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TMI Blog2013 (1) TMI 422X X X X Extracts X X X X X X X X Extracts X X X X ..... atement given by him u/s 132(4) - AO was right in law in initiating proceedings u/s 153C - against assessee. Violation of principles of natural justice by not confronting the documents obtained by the AO from the third parties - Held that:- There cannot be any dispute that the appellate proceedings are also considered as continuation of assessment proceedings in certain aspects, particularly in view of the fact that the powers of the CIT(A) are co-terminus with that of the AO. Hence, the assessee should not have any grievance in this regard after the completion of appellate proceedings, as the first appellate authority has duly considered the views expressed by the assessee on the documents relied upon by the assessing officer. Accordingly, we do not find any merit in the grounds raised on this issue. Correctness of estimation of suppressed business income - Held that:- CIT(A) concluded that the estimation of huge unaccounted turnover made by the AO was not supported by any specific evidence and hence the said estimates are not sustainable. AO had taken adverse views with regard to the discrepancies noticed by the Commercial taxes department & the power theft alleged by the E ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e fact that the sharp rise in the selling rate of finished goods has helped in the increase of Gross profit rate for the assessment year 2008-09 by 6.02%. Accordingly, CIT(A) has given a specific finding that the effect of increase in prices in the year relevant to the assessment year 2008-09 is evened out, i.e., (9.73% (-) 6.02%), the gross profit rate for that year would work out to 3.71% only. Accordingly, CIT(A) has opined that the gross profit rate of 3.71% was comparable with the gross profit declared in some of the years. Having opined so, still the CIT(A) held that the fluctuation in the GP rate in various rates are unreasonable. Thus the said decision of the CIT(A) does not have any basis. Having understood that there might be various reasons for the fluctuation in the rate of G.P, thus Ld CIT(A) should not have come to such a conclusion. Thus order of CIT(A) on this issue is modified accordingly as it would be just and reasonable, if the Gross profit rate declared by the assessee in various years is adopted to determine the undisclosed income of the respective years. To determine the total turnover at 108% of the disclosed turnover the amount of Gross Profit by appl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -2007. Consequently, a survey operation u/s 133A of the Act was conducted in the business premises of the assessee herein. It is pertinent to note that both the Managing director and the director are running steel units in their individual capacities also. Consequent to the search operations carried in the hands of its Managing Director, the AO initiated assessment proceedings u/s 153C of the Act in the hands of the assessee company herein for the years under consideration. While completing the said assessment, the AO made additions in business income on account of suppression of sales for all the years under consideration and also made additions u/s 68 of the Act in some of the years. The assessee challenged the validity of initiation of proceedings u/s 153C of the Act and also the various additions made by filing appeal before Ld CIT(A), but could get only partial relief. While granting relief, the Ld CIT(A) substantially reduced the additions by changing the method of computation of suppressed business income. Aggrieved by his order, both the parties are in appeal before us challenging the order of first appellate authority on the points decided by him against each of them. 3. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was initiated only on the basis of sworn statement. 6. We have heard the rival contentions on this issue. It is an undisputed fact that the Managing Director of the assessee company, i.e. Shri K.P.Ummer has confessed about the suppression of purchases and sales in the sworn statement taken u/s 132(4) of the Act. The relevant question and answers are extracted below:- Q. No.13 - Have you properly maintained accounts relating to scrap purchases, finished goods, sales etc of your establishments. Ans.:- In scrap purchase 90% is imported scrap and sponge iron. Details of its purchases have been properly accounted. 10% includes local purchase. 90% of the local purchase has been accounted. 10% of local purchase has not been accounted. 8% of the sales also has not been accounted. Q. No.14 - You have said in your earlier question that 8% of the sales have not been accounted. What did you do with the profit so obtained from the sales. Ans.:- Money obtained from such unaccounted sales have been utilised for purchasing property in my name and also for the house which is under construction. These questions and answers given by the Managing director clearly indicat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... obtained by the AO from the third parties. It is noticed that the AO primarily relied upon certain documents obtained though the Commercial taxes department, i.e., the report of KSIDC about the steel industry, for arriving at the suppressed business income. From the assessment order, it is not clear as to whether those documents were confronted with the assessee or not. However, we notice that the assessee has given its view on those documents in the notes filed before the Ld CIT(A) and the first appellate authority has also duly considered them while framing his order. Hence, the violation of natural justice at the level of the AO, if any, has been made good at the level of Ld CIT(A). This is clear from the following observations made by Ld CIT(A). 11. I have carefully considered the relevant facts and provisions of law with regard to the issue involved. I find that Assessing Officer has made substantial addition relying on information gathered by Commercial Taxes Authorities from KSIDC Ltd. The information so relied upon by the Assessing Officer was apparently not made available to the appellant before using the same against the appellant before drawing an adverse inferen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... search and survey proceedings, on the basis of audited accounts. However, the AO decided to reject the book results for the following reasons, which is narrated in Page 8 9 of assessment order:- (i) The search conducted by the Department on 6/9/2007 at the business premises of the assessee also revealed indicative but serious defects. On that day the Director Shri Ummer deposed that there are serious defects in his books of account: Q.13: Do you record the scrap purchase as well as furnished goods in your books of accounts exactly? Ans: 90% of the scrap purchases include imported scrap and sponge iron. All these purchases have come into accounts correctly. But there are 10% local purchases. 90% of the local purchases are also accounted. As such 10% of the local purchase has not come into account. 8% of sales are also not recorded in the books of accounts. Q.14: You have stated in reply to my earlier question that 8% of sales are unaccounted. What have you done by the profit you earned from such sale? Ans: I have deployed the unaccounted money received from such transaction in purchasing immovable property in my name and to invest in the residential ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... **112.5 181.362 *13167 2387993 2004-2005 2,47,464 3,09.330 125.920 183.410 *13860 2542062 2005-2006 78,13,320 6250.656 6145.747 104.909 14590 1530622 2006-2007 88,08,288 7046.630 6741.735 304.895 15358.42 4682712 2007-2008 88,66,080 7092.864 6392.115 700.749 15484.45 10850712 2008-09 93,20,496 7456.397 6872.815 583.582 16752.39 9776359 TOTAL 3,52,90,738 2,81,55,877 2,62,78,332 18,77,545 89212.26 31770460 *Since the assessee did not supply the required data estimated @ 5% decrease for each preceding year **Since the assessee did not supply the required data estimated @ 10% decrease for each preceding year. 7. M.S. FLATS RODS: Asst Year Power consumption Production as per norms (in tonnes) Production as per return Suppr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it on the suppressed sales, so arrived by the AO, was added by him in the respective years under consideration. 11. In the appellate proceedings, the Ld CIT(A) noticed many mistakes in the assessment order and accordingly concluded that the AO has passed the assessment orders in haste without taking into account correct facts. The relevant observations made by Ld CIT(A) are extracted below:- 11.1 It is further seen that the Assessing Officer has committed serious errors in the assessment order as under: -The Assessing Officer estimated substantial production of ingots for A.Y. 2003- 04 and A.Y. 2004-05 in para 6 of the assessment order whereas the appellant started production of ingots only from 19th March, 2004. -In para 7 of the assessment the Assessing Officer, for A.Y. 2003-04 indicated estimation of power consumption and production as per return respectively 5% and 10% less than A.Y. 2004-05 but adopted higher figures than for A.Y. 2004- 05. -The Assessing Officer aggregated estimated suppressed production of ingots along with estimated suppressed production of MS Flats and rods and applied gross profit rate declared for A.Y. 2008-09 to work out undi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dition of Rs. 2,56,620 was made as against declared turnover of Rs. 12,37,41,737. The difference found was negligible compared to the turnover disclosed. Another inspection by Intelligence squad of Commercial Taxes Department took place on 15.11.2006 wherein only shortages of minor quantities were detected as under: 1. M.S. Ingots 0.208 MT short 2. M.S. Tor Rod 0.600 MT 4. M.S. Flat Square 4.770 MT The penalty levied as a consequence of above inspection of 15.11.2006 has since been set aside by Dy. Commissioner (Appeals) vide order dated 10.11.2010. I have gone through this order and find that the appellate authority has pointed out defaults in the working of stock by the Intelligence Officer in following words: The Intelligence Officer is considering the opening stock as on 6.11.2006 and physical stock on 16.11.2006. Without considering the production consumption, sales from 6.11.2006 upto inspection, the physical stock verification is found to be not in order. 13. The Ld CIT(A) also noticed that the power theft incident that occurred in the assessee s factory did not have much consequenc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... considered the power used for the functioning of pollution control equipment, water pumps, crane cooler, lighting fans etc. He also invited to my attention to a decision of the Hon ble High Court of Bombay in Central Excise Vs. Air Carrying Corpn. (P) Ltd. wherein it was held that when the certificate issued by the chartered engineer was to be disbelieved, the Revenue could have and ought to have recorded his statement or called him for cross examination. Based on the ratio set up in the above decision, he contended that disregarding the certificate of the chartered engineer without assigning a valid reason by the Intelligence Officer is unsustainable. Considering the entire facts and circumstances of the case, I am of the view that the Intelligence Officer could not give any satisfactory explanation either for placing reliance on the report of KSIDC or for rejecting of certificates issued by the chartered engineer and other competent authorities. Considering the above facts, I am of the view that only after conducting test run in the appellant s industry, that the Intelligence Officer can reach a definite conclusion as to the power required for production of 1 MS ingots ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsumption of electricity as is held by the appellate authority of the Commercial Taxes Deptt. The reference by the Assessing Officer to a power theft incident in the appellant s factory is of not much consequence as the service connection was disconnected only for a period of five days and this fact in itself cannot justify determination of substantial unaccounted production as done by the Assessing Officer. I thus find that Assessing Officer did not bring on record any specific and gross defects in the books of accounts of the appellant to justify resorting to estimation of production on the basis of electricity consumption and that too on the basis of project report with KSIDC collected from commercial taxes authorities . 15. The Ld CIT(A) noticed that the case law relied upon by the AO for making estimate of production on the basis of power consumption was also not correct. In this regard, the Ld CIT(A) has observed as under:- The decisions relied upon by the Assessing officer have been dealt with by the learned counsel for the appellant in para 6 7 of written submission of 23rd November 2010. The learned counsel for the appellant has also placed reliance on the follo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6872.815 1356.14 It is therefore apparent that power consumption shown by the Appellant was on an average lesser than determined in the above report of Mr. M.Jacob Varghese except in A.Y. 2004-05 wherein the factory started and functioned only for 12 days and would obviously include trial runs. 17. The Ld CIT(A) then went on to analyse the average power consumption for production of MS products, viz., MS flats and rods and noticed that there is no abnormal fluctuation in power consumption over the years and in fact, the efficiency level has increased gradually. The relevant observations are extracted below:- There is also no abnormal fluctuation in power consumption over the years. In a similar manner Appellant had shown power consumption in MS Flats rods as under:- A.Y. Power consumption (Units) Production of MS Flats and rods (MT) Power consumption (units per MT) 2003-04 1001832 3109.113 322.22 2004-05 1031272 3619.091 284.95 2005-06 1402598 5467.121 256.55 2006-07 1370070 5581.166 245.48 2007-08 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t was proved that the basis (KSIDC report) adopted by the AO cannot be considered as a scientific one. For the sake of repetition, we may state that the AO had taken adverse views (a) with regard to the discrepancies noticed by the Commercial taxes department. (b) with regard to the power theft alleged by the Electricity board officials. and they were proved to be insignificant when compared to the volume of transactions carried out by the assessee. The AO had adopted the basis of Power consumption factor supplied by the KSIDC, which was proved to be unreliable. It is pertinent to note that the KSIDC is a financial institution and it processes the project reports submitted by the prospective borrowers. The power consumption factor submitted by the KSIDC is based on such project reports. The report given by KSIDC has got the heading viz., NORMS AND ASSUMPTIONS UNDERLYING COST OF PRODUCTION . The said heading itself clearly shows that the Power consumption factor is an assumption/norm fixed by KSIDC for processing the project reports. There cannot be any dispute that the KSIDC, being a financial institution, cannot be considered as a technical expert and hence reli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Have you properly maintained accounts relating to scrap purchase, finished goods, sales etc. of your establishments. Ans. In scrap purchase, 90% is imported scrap and sponge iron. Details of its purchase have been properly accounted. 10% includes local purchase. 90% of the local purchase has not been accounted. 8% of the sales also has not been accounted . The above deposition of the Director of the appellant company clearly admits that the turnover was suppressed to the tune of about 8%. The argument of the learned counsel for the appellant that above statement was only with reference to proprietory concern of Mr. Ummer does not have much merit for the reason that Mr. Ummer replied with reference to the business activities of all his establishments which obviously did include the appellant company. In view of above deposition, another argument of the learned counsel for the Appellant that proper books of accounts were maintained and were duly audited also does not have much merits. This is more so for the reason that in the above deposition (Q.10) it was further admitted that actual stock was not taken but was adopted based on output percentage. He further admitted tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rate of 14.16% only on the suppressed production leaving intact the Gross profit declared by the assessee for the disclosed turnover. The Ld CIT(A) did not agree to it and hence opined that the Gross profit rate should have been applied to the entire sales value, both disclosed and undisclosed. 24. The assessee had declared the rate of gross profit as under in various years:- Asst. year G.P. rate 2003-04 2.24% 2004-05 5.83% 2005-06 4.00% 2006-07 4.59% 2007-08 6.10% 2008-09 9.73% The Ld CIT(A) took the view that the fluctuation in the rate of Gross Profit declared over the years is unreasonable. Accordingly he took the view that the Gross Profit may be estimated uniformly @ 6.50% for the assessment years 2003-04 to 2007-08. Since the assessee had declared the rate of Gross profit for the assessment year 2008- 09 at 9.73%, the Ld CIT(A) held that the same rate may be adopted for that year. Accordingly he calculated the Gross Profit on the enhanced turnover (108% of the disclosed turnover) and deducted there from the amount of gross profit declared by the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A of the Act, in our view, the assessee cannot place reliance on the said decisions. With regard to the case law listed as (a) above, we notice the assessee therein has proved that the statement u/s 132(4) was given in a state of confusion and later retracted. However, in the instant case, it is not shown that the statement u/s 132(4) was given by the assessee in a state of confusion. Further we have already recorded a finding that the assessee has not retracted from the statement given by him. Hence, the said decision is also not applicable to the facts of the instant case. 27. In our view, the admission made by the Managing director is an important piece of evidence. Generally the details regarding suppression of purchases and sales are within the personal knowledge of the parties who are indulging in such type of activities. If the assessee had not indulged in such kind of trade practices, there would not have been any occasion for the Managing director to give a statement about the suppression of purchases and sales. Hence, in the facts and circumstances of the case, in our view, it would be very much reasonable to presume that the assessee was indulging in suppression of pur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... res reported by the assessee. It is pertinent to note that the level of efficiency in the power consumption stands corroborated by the fact that the Gross profit rate disclosed by the assessee was also increasing consistently. The abnormal increase was seen only in assessment year 2004- 05 and 2008-09. The assessee has proved that the reason for the abnormal increase in assessment year 2008-09 was the price rise witnessed in that year. The Ld CIT(A) has already given a finding that the factory worked for only 12 days in the year relevant to the assessment year 2004-05. Thus the abnormal variation for these two years stand explained. Besides the above, the Ld CIT(A) has not brought on record any material to suspect the rate of gross profit declared by the assessee over the years. We may also observe here that the assumption made by the AO that the gross profit rate declared for the assessment year 2008-09 is the correct rate to be adopted for all the years is also not based on any material. Under these circumstances, we find no reason to adopt a rate of gross profit, which is altogether different from Gross profit rate declared by the assessee, for estimating the undisclosed incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he chose to add them again in the hands of the assessee company also. It is pertinent to note that the AO did not make any addition with regard to the funds received from Shri Sather Chavakad in the individual assessment of Shri K.P. Ummer, apparently accepting the genuineness of the credit. In spite of the said fact, the AO chose to assess the same in the hands of the assessee company. Accordingly the AO assessed a sum of Rs.1,37,50,000/- in the assessment year 2006-07 and a sum of Rs.60,21,000/- in the assessment year 2007-08. By placing reliance on the decision of Hon ble Allahabad High Court in the case of Jagmohan Ram Ram Chandra Vs. CIT (153 CTR 193), the AO held that the assessment of the very same amount again in the hands of assessee company is legally valid, even though it has already been assessed in the hands of Shri K.P. Ummer. 33. Before Ld CIT(A), the assessee submitted that the sum of Rs.1,37,50,000/- was received by the assessee during the financial year relevant to the assessment year 2007-08 and hence the AO was wrong in assessing the same in the asst. year 2006-07. In the same manner, the sum of Rs.60,21,000/- pertaining to the asst. year 2008-09 was wrongly a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ious occasions during the relevant previous years. The Assessing Officer has selectively identified certain entries for non-acceptance of the borrowings. This was not permissible for the basic reason that either the creditworthiness of the loanee was to be believed or disbelieved. There was no provision in law to partly believe the creditworthiness of a loanee. As far as the Appellant Company was concerned the borrowings were from Mr. K.P. Ummer who was not only director and managing the business affairs of the appellant company in a single handed manner but was also having substantial and ostensible sources of income in his individual capacity and was also assessed to tax with the same Assessing Officer. The basic spirit behind deeming provisions of sec. 68 was that the beneficiary of a loan transaction should be brought to tax if the creditworthiness of the loanee was not established. These were deeming provisions and there was underlying presumption that an assessee having unaccounted funds was bringing in money through accommodation entries so that such unaccounted funds are available for his use in the books of accounts even when the funds appear in the books as loans from per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se of above judicial pronouncement. The additions made by the Assessing Officer on this account in A.Y. 2006-07 and 2007-08 are accordingly directed to be withdrawn. The Assessing Officer shall accordingly grant appropriate relief to the appellant. This ground of appeal is therefore allowed . (Para 20 and 20.1 of Ld CIT(A) in a. y 2006-07) 35. We have carefully considered the decision rendered by Ld CIT(A) on this issue. The fact remains that the cash credits sought to be assessed in the hands of the assessee herein have already been assessed in the hands of the Managing Director Shri K.P. Ummer. The Ld CIT(A) has observed that the decision rendered by Hon ble Allahabad High Court in the case of Jagmohan Ram Ram Chandra, (Supra) is distinguishable. Even otherwise, in our view, the assessment of very same amount both in the hands of the Managing Director Shri K.P.Ummer and also in the hands of the assessee company would lead to double assessment of the very same amount, which is against the scheme of the Act. In this regard, we may gainfully refer to the observations of Hon ble Supreme Court in the case of ITO Vs. Ch. Atchiah (218 ITR 239), wherein the Hon ble Apex Court observed ..... X X X X Extracts X X X X X X X X Extracts X X X X
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