2015 (8) TMI 508 - HC - Income Tax

Estimation of sales - Tribunal held that the assessments, on estimation, were not permissible, on the face of the material, which was found during the search, and statement made by the assessee - Whether ITAT was justified in approving finding of the CIT (Appeals) for reaching to conclusion about estimate of sales from ₹ 7,59,000 to ₹ 5 lakhs only ? - Held that - After the seizure on October 10, 1990, the chartered accountant of the assessee had sent a clarification on December 8, 1990, with regard to the surrender that the entire surrendered amount of ₹ 9,32,107 was coupled with the statement that the amount may be verified from the credits entered in the diaries. The chartered accountant clarified the statement, with an observation that the surrendered amount must be subject to the verification of the credits entered in the diaries and thereby reducing the amount surrendered to that extent. He had further explained that the amount worked out was on the peak investment, for which working had been done by arranging transactions entered in the diaries in historical sequence in a details statement. The statement included both the unexplained and surplus resulted from such transactions. The total unexplained investment, according to the chartered accountant, worked out to ₹ 6,13,080 as against ₹ 9,32,107 arrived by merely roughly adding the sums mentioned in diaries irrespective of it being a debit entry or credit entry. Further, surplus of cash according to working statement, comes to ₹ 1,52,407. Thus no force in the submission of Revenue that the surrender was unconditional, without any explanation, or that, the assessee had agreed, at that time to add the entire surrendered amount to his income. He had clearly mentioned that the amount surrendered, as reflected in the red and blue diaries, should be accounted, subject to the verification of credits entered in the diaries, and thereby, reducing the amount of surrender, to that extent. No error in the findings of the Tribunal, that the statements made during search, must be correlated with the records, which are found, and if there is any ambiguity, the explanation given by the assessee should be taken into consideration, before making the assessment. The legal position with regard to the undisclosed income from the diaries, does not need any elaboration, however, if the material found during the search, does not tally with the statement records, and that the statement is made subject to the material, which has been seized, a conscious effort should be made to consider the effect of the statement and to make an appropriate assessment by correlating the statements with due material. - Decided against revenue.

Summary

Issues:
1. Interpretation of statements recorded under section 132(4) of the Income-tax Act.
2. Validity of estimation in assessment for pre-block period.
3. Justification of estimation of unaccounted sales and gross profit.

Analysis:

Issue 1: Interpretation of statements under section 132(4)
The case involved a search at the business premises leading to the discovery of diaries indicating unaccounted credit sales. Partners of the assessee-firm surrendered an amount based on these diaries. The Commissioner of Income-tax (Appeals) found the estimation justified under section 145, correlating the surrendered amount with the unrecorded sales. The Tribunal held that assessments based on estimation were impermissible beyond the material found during the search and the statement made by the assessee. The Tribunal emphasized the need to correlate statements with seized records before making assessments.

Issue 2: Validity of estimation in pre-block period assessment
The assessing authority made additions based on estimations for four years, which were partially upheld by the Commissioner of Income-tax (Appeals). The Tribunal found the assessments on estimation impermissible beyond the material found during the search and the statement made by the assessee. The Tribunal emphasized the need for a conscious effort to consider the effect of statements and make appropriate assessments by correlating them with the material seized.

Issue 3: Justification of estimation of unaccounted sales and gross profit
The Commissioner of Income-tax (Appeals) disagreed with the quantum of additions made by the assessing authority, considering the statement of the assessee and the books of account. The Tribunal upheld the Commissioner's assessment, finding it correct. Relying on previous court decisions, the Tribunal dismissed the Revenue's appeal, returning the questions in favor of the assessee. All Income-tax appeals were subsequently dismissed.

This judgment highlights the importance of correlating statements made during searches with seized records for accurate assessments, especially in cases involving unaccounted sales and estimations for pre-block period assessments. The Tribunal's decision emphasizes the need for assessments to be based on concrete evidence and material found during searches, rather than arbitrary estimations beyond the available information.