2014 (4) TMI 631 - AT - Income Tax

Estimation of profit - Estimated unaccounted turnover of unaccounted receipts Held that - The CIT(A) worked out the turnover on the basis unaccounted electricity charges worked out at ₹ 13,98,08,035 and estimated the profit on it at 2.76% - According to the CIT(A) unaccounted turnover is more than the accounted turnover - Instead of applying rate of profit at 2.76% as income on unaccounted turnover, it is appropriate to determine the net profit on the basis of mean rate of net profit which was worked at 2.06%, as recorded by the CIT(A) relying upon DCIT Central Circle, Vijayawada Versus M/s. Prakash Arts Moving Media 2010 (11) TMI 863 - ITAT VISAKHAPATNAM - the AO is directed to recompute the net profit on unaccounted turnover at ₹ 13,98,08,035 by applying the mean rate of net profit as mentioned in CIT(A) s order at 2.06% - Decided in favour of Assessee. Addition on account of estimated seed capital Unaccounted business carried on Held that - The addition is made by the CIT(A) only on estimation basis though there is no whisper on this issue at the end of the AO which is nothing but enhancement of assessed income by CIT(A) without giving fair opportunity of hearing to the assessee - no information relating to the capital employed for the purpose of purchase of raw material outside the books of account was found during the course of search - the addition is only on surmises and conjectures which cannot be permitted in search assessment Decided partly in favour of Assessee. Genuineness of the transaction Validity of admission of additional evidence u/s 46A of the Rules Held that - All 13 investors are of the family members/director of the assessee 5 company and out of them 9 are assessed to tax and they have furnished returns of income and investment is through banking channels - the CIT(A) deleted ₹ 30.25 lakhs pertaining to 9 parties and confirmed ₹ 4 lakhs from non 5 assessees Relying upon CIT vs. Lovely Exports 2008 (1) TMI 575 - SUPREME COURT OF INDIA - When the assessee furnished income 5 tax details, the burden cast upon the assessee is proved - If the Department has any doubt it could have proceeded against the investor and not against the assessee the addition cannot be made in the hands of the assessee - the same could be considered in the hands of the respective investors as unexplained investments u/s 69 of the Income Tax Act, 1961 there was no infirmity in the order of the CIT(A) - It is not possible to say that there is violation of Rule 46A of IT Rules Decided against Revenue. Unexplained credits in bank account Addition on account of protective basis - Held that - CIT(A) was of the view that the additions are made by the AO on protective basis in the hands of the assessee - there is a confusion in mentioning of the bank account held jointly by Mr. Shivram K. Agarwal, the assessee and his wife Mrs. Vanita Agarwal at M/s Nasik Cooperative Urban Bank Ltd whose account number is 1624 - the company was shown as source of the cash deposits and also the end 5 user of the amounts for making out its expenditure in the form of electricity charges, the said amounts are offered for tax in the hands of M/s. Mahavir Ispat Pvt. Ltd thus, the AO is directed to delete the addition made on the protective basis in the hands of the assessee.

Summary

Issues Involved:
1. Whether the CIT(A) erred in deleting the addition of unexplained credits in the bank account.
2. Whether the CIT(A) erred in estimating the assumed profit and seed capital required for earning the estimated profit.
3. Whether the CIT(A) erred in making routine additions without incriminating seized material.
4. Whether the CIT(A) erred in treating the unexplained deposits as business receipts and allowing related expenses.
5. Whether the CIT(A) erred in accepting additional evidence without giving the AO an opportunity to cross-examine.
6. Whether the CIT(A) erred in deleting the protective addition in the hands of the assessee.

Detailed Analysis:

1. Deletion of Addition of Unexplained Credits:
The CIT(A) deleted the addition of Rs. 2,44,96,200 made towards unexplained credits, holding that the amount was utilized for payment of electricity charges for business purposes. The CIT(A) observed that the cash deposits were business receipts used for paying electricity bills of the company through account payee cheques, and thus, should be treated as an allowable business expense under section 37(1) of the IT Act, 1961. The CIT(A) concluded that the receipts and expenses were part of the same transaction recorded on loose sheets and should be considered holistically.

2. Estimation of Assumed Profit and Seed Capital:
The CIT(A) estimated the unaccounted turnover based on unaccounted electricity charges and calculated the profit at 2.76%, resulting in an addition of Rs. 38,58,701. The CIT(A) also estimated the seed capital required for earning this profit at Rs. 33,49,567. The Tribunal, however, directed the AO to recompute the net profit on unaccounted turnover by applying a mean rate of 2.06%, as recorded by the CIT(A), and deleted the addition of Rs. 33,49,567 for seed capital, deeming it as based on surmises and conjectures without proper opportunity for the assessee to be heard.

3. Routine Additions Without Incriminating Seized Material:
The CIT(A) made additions based on estimates without any incriminating seized material detected during the search operations. The Tribunal found that the CIT(A) resorted to routine additions purely on estimate basis, which should not have been made in a search-related assessment without corroborative evidence.

4. Treatment of Unexplained Deposits as Business Receipts:
The CIT(A) treated the unexplained deposits as business receipts and allowed related electricity expenses as business expenditure. The Tribunal upheld this view, noting that the deposits and subsequent payments were part of the same transaction, evidenced by payments made through account payee cheques and supported by electricity bills.

5. Acceptance of Additional Evidence:
The CIT(A) accepted additional evidence submitted by the assessee during the appellate proceedings without giving the AO an opportunity to cross-examine, violating Rule 46A of the IT Rules. The Tribunal, however, found no infirmity in the CIT(A)'s order and confirmed the deletion of the addition, relying on the Supreme Court's judgment in the case of Lovely Exports.

6. Deletion of Protective Addition:
The CIT(A) deleted the protective addition made in the hands of individual assessees, holding that the cash deposits pertained to the business of the company, M/s Mahavir Ispat Pvt. Ltd. The Tribunal vacated the protective assessments, directing that the additions should only be sustained in one hand if warranted.

Conclusion:
- ITA No. 990/Hyd/2012 (Assessee) - Partly allowed.
- ITA No. 1089/Hyd/2012 (Revenue) - Dismissed.
- ITA No. 1090/Hyd/2012 (Revenue) - Dismissed.
- ITA No. 639/Hyd/2012 (Revenue) - Dismissed.
- ITA No. 713/Hyd/2012 (Assessee) - Partly allowed for statistical purposes.
- ITA No. 640/Hyd/2012 (Revenue) - Allowed for statistical purposes.
- ITA No. 430/Hyd/2012 (Revenue) - Dismissed.
- ITA No. 641/Hyd/2012 (Revenue) - Dismissed.