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TMI Blog2015 (5) TMI 849X X X X Extracts X X X X X X X X Extracts X X X X ..... he view that the seized diary during the course of search and the statements of Shri Salek Chand Garg recorded during the course of search and post-search was not sufficient to draw an inference about the alleged undisclosed sales dehors corroborative evidence supporting the third party statements and the entries recorded in the diary found from the possession of the third party during the course of search. - Decided in favour of the assessee. Whether a profit can be estimated without rejecting books of account with this finding that on the basis of the said books of account, proper income cannot be adduced? - Held that:- It is a settled position of law that estimation of profit by applying a reasonable g.p. rate can be adopted and applied only when it is not possible for the Assessing Officer to deduce the profit of the assessee on the basis of books of accounts produced by the assessee. In such a situation, the Assessing Officer will have to afford opportunity of being heard to the assessee to meet out the defects pointed out by the Assessing Officer in the books of account and if the Assessing Officer is not satisfied with the explanation of the assessee to those defects pointed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be amounting to unexplained investment for the assessment year 2009-10, especially when the closing stock of that assessment year was accepted. In this regard, we find support from the cited decision of Hon'ble Delhi High Court in the case of CIT vs. Om Prakash Mahajan (supra) and in the case of J.M. Wire Industries vs. CIT (supra). The addition of 6,62,35,000 sustained by the Learned CIT(Appeals) is thus not tenable. The same is directed to be deleted - Decided in favour of assesse. Undisclosed investment - assessee company had paid balance amount to the seller in cash outside the books of account by utilizing unaccounted income - held that:- provisions laid down under sec. 50C of the Act are not applicable in the case of buyer and the valuation report in absence of corroborative evidence in support cannot be the sole basis to arrive at a conclusion beyond doubt that the value shown therein was invested by the assessee to purchase the property in question. It is also an established position of law that a document is reliable or unreliable in its entirety. The Learned CIT(Appeals) was thus not justified in relying upon the valuation report only for the purpose of the value of const ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ized from residential premises of Shri Salek Chand Garg and the statement recorded Shri Salek Chand Garg neither in law and nor on fact could be made a basis to assume that appellant had made undisclosed sales and as such, addition made on the basis of irrelevant and inadmissible evidence is illegal, invalid and unsustainable. 1.2 That the Learned CIT(Appeals)-XXXI, New Delhi has further erred both in law and on facts in upholding the addition without appreciating that trading addition made without rejecting the books of account u/s. 145(3) of the Act is illegal, invalid and therefore, wholly untenable. 1.3 That the Learned CIT(Appeals)-XXXI, New Delhi has failed to appreciate that seized diary from Shri Salek Chand Garg pertains to his own transactions and not to the appellant company and therefore, addition sustained is wholly unsustainable. 1.4 The finding of the Learned CIT(Appeals) that the subsequent statement of Shri Salek Chand Garg recorded in response to summons u/s. 1341 of the Act creates doubts in the mind that why Shri Salek Chand Garg has denied when he himself admitted earlier itself establishes the addition has been sustained on surmises, suspicion and conjec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the levy of interest under sec. 234B of the Act which is not leviable on the facts and circumstances of the case of the appellant company." 4. Ground No.1 of the appeal preferred by the Revenue is general in nature, hence, does not need independent adjudication. 5. Ground No.2 (Revenue ) & Ground Nos. 1, 1.1 to 1.5(Assessee): The issue involved in the grounds is as to whether the Learned CIT(Appeals) was justified in restricting the addition of ₹ 4,18,80,000 out of the addition of ₹ 8,37,60,000 made by the Assessing Officer by applying g.p. rate of 5% on the alleged suppressed sales assumed on the basis of a diary seized from third party. 6. The relevant facts are that the assessment order has been framed in pursuance to search carried out at the premises of the assessee company and others on 07.01.2010. The Assessing Officer on the basis of the diary found at the premises of Shri Salek Chand Garg amounting to ₹ 8,37,60,000 added the amount in the income of the assessee on account of undisclosed profit on unaccounted sales. The Learned CIT(Appeals) has restricted the addition to ₹ 4,18,80,000. Thus, the parties are in cross appeals. 7. The Learned AR sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The Learned AR submitted mere substitution of rate based on the diary of third party so as to assume undisclosed sales of the appellant company and as such the figures of ₹ 44.94 crores is undisclosed sales is entirely misconceived, misplaced and untenable. 8. The Learned AR submitted that even the figure of ₹ 38.82 crores is based on hypothetical assumption and presumption. 8.1 It was submitted that the said figure has been arrived by aggregating the figures stated at pages 179 to 183 of Annexure A-I i.e. diary seized from the premises of Shri Salek Chang Garg. 8.2 It was submitted that the revenue before making the impugned addition has not established any nexus of the said figures with the appellant company 8.3 It was submitted that in absence of any nexus of the said figures adverse inference drawn is entirely misplaced more particularly in light of the undisputed facts submitted in sub-para (a) to (j) of para 2.1 of this synopsis. 8.4 It was submitted that the statement of Shri Salek Chand Garg was recorded on the date of search pages 53A to 71A of typed copies of statement shows that Shri Salek Chand Garg was carrying on his own business in the name of M/s As ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... documentary evidence. It was also submitted that the said inferences are also being drawn on the basis of record of a third party whose testimony was unbelievable as he has himself adopted shifting stands. Reliance was placed on the judgment of Hon'ble Apex Court in the case of CIT vs. P.V. Kalynsundaram reported in 294 ITR 49 holding that in which allegations of on money transaction on the basis on non convincing loose sheets found during the course of search and conflicting statement of the seller was there, the addition was rightly deleted by the Tribunal and affirmed by the Hon'ble High Court. Moreover it was also submitted that Hon'ble Apex Court in the case of K.P. Varghese vs. ITO reported in 131 ITR 597 held that the burden of proving is that of revenue when there is allegation of understatement on concealments in the consideration shown. Infact both the above judgments were relied upon by the Hon'ble Delhi High Court in the case of CIT vs. Prem Prakash Nagpal reported in 220 Taxman 168 (Del) (Mag) (pages 963-966 of JPB) to hold that third party evidence cannot be a ground for making addition in absence of any corroborative material found from the assessee. 9.1 The Learne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9.3 The Learned AR further submitted that, the aforesaid material even otherwise and, in absence of any corroborative evidence found from the possession of the assessee company, cannot form basis for making any addition. In support to its contention, the Learned AR places reliance on the following judicial pronouncements: i) 72 ITD 340 (Mum) D.A. Patel vs. DCIT ii) 40 TTJ 668 (Ind) Brij Lal Rupchand vs. ITO iii) 63 TTJ 532 at 535 (Delhi) S K Gupta vs. DCIT 9.4 The Learned AR humbly submitted further that no evidence has been brought on record by learned Assessing Officer to connect the seized documents with the assessee. Infact the Hon'ble ITAT in the case of Ashwani Kumar reported at 39 ITD 183 at page 193 has held that mere finding of dumb document cannot be made the basis for making any addition. It went on further to hold that unless the revenue is able to establish that document was in possession or control of the assessee no adverse inference could be drawn against such an assessee. He also placed reliance upon the case of Amarji Singh Bakshi (HUF) v ACIT reported in 263 ITR 75 (AT) (TM) (pages 828-868 of JPB). 9.5 The Learned AR submitted that, once the document is uns ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rl. Nos. 1716 of 1997); wherein it was held that evidence to be used against accused should be evidence acceptable to process of law. An evidence, which is not found in possession of a person, cannot be used against him unless the evidence being used is supported by other concrete evidence. 11. Apart from the above it was submitted that even the gross profit rate adopted at 10% by the learned Assessing Officer and 5% by the learned CIT(A) is without any basis and therefore not tenable. 12. The Learned AR submitted that the declared profit in the instant year as manufacture sales alone is 1.24% (page 17 of CIT(A) order) and average profit is loss of 14.54% in all the four years namely Assessment years 2007-08 to 2010-11. This position is also confirmed from the result of the comparative companies tabulated at page 22 of CIT(A) order. 13. In such circumstances the submission of the Learned AR remained that on any of the ground the addition made is not tenable and unsustainable. 14. Without prejudice to the aforesaid, the Learned AR submitted that learned AO has applied a GP rate of 10% and learned CIT(A) has reduced such GP rate to 5% failing to appreciate that GP rate declared ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of account and he noted that profit on sale of the aforesaid amount has not been accounted for in the books of accounts, he estimated the profit by applying gross profit rate at 10% of the sales amount. The Learned CIT(Appeals) has held that the statement of Shri Salek Chand Garg recorded at the time of search was spontaneous, hence, is more reliable and as such transaction recorded in diary belong to the assessee. He, however, held that gross profit rate applied by the Assessing Officer at 10% is excessive and he took the gross profit of assessee @ 5% and deleted the addition of ₹ 4,18,80,000 and sustained the addition of ₹ 4,18,80,000. 17. On perusal of the facts relating to the issues raised in the grounds under consideration, we find that following three sub-issues are to be adjudicated upon to decide the main issue. These are (i) as to whether the documents seized during the course of search and the statements recorded during search and post-search was sufficient to draw an inference about undisclosed sales? ; (ii) as to whether a profit can be estimated without rejecting books of account with this finding that on the basis of the said books of account, proper in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he diary pertained to sale and purchase made on behalf of the assessee. Shri Vijay Pal Garg, director of the assessee in his statement recorded on 16.3.2010 has stated that he does not have any business relation with Shri Salek Chand Garg, however, assessee has business relation with Shri Sawar Mal Goel who sells the goods of the assessee in Bhiwani on commission. It was specifically stated by him that Shri Sawmar Mal Goel collects the payment from the parties and sends the cheques to the assessee and in consideration to the aforesaid, commission was paid to Shri Sawmar Mal Goel by cheques and TDS was also deducted. 19. It is an established proposition of law that entries found recorded in the books of account of third party or statement recorded under sec. 132(1) of the Act or 131 of the Act of a third party are binding upon him in his own case only and the same cannot be foisted upon the other party in the absence of sufficient corroborative material, more particularly, when such third party do not admit any business relationship with the assessee. The statutory presumption under sec. 132(4A) of the Act cannot be raised against the assessee in respect of the entries recorded in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tements and the entries recorded in the diary found from the possession of the third party during the course of search. The sub-issue No. (i) is accordingly decided in favour of the assessee. 20. Sub-issue No. (ii): The contention of the Learned AR remained that the entire addition is based on presumption. The assessee has maintained complete books of account, which are audited, the goods manufactured and sold by the assessee are excisable and no defects has even been found by Excise Authority. The VAT Authorities have accepted the turnover declared by the assessee. The entire stock found in the course of search was duly reconciled with the books of account. It was submitted that entire sales as made by the assessee during the year aggregate to ₹ 699.73 crores out of which the sale of manufactured goods is of ₹ 257.51 crores. The quantitywise detail was maintained and has been accepted as such. The sales have been made to the identifiable and verifiable parties and no evidence has been gathered post-search to unaccounted sales. It was also contended that not a single party has been examined before drawing adverse inference. 21. In our view, it is a settled position of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... explained investment in stock. The Learned CIT(Appeals) has sustained the addition to the extent of ₹ 6,62,35,000, thus the parties are in appeals. 25. In support of the ground of the Revenue, the Learned CIT(DR) placed reliance on the assessment order with this contention that the Assessing Officer was justified in making the addition in question on account of unexplained investment in stock with this observation that there was difference of ₹ 17,69,98,750 in the valuation of stock as per bank statement furnished to the bank and the stock as per stock register seized as page Nos. 1 to 119 of annexure A-9 and annexure A-35. He placed reliance on the decision of Hon'ble Punjab & Haryana High Court in the case of B.T. Steels Ltd. vs. CIT (2011) - 196 Taxmann 362 (P&H) holding that the ITAT was justified in sustaining the addition made by the Assessing Officer on account of unexplained investment in stock on the basis of difference of stock shown by the assessee hypothecated by the bank and the stock shown in the assessee's books of account. 26. The Learned AR on the other hand tried to justify the First Appellate Order on the issue. He submitted that the Learned CIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s from whose possession diary had been seized by the Revenue. He had also not alleged that he was in possession of any stock of the assessee. 28 The Learned AR submitted further that the Learned CIT(Appeals) was not justified in sustaining the addition of ₹ 6,62,35,000 out of the addition of ₹ 17,69,98,650 made on account of unexplained investment in stock. He submitted that the Learned CIT(Appeals) has held that the stocks as on 1.4.2009 of 1324.70 MT is unexplained investment, which perse is a misnomer. It was submitted that this conclusion is based on the page 177-178 of diary which has been tabulated at page 38 of the order of learned CIT(A). It is submitted that, the learned CIT(A) has failed to appreciate that once closing stock of 31.3.2009 stands accepted in an order u/s 143(3) of the Act then there can be no unexplained investment in opening stock. The relevant evidences are as under: i) Audited financial statements as on 31.3.2009 (pages 231-278 of Paper Book) ii) Order of Assessment for Assessment for Assessment Year 2009-10 (pages 767-769 of Paper Book) Reliance has also been placed on the following judgments in support of the contention that if closing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the difference was only in quality of six items out of twelve items and therein no difference in rates was there as evident from the following chart: Sr. No. Particulars Rate (Rs.) Quantity Difference Bank statement (MT) Stock Register (MT) TALLIED i) Scrap 18,200 1680 1680 3,05,76,000 ii) Silicon Manganese 49,000 44.70 44.70 21,90,300 iii) Flourspar 21,500 153.40 153.40 32,98,100 iv) Dolomite 2,800 45.00 45.00 1,26,000 v) Lime 2500 108.00 108.00 2,70,000 vi) Met Coke 4625 23.00 23.00 1,06,375 Sub Total (A) 3,65,66,775 Sr. No. Particulars Quantity Bank statement Stock Register Difference Quantity Value NOT TALLIED i) S S Scrap 360000 551.10 51.10 500 1,80,00,000 ii) HC Ferro Charome 43300 1110.00 110.00 1000 4,33,00,000 iii) Ferro Maganese 1 45250 896.00 43.00 853 3,85,98,250 iv) Ferro Silicon-NE 56000 1140.00 140.00 1000 5,60,00,000 v) Copper 278810 68.365 18.365 50 1,39,40,500 vi) Nickle 716000 21.00 11.00 10 71,60,000 Sub Total (B) 17,69,98,750 GRAND TOTAL (A+B) 17,69,98,750 32. The Learned CIT(Appeals) thereafter has held that variation in quantity of raw material of six items ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aximum stock was available as on 01.04.2009 for 1324.7 MTs as per table-2. After comparing both the tables, the Learned CIT(Appeals) took peak figure of table-2 as peak investment in stock worth ₹ 6,62,35,000. The Learned CIT(Appeals) was thus of the view that no addition is called for on the basis of imaginary figure of stock given to the bank where there was no difference found in stock at the time of search, however, peak investment in stock for ₹ 6,62,35,000 is liable for addition. The Learned CIT(Appeals) observed further that the two tables show variation in rates over a period of time. The rates for arriving at peak figure have thus been taken of as of the date on which maximum stock was available. He, therefore, restricted the addition of ₹ 17,69,98,750 on account of undisclosed stock to the amount of peak investment of ₹ 6,62,35,000. We, however, find substance in the contention of the Learned AR against the sustenance of the addition of ₹ 6,62,35,000 made by the Learned CIT(Appeals) that once closing stock as on 31.3.2009 has been accepted in the assessment order framed under sec. 143(3) of the Act, there cannot be unexplained investment in o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y was mentioned as ₹ 2,33,16,750. The Assessing Officer accordingly held that assessee company had paid balance amount to the seller in cash outside the books of account by utilizing unaccounted income for the assessment year under consideration and held the investment as undisclosed investment within the provisions of sec. 69 of the Income-tax Act, 1961. 35. The assessee contended above action of the Assessing Officer with this submission that the Assessing Officer has applied the provisions of sec. 50C of the Act on the buyer, whereas the said provisions will always be applicable on the seller of the property and that of the report shown by the valuer found during the course of search which was meant for submission to the bank to avail the credit facility and without any corroboration. The Learned CIT(Appeals) accepted the contention of the assessee that the valuation report found during the course of search meant for submission to the consortium of banks to avail the credit facilities showing the value of the property at ₹ 2,33,16,750 as on 28.7.2009, cannot be a basis to accept the said value of the property in absence of finding of incriminating papers relating to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Bhuchar; c) 220 Taxman 112 (Guj) (Mag) CIT vs. Sarjan Realities Ltd. ; d) 217 Taxman 35 (Guj (Mag) CIT vs. Meghjibhai Popatbhai Virani; e) 138 ITD 255 (Ahd) DCIT v. Virjibhai Kalyanbhai Kukadia; f) 38 SOT 486 (Ahd.) ITO v. Harley Street Pharmaceuticals Ltd. 38. The Learned AR contended further that valuation report dated 28.7.2009 also cannot be relied upon as admittedly it was for bank purpose and is prior to sale dated 17.12.2009. The fact that the report mentioned that property was under sale ownership is also incorrect, as the property had not vested with the assessee and payment of ₹ 20 lacs was outstanding. The Learned CIT(Appeals) has also noted that the rate of land adopted for valuation at ₹ 90,000 per sq. yd. is not even the rate as per "A" category whereas property is in "D/E Category". Even otherwise, valuation report cannot be made the basis of addition, particularly when books have been accepted and there is no material to disbelieve the sale deed. He placed reliance on the following decision in support: a) 328 ITR 516 (Del) CIT v. Naveen Gera; b) 328 ITR 604 (Del) CIT v. Smt. Suraj Devi; c) 338 ITR 485 (Del) CIT v. Puneet Sabharwal; d) 328 ITR 7 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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