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TMI Blog2008 (2) TMI 883X X X X Extracts X X X X X X X X Extracts X X X X ..... imation at 90 lakhs i.e. 10 lakhs per month for a period of nine months and at the other place, proposed 1.48 crores which shows that the AO was not certain in regard to the addition to be made on account of unaccounted sales for the period of nine months. In our opinion, the addition of 58 lakhs (corrected figure is 38 lakhs) made by the AO is arbitrary and unwarranted on the facts and in the circumstances of the case. We, therefore, hold that the no details were available to the AO to arrive at such figure. Had there been any concealed sales for nine months, it could have been detected by the Central Excise authority during their search operation. We are therefore of the considered opinion that the addition made by the AO is purely based on guesswork, presumption and surmises and not on the basis of any material found during the course of search operation by the Central Excise authority. The learned CIT(A) completely failed to appreciate the facts of the case. In our view, such additions based on hypothetical calculation of turnover and estimation of GP on presumption and surmises are not sustainable. We direct the AO to delete the same. The first ground of appeal of the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as been enacted with objective of checking tax evasion and to know whether the transactions are genuine and has been made out of the income from disclosed sources . In the present case, the disallowance under s. 40A(3) has been made by the learned AO out of unrecorded purchases therefore it is not accordingly to law and judicial decisions as stated. In our considered view, the learned CIT(A) has very correctly and judiciously deleted the addition. No interference is called for in the order of the learned CIT(A) in deleting the disallowance made by the AO under s. 40A(3) of the Act. The order of the learned CIT(A) is confirmed and the ground of appeal of the Revenue is dismissed. In the result, the appeal of the Revenue is dismissed. In the result, the appeal of the assessee is partly allowed whereas the appeal of the Revenue is dismissed. X X X X Extracts X X X X X X X X Extracts X X X X ..... ing a steel re-rolling mill, trading of iron and steel etc. It came into existence in the year 1989. The assessee filed the return of income on 1st Nov., 2004 declaring total income of ₹ 22,46,038. The assessee maintained the regular books of account and the same were audited under s. 44AB of the IT Act, 1961. The factory premises of the assessee was searched by the Central Excise Department on 10th March, 2004 wherein documents relating to avoidance of excise duty were found, as the concern is engaged in clandestine removal of M.S. ingot and hot re-rolled products as well as non-alloy steel. Consequentially excise duty of ₹ 25 lakhs has also been paid by the concern. On the perusal of the copies of seized documents it was seen that from January, 2004 to March, 2004, the assessee has purchased 346.850 MT of raw material and sold 1133.195 MT of finished products out of books. 6.2 In the return of income filed for the asst. yr. 2004-05, the assessee has shown an amount of ₹ 50 lakhs under the head other income from manufacturing and clubbed it under 'income' in the P&L a/c. In the note No. 3 appended to audit report, it has been stated that the above income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e been debited in the P&L a/c indicate that the assessee has indulged in such activities in the earlier periods also. The inference from the impounded documents and the time span involved forces one to ponder whether the activities have continued for the period for which the papers have been found or the activities have continued for a longer span. Though at the time of action only papers relating to transactions detailing two months of activities were found. It is beyond the comprehension of human probabilities that the assessee had not engaged itself in out of books trade when a lucrative option of saving both indirect taxes and direct taxes existed. The length of time to which the paper relates also strengthens this assumption." 6.5 The AO relied upon the judgment of Hon'ble Supreme Court in the case of CST vs. H.M. Esufali H.M. Abdulali 1973 CTR (SC) 317: (1973) 90 ITR 271(SC). On this basis as also taking the recording on p. 81 of the seized materials (by the Customs and Central Excise Department) that there was an opening balance with one of the parties, the learned AO issued a show-cause notice dt. 13th Dec., 2006 asking the assessee to explain as to why a lump su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the figure. The AO has resorted to the later option. I could find in the later option, the AO had both the figures of gross suppressed turnover for 56 days and the ratio as taken by the appellant for the relevant period. I could further observe that the estimation made by the AO is as per the provision of the law. There is no evidence on record to suggest that he has acted capriciously or in a biased manner. So long the estimation is based on material evidence and without any bias, such estimation cannot be questioned. The fact remains that appellant had suppressed its sales for which it has to pay the Central Excise duty. The fact further remains that it has admitted that it has made a concealment for which it has prayed before the adjudicating authority for exoneration from penalty and prosecution. It is also a fact that there was an opening entry by way of old balance, hence, the AO is very much in his jurisdiction to make a reasonable estimate, which he has done in the instant case. On proportionate basis, the suppressed turnover came at ₹ 9.50 crores but he has taken the figure of ₹ 8 crores. There is no evidence to suggest that he has acted in defiance of law ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fore, the assessee accounted for the amount of ₹ 50 lakhs as other income. Therefore, it is not correct to conclude that the opening balance was due to unaccounted sale made earlier. He submitted that the Excise Department has estimated unaccounted sales as per loose papers only and have not extrapolated sales beyond that period. He submitted that even the opening balance was not treated as sales by the Excise Department. 8.1 He further submitted that learned AO has estimated the turnover for 9 months (April to December, 2003) at ₹ 9.50 crores based on the turnover of 2.21 crores for two months but adopted ₹ 8 crores on which applied the GP @ 16 per cent on the turnover and worked out income at ₹ 1.48 crores the correct figure comes to ₹ 1.28 crores i.e. ₹ 8 crores @ 16 per cent, which is not correct. 9. Referring to p. 6 of the assessment order, it was further submitted that the AO, at one place proposed the estimation at ₹ 90 lacs (Rs. 10 lacs per month for the period from March to December, 2003 and at other place proposed ₹ 1.48 crores, which shows that the AO was not of settled mind in regard to the addition to be made on accou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssued under s. 143(2). He submitted that in assessee's case, return was filed under s. 139(1) and all the compliances were made in terms of ss. 142(1) and 143(2). Therefore the provisions of best judgment defer in sales-tax and income-tax proceedings. 11.2 He submitted that in case of Esufali (supra) it was estimation of turnover whereas in assessee's case it is proposed to go further by estimating income also and that too without any material on records to suggest/estimate any escaped sale or any income resulting from escaped turnover. 11.3 He further submitted that in search conducted by Excise Department, no other loose papers were found to suggest that there was any escaped production or sale before that period i.e. 1st Jan., 2004. He stressed the point that the entire stocks were found in order. 11.4 Arguing further he submitted that if the assessee had made any unaccounted sales before that period the excise authorities would have got some or other materials from assessee's premises but there is no such material to suggest that there was any escaped sale for the rest of the period commencing from 1st April, 2003 to 31st Dec., 2003. To apply any basis or estima ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... surmises to the income returned by the assessee. 11.8 He further submitted that the Courts are the guardian of citizens in democratic set up, therefore justice be rendered. 12. On the other hand, the learned Departmental Representative strongly supported the orders of the Revenue authorities. 13. We have considered the rival submissions in the light of the facts and circumstances of the case. We have gone through the records as well as the paper books filed by the assessee. We have also deliberated upon the case law cited on behalf of both the parties. On careful consideration of the facts and circumstances, we find that the action of the AO is based purely on guesswork without any basis. The assessee is in the business of running of steel re-rolling mill and trading of iron and steel etc. since 1989. Regular books are maintained and audited under s. 44AB of the IT Act. Quantitative details are also maintained. A search was conducted on 10th March, 2004 by the Director General of Central Excise Intelligence, Raipur on the factory premises of the assessee. After verification of loose papers, unrecorded transactions were estimated at ₹ 57,81,994 on purchase of 346.850 MT of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... admitted that it has suppressed sales to the extent of ₹ 2.21 crores only for 56 days during the course of search by the Central Excise Department but there was no such unrecorded transactions prior to 1st Jan., 2004. The learned AO issued a show-cause notice dt. 13th Dec., 2006 asking the assessee to explain as to why a lump sum addition by extrapolation of income for unaccounted sales for the months April, 2003 to December, 2003 be not made and added to the total income of the assessee. In compliance to the notice, the assessee filed reply dt. 18th Dec., 2004 on 22nd Dec., 2006 and extract of its reply has also been incorporated on pp. 6 and 7 of the assessment order. However, the learned AO recorded his finding on p. 8 of his order which reads as under : "The turnover out of books for two months stood at ₹ 2.21 crores. For 9 months (April to December, 2003) this would stand at a figure of about ₹ 9.50 crores. Let me take this at ₹ 8 crores, for the sake of reasonableness and practical realities in the business. On this applying the standard of the assessee @ 16 per cent of the turnover, the income stands at ₹ 1.48 crores. Since no excise duty ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accounted sales and peak investment. 14.1 In our opinion, the learned counsel for the assessee has rightly distinguished the judgment of the Hon'ble Supreme Court in the case of Esufali (supra) because the said judgment is distinguishable on the facts of the present case. The case of H.M. Esufali (supra) was related to sales-tax and Central Sales-tax and where the assessment was done under best judgment which is not in the present case. 14.2 It is also seen from the records that the assessee has made an application to the Settlement Commission, Mumbai Bench and vide order dt. 18th May, 2005, immunity from prosecution and penalty was granted to the assessee after due consideration of the co-operation extended, full and true disclosure of unrecorded transactions and payment of excise duty. 14.3 We are of the considered opinion that hypothetical calculation of turnover and estimation of GP merely on guesswork and presumption is not sustainable in law. We, therefore, hold that the no details were available to the AO to arrive at such figure. Had there been any concealed sales for nine months, it could have been detected by the Central Excise authority during their search operati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lakhs ₹ 10,154 Trident Lame Pack (P) Ltd. HC/10, Ram Krishna Sarani, Baguati, Kolkata 6,00,000 24,00,000 30 lakhs ₹ 7,945 (ii) It is evident that the quantum of capital introduced by these companies is not commensurate with the IT returns filed by them. Introduction of huge share premium by them in the assessee company was very awkward and beyond comprehension. The assessee was asked to produce balance sheets of these companies and to produce the directors of these companies in person before the undersigned. A copy of balance sheet was submitted. The copy of the portion of the bank statement of the investor companies, wherein they have shown the transfer of share capital and share premium amount to the assessee company has also been submitted. (iii) In response to the query letter dt. 15th Dec., 2006, the assessee tried to contact the executives of the above companies, and obtained the copy of their balance sheet, which were filed during the assessment proceeding. The learned AO from the very beginning raised doubts that the investor companies are not actually investors. They are mere conduit companies and the money of the assessee has been routed through the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appeal before the Tribunal. 21. The learned counsel for the assessee made the elaborate submissions which are summarized as under : (1) It is submitted that after the search by the Central Excise Department, the assessee paid ₹ 25 lakhs to the Excise Department and thereafter due to need of fund for the business, the assessee sold its shares on premium to the abovementioned four companies of Kolkata, by the end of the March, 2004. These companies are duly registered with the RoC where the address of the registered office has been mentioned. The above companies have also obtained their PAN at the abovementioned address and also filed IT returns showing the same address, at Kolkata. Thus the existence of the above companies is beyond doubt as doubted by the learned AO. The assessee is not supposed to know the various activities of the said companies before selling its shares. The assessee due to need of funds offered to sale its shares, which the above companies agreed to purchase at premium as mentioned above. (2) It is very much relevant to submit that at the time of search by the Central Excise Department, no such huge cash was found, hence the doubts about introducing t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nevertheless, under no circumstances, can the amount of share capital be regarded as undisclosed income of the assessee. It may be that there are some bogus shareholders in whose names shares had been issued and the money may have been provided by some other persons. If the assessment of the persons who are alleged to have really advanced the money is sought to be reopened, that would have made some sense but we fail to understand as to how this amount of increased share capital can be assessed in the hands of the company itself." However, in CIT vs. Sophia Finance Ltd. (1993) 113 CTR (Del)(FB) 472: (1994) 205 ITR 98(Del)(FB), it was held that the AO can look into the existence of the sharesholders and once the shareholders exist the AO need not do any further enquiry for taxing the company. Sec. 72 of the Companies Act restricts the company in seeking information from the shareholders and it cannot enquire as regards the source of funds for the shareholders in subscribing to the shares. 24. In ss. 68 and 69A, a discretion is given to the AO by use of the word "may" and the AO even if not satisfied with the explanation of the assessee need not necessarily assess th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the Supreme Court has not laid any proposition on the issue and has declined interference on the ground that the issue was decided by the High Court on facts only. (viii) The decision in CIT vs. Sophia Finance Ltd. (supra), is still valid and applicable. In this case the Court held in page No. 105 as under : "It is neither necessary nor desirable to give examples to indicate under what circumstance s. 68 of the Act can or cannot be invoked. What is clear, however, is that s. 68 clearly permits an ITO to make enquiries with regard to the nature and source of any or all the sums credited in the books of account of the company irrespective of the nomenclature or the source indicated by the assessee. In other words, the truthfulness of the assertion of the assessee regarding the nature and the source of the credit in its books of account can be gone into by the ITO. In the case of CIT vs. Steller Investment Ltd. (1991) 99 CTR (Del) 40: (1991) 192 ITR 287(Del), the ITO had accepted the increased subscribed share capital. Sec. 68 of the Act was not referred to and the observations in the said judgment cannot mean that the ITO cannot or should not go into the question as to whe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sed income of the assessee. An ITO is indeed entitled to examine the truthfulness of the explanation. In cases where the credit entry relates to the issue of share capital, the ITO is also entitled to examine whether the alleged shareholders do in fact exist or not. Such an inquiry was conducted by the AO in the present case. In the course of the said inquiry, the assessee had disclosed to the AO not only the names and the particulars of the subscribers of the shares but also their bank accounts and the permanent account numbers issued by the IT Department. Superadded to all this was the fact that the amount received by the company was all by way of cheques. This material was, in the opinion of the Tribunal, sufficient to discharge the onus that lay upon the assessee. In the absence of any perversity in the view taken by the Tribunal or anything to establish conclusively that the finding regarding the genuineness of the subscribers and the transaction suffered from any irrationality, no substantial question of law arose for consideration in the appeal to warrant interference. (ii) Shree Barkha Synthetics Ltd. vs. Asstt. CIT (2006) 197 CTR (Raj) 432 : (2006) 283 ITR 377 (Raj) Wher ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er person made investment in his name. Further, distinction between a public and a private limited company is not very material, so far as introduction of share capital money is concerned. Thus, where not only identity of the creditor but even capacity to advance funds had been proved on record, the creditors were also found to be assessed to tax, further investigation of the matter was not necessary; if any shareholder was found to have made unexplained investment, then addition of such investment was required to be made in the hands of the shareholder and not in the account of the assessee. (vi) Nemi Chand Kothari vs. CIT (2003) 185 CTR (Gau) 635 : (2003) 264 ITR 254 (Gau); Held : That the assessee had established the identity of the creditors. The assessee had also shown, in accordance with the burden, which rested on him under s. 106 of the Evidence Act, that the said amounts had been received by him by way of cheques from the creditors which was not in dispute. Once the assessee had established these, the assessee must be taken to have proved that the creditor had the creditworthiness to advance the loans. Thereafter the burden had shifted to the AO to prove the contrary. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es into the genuineness or otherwise of the loans taken by the assessee. After considering the evidence, the AO made an addition of ₹ 12,85,000 to the returned income of the assessee. This was confirmed by the CIT(A). On further appeal to the Tribunal the Tribunal held that the phraseology of s. 68 of the IT Act 1961, was clear, that the legislature has laid down that in the absence of a satisfactory explanation, the unexplained cash credit may be charged to income-tax as the income of the assessee of that previous year, that the legislative mandate is not in terms of the words 'shall be charged to income-tax as the income of the assessee of that previous year', that the unsatisfactoriness of the explanation does not and need not automatically result in deeming the amount credited in the books as income of the assessee. The Tribunal found that the assessee had discharged the initial onus which lay on it in terms of s. 68 by proving the identity of the creditors by giving their complete addresses, GIR numbers/PANs and the copies of assessment order wherever readily available, that it had also proved the capacity of the creditors by showing that the amounts were receive ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rmed the addition under s. 68 of the Act which is highly unjustified and unwarranted. He strongly placed his reliance on the decisions reported in (1991) 99 CTR (Del) 40: (1991) 192 ITR 287(Del) (supra), (1993) 113 CTR (Del)(FB) 472: (1994) 205 ITR 98(Del)(FB) (supra), (2003) 182 CTR (Cal) 585: (2003) 263 ITR 289(Cal) (supra), Barkha Synthetics Ltd. vs. Asstt. CIT (supra) and (2006) 206 CTR (Raj) 626: (2006) 286 ITR 477(Raj) (supra), Jaya Securities Ltd. vs. CIT (2008) 166 Taxman 7(All), 8 ITJ 165 (Indore), CIT vs. Daulatram Rawatmull 1972 CTR (SC) 411: (1973) 87 ITR 349(SC) and (1998) 230 ITR 500 (SC)(sic). In view of above facts, circumstances and judicial decisions, he submitted that the impugned addition of ₹ 90,00,000 be deleted. 29. On the other hand, the learned Departmental Representative strongly relied on the orders of the Revenue authorities and submitted that all the three criteria are not established simultaneously nor the genuineness of the creditor is proved. Hence the authorities below are fully justified in making the impugned addition under s. 68 of the Act. 30. We have carefully considered the facts and circumstances of the case and material available on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hares and receipt of subscription and premium has been made through banking channel. 32. In the present case, it is an admitted fact that the assessee has filed the details of the shareholders, their addresses, bank draft/cheque numbers for the subscription and premium received along with their income-tax file numbers. The assessee has filed the details of all the four companies. The assessee also filed the audited accounts of all the four companies. It is also admitted fact that the above companies have sufficient fund for investment in other companies. Before making the addition, the AO did not make any necessary enquiry on the income-tax file numbers submitted by the assessee. 33. In our considered opinion, the assessee has complied with all the requirements to prove (i) the genuineness of the amount received towards share application money and premium, (ii) identity of the creditor, (iii) genuineness of the transaction and (iv) creditworthiness of the creditor by filing the relevant documents. The AO failed to make necessary enquiries and only relied on the report of the Inspector thereby rejecting the explanation of the assesseee for making addition under s. 68 without havin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1 In response to aforesaid memo, a reply dt. 18th Dec., 2006 was filed which reads as under : "1. That the expenditures/payments made as per seized records have not been actually claimed by the assessee. No manufacturing or P&L a/cs have been prepared to derive the profit or loss. Instead of that a flat rate of profit of about 16 per cent has been estimated on unaccounted sales and the same has been accounted and offered for taxation. 2. Since the expenditure has not been claimed in the P&L a/c, any part of it should not be disallowed. 3. When the profit is estimated as a percentage of sales it is clear beyond doubt that no particular purchase or expense is being specifically allowed from sales. Therefore there is no question of disallowance. The same has been held by Allahabad High Court in case of CIT vs. Banwarilal Banshidhar (1998) 148 CTR (All) 533: (1998) 229 ITR 229(All). 4. Without prejudice to above submission, there is one more aspect of the case. From loose papers found it can be seen that the expenditures in the form of purchases from some parties are lower than payments made to them. Party-wise accounts of cash payments and purchases are enclosed with a summar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has applied s. 40A(3) only on such expenditures which were noted in the seized document and not on other expenses figured in regular books of accounts. I find force in the submission of the learned Authorised Representative and action of the AO is reversed." 37. Aggrieved by the order of the learned CIT(A), the Department has come up in appeal before the Tribunal. 38. The learned Departmental Representative vehemently argued that the expenditure was actually claimed by the assessee because it has given only GP ratio on the suppressed sales. He submitted that the GP is the resultant figure of difference between sales and purchase and other direct expenses. Now when the GP on suppressed sales is applied then the assessee is not entitled for other expenditure and hence there is no scope for entertaining the claim of the assessee that it will not come under the mischief of s. 40A(3). He submitted that from GP, the assessee has claimed payment of Central Excise duty. There is no occasion for the assessee to claim other expenses such as electricity duty and other indirect expenses because it had already claimed it while booking such expenditure in its regular books of account. He ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ined by the appellant. The violation of s. 40A(3) comes out of loose papers seized by the Excise Department forming part of unrecorded transaction therefore the ratio of judgments of Hon'ble Allahabad High Court in case of Banwarilal Banshidhar (supra) Hon'ble P&H High Court in case of Santosh Jain (supra) and Hon'ble Madhya Pradesh High Court in case of Purushottamlal Tamrakar (supra) are directly applicable to the present case. 41. It is very much relevant to refer to the decision of Hon'ble Gujrat High Court in case of Hasanand Pinjomal vs. CIT 1977 CTR (Guj) 486: (1978) 112 ITR 134(Guj). It was held that 40A(3) has been enacted with objective of checking tax evasion and to know whether the transactions are genuine and has been made out of the income from "disclosed sources". In the present case, the disallowance under s. 40A(3) has been made by the learned AO out of unrecorded purchases therefore it is not accordingly to law and judicial decisions as stated above. 42. It appears that this disallowance/addition has been made by the learned AO under over enthusiasm to make high-pitched assessment discarding all the factual position and judicial decisio ..... X X X X Extracts X X X X X X X X Extracts X X X X
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