MR. VIMALKUMAR JEEVRAJ NAHAR,HYDERABAD vs. ACIT, CENTRAL CIRCLE 1(1), PUNE

The cross appeals filed by the Revenue and assessee were heard together and are being disposed of by this consolidated order for the sake of convenience. However, in order to adjudicate the issues, reference is being made to the facts in ITA Nos.1347/PUN/2013 & 1362/PUN/2013 relating to assessment year 2007-08.

The Revenue in ITA No.1347/PUN/2013, relating to assessment year 2007-08 has raised the following grounds of appeal:- 01. On the facts and in circumstances of the case the Ld. Commissioner of Income-tax(A) has erred in taking the G.P. @ 22% of unaccounted cash received by assessee. 02. The order of the CIT(A) may be vacated and that of the Assessing Officer be restored.

The assessee in ITA No.1362/PUN/2013, relating to assessment year 2007-08 has raised the following grounds of appeal:- 1. The learned CIT (A)-II, Pune erred in law and on facts in confirming the order of the learned AO in holding jurisdiction for assessment for A.Y.2007-08 in the absence of any incriminating material found for said A.Y. 2007-08. 2. The learned CIT (A)-II Pune erred in law and on facts confirming addition of Rs.1,34,36,200/- made by the learned AO on the basis of diary found at the premises of Shri Sohanlal Mehta, though no incriminating material found during the search proceedings at the appellant's premises w.r.t. the said amount.

Briefly, in the facts of the case, search action under section 132(1) of the Act was conducted on the RMD Gutkha Group of cases on 20.01.2010. The assessee was also searched on 20.01.2010. The Assessing Officer issued notice under section 153A of the Act to the assessee, who in turn, filed the returns of income disclosing additional income in the respective years in addition to the original returns of income. The said additional income was declared on account of net profit from undisclosed sales. Further, show cause notice was issued to the assessee as to why addition should not be made for receipt of cash from Sohanraj Mehta on behalf of Dhariwal Industries. The assessee denied receipt of any cash and said that there were no other transactions apart from recorded transactions accounted for in his books of account. It was stressed by the assessee that there was no transaction or supply of any material to Sohanraj by the assessee. Hence, there was no question of any payment being made by him and the entries, if any, were fictitious and not substantiated. The assessee further claimed that during search operation, no corroborated document or evidence were found in the name of Sohanraj or M/s. Dhariwal Industries. The assessee also questioned whether the two directors of M/s. Dhariwal Industries had accepted the fact of payment to the assessee in their statements. However,

The CIT(A) dismissed the plea of assessee that in the absence of any incriminating discovery during the search, corroborating the allegation of cash payment made by Shri Sohanraj Mehta to the assessee. However, he was of the view that the addition of Rs.1.34 crores in assessment year 2007-08 and Rs.1.77 crores in assessment year 2008-09 on account of undisclosed income has to be computed on the basis of evidence found and he directed the Assessing Officer to apply GP rate of 22% on unaccounted sales to compute the income in the hands of assessee.

Both the assessee and the Revenue are in appeal against the order of CIT(A).

The learned Authorized Representative for the assessee pointed out that the basis for making addition in the hands of assessee was on account of sale of Gutkha outside the books of account in cash. The allegation of the Department was that Shri Sohanraj Mehta was collecting cash from customers on instructions of M/s. Dhariwal Industries and that cash was given to the vendors from whom the raw material was purchased, wherein the assessee was one of the vendors. However, referring to various case laws of different Tribunals relating to search on M/s. Dhariwal Industries, the learned Authorized Representative for the assessee pointed out that diary and statement of Shri Sohanraj Mehta was held

The learned Departmental Representative for the Revenue on the other hand, pointed out that SLP has been admitted against decision of the Hon’ble Bombay High Court in CIT Vs. Continental Warehousing Corporation (supra).

We have heard the rival contentions and perused the record. Pursuant to search on the premises of assessee, proceedings under section 153A of the Act were initiated against assessee. The issue which is the jurisdictional issue raised by the assessee by way of grounds of appeal No.1 and 2 in assessment year 2007-08 goes to root of the case, hence the same is taken up first. For addressing jurisdictional issue, we refer to the facts of the case. Consequent to search on M/s. Dhariwal group of cases, statement of Shri Sohanlal Mehta was recorded, who admitted that cash was being collected from the customers on instructions of directors of M/s. Dhariwal Industries and the same was given to vendors from whom raw material was purchased. The assessee was one such vendor and the case of Revenue is that the assessee had also received such cash. However, no evidence in this regard was found. Further, even in series of cases when the issue of noting in diaries and statement of Shri Sohanlal Mehta was considered by the Tribunal, it was held that the same was not sufficient to make the addition in the case of vendors. There are series of decisions and one such decision in the case of Pradeep Amrutlal Runwal Vs. Tax Recovery Officer (2014) 47 taxmann.com 293 (Pune-Trib.). Further, consequent to search, additions were made in the hands of M/s. Dhariwal Industries Ltd. and the similar plea of transactions through Shri Sohanlal Mehta and the statement recorded of him was considered by the Tribunal starting from paras 125 to 130. The conclusion in para 130 reads as under:- “130. So far as the finding of the Revenue authorities that the profit generated from suppressed production and sale was diverted to various persons whose

The Tribunal further went on to refer to the decision in the case of Shri Vinit Ranawat Vs. ACIT vide ITA Nos.1105 and 1106/PN/2013 order dated 12.06.2015 for assessment years 2006-07 and 2007-08, wherein the addition made on account of loose papers found during the course of search in the case of Shri Sohanlal Mehta was deleted. The relevant findings of the Tribunal are as under:- “131. Based on the above decisions, the Pune Bench of the Tribunal in the case of Shri Vinit Ranawat vide ACIT vide ITA Nos. 1105 and 1106/PN/2013 order dated 12-06-2015 for A.Yrs. 2006-07 and 2007-08 has deleted the addition of Rs.21 crores made in the hands of the assessee on account of loose papers found during the course of search in the case of Shri Sohanraj Mehta, C&F Agent of M/s. DIL for Karnataka Region. Thus, we find some force in the submission of the Ld. Counsel for the assessee that the different Benches of the Tribunal have deleted the additions made in their hands on the basis of so called deployment of funds by the assessee company out of the generation of unaccounted income out of suppressed turnover.”

The Tribunal thus, concluded as under:- “132. As mentioned earlier, no incriminating documents in shape of any unaccounted purchase, unaccounted sale, unaccounted transport receipt was found either during the course of search at the place of Shri Sohanraj Mehta/Shri Mithulal or at the premises of the assessee. If the extent of unaccounted

In view of the findings of Tribunal in the case of person searched i.e. M/s. Dhariwal Industries Ltd., who was alleged to be involved in receipt of cash on sales of its products and further payment of cash to the vendors from whom raw material was purchased, has been deleted, then there is no basis for making any addition in the hands of assessee. The question thus, arises is in the absence of any incriminating material found during the course of search whether assessment proceedings can be taken up for the years which had not abated.

The claim of assessee is that in both the assessment years i.e. 2007-08 and 2008-09, assessment proceedings had not abated and in the absence of any incriminating material found during the course of search, there is no merit in making any addition in the hands of assessee. In this regard, he placed reliance on the ratio laid down by the jurisdictional High Court in the case of CIT Vs. Continental Warehousing Corporation (supra). The assessee further relies on the ratio laid down by the Pune Bench of Tribunal in the case of Manish Hiralal Malu Vs. DCIT (supra), wherein the addition made in the case of assessment years which have not abated, and in the absence of any incriminating documents found, the additions were deleted. The relevant findings of the Tribunal are in paras 10 to 15 of the said order. In the facts of the present case before us, the scrutiny assessment had not been taken up and also the period for taking up scrutiny had expired, hence in the absence of any incriminating evidence found during the course of search, there is no merit in making any addition in the hands of assessee in the years where the proceedings were not abated. We place reliance on the ratios laid down by the Hon’ble Bombay High Court in CIT Vs.

The facts and issues in assessment year 2008-09 are identical to the facts and issues in assessment year 2007-08 and our decision in assessment year 2007-08 shall apply mutatis mutandis to assessment year 2008-09. The appeals of Revenue on merits would thus, become academic and the same are dismissed.

Now, coming to the appeal for assessment year 2010-11. The assessee has raised the following grounds of appeal:- 1. The learned CIT(A)-II, Pune erred in law and on facts in confirming the additions made by the learned AO amounting to Rs.5,22,37,102/- on account of purchases invoking provisions of sec.40A(3), carrying a view that the purchases are settled vide cash payments exceeding Rs.20,000/- 2. The learned CIT(A)-II, Pune erred in law and on facts confirming separate addition of Rs.2,31,383/- made by ACIT, CC 1(1), disregarding the request for telescoping the same against overall declaration of Rs.2,87,10,000/-

The Revenue in the appeal relating to assessment year 2010-11 has raised the following grounds of appeal:- 1) On the facts and in circumstances of the case, the Ld. CIT(A) erred in allowing the set off of income disclosed during search action under head income from other sources against statutory disallowances u/s.40A(3) of the Act. 2) The order of the Commissioner of Income-tax(A) may be vacated and that of the Assessing Officer be restored.

The assessee has only pressed ground of appeal No.1 and the ground of appeal No.2 is not pressed, hence the same is dismissed as not pressed. The

The Revenue is in appeal against directions of CIT(A) in allowing the set off of income disclosed during search action under the head ‘Income from other sources’ against statutory disallowance made under section 40A(3) of the Act.

The issues raised by the assessee and the Revenue are connected and hence, we proceed to decide the same after referring to the factual aspects of the case.

Briefly, in the facts relating to the issue, during the course of search, diary was found in which transactions of trading in cardamom outside the books of account were found. During the course of search, cash of Rs.11,75,000/- was found from the office premises of assessee at Hyderabad and Rs.10 lakhs was seized and cash of Rs.1 lakh in that belongs to assessee. Further, at the residential premises of assessee in Hyderabad, cash of Rs.2.39 crores was found, out of which, cash of Rs.2.34 crores was seized, the same also belonged to the assessee. During the course of search, the assessee admitted the said cash of Rs.2.35 crores to be his unaccounted income i.e. represented by undisclosed profit on unrecorded sales and undisclosed commission income. Accordingly, he offered Rs.2.35 crores as his additional income. Further, he declared additional physical sock found of Rs.6,94,000/- and unexplained expenses amounting to Rs.28,021/-; and further disclosure of Rs.44,87,979/- as income from other sources. The total declaration of Rs.2.87 crores was made by the assessee during the course of search. In the return of income, the assessee declared additional income of Rs.2.87 crores. The Assessing Officer asked the

The next issue which was raised in the case of assessee was where the Assessing Officer asked the assessee as to why unaccounted purchase expenses amounting to Rs.5,22,37,102/- should not be disallowed under section 40A(3) of the Act. The assessee explained that it had already made disclosure of Rs.2.91 crores of additional income. It was further explained by the assessee that he had declared gross profit on unrecorded sales which was discovered as per certain loose papers seized. He further stated that no set off of undisclosed purchases was asked for. He stressed that all the seized documents pertaining to purchases and sales were in loose leaves and in scattered form and could not be corroborated; the estimated adhoc income on the basis of gross profit on sales recorded in loose papers was declared to buy peace of mind. Therefore, there was no merit in holding that there is violation of provisions of section 40A(3) of the Act. He stressed that once the gross profit has been estimated in the hands of assessee, then no disallowance could be made under any section. However, the Assessing Officer rejecting the claim of assessee, made the aforesaid disallowance under section 40A(3) of the Act on account of purchase expenses made in cash at Rs.5.22 crores.

The CIT(A) upheld the addition made by the Assessing Officer. However, he directed the Assessing Officer to allow set off of Rs.44,87,970/- which is the amount available for investment.

Both the assessee and the Revenue are in appeal against the order of CIT(A).

The learned Authorized Representative for the assessee pointed out that the declaration of Rs.2.91 crores made by the assessee during the course of search and the cash found of Rs.2.35 crores were sourced out of unaccounted trading of cardamom and spices and the commission income. However, at the fag-end of scrutiny proceedings, the Assessing Officer raised the query that why purchases should not be disallowed under section 40A(3) of the Act amounting to Rs.5.22 crores. Our attention was drawn to the bills found, which totaled Rs.5.22 crores. He further referred to the explanation of assessee before the Assessing Officer, which is available at page 3 of Paper Book and it was pointed out that declaration was made on account of GP on undisclosed sales. There was no correlation between the documents found i.e. of purchases and sales and no set off of purchases was asked for, only GP was estimated. Hence, there is no question of making any disallowance under section 40A(3) of the Act. In this regard, he placed reliance in various case laws of Hon’ble High Courts and various Tribunals. He further stressed that diary which was found had notings of sales in cash. Our attention was drawn to the page 87 of Paper Book, where the sales were to the tune of Rs.6.46 crores. He further pointed out that GP @ 12% was declared on the said sales of Rs.6.46 crores. He admitted that the assessee was purchasing raw material from different entities at different locations. However, the payment was made in the bank account of purchasers totaling Rs.2.95 crores. He further stated that declaration of Rs.2.91 crores made by the assessee during the course of search included Rs.81.45 lakhs, which was disclosed. He stressed that in the absence of maintenance of books of account,

The learned Departmental Representative for the Revenue on the other hand, placed reliance on the ratio laid down by the Hon’ble High Court of Gujarat in CIT Vs. Hynoup Food & Oil Industries Pvt. Ltd. (2006) 150 TAXMAN 194 (Guj) and the Hon’ble High Court of Andhra Pradesh in S. Venkata Subba Rao Vs. CIT (1987) 35 TAXMANN 401 (AP).

We have heard the rival contentions and perused the record. The issue which arises in the present appeal is against the disallowance made under section 40A(3) of the Act. During the course of search, certain loose papers were found, which related to transactions of trading in cardamom outside the books of account. The documents relating to sales were found and the same have been computed at Rs.6.21 crores. The assessee was also found in possession of cash of about Rs.2.35 crores during the course of search itself. The assessee made a declaration of Rs.2.91 crores, which was on account of unaccounted trading in cardamom, spices and on account of commission income. The assessee had honoured the declaration made during the course of search and added the additional income in his return of income itself. The

Further, we find that similar ratio has been laid down by the Pune Bench of Tribunal in bunch of appeals with lead order in DCIT Vs. Shri Narendra Mithailal Agrawal in ITA Nos.811 & 808/PN/2010, relating to assessment years 2006-07 & 2000-01, order dated 26.09.2012. Relying on the ratio laid down by different High Courts, differentiating the decision of the Hon’ble High Court of Gujarat in CIT Vs. Hynoup Food & Oil Industries Pvt. Ltd. (supra) (relied upon by the learned Departmental Representative for the Revenue), the Tribunal held that there was no merit in making any disallowance under section 40A(3) of the Act. The relevant findings of the Tribunal are in paras 5.4 to 5.7. In view of the above said proposition laid down by various High Courts which has been applied by the Pune Bench of Tribunal in DCIT Vs. Shri Narendra Mithailal Agrawal (supra), we hold that while estimating the gross profit on the alleged unaccounted sales, where no deduction has been allowed on account of unaccounted purchases perse, even if the purchases are made in cash, no disallowance is warranted under section 40A(3) of the Act.

The next stand of assessee in respect of so-called purchases was that the cash was deposited in bank accounts of purchasers and hence, no violation of section 40A(3) of the Act is not being addressed by us since we allowed the claim of assessee on preliminary issue itself. Consequently, the ground of appeal No.1 raised by the assessee is allowed and the ground of appeal No.2 being not pressed, is dismissed. The grounds of appeal raised by the Revenue

In the result, appeals of assessee for assessment years 2007-08 and 2008-09 are allowed and appeal for assessment year 2010-11 is partly allowed and the appeals of Revenue for all three years are dismissed.