P L TONY,KERALA vs. DCIT, CENTRAL CIRCLE, THRISSUR

For AY 2016-17 the appellant had filed regular return of income on 12.10.2016 disclosing income of Rs. 2,78,39,280/-. Against the said return of income, the assessment was completed by the DCIT, Central Circle, Thrissur (hereinafter called "the AO") vide order dated 29.12.2017 passed u/s. 143(3) of the Act at a total income of Rs. 8,40,24,607/-. While doing so, the AO rejected the books of account and proceeded with estimation of turnover based on the seized material found as result of the search and seizure action at Rs. 31.49,45,109/-. The AO had arrived at the above figure of turnover by estimating the turnover shown for 44 days in the seized material and extrapolated the same for the whole year and estimated the gross profit at 20% of such estimates of sales. In the process made an addition of Rs. 3,54,28,423/-. The AO also made addition on account of income from workshop of Rs. 16,36,904/-. The AO made additions of Rs. 1,70,95,000/- on account of suppressed sales and Rs. 7,75,000/- on account of real estate business. The AO also made addition of Rs. 12,50,000/- on account of purchase of Ford Ecosport vehicle. to 860/Coch/2022 P.L. Tony 5. Being aggrieved, an appeal was filed before the CIT(A), contending that the AO ought not have extrapolated the sales for the entire year based on the information contained in the seized diary notes for 44 days. It is further submitted that estimation of gross profit at 20% is unreasonable and excessive. However, the CIT(A), while reducing the percentage of gross profit from 20% to 12%, had upheld all other additions including estimating of turnover.

Being aggrieved, the appellant is in appeal before us in the present appeal.

The learned counsel for the assessee vehemently submits that no incriminating material was found as a result of search and seizure action u/s. 132 of the Act. Therefore, no addition can be made in the assessment made pursuant to the search and seizure action placing reliance of the decision of the Hon'ble Apex Court in the case of CIT v. Abhisar Buildwell P. Ltd. [2023] 454 ITR 212. He further contended that for extrapolation of turnover based on the material found for 44 days is not permissible in the absence of evidence to show that the appellant suppressed turnover for the whole year. Further he submits that estimation of turnover based on KVAT returns has no rationale, inasmuch as, KVAT returns have no direct nexus to the turnover as KVAT tax is paid both on purchases and sales. Further he submits that the statement recorded from the appellant about suppression of turnover is only in respect of 44 days, therefore, it cannot be presumed that the appellant suppressed to 860/Coch/2022 P.L. Tony turnover for whole of the previous year. Finally he submits that adoption of 12% is excessive and unreasonable. It should be based on the comparables in the same line of business.

On the other hand, the ld. CIT-DR vehemently opposed the above submissions and submits that the AO as well as the CIT(A) have correctly estimated the turnover based on the statement given by the appellant u/s. 132(4) of the Act and also the material unearthed as a result of search and seizure action. Estimation of profit at 12% is reasonable and requires no interference by this Tribunal.

We have heard the rival contentions and perused the material available on record. The issue that arises for our determination is whether the AO as well as the CIT(A) were justified in estimating the turnover as well as the profits thereon. Undisputedly, during the course of survey operations in the business premises of the appellant pursuant to the search action in the residential premises of the appellant, certain diary notes regarding actual turnover for a period of 44 days were found. When this material was confronted with the appellant, the appellant had admitted that he had disclosed turnover only to the extent of 20% and thereby suppressing the actual turnover by 80%. Based on this information the AO proceeded to estimate the turnover by adopting the turnover shown in the KVAT returns as the base figure and multiplied the same by 5 times to arrive at the actual turnover and estimated the profit at 20% thereon, to 860/Coch/2022 P.L. Tony however, on further appeal, the CIT(A) reduced it to 12%. It is settled position of law that even in the best judgement assessment u/s. 144 of the Act, while rejecting the books of account, no doubt, the AO is empowered to estimate the turnover and also estimate the net profit thereon but the estimation of turnover cannot be on subjective basis. The basis for adoption of turnover should have direct nexus with the material found. In this case, the AO only found the material for 44 days. No doubt, when the appellant was confronted with the seized material it appears that the appellant stated that he suppressed turnover to the extent of 80%. In our considered opinion the AO should have examined the books of account and bank statements and other relevant material to arrive at the true and correct turnover and there should be valid nexus for estimating the turnover. Further, mere estimation of the net profit should be based on the historical data or a comparable instance in the same line of business. In the circumstances we are of the considered opinion that the approach adopted by the AO as well as the CIT(A) is erroneous and cannot be sustained in the eyes of law. In order to meet the ends of justice we restore the matter to the file of the CIT(A) for de novo disposal in accordance with law after affording reasonable opportunity of hearing to the appellant. All other contentions raised before us by the appellant are kept opened before the CIT(A).