2010 (7) TMI 769 - HC - Income Tax

Undisclosed investment in jewellery - search - Held that - Central Board of Direct Taxes Circular No. 1916, dated May 11, 1994, lays down guidelines for seizure of jewellery and ornaments in the course of search, the same takes into account the quantity of jewellery which would generally be held by the family members of an assessee belonging to an ordinary Hindu household. The approach adopted by the Tribunal in following the said circular and giving benefit to the assessee, even for explaining the source in respect of the jewellery being held by the family is in consonance with the general practice in the Hindu families whereby jewellery is gifted by the relatives and friends at the time of social functions, viz., marriages, birthdays, marriage anniversary and other festivals. These gifts are customary and customs prevailing in a society cannot be ignored. Thus, although the circular had been issued for the purpose of non-seizure of jewellery during the course of search, the basis for the same recognizes customs prevailing in the Hindu society. In the circumstances, unless the Revenue shows anything to the contrary, it can safely be presumed that the source to the extent of the jewellery stated in the circular stands explained - in favour of assessee. Gross profit - AO had applied the rate of 10 per cent. for working out the gross profit from trading activity and allowed the deduction at the rate of 5 per cent. towards expenses - Held that - The gross profit had been merely estimated but there was no basis for such estimation in respect of gross profit or expenses in the assessment order. As whatever income the assessee may have earned from unaccounted business, the same would be held by the assessee as an investment or would have been spent towards personal expenses. During the course of search, no material had been brought on record to prove the investment of such undisclosed amount - Keeping in view the totality of the facts the Tribunal found it appropriate that the gross profit should be adopted at the rate of 5 per cent, on the same set of facts, the Commissioner (Appeals) has worked out the gross profit at the rate of 6 per cent. whereas the Tribunal has adopted the rate of 5 per cent. Thus, the two authorities have on the same set of facts made different estimates. Thus, on these facts, the order impugned does not give rise to a question of law so as to warrant interference because that would only be a case of replacing one estimate by another estimate. Addition of income from bill discounting Held that - AO has estimated the bill discounting income on the basis of cheques being deposited in the accounts of Kamal Trading, Jai Ambe Trading Co. and Arihant Sales Corporation and others & observations of the AO clearly denote that this also relates to the discounting of the cheques, that is why the assessee has deposited the cheques in these accounts. As the figures of these cheques discounted relating to Kamal Trading, Jai Ambe Trading Co. and Arihant Sales Corporation have already confirmed the addition on account of income from the cheque discounting. Therefore, no separate addition can be made estimating as income from the bill discounting - in favour of assessee. Unexplained expenditure incurred on renovation of house property - Held that - The expenditure to the extent of ₹ 3.73 lakhs for renovation of the house property had been incurred by Smt. Kantadevi and the said expenditure was disclosed in the return filed by the said Smt.Kantadevi, hence, AO could not have disregarded the same. Besides the expenditure of ₹ 4.92 lakhs incurred by the asses-see is concerned, the assessee had already made a disclosure of the said amount in the total disclosure of ₹ 30 lakhs. In the circumstances, no infirmity can be found in the view taken by the Tribunal in holding that the addition was required to be reduced to the said extent - in favour of assessee.

Issues Involved:
1. Undisclosed investment in jewellery.
2. Unexplained interest payments.
3. Disallowance of payments under section 40A(3) of the Income-tax Act.
4. Adoption of gross profit rate.
5. Income from adat commission.
6. Income from bill discounting.
7. Unexplained expenditure on renovation of house property.

Detailed Analysis:

1. Undisclosed Investment in Jewellery:
The Assessing Officer (AO) treated 655 grams of jewellery valued at Rs. 3,46,668 as unexplained and added it to the income of the assessee. The Commissioner (Appeals) restricted this addition to Rs. 1,01,145, but the Tribunal fully deleted the addition. The Tribunal relied on Central Board of Direct Taxes (CBDT) Circular No. 1916, which provides guidelines for the seizure of jewellery during searches. The Tribunal's approach was deemed reasonable as it considered customary practices in Hindu families, where jewellery is often gifted during social functions. The High Court found no legal error in the Tribunal's decision, emphasizing that the circular recognizes prevailing customs, and unless the Revenue shows otherwise, the source of the jewellery can be presumed explained.

2. Unexplained Interest Payments:
The AO disallowed interest payments of Rs. 1,68,680 and Rs. 1,06,489 noted on a seized paper, despite the assessee's claim that no interest was claimed as a deduction. The Commissioner (Appeals) deleted the addition, and the Tribunal confirmed this. The High Court upheld the Tribunal's decision, noting that the assessee had not claimed such interest payments, and thus, there was no question of disallowing them.

3. Disallowance of Payments under Section 40A(3):
The AO disallowed Rs. 63,51,540 under section 40A(3) on the basis of estimated cash purchases of Rs. 3 crores. The Tribunal found that the AO had merely estimated cash payments without specific evidence of payments exceeding Rs. 20,000. The High Court agreed with the Tribunal, stating that disallowance under section 40A(3) cannot be made on an estimated basis without concrete evidence.

4. Adoption of Gross Profit Rate:
The AO applied a 10% gross profit rate for trading activity, which the Commissioner (Appeals) reduced to 6%. The Tribunal further reduced it to 5%, finding no basis for the AO's estimation. The High Court noted that the Tribunal's decision was based on the totality of facts and circumstances, and replacing one estimate with another does not give rise to a question of law.

5. Income from Adat Commission:
The AO estimated the adat commission income at Rs. 30,17,000. The Commissioner (Appeals) confirmed this, but the Tribunal deleted the addition. The High Court found that the Tribunal's conclusions were based on factual findings and appreciation of evidence, and thus, did not warrant interference.

6. Income from Bill Discounting:
The AO estimated bill discounting income at Rs. 15,93,600, which the Commissioner (Appeals) confirmed. The Tribunal, however, deleted the addition, noting that the figures related to cheque discounting and had already been accounted for in the cheque discounting income. The High Court upheld the Tribunal's decision, finding no error in its factual conclusions.

7. Unexplained Expenditure on Renovation of House Property:
The AO noted that the total renovation expenditure was Rs. 17,58,503 and made an addition of Rs. 11,85,000 after accounting for disclosed amounts. The Tribunal reduced this addition by Rs. 8.65 lakhs, considering the expenditure incurred by Smt. Kantadevi and the assessee's disclosure of Rs. 4.92 lakhs. The High Court found no infirmity in the Tribunal's decision, as the expenditure had been duly disclosed and accounted for.

Conclusion:
The High Court found no legal errors in the Tribunal's decisions on all issues and dismissed the appeals, concluding that the Tribunal's findings were based on factual evidence and did not give rise to any substantial questions of law.

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