2003 (9) TMI 304 - AT - Income Tax

Validity of AO's power to disturb trading results already disclosed in regular returns - Search and seizure operation u/s 132 - notices u/s 158BC - Addition on the basis of making any estimation of sales by the AO - HELD THAT - Undisputedly no material whatsoever was found by the search party during the course of search, which suggests that these assessees have not disclosed their income fully and truly. Chapter XIV-B is a special chapter by which only income can be computed which has not been disclosed by assessee falling under the block period. The AO has drawn an adverse view on the basis of sale register relating to the period 1st April, 1995 to 22nd Feb.,1996, and picked up some figures of sales and then arrived at a figure of GP rate, which was of 7.86 per cent in some cases and in some other case ft was 7.46 per cent and after allowing a marginal relief, the AO applied a GP rate of 7 per cent for all the years falling under the block period. Though provisions of s. 158B(b) were amended with retrospective effect from 1st July, 1995, but under these provisions also it has been provided that entry in the books of accounts or other document or transaction represents wholly or partly income or property which has not been or would not have been disclosed for the purpose of this Act. As stated, undisputedly no material whatsoever was found up to the asst. yr. 1995-96, which suggests that any part of income has not been disclosed by the assessee. Therefore, the contention of the learned DR that the AO can disturb the trading results of earlier year, in our considered view, has no weight or leg to stand. We found that they are in regard to regular assessments, as while completing the assessment during assessment proceedings if AO found that assessee has not declared fully and truly trading results, then he can reopen the assessments of earlier years also. However, as stated above, no material whatsoever was found by the search party for the years falling under block period upto AY 1995-96. As also stated above that Chapter XIV-B is a special chapter under which only income which has not been disclosed, can be assessed and those also on the basis of material found during the course of search. Assessment under Chapter XIV-B and assessment under ss. 143, 144 and 147/148 are altogether different. If AO found that assessee has not disclosed fully and truly particulars of income while filing the regular returns, then he can resort the provisions of s. 142(1), 143(2) or s. 147/148, but while completing the assessment u/s 158BC, he cannot draw any adverse inference on the returned income already disclosed while filing the regular returns. Therefore, the decisions relied upon by the learned DR are distinguishable and not applicable on the facts of the present case. As stated, no evidence has been found to conclude that assessee has failed to disclose any transaction, which is in the nature of an income and has not been entered by it in the books of accounts. On the contrary the AO himself admitted that assessee had entered into transactions which, though, have all been disclosed, yet the AO estimated the higher GP rate for the entire block period upto asst. yr. 1995-96. Therefore, we are not hesitant in holding that there was no evidence or material with the AO to adopt a higher GP rate for the block period upto asst. yr. 1995-96. Accordingly, the entire additions made for the block period up to asst. yr. 1995-96 are deleted by us in all the four cases. Estimation of sales by the AO - Neither any estimate can be made as no other material or evidence was found by the AO. Even during the course of hearing of appeal, the learned DR has fairly conceded that if original copies of cancelled bills could have been produced, then the Department has no case for making any addition. On these submissions of the learned DR, the Bench required to produce the original cancelled bills and in reply at the very same time, the counsel of the assessee has shown the blank bills, which were duly cancelled. On direction of the Bench, the list of cancelled bills, along with photocopies of blank cancelled bills or marked B bills were filed by the learned counsel and after examining these cancelled bills and comparing with the entries in the sale register, we found that these cancelled bills were part of the regular bill books maintained by the assessee for its business purposes. All the bill numbers were entered in the sale register and they were tallied, either they were issued on the basis of sales made or they were cancelled bills as they were entered in the sale register serial-wise. We further found that even each assessee has filed regular return for asst. yr. 1996-97 with the Department and as per statement of the learned counsel, the same has been accepted also. Thus, we found that there was no basis for making any estimation of sales by the AO. Accordingly, we delete the estimation of sales made by the AO. There was a further addition of Rs. 2,28,264 in sales in the case of H.C. Chandna (P) Ltd. and difference of Rs. 1,42,655 in case of Chandna Textile Traders. These differences were found by the AO on the basis of sale register maintained by assessee. We have already held that sale register was part of regular books of accounts, and the date of filing of the return was not due, as the search was conducted before the close of the year. Therefore, it cannot be said that these differences could not be or would not have been reconciled while preparing the final return of income at the time of auditing of accounts, as the accounts are liable to audit as per provisions of s. 44AB of the Act. Therefore, we cancel the estimation of sales of these two amounts, as mentioned above, in cases of these two assessees. Estimation of sales were made by the AO by drawing an adverse inference on a paper found during the course of search, wherein it was mentioned that how much purchases are required and how much sate bills are required. From this document, it was inferred by the AO that the assessee is adopting reversing method to show its sales and purchases. Therefore, he made an estimate of sales of Rs. 12 lakh and Rs. 17,80,263 over and above the sales already shown in the sale register. We have discussed the issue in detail that without any cogent material or evidence, no addition or estimate is possible while making the assessment u/s 158BC. If any rough estimate or trading account was found, the AO could have considered that trading account only but he was not supposed to make any estimation of sales without any direct evidence of sales. Neither any evidence was found nor there was any material that assessee has made purchases or have made sales, which were not recorded in the sale register. Therefore, for the same reasoning as given above while disposing other issues which were similar in nature, we cancel the estimation of sales in these cases also. For the same reasoning we cancel the estimate of higher GP rate also. Accordingly, the entire additions are cancelled which were made on account of estimation of sales and on account of higher GP rate applied by the AO. For the sake of completeness in these two cases also the assessee had filed its regular returns, copy of acknowledgement of receipt of returns were also filed during the course of hearing. As stated by the counsel of the assessee that even assessments have already been completed on the basis of regular returns filed by these assessees. It was also stated by the learned counsel that all the discrepancies were reconciled while filing the regular return, as the due date was not expired when the search took place. In the result, the appeals of all these four assessee are allowed.

Summary

Issues Involved:
1. Validity of AO's power to disturb trading results already disclosed in regular returns.
2. Estimation of sales and application of higher GP rate.
3. Treatment of interest income as undisclosed income.
4. Adequacy of opportunity provided to the assessee.

Summary:

1. Validity of AO's Power to Disturb Trading Results:
The Tribunal examined whether the AO can disturb trading results already disclosed in regular returns and accepted. The Tribunal noted that as per the provisions of s. 158B(b) and s. 158BB(1)(d), the AO can make additions for the block period if material found during the search indicates undisclosed income. However, no material was found suggesting that the assessees had not disclosed their income fully and truly for the years up to the assessment year (AY) 1995-96. The Tribunal held that the AO cannot disturb trading results for these years under Chapter XIV-B, which is a special chapter for assessing undisclosed income based on material found during the search.

2. Estimation of Sales and Application of Higher GP Rate:
The AO estimated sales and applied a higher GP rate of 7% for the period from 1st April 1995 to 22nd Feb 1996, based on documents found during the search. The Tribunal found that the AO's estimation was based on assumptions and not on direct evidence. The Tribunal noted that the sales registers were part of regular books of accounts, and the due date for filing returns had not expired. Therefore, the transactions could not be treated as undisclosed. The Tribunal deleted the estimation of sales and the application of a higher GP rate, stating that there was no cogent reason for such actions.

3. Treatment of Interest Income as Undisclosed Income:
The AO treated interest income as undisclosed income in the cases of H.C. Chandna (P) Ltd. and Chandna Textile Traders. The Tribunal found that the interest income was part of regular income, and no additions were made on account of undisclosed deposits. The Tribunal held that the AO had not applied his mind and canceled the additions of interest income.

4. Adequacy of Opportunity Provided to the Assessee:
The Tribunal noted that the assessees had replied to each letter from the AO and were ready to provide further information if required. The Tribunal found that the assessees were not given adequate opportunity to explain the material on which adverse inferences were drawn. However, since the entire additions were deleted, this issue was treated as resolved in favor of the assessees.

Conclusion:
The Tribunal allowed the appeals of all four assessees, deleting the additions made by the AO on account of estimation of sales, application of higher GP rate, and treatment of interest income as undisclosed income. The Tribunal emphasized that any addition under s. 158BC must be based on material found during the search, and no adverse inference can be drawn without direct evidence.