revenue, even in respect of some of the syndicates, separate assessments have already been framed by the various assessing officers u/s. 144/153C r.w.s. 153A of the Act and while making assessments in the hands of such syndicates, the amount of undisclosed income earned by these syndicates, have already been determined. It is well known maxim of the law that same income cannot be taxed twice in the multiple hands unless otherwise so warranted by the specific provisions of the Act itself. AO besides making addition on account of assessee s having derived share of profit from various syndicates, has also made addition, to the extent of the assessee s share in such syndicate, qua some alleged inadmissible expenses incurred by such syndicates. We find full substance in the assessee's contention that since none of these inadmissible expenditure was claimed by the assessee himself, and therefore, any disallowance for claim of any such expenses can only be made in the hands of the syndicates which have actually incurred such expenditure. Additions on account of disallowances of expenses, the income of the syndicates ought to have been computed in accordance with the various provisions of the Act and once such income of the syndicate was computed, for the purpose of section 67A, the resultant share of income of the assessee in the total income of the syndicates was required to be apportioned. Thus, any share of the assessee in the inadmissible expenses of the syndicates ought to have been taken as in the nature of share of profit and that was required to be added under section 67A of the Act, but again, after making such addition, the necessary relief in accordance with the provisions of section 86 ought to have been granted by the AO to the assessee which has not been so done in the instant case. In view of the above findings, we find no infirmity in the findings given by the ld. CIT(A) in deleting the entire additions made by the AO in the hands of the assessee on account of assessee's share in profit and inadmissible expenses of various syndicates, for various assessment years in the appeal. Addition on account of undisclosed interest income from capital in M/s. Mahakal Traders - CIT(A) deleted addition - HELD THAT - The interest income earned by the assessee from such syndicate which is in the form of an AOP/BOI, cannot be charged to tax in the hands of the assessee. We find that while dealing with the Ground No. 1 for A.Y. 2010-11 to A.Y. 2013-14 A.Y. 2015-16 Ground No. 2 for A.Y. 2016-17 of the Revenue, we have already discussed the legal position of law that if any AOP is chargeable to tax at the maximum marginal rate, then any income earned by any member from such AOP cannot be charged to tax in the individual hands of the member thereof. In the present case, we find that as per the AO s own findings, both the M/s. Mahakal Traders, Dhar M/s. Mahakal Traders, Indore are AOPs which are separate taxable entities and which are chargeable to tax at the maximum marginal rate and therefore, any interest income derived by the assessee from such syndicates cannot be added to the taxable total income of the assessee. Additions made on account of undisclosed investment in loans and advances on the basis of jottings in seized diaries - CIT(A) deleted addition - HELD THAT - We find merit in the contention of the assessee that on every occasion the company M/s. Regent Beers and Wines Limited had withdrawn cash of the same amount the same dates, from their bank account maintained with State Bank of India, which is supported by the copies of the bank statements of the above named company. We also find merit in the contention of the assessee that a similar additionwas also made by the same AO in the simultaneous assessment proceedings for A.Y. 2010-11 carried out in the case of M/s. Regent Beers and Wines Ltd. and therefore, there was absolutely no justification for the ld. AO to hold that such transactions were carried out by the assessee in his individual capacity. No infirmity in the Order of the ld. CIT(A) in deleting the addition made by the AO on account of alleged investment in loans and advances by the assessee. Investment in loans and advances merely on the basis of seized documents which are in the form of diaries - HELD THAT - Any seized document has to be interpreted in its entirety and a combined full effect of such document is required to be taken into consideration while making the assessment. In our view, making of loans and advances can be subjected to income of an assessee only if the sources of making such loans and advances remain unexplained. However, in the instant case, from the seized diaries and compilation made on the basis of such diaries by the Special Auditors, appointed u/s142(2A) of the Act, the sources of making of loans are becoming visible and the sources are such which can be regarded only as capital receipts in the hands of the assessee and by no stretch of imagination, such sources can be termed to be undisclosed income of the assessee. We find no infirmity in the action of the ld. CIT(A) deleting the additions. Investments in immovable properties - Addition made on the basis of jottings in seized diaries - HELD THAT - From the compilation of the personal diaries, it transpires that in such diaries, the very sources of making unrecorded/unaccounted investment in immovable properties have been shown to be out of unsecured loans taken by the assessee from some other persons as per the details compiled by the Special Auditors in Annexure-1 of Sub-schedule 5. In our considered view, any seized document has to be interpreted in its entirety and a combined full effect of such document is required to be taken into consideration while making the assessment. In our view, making of unrecorded investment can be subjected to income of an assessee only if the sources of making such investments remain unexplained. However, in the instant case, from the seized diaries and compilation made on the basis of such diaries by the Special Auditors, appointed under s.142(2A) of the Act, the sources of making investments in immovable properties are becoming visible and the sources are such which can be regarded only as capital receipts in the hands of the assessee and by no stretch of imagination, such sources can be termed to be undisclosed income of the assessee. We find no infirmity in the action of the ld. CIT(A) in deleting the additions. Unexplained investment in purchase of plot - The provisions of s. 69, 69A and 69B etc. contemplate the investments the sources whereof remained unexplained and it does not contemplate deeming any income on the sole basis of recording or non-recording of any investment in the books of account. Although, in the instant case, the payments made by the assessee for purchase of the land, over and above that stated in the registered sale deeds remained unrecorded in the regular books of account, but, such fact alone cannot be a basis for making the addition if the assessee is in a position to demonstrate the sources of making such investments and in respect of such sources of investments, the assessing officer has already made additions. In our considered view, even if the income from the syndicates remained exempted in the hands of the assesee because of the operation of the law, but, at any rate, the credit for such income deserves to be given to the assesseee for explaining the sources of other investments. Thus, on the theory of telescoping for which the assessee is legally entitled to, we find no merit in the action of the ld. CIT(A) in making the addition. Undisclosed expenditure in purchase of jewelleries - additions deleted by the ld. CIT(A) - HELD THAT - Most vital fact which we noted from the seized document is that such estimate is bearing the date 21/01/2012 which falls during the financial year 2011-12 relevant to A.Y. 2012-13 and therefore, at any rate, in our considered opinion, it could not have been presumed that the assessee made any actual purchase against the jewelleries mentioned in such estimate during the financial year 2012-13 relevant to the assessment year 2013-14 under appeal. In nutshell, the ld. AO has made the subject addition in inappropriate assessment year i.e. in A.Y. 2013-14 instead of correct A.Y. 2012-13 and therefore, on this count alone, in our considered view, no addition was warranted in the assessee s income on account of unexplained expenditure in jewelleries - no infirmity in the action of the ld. CIT(A) in deleting the said addition. Resultantly, the Ground of the Revenue dismissed. Addition on the basis of seized/impounded documents - We are in agreement with the findings given by the ld. CIT(A) that as per the settled law, the initial onus lies upon the assessing officer that the assessee had made any investment or had incurred any expenditure and once this onus is discharged with any positive material on record, then only, the assessee can be subjected to explain the sources of the alleged investment or expenditure. An assessee cannot be supposed to discharge the negative burden. AO of the impugned Order, has disregarded the explanation of the assessee with a finding that the assessee could not disprove the purchase of the jewellery with any positive evidence. We further find that in the loose paper containing the details of Rs.1,22,58,148/-, even the date has not been found mentioned. We also find merit in the contention of the assessee that during the course of the search, no physical jewelleries of the description and weight noted on such estimates were found from any of the premises of the assessee. We find that the findings given by the ld. CIT(A) to the effect that during the course of the search, no seizure of any jewellery was made from the possession of the assessee could not be rebutted by the CIT(DR) and therefore, the contention of the assessee that such loose papers contain only estimates and quotations for the jewelleries and no actual transaction against such estimates had actually taken place has substantial merit. Thus, we do not find any infirmity in the action of the ld. CIT(A) in deleting the addition. As during the course of the search, the assessee was not found to be in possession of any undisclosed jewellery. In view of such facts and circumstances, we do not find any infirmity in the action of the ld. CIT(A) in further granting a relief of Rs. 68,75,000/- to the assessee out of the total additions for A.Y. 2015-16 made by the AO at Rs. 2,22,56,148/- on account of undisclosed jewellery which were solely based on the jottings made in some seized diaries. Investment in purchase of land - As from the audited financial statements of the assessee we find that in the details of bank accounts, the account of the assessee with Punjab National Bank is also getting reflected. Thus, we find sufficient merit in the contention of the assessee that all the payments towards purchase consideration aggregating to Rs. 20,00,000/- was made by the assessee in three trenches through account payee cheques only which were duly recorded in the audited books of account of the assessee. Thus, we find no infirmity in the action of the ld. CIT(A) in deleting the addition of Rs. 10,00,000/- made by the AO in the assessee s income on account of unexplained investment in purchase of land at Lalitpur for A.Y. 2013-14. Undisclosed interest received from a partnership firm - We find that such partnership firm has not claimed payment of any interest on the outstanding balances of partners capital and thus, has not claimed any deduction u/s. 40(b) of the Act. We find merit in the contention of the assessee that as per the explicit proviso to clause (v) of section 28 of the Act, where any interest, salary, bonus, commission or remuneration which has not been allowed to the partnership firm u/s 40(b), the same shall not be subjected to tax in the hands of any partner, in their individual capacities. However, we find that in the present case, the AO, except relying upon the subject loose paper, could not bring any adverse material on record to establish receipt of interest income by the assessee from the partnership firm. It was further observed that even during the course of remand proceedings, the AO failed to controvert the evidences furnished by the assessee. Thus, we do not find any infirmity in the action of the ld. CIT(A) in deleting the subject additions. Undisclosed expenditure on the occasion of son s marriage - From the relevant abstract of the regular cash book of the assessee maintained by him in his regular course of liquor business, we find that as on 05/02/2015, in the regular cash book receipt by way of cash withdrawals from UCO Bank has been shown and on the same date, the account of the assessee has been debited for the same amount showing the withdrawals made by the assessee from his capital account with his proprietorship concern. Again on 08/02/2015, from the copy of the abstract of cash book we find that again the credit for the aforesaid sum has been given to the assessee upon his re-deposition of cash in the proprietorship concern. We find that neither the AO in his remand report, nor the ld. CIT(DR) could controvert the trueness of such entries made in the regular books of account of the assessee. Maintaining the addition to the extent of Rs. 76,32,770/- by the ld. CIT(A) on account of marriage expenses - The provisions of s. 69, 69A, 69B and s. 69C contemplate the investments or the expenditure the sources whereof remained unexplained and it does not contemplate deeming any income on the sole basis of recording or non-recording of any expenditure or investment in the books of account. Although, in the instant case, certain payments made by the assessee for incurrence of marriage expenditure remained unrecorded in his regular books of accounts, but, such fact alone cannot be a basis for making the addition if the assessee is in a position to demonstrate the sources of incurring such expenditure and in respect of such sources of expenditure, the assessing officer has already made additions. In our considered view, although the income from the syndicates remained exempted in the hands of the assesee because of the operation of the law, but, at any rate, the credit for such income deserves to be given to the assesseee for explaining the sources of other investments or expenditure. Thus, on the theory of telescoping for which the assessee is legally entitled to, we find no merit in the action of the ld. CIT(A) in sustaining the addition to the extent of 76,32,770/- in A.Y. 2015-16, towards the unexplained marriage expenses. Accordingly, such additions are also directed to be deleted. Unexplained cash found during the course of search - The claim of the assessee regarding availability of the cash balance of Rs. 14,46,530/- as per his regular cash book cannot be doubted. In such circumstances, the cash amount of Rs. 14,46,530/- cannot be regarded as the unexplained money of the assessee. Thus, we find no infirmity in the action of the ld. CIT(A) in deleting the addition of Rs. 14,46,530/- made by the AO in the assessee s income on account of unexplained cash found and seized. Unexplained or unaccounted investment in purchase of shares of ADPL - The addition having been made by the AO in a wrong year, is not sustainable in the eyes of the law. Accordingly, we are inclined to hold that during the previous year relevant to assessment year 2016-17, the assessee had not made any unexplained or unaccounted investment in purchase of shares of ADPL and therefore, no addition of any amount was warranted in the assessee s income for A.Y. 2016-17 on this count. Accordingly, in our considered view, the ld. CIT(A) was not justified in confirming addition even to the extent of Rs. 71,00,000/- in the income of the assessee for A.Y. 2016-17 out of the total addition of Rs. 3,05,00,000/- made by the AO on this count. Undisclosed income by way of commission from some Geda Ji against sale of share in Jhokanbagh site - AO could not bring on record evidencing transfer of any portion of property situated at Jokhanbag which could have been either in the form of agreement to sale coupled with possession or a sale deed. We are in agreement with the findings of the ld. CIT(A) that even if it is presumed that the assessee was in receipt of a sum of Rs.11,00,000/- against release of 2% share in the land at Jokhanbag, the same would only partake character of an advance unless and until it is proved by any positive material on record that against such receipt, any transfer of property as contemplated u/s 45 read with section 2(47) had taken place by the assessee in favour of Mr. Geda or anyone else. In these circumstances, in absence of any corroborative material on record, we do not find any infirmity in the action of the ld. CIT(A) in deleting the addition of Rs. 11,00,000/- from the income of the assessee for A.Y. 2016-17 on this count. Unexplained cash found during the course of search in bank locker - The sources for the cash found in the lockers of the assessee could not be the regular cash balance available with the assessee. However, we find force in the contention of the assessee that sources of such cash can also be considered as explained out of the accumulated share of profit of the assessee in various syndicates which has been determined by the AO herself. We find that there would remain sizeable amount of funds in the hands of the assessee even after giving benefit of telescoping on other grounds adjudicated by us in the preceding paras and therefore, on the theory of telescoping, we are inclined to hold that the sources of cash found in the lockers of the family members of the assessee were out of the explained sources only and therefore, no addition on this count was warranted. Accordingly, the Ground of the Department is hereby Dismissed. Trading additions in the business income of the assessee without first rejecting the regular books of account u/s. 145(3) - AO has not disturbed the trading results shown by the assessee in his books of accounts which were containing the records only in respect of the liquor business carried out by the assessee in his individual capacity. We find that the AO has made addition in the income of the assessee on a different ground i.e. the assessee's share of profit in various syndicates. Since, the addition has been made by way of discovering a new source of income by the assessee, without disturbing the results shown by the assessee in his regular books of account, there was absolutely no occasion for the AO to reject the regular books by invoking the provisions of s. 145(3). Undisclosed warehouse profit from Syndicate M/s. Mahakal Traders - We find absolutely no infirmity in the action of the ld. CIT(A) in confirming the addition amounting to Rs. 4,25,000/- made by the AO in the assessee s income for A.Y. 2010-11 on the basis of one document seized from the premises of the assessee himself. We find that in such document, the capital account of the assessee has been credited with some warehouse profit and in our considered view, such warehouse profit derived by the assessee is not exempted u/s. 86 of the Act. Unexplained payment of commission to achieve turnover - Upon overall consideration of the entire material placed on record, we do not find any infirmity in the action of the ld. CIT(A) in confirming the addition to the extent of Rs. 2,36,000/- in the income of the assessee for A.Y. 2010-11 on account of payment of commission for achieving turnover for some company. We find that neither before the lower authorities nor before us, the assessee could give any explanation as to the circumstance in which the document seized was found in his possession. In absence of any explanation by the assessee, in our considered view, the AO was justified in making the addition in the assessee s income on account of unexplained payment of commission. Unexplained expenditure in the nature of illegal gratification - We find that the subject paper was found and seized from the premises related to the assessee and from which the payment of Rs. 5,00,000/- is clearly discernible. We find that in respect of such payment, the assessee could not explain the source and therefore, we find no infirmity in the action of the ld. CIT(A) in confirming the aforesaid addition.

Summary

Issues Involved:

1. Legality of Special Audit under Section 142(2A) of the Income Tax Act.
2. Additions based on Special Audit Report and lack of opportunity to be heard.
3. Additions related to undisclosed income and investments in syndicates.
4. Additions on account of unexplained expenditure on son's marriage.
5. Additions due to unexplained cash found during search.
6. Additions related to undisclosed income from partnership firm.
7. Additions based on seized documents and loose papers.
8. Time limit for passing assessment order.

Detailed Analysis:

1. Legality of Special Audit under Section 142(2A):
The appellant challenged the legality of the direction for a special audit under Section 142(2A) without providing an opportunity to be heard. The appellant argued that the audit was directed without specific observations or confronting the appellant regarding the complexity of accounts or specialized nature of business. The CIT(A) upheld the AO's direction for special audit, stating that the appellant's business activities warranted such an audit due to their complex nature.

2. Additions based on Special Audit Report:
The appellant contended that the assessment based on the Special Audit Report was framed without giving an opportunity to be heard. The CIT(A) found that the appellant was given sufficient opportunity and that the report was part of the assessment proceedings. The CIT(A) confirmed the additions made by the AO based on the audit report, stating that the appellant failed to provide satisfactory explanations for discrepancies noted in the audit.

3. Additions related to Syndicates:
The AO made additions based on the appellant's alleged involvement in syndicates, asserting undisclosed income and investments. The CIT(A) held that the appellant had indeed formed syndicates for liquor business and derived income therefrom. However, the CIT(A) deleted the additions on the grounds that the income should be assessed in the hands of the syndicates (AOPs) and not the appellant individually, citing Section 86 and 67A of the Act.

4. Unexplained Expenditure on Son's Marriage:
The AO added Rs.1,27,32,770/- for unexplained marriage expenses. The CIT(A) reduced this by Rs.51,00,000/- after accepting the appellant's explanation regarding cash withdrawals for ceremonial display. The remaining Rs.76,32,770/- was upheld as unexplained expenditure.

5. Unexplained Cash Found During Search:
The AO added Rs.14,46,530/- as unexplained cash found during search. The CIT(A) deleted this addition, accepting the appellant's explanation that the cash was part of the regular business cash balance, duly recorded in the cash book.

6. Undisclosed Income from Partnership Firm:
The AO added undisclosed interest income from a partnership firm. The CIT(A) deleted these additions, noting that the partnership firm had not claimed any interest deduction under Section 40(b), and therefore, the interest was not taxable in the appellant's hands as per Section 28(v).

7. Additions Based on Seized Documents:
Several additions were made based on seized documents and loose papers. The CIT(A) deleted many of these, citing lack of corroborative evidence and noting that some documents did not belong to the appellant or were not found from the appellant's premises.

8. Time Limit for Passing Assessment Order:
The appellant argued that the assessment order was passed beyond the statutory time limit. However, this ground was not pressed during the appellate proceedings, and thus, no specific findings were made on this issue.

Conclusion:
The CIT(A) provided substantial relief to the appellant by deleting several additions made by the AO. The CIT(A) emphasized the need for corroborative evidence and proper legal basis for additions, especially when based on seized documents and special audit findings. The appellant's appeals were partly allowed, and the revenue's appeals were dismissed.