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TMI Blog2011 (11) TMI 739X X X X Extracts X X X X X X X X Extracts X X X X ..... ner (Appeals)-I, Mumbai, vide Paras-3.1, 3.2 and 3.3, are reproduced below for ready reference:- "13.1 The facts relevant to the issue are that , during the search & seizure action at the residence of Shri Kantilal Gada , ceratin documents with incriminating entries were found. Shri Kalpesh Gada , one of the partners admitted the seized documents to contain details of unrecorded sales. This fact was confirmed by one another partner , Shri Bhagwan Gada, whose son Shri Vipul Gada , is one of the main persons in this group. 3.2 The entries in seized documents such as 'p''v''j' and Saibaba were stated to represent unaccounted trading. However , no income from this unaccounted trading was found to be admitted in the return of the appellant, whereas Shri Kalpesh Gada and Shri Vipul Gada , in their respective returns , had admitted certain additional income on account of the said unaccounted trading activity. The AO, however , issued a show cause notice requesting the appellant to explain as to why the unaccounted sales could not be treated as unaccounted income in the hands of M/s K K Enterprises and M/s Appu Textile Mills , Proprietor Shri Alpesh Gada , the appellant. The following i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the unaccounted sales were part of trading activity. That the surplus arising from unaccounted trading activity has been offered as income in the individual hands of Mr. Kalpesh B. Gada, and Mr. Vipul Gada, as the unaccounted trading activity had been done by the said two individuals only. The assessee contended that the material seized, the statement recorded and the returns of income filed, clearly show that the income belongs to Mr. Kalpesh B. Gada and Mr. Vipul Gada, and not to the assessee Mr. Alpesh B. Gada and M/s. K.K. Tex Enterprises. That the material seized during the course of search, evidenced purchases outside the books and this fact is corelated with the bank accounts maintained in the name of Saibaba Textiles. The Commissioner (Appeals), on the ground that no evidence was found during the course of search, which proves unaccounted purchases and on the ground that the fabrics sold outside the books were actually produced by using the machinery and raw material, rejected the contentions of the assessee. Further aggrieved, the assessee is in appeal before the Tribunal. 5. The facts arising out of the second issue, as brought out in Paras-4.1, 4.2 and 4.3 of the C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... labour charges should not be restricted. The reply of the appellant was that , the statement of Shri Kalpesh Gada admitting inflation of labour expenses was wrong. Shri Bhagwaji Gada, the main person has strongly objected to it. It is stated that, only a few persons out of 80 labourers had given adverse statements and the further reply was that , in order to buy peace of mind , the appellant disclosed Rs. 50.50 Lacs as additional income during search. Through another show cause notice , the appellant was asked to explain as to why labour charges claimed beyond Rs. 1.50 per meter should not be disallowed. The appellant replied that , Rs. 4 to Rs. 4.5 per meter was paid during the AY 04-05 and 05-06 and Rs. 4 and Rs. 6 were paid during the years relevant to the AY 07-08 and 08-09. Considering the argument of the appellant that, he did incur certain expenses other than the expenses recorded in books, the AD chose to allow Rs. 3 per meter as labour charges, which worked out to Rs. 13,85,232/- and disallowed the balance amount of Rs. 1,29,046/-. The following is the observation of the AD. The assessee's submissions have been duly considered, It is a settled law that, documents / evid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... recorded in the books of accounts after allowing a margin of Rs. 3 per meter (Rs 1.5 for labor + Rs. 1.5 for other incidental expenses like transport power, beam drawing etc) is worked out as below: Closing stock of grey cloth = 12162 meters, Rs. 310673 Average price = Rs. 310673 / 12162 Rs. 25 Sales shown is Rs. 11543622/- @ Rs. 25 per meter, quantity of grey cloth manufactured = 11543622 / 25 = 461744 meters Labour charges claimed Rs. 1514278/- Labour charges allowable Rs. 3 per meter = 461744 meters x 3 = Rs. 1385232/- Disallowance Rs. 1514278 - Rs. 1385232 = Rs. 129046/-. 4.3 That is, the AO worked out the number of meters woven at 4,61,744 meter by dividing the total sales by the average sale price @ 25 per meter and allowed Rs. 3 per meter for labour charges , which worked out to Rs. 13,85,232/- and disallowed the balance amount of Rs. 1,29,046/- out of total expenses claimed of Rs. 15, 14,278/-." 6. On appeal, the Commissioner (Appeals) granted part relief. Aggrieved, the assessee is in further appeal before the Tribunal. The following grounds are raised:- "1. On the facts and circumstances of the Appellant's case and in law the Ld. CIT(A) erre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h materials and the statement of Mr. Kalpesh K. Gada, in support of this contention that the unaccounted sales in question is from trading and not for manufacturing and that it belongs to Mr. Kalpesh K. Gada. We would be referring to each of these materials in our findings. 9. He also drew the attention of the Bench to various purchase bills of Saibaba Textiles, and co-related the bills to the payments recorded in the copy of bank account which were found during the course of search in support of his contentions that unaccounted purchases were evidenced by the material found during the course of search as well as entries in unofficial bank account maintained for this unaccounted trading. He strongly disputed the findings of the Assessing Officer as well as the Commissioner (Appeals) that unaccounted purchases were not evidenced by entries in the bank account or by materials found during the course of search. He submitted that these findings are contrary to the facts. 10. Learned Counsel, further submitted that Mr. Kalpesh K. Gada, at the time of search, admitted that this unaccounted sales belongs to him and also that the bank accounts were operated by him. This admission has bee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ficer for verification as to whether the material found during the course of search and also considering the increase in rates from year-to-year and then deciding the issue afresh. Referring to the statement recorded from Mr. Bhagwan Gada, he submitted that the period during which the amount was paid as labour charges, was not stated. 12. Learned Counsel submitted that these issues are common for all the assessment years in both the assessees' cases before the Tribunal with some exceptions which were argued as follows:- 13. ITA no.896/Mum./2011, in the case of Mr. Alpesh B. Gada, assessment year 2008-09, an additional ground in respect of telescoping of addition of inflated labour charges against excess stock found was made. Learned Counsel argued that telescoping should be granted. 14. Similarly, in ITA no.898/Mum./2011, in the case of M/s. K.K. Tex Enterprises, identical additional ground was taken in respect of telescoping. 15. In ITA no.1489/Mum./2011, in the case of M/s. K.K. Tex Enterprises, which is against the disallowance under section 40(a)(ia) r/w section 194C, learned Counsel submitted that he is not pressing this ground. 16. On ground no.5, in this appeal which is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of telescoping, the learned Departmental Representative submitted that the assessee should demonstrate nexus before making the claim. 20. On section 40(a)(ia), she relied on the order passed by the Commissioner (Appeals). 21. Rival contentions heard. On a careful consideration of the facts and circumstances of the case and on a perusal of the papers on record, as well as the case laws cited before us, we hold as follows:- 22. The issue before us is whether the unaccounted sales in question are from trading transactions or from manufacturing transactions. This decision has to be arrived based on the statement recorded during the course of search and the material seized at the time of search. If the statements and material lead us to a conclusion that the unaccounted sales are from trading transactions, then these sales cannot be added in the hands of the assessee. The supplementary question is whether the entire turnover can be treated as income or reasonable expenses are found in the material seized is to be allowed and only profit from transaction taxed. 23. The fact that the assessee has unaccounted sales, have come to light during the course of search. Certain materials were ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the statement, Mr. Bhagwan Gada, stated that all these transactions in question are unaccounted trading transactions and that certain evidences found are purchase bills of Saibaba Textiles. Mr. Kalpesh Gada, in a statement recorded on 12th July 2007, i.e., on the date of search has, in reply to a question, stated as follows:- "Q.22 During the course of the search proceedings, books of account / documents as per annexure AR-1, have been seized. I am showing you each item of such seizer. Please identity the same and explain the contents in detail? Ans. A/9 - This register is related to sales made to grey cloth by me under the name Saibaba Textile, prop. Shri Dilip Prajapati, who is also our employee. This concern was operated for 3 years by me and the transactions were never disclosed to income tax by me. There is a bank a/c opened in the name of this concern with Abhyudaya Corp. Bank, Bhiwandi. This register reflects the sale transactions of this concerns for the period 01.04.06 to 13.02.07." [emphasis added] 26. This shows that Mr. Kelpash K. Gada, admitted that Saibaba Textiles, is operated by him. He has filed return of income to that effect. At Page-41 of the paper book, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssumes that the suppression is equal and made ad-hoc addition. No evidence is found to link the assessee with these sales. Thus, the addition made and sustained by the Commissioner (Appeals) on account of unaccounted sales is hereby deleted. 27. Even otherwise, the entire turnover could not have been brought to tax. At best, only profits arising out of an activity can be brought to tax. Additions are sought to be made on the basis of gross receipts in a bank account. At best, the peak credit could have been added. In the case on hand, gross receipts have been added as income which, to our mind, is not correct. Only surplus of the transaction could be taxed. 28. In any event, as we have held that the additions in the case of Mr. Alpesh G. Gada and M/s. K.K. Tex Enterprises, which is made on a 50:50 adhoc basis, is bad-in-law, for the reason that the transactions do not pertain to these enterprises, we do not go into the issue of what is the surplus in these transactions. Consequently, we set aside the impugned order passed by the Commissioner (Appeals), and allow ground no.1, raised by the assessee. 29. Coming to ground no.2, from the seized documents at Pages-22 and 34 to Annexu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for assessment year 2003-04. Consistent with the view taken by us in this order vide Para-28 above, we set aside the impugned orders passed by the Commissioner (Appeals) and restore the issue back to the file of Assessing Officer for denove adjudication in accordance with law. Thus, ground no.2, in all the three years are allowed for statistical purposes. 35. In ITA no.896/Mum./2011, the assessee has raised an additional ground in respect of telescoping of addition of inflated labour charges against excess stock found. 36. As we have restore the issue of addition on account of inflation of labour charges for adjudication afresh, we set aide the impugned order passed by the Commissioner (Appeals) and restore this ground of telescoping to the file of Assessing Officer for denovo adjudication. The Assessing Officer has to grant telescoping benefit to the extent of additions sustained by him. This ground is, thus, allowed for statistical purposes. 37. In the result, assessee's appeals in ITA no.894/Mum./2011, ITA no.895/Mum./2011, ITA no.895/Mum./2011 and ITA no.1487/Mum./2011, are partly allowed. 38. We now take up assessee's appeals in ITA no.897/Mum./2011, for assessment year 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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