THE ASSISTANT COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE- 2, MANGALURU vs. SRI. KANAIYA C GAJRA, MANGALURU

The revenue has raised the following grounds:-

2. The CIT(A) has erred in estimating the income of the assessee @8% as the income is much higher, as income estimated based on the seized material. 3. The CIT(A) has failed to appreciate the fact that the AO has rejected the books of account and estimated the income based on the evidences found in the *seized material 4. Without prejudice to the above, the CIT(A) erred in not appreciating the fact that the assessee himself has claimed indirect expenses of only Rs.1,89,30,429/- as against Rs.5,94,56,061/- allowed in appeal. 5. Without prejudice to the above, the CIT(A) erred in not considering the fact that assessee failed to adduce evidence for the expenses incurred , for purposes of business. 6. Without prejudice to the above, the CIT(A) erred in not considering the fact that assessee failed to comply with provisions of section 40 and section 40A of I.T. Act. 7. For these and other grounds that may be urged upon, the order of the CIT(A) may be reversed and that assessment order to be restored.”

The assessee has raised the following grounds:-

The facts are that the assessee is a proprietor of M/s. Ocean Cargo engaged in the business of transportation of goods. Assessee filed return of income on 17.10.2016 declaring total income of Rs.44,85,550. There was a search operation u/s. 132 conducted at the residential premises of assessee on 24.11.2015 situated at H.No.156, Mylareshwara Nilaya, Gopala L Block, Gapata Gowda Extension, Shimoga. Survey was also conducted u/s. 133A on 24.11.2015 at the business premises of assessee at Batkal Bazar, Ansari Cross Road, Bunder, Mangaluru. Various incriminating material of books, documents and cash of Rs.8 lakhs was found. Consequent to search, notice u/s. 153A was issued on 15.9.2016 for AYs 2010-11 to 2016-17. Consequently assessment was framed u/s. 143(3) r.w.s. 153A of the Act.

While framing assessment the AO observed that search and survey operations in the appellant's case resulted in detection of large scale of suppression of business income by manipulating the freight collections, inflation of expenses, absence of books of account, suppressing the quantity of consignment transported etc., incriminating documents marked as exhibits KGRA/A1 to KGRA/A13, A/OC/1 to 4 were impounded during the course of survey. During the course of search the appellant was not able to prove any kind of significant administrative overheads. There has been no evidence found to prove that payments have been made to agents of the appellant. No evidence with respect to establishment expenses also have been found. Further, in the statement recorded u/s,.132(4) on 24.11,2045 and u/s.131 on 16.12.2015, the appellant has confessed that, normally 4 per kg. for transportation to Gujarat and Rs.5 per kg. for transportation to Delhi is charged.

Accordingly, the AO recomputed the appellant's income by stating that, the total freight collection declared by the appellant as per return is Rs.11;65,76076/, and whereas total quantity of consignment transported was 4,04,463 kgs., each bag weighs 70 Kgs. Hence, AO arrived at the figure of Rs.2,83,12,410 kgs. Freight charges debited to P&L account of Rs 9,31,60,100 reworked by AO to Rs..6,66,24620/- by adopting Rs,2/- per kg. as lorry freight. Accordingly, he was of the view that appellant has inflated the expenses debited to P&L Account on lorry hire itself around Rs.3,65i35,280/- (9,31,60,100 – 5,66,24,820).

The AO noted that the return of income and statement of accounts produced during the course of assessment proceedings suffer from various discrepancies in contrast to the findings detected during search. Hence, the AO recomputed the income of the appellant by adopting Rs.5/- per kg. as freight collection and arrived at profit earned is at Rs.2.50 per kg. and accordingly recomputed the total assessed income at Rs:7,07,81,025 by rejecting the appellants audited books of account and income declared in the return of income.

Against this, the assessee went in appeal before the CIT(Appeals), who observed as follows:-

Against this, both the parties are in appeal before us.

The contention of the ld.AR is that sustaining the addition by CIT(Appeals) @ 8% of net profit on total receipts is on the higher side. The books are duly audited and declared income has to be accepted as correct and there is no necessity of any further addition on this count.

On the other hand, the ld. DR submitted that the books are not reliable. Various discrepancies were found during the course of search action as clearly brought out on record by the AO in his assessment order which is totally overlooked by the CIT(Appeals) and he has given excess relief against the facts of the case.

We have heard both the parties and perused the material on record. We have carefully gone through the order of the CIT(Appeals). The AO in his assessment order observed that the seized document KGRA/A-1 and the corresponding invoices/memos will help in understanding the amount of profit the M/s. Ocean Cargo makes in the business of transportation as follows:-

The AO noted that from the above transactions M/s Ocean Cargo earns about Rs. 4.50 to Rs. 5.00 per Kg for transportation of consignment. Out of this amount, an amount of approximately Rs. 2.00 is paid to the lorry owner as truck freight.. The balance amount of Rs. 2.50 to Rs. 3.00 per Kg is the profit that is earned by assessee.

These documents were confronted to the assessee who has confirmed the discrepancies as follows:-

On the basis of the above, the AO observed that the total freight collections declared by the assessee as per return is Rs. 11,65,76,076. The total quantity of consignment transported was submitted as 404463 bags. As detected from the seize material discussed above, each bag weighs 70 kgs. hence 2,83,12,410 kgs have been transported. The assessee has computed the freight collections on 65kgs /bag. The freight charges paid debited to the P&L, account is Rs 9,31,60,100/-. Considering that the lorry freight paid is only Rs.2 per kg which amounts to Rs.5,66,24,820/- on 2,83,12,410 transported, the inflated expenses debited to the P&L account on lorry hire itself is around Rs. 3,65,35,280/- (9,31,60,100.5,66.24,820). Hence the AO concluded that there is an inflation of expenses to the extent of Rs.3,65,35,280/- under freight paid charges.

From the above findings it was evident that assessee had not disclosed the actual income out of the freight collections. During the course of the assessment proceedings, the assessee was appraised about the findings and a few examples of the seized material indicating the collections and lorry freight (as discussed in the preceding paras) were brought to the notice of the assessee with a proposal to consider the net profit at Rs. 2.51 to Rs 3 per Kg. The assessee objected to the same vide letter dated 13.11.2017.

The assessee's submission was rejected by the AO in view of the findings discussed and for the following reasons:-

The assessee has not furnished any bills/invoices or any such evidences to support the claim of additional charges incurred towards freight, hamali, local Pickup etc. Nor has any TDS been made. Incidentally the GC notes from Apri1,2014 to 24/11/2015 (the date of search) do not contain any other incidental charges like hamali commission etc. However the GC notes produced post-search contains an entry "Hamali Charges". This can be verified from a scanned copy of one of the memo book seized dated 20/08/2015 and produced during assessment proceedings dated 4/01/2016 (subsequent to the search).

From the above, according to the AO, it is evident that the expenses claimed are not authentic and appears to be cooked up after the search. The only books.maintained are the consignment notes and memo Bill which is inclusive of the source to the destination including door step. The details of the memo books are incorporated in the registers seized in KGRA/A-1, KGRA/A-5 to 8 and A/OC 3 & 4. Since the transport memo books are the internal consumption of the assessee only, any hidden charges/payments would have been incorporated therein. However no such extra payments are reflected. The assessee's claim during assessment proceedings is without any supporting evidence and therefore rejected by the AO.

The AO concluded that the freight charges collected have been suppressed and expenses claimed including freight charges paid are astronomically high without any supporting evidence. From the seized documents and the assessee's own submission during search proceedings, it is confirmed that the assessee collects Rs. 5/Kg as freight and the profit earned is at least Rs. 2.5/kg. Throughout the period from 1.4,2015 till the date of search, the seized memos and GC notes and the corresponding entries in the register KGAR/A1, A/OC 3 & 4 reflect the lorry payments es Rs. 2 per kg. In view of the discrepancies enumerated above, the accounts were rejected and the total assessed income by AO is computed as under:-

Contrary to this, the CIT(Appeals) estimated income @ 8% of the total receipts which is not correct. The AO had also estimated the income @ 50% of total receipts. Against this, the CIT(Appeals) made one more estimation and directed the AO to make specific additions towards discrepancies found in the books of account in the course of search action. In the present case, the assessee’s books of account are not reliable which do not deduce the true and correct profits therefrom and demonstrate as correct and complete. Therefore the books of accounts are to be rejected. However, estimation of income @ 50% by AO is on the higher side. In this kind of business of assessee it would not result in earning of 50% of net profit. In our opinion, though books of accounts are rejected, estimation of income @ 50% cannot be sustained. In a similar way, estimation of income by CIT(Appeals) @ 8% is also not genuine. The addition is to be sustained only to the extent of discrepancies found in the course of search/survey action over and above the profit declared by the assessee. With these observations, we remit the entire issue in dispute to the file of the AO for fresh consideration.

In the result, both the appeals are allowed for statistical purposes.