2004 (10) TMI 315 - AT - Income Tax

Validity of the assessment u/s 158BE - authorization for search u/s 132 or for requisition u/s 132A - Ownership and validity of duplicate books of account - Additions based on alleged undisclosed income and investments - purchases and sales of coal - HELD THAT - We are of the view that the purpose of this Panchanama was merely to lift the prohibitory order passed u/s. 132(3) of the Act which cannot be equated to authorize search for the purpose of recognizing last Panchanama made u/s 158BE(1) of the Act. Even the Panchanama executed on 8th Dec., 1998 does not speak of any search in the premises on which the seal was put by way of prohibitory order as u/s. 132(3). Therefore, under these circumstances the only conclusion can be drawn that there was no search or seizure on 8th Dec., 1998 and the search proceeding had been concluded prior to 31st Oct., 1998. As the block assessment should have been completed within two years from the end of the month when the search was executed, i.e., by 31st Oct., 2000, the assessment has been framed by the AO on 27th Dec., 2000, i.e., after the expiry of two years. Therefore, it is beyond the time-limit as stipulated under s. 158BE(1) and accordingly we quash the assessment so framed. While holding, so, we rely on the aforesaid view supported by the decisions relied by the learned AR, to which the learned DRs has also not objected in the Bar. Since we have already quashed the assessment, there is no need to deal with the other grounds of appeal. Thus, we allow ground No. 2 along with additional ground of the assessee. We have gone through the statement of Sri G. Rama Rao, partner also and that of the managing partner of the assessee-firm. Although the managing partner in reply to question No. 4 accepted that the transaction recorded in the other books at the time of search are the duplicate set of books, but in reply to question No. 5 he stated that the transaction relating to the Delta Paper Mills relate to Sri Sai Ram Traders and agreed to file the confirmation which was subsequently filed. We agree with the submission of the AR that at the most, the sale on the basis of material seized could be regarded to belong to the assessee. Accordingly, we set aside the order of the AO and direct him to take only Sales outside the books. In view of the provision of s. 44AF which, can be a guiding factor for estimating the profit, we also direct the AO to compute profit @ 5 per cent thereon. The investment made outside the books of account cannot be ruled out. The AO has taken the investment to be 50 per cent of the profits added by him which, in our opinion, is just and fair keeping in view the nature of the business and, accordingly, we sustain the addition for the profit on undisclosed turnover and on account of capital investment. Thus, the additions sustained by CIT(A) are reduced and AO is directed accordingly. Addition made in each of the year in the block period in respect of salary paid to, Sri Rama Rao , we find force in the submissions of learned AR that if income is added, the expenditure incurred by way of salary must be allowed as deduction as this expenditure must have been incurred for earning the undisclosed income. Accordingly, we delete the addition in each of the assessment in the block period. In the result, the appeal of the assessee so far ground relates merits are concerned is party allowed although we have already quashed the assessment by allowing ground No. 2 and additional ground raised by the assessee.

Summary

Issues Involved:
1. Validity of the assessment u/s 158BE.
2. Ownership and validity of duplicate books of account.
3. Additions based on alleged undisclosed income and investments.
4. Disallowance of expenses and additions related to stock discrepancies.

Summary:

1. Validity of the Assessment u/s 158BE:
The primary issue was whether the assessment completed on 27th Dec., 2000 was within the time allowed by s. 158BE of the IT Act. The Tribunal found that the search and seizure operations concluded on 21st Oct., 1998, and the prohibitory order issued on 21st Oct., 1998, was lifted on 8th Dec., 1998. The Tribunal held that the prohibitory order u/s 132(3) does not extend the time limit for completing the assessment. Consequently, the assessment should have been completed by 31st Oct., 2000. Since it was not, the assessment was quashed as void ab initio.

2. Ownership and Validity of Duplicate Books of Account:
The assessee contended that the duplicate books found during the search belonged to Sri Sai Ram Traders, not the assessee. The Tribunal noted that the books were found at the premises of Sri G. Rama Rao and brought to the assessee's premises. The Tribunal found that the sales recorded in these books were partly confirmed by Delta Paper Mills Ltd. as transactions with Sri Sai Ram Traders. Therefore, the Tribunal directed the AO to consider only the unconfirmed sales as belonging to the assessee and compute the profit accordingly.

3. Additions Based on Alleged Undisclosed Income and Investments:
The Tribunal addressed various additions made by the AO:
- Sales Outside Books: The Tribunal directed the AO to consider only Rs. 5,53,648 as sales outside the books and compute profit at 5% thereon. The investment outside the books was sustained at 50% of the profit.
- Salary to Sri Rama Rao: The Tribunal allowed the deduction of salary paid to Sri Rama Rao as it was incurred for earning the undisclosed income.
- Commission Income: The Tribunal reduced the commission income addition to Rs. 3,300, considering a reasonable commission rate of Rs. 25 per tonne.

4. Disallowance of Expenses and Additions Related to Stock Discrepancies:
- Disallowance u/s 40A(3): The Tribunal deleted the disallowance, stating that no disallowance can be made when income is computed on an estimated basis.
- Excess Stock: The Tribunal found that the AO did not properly account for the stock belonging to other parties. It directed the AO to consider 75% of the stock as belonging to the assessee and value the excess stock at Rs. 1,200 per tonne, reducing the addition to Rs. 64,800.

Conclusion:
The Tribunal quashed the assessment as it was beyond the time limit stipulated u/s 158BE. Additionally, it provided specific directions on the treatment of duplicate books, undisclosed income, and stock discrepancies, resulting in partial relief to the assessee.