THE DCIT, CENTRAL CIRCLE-2, VADODARA vs. M/S. SIGMA INSTITUTE OF TECHNOLOGY AND ENGINEERING,, VADODARA

It is, therefore, prayed that the order the Ld. CIT(A)-12, Ahmedabad may be set aside and that of the AO may be restored to the above extent.

Brief facts relating to the case are that a search action u/s.132 of the Act was initiated on 12.11.2014 on Sigma group of Institutes which included the assessee. During search, various incriminating documents regarding unaccounted donations, received by the trust, salary paid received back and various undisclosed bank accounts in the name of the assessee trust/institutions were found. Accordingly, the case of the assessee was reopened by issuing notice u/s.148 of the Act. The assessee filed return of income declaring Nil income. During assessment proceedings several inquiries were made from the assessee. Thereafter show cause notice was issued proposing additions on account of 30% of salary received back from staff, unaccounted donations and deposits in various undisclosed bank accounts. Due reply was filed by the assessee, considering which, the AO made addition on account of unaccounted donations received by the assessee, salary received back and not recorded in the books of the assessee, unaccounted deposits in bank account not disclosed and disallowance of various expenses. The AO noted that the registration of the assessee trust had been cancelled on 05.11.2015 by Ld.PCIT and accordingly, thereafter he computed the income of the assessee at Rs.2,31,77,093/- after adding the unaccounted donations, salary expenses and undisclosed bank receipts to the income of the assessee and deducting there from the [DCIT vs. M/s. Sigma Institute Of Technology And Engineering] A.Y. 2008-09 - 4 – expenses incurred by the assessee as reduced by the expense disallowed by the AO.

The addition on account of unaccounted donations and salary received back was made by the AO by extrapolation .Basis the evidences found during search, he estimated unaccounted donations to have been received from other students also of the same category as those with respect to whom evidences were found during search. Extrapolation was exercised with respect to salaries received back for the impugned year on the basis of evidences found for the succeeding year.

Aggrieved by the above order of the Ld. CIT(A), the Revenue is in appeal before us challenging the restriction of addition made on account of unaccounted donations and salary received back to the extent of evidences found during search and that on account of credits in the undisclosed bank account of the assessee by accepting the explanation of the assessee.

We shall therefore be considering first the judicial view/stance on the exercise of extrapolation to evidences collected.

Extrapolation refers to the method where income discovered is projected over a wider period to estimate suppressed or undisclosed income. It is the projection of discovered income over the full assessment period using material found during search/survey/investigation pertaining to a specific period, presuming similar behaviour for the rest of the period. Extrapolation is an evidentiary inference and not a legal fiction. Courts have dealt with this issue in a number of decisions and the [DCIT vs. M/s. Sigma Institute Of Technology And Engineering] A.Y. 2008-09 - 6 – principle laid down is that extrapolation , since it tantamounts to estimation, it must be anchored in reasonableness, co-relation and judicial prudence. Extrapolation has been held acceptable only where the material on record establishes a recurring modus operandi and a pattern of suppression which is systematic and continuous. Courts have held extrapolation to be permissible in the aforesaid circumstances only and have rejected the exercise of extrapolation where it was based purely on suspicion, probability and on seized materials relating to isolated or solitary transaction with no further nexus between sample and the total period. The landmark decision in this case is of the Hon’ble Apex Court in the case of H. M. Esufali H. M. Abdulali (supra), wherein the Hon’ble Apex Court held that where the AO had evidence of assessee having dealings outside its books of accounts for some days it was open to the officer to infer that the assessee had large scale dealings outside the books. The Apex Court noted that while in such situation it was not possible for the AO to find out precisely the suppressed turnover, he could make a fair estimate of the same. The Hon’ble apex court observed in the said case, that a certain amount of guesswork is involved in estimating the turnover, but, it must have a reasonable nexus to the available material.

We shall now apply the principle of extrapolation to the facts of the present case. In relation to unaccounted donation, the facts on record reveal that the evidences relating to unaccounted donations found during search, revealed donations to have been taken from students who had applied for admission through management quota. The evidences found revealed the modus operandi that the students seeking admissions were first required to fill in admission form. Once the forms were filled, the parents and students were required to meet the trustees of the trust i.e. Mr. Shailesh Shah, Mrs. Jyotsnaben Shah, Mr. Harsh Shah and Mr. Jigar Patel, who decided the amount of donation which was necessary to get admission. The decided donation was written on the back of the admission form in code language. The details of payments by the students were also mentioned on the back of the admission form as and when payments were received from students. Evidences found to this effect were:

On considering all the above evidences, there is no doubt that it establishes a pattern of receiving donations by the assessee from students enrolled through the management quota. The evidences found with respect to some of the students exhibit the modus operandi followed by the assessee trust for taking donation on admission of students which is corroborated by the statement of the Cashier of the assessee college and of Shri Harsh Shah, son of trustee admitting to the said fact. The evidences establish modus operandi/ systematic and continuous pattern of receiving donations from management quota students and are not in relation to any isolated incidence of receipt of donation.

There is no doubt, therefore, that the documents found during search establish a pattern of suppression of donation received on admission of students through the management quota and the extrapolation, therefore, adopted by the AO we hold was correct.

At the same time, considering that the exercise of extrapolation has to be on a reasonable basis, we hold that extrapolation should not be exercised with respect to the entire management quota students. The possibility of some students managing to secure admission through the management quota by adoption of means other than donation cannot be completely ruled out. In view of the same, we consider it fit and reasonable for extrapolation to be exercised on 75% of the management quota students alone.

In the case of salary received back not recorded in the books of the assessee, the AO concluded from the various incriminating evidences found during search that the various trusts run by the Sigma group were involved in the practice of receiving back of [DCIT vs. M/s. Sigma Institute Of Technology And Engineering] A.Y. 2008-09 - 11 – portion of salary paid by the trust to staff in cash. A sample of loose paper found during search listing in columnar form the name of employees alongwith their employee code. The mode of payment of salary to them the amount of salary paid as recorded in the books of accounts, the actual amount of salary to be paid to the employees and the difference between the salaries recorded in the books and actually payable, which was received back in cash is reproduced in the assessment order at page no.34.

On considering the above we completely agree with the AO that these evidences recorded and demonstrated the trust to be regularly engaged in the activity of generating unaccounted income by receiving salary back from its employees. These are not one of evidences found, pertaining to the unaccounted income being generated by the assessee, but reflecting a pattern being followed by the assessee regularly over the years. The extrapolation, therefore, done by the AO is justified in the impugned year. We see no reason to restrict the extrapolation to some employees alone, as done in the case of unaccounted donations above.

The facts relating to the issue are that during search one undisclosed bank account in the name of the assessee trust was [DCIT vs. M/s. Sigma Institute Of Technology And Engineering] A.Y. 2008-09 - 15 – found. In its submission before the investigation wing of the Income Tax Department, the assesse accepted the transaction in this account be unaccounted but in reply to show cause notice issued during assessment proceedings the assessee confirmed that it had offered only difference of cash deposit and withdrawal as unaccounted income in the return of income filed. The submission was not accepted by the AO for the reason that no proof had been submitted by the assessee that the cash deposits were made from cash withdrawals from that account. The AO, in fact, noted that various evidences were found which showed that the assessee had been investing money from unaccounted sources for the purchase of property, gold and personal assets of the trustees. He, therefore, held that the entire deposits in the undisclosed bank account of the assessee was to be treated as its income amounting to Rs.25,75,620/- and added the same to the income of the assessee. Further, the AO noted that list of other bank accounts of the trustees and related parties with unaccounted transactions was furnished by the assessee before the Investigation Wing. The same are listed at page no.42 to 44 of the assessment order. In response to the explanation sought by the AO, the assessee gave general explanation contending that cash withdrawn or amounts from these bank accounts were recycled by withdrawal or further deposited in different accounts and due to large volume of transactions, as also the number of unaccounted bank accounts and in view of paucity of time, the assessee group was unable to prepare a detailed cash flow. The AO noted that in the absence of cash flow statement, it was not possible to verify the genuineness [DCIT vs. M/s. Sigma Institute Of Technology And Engineering] A.Y. 2008-09 - 16 – and authenticity of the assessee’s claim. As per the AO, the total deposits in these bank accounts as submitted by the assessee for the impugned year i.e. A.Y. 2008-09 was Rs.1.88 Crores, out of which, the amount in two undisclosed bank account of Shri Parishram Education and Medical Charitable Trust were Rs.58,55,244/- and in the bank account of the assessee was Rs.25,70,020/- and further, the total unaccounted money deposited in various other bank accounts was Rs.1,04,25,744/-. This entire amount of Rs.1.04 Crores was treated as unaccounted deposits, 50% of which was treated as unaccounted money of the assessee and the balance that of Shree Parishram Education and Medical Charitable Trust. Thus, total unaccounted deposits of Rs.77,82,892/- being aggregate of Rs.25,70,020/- and Rs.52,12,872/- was added to the total income of the assessee.

Before the Ld. CIT(A), the assessee submitted that out of the accounts listed as undisclosed, two accounts were in relation to entities which had accounted for the transactions in their books of accounts and were independently assessed to tax. The assessee pointed out the said entities as being Shah Associates and Shree Takshila Foundation in which total deposits of Rs.95,38,645/- was made. The assessee pointed out that Shah Associates was the firm which was independently assessed and the transactions were accounted for in its books of accounts. With respect to Shree Takshila Foundation also the assessee made identical submission and furnished certificate of the Auditor of the said entity certifying that the transactions of the bank account of this entity [DCIT vs. M/s. Sigma Institute Of Technology And Engineering] A.Y. 2008-09 - 17 – were duly incorporated in the books of the assessee. The Ld. CIT(A) found merit in the contention of the assessee that the above two bank accounts pertaining to Shah Associates and Shree Takshila Foundation could not be attributed to the assessee and the amounts deposited therein needed to be excluded from the additions made in the hands of the assessee. He directed, therefore, the AO to delete the addition with respect to the deposits made in these bank accounts amounting to Rs.95,38,645/- . The assessee further submitted that an amount of Rs.21,75,367/- was cash deposits out of cash withdrawals made from the bank and Rs.9,80,000/- were transferred from one bank account to another bank account by inter-bank transfer contra entry. Ld. CIT(A) accepted the contention of the assessee subject to verification of claim of contra entries i.e. transfer from one unaccounted income to another unaccounted income. Accordingly, he held that out of the total deposits only an amount of Rs.61,56,996/- could be treated as unexplained and directed the AO to confirm the addition of 50% of the same amounting to Rs.30,77,498/-.

Before us, Ld. DR was unable to controvert the factual finding of the Ld. CIT(A) that two bank accounts pertain to entities which were separately assessed to tax and had accounted for entries in the said bank accounts in their bank accounts. He was unable to also point out any infirmity in the order of the Ld.CIT(A) directing deletion of cash deposits attributable to contra entries subject to verification by the AO. In view of the same, the order of the Ld. CIT(A) deleting the addition made on [DCIT vs. M/s. Sigma Institute Of Technology And Engineering] A.Y. 2008-09 - 18 – account of deposits in these bank accounts are confirmed. The ground of appeal raised by the Revenue is, accordingly, dismissed.

In the result, appeal filed by the Revenue is partly allowed.