SMT. MEETA GUTGUTIA,NEW DELHI vs. DCIT, NEW DELHI

Assessee by None Department by Sh. Dev Jyoti Das, CIT-DR Date of Hearing 17/02/2016 Date of Pronouncement 13/05/2016 ORDER PER BENCH: These are cross appeals arising out of the orders of the Ld. CIT(A), the details of which are as under:

2 I.T.A.No. 2409-2413/Del/2012 Asstt. Year Appeal by Appeal by Dept. Date of order of Assessee CIT(A) 2000-01 ITA No. 2433 12/03/2012 2001-02 ITA No. 2410 ITA No. 2434 12/03/2012 2002-03 ITA No. 2411 ITA No. 2435 13/03/2012 2003-04 ITA No. 2412 ITA No. 2436 14/03/2012 2004-05 ITA No. 2413 ITA No. 2437 14/03/2012

3. Aggrieved by the order of the ld. CIT(A), the assessee as well as the revenue has preferred appeals before us. 3.1 At the outset we observe that the assessee, in its appeal for all the assessment years under consideration, has raised the jurisdictional issue, in respect of validity of assessment u/s 153A of the Act, as no incriminating material pertaining to the assessment years 2000-01 to 2003-04 were found seized during the course of the search. It is the case of the assessee that the assessment proceedings for all these assessment years listed

4 I.T.A.No. 2409-2413/Del/2012 above are illegal and these assessment orders should be quashed. 3.2. At this juncture we consider it appropriate to take up ground no. 1 of assessee’s appeal as it raises the jurisdictional issue of the validity of order passed u/s 153A of the Act. 3.3. The legal issue in assessee’s appeals, is that the addition on these years are not sustainable, because no incriminating material relating to such additions were found during the course of search and further the assessment for these years, were not pending as on the date of search and hence they have not abated.

assets are requisitioned under section 132A after the 31st day of May, 2003, the Assessing Officer shall-- (a) issue notice to such person requiring him to furnish within such period, as may be specified in the notice, the return of income in respect of each assessment year falling within six assessment years referred to in clause (b), in the prescribed form and verified in the prescribed manner and setting forth such other particulars as may be prescribed and the provisions of this Act shall, so far as may be, apply accordingly as if such return were a return required to be furnished under section 139; (b) assess or reassess the total income of six assessment years immediately preceding the assessment year relevant to the previous year in which such search is conducted or requisition is made: Provided that the Assessing Officer shall assess or reassess the total income in respect of each assessment year falling within such six assessment years: Provided further that assessment or reassessment, if any, relating to any assessment year falling within the period of six assessment years referred to in this sub- section pending on the date of initiation of the search under section 132 or making of requisition under section 132A, as the case may be, shall abate: ...........”

6 I.T.A.No. 2409-2413/Del/2012 4.2. A careful perusal of the above provision brings to light that where a search is initiated u/s 132 of the Act etc., the A.O shall issue a notice requiring the person searched to furnish his return of income in respect of assessments for six years pending, immediately preceding the assessment year relevant to the previous year in which the search or requisition was made. This proposition is squarely covered by the decision of the All Cargo Global Logistics Ltd. vs. DCIT reported in (2012) 137 ITD 287 (SB) (Mum.). 4.3 The Hon’ble Jurisdictional High Court in the case of M/s. Kabul Chawla Vs ACIT reported in 380 ITR 575 has analyzed the section and laid down the following propositions of law: “Summary of the legal position 37. On a conspectus of Section 153A(l) of the Act, read with the provisos thereto, and in the light of the law explained in the aforementioned decisions, the legal position that emerges is as under: i. Once a search takes place under Section 132 of the Act, notice under Section 153 A (1) will have to be mandatorily issued to the person searched requiring him to file returns for six A Y s immediately preceding the previous year relevant to the AY in which the search takes place. ii. Assessments and reassessments pending on the date of the search shall abate. The total income for such A Y s will have to be computed by the AOs as a fresh exercise. iii. The AO will exercise normal assessment powers in respect of the six years previous to the relevant A Y in which the search takes place. The AO has the power to assess and reassess the 'total income' of the aforementioned six years in 7 I.T.A.No. 2409-2413/Del/2012 separate assessment orders for each of the six years. In other words there will be only one assessment order in respect of each of the six AYs "in. which both the disclosed and the undisclosed income would be brought to tax". iv. Although Section 153 A does not say that additions should be strictly made on the basis of evidence found in the course of the search, or other post-search material or information available with the AO which can be related to the evidence found, it does not mean that the assessment "can. be arbitrary or made without any relevance or nexus with the seized material. Obviously an assessment has to be made under this Section only on the basis of seized material." v. In absence of any incriminating material, the completed assessment can be reiterated and the abated assessment or- reassessment can be made. The word 'assess' in Section 153 A is relatable to abated proceedings {i.e. those pending on the date of search) and the word 'reassess' to completed assessment proceedings. vi. Insofar as pending assessments are concerned, the jurisdiction to make the original assessment and the assessment under Section 153A merges into one. Only one assessment shall be made separately for each AY on the basis of the findings of the search and any other material existing or brought on the record of the AO. uii. Completed assessments can be interfered with by the AO while making the assessment under Section 153 A only on the basis of some incriminating material unearthed during the course of search or requisition of documents or undisclosed income or property discovered in the course of search which were not produced or not already disclosed or made known in the course of original assessment. "

8 I.T.A.No. 2409-2413/Del/2012 4.4 Further in the case of DCIT Vs Lata Jain vide order dated 29.04.2016, the Hon'ble Jurisdictional High Court held that Section 153A assessment cannot be made for those assessment yeas in which no incriminating material is recovered, even though incriminating material may have been recovered for the other assessment year(s) in the block of 6 years. 4.5 Applying the propositions laid down in these case laws to the facts of this case, we have to necessarily hold that the assessments made u/s 153A for Assessment Years 2000-01 to 2003-04 are bad in law as the undisputed fact is that no incriminating material has been found or seized, which are relatable to these years, during the course of search. 4.6 In the result, we quash all the assessment orders pertaining to Assessment Years 2000-01 to 2003-04 as bad in law.

9 I.T.A.No. 2409-2413/Del/2012

raised by the Revenue for the Assessment Year 2004-05 are as under: 6.1 Ground No.1:

1. That the Commissioner of Income Tax (Appeals) erred in law and on facts of the case in deleting the addition of Rs.13,79,801/- made by the Assessing Officer on account of expenditure not related to business.”

6.2 The case of the assessee is that, in the profit and loss account, the assessee has claimed a sum of Rs.60,066/- on account of payment of franchisee commission. It was submitted that it is a usual practice that the landlords makes franchisee agreements instead of rent agreement, for giving space on rent, in order to safeguard the interest of Land lord in the property. During the year under consideration the assessee had paid commission of Rs. 60,066. The Ld.AO treated this expenditure as not related to the business of the assessee and added the same to the income. 6.3 Aggrieved by the order of the Ld. AO, the assessee preferred an appeal before the Ld. CIT (A). The Ld. CIT(A), deleted the addition made by the AO. The Ld.CIT(A) observed that the AO has also not rejected the books of account of the assessee and has based the disallowance on the basis of the figures shown in the books only. He admitted additional evidence and called for remand report from the Assessing Officer and found that the claim is genuine and supported by evidence. Aggrieved by the 10 I.T.A.No. 2409-2413/Del/2012 order of the Ld.CIT(A), the revenue has preferred an appeal before us now. 6.4 From the findings recorded by the Ld.CIT(A), it is found that during the appellate proceedings the assessee had filed certain additional evidence relating to the franchisee agreements entered into between her and various parties. These additional evidences were sent to the Ld. AO for verification, and report was called for in respect of the same. The Ld.AO in the report observed that the payment of commission paid by the assessee does not tally with the terms and condition mentioned in the agreement. He therefore justified the addition made by her as correct. 6.5 These additional evidence are in the form of, copy of confirmation of franchisee commission, rent received from various parties etc. The genuineness of these agreements are not doubted by the Ld. AO in the remand report. It is an admitted position that the assessee has made the payment of commission by way of check on the basis of which TDS has been deducted. 6.6 The observations made by the Ld.CIT(A) that the AO has not rejected the books of accounts of the assessee and that disallowance is based on the figures as shown in the books of accounts and there has been no adverse observation made by the Ld.AO on the documentary evidence filed by the assessee is not controverted by Ld. A.O. It is further observed that the assessee has paid the commission to the payee after deducting

11 I.T.A.No. 2409-2413/Del/2012 the TDS. We therefore do not find any reason to interfere with the findings of the Ld.CIT(A). We are therefore inclined to uphold the findings of the Ld.CIT(A). Accordingly ground No. 1 raised by the revenue stands dismissed. 7. Ground No. 2: “2. That the Commissioner of Income Tax (Appeals) erred in law and on facts of the case in deleting the addition of Rs.88,00,000/- made by the Assessing Officer on account of undisclosed Franchisee Commission.”

7.1 It is observed from the order of the Ld. CIT (A) that the assessee had submitted additional evidence in the form of agreements which were sent to the Ld. AO for his report. 7.2 The Ld. CIT (A) observed that Ld. AO has raised general objection against the admission of additional evidences and he has not made any adverse comments regarding the genuineness of these documents filed as additional evidence. The Ld. CIT (A) admitted these documents in the interest of Justice and for deciding the issue in proper prospective. After going through the documents and the submissions made by the assessee the Ld. CIT (A) deleted the addition of Rs. 88 Lacs on account of undisclosed franchisee commission. 6.3 Aggrieved by the order of the Ld.CIT (A) the revenue has preferred an appeal before us. The act of admission of additional evidence by the Ld. CIT(A) has not been challenged by the Revenue.

12 I.T.A.No. 2409-2413/Del/2012 6.4 The Assessing Officer has made addition on the ground that the assessee has not declared income on account of commission from 52 franchises operated and controlled by her and 4 wedding franchises during the Assessment Year 2004-05. The assessee’s contention is that she never admitted that she is having 52 controlled and operated franchises outlets during the Assessment Year 2004-05. 6.5 It is a case of the assessee that no material was fond during the course of search, which supports the case of the Assessing Officer and which is contrary to the submissions on affidavit by the assessee. The assessee has submitted the name and addresses of all the parties that are Franchise outlets, wedding franchises and retail outlets of hers, year-wise and Assessing Officer verified the same and has not made any adverse comments. 6.6 Ld. CIT(A) after considering all the evidence on record, held as under: “6.3 On the basis of appreciation of the views of the AO in the assessment order and the remand report, the contention of the appellant and the verification of the original franchisee agreements by the AO and the undersigned, the following facts emerge: (a) That during October -December 2007, the AO asked the appellant to give details of various controlled outlets/franchisees outlets of the appellant's business without asking for any year- wise bifurcation of the same. The same question.

13 I.T.A.No. 2409-2413/Del/2012 'Please give the details which complete names and address of 46 outlets, 65 strategic alliance and 156 vendor partners outside India as mentioned in your group profile' was included by the AO in all questionnaires issued for various assessment years from 7.001-02 to 2006-2007 on basis of information collected from the appellant's website.

(b) That the appellant gave a general reply based on the factual position as on the date of submission of details without giving any bifurcation year-wise in response to the above question in replies submitted for all the assessment years starting from 2001-02 to 2006-2007. Since the appellant had during the period October- December 2007, 52 owned controlled/franchisee outlets and 4 weddings franchisees, the information was supplied by her in respective replies supplied for all the assessment years involved.

(c) The AO has treated this information as applicable to all the assessment years from 2001-02 to 2006-07 on the basis of the replies filed by the appellant. The appellant on the other hand has disputed this finding through an affidavit dated 18/03/2010 which was forwarded to the AO for examination In his remand report dated 03103/2011, the contents of the affidavit have not been rejected by the AO on the basis of any evidence to the contrary.

(d) Since the appellant had made a disclosure of Rs.110 Lakh during the sear proceedings on account of change in method of accounting of franchise fees and undisclosed franchise fee for the F.Y. during which the search was conducted, the AO presumed that the appellant must have such undisclosed income in the earlier years also. Since he presumed that the number of outlets remained constant in all the assessment years from 2001-02 to 2006-07, he estimated the undisclosed income at a certain percentage of the amount of disclosure made by the appellant during her statement u/s 132(4). He estimated such undisclosed income for various assessment years as under: a. A.Y.2001-02 @50% of disclosed amount Rs.55,00,000/-

14 I.T.A.No. 2409-2413/Del/2012 b. A.Y.2002-03 @60% of disclosed amount RS.66,00,000/- c. A.Y.2003-04 @70% of disclosed amount RS.77,00,000/- d. A.Y.2004-05 @80% of disclosed amount Rs.88,00,000/- e. A.Y.2005-06 @90% of disclosed amount Rs.99,00,000/- f. A.Y.2006-07 @100% of disclosed amount Rs.1,10,00,000/- (e) Although the appellant had made a disclosure during the F.Y. relevant to A.Y. 2006-07, no such disclosure was made for earlier years, nor was there, any evidence unearthed during 'the search by the Department that such franchise income was not disclosed by the appellant during these years.

(f) Verification of record produced by the appellant showed that there were different number of owned/controlled outlets and franchisee outlets of the appellant during various assessment years Involved as mentioned by the appellant in her affidavit dated 18/03/2010. From the details which are part of the affidavit, it is seen that for the A Y 2004-05, there were only four owned outlets and there were twenty-one franchisee outlets. No evidence to dispute the affirmations in the affidavit have been brought on record by the AO in the remand proceedings 6.3.1 In view of the above factual position, it is seen that the estimated addition made by the AO to the tune of RS.88,00,000/- is based' on misconception of the factual position with regard to the number of outlets in existence during the relevant previous year as well as on the suspicion that the appellant must have earned undisclosed income during the year under appeal also since she had made a disclosure during the period relevant to A.Y. 2006-07. It is pertinent to note here that in the appellant's case a search & seizure operation was conducted but no incriminating material relating to the A.Y. 2004-05 has been brought on record which could support such presumption as made by the AO in her case. The presumption of the AO is based on mere suspicion and not on any evidence whatsoever. It has been held by the Hon. Supreme Court in the case of Dhirajlal Giridharilal v CIT 26 ITR 736(SC) that mere existence of reason for suspicion would not tantamount to evidence. Since the AO has made the impugned addition on mere suspicion and without any 15 I.T.A.No. 2409-2413/Del/2012 evidence, the same cannot be sustained and the same is hereby deleted. (Deleted addition of Rs.88,00,000/-).”

6.7 We find no infirmity in the factual findings of Ld. CIT(A). We uphold the same. In the result, we dismiss this gsorund of appeal.

7.1 The AO observed that during the period under consideration, the appellant has claimed to have received fresh deposits amounting to Rs.17,32,511/- as per balance sheet. The appellant was asked to furnish copies of account duly confirmed indicating complete address, PAN and Ward/Circle in respect of these deposits. The appellant vide letter dated 12.12.2007 furnished the confirmations. From perusal of these confirmations it was' clear that these deposits have been received by the appellant from various franchisees to whom outlets have been allotted during the year. The AO was of the view that these deposits have been received by the appellant in pursuance of para 3.2.1 of "Franchisee Proposal-Ferns 'N' Petals" which deals with franchisee fee etc. which are non- refundable. As such, he concluded that these deposits constitute

16 I.T.A.No. 2409-2413/Del/2012 the income of the appellant for the year under consideration. Accordingly a sum of Rs.17,32,511/- was added to the income of the appellant on account of non-refundable security deposits received by her during the year. 7.2 Ld. CIT(A) held as follows: “7.3 I have carefully considered the facts of the case and ht arguments of the appellant as well as the remand report of the Assessing Officer and the rejoinder of the appellant. The appellant has produced copy of the relevant Franchisee Agreement as additional evidence. Although the AO has raised general objection that since the appellant was allowed two' opportunities vide letters dated 03/10107 and 06/12/2007 for furnishing details and evidences during the assessment proceedings, she should not be allowed to submit additional evidence, no adverse comments on the genuineness of the additional evidence produced have been made. I, therefore, in the interest of justice. allow the additional evidence u/s 46A and proceed to decided the issue. “7.3.1 In his remand report, it appears that the AO has copied wrong figures of refundable and non-refundable security deposits received by the appellant during the year. However, the AO has given a clear finding that the appellant's submission as to non-taxability of refundable deposits is acceptable. At the same time, he has emphasized that the non-refundable security deposit being one time non- refundable revenue receipt is to be treated as the appellant's income. This issue has also been decided by the undersigned on the above principle while deciding the appeals in the appellant's own case for A.Y.2003-04. Therefore, it is held that out of the total addition of Rs.17,32,511/- the addition of Rs.3,28,336/- (Rs. 4,48,168/- received as non refundable security deposit minus Rs.1, 19,832/- credited as income on deferred basis) is justified and correct. The appellant gets a partial relief of Rs.14,04,175/- only.”

17 I.T.A.No. 2409-2413/Del/2012 7.3 We find no infirmity in these findings of Ld. CIT(A) when the Assessing Officer himself has given a clear finding in the remand report that the submissions of assessee as to non taxability of refundable deposits is acceptable, the question of challenging the order of Ld. CIT(A) on this issue does not arise. In the result, this ground is dismissed.

18 I.T.A.No. 2409-2413/Del/2012

“5. That the Commissioner of Income Tax (Appeals) erred in law and on facts of the case by allowing relief of RS.12,07,705/- out of total addition of Rs.14,49,246/- made by the Assessing Officer on account of suppression of closing stock.”

9.1 During the course of search conducted in the assessee's case on 23.12.2005, Annexure A-5 (bunch of loose papers) was seized. As per page 14 to 39 of this annexure, closing/opening stock of the assessee in respect of premises at Vasant Vihar as on 31.03.2004 and 01.04.2004 has been worked out at Rs.3,41,491/- as against total closing stock of Rs. 99,950/- declared by the assessee. Vide questionnaire dated 03.10.2007, the assessee was asked to explain the discrepancies in closing stock as pointed out above. In her reply dated 1311.2007, the assessee has contended that the value of closing stock of Rs.3,41,491/- represents the closing stock of all three outlets owned by the assessee which ore together known as Vasant Vihar The assessee further contends that stock of Rs 99,950/- as on 31 03 2004 declared by the assessee is as per the cost or market value whichever is less, therefore, there is bound to be difference between the cost and tag price valuation of stock.

It is worth mentioning here that both the valuations of closing stock i.e. as per return of income for the year under consideration and as evident from the seized papers referred to above have been done by the assessee herself. If the argument

19 I.T.A.No. 2409-2413/Del/2012 of the assessee that there is bound to be difference in the cost and tag price of valuation of stock then the GP of the assessee is bound to go up to 200% as against the GP of hardly 20% to 25% shown by the assessee as the valuation of stock as per the seized documents is more than three times the value of stock declared by the assessee, a situation the assessee herself would not like. Accordingly, there is no force in the various arguments put forth by the assessee in support of her claim and the same are accordingly, rejected. It is to be noted that this valuation of stock is only in respect of one of the six outlets; she is running as per the list of outlets submitted by her during the course of assessment proceedings. Tote! undisclosed closings stock for all the six outlets controlled by the assessee is worked out at Rs. 14,49,246/- taking undisclosed closing stock for Vasant Vihar branch at Rs.2,41,541/- (Rs. 3,41,491- Rs. 99,950). This would mean an addition of Rs. 14, 49, 246/- to the income of the assessee on account of suppression of closing stock as discussed above.

9.2 Ld. CIT(A) held as under: “9.3 I have carefully considered the facts as noted by the AO and the arguments of the appellant. The appellant has not been able to successfully explain the difference of stock as on 110412004 at the Vasant Vihar outlet as reflected in the seized documents and the stock as declared by the appellant. As such the difference is taxable in the hands of the appellant. However, I' do not agree with the AO's estimation of similar difference of stock in other outlets of the 20 I.T.A.No. 2409-2413/Del/2012 appellant without any basis. Further, it has been established that the appellant had only three outlets during the year whereas the AO has estimated such difference of stock in respect of six outlets, which is factually incorrect. Such estimated addition without any specific evidence found during the search against the appellant cannot be sustained. Thus, only the addition to .the tune of the difference found in the seized documents and the declared stock for Vasant Vihar branch i.e. Rs.2,41,541/- is sustained. The appellant gets relief on account of estimated addition to the tune of Rs.12,07.705.

9.3 The Ld. D.R. could not controvert the factual findings of the Assessing Officer. Hence, we uphold the same and dismiss this ground.

The order is pronounced in the open court on 13th May, 2016.