2007 (7) TMI 356 - AT - Income Tax

Computation Of Undisclosed Income - search and seizure operations - incriminating documents and other evidences showing suppression of sales found - estimated the turnover for three earlier years of the block period - seized material related to 57 days only - Violation of the Principles of Natural Justice - Production and sale of Rawa from wheat - HELD THAT - In the case under consideration, whatever undisclosed income on the basis of material is found at the time of search has been offered by the assessee in the return filed for the block period. It is also a fact that in the statement recorded it was admitted that such suppression of income was not there in earlier years. Thus, we find that the action of the AO is arbitrary and not based on material found at the time of search nor it is based on the statement recorded at the time of search. Such addition merely on the basis of arbitrary or notional income on the assumption that since there was suppression of turnover for the period 1st April, 2002 to 21st Jan., 2003 and therefore, by same proportion there was suppression of turnover/income for the earlier years and subsequent year/period, is not sustainable. There is no suppression of turnover or sales or unaccounted business of earlier years; there is no question of making any addition on account of investment for running the unaccounted business for earlier years/subsequent period to search. We, therefore, delete the addition sustained by the CIT(A) on account of suppression of turnover and enhanced by the CIT(A) on account of capital employed for running the unaccounted business. So far as the ground regarding net profit rate of 4 per cent is concerned, this ground becomes infructuous as we have held that there was no unaccounted turnover in earlier years. Therefore, the question of applying 4 per cent net profit rate does not arise. The assessee's appeal is allowed. In the result, Appeal of the assessee is allowed, Appeal filed by the Revenue and CO No. filed by the assessee are dismissed.

Summary

Issues Involved:
1. Addition of Rs. 84,07,790 for alleged suppression of sales.
2. Estimation of capital required to run the undisclosed portion of the business at Rs. 14,86,218.
3. Application of a net profit rate of 4% instead of 3.28%.
4. Typographical error regarding the period of deposits in bank accounts.

Issue-Wise Detailed Analysis:

1. Addition of Rs. 84,07,790 for Alleged Suppression of Sales:
The assessee contested the addition of Rs. 84,07,790 made by the AO and sustained by the CIT(A) for alleged suppression of sales. The AO estimated the undisclosed sales/turnover and undisclosed profit at 4% for the entire block period from 1st April 1999 to 21st January 2003, based on seized documents and bank accounts showing unaccounted sales. The CIT(A) revised the ratio of accounted to unaccounted sales and calculated the unaccounted turnover at Rs. 21,01,94,771, resulting in unaccounted profits of Rs. 84,07,790. The assessee argued that the AO's calculations were based on presumptions and not on actual evidence found during the search. The Tribunal agreed with the assessee, noting that no material was found for the earlier years, and the suppression of sales was not admitted for those years. Consequently, the addition of Rs. 84,07,790 was deleted.

2. Estimation of Capital Required to Run the Undisclosed Portion of the Business at Rs. 14,86,218:
The CIT(A) enhanced the addition by Rs. 14,86,218, estimating the initial capital required to run the unaccounted business. The assessee had admitted an amount of Rs. 2,55,378 as the undisclosed capital. The Tribunal found that since there was no suppression of undisclosed sales in earlier years, there was no basis for such an investment in undisclosed business. Therefore, the addition of Rs. 14,86,218 was also deleted.

3. Application of a Net Profit Rate of 4% Instead of 3.28%:
The assessee argued that the AO applied a net profit rate of 4% without any basis, whereas the net profit declared by the assessee was 3.28%, based on income-tax records. Since the Tribunal held that there was no unaccounted turnover in earlier years, the question of applying a 4% net profit rate did not arise, rendering this ground infructuous.

4. Typographical Error Regarding the Period of Deposits in Bank Accounts:
The Revenue pointed out a typographical error in the CIT(A)'s order, which mentioned the period of deposits as 26th November 2002 to 11th January 2003 instead of 21st January 2003. The Tribunal corrected the period to 57 days, noting that this correction did not affect the merits of the case, as the addition had already been deleted.

Conclusion:
The Tribunal allowed the assessee's appeal, deleting the additions of Rs. 84,07,790 for suppression of turnover and Rs. 14,86,218 for initial capital investment. The Revenue's appeal and the assessee's cross-objection were dismissed as infructuous.