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Income Tax Appellate Tribunal, MUMBAI BENCH “H” MUMBAI
Before: SHRI OM PRAKASH KANT & SHRI SANDEEP SINGH KARHAIL
PER OM PRAKASH KANT, AM These cross appeals by the assessee and revenue are directed against a consolidated order dated 28/02/2022 passed by the learned commissioner of Income-tax (Appeals)-54, Mumbai [in short the Ld. CIT(A)] for assessment year 2001-02 to assessment year 2006-07. As common grounds have been raised by the parties in their appeals for all the assessment years except grounds raised additionally in A.Y. 2005-06 therefore these appeals were heard together and disposed off by way of this consolidated order for convenience. The parties agreed to take the assessment year 2001-02 as the lead case and decision in that year to be applied mutatis mutandis. 2. The grounds of appeal of the assessee for assessment year 2001-02 reproduced as under: “The Appellant is aggrieved by an Order dated 28.02.2022, passed by the Commissioner of Income Tax CIT(A) 54 received on 28.02.2022 under section 253 of the Income Tax Act, 1961 („the Act‟) on the following
3 ITA Nos. 807,808,809,810,811,812,853,854,855,856,857,858/MUM/2022 Hemendra Merchant amongst other grounds each of which is in the alternative and without prejudice to any other: 1. The CIT (A) erred in adjudicate the issue on the aspect of framing of search assessment under the provision of 153 (A) of the Act in respect of unabated assessment without the presence of incriminating materials found during the search and seizure operation on 21.12.2006 at the residence and the office premises of the Appellant/Assessee.
The CIT(A) failed to appreciate the intent of legislature and object of inserting the provisions of 153A, 153B and 153C of the Finance Act, 20032 discarding the then existing provisions relating to search and seizure cases contained in Chapter XIV B of the Act.
The CIT(A) failed to appreciate the memorandum explaining the provisions in the Finance Bill 2003 relates to question as to whether a particular income could be disclosed as „undisclosed income‟ or whether particular income could be said to be relatable to the material found during the course of search and seizure.
The CIT(A) failed to appreciate and consider that the case of the Appellant is the unabated assessment and nothing incriminating material was found during the said operation 21.12.2006, since the regular assessment of the Appellant were filed and accepted till the date of the search and seizure.
The CIT(A) failed to appreciate the source of income for the Appellant is derived from the business carried out by the Assessee‟s Six
4 ITA Nos. 807,808,809,810,811,812,853,854,855,856,857,858/MUM/2022 Hemendra Merchant Partnership Firms of Shriram Group stood dissolved on 31.03.2004 (hereinafter referred to as the „said Firms‟).
The CIT(A) failed to appreciate that when the search was carried out on 21.12.2006, the Firms were dissolved as on 31.03.2004 and the FDRs recovered under the Panchanama dated 21.12.2006 stood in the name of said Firms and tax was recovered out of the FDRs.
The CIT(A) failed to appreciate that, by an order dated 05.11.2014 passed by the Hon’ble Supreme Court of India in SLP CIVIL No. 29309 OF 2012 read with Order dated 22.02.2019 passed by the ITAT MUMBAI “H” in ITA No. 5667/MUM/2010 to 5670/MUM/2010, search and seizure against the firms declared illegal and void ab initio and all assessment framed under 153A and Warrant of Authorization of Search would also become void ab initio.
The CIT(A) failed to appreciate, disclosure of amount of Rs. 5.12 Crores voluntarily by the Appellant before the Settlement Commission on 31.05.2007 due to incorrect advise the erstwhile CA which was revised by the Assessee on 21.01.2010 to the extent of 28 Lakhs, as un disclosed income after seeking advice of the couple of CAs, rejected by the Settlement Commission on 11.03.2015 and the AO passed an order on 26.02.2016 which is time barred.
The CIT(A) failed to appreciate that the amount of about Rs. 2.52 Crores were recovered out of which a sum of Rs. 1.75 Crores on the pretext of the Tax was paid on the individual PAN of the assessee which was derived and recovered from the FDRs stood in the name of the said Firms against which the said operation of search and
5 ITA Nos. 807,808,809,810,811,812,853,854,855,856,857,858/MUM/2022 Hemendra Merchant seizure was declared void ab intion by the Hon‟ble Supreme Court of India and ITAT as stated above.
The CIT(A) failed to appreciate and consider the aspect of sundry creditors, loan from Laxmi Cooperative Credit Society, duplication of accounting of FDRs, interest income, deduction of TDS upon interest of income and percentage of profit of said Firms for the more than 70% on the basis of which the assessments were carried out and additions were made.
The CIT(A) failed to appreciate that during the search and seizure nothing incriminating material was found on 21.12.2006 and entire proceedings of the assessments are time barred.
The CIT(A) failed to appreciate that original books of accounts of the assessee were lying with the office of the provident fund commissioner and service tax authorities at the relevant time.
The CIT(A) ought to have held that the proceeding taken by the AO under section 153A of the Act of the Act without fulfilling the jurisdiction pre-conditions in that section is illegal and bad in law.
The CIT(A) erred in not computing the income of Appellant on the basis of books of account regularly maintained by it.
The CIT(A) failed in to follow the Order dated 05.01.2022 passed in six WPs being W.P. (L) No. 14895 of 2021 along with other 5 WPs by which the DB presided over by Hon‟ble Shri Justice K.R. SRIRAM of the Hon‟ble Bombay High Court directed CIT(A) to dispose the appeal within eight weeks of the said order after giving personal
6 ITA Nos. 807,808,809,810,811,812,853,854,855,856,857,858/MUM/2022 Hemendra Merchant hearing to appellant and giving the one week advance notice before the personal hearing.
The CIT(A) ought to have held that the Appellant is entitled to deduction in respect of administrative expenses.
The CIT(A) ought to have allowed deduction in respect of remuneration to partners as claimed in the return of income.
The Grounds of appeal of the Revenue for assessment year 2001-02 are reproduced as under; “ 1. Whether on the facts and circumstances of the case and in law, the ld. CIT(A) has erred in restricting the addition made u/s. 69 of the I.T Act to Rs. 1,00,21,724/- as against Rs.2,68,15,768/- made in the assessment order u/s. 143(3) r.w.s 153A of the I.T. Act., even when the Ld. CIT(A) has admittedly observed that the assessee has not proved any details of fresh FDRs made or renewal of FDRs during period 01.04.2000 to 31.03.2006 either during the assessment proceedings or appellate proceedings?
Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in restricting the addition made on account of undisclosed interest to Rs. 9,52,063/- without appreciating that since the assessee has not provided any details of fresh FDRs made or renewal of FDRs?
The Applicant craves to leave, to add, to amend and/or to alter any of the ground of appeal, if need be.”
7 ITA Nos. 807,808,809,810,811,812,853,854,855,856,857,858/MUM/2022 Hemendra Merchant 4.1 Briefly stated facts of the case as culled out from the order of the lower authorities and submission made by the assessee, are that the assessee filed his regular return of income for the year under consideration on 31/03/2003 declaring total income of ₹ 8, 39, 533/-. Subsequently, a search and seizure action under section 132 of the Income-tax Act, 1961 ( in short the Act) was carried out on 21/12/2006 at the premises of the assessee along with premises of the other group concerns of Sri “Ram Group.” Regarding the activities of the group the assessee stated before the Ld. CIT(A) that he was carrying on business activity of providing security services to various Banks on behalf of Court Receiver though six partnership firms constituted by the assessee i.e. Sh Hemendra Merchant and his wife i.e. smt Hema Merchant. The banks used to file suits against the parties who defaulted in making repayment of the loan and the interest. The Court Receiver, after attaching the properties of the defaulting partirs, used to appoint the partnership firms of the assessee for providing security services for guarding the attached assets. According to the assessee, the lender banks used to make the payment for providing such services. The said business activity was carried through six partnership firm namely (1) M/s Sriram Security and consultancy services (2) M/s Sriram warehousing Corporation (3) M/s Sriram Security agency (4) M/s Sriramakrishna security services (5) M/s Srikishna security services, and (6) M/s Sriram maintenance services. During the course of such action, a trust namely H& H Merchant Trust, whose beneficiary included the assessee and his wife was found in existence 4.2 The Ld. Assessing Officer noted that during the course of the search action in addition to cash of ₹ 2 lakhs and jewellery of ₹ 6, 05, 340/- ( as per pnachnama dated 21/12/2006 prepared from residence of assessee , available on PB -15, jewellary is of Rs. 43,54,730/-,investment in fixed
8 ITA Nos. 807,808,809,810,811,812,853,854,855,856,857,858/MUM/2022 Hemendra Merchant deposits/ bonds/ National saving certificates(NSC) of ₹ 11, 49, 61, 339/- was found. The break up fixed deposits has been provided by the Assessing Officer on page 3 of the Assessment order, which is extracted as under: S. No. Investment Amount Rs. 1. Bank FDRs( reflected/not reflected in 8,50,07,339/- books of account) 2. RBI Bonds ( reflected / non reflected) 85,29,000/- 3. NSCs (National Saving Certificate) 14,25,000/- 4. FDRs in Trust name (reflected) 2,00,00,000/
4.3 During the course of search , in a statement under section 132(4) of the Act, the assessee made a disclosure of ₹ 5.12 crore( Rs. 5,12,23,284/-) for undisclosed investment in fixed deposits etc. 4.4 Consequent to search action, a notice under section 153A of Act was issued on 28/05/2007. In the return of income filed in response to 153A of the Act, the assessee reiterated the income declared of Rs. 8,39,533/- in regular return of income, which was filed on 31/03/2003. 4.5 Thereafter the assessee filed an application before the Income Tax Settlement Commission(ITSC) on 30/05/2007 under section 245C(1) of the Act and offered income of ₹ 5, 17, 23, 284/-for taxation and paid Income- tax amounting to ₹ 1.75 crores. The statement of income disclosed in the return of income vis-à-vis the additional income offered before the ITSC, reproduced by the Assessing Officer in para 5.1 of the assessment order, is extracted as under:
9 ITA Nos. 807,808,809,810,811,812,853,854,855,856,857,858/MUM/2022 Hemendra Merchant S. A.Y. Income Additional Total Addl. Total Income as per income income as Income No Return offered per disclosed u/s. 139 before ITSC before the return AO u/s. 153A A B C D E F(D+E) 1 2001- 8,39,533 - 8,39,533 1,00,000 9,39,533 02 2 2002- 5,90,802 - 5,90,802 1,00,000 6,90,802 03 3 - 6,64,506 1,00,000 7,64,506 2003- NOT 04 submitte d by the assessee 4 - 6,12,005 1,00,000 7,12,005 2004- Not 05 submitte d by the assessee 5 - 20,62,878 1,00,000 21,62,878 2005- 20,62,87 06 8 6 2006- 13,83,36 - 13,83,366 521,23,284 5,35,06,650 07 6 61,53,090 5,26,23,284 5,87,76,374
4.6 Further, on 21/01/2010, the assessee filed a written letter before the ITSC praying that his correct income should be only be only Rs. 28 lakh
10 ITA Nos. 807,808,809,810,811,812,853,854,855,856,857,858/MUM/2022 Hemendra Merchant as against the income offered originally. The ITSC in its order dated 11/03/2015 passed under section 245D(4) of the Act rejected the application of the assessee in view of disclosure by the assessee not being true and full. The relevant paragraph of the order of the settlement commission, reproduced by the Assessing Officer in para 6.1 of the assessment order is extracted as under: “The Hon‟ble Settement Commission vide its order u/s. 245D(4) dated 11.03.2015 rejected the application of the assessee wherein the Hon‟ble Settlement Commission in para No. 10.3 of its order has stated as below:- 10.3 It is true that the applicant did not submit a revised application in writing but his argument along with the submissions during the proceedings would tantamount to a revised application which, we are confident, cannot be entertained. We are also not in agreement with the applicant’s argument that a downward revision is possible whereas an upward revision is not. We consider that a revision is a revision, be it upward or downward. Hence, we are of the considered view that the fullness of the application has not been put to test because of the non-compliance of the applicant and so far as the trueness of the disclosure is concerned, we are certain that the offer is not true as the applicant himself does not consider it as true and has been asking for a downward revision. 11. In view of the discussion above, we are inclined to hold that the application is not true and cannot be treated as valid and hence rejected. The Assessing Officer is directed to proceed accordingly.”
11 ITA Nos. 807,808,809,810,811,812,853,854,855,856,857,858/MUM/2022 Hemendra Merchant 4.7 Consequent to the order of the ITSC which has been claimed by the Assessing Officer to be received on 20/03/2015) , rejecting the petition for settlement of the assessee, the Assessing Officer issued notice under section 143(2) and 142(1) of the Act. The date of said notices has been mentioned by the Assessing Officer as 31/07/2015, whereas the assessee in its submission before the Ld. CIT(A) has mentioned the date of notice u/s 142(1) as 15/04/2015 followed by another notice dated 10/12/2015. The Assessing Officer on page 4 of the assessment order had mentioned the amount of year wise additional income offered by the assessee before the settlement commission, which is extracted as under: Assessment Year Returned Income Total Income Additional Income Offered 2001-02 839533 100000 939533 2002-03 590802 100000 690802 2003-04 664506 100000 764506 2004-05 612005 100000 712005 2005-06 2062878 100000 2162878 2006-07 1383366 52123284 53506650 Total 6153090 52623284 58776374
4.8 During the course of assessment proceeding, the Assessing Officer asked the assessee to explain the source of investment in those fixed deposits /bonds /NSC etc of ₹ 11, 49, 61, 339/- along with documentary evidences i.e. audited and certified copies of the balance sheet of the firms/ trust etc. He also asked whether the fixed deposits were matured and renewed during the year from 01/04/2000 to
12 ITA Nos. 807,808,809,810,811,812,853,854,855,856,857,858/MUM/2022 Hemendra Merchant 31/03/2005. The assessee mainly filed two submissions. The first submission was filed on 13/01/2016 and another submission was filed on 02/02/2016. The main contention of the assessee was that fixed deposits were made in years prior to the assessment year under consideration i.e. A.Y. 2001-02 and after renewal from time to time finally the fixed deposit as on 31/03/2000 stood at ₹ 6, 89, 89, 000/-. For year wise breakup of the figure of ₹ 6, 89, 89, 000/-it was submitted that same contained in the chart appearing on page 407 of volume 3 of reply to report filed before the ITSC in reply to report of the commissioner u/s. 245D(3) of the Act. However, considering the books of accounts not properly maintained and not available in continuity, the assessee sought further time to collate the data. The Assessing Officer rejected the breakup of fixed deposits of ₹ 6, 89, 89, 000/-as on 31/03/2000 holding that same was only a statement of fixed deposits reflecting in different bank accounts and it was not a full, inclusive and true statement of all the investment in fixed deposits found. The claim of the assessee of interest accrued on fixed deposits for assessment year 2000-01 at the rate of 7% per annum, amounting to ₹ 48, 29, 230/- was also rejected by the ld. Assessing Officer on the ground that same was a mere estimation and not exact working of interest on those fixed deposit. 4.9 In relation to computing addition for unexplained investment in fixed deposits, the ld. Assessing Officer has preferred to information collected from four sources. The first source being amount of fixed deposits of Rs. 11,49,61,339/- found and seized during the course of search action, inventory of which was prepared during the course of search. The second source is information gathered by the DDIT(Inv) in post search proceedings. According to the Assessing Officer, for verification of actual amount of fixed deposits invested by the assessee in various banks, in
13 ITA Nos. 807,808,809,810,811,812,853,854,855,856,857,858/MUM/2022 Hemendra Merchant post search assessment proceeding, the Deputy Director of Income-tax (Investigation) gathered information from various branches of the banks in terms of section 133(6) of Act/. The details gathered of fixed deposits amounting to ₹ 3, 88, 33, 924/-, has been listed by the Assessing Officer in para 10.3.1 of the assessment order. The Assessing Officer has further refers to the details of undisclosed investment in FDR as reflected in diary marked as annexure-A3, total of which has been worked out to ₹ 6, 40, 23, 950/-. This is the third source of working of amount of unexplained investment is fixed deposits. The Assessing Officer further referred to details of fixed deposit as reflected in seized register marked as annexure A-4, total of which has been worked out to Rs. 2,63,000/-. This is the fourth source of working of amount of unexplained investment is fixed deposit. 4.10 In this manner the Assessing Officer computed the total amount of unexplained investment in fixed deposits etc at Rupees 11,49,61,339 + Rs. 3,88,33,924 + Rs. 6,40,23,950 + Rs. 2,63,00,000 totalling to ₹ 2.24, 41, 19, 213/-. The Assessing Officer worked out opening balance of fixed deposits as on 01/04/2000 at ₹ 1, 51, 20, 341/- and accordingly, he considered the undisclosed investment during the search period from 01/04/2002 to 31/03/2005 at rupees ( 24,41,19,213 – 1,51,20,341) = Rs. 22,89,98,872/-.
4.11 Thereafter, the issue before the Assessing Officer was as how to bifurcate this amount of unexplained investment in various year of the search period. According to the Assessing Officer, the amount in fixed deposit had been invested by way of inflating the expenses, which had been debited in various partnership firms, withdrawal from the
14 ITA Nos. 807,808,809,810,811,812,853,854,855,856,857,858/MUM/2022 Hemendra Merchant partnership firms in the name of employees etc therefore, according to him the investment in fixed deposit should be bifurcated in the ratio of year wise expenditure booked in various partnership firm of the group. The Assessing Officer worked out the year wise expense ratio as under: Details of Expenses shown in Balance Sheet from 2001-02 to 2006-07 Name 2001- 2002- 2003-04 2004-05 2005-06 2006-07 Total 02 03 Sriram 88912 81764 112755 1020185 4995483 4028548 Sec. & 7 4 2 Cons. Serv. Sriram 12264 11697 113310 1160713 1181753 4381695 Warehosin 15 43 8 g Corp. Sriram 58776 54984 506962 578913 1193334 Secuirty 5 6 Agency Sriramkris 54804 52961 399131 343595 852559 322001 hna 0 1 Security Ser. Srikrishna 40929 74501 53768 45748 112819 9967 Sec. Ser. 1 Sriram 29183 256707 297648 178684 Maint. 8 Ser.
15 ITA Nos. 807,808,809,810,811,812,853,854,855,856,857,858/MUM/2022 Hemendra Merchant Total 36,60, 34,33, 34,77,2 25,70,24 80,19,17 1,01,14, 3,12 638 183 28 1 5 229 ,74, 691 Percentag 11.70 10.97 11.11% 8.21% 25.64% 32.33% 100 e % % %
4.12 Applying, above yearwise percentage of expenditure, the learned Assessing Officer computed the year wise undisclosed investment in fixed deposits as under: A.Yrs 2000- 2001- 2002- 2003- 2004-05 2005-06 2006-07 01 02 03 04 Percentag 11.71% 10.98% 11.12% 8.22% 25.64% 32.33% e to allocate undisclos ed FDs FDRs 151203 419361 670801 925448 111368 170083 opening 41 09 85 59 566 877 balance Unaccoun 268157 251440 254646 188237 587153 740353 ted FDRs 68 76 74 07 11 36 of Rs. 22899887 2/- allocated on the
16 ITA Nos. 807,808,809,810,811,812,853,854,855,856,857,858/MUM/2022 Hemendra Merchant basis of the % of expense incurred yearwise FDR 151203 419361 670801 925448 111368 170083 244119 41 09 85 59 566 877 213 Closing balance as recasted
FDRs 151203 195453 258389 316307 142533 203718 398880 closing 41 41 41 96 49 37 55 balance as per Balance sheets filed
4.13 The Assessing Officer also estimated the interest income on above undisclosed investment in fixed deposits applying the interest rate of 9.5% per annum relying on information gathered by the Investigation wing from Canara Bank vide letter dated 21/12/2006, wherein bank authorities stated that rate of interest for the period from 24/04/1999 to 24/05/2000 at the rate of 9.5%. The year wise computation of undisclosed income from interest, reproduced by the Assessing Officer in Para 11.1 of the assessment order, is extracted as under:
17 ITA Nos. 807,808,809,810,811,812,853,854,855,856,857,858/MUM/2022 Hemendra Merchant
A.Yrs 2000- 2001- 2002-03 2003-04 2004-05 2005-06 2006-07 01 02 FDR 1,51,20 4,19,3 6,70,80, 9,25,44, 11,13,68, 17,00,83, 24,41,19 Closing ,341 6,109 185 859 566 877 213 balance as recasted Interest at 39,83, 63,72,61 87,91,76 1,05,80,0 1615796 2,31,91, 9.50% on 930 7 2 14 8 325 the basis of FDRs above Less: 12,90, 16,24,74 15,55,33 9,31,511 4,20,311, 8,23,102 Interest 499 4 1 offered Undisclose 26,93 47,47,8 72,36,4 96,48,50 1,57,37, 2,23,68, d Interest ,431 73 30 2 657 223 now brought to tax
4.14 The Assessing Officer also disallowed sundry creditors invoking section 41(1) of the Act . According to the Assessing Officer the assessee during the course of search proceeding stated that source of investing in fixed deposits (FDR) was through creditors outstanding in the balance sheet of the firms. The Assessing Officer asked the assessee to justify the creditors and in absence of the genuineness of the creditor not established by the assessee, the Assessing Officer rejected the
18 ITA Nos. 807,808,809,810,811,812,853,854,855,856,857,858/MUM/2022 Hemendra Merchant contention of source of fixed deposit out of the sundry creditors. The Assessing Officer computed outstanding creditors in various partnership firms as under: Name 2000- 2001- 2002-03 2003-04 2004-05 2005-06 2006-07 01 02 Sriram 62574 25341 239908 333993 432091 409734 415212 97 02 4 1 1 4 3 Sec & Cons. Serv. Sriram 19459 42802 893882 104262 123885 120235 117729 57 23 7 00 99 57 72 Warehosi ng Corp. Sriram 65029 740654 857789 106627 106761 Secuity 9 7 7 Agency Sriramkri 88237 119591 117001 116600 876546 876546 shna 2 3 7 0 Secuity Ser. Srikrishn 11397 11397 101029 999484 100398 994055 994055 a Sec Ser. 69 69 2 4 Sriram 137986 165391 152567 152567 Maint. 40 4 9 9 Ser. Hemendr a
19 ITA Nos. 807,808,809,810,811,812,853,854,855,856,857,858/MUM/2022 Hemendra Merchant Merchant Hemendr a Merchant H & H Merchant s Trust Total 93,43, 94,86, 1,56,83, 1,84,47, 1,88,79, 2,05,83, 2,03,88, 223 765 410 335 494 458 992
Thereafter he computed, net increase in creditors for each year of the search period, for making addition under section 41(1) of the Act as cessation of liability. The relevant details are reproduced as under: Name 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 Total 9486765 1568341 1844733 1887949 2058345 20388992 outstandi 0 5 4 8 ng during the year Less : 9486765 1568341 1844733 1887949 32778938 opening 0 5 4 Creditors 94,86,76 61,96,64 27,63,92 4,32,15 17,03,96 1,23,89,9 added 5 5 5 9 4 46 back to total income.
20 ITA Nos. 807,808,809,810,811,812,853,854,855,856,857,858/MUM/2022 Hemendra Merchant
4.15 The Assessing Officer also held loan from Sri Lakshmi corporate credit society amounting to ₹ 45, 83, 745/-as cessation of liability under section 41(1) of the Act. 5.1 On further appeal before the Ld. CIT(A), the assessee challenged validity of the assessment on two grounds. Firstly, all the assessments were unabated and no incriminating material was found in the course of the search, therefore, no addition could have been made in the case of the assessee following the decision of the Hon’ble Bombay High Court in the case of Continental Warehousing Corporation (supra). Secondly, the assessment as per the provisions of section 153A of the Act, have been passed on 26/02/2016 after a long period from the date of the search on 21/12/2006, therefore the assessments are barred by limitation. The assessee also submitted that the partnership firms were dissolved from 31/03/2004 onward and therefore search assessment passed for six years in case of those six partnership firm have been held by the co- ordinate bench of Tribunal in ITA No. 5671 to 5674/MUM/2010 in order dt 22/02/2019 as void ab initio being search action carried on non-existent entity as illegal. The Ld. CIT(A) rejected the contention of the assessee challenging the validity of the assessments. However on merit, the Ld. CIT(A) admitted the additional evidence containing bank statements and forwarded the same to the Assessing Officer calling for a remand report. The Assessing Officer in remand report verified the investment in fixed deposits reported by the various firms as on 01/04/2000 and quantified the same at ₹ 6, 81, 39, 500/-. But objected for allowing credit on the ground that source of investment in fixed deposits or the liability side of the balance sheet was not explained by the assessee. However, the Ld. CIT(A) after considering submission of the assessee allowed the benefit of opening balance of the
21 ITA Nos. 807,808,809,810,811,812,853,854,855,856,857,858/MUM/2022 Hemendra Merchant fixed deposit of ₹ 6, 81, 39, 500/-. Futher, he also reduced fixed deposits which were common in four sources (list) of fixed deposits quantified by the Assessing Officer. According to the Ld. CIT(A) the total investment in fixed deposits by the assessee in his firms/(concerns) as on the date of the search was of ₹ 11, 49, 61, 3 to 39 ( the deposits found in the course of the search ) + Rs. 3,88,33,924 ( information of the additional fixed deposits gathered by the investigation wing in post search proceeding) totalling to ₹15, 37, 95, 263/-. After allowing opening balance of fixed deposit of ₹ 6, 81, 39, 505, the Ld. CIT(A) upheld the addition of ₹ 8, 56, 55, 763/-. The Ld. CIT(A) also held that no separate addition in respect of unexplained investment in FDR which was offered before the ITSC amounting to ₹ 5, 26, 23, 284/- was required to be made. 5.2 In view of relief on unexplained investment in fixed deposit, the corresponding interest on those fixed deposit was also reduced by the Ld. CIT(A) for various years of the search period. 5.3 Regarding the sundry creditors of ₹ 94, to 6, 765, the Ld. CIT(A) upheld the addition on the ground that no submission were filed by the assessee before him. 5.4 The addition of the Rs. 45, 83, 741 in respect of the loan from Sri Lakshmi cooperative credit society, the Ld. CIT(A) deleted the same as liability not being part of the trading liability. 6. Aggrieved with the finding of the Ld. CIT(A), both the assessee and the Revenue are before the ITAT (Tribunal) by way of raising grounds as reproduced above. 7. Before us the Ld. Counsel of the assessee has filed a combined paper book for assessment year 2000-01 to 2005-06 containing pages 1 to 722.
22 ITA Nos. 807,808,809,810,811,812,853,854,855,856,857,858/MUM/2022 Hemendra Merchant 8. In ground Nos. 1 to 4 , the assessee has challenged issue of validity of the assessment on the grounds of no addition could be made in case of unabated assessment without presence of any incriminating material found during the course of search at the premises of the assessee. The ground Nos. 11 and 13 are also partly related to this issue. 8.1 The facts qua the issue in dispute are that in the case of the assessee, search was carried out on 21/12/2006, therefore six assessment years prior to the assessment year in which search was carried out are from assessment years 2001-02 to 2006-07. As per provisions of the Act, the assessment gets abated wherever on the date of search, assessments are pending. The limitation for issue of notice under section 143(2) of the Act in case of return of income for assessment year 2006-07 was to be expired on 30/09/2007,(i.e. long period after search), so even if the return of income had been filed by the assessee prior to the date of the search, limitation for issue of notice under section 143(2) of the Act was available with Assessing Officer, therefore the assessment year 2006-07 was in the category of abated assessment. In remaining assessment years from A.Y. 2001-02 to 2005-06, no assessment was pending as on date of search and limitation for issue of notice u/s. 143(2) of the Act had already expired, before the date of search, hence those assessment are unabated. The assertion of the assessee that remaining assessment years are unabated, has not been disputed by the Revenue also. On the issue of no addition could have been made in case of unabated assessment in absence of any incriminating material, the Ld. CIT(A) has adjudicated as under: “The term “Incriminating material/evidence has neither been used in section 153Ai nor has been defined in the section however, the Act as well as various judicial decisions provide a hint. Such incriminating material/ evidence could be any books of account or
23 ITA Nos. 807,808,809,810,811,812,853,854,855,856,857,858/MUM/2022 Hemendra Merchant documents or any information unearthed during the course of search action having a bearing on the determination of the total income of a person. Clearly, such incriminating material has to be either the books of account or document (seized or requisitioned) itself or any information gathered during search or statement recorded during the search action which such information relates. Hence, if a search is conducted to investigate certain allegations which are found to be correct during search and based on the various documents collected during the search action, specific information or finding is generated on account of inquiries conducted during search process which has a bearing on the determination of total income of an assessee, the AO would be within his power to proceed under section 153A of the Act against such person on the basis of such finding which would also constitute incriminating material.” 8.2 Before us, the Learned Counsel of the assessee referred to following decisions: (i) the decision of Hon’ble Bombay High Court ( Nagpur Bench) in the case of Murli Agro products Ltd in ITA No. 36 of 2009 (ii) the decision of Hon’ble Bombay High Court in the case of CIT Vs continental warehousing Corporation in ITA No. 523 of 2013 (iii) the decision of Hon’ble Delhi High Court in the case of CIT versus Kabul Chawala in ITA 707 of 2014 (iv) the decision of Coordinate bench of the ITAT in the case of ACIT Vs PACL India Ltd in ITA No. 2637/Del/2010. 8.3 Per conta, the learned DR relied on the order of the Ld. CIT(A) and submitted that there are ample evidence of incriminating material found in the course of the search, particularly the fixed deposits for which the Assessing Officer has made addition. He also referred to disclosure made by the assessee before ITSC.
24 ITA Nos. 807,808,809,810,811,812,853,854,855,856,857,858/MUM/2022 Hemendra Merchant 8.4 We have heard rival submission of the parties on the issue in dispute and perused the relevant material on record. As per the various decisions cited by the Ld. Counsel of the assessee, no addition could have been made in period of six assessment years covered in search if , following two conditions are satisfied: (i) no assessments was pending as on the date of the search i.e. unabated assessment (ii) no incriminating material has been found during the course of the search of the premises of the assessee qua the assessment year involved/ issue in dispute.
8.5 When we examine the case of the assessee from the angle of presence of incrementing material, we found that Ld. CIT(A) has specifically referred to the investment in fixed deposits of Rs. 11,49,61,339/-, part of which was admitted as unexplained by the assessee himself during the course of search proceeding. The assessee also offered additional income before ITSC on the basis of those investment in fixed deposits for various years covered in the search period. On perusal of the paperbook, we find that assessee has enclosed copy of various annexure of panchnamas of seizure in the paperbook. The paper book page 10 is the copy of annexure of inventory of fixed deposits prepared as a part of Panchnama prepared from ground floor, Sudha Kunj , Opp Hira Panna shopping complex, Tardeo Road, Mumbai. In this annexure there is a list of 17 fixed deposits made in the name of assessee sh Hemendra Merchant and his wife Mrs Hema Merchant. On paper book page 25, there is a inventory dated 21/12/2006 of fixed deposit found during search action at the premises of Shriram security and consultancy services at 211/219, Bharti bhwan , P Dmallo Road, Opp. George Hospital , Fort , Mumbai. In the list of inventory there are 60 fixed deposits varying from ₹
25 ITA Nos. 807,808,809,810,811,812,853,854,855,856,857,858/MUM/2022 Hemendra Merchant 25,000 to ₹ 5 lakh in the joint name of ssesse sh Hemnedra Merchant and his wife Mrs Hema Merchant. During the course of assessment proceeding, the assessee has failed to explain source of investment in those fixed deposits from its books of accounts and therefore same have been treated as incriminating material by the Assessing Officer as well as by the Ld. CIT(A). 8.6 In the facts and circumstances discussed above, there is no doubt of existence of incrementing materials qua all the assessment years covered in search period i.e AY 2001-02 to 2006-07 therefore ratio of decision relied upon cannot applied over facts of the case. In our opinion, there is no error in the order of the Ld. CIT(A) on the issue in dispute and accordingly, we uphold the same. The relevant grounds of the appeal of the for the assessment year 2000-01 are accordingly dismissed. 9.1 In ground No. 5 (five), the assessee has contended that source of income in the hands of of the assessee is derived from the business carried out by the assessee’s six partnership firm which have been dissolved on 31/03/2004. In ground 6(six) and 7(seven), the assessee has contended that search carried out on 21/12/2006 on the partnership firms, which were already dissolved on 31/03/2004, and the search assessments on said firms have been held as void ab initio, therefore no addition could have been made in the hands of the assessee in respect of the fixed deposits, which were in the name of already dissolved partnership firms. 9.2 The facts in brief qua the issue in dispute are that search was also carried out on the six partnership firms constituted by the assessee and his wife. Those partnership firms were dissolved by the assessee on 31/03/2004. The ITAT in case of Sri Kirshana security services in ITA No. 5671 to 5674/Mum/2010 for assessment year 2001-02 to assessment year 2004-05 and other partnership firm held that issuing of search warrant under section 132 of the Act on dissolved entity is
26 ITA Nos. 807,808,809,810,811,812,853,854,855,856,857,858/MUM/2022 Hemendra Merchant illegal and void ab initio therefore consequent assessment framed under section 153A of the Act pursuant to such illegal warrant of authorisation held to be void ab initio. The relevant finding of the Tribunal is reproduced as under: “During the course of hearing before us. The learned. Counsel for the assessee drew our attention to the copy of panchanama (enclosed in old paper book) issued in the name of the erstwhile firms which were already dissolved way back on 31.3.2004, in support of which, he drew out attention to the pages 54 to 58 of the old paper book containing the letters filed before the income tax officer, ward no. 16(1)(4) on 17.11.2005 duly intimating the fact of dissolution of the assessee firms with effect from 31.03.2004 together with the copy of respective dissolution deeds. In the said letters, it was also specifically stated that no return of income in the name of assessee firms need to be filed from Asst Year 2005-06 onwards. We find that assessee firms need to be filed from Asst Year 2005-06 onwards. We find that these documents conclusively go to prove that all the assessee firms stood dissolved way back on 31.03.2004 and the income tax department had been duly informed about the same. The Tribunal in its order has categorically held that the firms were dissolved on 31.03.2004 and this factual findings of the Tribunal was not controverted by the revenue. In that scenario, issuing a search warrant of authorization u/s. 132(1) of the Act in the names of those dissolved firms and conducting search on 21.12.2006 would become illegal and pursuant to such illegal warrant of authorization would also become void ab initio. The directions of the Hon‟ble Supreme Court is disposed off in this manner accordingly.” 9.3 The contention of the assessee before us is that part of the fixed deposits are in the name of the partnership firms and few fixed deposits are in the
27 ITA Nos. 807,808,809,810,811,812,853,854,855,856,857,858/MUM/2022 Hemendra Merchant name of the assessee and his wife and investment in those fixed deposits is application of income earned by the partnership firms only, thus source being evident, no addition should be made at the stage of application of income in fixed deposit. 9.4 We have considered rival submission of the parties on the issue in dispute and perused the relevant material on record. In our opinion, in the instant case the assessee was required to explain source of investment in fixed deposits made in various years. It was the onus of the assessee to explain the source of those fixed deposits from the books of accounts of six partnership firms or other entities maintained in the regular course. In failure to do so, the Assessing Officer is well within his powers to assess the undisclosed investment in fixed deposits in the case of the assessee. Regarding the source of the fixed deposit the assessee has given contradictory replies. Sometimes the assessee has explained that those fixed deposit have been made by the partnership firm out of their books of accounts, however the assessee could not substantiate the same. The Assessing Officer has has observed that that source of investment in fixed deposit is out of money siphoned off from partnership firms. In our opinion, in absence of explanation of the source of investment in the fixed deposits found in the course of search action , addition in the hands of the assessee cannot be deleted merely for the reason that search assessments in the hands of the firm have been held to be void-ab-initio. The ground No. 5 to 7 of the appeal are accordingly dismissed. 10.1 The ground No 8 of the appeal of the assessee relates partly to the addition made on merit, whereas partly related to challenging the expiry of limitation in passing the assessment order. In ground 11 also partly proceedings of the assessment has been challenged for expiry of limitation.
28 ITA Nos. 807,808,809,810,811,812,853,854,855,856,857,858/MUM/2022 Hemendra Merchant 10.2 As far as issue of expiry of limitation is concerned, the Ld. CIT(A) has adjudicated the issue as under: “6.2.1 The appellant has challenged the order of the AO u/s. 153A of the Income-tax Act, 1961 on the ground that the search was conducted on 21.12.2006 and the order has been passed on 26.02.2016 after a long period therefore it is timebarred. Explanation 1 to section 153 provides for exclusion of the time period from the date of making application to settlement Commission and ending with the date on which the order u/s. 254D(1) was received by the PCIT or CIT, for the purpose of computing the time limit to complete the assessment. The proviso to explanation 1 to section 153 of the Act further provides that if such period is less than one year or the period of limitation is less than one year, then the time barring limit shall get extended u/s. 245C(1) year. In the case of the appellant, the appellant had filed an application u/s. 245C(1) before the Settlement Commission on 30.05.2007 and the order u/s. 245D(4) was passed on 11.03.2015 by the Settlement Commission. After exclusion of the time period from 30.05.2007 to 11.03.2015, the period available to the AO to complete the assessment u/s. 153A of the Act Was less than one year. Therefore, the AO duty bound to complete the assessment before 26.02.2016. The AO has specifically mentioned in para 6 of the Assessment Order that notice u/s. 143(2) dated 31.07.2015 and notice 142(1) alongwith detailed questionnaire was issued and served on the assessee.
29 ITA Nos. 807,808,809,810,811,812,853,854,855,856,857,858/MUM/2022 Hemendra Merchant Thus, the AO had provided sufficient opportunities to the appellant to make the submissions in response to the queries raised by the AO. The AO has specifically mentioned in assessment order that throughout the course of assessment proceedings, the assessee had defaulted at multiple instance in filing response to various statutory notices issued in its case leading to inordinate delay in completion of assessment proceedings. The AO has elaborated the specific instances of noncompliance by the assessee as under: In view of the above discussion, the Assessment Order passed by the Ao u/s. 153A of the a of the Act is a valid order and it is upheld. 6.2.2 The appellant has submitted that search action u/s. 132 dated 21.12.2006 in the case erstwhile firms of the appellant was declared illegal and void-ab-initio by ITAT, Mumbai, therefore, assessment order u/s. 153A in the case of the appellant which was consequent to their search would also be void-ab-initio. This argument of the appellant is not valid because search was conducted in the case of the appellant alongwith search in the case of business concerns of the appellant including six erstwhile firms. Assessment proceedings u/s. 153A were initiated consequent to the search conducted u/s.153A and the Assessment Order passed u/s. 153A passed by the AO is a legal and valid Assessment Order.” 10.3 We have heard rival submission of the parties on the issue in dispute and perused the relevant material record. After filing return of income under section 153A of the Act, the assessee filed application before the
30 ITA Nos. 807,808,809,810,811,812,853,854,855,856,857,858/MUM/2022 Hemendra Merchant ITSC on 30/05/2007. The Ld. CIT(A) referred to the provisions of the Act which provide exclusion of the time period for the purpose of the assessment from the date of making application to the ITSC and ending with a date on which order u/s 245D(1) of the Act i.e. the petition of the assessee admitted. It is during this period jurisdiction of the Assessing Officer is excluded and after admitting the jurisdiction remained with the ITSC till the date of passing final settlement order. But in this case settlement petition of the assessee has rejected under section 245D(4) of the Act on 11/03/2015 by the ITSC. Regarding the jurisdiction of Assessing Officer in situation of order passed by the settlement commission rejecting settlement, the relevant provisions are reproduced as under: “The Section 254HA where (i) ……… to (ii) ………. (iiia) in respect of any application made under 245C, an order under subsection (4) of section 245D has been passed out providing for terms of settlement (iv) ………… the proceedings before the ITSC shall abate on the specified date. The specified date has been defined Explanation below section 245HA as under: (a) ……….. (b) ……….. (c) ………..
31 ITA Nos. 807,808,809,810,811,812,853,854,855,856,857,858/MUM/2022 Hemendra Merchant (ca) in respect of an application referred in (iiia) the day on which the order under subsection 4 of section 245D was passed not providing for the terms of settlement.” 10.3.1 Under the second proviso below to Explantaion-1 to section 153, further period has been provided to the Assessing Officer for completion of assessment as under: “Provided further that where a proceeding before the Settlement Commission abates under section 245HA, the period of limitation available under this section to the Assessing Officer for making an order of assessment, reassessment or recomputation, as the case may be, after the exclusion of the period under sub-section (4) of section 245HA, be not less than one year; and where such period of limitation is less than one year; it shall be deemed to have been extended to one year; and for the purposes of determining the period of limitation under sections 149, 153B, 154, 155, 158BE and 231 and for the purposes of payment of interest under sections 243 or section 244 or, as the case may be, section 244A, this proviso shall also apply accordingly.” 10.3.2 The proviso reproduced above prescribe that after exclusion of the period under section 245HA the period should not be less than one year and, if the remaining period is less than one year, it shall be deemed to have been extended to one year. In the case of the assessee after exclusion of the time period from 30/05/2007 to 11/03/2015, the period available to the Assessing Officer for completing the assessment under section 153A was less than one year and therefore Assessing Officer has validly completed assessment on 26/02/2016 within the period of one year from the end of order of the ITSC i.e. 11/03/2015. In our opinion, the assessment has been completed following the provisions of the law and therefore contention of the assessee of expiry of the limitation for
32 ITA Nos. 807,808,809,810,811,812,853,854,855,856,857,858/MUM/2022 Hemendra Merchant completing assessment are rejected. The relevant grounds of the appeal are accordingly dismissed. 11.1 As far as grounds challenging addition on merit , the assessee has raised the issue in ground No. 8 , ground No nine and ground No. 10 . 11.2 We have heard rival submission of the parties on the issue in dispute and perused the relevant material on record. Regarding the issue of undisclosed investment in fixed deposit is concerned, we have already mentioned brief acts in respect of additions made by the Assessing Officer and relief allowed by the Ld. CIT(A). Before the Ld. CIT(A), the assessee filed additional evidence in respect of the issue. After considering remand report of the Assessing Officer, the Ld. CIT(A) has given a detailed finding for sustaining total addition of ₹ 8, 56, 55, 763/- for investment in fixed deposits for entire period of search. The Ld. CIT(A) has further bifurcated this amount of undisclosed investment in fixed deposits for assessment year of search period on the basis of the formula prescribed by the Assessing Officer. 11.3 In the instant case main addition is for investment in fixed deposits. The addition for unexplained investment is made u/s 69 of the Act holding that the source of said investment is not known. If regular books of accounts are maintained and balance sheet is prepared at the end of the financial year, then how much money is received during the year and where applied, can be easily known from the balance sheet. In such a case, source of investment in assets/investment stands explained by the liability side of balance sheet and addition under section 68 could be made if the liability side remains unexplained or source of credits of liability side is not explained. But in case of no books of account or defective books of account, if evidence of investment in assets are found during the course of search action, then onus is on the assessee to explain source of such assets or investment or expenditure out of
33 ITA Nos. 807,808,809,810,811,812,853,854,855,856,857,858/MUM/2022 Hemendra Merchant disclosed sources of income and in case of failure to do so, the addition would be liable to made under section 69A for unexplained investment. Further, it during search, in addition to evidence of investment in asset, evidence of undisclosed receipts/income are found and the assessee is in position to explain application of such undisclosed receipts/income towards application in assets/investment, then no separates addition to the extent of application of such undisclosed receipt/income may be required to be made following the real income theory. 11.4 In the case in hand also the Assessing Officer has stated that assessee has siphoned off money from the six partnership firms by way of inflation of expenses including drawing money for employees of firm used at residence and same has been invested in those fixed deposits. In such circumstances, either the addition could be made for the amount of money siphoned off from the firms or application of the same for investment into fixed deposit found as on the date of search. Thus the amount of fixed deposit as on the date of search would represent the accumulation of undisclosed income of the assessee for search period and therefore in the case of the assessee , the option was avaialbale with Assessing Officer either to make addition for unexplained investment in fixed deposits existing as on the date search or the undisclosed money siphoned off from the partnership firms. The Assessing officer has exercised the option of assessing unexplained investment as on the date of search. The addition made by the Assessing officer has been further reduced by the Ld CIT(A). 11.5 In our opinion, as far as addition of ₹ 8, 56, 55, 763 in respect of undisclosed investment in fixed deposit sustained by the Ld. CIT(A) is concerned, the Ld. CIT(A) has considered all the fixed deposits irrespective of the fact, whether same were made in the name of partnership firms or the assessee or his wife. We find that Ld. CIT(A) for
34 ITA Nos. 807,808,809,810,811,812,853,854,855,856,857,858/MUM/2022 Hemendra Merchant sustaining the addition of ₹ 8, 56, 55, 763 /- has considered the amount of fixed deposits of Rs. 11, 49, 61, 339 - found during the course of the search action and ₹ 3, 80, 33, 924 /- in respect of which information was gathered by the investigation wing in post-search proceedings as undisclosed investment in fixed deposits as on the date of the search i.e. end of search period and thereafter subtracted the amount of fixed deposits of ₹ 6, 81, 39, 500/- available at the beginning of the search period i.e. 1/4/2000. We find that Ld. CIT(A) has treated all the fixed deposits of the entire group , irrespective whether same were made in the name of the partnership firm or the assessee or his wife . As far as list of fixed deposits found during the course of the search is concerned, inventory of the same is available in the panchnamas prepared during the course of the search. Similarly, the name of the entity on whose name fixed deposits were made must be also available in the information gathered by the investigation wing in post-search proceedings. Regarding the opening balance of fixed deposit as in 01/04/2000 is concerned, the ld. Assessing Officer in the remand report has produced details, which for the purpose of ready reference extracted as under: Sr. No. Name of Firm Amount of investments in FD made prior to 01.04.2000 1 M/s Srirma Warehosing 1,44,80,000 2 M/s Sriram security 5,34,59,500 and consultancy services 3 M/s. Sriram security 2,00,000 services (already) allowed by the
35 ITA Nos. 807,808,809,810,811,812,853,854,855,856,857,858/MUM/2022 Hemendra Merchant assessing officer in assessment order) Total 6,81,39,500
11.6 In our opinion, without carrying out such an exercise, making addition in the hands of the assessee irrespective whether those fixed deposit stood in name of the assessee or in the name of the other entities, is not justified. The addition cannot be held in respect of undisclosed investment appearing in the name of the other person unless it is established that same has been invested out of the undisclosed funds of the assessee. Similarly benefit of opening balance of fixed deposits of partneship firms cannot be given against closing undisclosed investment of the assessee. One more issue arises in the case of the assessee. The partnership firms have been dissolved wef 31/3/2004 ,and thereafter , the entire undisclosed investment in fixed deposit has been transferred either to assessee or his wife. So prior to 31/03/2004 , undisclosed investment in fixed deposits of the assessee should only be considered for addition in the hands of the assessee but after 31/3/2004 , the investment in fixed deposit which been transferred to the assessee consequent to dissolution of partnership firms also has to be considered. Before us detail information of dissolution of firms and transfer of asset/ liability of firms has not been provided by the assessee. The fact of dissolution came to light after the writ petition of the assessee and order of Tribunal(supra) and the Assessing Officer did not take into consideration the impact of dissolution of the partnership firms while framing assessments on the assessee. We are of the opinion that all these issues must be verified by the Assessing Officer . Though the matter is very old, however for dispensing of justice, we feel it
36 ITA Nos. 807,808,809,810,811,812,853,854,855,856,857,858/MUM/2022 Hemendra Merchant appropriate to restore this issue to the file of the Assessing Officer for verifying the name of the entity appearing on the fixed deposits , and considering for addition of the fixed deposits , which are in the name of the assessee , both for working the amount of fixed deposit at the end of search period / on the date of dissolution of firms or for working of fixed deposit at the opening of search period. 11.7 As far as bifurcation of year wise undisclosed investment is concerned, the Ld. CIT(A) has followed the formula adopted by the ld. Assessing Officer. The Assessing Officer bifurcated the amount of undisclosed investment in fixed deposits as on date of search in the percentage of expenses debited by the partnership firm in each assessment year as compared to the total expenses debited for whole of the search period. In our opinion, the Assessing Officer was required to follow any reasonable method for bifurcating the undisclosed investment of fixed deposits in each of the assessment year. The total amount of unexplained investment in fixed deposit could have been distributed equally among all the years of search period, however, the Assessing officer has attempted to link the amount of undisclosed income in view of his allegation that money has been siphoned off by way inflation of expenses of the partnership firms. In our opinion, it is one of the reasonable approach for distribution of undisclosed income in various years. Accordingly, we uphold this formula applied by the Assessing Officer for distribution of undisclosed income in various years of search period. 12. As far as grounds related to addition of interest in respect of the undisclosed fixed deposit is concerned, we have heard rival submission of parties. We are of the opinion that once the undisclosed investment as on search date has been considered for making estimation of undisclosed income , then no further addition for undisclosed income
37 ITA Nos. 807,808,809,810,811,812,853,854,855,856,857,858/MUM/2022 Hemendra Merchant earned should be made. The interest accrued if any on the fixed deposits made during the search period, ultimately get accumulated in the fixed deposits found as on the date of search or the fixed deposits which were in existent on the date of search. Therefore , making of addition for interest on amount of yearwise undisclosed investment in fixed deposits , is not justified. Accordingly, we direct the Assessing officer to delete the same. 13.1 As far as ground of addition of sundry creditors of ₹ 94, 86, 765/-for assessment year 2001-02, is concerned Ld. CIT(A) has upheld the addition only on the ground that no submissions were made by the assessee before him . We find that ld. Assessing Officer made addition observing as under: “12. During the course of proceedings it was stated by the assessee that the source for investing FDRs through creditors outstanding in the Balance Sheet of the firms. During the course of proceedings, the AR of the assessee was required to furnish the name address and amounts of the creditors alongwith details of payments made to the creditors alongwith source for payment. The assessee in his submission dated 22.02.2016 has stated as below: “Your good self vide the captioned notice have asked the undersigned to give complete details regarding the names, addresses, amount due and repayment details about the creditors outstanding as on 31.03.2006. In this connection at the outset your attention is invited to the assessment order in the case of the undersigned for the A.Y. 2011-12 attached as Exhibit “L” from page 539 to page 546 submitted along with written submission dated 29.01.2010. Page 3 of this order contained Table-1 regarding the total liability contained in the firms of the undersigned as aggregating to Rs. 3,27,78,938/-.
38 ITA Nos. 807,808,809,810,811,812,853,854,855,856,857,858/MUM/2022 Hemendra Merchant Out of this, The AO has reduced an amount for Rs. 1,01,28,824/- appearing at serial no 3 & 4 of Table-2 on page 5 of that order, on account of inter-liabilities of the firms. Then he has made an addition of Rs. 2,26,50,114/- (3,27,78,938 – 1,01,28,824) on account of cessation of liability) as mentioned on page 8 of his order”. “Regarding the payments made to the creditors, it is submitted that the undersigned periodically and systematically withdrew cash from some of his personal bank account and infused the money into his business concerns M/s. Sriram Warehousing Corporation and Shriram Security & Consultancy Services. These funds along with opening balances were utilized to pay off sundry creditors to the tune of Rs. 95,38,277/- in cash. Apart from this creditors to the tune of Rs. 5,94,447/- were paid through cheques”. 12.1 No Supporting evidences were brought on record to prove the source for paying off the said creditors, were brought on record neither evidences of cash withdrawal/ source or cash summary was ever produced by the assessee. As per the labour laws prevailing in the country, it is mandatory for the employer to pay off his employee before the 7th of every month. It cannot be said that the labourers were not paid and no actions / complaint were ever lodged by the labourers. It is very hard to believe that the labourers who are people who come from the lower income group and whose daily survival is on the income earned during the day may forgo even a penny. During the time of search the modus operandi of the assessee for inflation of expenses to generate unaccounted income was
39 ITA Nos. 807,808,809,810,811,812,853,854,855,856,857,858/MUM/2022 Hemendra Merchant detected and the assessee has accepted that his books of accounts were not maintained properly and in continuity. 12.2 The assessee in his submission dated 22.02.2016 has stated the AO has reduced an amount of Rs. 1,01,28,824/- appearing at serial no 3 & 4 of Table-2 on page 5 of the assessment order pertaining to A.Y. 2011-12, on account of inter-liabilities of the firms the AO has made an addition of Rs. 2,26,50,114/- (3,27,78,938 – 1,01,28,824) on account of cessation of liability as mentioned on page 8 of his order. 12.3 The submission dated 22.02.2016 of the assessee should not be read in isolation but in continuation with the submission made by him in para 14(ii) on 13.01.2016, while deciding the issue pertaining to unpaid creditors wherein he has stated that the unpaid credit liabilities were also fund available for making investments for the period 2001-02 to 2004-05. And the total creditors outstanding as on 31.03.2006 are Rs. 3,27,78,938/-. From the submission of the assessee the following conclusions can be drawn as below:- (ii) The assessee admits that the source for investment in FDRs for the period 2001-02 to 2004-05 were unpaid creditors. Then as per the assessee‟s submission the addition on this account should be made from the period 2001-02 to 2004-05 and not during A.Y. 2011- 12 as made by the AO while passing order u/s. 143(3) (iii) The submission of the assessee that the unpaid creditors were the source for investment cannot be accepted since the genuineness of the creditors were never proved/ established by the assessee.
40 ITA Nos. 807,808,809,810,811,812,853,854,855,856,857,858/MUM/2022 Hemendra Merchant (iv) The total creditors outstanding as on 31.03.2006 are Rs. 3,27,78,938/- 12.4 In View of the same the creditors outstanding in the firms of assessee are recasted as below:- Name 2000- 2001- 2002-03 2003-04 2004-05 2005-06 2006-07 01 02 Sriram 62574 25341 239908 333993 432091 409734 415212 97 02 4 1 1 4 3 Sec & Cons. Serv. Sriram 19459 42802 893882 104262 123885 120235 117729 Warehosi 57 23 7 00 99 57 72 ng Corp. Sriram 65029 740654 857789 106627 106761 9 7 7 Secuity Agency Sriramkri 88237 119591 117001 116600 876546 876546 shna 2 3 7 0 Secuity Ser. Srikrishn 11397 11397 101029 999484 100398 994055 994055 a Sec Ser. 69 69 2 4 Sriram 137986 165391 152567 152567 Maint. 40 4 9 9 Ser.
41 ITA Nos. 807,808,809,810,811,812,853,854,855,856,857,858/MUM/2022 Hemendra Merchant Hemendr a Merchant Hemendr a Merchant H & H Merchant s Trust Total 93,43, 94,86, 1,56,83, 1,84,47, 1,88,79, 2,05,83, 2,03,88, 223 765 410 335 494 458 992
12.5 Difference in the creditors i.e. difference of previous and current year brought to tax year wise:- Name 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 Total 9486765 15683410 18447335 18879494 20583458 20388992 outstanding during the year Less : 9486765 15683410 18447335 18879494 32778938 opening Creditors 94,86,765 61,96,645 27,63,925 4,32,159 17,03,964 1,23,89,946 added back to total income.
42 ITA Nos. 807,808,809,810,811,812,853,854,855,856,857,858/MUM/2022 Hemendra Merchant 12.6 In view of the above, the total creditors of Rs. 94,86,765/- for the year under consideration added back to the total income of the assessee as cession of liability u/s. 41(1) of the I.T. Act. Penalty u/s. 271(1)(c) r.w. Explanation 5 of the I.T. Act are initiated separately for furnishing inaccurate particulars of income.” 13.2 On perusal of the above table of sundry creditors, we find that all those sundry creditors are in respect of partnership firms and not in relation to the assessee. The partnership firm have been dissolved from 31/03/2004 and thereafter assets / liabilities including the sundry creditors have been transferred to the partners by way of converting the partnership firm into proprietary firms. As far as period prior to 31/03/2004 is concerned, no addition could have been made in the hands of the assessee as those sundry creditors were not appearing in the books of account of the assessee, For the period subsequent to 31/03/2004 , the successor of the partnership firm , need to be ascertained and addition could have been made in the hand of the successor in accordance with law. Therefore, we feel it appropriate to restore this issue also to the file of the ld Assessing Officer. In view of our discussion the relevant ground of the appeal of the assessee are accordingly allowed for statistical purposes. 14.1 The ground No. 12 and 14 of the appeal regarding not considering books of account of the assessee, the contention of the assessee are that original books of accounts were lying with the office of the Provident Fund Commissioner and Service Tax Authorities. 14.2 We have heard rival submission of the parties on the issue in dispute in perused the relevant material on record. We find that no such submission whether original books of accounts were lying with the office of the Provident Fund Commissioner or service tax authority was raised
43 ITA Nos. 807,808,809,810,811,812,853,854,855,856,857,858/MUM/2022 Hemendra Merchant either during the assessment proceeding or during the appellate proceeding before the Ld. CIT(A). In spite of the repeated opportunities provided by the Assessing Officer no books of accounts were provided. The assessee itself has admitted that its regular books of accounts are not reliable in view of the various infirmities. In such circumstances, the contention of not considering the books of accounts is without any basis and accordingly rejected. The ground No. 12 and 14 of the appeal are accordingly dismissed. 15 The ground No. 15 to 17 of the appeal are not pressed and therefore accordingly same are dismissed as infructuous. 16.1 As far as grounds of the appeal of the Revenue is concerned, the Revenue is aggrieved with reduction in the amount of undisclosed investment in fixed deposits and consequent interest on fixed deposits. The Ld CIT(A) has reduced the amount of fixed deposits , which were common in three list of fixed deposits considered by the Assessing officer. The exclustion of such amount of fixed deposit which were counted in multiple lists is justified in principle. However, since while disposing the appeal of the assessee , the issue of undisclosed investment in fixed deposits has been restored to the file of the Assessing Officer, the ground raised in the appeal of the Revenue, being connected to the relevant grounds of the appeal of the assessee, therefore, the ground No. one of the appeal of the Revenue is restored to the file of the Assessing Officer and accordingly allowed for statistical purposes. 16.2 The ground No. 2 beeing connected to interest on fixed deposit in the case of the assesee, which we held not to be included while working the undisclosed income based on uxplained investment as on the date of search, in view of consistent approach, this ground of the Revenue is also dismissed.
44 ITA Nos. 807,808,809,810,811,812,853,854,855,856,857,858/MUM/2022 Hemendra Merchant 17. All the grounds raised in other years are identical to the grounds raised by the assessee and Revenue in their respective appeals except ground No. 3 in the appeal of the revenue for assessment year 2005-06, wherein deletion of addition of jewelry of Rs. 8.00 lakhs by the ld CIT(A) has been challenged. Therefore all other grounds in other except Ground No. 3 for A.Y. 2005-06 are adjudicated mutatis mutandis. 18. We have heard rival submission of the parties on the issue in dispute in ground No.3 for A.Y. 2005-06 of Revenue. We find that Ld. CIT(A) has deleted the addition observing as under: “ 68.1 During the assessment proceedings the AO observed that the seized loose papers indicated sale of jewellery of Rs. 8,00,000/- by the assessee. Therefore, the AO asked the assessee to give the working of capital gain on the same and the year in which the same have been offered for tax. In response to that, the assessee submitted that he had sold silverwares amounting to Rs. 3,97,266/- at two instance. The silverwares were acquired by him since past several decades at the time of marriage and several occasions. Further, even after indexation, there would not be long term capital loss as the jewellery was old and acquired before 01.04.1981. Therefore, the assessee contended that no capital gain was taxable in his hands. The reply of the assessee was not found acceptable by the AO. The AO was of the view that the assessee had not provided supporting documentary evidences regarding the claim of long term capital under the head „Capital Gain‟ on silverwares. The only documents produced by the assessee were sale deed dated 17.12.2004 amounting to Rs. 2,00,014/- from Dilkush & Company and Rs. 1,97,252/- from Choksi Vimal Kumar & Co. Accordingly, the
45 ITA Nos. 807,808,809,810,811,812,853,854,855,856,857,858/MUM/2022 Hemendra Merchant AO has made an addition of Rs. 8,00,000/- on sale of jewellery u/s. 68 of the Act. 68.2 During the appellate proceedings, the appellant has filed written submissions on 30.10.2017 and 20.10.2021. However, not a single word has been uttered with respect to the ground of appeal related to the addition of Rs. 8,00,000/- made by the AO. 68.3 From the Assessment Order, it is seen that the AO has referred to some loose papers in which there was a noting related to sale of jewellery amounting to Rs. 8,00,000/- by the appellant. The AO has made addition u/s. 68 on the basis of loose papers found during the search. During the assessment proceedings, the appellant had stated that he had sold only silverwares and had submitted supporting evidences of sale of silver wares. During the assessment proceedings, the appellant had questioned about the existence of any loose papers indicating the sale of jewellery amounting to Rs. 8,00,000/- by the appellant. It is seen that the AO had made addition in respect of sale of jewellery on the basis of alleged loose paper, but the AO was silent about the nature and content of these loose paper. AO has also not mentioned from where these loose paper was found/seized. Thus, in the absence of any evidences brought on record by the AO about the loose papers, the addition of Rs. 8,00,000/- made by the AO regarding the sale of jewellery is deleted.” 18.1 We find that the Ld. CIT(A) questioned the addition made by the Assessing Officer on the ground that he even did not mention from where the said loose paper referring to sale or investment in jewelry was found. Before us the ld DR also could not explain from where the said loose
46 ITA Nos. 807,808,809,810,811,812,853,854,855,856,857,858/MUM/2022 Hemendra Merchant paper was found. In such circumstances, we do not find any error in the order of the Ld. CIT(A) in deleting the addition. The ground of the appeal of the revenues accordingly dismissed. 19. In the result, all the appeals of the assessee are allowed as partly for statistical purposes and appeal of the revenue except assessment year of 2005-06 are allowed for statistical purposes. The appeal of revenue for assessment year 2005-06 is allowed partly for statistical purposes.
Order pronounced under Rule 34(4) of the ITAT Rules, 1963 on
30/11/2022.
Sd/- Sd/- (SANDEEP SINGH KARHAIL) (OM PRAKASH KANT) JUDICIAL MEMBER ACCOUNTANT MEMBER
Mumbai; Dated: 30/11/2022 Dragon Legal/Uday Mugal Stenographer
Copy of the Order forwarded to : 1. The Appellant
47 ITA Nos. 807,808,809,810,811,812,853,854,855,856,857,858/MUM/2022 Hemendra Merchant 2. The Respondent. 3. The CIT(A)- 4. CIT 5. DR, ITAT, Mumbai 6. Guard file.
BY ORDER, //True Copy// (Sr. Private Secretary) ITAT, Mumbai