OM LAMCOAT PVT LTD,MORBI vs. THE ACIT, CENTRA CIRCLE-1, RAJKOT, RAJKOT

The facts of the case which can be stated quite shortly are as follows: The assessee is a Private Limited Company engaged in the business of manufacturing and trading of paper based decorative laminates and allied products. A Search and seizure action named "Operation Star Alliance" was conducted on 26.09.2018. Various builders and financiers were covered under this operation. Inquiries revealed that huge cash transactions in various forms have been carried out by the builders and financiers. Some of the prominent builder and financer groups of and around Rajkot city were covered under the operation. Residential premise of ShriJayantibhai P. Rajkotiya (Director of the assessee- company) was also covered u/s 132 of the Act during the search operation. Various incriminating documents have been found and seized from the residence. Some of these documents contained information relating to the assessee firm i.e. M/s OM Lamcoat Pvt Ltd.

The original return of income u/s 139 of the Act for the year under consideration has been filed on 17/10/201 with total income of Rs. 1,27,15,350/-. The case for the search year i.e. the year under consideration has been selected as per compulsory criteria for scrutiny prescribed by the CBDT in this regard. Notice u/s 143(2) of the Act was issued on 13/11/2020 and then notices u/s 142(1) have been issued seeking details and explanations from the assessee from time to time. The seized documents containing the information relating to the assessee company have also been provided to the assessee in view of natural justice. In response to the above notice/questionnaire, the assessee has submitted replies from time to time, before the assessing officer. During the search proceedings at the residence & 287/RJT/2025 M/s. Om Lamcoat Pvt. Ltd. of Shri Jayantibhai P. Rajkotiya, documents (seized and inventoried as page no. 38 to 41A of Annexure A24) containing information pertaining to the assessee has been recovered. The same is reproduced in the assessment order. During the assessment proceeding, in questionnaire issued u/s 142(1) of the Act, the assessee was requested to explain the content of seized material in view of natural justice. In reply to the notice, the assessee has contended that these documents in the seized material are basically dumb documents and do not indicate any meaning. This reply of the assessee was not found tenable in view of the admission of Shri Jayantibhai Rajkotia before the investigating officer during post search proceedings. The admission of Shri Jayantibhat Rajkotia (One of the directors of the assessee-company) clearly indicates that the seized documents inventoried as page 38 to 44 of Annexure A24 from his residence bear details regarding unaccounted transactions of his company M/s Om Lamcoat Pvt Ltd. However, the director Shri Jayantibhai failed to elaborate the contents of the above seized documents and to disclose the income arising thereon.

In view of the above, during the assessment proceeding, vide notice dated 26/05/2021, the assessee was requested to show cause as to why the transactions appearing on these seized documents, should not be treated as its unaccounted income. Relevant part of the notice is reproduced here under :

Moreover, the assessee has contended before assessing officer that the revenue cannot modify the book profit, which has already been accepted and approved in the Annual General Meeting of shareholders relying on the decision of Hon'ble Supreme Court of India in the case of Apollo Tyres Ltd. v. CIT (2002) 255 ITR 273 (SC). In this regard it is to state that the hon'ble Supreme Court in the landmark judgment of Apollo Tyres Ltd Vs. CIT has held that the AO while computing the income under section 115J has only the power of examining whether the books of account are certified by the authorities under the Companies Act as having been properly maintained in accordance with the Companies Act. The AO thereafter has limited power of making additions and reductions as provided for in the Explanation to the said section. To put it differently, the AO does not have jurisdiction to go behind the net profit shown in the P&L account except to the extent provided in the Explanation to section 115J. In the case of Malyala Manorama Co. Ltd. [2008] 300 ITR 251 (SC), the AO observed that the depreciation debited in the P&L account as per the IT Rules was not admissible and the company should have debited depreciation as per the provisions of the Companies Act. Thus, the issue of scrutiny of P&L account prepared by the Company is still wide open. Therefore, the assessee's claim regarding not altering the book profit by the amount of gross profit estimated on the unaccounted transactions was not considered by the assessing officer.

The assessee also argued before the assessing officer that in the satisfaction recorded for initiating action u/s 153C of the Act, there is no reference of any unaccounted income of the earlier assessment years and & 287/RJT/2025 M/s. Om Lamcoat Pvt. Ltd. thus, addition proposed in such years would be treated as deviation from the satisfaction note, which is completely invalid and illegal. However, assessing officer, in this regard, noticed that the requirement for initiating any proceeding u/s 153C of the Act is seizure of such documents that contain information pertaining to the person other than the one covered u/s 153A which is validly fulfilled in the present case. Further, section 153C nowhere states that addition can only be made in years which are referred in satisfaction note. Here, the content of the same seized document reveals, upon inquiry during assessment proceeding, that the details on the said document belong to more than one assessment years including the one for which the satisfaction was recorded initially. The assessee in its reply to SCN has also contended that the closing balance may belong to period prior to the date mentioned on the seized document. It is important to note here that the addition is proposed on the basis of the seized documents only. Therefore, the proposed addition is legally within the ambit of section 153C and various judgments of higher courts.

The assessing officer, after considering other reply of the assessee, noted that the response of the assessee was not found acceptable, as far as its denial regarding making addition based on the estimated gross profit on the unaccounted transactions after rejection of books is concerned. Therefore, in view of the unaccounted transactions found from the seized papers during the search at the residence at the director and having considered the response of the assessee on the same, the accuracy of the books of the assessee-company cannot be accepted. Therefore, the provisions of section 145(3) of the Act were invoked. Section 145(3) of the Income-tax Act states that where the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee, the Assessing Officer may make an assessment in the manner provided in & 287/RJT/2025 M/s. Om Lamcoat Pvt. Ltd. section 144 of the Act. The Section 144 of the of the Act lays down that the Assessing officer, after taking into account all relevant material gathered shall make the assessment of the total income or loss to the best of his judgment and determine the sum payable by the assessee on the basis of such assessment. The assessment of total income as per provisions of section 144 of the Act is being carried out by way of enhancing the returned incomes of respective years by the amount of gross profit earned on unaccounted transactions. The estimation of gross profit earned on the unaccounted transactions is made in the following manner:

Aggrieved by the order of the assessing officer, the assessee carried the matter in appeal before the Ld. CIT(A), who has partly allowed the appeal of the assessee. Therefore, the assessee is in further appeal before us.

We have heard both the parties and carefully gone through the submission put forth on behalf of the assessee along with the documents furnished and the case laws relied upon, and perused the fact of the case including the findings of the ld CIT(A) and other materials brought on record.

On technical grounds, ld. Counsel stated that about the validity of notice issue u/s.153C of the Income-tax Act, 1961, which is bad in law as initiation of action u/s 153C of the Act was without there being incriminating material found from the premises of assessee is invalid and assessment made on such invalid initiation deserves to be quashed. Besides, the initiation of action u/s.153C of the Act on the basis of dumb documents is invalid and assessment made on such invalid initiation deserves to be quashed.

On merit, Learned Counsel for the assessee argued before us that Id. Commissioner of Income-tax (Appeals) was erred on facts as also in law making addition of Rs.56,68,212/-on account of alleged unexplained expenditure, which should be deleted. The Id. CIT(A) was also erred on facts as also in law enhancing the addition from Rs.34,78,105/-to Rs.72,37,189/- by estimating NP @ 6.5% on estimated unaccounted sale of Rs.11,84,88,806/-.

On the other hand, learned DR for the revenue, on technical issue submitted that even a single satisfaction note is sufficient in case of same AO of searched person and other person for the purpose of issuing valid notice u/s 153C of the Act. Besides, the documents were seized from the residence of the director of the company during the course of search on being confronted, Shri Jayantibhai P. Rajkotiya, director of the assessee company in his sworn statement u/s 132(4) had admitted that these & 287/RJT/2025 M/s. Om Lamcoat Pvt. Ltd. transactions pertain to the assessee. Further, on page No. 41A, beneath the printed table there is a reference of 'OM' and some production and sale details of sheets are noted. Clearly word "OM" denoted the name of the assessee whose name is Om Lamcoat Pvt. Ltd and the word "sheet" is nothing but the laminate sheets manufactured by the assessee company. Further the name of parties like DN Chemicals, Aatmajyot Chem Pvt Ltd in the said documents clearly proves that such seized documents belong/pertains to the assessee company only as these companies are group companies of the assessee. Therefore, it is clear that these documents are not dumb documents. Hence, the proceedings u/s. 153C has been rightly initiated.

On merit, learned DR for the revenue, submitted that learned CIT(A) has given sufficient relief to the assessee. Therefore, further relief should not be given to the assessee and both the appeals of the assessee, on merit, should be dismissed.

We have considered submissions of both the parties. Though facts have been discussed in detail in the foregoing paragraphs, however in the succinct manner, the relevant facts and background are reiterated in order to appreciate the controversy and the issue for adjudication. The assessee is a Private Limited Company engaged in the business of manufacturing and trading of paper based decorative laminates. It had filed its return of income on 03.10.2017 showing income of Rs.1,54,17,972/-. Proceedings u/s. 153C were initiated in the case of the assessee for the reason that, during the course of search at the premises of one Shri Jayantilal P Rajkotiya, certain documents pertaining to the assessee- company was found and seized. Shri Jayantilal P Rajkotiya happens to be one of the directors of the assessee- company. During the course of search, certain documents inventoried as page no. 38 to 44 of Annexure A-24 were found and seized. The AO on the & 287/RJT/2025 M/s. Om Lamcoat Pvt. Ltd. basis of documents seized has taken the unaccounted purchase of the assessee for Α.Υ.2013-14 to 2019-20 at Rs.15,85,99,555/-and then, year- wise unaccounted purchase is derived by taking weightage of the turnover reported in the tax audit report. For the year under appeal, the AO had taken the unaccounted purchase of Rs.3,64,77,898/-, on which GP of 18% is applied for arriving the figure of unaccounted business income of Rs.80,07,343/-.

The ld.CIT(A) noted that the mechanism provided in the Act is in such manner that the AO of searched person after recording his satisfaction should handover the relevant seized assets or books of account or documents or information to the AO of other person and then, the AO of other person should record his satisfaction before initiating assessment proceeding in the case of other person u/s.153C of the Act. Therefore, two times satisfaction has to be recorded, i.e. first satisfaction to be recorded by the AO of searched person and second satisfaction to be recorded by the AO of another person. The assessee for this plea, relied upon the settled decision by the Hon'ble Supreme Court in the case of CIT v. Calcutta Knitwears (2014) 6 SCC 444 and subsequent circular of CBDT no. 24/2015 dated 31.12.2015. According to the assessee, in its case, only one common satisfaction has been recorded. Hence, the proceeding initiated by the AO on the basis of common and single satisfaction note is completely unjustified and illegal. In this connection, the learned CIT(A) noticed that the reason as to why two satisfaction needs to be recorded is that, by first satisfaction, the AO of the searched person certifies that the impugned materials belong to another assessee and by virtue of second satisfaction, the incumbent AO of the assessee certifies that such material has a bearing upon the income of the assessee. In the present case, by virtue of a common satisfaction, both the process has been achieved as the AO is common for & 287/RJT/2025 M/s. Om Lamcoat Pvt. Ltd. the searched person as well as the assessee. The Hon'ble Supreme Court the case of Super Malls Private Limited vs. PCIT (2020) 423 ITR 281 had considered its own judgement in the Pr. CIT vs. Calcutta Knitwears and laid down clear law that single satisfaction note is sufficient in case of same AO of searched person and other person for the purpose of issuing valid notice u/s 153C of the Act. Therefore, ld.CIT(A) did not find any defect in the common satisfaction recorded by the AO of the assessee. Therefore, ld.CIT(A) rejected the plea of the assessee.

About the plea of the dump document, the ld.CIT(A) noted that the AO has relied on the loose papers seized and inventoried at page no. 38 to 41A of Annexure A-24, which are print outs from the computerized accounting software (Tally) under the heading "XYZ", is a dumb document, as per assessee. Therefore, it cannot be said that documents seized from the premises of Shri Jayantibhai Rajkotiya (searched person) is actually belonging to or pertaining to or relates to the assessee. In this connection, the learned CIT (A) noted that the documents were seized from the residence of the director of the company during the course of search on being confronted, Shri Jayantibhai P. Rajkotiya, director of the assessee- company in his sworn statement u/s 132(4) had admitted that these transactions pertain to the assessee. Further, on page No. 41A, beneath the printed table there is a reference of 'OM' and some production and sale details of sheets are noted. Clearly word "OM" denoted the name of the assessee whose name is Om Lamcoat Pvt. Ltd and the word "sheet" is nothing but the laminate sheets manufactured by the assessee- company. Further the name of parties like DN Chemicals, Aatmajyot Chem Pvt Ltd in the said documents clearly proves that such seized documents belong/pertains to the assessee- company only as these companies are group companies of the assessee. Therefore, it is clear that these documents are & 287/RJT/2025 M/s. Om Lamcoat Pvt. Ltd. not dumb documents. Hence, the proceedings u/s. 153C has been rightly initiated.

The assessee stated before ld.CIT(A) about page no. 39 of seized documents that it consists the summary of sale of various items such as Kolsi, Ply Bhuki, P.P. Rakhodi etc. However, the assessee- company does not deal or trade in any of such products, but it is in the business of manufacturing and trading in paper based decorative laminate sheets. Therefore, it is proved that entries/notings in the seized documents are not pertaining to the assessee- company. However, learned CIT(A), rejected the above arguments of the assessee and noted that the name of the said products was written on the seized documents in the Gujarati Language and all the products are used in the manufacturing process. It cannot be said that the contents of such documents were not pertaining to the assessee- company because on the same page beneath the table there is handwritten note about the assessee's name. Further, the director of the assessee- company has in his statement recorded in post-search investigation admitted that contents on the seized documents were related to the assessee- company and various transactions on such documents were unaccounted transactions. Therefore, when the director himself had accepted the unaccounted transactions in the documents seized, that too after the search, there is no room for the assessee to deny the same by merely stating that the documents are dumb documents. Therefore, this plea of the assessee was not accepted by ld.CIT(A). Not only that, the assessee -company itself had declared additional business income of Rs. 10,00,000/- in the returns of income filed for A.Y.2016-17, A.Υ.2017-18 &Α.Υ.2018-19 each, which itself shows that the assessee- company had received some profit, which had not been accounted for in the regular books of account. Thus, the claim & 287/RJT/2025 M/s. Om Lamcoat Pvt. Ltd. of the assessee that entries/notings in the seized documents are not pertaining to the assessee- company, was rejected by the learned CIT( A).

The assessee also argued that the AO nowhere in the satisfaction note established with any cogent or corroborative evidence that such loose papers are actually belonging or pertaining to the assessee. This finding of the AO is not backed by any corroborative evidence and thus, it is not understood as to how and what analysis had been made by the AO and how the satisfaction had been arrived within the meaning of section 153C of the Act. However, learned CIT(A) rejected this claim of the assessee and noted that the document was seized from the residence of the director of the company during the course of search on being confronted, Shri Jayantibhai P. Rajkotiya, director of the assessee- company in his sworn statement u/s 132(4) had admitted that these transactions pertain to the assessee. Therefore, it is clear that the documents pertained to the assessee. Therefore, it is held that, prima facie, the AO had sufficient material on hand to initiate proceedings u/s. 153C of the Act.

The assessee also argued that the AO relied on the statement recorded from Shri Jayantibhai Rajkotiya (director), wherein, it was stated that he had admitted that the seized documents contain transactions of the assessee. Mere statement recorded in itself cannot be treated as incriminating evidence in absence of any other corroborative evidences. Therefore, proceeding initiated merely on the basis of statement recorded from searched person it not valid. However, learned CIT(A) rejected this argument of the assessee and observed that one of the key directors acceded to the fact that the seized papers belonged to/pertained to the assessee- company, is sufficient to initiate proceedings u/s.153C of the Act. The initiation of proceedings was not merely on the basis of statement without any basis. But the statement was made by the director of the company after & 287/RJT/2025 M/s. Om Lamcoat Pvt. Ltd. perusing the seized documents wherein the transactions related to group companies were mentioned. Therefore, the proceedings were rightly initiated by the AO.

On merit, ld.CIT(A) noted that on perusal of the assessment order reveals that the AO had made addition of unaccounted profits on the basis of allowing seized documents contained in annexure A-24 (Page No. 38 to 41A). Perusal of these documents revealed its nature as under.

The ld.CIT(A) noticed that loose papers seized at page nos. 41 & 41A on the basis of which addition is made reflects closing balance of creditors at the end of period 31.01.2017 and on this basis, it cannot be assumed that such closing balance pertains to unaccounted transactions carried in A.Y.2018-19. Further, it is also observed that there is an opening balance is shown, hence it can be assumed that such opening balance pertained to unaccounted transaction for A.Y.2016-17.Therefore, considering the facts of the case, coupled with the judicial pronouncements, the ld.CIT(A) held that addition made by the AO on the basis of loose papers seized at page nos. 41 & 41A of Annexure A-24 in the assessment years 2014-15, 2015- 16 2018-19 is without supported by any incriminating document or data, therefore, addition made in these assessment years were deleted.

The ld.CIT(A) noted that the AO while working out unaccounted purchases of Rs. 15,85,99,555/- on the basis of impugned seized documents has made total of credit side (Rs.14,65,27,086) and debit side (Rs.1,20,72,469). The same can be seen from the relevant seized paper reproduced as in the order of learned CIT(A). The ld.CIT(A) observed that action of the AO is not correct as the balance on credit side represents the amount payable for purchases made, whereas, debit side represents the payment already made. Therefore, both the sides of the account cannot be clubbed for making addition, but net effect of the same at Rs.13,44,54,617/- (14,65,27,086- 1,20,72,469) can be treated as net unaccounted purchases or & 287/RJT/2025 M/s. Om Lamcoat Pvt. Ltd. expenses for A.Y.2016 and A.Y.2017-18. It is important to mention here the unaccounted purchase or expenses (based on opening brought forward figure as on 01.04.2016 as per the page no. 41 of the seized document) for A.Y.2016-17 is Rs.11,84,88,806/- (Rs.12,75,62,791 -Rs.90,73,985) and A.Y.2017-18 is Rs.1,59,65,811/- (Rs. 13,44,54,617 - Rs.11,84,88,806).

About the estimation of profit earned by the assessee out of unaccounted business transactions, the ld.CIT(A) noticed that the AO has estimated the Gross Profit reported by the assessee in its audited financial statement of respective year. On the other side, the assessee in its written submission pressed that the various expenses in the nature of salary, printing, packing etc., which has no effect in determining the Gross Profit, but the same is considered in determining Net Profit and on this ground, the assessee requested to estimate reasonable net profit on the unaccounted transactions in order to avoid dispute. The observation of the AO and the contention of the assessee are verified in the light of loose papers seized. It is seen that one of the loose papers seized at page no. 40 reflects various nature of expenses for the period 01/01/2017 to 31/01/2017, extract from which is reproduced by learned CIT (A) in his order. It is seen that various expenses in the nature of salary, interest, transport etc. is falling below the line of profit & loss account and such expenses are not considered for determining GP. Further, list of creditors on page nos. 41 & 41A are also containing various payable for salary expense, which directly affects the Net Profit. Therefore, the AO's action of estimating GP is not proper, but estimating NP on the unaccounted transactions would meet the ends of justice. The assessee has declared following Net Profit in its audited financials:

Therefore, learned CIT( A) partly allowed the appeal of the assessee. We note that learned CIT(A) has passed the reasoned and speaking order, & 287/RJT/2025 M/s. Om Lamcoat Pvt. Ltd. taking into consideration all the facts of the assessee. We do not find any infirmity, in the conclusion reached by the learned CIT(A). On a careful reading of the Ld.CIT(A) order and the findings thereon, we do not find any valid reason to interfere with the decision and findings of the Ld.CIT(A). Hence, we sustain the order of the Ld.CIT(A) and reject the grounds raised by the assessee in both these appeals.

In the result, both appeals filed by the assessee (in and 287/RJT/2022) are dismissed.