M/S. GITA REFRACTORIES PRIVATE LIMITED,BANGALORE vs. INCOME TAX OFFICER, WARD- 11(2), BANGALORE

The Assessee craves leave to add, alter, amend, substitute, change and delete any of the grounds of appeal

The ld. DR relied on the order of the lower authorities.

We heard the rival submissions and perused the material on record. During the survey proceedings certain books of accounts and diaries written by Mr.Rajgopal Gilda, MD of the assessee were found and impounded under inventory No.GRPL-63. The AO noticed that the diary has notings about the monitory transactions which are not recorded in the books and based on the same has issued notice u/s148 for reopening the assessment. Before proceeding further we will look at the provisions of section 147

The reasons for the formation of the belief must have rational connection with or relevant bearing on the formation of belief. Rational connection postulates that there must be a direct nexus or live link between the material coming to the notice of the Assessing Officer and the formation of his belief that there has been escapement of income of the assessee from assessment in the particular year. In the given case, from the notings in the diary, the AO has a reason to believe that the income that should have been offered in the hands of the assessee has escaped assessment and the AO has recorded the same. The contention of the ld AR that the AO has recorded that the cumulative figure in the notings should have been offered to is the ‘reason to belief’ is not correct. The reason to belief of the AO is the notings which is not recorded in the books thereby in the opinion of the AO has escaped assessment. The expression "believe" in Section 147 requires an objective satisfaction based on definite material and information, howsoever insufficient it is. The belief formed about escapement of income for recording reasons to reopen the assessment is only prima facie. Such material coming from independent source may not be complete or full, may prove to be incorrect on inquiry, but before reopening assessment, the AO must be able to infer in good faith that income of the assessee is chargeable to tax and has escaped assessment. Thus, relevancy of material for formation of belief is crucial. The AO has noticed from the documents impounded during the course of search noticed that there are several entries relating to cash transactions and other receipts and payments which have not been recorded in the books of accounts of the assessee and on that ground the AO has a ‘reason to believe’ that the income has escaped assessment. Therefore in our considered view the notings in the diary impounded during the course of survey proceedings is a relevant material for the formation of the belief by the AO and hence we see no reason to interfere with the order of CIT(Appeals) in so far as the legal issue contended by the assessee is concerned. The grounds raised in this regard is dismissed.

Ground No.4 relates to the addition made with respect to purported sale of steel. The AO found in page No.48 of the impounded diary certain notings as under:-

Cash transaction/payments are through Githa.

L/C through sait - Ist lot / 250 mtrs. Rs.6,40,800/- - 60/- 3204000 Rs.22,40,000/- - 240/- 2883600 Rs.28,88,800/- - 300 USD 13. The assessee submitted before the AO that these are calculations regarding material that are going to be imported by sister concern M/s.

The CIT(A) confirmed the addition by holding that similar addition was confirmed in AY 2005-06 and therefore the addition during the year under consideration is also upheld.

The AO also made an addition of Rs.17,00,000 based on the entry in page No.60 of the diary where the cash flow from various sources and payments to various persons have been noted. The assessee submitted that it is an entry of financial planning made for the day and therefore not recorded in the books. The AO concluded that the said notings pertains to amount receivable on sale of scrap and the assessee has not shown any evidence that receipt was accounted in any future date and made an addition of Rs.17 lakhs as undisclosed income. The CIT(A) upheld the addition.

With regard to the first addition of Rs.32,04,000 the ld AR submitted that the director of the assessee has negotiated for purchase of steel scrap for use in refurbishing the tempering kilns and made projections in the planner of the approximate funds required for purchase of the same. The said transaction has fructified and the funds were transferred in the financial year 2007-08 i.e. AY 2008-09 (page 145-146) for the purchase of steel and the said products were also received from the seller, situated in Senegal, Africa. The details of payments made overseas and for purchase of steel was furnished before the CIT(A) (page 122, 125-130, 145-146) and also before the AO in remand proceedings. The AO has preferred not to comment on the same, which the CIT(A) has summarily dismissed without proper reasoning.

Without prejudice it was submitted that the learned CIT(A) upon prima facie appreciation of the documents, ought to have appreciated that the entire addition was on an erroneous premise and a purchase of goods could not be considered as unaccounted sale and the entire addition of Rs. 32,04,000/- was required to be deleted. In view of the above the ld AR prayed that the entire additions made on the premise that the entries were pertaining to sale of goods were incorrect and rather purchase of goods and are required to be deleted in full.

With regard to the second addition the ld AR submitted that the assessee in the course of planning his cash flow for managing various business interests, has projected that Rs. 17,00,000/- could be raised out of refund of loans from M/s Ajay Constructions, Pune, arising out of sale of goods at Pune, in the regular course of their business, which was in the knowledge of the director of the assessee. The said funds were intended to meet business requirements out of the loans earlier advanced to M/s Ajay Constructions, which is available in the financials of the assessee. The said monies totaling Rs. 20,00,000/- was also received back (page 150-151, 20/07/2007) in AY 2008-09 and the same is reflected in the bank accounts and also in the ledger accounts of the respective parties. The said entry in the planner of the director was a mere noting for future cash flows and there was no sale of scrap by the assessee. The documents filed by the assessee and the creditor are ample proof that the fund flow was anticipated to meet the requirement of the assessee's financial requirement, which was entirely explained and accounted in the books of both the parties. In view of the above, the entire addition of Rs. 17,00,000/- as a sale transaction was a mere speculation by the assessing officer and is required to be deleted in full.

We have heard the rival submissions and perused the material on record. The AO made two additions towards suppressed sale of scrap. The first addition is for an amount of Rs.32,04,000 based on the noting made on 3.2.2007 which is extracted in the earlier part of this order. The ld AR during the course of hearing drew our attention to the submissions made before the lower authorities stating that the MD has made note of a proposed import from SAIT (which is the short form for Society Africana D Immobilier Et De Transport) which is located in Republic of Senegal, which is supported by the ledger of SAIT produced for FY 2007-08 (page 146 of paper book) wherein the proposed purchased actually happened and the payment is made. We also notice that State Bank of Hyderabad had confirmed the outward remittance to SAIT vide letter dated 30.12.2016 addressed to the CIT(A). We further notice that this submission of the assessee regarding factual position has not been considered by the lower authorities as whether the noting in the diary crystallized in the subsequent financial year and the addition is made merely based on the entries in the diary. We further notice that these transactions relate to import of materials from the vendor SAIT which is an expense in the hands of the assessee and from the records / ledger copies it is noticed this transaction has materialized in the subsequent financial year i.e. 2007-08. We therefore see merit in the argument that noting found in the diary are proposed imports which happened in the subsequent year. Further, the AO has made the addition as undisclosed income by sale of steel scrap, whereas based on facts submitted, the transaction is that of an import/purchase and hence the findings of the AO is factually incorrect. In view of this discussion and based on the perusal of the facts of the case, we are of the considered view that this addition is not tenable and therefore deleted.

With regard to the addition of Rs.17,00,000 the AO has done it based on the noting in the diary where it is mention as “Steel Scrap – Rs.17 lakhs”. The submission of the assessee that this is a projected receipt from sister concern and the amount was actually received in FY 2007-08 which was not accepted by the AO. The ld AR argued before us that the assessee does not sell any scraps and the noting is an expected receipt from the sister concern M/s.Ajay Constructions that has sold the steel scrap. The ld AR drew our attention to the ledger copy of assessee’s account in the books of M/s.Ajay Constructions and the bank statement of M/s.Ajay Constructions where in an amount of Rs.20,00,000 is paid to the assessee on 20.07.2007. The ld AR submitted that this is the proposed receipt noted by the MD of the assessee which is received in the subsequent financial year. We notice that the AO while making this addition has stated that the amount noted as receivable should have been received on that day or any future date and that the assessee company has not furnished any evidence to show that such receipt was accounted in any future date either in the hands of the assessee or in the hands of any other sister concern. We find that this conclusion is arrived at not based on perusal of any materials produced before the AO. We also notice that the CIT(A) has upheld the addition merely on the basis that the during AY 2006-07 also similar issue is noticed and the unaccounted income arising out of the business transaction needs to taxed. The CIT(A) has not recorded any finding based on the details submitted and has not brought anything on record to state that the details submitted are not correct. The CIT(A) has instead decided on the earlier year which in our view is not the right way to arrive at the decision. The assessment of each year is different and have to considered based on the facts pertaining to that particular assessment year. The submission of the ld AR that the noting of Rs.17,00,000 relates to the subsequent receipt of Rs.20,00,000 needs to be examined, though there is no other payment received from M/s.Ajay Constructions for FY 2007-08. The receipts if any from M/s.Ajay Constructions to the assessee during the year under consideration also needs to be verified before accepting the contention of the ld AR. In these circumstance and considering the facts of the case, we remit the issue back to the AO for examination of the submissions afresh based on ledger and other documents submitted by the assessee. The assessee is directed to submit the relevant details before the AO and cooperate with the proceedings. It is ordered accordingly.

The AO called on the assessee to explain the various notings done in the diary and based on the reply filed by the assessee the AO found the following entries to be not acceptable.

The AO treated the above amount as unexplained expenditure u/s. 69C on the basis that the expenditure were not entered in the books of accounts of the assessee and that the explanation provided by the assessee that these expenses pertained to sister concerns was not acceptable. On further appeal, the assessee filed details pertaining to these expenses before the CIT(A). The CIT(A) did not admit the additional evidence filed by the assessee and confirmed the addition.

The ld. AR submitted that the additions in respect of miscellaneous entries are stated in the assessment order along with the comments of the assessee. The ld AR further submitted that a substantial portion of the entries were either personal expenditure of the director of the assessee or transactions made in the personal capacity of the director and not related to the primary activities of the assessee. The monies receivable from Kanishk Steels, Chennai, of Rs. 13,60,485/- were an actual outstanding arising out of sale of goods during the earlier year and the same was a closing balance (page 168 of paper book) in the books of the assessee and received through banking channels in the following assessment year. Further, the transactions of the director with the sister concerns of the assessee, were stated to be recorded in their respective books and the same could not have been added as unexplained in the hands of the assessee. It was further submitted that the learned CIT(A) has also given a perverse finding that the assessee has furnished additional details and filed for the first time, which is contrary to record, when the details of the transaction were explained to the AO during assessment proceedings and thus the additions ought to have been deleted by the CIT(A).

Without prejudice, the ld. AR submitted that the payments for personal purposes would be paid from the personal resources of the director and could in no instance be considered as payments made by the assessee. Hence, no addition could have been made in the hands of the assessee in respect of the various working notes made by the director of the assessee for mere reason that he was the managing director of the assessee, when the said entries have been sufficiently explained to been made by the director individually or were mere working notes for financial planning purposes.

We have heard the rival submissions and perused the material on record. We notice that the AO had given a list of various noting from the diary and based on the details furnished made the addition in the hands of the assessee for an amount of Rs.6,64,180. We also notice that during the appellate proceedings the assessee has filed certain documents related to these amounts and also submitted that sum of these are personal expenses noted in the diary or expenses not pertaining to the assessee. However the CIT(A) rejected these documents by stating that the assessee has not submitted the same before the AO inspite of having sufficient opportunity and did not provide sufficient cause for his failure to furnish these documents before the AO. On this ground the CIT(A) upheld the addition. The ld AR during the course of hearing submitted that the major amount of Rs.4,99,000 does not belong to the assessee and belongs to some other entity. The ld AR in this regard drew our attention to pg 168 of paper book where the relevant document to substantiate the said claim and submitted that the same was furnished before the lower authorities. Since the CIT(A) did not admit the documents to arrive at the decision to uphold the addition and that the assessee’s contention that the amounts are either personal in nature or does not belong to the assessee need to be factually examined. Since the AO has stated that the assessee has not furnished any details before him to support the claim in the interest of justice, we remit the issue back to the AO. The AO is directed to consider the evidences and documents and decide the issue afresh after examination in accordance with law. Needless to say that the assessee may be given a proper opportunity of being heard.

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