2013 (6) TMI 13 - AT - Income Tax

Validity of search - addition of income - as per assessee assessment order is barred by limitation - Held that - As the assessee has urged this issue for the first time before the CIT(A) after a gap of almost three years from the date of search it is well settled proposition that the retraction should be made at the earliest possible opportunity. On perusal of the case of Cochin Plantations Ltd Vs. State of Kerala 1997 (2) TMI 76 - KERALA High Court would show that the assessment order would become complete and effective if it is issued so as to be beyond the control of the authority concerned for any possible change or modification therein meaning thereby the assessment order should leave the hands of the AO. The date of service of the same is the date on which it becomes operational or takes effect for the consequences arising there from. In the instant case the impugned assessment orders were passed on 31.12.2010. It is not shown that the said orders remained in the hands of the assessing officere even after 31.12.2010. On the contrary the D.R has submitted that they have been dispatched on that date itself leaving them beyond the control of the assessing officer to make any change or modification. Under these set of facts the impugned assessment orders have become complete and effective on 31.12.2010 itself in which case they cannot be considered as barred by limitation. Accordingly reject the grounds raised by the assessee on this issue. Rejection of book results - Held that - The gold and silver ornaments are high valued items and hence all traders are vigilant over the stock kept by them. Hence at any point of time a gold merchant would be in a position to tell the aggregate quantity of stock held by him. If a prudent business man follows a systematic method of accounting only a portion of purchase and sales then it would be difficult for anybody to find any defect in the books of accounts. In the instant case also even if the AO did not point out any defect in the books of accounts other factors as the assessee claims that the excess stock actually belong to the partner of the assessee firm veracity of which requires examination yet the fact remains that the assessee did not account for the same in its books of account even as per its claim thus the books of accounts maintained by the assessee are not reliable. Hence CIT(A) was justified in confirming the action of the AO in rejecting the books of accounts of the assessee for all the years. Estimation of income of the assessee - Held that - It is a fact that the AO did not bring on record any other material was brought on record except the estimation slips yet there is some basis in the estimate made by the AO though they cannot be considered as conclusive proof. The CIT(A) however has not brought on record any material to support his view to reduce the estimated turnover to five times of the declared turnover. Under these circumstances it is forced to estimate the total turnover on a via media manner. Accordingly on a conspectus of the matter the total turnover may be estimated at six times of the declared turnover and it would meet the ends of justice. Since the AO has himself has determined the rate of Gross profit @ 20% as against the G.P. declared by the assessee at higher rates on the reasoning that a normal business man could realize Gross Profit to that extent only no interfere with the decision of CIT(A) in upholding the rate of gross profit @ 20%.

Summary

Issues Involved:
1. Validity of search proceedings.
2. Partial sustaining of the addition made by the Assessing Officer (AO).
3. Granting substantial relief in the addition made by the AO.

Issue-wise Detailed Analysis:

1. Validity of Search Proceedings:
The assessee challenged the validity of the search on the grounds that the panchas were not present during the search, as mandated by Rule 112(6) and (7) of the Income Tax Rules. The assessee supported this claim with affidavits from the panchas. However, the Ld CIT(A) held that the validity of the search cannot be examined in appellate proceedings, relying on the decision of the Delhi Special Bench of ITAT in Promain Ltd Vs. CIT. The Ld CIT(A) also rejected the claim on merits, noting that the panchanamas were signed by the panchas and the assessee did not raise any objections during the search or assessment proceedings. The appellate tribunal, however, agreed with the assessee's contention based on the Karnataka High Court's decision in C.Ramaiah Reddy Vs. ACIT, which allows the validity of the search to be examined in appellate proceedings. Despite this, the tribunal found that the affidavits from the panchas, filed almost three years after the search, were not credible and rejected the challenge to the search's validity.

2. Partial Sustaining of the Addition Made by the AO:
The AO rejected the books of accounts maintained by the assessee, citing several discrepancies, including unaccounted sales and purchases, and excess stock of gold and silver ornaments found during the search. The AO estimated the turnover at ten times the declared turnover and applied a gross profit (GP) rate of 20%, assessing the difference as undeclared income. The Ld CIT(A) partially sustained this addition, reducing the estimated turnover to five times the declared turnover but maintaining the GP rate at 20%. The appellate tribunal upheld the rejection of the books of accounts, agreeing that the high GP rates declared by the assessee (36.55% to 48.08%) indicated unreliability in the accounts. The tribunal found that the practice of making sales through estimate slips and the excess stock found during the search supported the AO's decision to reject the books.

3. Granting Substantial Relief in the Addition Made by the AO:
The revenue challenged the Ld CIT(A)'s decision to grant substantial relief by reducing the estimated turnover. The appellate tribunal noted that while the AO's estimation based on estimate slips for 15 days was a basis for determining suppression of sales, it was not conclusive proof that the assessee accounted for only 10% of actual sales at all times. Considering the festival and marriage seasons' impact on sales, the tribunal found the Ld CIT(A)'s reduction to five times the declared turnover unsupported by material evidence. The tribunal adopted a via media approach, estimating the total turnover at six times the declared turnover and upheld the GP rate of 20% as determined by the AO.

Conclusion:
The appeals filed by both the assessee and the revenue were partly allowed. The tribunal upheld the rejection of the books of accounts and the GP rate of 20% but modified the total turnover estimation to six times the declared turnover, balancing the contentions of both parties. The decision emphasized the importance of credible evidence and timely objections in challenging search proceedings and the reliability of books of accounts.