2014 (12) TMI 524 - AT - Income Tax

Estimation of profits Directions made by Tribunal to AO for consideration Held that - In the first round of appeal, CIT(A) considering that assessee could have purchased material for making turnover outside the books of accounts, has considered the average purchases in the earlier years to arrive at 60% of the cost of sales, being purchase cost - there are clear indications/directions of what AO was supposed to do and also gave certain opinions - without considering these, AO travelled beyond the directions of ITAT and beyond the scope of consequential assessment proceedings in determining the income at 100% of the so-called undisclosed turnover - the entire addition as confirmed by CIT(A) cannot be upheld - to that extent, assessee automatically gets relief without going into any other aspects. Undisclosed turnover and ratios Held that - Assessee contended that turnover was recorded by parties for the purpose of supervision and those two parties from whom statements are recorded are not partners of the firm - these aspects were already considered in first round of appeal and admittedly, the spiral bound diaries are held by ITAT to be material available at the time of search and the same relates to assessees . What profit can be estimated on the basis of material available on record, including the material found during the course of search operations Held that - The seized material do pertain to assesses - The detailed discussion of CIT(A) to that extent is upheld - turnover can be estimated at 1 1.28, this turnover pertains to both the firms and not to one firm alone, as the combined turnover in the books of accounts pertains to both the firms, stated for the purpose of controlling the transactions - Therefore AO is directed to rework out the total turnover taking the ratio at 1 1.28. and apportion between two firms on the basis of declared turnover in each year. Adjudication of year(s) in which this estimation can be resorted to Held that - Assessee has estimated in all years in the Block period, without restricting to the years in which such dairies are available relying upon Rajnik and Co. vs. ACIT 2001 (4) TMI 53 - ANDHRA PRADESH High Court - there is admission by the partner that they were resorting to same method in earlier years as well Even then, the GP adopted in other years was less - However in this case, assessee has not admitted that the turnovers recorded are undisclosed In fact the statement was that they recorded in small note books for the purpose of controlling and belongs to both firms and are of accounted transactions - incriminating material was available only in AYs 2003-04, 2004-05 and part of AY 2005-06 in the Block period Thus, estimation can only be done in those years only - Even though AO verified some DDs pertaining to AY 2002-03 for rejecting books of account, the invoices / data impounded are in relation to invoices recorded in Books of account - There is finding by AO that invoices are accounted but payments by DDs are not matching - that alone cannot be taken for estimation of undisclosed turn over in AY 2002-03 - AO is directed to calculate the additional sales turn over in both assessee s case in those three assessment years i.e., AY 2003-04, 2004-05 and Part of AY 2005-06 only - it is not correct to tax 100% of the undisclosed turnover as income as assessee certainly incurs expenditure including cost of purchases - 10% net profit on the additional turnover would be justified Decided partly in favour of assessee.

Summary

Issues Involved:
1. Legitimacy of the suppression of sales and income estimation.
2. Validity of the statements and evidence used by the Assessing Officer (A.O.).
3. Correctness of the ratio used to estimate undisclosed turnover.
4. Applicability of the provisions of section 132(4) and section 145(3).
5. Determination of the appropriate assessment years for estimation.
6. Calculation of profit on undisclosed turnover.

Issue-wise Detailed Analysis:

1. Legitimacy of the Suppression of Sales and Income Estimation:
The primary issue revolves around whether the suppression of sales and the income estimation by the A.O. were legitimate. The A.O. relied on seized spiral diaries and statements recorded during the search to estimate the suppressed sales. The A.O. estimated the income at 100% of the undisclosed turnover, which was contested by the assessees. The Tribunal found that the A.O. did not provide a clear connection between the seized material and the assessee's business transactions, leading to a remand for reconsideration.

2. Validity of the Statements and Evidence Used by the A.O.:
The A.O. used statements recorded under section 132(4) and the contents of seized diaries to estimate the suppressed sales. However, the Tribunal noted that the A.O. did not adequately establish how the seized material related to the assessees. The Tribunal emphasized the need for a fair opportunity for the assessee to explain the notations in the diaries and directed the A.O. to reconsider the issue afresh, considering all material facts.

3. Correctness of the Ratio Used to Estimate Undisclosed Turnover:
The A.O. used a ratio of 1:1.66 to estimate the undisclosed turnover based on declared sales for specific months. The assessees contended that the correct ratio should be 1:1.28, considering both firms' declared sales. The Tribunal found merit in the assessee's contention and directed the A.O. to rework the total turnover using the 1:1.28 ratio and apportion it between the two firms based on declared turnover in each year.

4. Applicability of the Provisions of Section 132(4) and Section 145(3):
The A.O. invoked the provisions of section 132(4) and section 145(3) to estimate the suppressed sales. The Tribunal noted that the A.O. did not adequately justify the application of these provisions, especially since the evidence did not conclusively link the seized material to the assessees' undisclosed income. The Tribunal emphasized that estimation should be based on material facts and directed the A.O. to reconsider the issue.

5. Determination of the Appropriate Assessment Years for Estimation:
The A.O. estimated suppressed sales for all years in the block period. However, the Tribunal found that incriminating material was available only for specific assessment years (2003-04, 2004-05, and part of 2005-06). The Tribunal directed the A.O. to restrict the estimation to these years, in line with the evidence available.

6. Calculation of Profit on Undisclosed Turnover:
The A.O. treated 100% of the undisclosed turnover as income, which was contested by the assessees. The Tribunal noted that the A.O. did not consider the cost of sales and other expenses recorded in the books. The Tribunal directed the A.O. to estimate the net profit at 10% of the additional turnover, considering the varying profit ratios declared by the assessees in different years.

Conclusion:
The Tribunal found several issues with the A.O.'s estimation of suppressed sales and income. It directed the A.O. to rework the total turnover using a corrected ratio, restrict the estimation to specific assessment years, and calculate the profit on undisclosed turnover at 10%. The appeals for assessment years 1999-2000 to 2002-03 were allowed, and appeals for 2003-04 to 2005-06 were partly allowed. The Tribunal emphasized the need for fair consideration of all material facts and adherence to legal provisions.