SRI SANTHOSH DAMODAR NAIK ,BANGALORE vs. ASSISTANT COMMISSIONER OF INCOME TAX CENTRAL CIRCLE -2(4), BANGALORE

The assessee an individual is engaged in the business of supplying of building materials. There was a search and seizure operation carried out under section 132 of the Income Tax Act, 1961 (hereinafter called ‘the Act’), in the case of one Mr. Muniraju on 09.10.2016. In the course of search, documents were seized. The residence of the assessee was also covered by the warrant of authorization of search though the search was in the case of Muniraju. Documents were seized from the residence of the assessee. Since the documents had a bearing on the determination of the total income of the assessee for Assessment Year 2014-15, notice under section 153C of the Act was issued to the assessee.

In the course of assessment proceedings under section 153C of the Act, the AO proposed to tax 12% of a sum of Rs.45,61,441/- which was the sales as reflected in the seized documents. The seized documents were pertaining to the period 01.12.2013 to 28.03.2014. In response to the proposal of the AO in his show cause notice dated 28.12.2016 as above, the assessee submitted that 5% of the total sales as reflected in the seized documents should be considered as undisclosed income of the assessee. The AO however held that though the seized documents relate to period from 01.12.2013 to 28.03.2014, the assessee would have indulged in similar unaccounted sales for the period from 01.04.2013 to 30.11.2013 also and by the process of extrapolation considered Rs.1,36,84,323/- as the unaccounted sales of the assessee. The AO however was of the view that instead of taxing percentage of income on the undisclosed sales, it would be better to treat the entire undisclosed sales of Rs.45,61,441/- as income of the assessee since the assessee did not file any evidence explaining the purchases against the sales and the capital out of which the assessee indulged in unaccounted business.

On appeal by the assessee against the order of assessment, the CIT(A) confirmed the order of the AO by holding that the provisions of section 44AD of the Act by which 8% of the total recepts of a person engaged in contract business would be deemed to be presumptive income was not applicable to the case of the assessee since his turnover exceeded a sum of Rs. 1 Crore, upheld the action of the AO.

Aggrieved by the order of the CIT(A), the assessee has preferred the present appeal before the Tribunal.

I have heard the rival submissions and I find that there is no basis for the AO to come to a conclusion that the assessee’s unaccounted sales for Assessment Year 2014-15 was Rs.1,36,84,323/-. The admitted position is that the documents found in the course of search show that the assessee engaged in unaccounted sales for the period from 01.04.2013 to 28.03.2014. There is no material to show that for the remaining period also, the assessee engaged in unaccounted sales. The AO’s conclusion that similar unaccounted sales would also have been made by the assessee is only based on his surmises without any valid evidence brought on record by the AO.

If the unaccounted sales of the assessee is only Rs.45,61,441/- for Assessment Year 2014-15, then certainly the assessee would be entitled to the benefit of the presumptive rate of income under section 44AD of the Act. The presumptive percentage of income as applicable for Assessment Year 2014-15 under section 44AD of the Act was 6%. I am of the view that considering the facts and circumstances of the case, an estimation of 8% of the unaccounted sales of Rs.45,61,441/- would be just and appropriate. In this regard, I am of the view that the AO’s action of treating the entire sales as income of the assessee is against all canons of tax where only income has to be assessed. I am also of the view that estimation of income would be the appropriate course of action in the given facts and circumstances of the case. I, therefore, restrict the addition made by the AO to 8% of the unaccounted sales of Rs.45,61,441/-. In view of the above conclusion, the other grounds of appeal with regard to validity of initiation of proceedings under section 153C of the Act and other connected issues raised by the assessee in the grounds of appeal are not being adjudicated, as agreed by the learned Counsel for the assessee at the time of hearing.

In the result, appeal of the assessee is partly allowed.