THE COMMISSIONER OF INCOME TAX vs. SHRI S RUDRAMUNIYAPPA

: 1 : IN THE HIGH COURT OF KARNATAKA DHARWAD BENCH ON THE 30TH DAY OF JULY, 2015 BEFORE THE HON’BLE MR.JUSTICE RAVI MALIMATH AND THE HON’BLE MR.JUSTICE P.S.DINESH KUMAR I.T.A. NO.81/2008 C/W I.T.A. NO.83/2008 I.T.A. NO.81/2008: BETWEEN 1. THE COMMISSIONER OF INCOME TAX FEROZ KHIMJIBHAI COMMERCIAL COMPLEX, OPP. CIVIL HOSPITAL, DR. AMBEDKAR ROAD, BELGAUM 590 001 2. THE ASST COMMISSIONER OF INCOME TAX FEROZ KHIMJIBHAI COMMERCIAL COMPLEX, OPP. CIVIL HOSPITAL, DR. AMBEDKAR ROAD, BELGAUM 590 001. ... APPELLANTS (BY SRI. Y V RAVIRAJ, ADV.) AND SHRI S RUDRAMUNIYAPPA, OPP KEB OFFICE, TYAGARAJANAGAR, CHITRADURGA ROAD, CHALLAKERE, CHITRADURGA DIST. ... RESPONDENT (BY SRI.SHASHANK HEGDE, ADV. FOR SRI. A SHANKAR, ADV.)

: 2 : THIS ITA IS FILED UNDER SECTION 260-A OF IT ACT, 1961 ARISING OUT OF ORDER DATED 13.08.2007 PASSED IN IT(SS)A NO.2/PNJ/2006, FOR THE BLOCK ASSESSMENT PERIOD 1/4/1990 TO 7/9/2000, PRAYING THAT THIS HON’BLE COURT MAY BE PLEASED TO FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATERD THEREIN AND ETC. I.T.A. NO.83/2008: BETWEEN 1. THE COMMISSIONER OF INCOME TAX FEROZ KHIMJIBHAI COMMERCIAL COMPLEX, OPP. CIVIL HOSPITAL, DR. AMBEDKAR ROAD, BELGAUM. 2. THE ASSISTANT COMMISSIONER OF INCOME TAX CENTRAL CIRCLE-2, FEROZ KHIMJIBHAI COMMERCIAL COMPLEX, OPP. CIVIL HOSPITAL, DR. AMBEDKAR ROAD, BELGAUM 590 001. ... APPELLANTS (BY SRI. Y V RAVIRAJ, ADV.) AND M/S RAVI WINES TRADERS NEAR MARKET YARD BANGALORE ROAD CHALLAKERE CHITRADURGA DIST ... RESPONDENT (BY SRI.SHASHANK HEGDE, ADV. FOR SRI. A SHANKAR, ADV.) THIS ITA IS FILED UNDER SECTION 260-A OF IT ACT, 1961 ARISING OUT OF ORDER DATED 13/08/2007 PASSED IN IT(SS)A NO.3/PNJ/2006, FOR THE BLOCK PERIOD 1/4/1990 TO 7/9/2000, PRAYING THAT THIS HON’BLE COURT MAY BE PLEASED TO FORMULATE SUBSTANTIAL QUESTIONS OF LAW STATED THEREIN, ALLOW THE APPEAL AND SET ASIDE THE ORDER PASSED BY THE ITAT BANGALORE IN IT(SS) A NO.3/PNJ/2006, DATED 13/08/2007 CONFIRM THE ORDERS OF THE APPELLATE COMMISSIONER AND ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE – 2, BELGAUM.

: 3 : RESERVED ON 09.06.2015 PRONOUNCED ON 30.07.2015 THESE APPEALS COMING ON THIS DAY, P.S.DINESH KUMAR J., PROUNCED THE FOLLOWING: JUDGMENT Revenue has preferred these appeals challenging the order dated 13.08.2007 passed by the Income Tax Appellate Tribunal, Bangalore, in IT(SS)A No.2/PNJ/2006 and IT(SS)A No.3/PNJ/2006. The ITA No.81/2008 is by an individual. ITA No.83/2008 is by a firm in which the son of respondent in ITA No.81/2008 is a partner. Common questions of law and fact are involved in these appeals and hence, they are heard and disposed off by this common judgment. 2. The appeal in I.T.A.No.83/2008 was admitted on 23.03.2009 to consider the following substantial questions of law: “i) Whether the tribunal was correct in holding that the addition made of Rs.5,38,145/- and Rs.3,01,027/- on the papers seized in the course of search had not stood corroborated by other evidence and therefore the addition cannot be added back? ii) Whether the tribunal was correct in holding that the addition of Rs.8,14,907/- was made on the corresponding

: 4 : unaccounted sale and not based on any materials other than the documents seized? iii) Whether the tribunal was correct in holding that the addition of Rs.21,28,815/- made against receivable/debtors cannot be added back as the Assessing Officer had not established by examining the person shown in the papers to corroborate the same?” 3. The appeal in I.T.A.No.81/2008 was admitted on 06.06.2011 to consider the following substantial questions of law: “1. Whether the finding of Tribunal in deleting the addition made by the Assessing Officer of `.5,69,878/- and `.1,52,832/- based on various loose sheets of papers, (117 in number) marked as ARW/6, is perverse and arbitrary and unsustainable in law? 2. Whether the finding of the Tribunal that a sum of `.13,84,050/- is liable to be deleted, is perverse and arbitrary and contrary to law?” 4. The case of the revenue in these appeals is that the respondents/assessees are in the business of wholesale liquor trading. A search was conducted under Section 132 of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’, for short) in the premises belonging to the assessees on 07.09.2000 and certain incriminating

: 5 : documents were seized. Consequently, proceedings under Section 158(B)(C) of the Act were initiated. Pursuant to proceedings under Section 132, notice under Section 158 BC was issued to the assessees for returns in respect of undisclosed income in Form No.2B within 45 days from the date of service of notice. Assessees did not file the returns, but requested for copies of seized documents. Assessees filed returns belatedly on 10.07.2001 declaring undisclosed income of Rs.NIL. During the course of seizure, large bunch of loose sheets numbering 117 pages in a file captioned “Paramount Double Extra” was seized from the business premises of the assessees. Page 1 to 89 of the file contained cash receipts and payments for the period 09.01.2000 to 19.08.2000. Writing on these papers was in vernacular language ‘Kannada’. S.Rudramuniyappa (respondent in ITA 81/2008) while recording his statement on oath on 07.09.2000 stated that the file pertained to M/s. Ravi Wine Traders (respondent in ITA 83/2008) and contained cash statement which was either written by him or his son S.R.Satish Babu or their accountant Yallppa. First and the second columns in the loose account sheets pertain to amount in figures and third column is the description. The first column reflects cash receipt, second column reflects payment and the

: 6 : third column reflects the purpose for which the amount is either received or paid. 5. The Assessing Authority observed that there were large number of entries in the file. To re-confirm the correctness of figures mentioned in the sheets, efforts were made to correlate entries with other entries in the seized documents. A bunch of loose sheets pertained to Surya Bar which is owned by his son S.R.Satish Babu and managed by a salesman. The sheets seized revealed that the stock of liquor, receipt of stock, sale of liquor in units, payment receipts, pay outs and payment towards rent, taxes, salary etc., were recorded. During the course of search, as also during the block assessment proceedings, the assessees did not give any convincing explanation inspite of several opportunities. In the reply filed on various occasions, the assessees maintained a consistent stand that inference drawn is on imaginary basis and not on facts. Based on the admissions of S.Rudramuniyappa on oath that the assessees were not maintaining any cash book ledger other than a stock register which was also confirmed by the accountant, the Assessing Officer started correlating the figures and also collected information from the Commercial Tax Department with regard to the turn over declared by the assessees in

: 7 : respect of various concerns. Papers found during the search relate to the period between 09.01.2000 and 19.08.2000. Loose sheets and the yellow coloured file disclosed that the cash was received not only from various retail shops and bars, but also from various persons called Swamy, Shiva, Balraj etc., to whom assessees sold liquor on wholesale basis. In nutshell, what was found in the sheets and the yellow file was details of unaccounted sale to outside person like Shiva, Balraj, A.V.Ravi etc. and receipt of money from sisters concerns of S.Rudramuniyappa like M/s.Ravi Wine Traders, Vinayak Wines. In sum and substance, the amounts received represented the sales made by the assessees which were not brought on the record. Based on these figures, a total turn over for the period January 2000 to March 2000 was computed at Rs.34,32,140/-. The turn over for the period April 2000 to August 2000 was computed at Rs.48,41,150/-. There was gross discrepancy between the turn over declared to the Sales Tax Department and the Income Tax Department. A turn over for a three months period declared before the Sales Tax Authorities was comparable with the turn over declared by the assessees for the entire year to the Income Tax Department. Therefore, the Assessing Authority took the turn over as mentioned herein above based on the

: 8 : loose sheets and the yellow file and arrived at an average figure at Rs.12,00,000/- per month. Further for the year 1999-2000, turn over was worked out on pro rata basis by taking January 2000 to March 2000 as bench mark figures and estimated a turn over of Rs.1,53,19,064/-. In the returns filed, it was observed that the assessees for the year 2000-01 had declared a turn over of Rs.76,31,265/- for the year 2000 to 2001. Based on this figure, the Assessing Authority came to the conclusion that turn over of Rs.76,87,799/- (Rs.1,53,19,064 - 76,31,265) was with regard to sales outside the books of accounts which was not disclosed by the assessees. The turn over for the period 09.01.2000 to 19.08.2000 as could be gathered from the loose sheets and yellow colour file accounted for Rs.82,73,290/-. The details such as information about withdrawal by the assessees’ personal expenses, bribes paid were also found in the loose sheets. Therefore, the Assessing Authority considered the withdrawals and bribes as profit which worked out to Rs.13,78,640/- against the turn over of Rs.82,73,290/- for the period 09.01.2000 to 19.08.2000. During the block assessment, the assessees were called upon to furnish details with regard to purchase of a Santro Car bearing No.KA-04 MA-9549 registered on 24.05.2000. The

: 9 : assessee claimed that the said car belonged to his brother S.Somashekharappa. Thus the statement of the assessee completely corroborated the department’s claim that transactions recorded in the loose sheets were true but not disclosed to the Department. Thus, on a reasonable estimate, turn over was computed at Rs.76,87,799/- for year 1999-2000 after giving due credit to turn over declared by the assessee in the return of income for the year ending 2001-02 which included period from 01.04.2000 to 07.09.2000. Therefore, Section 158BB(1)(d) was invoked for the said period and the turn over of Rs.48,41,150/- was arrived at. Invoices for sale of goods of Rs.5,40,765/- were found during the search. Therefore, the said amount was deducted from unaccounted turn over of Rs.48,41,150/- and the balance amount of Rs.43,00,385/- was treated as unaccounted turn over and a margin of 7% applied on the turn over for the year 2001-02 and income on the undisclosed turn over was worked out at Rs.3,01,027/-. The capital required for undisclosed turn over was estimated based on stock turn over ratio and the initial capital calculated at 10.6% worked out to Rs.8,14,907/- and the same was brought to tax.

: 10 : 6. A proposition notice was issued to the assessee which was replied on 09.08.2002 and 16.08.2002, wherein the assessee disputed the estimated turn over for the year 2000-01. At the same time, the assessees were not able to establish that the turn over declared by him was correct. Assessing Authority made a fair and reasonable estimation. The documents found during the search also revealed that the assessees were due to receive money from various persons to whom the liquor was sold. Accounts were systematically maintained in the loose sheets with respect to each of the parties to whom supply of liquors was made. Assessee filed his explanations on 09.08.2002 and 16.08.2002 before the Assessing Authority contending that even if the details contained in loose sheet Nos.67 and 68 pertain to debtors, the same could not be considered as out of books, as they were covered and included in the regular books of accounts. Therefore, an opportunity was given to prove this stand. The assessees and the Chartered Accountant who appeared on 16.08.2002 were unable to substantiate their stand and expressed their inability to produce the books of accounts for the year 2000-01 and 2001-02. Thus, though assessee took a categorical stand that the names found in the loose sheets were included in the regular books of accounts,

: 11 : they miserably failed to establish their stand when an opportunity was given. Since no convincing explanation was forthcoming and the assessee as also his Chartered Account failed to substantiate their claim, it was held by the Assessing Authority that the assessees had not discharged their burden to prove that the case made out against them by the appellants was untenable. Therefore, the balance appearing in loose sheets amounting to Rs.21,18,615/- was included in the regular books of accounts and brought to tax for the year 2000- 01. 7. In the result, the Assessing Authority determined the tax in the following manner: “SUMMARY OF UNDISCLOSED INCOME FOR THE BLOCK PERIOD Sl. No. Assessment Year Total Undislosed Income 1 2000-01 3,481,667 2 2001-02 301,027 Total Undisclosed Income 3,782,694 Rounded off to 3,782,690 and held total tax payable at Rs.27,58,035/-. The order of Assessing Authority was challenged before the Commissioner of Income Tax and the same was allowed in part vide order dated 29.12.2005 in

: 12 : appeal No.ITA No.325/CC-Belgaum/CIT(A)-VI/2002-03. The order of Commissioner of Income Tax was challenged before the Income Tax Appellate Tribunal in No.IT(SS)A No.3/PNJ/2006 (ITAT for short). The ITAT by its order dated 13.08.2007 allowed the appeal. Hence, these appeals. 8. Heard Shri Y.V.Raviraj, learned counsel for the appellants and Shri Shashank Hegde for Shri A.Shankar, learned Counsel for the respondents. 9. Learned counsel for the revenue taking this Court through the orders of Assessing Authority, the Commissioner of Income Tax (Appeals) and the ITAT, submits that the Tribunal committed an error in holding that the addition of Rs.5,38,145/- and Rs.3,01,027/- based on the papers seized in the course of search were not corroborated by other evidence. He submits that Tribunal was also in error in holding that addition of Rs.8,14,907/- was based on material other than the seized documents. He further submits that the view of the Tribunal with regard to the addition of Rs.21,28,815/- against receivable is also erroneous. He submits that the search and seizure operation was conducted in the normal course of the official

: 13 : business. Respondent in ITA 81/2008, S.Rudramuniyappa has admitted on oath with regard to correctness of entries while answering the questions posed to him during the search. The details of entries found in the loose sheets were co-related with transaction held with sisters concerns. The purchase of Santro Car was also disclosed in the very loose sheets and the assessee has admitted that the said Car belonged to his brother. This is a sufficient circumstance to hold that the contents of loose sheets were correct. He further submits that though several opportunities were given, the assessees and the Chartered Accountant were unable to substantiate their specific stand that the receivables had found their place in the regular books of accounts. Under these circumstances, the Assessing Authority was correct in coming to the conclusion which have been erroneously set aside by the ITAT. Hence, he prays for allowing these appeals. 10. Per contra, learned counsel appearing for the respondents vehemently contends that the block assessment is based on some loose sheets and the yellow file. He submits that the law is fairly well settled as to how the block assessment is to be conducted in the circumstances akin to the case on hand. He submits that the

: 14 : various judicial pronouncements unequivocally declare that assessment cannot be done based on estimated figures. 11. We have given our anxious considerations to the submissions made by the learned Counsels and perused the records. 12. The grievance of the Revenue in these appeals is that the Tribunal has allowed the appeals on the ground that other than the papers seized by the Department, there was no direct or indirect documents to prove that the assessees indulged in unaccounted sales. Therefore, the financial figures arrived by the revenue are result of a guess work and bereft of any documentary evidence. On the other hand, the assessees’ contention before the Appellate Authority that entries recorded in the seized documents are true, but they relate to the person from whose possession the documents were seized and the presumption that it relates to assessee is rebuttable. However, the Appellate Authority while dealing with this aspect of the matter has come to the conclusion that it is not the case of the assessees that the entries recorded are untrue and they do not relate to the assessees and accordingly held that Section 292C would not come in aid of the Department to draw an inference that all entries relate to sale. The

: 15 : Tribunal has further come to the conclusion that there is nothing in the seized material to show that unaccounted sales were found in the course of search. This finding of the ITAT is factually incorrect. As observed supra, the Assessing Authority has referred to the sale invoices to an extent of Rs.5,40,765/- and deducted the said amount as can be gathered form para 6.17 of the assessment order. 13. The next premise on which the Appellate Authority allowed the appeals is that there was no variation in stock at the time of search and that is a strong evidence to show that there was no unaccounted trading. It is to be noted that the respondent S.Rudramuniyappa in the reply statement has admitted with regard to several aspects including the Santro Car. The order of the Assessing Authority is cogent and well reasoned. Every minute detail is reflecting in the said order. In a case of search of seizure, the revenue may discover assessees’ failure to account several transactions which ought to have been brought to tax. It is only in such circumstances that the provisions of search and seizure are invoked. Assessee took a definite stand that the entries found in the loose sheets were reflecting in the regular books. The assessees were given a fair and reasonable opportunity to substantiate

: 16 : their stand. Both the assessee and the chartered accountant failed to substantiate the same. There is no doubt with regard to the possession of documents in question. It is clearly recorded in the order of assessment that the partner S.Rudramuniyappa and the Chartered Accountant who accompanied him miserably failed to substantiate their claim. Further, the information gathered from the partner in the reply given by him on oath has been used to assess the undisclosed income and the same has been brought to tax. There is no dispute with regard to the proposition of law that tax cannot be levied on rough estimates made on whims and fancies of the Assessing Officer. But in the cases where an assessee suppresses material and conducts business in a camouflaged manner, the authorities are clothed with powers to conduct search and seizure operations and bring the undisclosed income to tax. We hasten to add that while assessing the undisclosed income, the strict discipline that needs to be scrupulously followed is to accord a fair opportunity to the assessee from whose possession the documents are seized. On facts, we are convinced that there is no dispute with regard to the seizure of documents and the assessee as well as the Chartered Accountant were given sufficient opportunity to substantiate their

: 17 : claim but they miserably failed justify their stand. In the circumstances, the orders of Commissioner of Income Tax (Appeals) partly allowing the appeal as well as the order of ITAT are unsustainable in law. Consequently, the appeals filed by the Revenue merits consideration. Hence, we pass the following: ORDER (i) Appeals are allowed. (ii) The substantial questions of law raised in these appeals are answered in favour of the revenue. (iii) Order dated 13.08.2007 in 17 (SS) A No.2/PNJ/2006 and Order dated 13.08.2007 in IT (SS) A No.3/PNJ/2006 are set aside. (iv) Ordered accordingly. No costs. Sd/- JUDGE Sd/- JUDGE Rsh