MYNENI VENKATA RAO,,VISAKHAPATNAM vs. THE ACIT,, VISAKHAPATNAM

आदेश /O R D E R Per Bench: These appeals are filed by the assessee against the order of the Commissioner of Income Tax (Appeals) [CIT(A)], Guntur dated 29.01.2014 for the Assessment Year (A.Y.) 2004-05 to 2010-11. Since the issues involved in these appeals are identical, the appeals are clubbed, heard

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together and disposed of in a common order for the sake of convenience as under.

Total Income Total income assessed A.Y. Declared u/s 153A by the AO of the Act (Rs.) (Rs.) 2004-05 9,19,520 36,92,753

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2005-06 81,44,910 97,94,846 2006-07 1,21,31,540 1,49,00,948 2007-08 2,10,19,910 2,51,73,613 2008-09 3,82,99,530 5,83,09,459 2009-10 4,85,01,045 7,48,30,872 2010-11 9,49,98,660 25,06,85,958 Subsequent to the completion of assessments, the assessee went on appeal before the CIT(A) and the Ld.CIT(A) allowed the appeals partly. Against the order of the CIT(A), the assessee filed the appeals before the Tribunal. I.T.A. Nos.168-172/Viz/2014, A.Y. 2004-05 to 2008-09 The assessee filed the appeals challenging the additions sustained by the Ld.CIT(A) assessment year wise as under : Addition A.Y. Sustained (Rs.) 2004-05 23,91,927 2005-06 11,74,444 2006-07 23,41,116 2007-08 10,57,169 2008-09 53,85,012 2009-10 73,19,009 2010-11 82,32,726 3. During the appeal proceedings, the assessee filed a petition for admission of additional ground. The Additional ground raised by the assessee for the A.Ys 2004-05 reads as under :

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“On the facts and in the circumstances of the case, whether the following additions made without reference to any seized material are outside the scope of assessment completed u/s 143(3) r.w.s. 153A of the Act. a. Rs.1,93,784/- towards disallowance of interest paid on loan alleged to have been used for acquiring personal asset. b. Rs.3,95,538/- towards unexplained cash credits c. Rs.21,67,998/- towards undisclosed income?” The assessee raised additional ground for the A.Ys. 2005-06 to 2008-09 also on identical issues. The contention of the assessee in additional ground for the A.Ys. 2004-05 to 2008-09 is related to issue of validity of additions made without having the seized material. The Ld.AR during the appeal hearing submitted that the said additional ground was not taken before the first appellate authority due to inadvertence and the additional ground is purely legal issue which does not involve any factual verification. The Ld.AR further submitted that the various courts and the tribunals have consistently held that the AO is not permitted to make the addition without having the basis of incriminating material in the case of assessments made u/s 153A r.w.s. 143(3). In the instant case, the AO has made the additions without having any reference to the seized material. Hence, the Ld.AR requested for admission of additional ground.

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A.Y. Addition(Rs.) 2004-05 27,73,233 2005-06 16,30,835 2006-07 26,69,408 2007-08 41,53,703 2008-09 2,04,25,430 6.1. The Ld.AR argued that in the above assessments for the A.Y.2004-05 to 2008-09, the additions were made either from the information already available in the assessment record or by assumptions and presumptions. The Ld.AR further argued that in respect of interest disallowance and the cash credits, the expenditure is debited to the P&L a/c and the information is available in the books of accounts. Estimation of undisclosed business income was also not based on any seized material and it is pure assumption and presumption of the AO or the guess work. With regard to the disallowance made u/s 40(a)(ia) also, the Ld.AR submitted that the information is accounted in the books of accounts and available in the assessment record and no incriminating material was found during the course of search supporting the addition. With regard to suppression of sales for the A.Y.2005-06, it was the enhancement of sales made by Sales Tax Department without any basis, no incriminating material was found supporting the addition. The assessee also stated that he did not accept the

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addition made by the Sales Tax department and the issue is pending before the appellate authorities. With regard to agreed addition in 2006-07, the Ld.AR submitted that the addition was agreed by the assessee during the original assessment proceedings and no fresh addition is made by the AO and the same would be continued and does not have any impact on search assessment. The Ld.AR argued that all the above additions were made without having the seized material in the A.Ys. 2004-05 to 2008-09 and the same required to be deleted.

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Ld.AR that the assessment should not be made without the basis of seized material for the assessments within the block of six years is erroneous and argued that the AO has rightly made the assessments which required to be upheld. Highlighting the issue of estimation of undisclosed income, the Ld.DR argued that it is not correct to say that the AO made the assessment in respect of undisclosed business income on pure assumptions and presumptions. During the course of search, the AO found certain irregularities and collected the information leading to conclusion that the assessee is involved in unaccounted sales, therefore, the Ld.DR vehemently supported that the estimated undisclosed business income is made on the basis of incriminating material and the information which was collected by the department during the course of search. The Ld.DR further argued that had the search was not conducted, the department would not have come know the issue of undisclosed sales. Therefore, the Ld.DR argued that undisclosed income estimated by the AO required to be upheld as the same was made on the basis of incriminating material or information available at the time of search.

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which is heavily pressed by the Ld.DR required to be examined to find out whether the addition is based on incriminating material or not? The facts of the case as available from the Ld.CIT(A)’s order in para No.8.7.1. are as under: The appellant through its proprietary concern M/s Bharathi Soap Works produces soaps, washing powders etc. under the brand name "XXX" as well as other names like Blue Diamond, Saregama, Bhavani etc. The appellant is also a major partner in the firm M/s.Annam Traders with a 75% share. This firm is engaged in the business of trading in chemicals and soups and has given its address as the factory premises of M/s.Bharathi Soap Works. The Assessing Officer noted that the entire, sales made by M/s.Annam Traders is in, cash, moreover, this firm could not furnish critical information such as their top 20 customers, record of delivery challans, or vehicle number in which goods are transported or the complete address of 'Persons, who have purchased chemicals/soaps from them. The AO noted that M/s Annam Traders was simply raising invoices in the name of customers and against the address, only the village was mentioned and hence the A.0. found the bills and vouchers to be fictitious, The Assessing Officer also noted that all the goods traded by M/s Annam Traders and M/s.Meenambal Agencies were delivered at the factory premises of M/s Bharathi Soap Works but there was no evidence to suggest that these chemicals were moved out of the premises of M/s Bharathi Soap Works, such as delivery challan, vehicle number etc. The Assessing Officer hence came to the belief that the chemicals purported to have been sold by these firms were in actual fact utilized by M/s Bharathi Soap Works, Guntur for manufacturing soaps/detergents and such finished goods were being sold outside the books of accounts. The Assessing Officer has noted that the following facts and circumstances give rise to the belief that the trading activity in the firms M/s Annam Traders and M/s Meenambal Agencies is a mere facade and the raw material traded in their names is actually utilized by M/s Bharathi Soap Works for unaccounted manufacture and sale of soaps. 8.1. From the assessment order, the Ld.CIT(A)’s order and from the submissions made by the Ld.AR, it is observed that the AO held that the

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assessee is indulging in sales outside the books of accounts due to the following observations : (i) All these firms operate from the premises of M/s Bharathi Soap Works and their books were also found in the office of M/s Bharathi Soap Works. (ii) M/s Bharathi Soap Works is not maintaining any stock register of packing material. (iii) There is no uniformity in the consumption of electricity vis-à-vis production of finished goods. (iv) Chemicals allegedly traded by M/s Annam Traders and M/s Meenambal Agencies were at the factory premises of M/s Bharathi Soap Works. (v) Excess cash balance was found the day of search, for which the appellant could not give any satisfactory reply. (vi) During the course of search, there was shortage of raw material and excess quantity of finished goods, which suggested unaccounted production. From the above observations, the AO believed that the trading activity in the name of M/s Meenambal Agencies is a mere façade and the raw material traded in the name was utilized by Bharathi Soap Works for unaccounted manufacture and sale of soaps. No other evidence or the incriminating material was available during the course of search indicating the sales outside the books of accounts. In the case of Annam Traders and M/s Meenambal Agencies, no defects were noticed either by the AO of the assessee or the concerned AO in the books of accounts maintained by the Annam Traders and Meenambal Agencies. No material was found during the search evidencing the suppression of sales or inflation of purchases. The Ld.CIT(A) also in his order in para No.8.7.6. observed that the search

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and seizure operations took place in the factory of M/s Bharathi Soap Works did not yield any conclusive documentary evidence of unaccounted production of the finished goods. Only certain discrepancies such as discrepancies in the stock of raw materials as well as finished goods, cash sales of Annam Traders and Meenambal Agencies were found. Unawareness of the fact regarding existence of Annam Traders and Meenambal Agencies by the Manager of the assessee gave rise suspicion to the AO as well as the Ld.CIT(A) to hold that the assessee has indulged in unaccounted trading activity by raising the bills in the names of Annam Traders and Meenambal Agencies which were used by the assessee as unaccounted sales. All the above observations are suspicions of the AO, but not supported by any evidence or the incriminating material found during the course of search. Therefore, we hold that the observations of the AO as well as the Ld.CIT(A) and the arguments of Ld.DR are only presumptions which gave rise to suspicion that the assessee is indulging in unaccounted trading activity. In the absence of any documentary evidence to establish that the assessee is making unaccounted sales, we are unable to accept the contention of the AO and the Ld.CIT(A)and the arguments of Ld.DR that

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the estimation of undisclosed income is based on the incriminating material. Accordingly, we reject the argument of the Ld.DR.

8.2. With respect to interest disallowance, the same was declared in the regular return of income and claimed by the assessee as a deduction. The cash credits were part of the books of accounts. The disallowance u/s 40(a)(ia) is also part of the expenditure which was debited to Profit & Loss account and necessary entries were made in the books of accounts. The addition towards suppression of sales also is neither the result of independent finding of the AO nor on the basis of material found during the course of search. The Sales Tax Department had made the addition of Rs.5,66,625/- in their assessment which was agitated by the assessee before the appellate authorities. There was no material found during the course of search with regard to suppression of sales and the AO also did not give any finding by conducting independent enquiries basing on the sales tax assessment order. Therefore, the additions made by the AO relating to the suppression of sales, cash credits and the disallowance u/s 40(a)(ia) cannot be held to be based on incriminating material.

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8.3. With regard to the addition of Rs.12,27,488/- for the A.Y.2006-07, the assessee had agreed for the addition in the original assessment which was not disputed by the assessee during the appellate proceedings. Therefore, we hold that the items of interest disallowance, cash credits, estimation of undisclosed business income, disallowance u/s 40(a)(ia), addition towards suppression of sales and agreed additions are not based on the incriminating material found during the course of search.

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As per the above information, the time limit for issue of notice u/s 143(2) was barred by limitation on 30.09.2009 for all the impugned assessment years including 2008-09 as mentioned above. Therefore, assessments for the A.Y.2004-05 to 2008-09 stands concluded and in case of completed assessments as held by this Tribunal in the case of P.Ramaraju vide I.T.A. No.424-426/Viz/2013 dated 31.07.2017, the AO is not permitted to make the addition without the having the incriminating material. The coordinate bench of ITAT relied on the decision of Y.V.Anjaneyulu Vs. DCIT, Central Circle, Vijayawada in I.T.A. 513 and 514/Viz/2013 while giving the above ruling. The Tribunal also considered the decision of S.S.Hari PrasadBhararia Vs. DCIT, Central Circle-1, in ITA Nos.435 to 441/Vizag/2014 dated 9.9.2016 for reaching the conclusion that the additions cannot be made in the search assessments without having the incriminating material. While giving the decision in the case of Shri P.Rama Raju supra the coordinate bench has considered the decisions of the Tribunal and Hon’ble High court in the following cases. (a) L. Suryakantham Vs. ACIT, in ITA Nos.300 to 305/Vizag/2012, (b) All Cargo Global Logistics Ltd. Vs. DCIT (2012) 137 ITD 287.

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(c) A.P. High Court decision in the case of CIT Vs. M/s. AMR India Ltd. in ITTA No.354 of 2014 dated 12.6.2014. (d) Andhra Pradesh High Court has also upheld by the orders passed by the Tribunal by following the decision rendered by the Special bench in the case of All Cargo Global logistics Ltd (supra) in the following cases: - (i) Sree Lalitha Constructions (J1TA No 368 of 2014) (ii) M/s. Hyderabad House Pvt Ltd (ITTA No.266 of 2013) (iii)M/s. AMR India ltd (FITA No.357 /v/2014)

9.1. The coordinate bench of ITAT, Kolkata in the case of Smt.Yamini Agarwal Vs. DCIT (Central Circle)-3, Kolkata reported in 83 taxman.com 209, placing reliance on All Cargo Logistics held as under : 25. We therefore hold that the scope of the proceedings u/s.153A in respect of assessment year for which assessment have already been concluded and which do not abate u/s.153A of the Act, that the assessment will have to be confined to only incriminating material found as a result of search. The next aspect to be considered is as to when returns of income filed u/s.139 of the Act are shown to have been accepted without an intimation u/s.143(1) of the Act or without any notice issued u/s.143(2) of the Act within the time limit contemplated by the proviso thereto, can be said to be assessment proceedings concluded that have not abated u/s.153A of the Act. Section 153A of the Act, uses the expressing "pending assessment or reassessment". When a return is filed and when neither an acknowledgement or intimation u/s.143(1)of the Act is issued nor a notice u/s.143(2) of the Act is issued within the time limit laid down in the proviso to Secc.143(2) of the Act, the proceedings initiated by filing the return are closed. In the present case, the period for issuing the notice u/s 143(2) elapsed. Therefore the process has attained the finality which can only be assailed u/s 148 or 263 of the Act. It can thus be concluded that making of an addition in an assessment under section 153A of the Act, without the backing of incriminating material, is unsustainable even in a case where the original assessment on the date of search stood completed by absence of issue of intimation under section 143(1) of the Act or by not issuing notice u/s.143(2) of the Act within the time limit laid down in the proviso to Sec.143(2) of the Act, results in an assessment proceedings and where such assessment proceedings are completed prior to the date of search then they do not abate in terms of the Second Proviso to section 153A(1) of the Act. The decision of the ITAT Kolkata Bench rendered in the case

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of Shri Bishwanath Garodia (supra) on identical facts of the case as that of the Assessee in the present case, clearly supports our conclusions as above. 26. In the light of the discussion above, our conclusion is that in the present case, the issue dealt with by the AO in the assessment order u/s.153A of the Act, could not and ought not to have been examined by the AO in the assessment proceedings u/s.153A of the Act as the said issue stood concluded with the assessee's return of income being accepted prior to the date of search and no notice having been issued u/s.143(2) of the Act within the time limit laid down in that section. Such assessment did not abate on the date of search which took place on 28.3.2008. In respect of assessments completed prior to the date of search that have not abated, the scope of proceedings u/s.153A of the Act has to be confined only to material found in the course of search. Since no material whatsoever was found in the course of search, the additions made by the AO in the order of assessment for both the Assessment years could not have been subject matter of proceedings u/.s.153A of the Act. Consequently, the said various additions made in the orders of Assessment ought not to have or could not be made by the AO. Gr.No.1 raised by the Assessee in both the appeals are accordingly allowed.

9.2. Ld.DR during the appeal hearing could not bring any material or any case law controverting the decisions relied upon by the Ld.AR.

9.3. Since the facts are identical, respectfully following the decision of this coordinate bench in the cases cited supra, we hold that the AO is not permitted to make the disallowance without having the supporting incriminating material in the case of completed assessments. Accordingly, the additions made by the AO for the A.Y. 2004-05 to 2008-09 relating to the interest disallowance, cash credits, estimation of undisclosed business income, disallowance u/s 40(ia) and the addition towards suppression of

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sales are unsustainable and accordingly deleted. Appeals of the assessee for the A.Ys 2004-05 to 2008-09 are allowed.

I.T.A. No.173/Viz/2014, A.Y. 2009-10 10. In this appeal, the assessee raised four grounds in total. Ground No.1 is related to the disallowance of interest of Rs.32,379/-. The AO during the assessment proceedings found that the assessee had claimed the interest of Rs.32,379/- on loan of Rs.10 lakhs taken from Sundaram Finance Ltd on 03.06.2005 which was used for purchase of property admeasuring 703 sq.yds at Brodipet, Guntur for a sum of Rs.30,52,000/-. The AO asked the assessee as to why the expenditure of Rs.32,379/- should not be disallowed and in response, the assessee submitted that the said site was used as parking place for vehicles, stock boxes, scrap etc., hence, argued that the expenditure is allowable as business expenditure. The AO observed that the factory premises located at Gorantla village which is 8 km away from the vacant site purchased by the assessee, hence, the explanation of the assessee was unbelievable and no supporting evidence was furnished by the assessee. Therefore, the AO disallowed the interest of Rs.32,379/- and added back to the income. Against the order of the AO, the assessee went on appeal before the CIT(A) and the Ld.CIT(A) confirmed the addition.

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for making addition. Accordingly, we set aside the order of the CIT(A) and delete the addition made by the AO u/s 68 of the Act. Accordingly, the appeal of the assessee on this ground is allowed.

Amount S.No Date Cash/DD/Cheque Name of Creditor Rs. 1 16.05.2008 Cheque Chakka Chalamaiah 100000 2. 09.04.2008 Cheque Sri Balaji Marketing 1,00,000 Services 3. 30.05.2008 Cheque Sri Venkateswara 1,00,000 Agencies Total Rs. 3,00,000

During the course of assessment proceedings, the AO has asked the assessee to prove the genuineness of the cash credits, but the assessee failed to furnish the evidence to prove the identity of the creditor, credit worthiness and genuineness of the transaction, therefore, the AO made the addition of Rs.3 lakhs as unexplained cash credits u/s 68 of the Act.

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remand report the Ld. CIT(A) deleted the addition relating to Shri Chakka Chalamaiah and confirmed the addition in respect of Sri Balaji Marketing Services and Sri Venkateswara Agencies treating the same as unexplained cash credits. Hence, the assessee filed appeal before this Tribunal.

16.1. In respect of the loans accepted from Sri Balaji Marketing Services, the assessee did not file confirmation letter either before the AO or before

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the Ld.CIT(A). Hence, we do not find any reason to interfere with the order of the Ld.CIT(A). Accordingly, out of the addition confirmed by the Ld.CIT(A) for an amount of Rs.2 lakhs, the addition of Rs.1 lakh in the case of Sri Venkateswara Agencies is deleted and addition of Rs.1 lakh in respect of Sri Balaji Marketing Services is confirmed. Accordingly, the appeal of the assessee on this ground is partly allowed.

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17.1. Since the AO viewed that the assessee is indulging in sales outside the books of accounts, the AO called for the explanation by issue of show cause notice as to why the income on sales outside the books of accounts should not be estimated and the assessee filed the reply objecting for the addition on account of unaccounted sales and submitted that no unaccounted sales were made by the assessee. Disbelieving the reply filed by the assessee, the AO held that the raw material and the chemicals traded by Annam Traders and Meenambal Agencies were used by the assessee and the resultant finished product was sold outside the books of accounts. The AO computed the chemicals traded by Annam Traders and Meenambal Agencies to the estimated amount of Rs.3,93,33,219/- for the A.Y.2009-10 and inferred that said material was utilized by the assessee for its own production for sales outside the books of accounts. The AO estimated 50% of the estimated material of Rs.1,84,86,613/- utilized by the assessee as profit and the same was brought to tax in the hands of the assessee. For the sake of clarity and convenience, we extract relevant part of the order of the AO in para No.8.29 of the assessment order for the A.Y.2009-10 which reads as under:

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“8.29. In view of detailed discussion made above, arguments of assessee that chemicals of M/s Annam Traders, M/s Meenambal agencies are not used by M/s Bharathi soap works for unaccounted production of detergents / detergent powders are rejected as assessee failed to furnish any evidence to show that chemicals of above two concerns are actually moved out of premises by filing delivery challans, way bills etc. He could not produce any of buyers of chemicals of above concerns to prove genuineness of sales made by them. Different explanations given by him for non maintenance of complete address of buyers is proved to be factually incorrect. Assessee could not explain discrepancy between consumption of raw materials and quantum finished goods with formulas given by him. Assessee himself admitted that he is inflating his business expenditure and also generating unaccounted business income by admitting income for different years on these two issues. Inspection conducted by sales department showed that he is indulging in unaccounted production of detergents. The same pattern is found during the course of search also as there was discrepancy between book stock and physical stock of finished goods and raw materials for which, no explanation could be furnished by assessee. In view of facts mentioned and by placing reliance on the laws laid down by the Hon'ble Apex Court in the case of CIT Vs. Durga Prasad More 110713 82 ITR 50 (SC) and Sumathi Dayal & Vs CIT {1995} 214 ITR 801 (SC), it is considered that chemicals traded by N/s Annam Traders M/s Meenombai Agencies amounting to Rs.3,93,33,219/- are utilized by assessee for unaccounted production. Grass profit on this amount © 50% which is the rate admitted by assessee is applied to arrive at unaccounted income Rs.1,84,86,613/- of assessee for the year. It is added to taxable income of assessee for the year. In view of discussion prima facie assessee has concealed his particulars of income, furnished inaccurate particulars of income for which penalty proceedings u/s 271(1)(c) are initiated separately.”

In the same manner the AO made the addition Rs.1,05,91,037/- for the A.Y.2010-11.

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“6.6. I have perused the assessment order as well as the submissions made by the appellant. It is true that the search and seizure action at the premises of the appellant including the factory of M/s. Bharathi Soap Works did not yield conclusive documentary evidence of unaccounted production of finished goods. However, discrepancies were noticed both in the stock of raw materials as well as in the stock of finished goods This could not have been possible in case the production was entirely as per the figures recorded in the books of accounts including stock registers, Secondly, all the attendant facts and circumstances regarding the trading activities of M/s Annam Traders and M/s Meenambal Agencies raise suspicion regarding the genuineness of the business activity carried out by them. It is unbelievable that over a period of six years, the said firms have never made a single sale by cheque or draft. Moreover, the other discrepancies pointed out by the A.0. in terms of no repetitive purchases, all material being sold on the first day itself, the factory manager of 8harathi Soap Works being unaware of the existence of the two firms, the lack of evidence regarding outward transportation of goods etc. form ample grounds to believe that these firms are a mere facade and the chemicals purportedly purchased by them have indeed been utilized by M/s Bharathi Soap Works. To summarize, what emerges is that

1) M/s Annam Traders and M/s Meenambal Agencies are under the control of the appellant and are not really separate entities and they operate from the

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same business premises.

2) Under Taxing Statutes, it is not necessary that the Assessing Officer has to bring on record conclusive documentary evidence to establish unaccounted production. The preponderance of probabilities in the instant case suggests and all attendant facts and circumstances indicate that the appellant is utilizing the chemicals purchased in the names of M/s Annam Traders and M/s Meenambal Agencies in his own business.

3) Finally if these chemicals have been utilized by the appellant's business entity namely Bharathi Soap Works, what is the reasonable profit that should be determined. In this connection, the alternate clams made by the appellant during the appellate proceedings are very relevant. The appellant has stated as under:

i) In the regular books of. accounts of M/s Bharathi Soap Works, the price of raw material consumed is net of CENVAT, which is in the region of 12% to 15% . Thus, , gross profit reflected in its trading account is arrived after taking into account the CENVAT credit. For unaccounted purchases/trading purchases, there would be no CENVAT credit and hence gross profit percentage would be reduced by the amount of CENVAT credit.

ii) Unaccounted sales would also be through the regular network of dealers, distributors and retailers and hence expenditure on saIes, commission etc, would also have to be incurred, which has not been taken into account by the Assessing Officer.

iii) The Assessing Officer has also not taken into account that some of the chemicals carry VAT @5% to 12 ½ %, which should be deducted from the profits estimated.

iv) M/s Annam Traders have filed returns of income and shown net profit of over 1% in various years. No credit for the same has been given.

v) Finally, the appellant has stated that while admitting undisclosed income during his statement u/s 13(4), the appellant offered Rs.1.97 crores as undisclosed income from his business (M/s Bharathi Soap Works) for various years and this undisclosed income was on account of manufacture of soaps and was related to the discrepancies in power consumption, deficit stock of raw material and excess quantity of finished goods detected during the course of search.

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6.7. Thus, I am in agreement with the Assessing Officer that the attendant facts and circumstances of the case indicate strong probabilities that chemicals purportedly used by M/s Annam Traders and M/s Meenambal Agencies have been utilized by the appellant’s business entity namely M/s Bharathi Soap Works. However, the Assessing Officer has adopted the gross profit rate via-â-vis raw materials consumed as appearing in the appellant's books to estimate the profit earned in respect of the value of chemicals purchased by M/s Annam Traders and M/s Meenambal Agencies. While this method is correct in principle, the Assessing Officer has failed to account for the fact that in the regular books of accounts, the value of the raw material consumed Is net of CENVAT and hence the gross profit as a percentage of the raw material consumed is higher. In the case of unaccounted purchases/trading purchases, there shell be no CENVAT credit and hence the G.P rate should be reduced by the amount of CENVAT, which is 12%. Secondly, in case all the chemicals purchased and sold by M/s Annam Traders and M/s Meenambal Agencies have been utilized by M/s Bharathi Soap Works, then credit should be given for the net profit offered by these two firms. Verification of their profit & loss account reveals yearly variations. However, I am inclined to give a credit of 1% on account of incomes offered by these two firms. Finally, the appellants contention regarding sales commission also has merit. The dealers and retailers would expect the same level of commission, whether the product is accounted or unaccounted and hence to that extent the gross profit ratio adopted should be reduced, A perusal of the final accounts of Bharathi Soap Works reveals that sales promotion expenses, which primarily include sates commission are approximately 2.5% of sales. I am inclined to give credit of 2% on account of expenditure related to unaccounted sales. However, the appellants contention regarding VAT on sales of chemicals is erroneous in that, unaccounted sales do not have an element of sales tag or VAT since they are not being routed through the regular books of accounts. Keeping the above in view, the G.P. rate adopted by the Assessing Officer is being reduced by 15% , i.e.12% CENVAT + 1% net profit of firms + 2% sales expenses. Finally, the appellant has stated that he should have been given credit for additional income offered u/s132(4) as well as in the return of income on account of the business of Bharathi Soap Works. The Assessing Officer has also agreed that this additional income admitted by the appellant is as a result of evidence gathered regarding unaccounted production and has in fact relied on this as critical evidence. Hence, the absence of documentary proof has to be juxtaposed against the attendant facts and circumstances, which point towards discrepancies in the contention of the appellant. As discussed above, the probabilities of the case indicate that chemicals shown as purchased by M/s.Annam Traders and M/s.Meenambal Agencies have actually been utilized by M/s Bharathi Soap Works, whether for production or otherwise, Hence, income on account of such additional chemicals purchased should be taxed in the hands of M/s Bharathi Soap Works. However,

28 I.T.A. Nos.168 to 174/Viz/2014 Arunachalam Manickavel, Guntur

while determining income from unaccounted production, credit for such income already offered in the return shall have to be given. For the present assessment year, the chemical purchases in the books of M/s Annam Traders and M/s Meenambal Agencies were Rs.2,11,82,075/- The Assessing Officer has adopted G P rate at 50% of the same in view of the fact that the G P rate in the books of M/s Bharathi Soap Works was 50% of purchases. However, as discussed above, this G.P.rate of 50% was arrived at after CENVAT credit of 12%. Further giving credit of 2% on account of sales expenditure and 1% on account of net profit already declared by M/s Annam Traders and M/s Meenam Agencies, the gross profit on purchases being adopted is 35%. This works out to Rs.74,13,726/-. Further, the appellant has already offered Rs.42 lakhs as undisclosed income from business of M/s Bharathi Soap Works. As discussed earlier, the Assessing Officer herself has treated admission of unaccounted business income by M/s .Bharathi Soap Works as a critical piece of evidence, and rightly-so, in favour of her view that unaccounted Production has taken p)ace. The unaccounted business income admitted by the appellant pertains to M/s Bharathi Soap Works and was on account of discrepancies in production including stock of raw material and finished goods. Hence, credit for this admitted additional income shall have to be given when determining addition on account of unaccounted business income of M/s Bharathi Soap Works. For Asst. Year 2010-11, the additional undisclosed business income offered by the appellant in the return of income filed u/s 153A was Rs.42 lakhs and hence the addition an account of undisclosed profit from business is being sustained at Rs.32,13,726/- (Rs.74,13,726 – Rs.42,00,000/-).This ground of appeal is partly allowed.” Aggrieved by the order of the Ld.CIT(A), the assessee filed appeal before this Tribunal.

29 I.T.A. Nos.168 to 174/Viz/2014 Arunachalam Manickavel, Guntur

either in the factory premises or in the business premises of the assessee evidencing the unaccounted sales made by the assessee. There was no evidence of suppression of sales by M/s Annam Traders or Meenambal Agencies found during the course of search or survey operations conducted in the business premises of the assessee. M/s Meenambal Agencies and Annam Traders were assessed to tax and there is no evidence found by the AO or defects found by the AO to indicate the unaccounted sales. Merely because of minor discrepancies found which are very normal in the business, adverse inference cannot be drawn which is prejudicial to the interest of the assessee. The assessee has already explained that goods related to Annam Traders and Meenambal Agencies are kept in the sheds in front side of the area of Bharati Soap Works, where different godowns were located. The godowns of Annam Traders, Meenambal Agencies and of the assessee are clearly demarcated as identifiable. Bharati Soap Works godowns are situated in the far behind area of the shed, the observation of the AO that the goods relating to Annam Traders and Meenambal Agencies were delivered at the premises of the assessee of M/s Bharati Soap Works is incorrect. Merely because of some cash credits, non maintenance of daily stock register, lack of

30 I.T.A. Nos.168 to 174/Viz/2014 Arunachalam Manickavel, Guntur

uniformity in consumption of electricity, excess cash balance, shortage of raw material and excess finished goods does not lead to unaccounted sales in the hands of the assessee. The Ld.AR argued that the entire addition made by the AO is pure guess work and unsustainable, hence requested to set aside the order of the Ld.CIT(A) and delete the addition.

31 I.T.A. Nos.168 to 174/Viz/2014 Arunachalam Manickavel, Guntur

estimated such unaccounted sales and brought to tax the gross profit on the resultant sales. It is undisputed fact that the assessee is maintaining proper books of accounts and the other sister concerns of the assessee, M/s Annam Traders and Meenambal Agencies are also maintaining the books of accounts. All the three firms i.e. proprietary concern of the assessee, partnership firms M/s Annam Traders and Meenambal Agencies are also independently assessed to tax. Using the common godown, non production of vehicle numbers, non-furnishing of top 20 customers of the partnership firms is not valid reason to infer that the assessee had utilized the purchases made by other concerns for his own production and to make unaccounted sales. There was no evidence brought on record in the case of Annam Traders or Meenambal Agencies with regard to understatement of sales or over statement of purchases. No defects were found by the AO or brought on record in the assessment order. The suspicion of the AO that the chemicals and raw materials of Annam Traders and Meenambal Agencies were diverted to the assessee outside the books of accounts should lead to either rejection of books of accounts in the concerned assessments or should result in addition on account of unaccounted sales in the hands of respective persons, but not in the hands of the assessee.

32 I.T.A. Nos.168 to 174/Viz/2014 Arunachalam Manickavel, Guntur

The inference of the AO that the assessee is using the raw material of Annam Traders and Meenambal Agencies leads to conclusion that Annam Traders and Meenambal Agencies are either transferring or selling the goods to the assessee outside the books of accounts which should lead to inference that Annam Traders and Meenambal Agencies are suppressing the sales or over stating the purchases. No such fact was brought on record by the AO. If there is such eventuality, the assessments of Annam Traders and Meenambal Agencies required to be modified basing on the evidences. In the instant case, the AO observed that there is shortage of raw material and excess stock of finished goods which is not uncommon since the raw material is used for finished product. Since the assessee is not maintaining the day to day stock register, shortage of raw material leads to excess quantity of finished goods. Shortage of raw material and excess quantity of finished goods should have been addressed by the AO independently in the hands of the assessee for the respective assessment years. Similarly, non-maintenance of day to day stock register and packing material should have been a good reason for rejection of books of accounts and estimation of income. The AO did not bring on record any case which is having more profit than the assessee and the AO has not rejected the

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books of accounts in the assessee’s case. The Ld.CIT(A) also in his order observed that there is no complete documentary evidence available in the assessee’s premises with regard to unaccounted production of finished goods. The Income Tax Department has resorted for the ultimate action of search in the assessee’s case and did not find any evidence to show that the assessee has either resorted for unaccounted sales or inflation of purchases etc. In the absence of any such evidence, there is no case for making the addition on the presumption and assumption or on guess work. For disturbing the assessee’s case for unaccounted sales or estimation of income, there must be conclusive evidence to show that the assessee has indulged in inflation of purchases or suppression of sales. No such evidence was found by the AO in the case of the assessee. The AO also did not bring any evidence to show that the gross profit of the assessee is lesser than the comparable cases. In the absence of any such evidence, we hold that the addition made by the AO is purely based on guess work and the Ld.CIT(A) also confirmed the addition merely believing the presumption and assumptions of the AO. Therefore, we are unable to uphold the order of the Ld.CIT(A) and accordingly set aside the orders of the lower authorities and delete the additions made by the AO for the A.Y.

34 I.T.A. Nos.168 to 174/Viz/2014 Arunachalam Manickavel, Guntur

2009-10 and 2010-11 on account of undisclosed business income and allow the appeals of the assessee for both the assessment years. I.T.A. No.174/Viz/2014, A.Y.2010-11 22. The assessee filed revised grounds of appeal during the appeal hearing. After hearing both the sides, revised grounds of appeal are admitted and adjudicated as under :

35 I.T.A. Nos.168 to 174/Viz/2014 Arunachalam Manickavel, Guntur

towards unexplained cash credits. During the assessment proceedings, the AO found the cash credits to the extent of Rs.1,91,95,000/- and was brought to tax as income from other sources, since the assessee failed to furnish the evidence with regard to genuineness, identity and the credit worthiness of the creditors the AO made the addition u/s 68 of the act. On appeal before the CIT(A), the Ld.CIT(A) confirmed the addition of Rs.26,00,000/- consisting of Rs.15,00,000/- loan taken from M/s Mangal Kiran Securities Ltd. and Rs.11,00,000/- received from M/s Sri Venkateswara Agencies, M/s Sreedhar Agences, Smt.K.Ammani, M/s Sarveshwara Agencies and M/s Kalyanaram Agencies since the assessee failed to furnish the strong evidence to support the credits which is agitated in this appeal.

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silver items. Still there is balance of Rs.99.00 lakhs out of additional income to cover the investments or the sources for cash credits and loans and the assessee is entitled for telescopic benefit. The Ld.AR argued that the Ld.CIT(A) sustained the additions of Rs.26 lakhs relating to unexplained cash credits and a sum of Rs.24,19,000/- relating to unexplained investment in jewellery should be given telescopic benefit and additions be deleted.

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jewellery.

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silver articles it is a fact that the assessee has admitted the additional income of Rs.13.21 crores and the Ld.CIT(A) allowed the telescopic benefit for unexplained cash found representing Rs.11.12 crores and the unexplained jewellery items for Rs.1.10 crores and the balance remained was Rs.99,00,000/- for which the assessee is entitled for application of income. The Ld.DR has objected for telescopic benefit since the ground was not raised. The Ld.AR’s argument cannot be rejected since the assessee has raised a general ground also stating that any other ground may be urged at the time of hearing. Therefore, the argument made by the assessee required to be addressed. In the instant case, the Ld.CIT(A) sustained the addition of Rs.26 lakhs representing cash credits and Rs.24,19,000/- relating to unexplained investment in jewellery and silver articles. The assessee had admitted the additional income of Rs.13.21 crores and the Ld.CIT(A) has allowed the telescopic benefit for cash found and seized amounting to Rs.11.12 crores and gold and silver items for 1.12 crores leaving the balance of Rs.98 lakhs. On close scrutiny of the Ld.CIT(A) order it is observed that the additional income admitted by the assessee was towards generation of income, but it is not linked to application of income towards the investments and expenditure. During

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the appeal hearing, the Ld.DR also could not make any submission or argument to support that the balance amount of Rs.98 lakhs was already allowed the telescopic benefit in respect of any other asset or application of income towards expenditure or any other asset. Since the assessee has admitted additional income till the date of search and the items found during the course of search in respect of gold and silver articles were acquired before date of search and similarly the cash credits were also introduced in the books of accounts before the date of search, there is no reason to reject the telescopic benefit sought by the assessee, from the additional income declared by the assessee. The Ld.CIT(A) also relied on the decisions of Hon’ble Supreme Court and Hon’ble Delhi High Court in the case of CIT vs Manicksons(1969) 74 ITR 1(SC) and R.Dalmia Vs CIT 255ITR 401(Delhi High court) which are in favour of the assessee. Hence, we direct the AO to allow the telescopic benefit from additional income declared by the assessee towards investments in gold and jewellery of Rs.24.19 lakhs and cash credits of Rs.26 lakhs. Accordingly, the additions sustained by the Ld.CIT(A) is set aside and the appeal of the assessee is allowed.

40 I.T.A. Nos.168 to 174/Viz/2014 Arunachalam Manickavel, Guntur

Order pronounced in the open court on 20th March, 2019.

Sd/- Sd/- (धड.एस. सुन्दर धसंह) (िी.दुगाा राि) (D.S. SUNDER SINGH) (V. DURGA RAO) लेखा सदस्य/ACCOUNTANT MEMBER न्याधयक सदस्य/JUDICIAL MEMBER नवशधखधपटणम /Visakhapatnam नदनधांक /Dated : 20.03.2019 L.Rama, SPS आदेश की प्रतितिति अग्रेतिि/Copy of the order forwarded to:- 1. ननधधाऩरती/ The Assessee- Arunachalam Manickavel, Prop : Bharathi Soap Works, 1st Line, Indira Gandhi Nagar, Nallacheruvu, Guntur 2. रधजस्व/ The Revenue – Income Tax Officer, Ward-1(4), Visakhapatnam 3. The Commissioner of Income Tax (Central), Hyderabad 4. The Commissioner of Income-Tax (Appeals), Guntur 5. तिभागीय प्रतितिति, आयकर अिीिीय अतिकरण, तिशाखािटणम /DR, ITAT, Visakhapatnam 6.गार्डफ़ाईि / Guard file आदेशािुसार / BY ORDER // True Copy //

Sr. Private Secretary ITAT, Visakhapatnam