M/S. NAKSHATRA HOTELS,,GUNTUR vs. THE ITO,, GUNTUR

आदेश /O R D E R

PER D.S. SUNDER SINGH, Accountant Member:

These appeals are filed by the assessee against the order of the Commissioner of Income Tax (Appeals)-1, Guntur vide ITA Nos.71-73/15- 16/CIT(A-1)/GNT dated 31.01.2016 for the Assessment Years (A.Ys) 2008- 09 to 2010-11. Since the grounds raised in these appeals are common, the

2 I.T.A. Nos.28-30/Viz/2017 M/s Nakshatra Hotels, Guntur

appeals are clubbed, heard together and a common order is being passed for the sake of convenience as under.

3 I.T.A. Nos.28-30/Viz/2017 M/s Nakshatra Hotels, Guntur

notice on 24.12.2014 stating that a survey u/s 133A was conducted on 17.02.2011 in the case of Mr Rao and Nakshatra Hotels, Guntur and during the course of survey, certain papers were found according to which there was a difference in the turnover declared by the firm in the case of Nakshatra Hotels as per the details given below : Turnover Turnover as Financial as per Sl.No. Asst.Year admitted Difference Year papers in the found return 1. 2007-08 2008-09 1,18,82,077 32,64,226 86,17,851 2. 2008-09 2009-10 1,93,05,488 64,19,937 1,28,85,551 3. 2009-10 2010-11 2,24,55,442 98,89,160 1,26,66,282

The AO directed the assessee to explain the difference. In response to the notice issued, the assessee submitted that the turnover declared by the assessee in the return of income was correct and there was no difference as alleged. During the relevant years, the firm was managed by Sri Sukhavasi Srinivasa Rao and the return of income was filed by the said managing partner duly verifying books of accounts. The assessee did not accept contention of the AO that the material found in the premises of Mr Rao was related to the assessee firm and submitted that the turnover found in the premises of Mr.Rao does not belong to the firm. The AO did not accept the

4 I.T.A. Nos.28-30/Viz/2017 M/s Nakshatra Hotels, Guntur

explanation/contentions of the assessee stating that the material/papers

impounded clearly indicates the name of the firm as Nakshtra hotels and thus,

held that the material pertains to Nakshtra hotels only. Summons u/s 131

were issued to Mr Rao and a statement was recorded from him on 05.03.2015.

During the course of recording the statement, the assessee stated that the said

turnover was not related to the assessee firm and further submitted that in

order to obtain the bank loan, the P&L a/c was prepared on estimation basis

boosting the figures for getting the higher loans from the bank. For ready

reference, we extract relevant part of the statement recorded from Mr.Rao,

which reads as under :

“Q.2. statement recorded at the time of survey: During the course of survey proceedings you have answered to some of the questions that" I am not in a position to say anything at present and also stated that I don't know". However, the same questions are again put to you for your proper answers now. However, once again the same questions are repeated as under: “During the course of survey proceedings certain papers containing the statements showing funds flow / the daily collection / expenditure which are inventoried as bundle no.10 etc. were found. As per which the total sales for F Ys 2007-08, 2008-09 and 2009-10 are Rs. 1,18,82,077/-, Rs. 1,93,05,488/- and Rs. 2,24,55,442/-- respectively against which the sales shown in the ROI filed for the relevant F.Y. were its 32,64,.226/-, Rs.64,19,937/- and Rs. 97,89,160/- respectively which has resulted in suppression of sales to the tune of Rs. 86,17,851/-, Rs.1,28,85,551/- and Rs.1,26,66,282/- respectively for the above F.Ys. What is your explanation?" From the above, it is very clear that there is a much variation in the turnovers shown in the papers impounded and the returns filed, what do you say now.

5 I.T.A. Nos.28-30/Viz/2017 M/s Nakshatra Hotels, Guntur

A. There is a managing partner Sri Sukhavasi Srinivasa Rao who is looking after the business transactions of the firm of M/s Nakshtra Hotel. In fact in order to obtain bank loan the P&L account etc have been prepared on estimated basis and particularly boosting the figures for getting higher loan from the Banks. It is a general practice in each and every business. In view of this, they cannot be relied upon, Q3. At the time of survey you have answered that "1 am not in a position to say anything. Now you are telling that those figures are estimated figures to get bank loan , You have not given this answer at the time of survey. Now what you are telling is nothing but an afterthought. Please explain. A. At the time of survey I was in a confused state of mind, that's why I have answered so. Q.4. You are informed that all the partners severally and individually are responsible for each and every transaction relating to the business activities of the firm. What do you say. A, May be. As already mentioned, the managing partner is looking after the entire business transactions of the firm. Moreover, I have also replied that the figures in the papers impounded are estimated figures and they are not real transactions. It is also brought to the notice of the department that the firm has declared income on the turnovers found by the department during the course of survey mentioned above, At the time of survey, the department has suggested to offer the income on the suppressed turnover for the asst. year 2011-12 , Accordingly, Nakshatra Hotel estimated the net income at 3.23% on the entire suppressed turnover Rs.3,84 Cr. and offered additional Income of Rs.11,04,500/- for the asst. year 2011-12 alone to avoid further litigations. Hence the same maybe accepted. Q5. Once you have accepted the turnovers found by the department, the assessments will be completed taking the suppressed turnovers for the respective years and not for one year as offered by you . What is your reply. A. I have no objection. But the net income may be estimated at 3.23% for all the 3 years i.e. 2008-09 to 2010-11 and complete the assessments accordingly. Q6. Please produce evidence by way of bills/vouchers in support of expenditure claimed for all the 3 years. In the absence of bills/vouchers, the book results cannot be relied upon. What do you say…

6 I.T.A. Nos.28-30/Viz/2017 M/s Nakshatra Hotels, Guntur

A. I request your good self that the rate of profit as admitted may be accepted. Why because the hotel business was started in the year 2007-08 only and much profit cannot be expected.”

submitted by the Managing partner, Mr Rao in the statement recorded u/s 131

dated 05.03.2015 reproduced above and found that the assessee’s explanation

that the turnover was not pertaining to M/s Nakshatra Hotels is unacceptable.

Further the assessee’s alternate contention to tax the net profit on turnover is

also not accepted by the AO. The assessee also submitted before the AO that

it had admitted the additional income of Rs.11,04,500/- for the for the A.Y

2011-12 covering the deficiencies of survey discrepancies was also rejected by

the AO. According to the AO, the correct method to be applied in this case is

to tax the gross profit on suppressed turnovers for the A.Ys 2008-09 to 2010-11

and accordingly estimated the gross profit as income for the respective A.Ys

2008-09 to 2010-11 as under and the resultant income was brought to tax.

Turnover as Turnover as admitted Estimated Difference Gross A.Y. per papers in the Income (Rs.) Profit Rate found (Rs.) return of (Rs.) income (Rs.) 1,18,82,077 32,64,226 86,17,851 2008-09 23% 19,82,362 1,93,05,488 64,19,937 1,28,85,551 2009-10 42% 54,10,998 2,24,55,442 98,89,160 1,26,66,282 2010-11 33.32% 41,21,367

7 I.T.A. Nos.28-30/Viz/2017 M/s Nakshatra Hotels, Guntur

the CIT(A) and the Ld.CIT(A) confirmed the addition made by the AO holding

that the assessee had no explanation to offer anything with regard to the said

difference in turnover and the silence of the assessee leads to presumption

that the assessee has accepted the turnover which were reflected in the

incriminating material found during the course of survey.

Tribunal. During the appeal hearing, the Ld.AR argued that the survey u/s

133A was conducted in the business premises of Mr Rao, one of the partners

of the assessee firm on 17.02.2011. During the course of survey, certain

incriminating material was found in the premises of Mr Rao which is said to be

the turnover of the assessee, M/s Nakshtra Hotels. A statement u/s 133A was

recorded from Mr Rao who has stated that he was not in a position to explain

the contents of the incriminating material found at the time of survey.

However, the assessee firm has admitted the additional income of

Rs.11,04,500/-, net profit of the aggregate turnover of 3 years amounting to

Rs.3.84 corres@3.25% on the suggestion of the survey team. The Ld.AR

submitted that as evident from question No.4 of the statement recorded

8 I.T.A. Nos.28-30/Viz/2017 M/s Nakshatra Hotels, Guntur

during the course of survey, the admission was given as suggested by the

department on suppressed turnover. During the course of statement recorded

on 05.03.2015 also Mr.Rao has stated that the turnover does not pertain to the

assessee firm. It was further submitted before the AO that during the above

period from 2008-09 to 2010-11 Sri Sukhavasi Srinivasa Rao was the managing

partner of the firm looking after the business transactions of the assessee. For

the purpose of obtaining the bank loan, the profit & loss account etc. has been

prepared on estimation basis particularly boosting the trading results for

getting the higher loans from the banks. The Ld.AR submitted that the

department has accepted the additional income offered by the assessee

covering deficiencies of the 3 years for an amount of Rs.11,04,500/- and

completed the assessment for the A.Y. 2011-12. The Ld.AR submitted that the

survey was conducted in the premises of partner Mr Rao, but not in the

premises of the assessee firm. Therefore, the Ld.AR argued that the AO simply

relied on the material found during the course of survey in the premises of

Mr. Rao and taxed the gross profit in the hands of the assessee which is unfair

and unjustified. The Ld.AR further submitted that as per the statement in

response to question No.2, Mr Rao stated that the profit and loss account was

prepared boosting the figures for getting the higher loan and it is unjustified to

9 I.T.A. Nos.28-30/Viz/2017 M/s Nakshatra Hotels, Guntur

estimate the gross profit as income instead of net profit. Therefore, requested

for estimation of net profit as income in the place of gross profit.

authorities.

record. The facts of this case are peculiar and distinct from other cases of

survey. Mr. Rao is one of the partners of the assessee firm and carrying on the

business independently. A survey u/s 133A was conducted in the case of

Mr.Rao in connection with his business on 17.02.2011. During the course of

survey, certain incriminating material was found stated to be relating to

Nakshatra Hotels. As per the material found, the turnover of the was recorded

at Rs.1,18,82,077/- for the A.Y.2008-09 , Rs.1,93,05,488/- for the A.Y. 2009-10

and Rs.2,24,55,442/- for the A.Y. 2010-11. The statement was recorded from

Mr.Rao on the date of survey and he stated that he was not in a position to

explain the details. Subsequently, on 05.03.2015, one more statement was

recorded and in the said statement also, Mr. Rao has denied that the turnover

was related to the assessee firm. However, he has admitted that they have

prepared the Profit & Loss account by boosting the figures on estimation basis

10 I.T.A. Nos.28-30/Viz/2017 M/s Nakshatra Hotels, Guntur

for the purpose of bank loan. Further, Mr.Rao during the course of survey has

admitted the additional income of Rs.11,04,500/- covering the deficiencies of

survey. The said admission was relating to the net income estimated @3.23%

on the entire suppressed turnover of Rs.3.84 crores covering the three years.

The AO did not make any enquiry with the then Managing Partner, Sri

Sukhavasi Srinivasa Rao to find out the fact regarding the suppressed turnover.

The AO also did not make any enquiry or verification of books of accounts

relating to the assessee firm to ascertain whether the turnover really belonged

to the assessee firm or Mr.Rao, one of the partners of the firm who is also

carrying on the business independently. It was also observed from the

assessment order and the statements recorded that on the suggestion of the

department, the assessee had admitted the additional income of

Rs.11,04,500/- which was also taxed in the A.Y.2011-12. According to the

statement recorded from the assessee on 05.03.2015, profit & loss account

etc. have been prepared on estimation basis to boost the turnover figures for

the purpose of bank loan. However, the AO did not discuss the contents of

profit and loss account stated to be prepared by Mr.Rao for the purpose of

bank loan but only taken the turnover for taxing the income. It is also not clear

from the assessment order whether the details found were daily sales,

11 I.T.A. Nos.28-30/Viz/2017 M/s Nakshatra Hotels, Guntur

monthly turnover or annual turnover or in lump sum figures. Though Mr.Rao

stated that the profit and loss account was prepared for the purpose of bank

loan, there was no discussion with regard to the profit and loss account found

during the course of survey. The Ld.DR or the Ld.AR during the appeal hearing

did not make available the statements recorded from Mr.Rao either during the

course of survey or subsequent to the date of survey and correlate the

information with the additions made by the AO. It is settled issue that if the

profit and loss account is found, the entire P&L a/c required to be taken in to

consideration and tax the net profit but not the piecemeal information. The

AO must consider the net profit as per the profit and loss account and to tax

the net income but not the gross income. In the instant case, the AO

estimated the gross profit instead of taking the profit and loss account and to

tax the net profit as per the profit and loss account found during the course of

survey. However, as discussed earlier there is no information made available

by either Ld.DR or the Ld.AR with regard to exact information / incriminating

material found at the time of survey. As per section 292C of the Act, the

presumption is available to the department to hold that the material found

during the course of survey was belonged to such person against whom the

survey was conducted but not in the case of third party. In this case, such

12 I.T.A. Nos.28-30/Viz/2017 M/s Nakshatra Hotels, Guntur

person is Mr.Rao, the partner of the assessee firm who is carrying

on his own independent business but not the assessee firm. Hence, there is no

application of presumption in the case of the assessee. Merely because it was

written on the face of it the Nakshatra Hotels it cannot be held that the

turnover was pertaining to the Nakshatra Hotels unless such person confirms

that the papers were related to the other person and other person also

accepts the contents of the incriminating material. Otherwise it is to be

presumed that the material belonged to the person who is surveyed. In this

case, neither Mr.Rao nor the assessee has accepted that incriminating material

was related to the assessee firm. In the absence of such enquiry and

information, the papers cannot be held to be related to the assessee. Further,

the assessee has admitted additional income of Rs.11,04,500/- covering the

survey deficiencies for three years which was accepted by the department and

completed the assessment for the A.Y.2011-12. For ready reference, we

extract relevant part of the order of the assessment order of A.Y.2011-12

dated 30.03.2014 which reads as under : “…basing on the impounded material and also the fact that one of the partners of M/s Nakshatra Constructions Sri Medepalli Rama Mohana Rao is also a partner in the assessee-firm. Thus, the assessee-firm in order to avoid tangible / intangible additions on account of Survey, has voluntarily offered additional income at Rs.11,04,500/- thereby returning income at Rs.13,64,620/- for A.Y.11-12….”

13 I.T.A. Nos.28-30/Viz/2017 M/s Nakshatra Hotels, Guntur

“…After examining the impounded material, books of accounts and the information / documents produced during the course of scrutiny proceedings, the income of the assessee, in view of the voluntary admission of additional income at Rs.11.05 lakhs, is accepted.”

stated that it had duly cooperated in survey proceedings u/s 133A and also

paid the taxes due as directed by the department and as such proceedings

under reference are not acceptable under law. In the statement recorded on

05.03.2015 in response to question No.4 also Mr.Rao stated that the additional

income was admitted as suggested by the department. Combined reading of

the reply given by the assessee to the notice u/s 148, the statement recorded

on 05.03.2015 in response to question No.4 and the assessment order for the

A.Y. 2011-12 dated 30.03.2014 shows that the assessee had admitted the

income of Rs.11,04,500/- on the suggestion of the department with an

impression that the issue is put at rest. Having taxed Rs.11,04,500/- as an

additional income for the A.Y. 2011-12 accepting the contention of the

assessee to cover the deficiencies found during the course of survey, the AO

would not have reopened the assessment by issue of notice u/s 148. From the

facts of the case it is under stood that the assessee had admitted the

additional income of Rs.11,04,500/- on the assurance of the department to

14 I.T.A. Nos.28-30/Viz/2017 M/s Nakshatra Hotels, Guntur

complete the survey proceedings. The very fact of accepting the returned

income in the assessment order and the contents of discussion in the

assessment fortifies the above impression. Having assured the department

should not resort for reopening of earlier assessments. Though reopening is

legal but not ethical and it damages the image of the department in the eye of

public. In the instant case as stated in the statement recorded on 05.03.2015,

the profit and loss account was prepared to boost the turnover figures for the

purpose of bank loan. The AO instead of taking the net profit adopted the

turnover figures and estimated the gross profit on the difference of the

turnover. The details of turnover found during the course of survey the

contents of the statements recorded were not made available at the time of

appeal hearing. For a query from the Bench, the Ld.DR replied that there is no

material available with regard to the details found at the time of survey. In the

absence of any information from the revenue, we have no option except to

believe that profit and loss account was found which was prepared for bank

loan and net profit required to be brought to tax, but not the gross profit.

Having admitted the additional income of Rs.11,04,500/- for an aggregate

turnover of Rs.3.84 crores on the suppressed turnover at 3.23% which the AO

has accepted, we find no reason to tax the gross profit once again. At the cost

15 I.T.A. Nos.28-30/Viz/2017 M/s Nakshatra Hotels, Guntur

of repetition we observe that the AO failed to establish that the turnover

found was pertaining to the assessee and did not bring any material to support

the contention, Therefore we hold that estimation of income on the

suppressed turnover as per the net profit at 3.23% is reasonable and meets the

ends of justice. The estimation of profit at 3.23% each year is in addition to the

income already admitted by the assessee for the A.Y. 2011-12. Accordingly, we

direct the AO to compute the income estimating the net profit @3.23% on the

difference of turnover each year independently.

Order pronounced in the open court on 7th December, 2018.

Sd/- Sd/- (िी.दुगाा राि) (धड.एस. सुन्दर ससह) (V. DURGA RAO) (D.S. SUNDER SINGH) न्याधयक सदस्य/JUDICIAL MEMBER लेखा सदस्य/ACCOUNTANT MEMBER धिशाखापटणम /Visakhapatnam ददिांक /Dated : 07.12.2018 L.Rama, SPS

16 I.T.A. Nos.28-30/Viz/2017 M/s Nakshatra Hotels, Guntur

आदेश की प्रधिधलधप अग्रेधर्ि/Copy of the order forwarded to:- 1. ननर्ााररती / The Assessee – M/s Nakshatra Hotels, Lakshmipuram, Main Road, Guntur 2. राजस्व / The Revenue– Income Tax Officer, Ward-2(2), Guntur 3. The Pr.Commissioner of Income Tax, Guntur 4. The Commissioner of Income Tax (Appeals)-1, Guntur 5. धिभागीय प्रधिधिधि, आयकर अपीलीय अधिकरण, धिशाखापटणम /DR, ITAT, Visakhapatnam 6. गाडा फ़ाईल / Guard file

आदेशािुसार / BY ORDER // True Copy //

Sr. Private Secretary ITAT, VISAKHAPATNAM