ASST. COMMISSIONER OF INCOME TAX, CIRCLE-9(1), HYDERABAD vs. VINSRI INFOTECH, HYDERABAD

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH ‘A', HYDERABAD BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI A. MOHAN ALANKAMONY, ACCOUNTANT MEMBER ITA No. 1891/Hyd/2017 Block Period: 1996-97 to 2001-2002 M/s Vinsri Infotech, vs. Dy. Commissioner of Hyderabad. Income-tax, Circle – 9(1), Hyderabad. PAN – AABFV6806E Appellant Respondent & ITA No. 2129/Hyd/2017 Block Period: 1996-97 to 2001-2002 Dy. Commissioner of vs. M/s Vinsri Infotech, Income-tax, Circle – Hyderabad. 9(1), Hyderabad PAN – AABFV 6806 E Appellant Respondent Assessee by: Shri Y. Ratnakar Revenue by: Shri Sunku Srinivasu Date of hearing: 19/09/2019 Date of pronouncement: 04/12/2019 O R D E R PER P. MADHAVI DEVI, J.M.:

These are the cross appeals by the assessee as well as revenue directed against the order of CIT(A) – 7, Hyderabad, dated 11/09/2017.

2 I.T.A. Nos. 1891 & 2129/H/17 M/s Vinsri Infotech, Hyd. consultancy. The department had conducted a search and seizure operation under section 132(1) on assessee's business premises as well as the residences of the partners on 31-01-2003. Consequent thereto, the Assessing Officer completed the assessment for the block period (accounting year 1996-97 to 31-01-2003) under section 158BC(c) rws 144 on 31-3-2005 determining the income at Rs.3,45,66,400/-. On an application filed by assessee u/s.264 of the I.T. Act before the CIT(Central) explaining the reasons for non-participation during the assessment proceedings, the CIT(Central), Hyderabad, set aside the assessment proceedings and consequently the assessment was completed u/s.158BC(c) rws 264 on 24-6-2008 determining the income of Rs.11,19,27,240/-.

2.1. Against the assessment order dated 24.6.2008, the assessee filed an appeal before the CIT(A) challenging the invocation of jurisdiction u/s.158BC of the I.T. Act and the CIT(A) granted partial relief to the assessee. The assessee filed an appeal before the ITAT in IT(SSA) NO.2/H/2013, while the department challenged the deletion of addition in appeal No. IT(SSA) No.6/H/2012. The 'C' Bench of ITAT, Hyderabad vide its order dated 11-12-2013 in IT(SS)A No.2/HYD/2013 dismissed the assessee's appeal challenging the jurisdiction u/s.158BC of the I.T.Act and in the revenue’s appeal in ITSS(A) No.6/HYD/2012 vide order dated 11-12-2013, set aside the issue to the file of the Assessing Officer with a direction to recompute the undisclosed income after taking the comparable cases into consideration.

2.2. In compliance thereof, the Assessing Officer passed an order u/s.158BC (c) rws 254 of the I.T. Act

3 I.T.A. Nos. 1891 & 2129/H/17 M/s Vinsri Infotech, Hyd. dated 23-3-2015 determining the total undisclosed income of the assessee at Rs. 2,86,72,896/-. Subsequently, the order passed u/s.158BC(c) rws 254 of the I.T. Act was amended on 14-8-2015 to rectify apparent mistakes and determined the total income at Rs. 4,94,91,508/-.

4 I.T.A. Nos. 1891 & 2129/H/17 M/s Vinsri Infotech, Hyd. general power of Attorney to Sri C. Suresh, her husband, to look after the business of the firm, to sign all contracts and to operate the bank accounts of the firm. The assessee firm from its inception has been an Income tax assessee and' has been filing its returns of income and the assessments too have been completed till assessment year 2002-03. A search and seizure, operation was conducted by the Department ~n 30-01-03 at the business premises of the firm and the residence of the partners and some account books, documents and loose papers were seized. The authorized officers also seized cash of Rs.2, 00,000/- found in the office premises and residence and clamped prohibitory orders on the bank accounts of the two concerns and seized Fixed Deposits of the family members also. Thus the business came to a standstill. The action of the Department resulted in virtual squeeze of the appellant's cash flow. The cheques issued by the appellant to the subcontractors for the work performed by them have bounced. The firm and the Directors have become targets of wide and adverse publicity in the press. Some criminal complaints for cheating and fraud were registered with the police department. Consequently arrest warrants were issued against the power of Attorney Holder Sri C.Suresh and his wife and children. Mr. Suresh was taken into remand by police on 08-05-03 and remained in judicial custody till August 06. His wife and children could obtain anticipatory bail only on 14.03.2005. He was granted bail on 28-08-06. The police Department officials have seized the records, documents and papers "Om the appellant's office and locked and sealed the premises. In this background, the appellant firm could not comply with the notices purported to have been served by the department further to the search operations. The

5 I.T.A. Nos. 1891 & 2129/H/17 M/s Vinsri Infotech, Hyd. Assessing Officer (Dy. Commissioner, Central Circle-2, Hyderabad) completed the assessment ex-parte for the block period under section 158BC, read with section 144 on 30-01-05 for failure to comply with notices under Section 158BC and 142(1) of the Income Tax Act, raising a tax and interest demand of Rs.2,66,22,170/-. Soon after his release Sri C.Suresh, GPA Holder represented under Section 264 of the IT Act before the Commissioner of Income tax, Central Circle, for grant of an opportunity to subject itself to due process of law by vacating the ex- parte order and directing the Assessing Officer to make a fresh assessment after giving an opportunity of hearing to the appellant. The Commissioner of Income Tax was kind enough to vacate the ex-parte assessment and afford an opportunity to the firm to file the returns. Thereafter the assessee obtained photo copies of the seized documents and records from the Department and attended to finalization of the accounts. Tae returns for the block period were filed before the Deputy Commissioner Income Tax, Central Circle-2 on 22-11-06, declaring a loss of Rs,47,80,881/-. The Assessing Officer did not approve of the expenditure declared by the appellant as he felt that the expenditure was not proved except for the purchase of books and came to a conclusion that it was fit case for estimate of “undisclosed income". The assessing officer estimated the income from the business at 40% of the receipts declared by the appellant. In doing so, he has taken into account the receipts of the assessment years also in respect of which the assessments have become final before the search operations. The assessing officer treated the expenditure on books purchased as capital expenditure and allowed depreciation on the cost of books and levied a tax and interest thereon at Rs. l0,08,35,185/-.

6 I.T.A. Nos. 1891 & 2129/H/17 M/s Vinsri Infotech, Hyd. The assessing officer also initiated penalty proceedings under Section 158BFA (2) and Section 27IB of the IT Act. The appellant being aggrieved of the assessment preferred an appeal before the Honourable Commissioner (Appeals) of Income Tax. The Commissioner (Appeals) of Income. Tax, Guntur, has passed the orders setting aside the assessments made by the Assessing Officer and in favour of the assessee on 28-04-2011. Thereafter the department filed an appeal before the Hon'ble Tribunal. The Hon'ble Tribunal after hearing both the parties observed that the assessing officer erred in treating the profit of the firm at 40% which was on high side and tax could have been levied after taking into consideration comparable cases. The Tribunal further observed that the books which are the source of work are consumables and should have been treated accordingly as revenue expenditure and not as capital expenditure. In the light of above facts, the case was referred back to the assessing officer for reassessment. The Assessing Officer, Circle 9(1) while allowing the expenditure on books as Revenue Expenditure, did not consider the profit/loss on the basis of comparable cases of relevant industries as directed by the Tribunal, but chose to estimate the income at 30% stating that during the course of search operations, "lots of incriminating material was found". The assessing officer therefore levied a total tax and interest at Rs.2,58,29,606/. It maybe pertinent "here to quote Hon'ble Supreme Court order ruling that all documents and pieces of paper seized during search can be incriminating documents. Also the assessing officer has not recorded any proof of

7 I.T.A. Nos. 1891 & 2129/H/17 M/s Vinsri Infotech, Hyd. such documents. Further, this issue of incriminating material being found was never raised with either the Commissioner (Appeals) or with the Tribunal. The working of his order are appended for immediate reference and verification.

S.No. Description Details Amount in Rs. 1. Gross Profit 10,04,62,046 2. Less expenditure on books 3,46,96,788 treated it as revenue expenditure 3. Balance after allowing the 6,57,64,358 expenditure on books 4. Less Depreciation of books on 2,08,18,612 Rs.3,46,97,688 @ 60% 5. Less depreciation on books 12,03,543 claimed for the AAY 1999-2000 & 2002-03 Total depreciation 2,20,22,155 4,37,42,203 6. Other expenditure @ 15% on 1,50,69,307 1,50,69,307 Gross Profit 7. Total undisclosed income: 2,86,72,896

S.No. Description Amt in Rs. 1 Income Tax thereon @60% 1,72,03,738 2 Add surcharge @5% 8,80,187 3 Total Tax and surcharge 1,80,63,925 4 Add interest u/s 158BFA(1) 77,65,681 5 Total Tax and Interest payable 2,58,29,606

Similarly for the assessment year 1-04-2002 to 31-3-03, the total income of the firm was only Rs. 15,000/-. The assessing officer has taken credits from the personal account of the GPA Holder (SB A/c No: 7494 with Allahabad bank, Sec'bad) and added them to the firms income and arrived at total receipts of Rs. 17,27,505/- and a Total income of Rs.7,70,026/- and levied tax and interest and surcharge amounting to a tax liability of Rs.7,57,381/-which is contrary to the laid down accounting procedure and against the law.

Aggrieved of the manner in which the assessment was made setting the directions of the Tribunal and the quantum of income determined by Assessing Officer, the

8 I.T.A. Nos. 1891 & 2129/H/17 M/s Vinsri Infotech, Hyd. appellant files this appeal before the Hon'ble Commissioner (Appeals) of Income Tax. The appellant therefore prays that the comparables cases be taken into account as ordered by the Tribunal and the loss declared be accepted, as the order of assessment of the learned Assessing Officer is contrary to the directions of the Tribunal and facts of the case.

Further, the learned Assessing Officer failed to note that the income of the GPA holder is different from that of the firm which he is representing and C clubbed the credits in the personal account with the, firm's receipts while, computing the tax liability, contrary to the established law. In the light of these facts, it is prayed that: , • The order passed by the learned Assessing Officer under Section 143(3) r.w.s.254 of the IT Act, 1961 be set aside and the loss declared by the appellant as per books be accepted The comparable cases furnished by the appellant, in support of the loss claimed, are taken into consideration. The penal interest imposed under section 158BFA(1) be removed as : (a) The returns in the block assessment were filed within the time frame, and the assessments were completed (b) The date of filing return for the year 2003-04 has not expired when the search took place. 5. As regards grounds against invocation of jurisdiction u/s 158BC, the CIT(A) dismissed the same and on the issue of determination of the undisclosed income, the CIT(A) granted partial relief by observing as under:

“The report published by GIAN JYOTHI JOURNAL gives about net profitability of the Software Industry for different periods. It is reported by the Author of

9 I.T.A. Nos. 1891 & 2129/H/17 M/s Vinsri Infotech, Hyd. the GIAN JYOTHI JOURNAL that the average net profit came down to 11.47% in 2001 as compared to 14.06% in 1998. It also further said that the net profit ratio continued to fall in succeeding years. The net profit ratio reported by journal is across the industry average considering both loss and profit making companies. Now coming to the net profit assessed by the Assessing Officer in the order of assessment dated 23-32015 and order u/s.154 dated 14-8-2015, the net profit assessed was Rs.4,94,91,508/- after correcting apparent mistakes in the order dated 23-32015. The net profit ratio comes to 14.77% on the gross receipts of Rs.33,48,73,485/-. This net profit of Rs.4,94,91,508/- @ 14.77% on the gross receipts of Rs.33,48,73,485/- was arrived on the basis of 30% of gross profit of Rs.1O,04,62,046/- and allowing the claim of expenditure on books of Rs. 3,46,97,688/- and other estimated expenditure of Rs. 1,50,69,307/- at 15% of the gross profit from the gross profit. The Assessing Officer in pursuance of the order of ITAT dated 11-12-2013 reduced the estimation of net profit from 40% to 30% as he was unable to find out the comparable cases. The allowance of estimation of general expenditure at 15% of gross profit also appear to be little low. Out of the total gross receipts of Rs.33,48,73,485/-, the major receipts Rs.31,90,15,834/- fall in the assessment year 2003-04 within the block period. Looking into the peculiar facts of the case and net profitability ratio of software companies at 11.47% in 2001 as reported by GIAN JYOTHI JOURNAL, and further reduction in net profitability of the Software Companies in subsequent period, I consider the net profit of the appellant company for the block period at 9% as reasonable profit. The claim of other expenditure of Rs.3,46,97,688/- on purchase of books and other expenses of Rs.1,50,69,307/- are deemed to have been allowed. No further separate expenses on account of purchase of books and other expenses, depreciation need to be allowed from the estimation of the net profit at 9% of the gross receipts of Rs.33,48,73,485/-. The net profit comes to Rs.3,01,38,613/-. The Assessing Officer is directed to give relief to the extent of Rs.1,93,52,894/- (Rs.4,94,91,508 - Rs.3,01,38,613) and assess the undisclosed income of the assessee to Rs.3,01,38,613/- the block period.”

10 I.T.A. Nos. 1891 & 2129/H/17 M/s Vinsri Infotech, Hyd. 6. Aggrieved by the order of CIT(A), both the assessee as well as revenue are in appeal before us by raising the following grounds of appeal: 6.1 Assessee’s grounds of appeal: “1 The order of the learned CIT(A)-7 in ITA No.105/CIT(A)-7/2015-16, dt.11/9/2007 is contrary to law and facts. 2 The appellant contends that the learned CIT(A) is in error in directing that the undisclosed income of the appellant to be assessed at Rs.3,01,38,613/- for the block period. In the facts and circumstances of the case, there is no undisclosed income at all. 3 The appellant contends that the learned CIT(A) erred in estimating the net income of the appellant at 9% of the turnover and without allowing any other expenses. The said estimate is erroneous. 4 The appellant contends that in the facts and circumstances of the case the income computation does not warrant any estimate. 5. It is contended that the inclusion of the income for asst. year 1999-2000 , 2000-01, 2001-02 and 2002- 03 is erroneous as the returns of income for these asst. years were filed in time and before the search was conducted . Hence the same cannot be included as undisclosed income in the block assessment. 6 The appellant contends that (even assuming while denying) if any estimate of profit is called for, the estimate at 9% is excessive. The assessing officer as well as the learned CIT(A) failed to consider the comparable cases cited by the appellant for making the assessment. The comparable cases shown were ignored on untenable and arbitrary grounds. 7 The appellant craves leave to add to amend or alter any of the aforesaid grounds as the occasion may require. 8 For these and other grounds that will be submitted at the time of hearing of appeal, the appellant prays that the order of the learned assessing officer and the learned CIT(A) be set aside and the income as declared by the appellant be accepted.”

11 I.T.A. Nos. 1891 & 2129/H/17 M/s Vinsri Infotech, Hyd.

6.2 Revenue’s grounds of appeal: i)The Ld. CIT(A) erred both on facts and law of the case. ii) Ld. C!T(A) ought not to have placed reliance on the report of Gian Jyothi Journal as authentic for the purpose of comparison of results in Computer Software industry. iii) The Ld.CIT(A) erred in holding the profit estimation on the entire receipts of Rs. 33,48,73,485/- at 9% as reasonable solely relying on the publication in Gian Jyothi Journal without giving opportunity to the A.O. iv) The Ld.CIT(A) erred in not considering the fact that the assessee has not substantiated general expenses with any creditable evidence and therefore the A.O. has rightly disallowed 5% of such general expenses. v) The Ld.CIT(A) erred in holding that estimation of net profit on the total turnover as 9% is reasonable without considering the comparable cases as directed by the ITAT. vi) Any other ground(s) that may be urged at the time of hearing.”

12 I.T.A. Nos. 1891 & 2129/H/17 M/s Vinsri Infotech, Hyd. He submitted that the AO and the CIT(A) have considered the entire receipts of the block period as undisclosed income of the assessee and have computed the net profit thereon, whereas the returns were filed for the relevant AYs taxes have been paid and the income declared therein cannot be considered as undisclosed income and brought to tax. He referred to the copies of the income tax returns placed at pages 139 to 141 of the paper book and submitted that these are copies of the returns which are all in the custody of the search party.

13 I.T.A. Nos. 1891 & 2129/H/17 M/s Vinsri Infotech, Hyd. S. Name of the 2001 2002 2003 2001 2002 2003 No. company Rs. Rs. Rs. Rs. Rs. Rs. 1. IGATE 4,21,419 2,92,664 2,87,801 (2,204) 5,738 (3,852) Technologies % profit/loss -0.5% 1.96% -4.38% 2. Mega Soft NA 387.84 NA NA -3.37 NA Ltd. -0.86 % profit/loss 3. Prism 0.32 4.37 6.40 -0.73 -5.99 ---- Informatics Ltd. 0 0 % profit/loss

S. Name of the Revenue Revenue Profit/Loss Profit/Loss No. company 1. B2B 287.89 419.58 (9.31) (39.94) Software (2009) (2010) (2009) (2010) Technologies Ltd., Hyd. 2. Ajel Infotech 149.32 -- (2.95) NA Ltd., Hyd. (2008) (2008) 3. Chakkilam 507.34 505.59 0.85 1.95 Infotech (2009) (2010) (2009) (2010) Ltd.

9.1. As seen from the above, all the companies seem to have incurred losses during the relevant period except for one company i.e. Chakkilam Infotek Ltd., which too has reported net profit of less than 2%. The AO has not accepted these companies as comparable cases but on his own accord also did not bring on record any comparable cases to adopt gross profit at 30% of the gross receipts. We find that the CIT(A) also has applied the net profit ratio of 14.77% of gross receipts of Rs.33,48,73,485/- and has adopted 30% of the said receipts as gross profit and has allowed the claim of expenditure on books and other estimated expenditure to arrive at 15% of the gross profit from the gross receipts. He has, therefore, directed the AO to adopt 9% of the gross receipts as the net profit.

9.2. In the written submissions filed by the Ld.Counsel for the assessee, he submitted that the computation of

14 I.T.A. Nos. 1891 & 2129/H/17 M/s Vinsri Infotech, Hyd. undisclosed income by the AO is erroneous. At para 16 of the written submissions, he submits that the actual amount of difference as available in the first block assessment order dated 31.5.2005 for the period from 1.4.2002 to 31.3.2005 i.e. relevant to AY 2003-04, the unaccounted cash receipts as per seized receipt books and as per special contract agreement totals to Rs.3,33,09,500/- only and not Rs.31,90,15,834/- as recorded by the AO in the impugned assessment order. He had submitted that this difference was explained during the assessment proceedings for the second time but that this was not considered by the AO.

9.3. We find that this factual position narrated by the assessee needs verification by the AO. In view of the same, we direct the AO to recompute the undisclosed income of the assessee by considering the following:-

(i) If the assessee has already filed returns of income for the AYs 1999-2000 to 2002-03, then the receipts which are disclosed in the said returns of income should be reduced from the total receipts considered by the AO to arrive at the undisclosed receipts of the relevant A.Ys. (ii) For the AY 2003-04 also, the actual figures of unaccounted cash receipts should be considered. (iii) The Net Profit on such unaccounted receipts from the AY 1999-2000 to 2003-04 should be estimated at the rate of net profit offered by the assessee on its unaccounted turnover. Since the AO has not brought out any comparable cases and the assessee also is only relying on

15 I.T.A. Nos. 1891 & 2129/H/17 M/s Vinsri Infotech, Hyd. comparable cases where there are losses, we are constrained to direct as above.

Pronounced in the open court on 04th December, 2019.

Sd/- Sd/- (A. MOHAN ALANKAMONY) (P. MADHAVI DEVI) ACCOUNTANT MEMBER JUDICIAL MEMBER Hyderabad, dated 04th December, 2019. *Kv/ *gmv Copy forwarded to: 1. M/s Vinsri Infotech, Plot No. HIG-76, CBI Colony, Krishna Residency, Vanasthalipuram, Hyderabad. 2. DCIT, Circle – 9(1), Hyderabad 3. CIT(A) – 7, Hyderabad 4. Pr. CIT - 7, Hyderabad. 5. The DR, ITAT, Hyderabad 6. Guard File

16 I.T.A. Nos. 1891 & 2129/H/17 M/s Vinsri Infotech, Hyd.