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Income Tax Appellate Tribunal, “C” BENCH, MUMBAI
Before: SHRI SANJAY ARORA, AM & SHRI AMARJIT SINGH, JM
O R D E R Per Sanjay Arora, A. M.: This is a set of two Appeals by the Assessee directed against the Order by the Commissioner of Income Tax (Appeals)-27/28, Mumbai (‘CIT(A)’ for short), disposing the Assessee’s appeals contesting its assessment u/s.143(3) r/w s. 147 and u/s. 143(3) of the Income Tax Act, 1961 (‘the Act’ hereinafter) for the assessment years (A.Y.) 2006-07 & 2007-08 respectively.
The background facts of the case, which are not disputed, are that the assessee, an individual, in the business of cable TV operator under the proprietary (trade) name M/s. Micro Vision (at Mumbai-400 007), was subject to survey u/s.133A of the Act on 11.2.2008. Certain collection books (numbered 1 to 29), reflecting cash collections 2 & 3108/Mum/2011 (A.Ys. 2006-07 & 2007-08) Prabhat Jhunjhunwala vs. Asst. CIT from customers (subscribers) for the financial years (f.ys.) 2005-06 to 2007-08 were found, which revealed suppression of receipt in the books of account, as under: Year ending 31.3.2008 31.3.2007 31.3.2006 Total collection 46,61,604 Cash receipt as per books 26,91,480 Suppression in receipt 30,00,000 47,03,172 19,70,124 We are presently concerned only with the A.Ys. 2006-07 and 2007-08, the relevant previous year being f.y.s. 2005-06 and 2006-07 respectively. The returns for these years, admitting a total income of Rs.11,43,929/- and Rs.14,14,282/- respectively had already been filed on 31.10.2006 and 31.10.2007 respectively. Vide letter dated 24.3.2008, the assessee declared an additional income of Rs.5 lacs and Rs.30 lacs as ‘income’ from unaccounted receipts for A.Ys. 2007-08 and 2008-09 respectively, filing a revised return for A.Y. 2007-08 on 16.7.2008. The assessee was examined on oath u/s.131 of the Act on 4.4.2008 by the Assessing Officer (A.O.) on various aspects of his business, apart from which he also had a business of providing internet connections (M/s. Microvision Network), besides another of service and maintenance of water purifiers (M/s. Unicom Corporation), stated to be run by his wife (refer statement, placed at PB pgs.5-9). The cable TV business was 15 years old, with a strength of about 2053 primary (main) connections and 1414 secondary (additional) connections. Some connections had to be provided free of cost – which was usually to the office bearers of the housing society (whereat cable TV network facility was provided) or to other influential persons of the area, the total of such (free) connections being between 100-150. The charge per connection is Rs.350/-, though a lesser amount is also charged. Set top boxes (purchased from Hathway) are also provided, and which have nil to nominal (Rs.200 to Rs.300) margin. The assessment for A.Y. 2006-07 was reopened by issue of notice u/s. 148 on 25.8.2008, also issuing notice u/s. 143(2) for A.Y. 2007-08 on the same day. The assessee, for A.Y. 2006-07, while admitting undisclosed trade receipt of Rs.19.70 lacs, claimed to have incurred 3 & 3108/Mum/2011 (A.Ys. 2006-07 & 2007-08) Prabhat Jhunjhunwala vs. Asst. CIT expenditure at Rs.20.07 lacs, so that he had in fact incurred a loss of Rs.36,806, pressing for the dropping of the proceedings u/s. 148 on that basis. Similarly, for A.Y. 2007-08, the claim of expenditure was made for Rs.42,11,860/-, including Rs.18 lacs toward paid for supply of set-top boxes (STBs), and which was accepted by the A.O. as yielding no income. The unaccounted expenditure, for both the years, detailed as under, was on salary, general expenses, stores and spares, conveyance and vehicle expenses, as under: (Amt. in Rs.) Head of expenses A.Y. 2007-08 A.Y. 2006-07 Salary 5,56,190/- 4,52,500/- General expenses 3,44,420/- 3,50,500/- Stores & Spares 11,47,200/- 9,17,000/- Conveyance 2,49,050/- 2,19,500/- Vehicle Expenses 1,15,000/- 67,430/- Total 24,11,860/- 20,06,930/- It is the allowance of this expenditure that is the bone of contention between the assessee and the Revenue, which has disallowed the same. No bill/voucher/receipt or other document stands maintained or produced for these expenses. The basis of the assessee’s claim is a note-book, adduced during assessment proceedings, much later. The note-book, thus, cannot be relied upon, no such being found during survey, nor in fact referred to thereat. The assessee’s claim was, thus, completely un-evidenced. Even otherwise, the nature of the expenditure, claimed to have been incurred out of books, was not such as would admit bifurcation between accounted and unaccounted categories. For example, it is inconceivable that the assessee would employ separate staff for collection of unaccounted (in the regular books of account) and accounted for receipts. The assessee had already claimed his business expenditure per the regular books of account, and allowing the expenditure being now claimed, wholly un- evidenced, would amount to a double deduction. The impugned expenditure was, accordingly, disallowed and, confirmed on the same basis, so that, aggrieved, the assessee is in second appeal.
4 & 3108/Mum/2011 (A.Ys. 2006-07 & 2007-08) Prabhat Jhunjhunwala vs. Asst. CIT 3. Before us, the ld. Authorized Representative (AR) would, adverting to the Question # 18 (of the assessee’s deposition dated 04.4.2008) and answer thereto, contend that the assessee had made reference to a note-book containing details of unaccounted expenditure. It was, therefore, incorrect to say that the note-book being now relied upon is not reliable for the reason that no such note-book had been found during survey. The assessee had also filed a police complaint on 12.9.2007 regarding theft of various documents from his office, and which explained the non-recovery of any such note-books in survey. It is only the net income, i.e., net of expenses, that could be brought to tax. The net profit ratio, which under the circumstances becomes the only reasonable measure to estimate income, for A.Ys. 2006-07 and 2007-08, taking the total income and expenditure for those years into account, works to 11.67% and 11.28% (of the gross receipt) respectively, as against 11.95% and 9.62% for A.Ys. 2005-06 and 2008-09 respectively, since accepted u/s. 143(3) (PB pg.1). The ld. Departmental Representative (DR) would, on the other hand, submit that the assessee’s case is wholly unevidenced and based on surmises.
We have heard the parties, and perused the material on record. 4.1 The unaccounted receipt of business for both the years under reference is admitted. The Revenue has disallowed the expenditure, which the assessee states to have incurred, likewise, i.e., out of books, on the ground of the same being not substantiated, further observing that the same are only regular business expenditure, i.e., of the same nature and falling under the same heads of account where-under the accounted expenditure is booked. As such, the assessee stating of some such, that could not be accounted in the regular books, in justification for not accounting for the same, is a false and incorrect statement. Why, it (the Revenue) argues further, the expenditure is in fact not amenable to be split, i.e., categorized or segregated into accounted and unaccounted. For example, the person engaged for collection of subscriptions would be the same, and his salary could not be bifurcated. Similarly, for 5 & 3108/Mum/2011 (A.Ys. 2006-07 & 2007-08) Prabhat Jhunjhunwala vs. Asst. CIT the expenditure on general expenses, conveyance, vehicle expenses. No evidence qua expenditure on store and spares has also been adduced. This sums up the Revenue’s case in disallowing the entire expenditure. The assessee, on the other hand, claims on the basis of the note-book (for the period December, 2007 to January, 2008) to be incurring expenditure out of books, i.e., vide answer to Q. No. 18, further stating of the same being produced ‘herewith’ for verification. In fact, it justifies keeping certain collection outside books only to meet such expenditure, which, as would be apparent, approximates the accounted receipts, and accordingly pleads its case with reference to the estimation of income on global basis, taking into account the results for the immediately preceding as well as the succeeding year, and converting thereby the disallowance/s of expenditure u/s. 37(1), on its’ mandate being grossly not met, into one of (broad) estimation of income. While such an attempt, i.e., as by the assessee should not normally succeed, we consider the same as liable to in the present case. This is as there is reference to a note book containing such expenditure in answer to Q. No. 18, which we reproduce as under: ‘Q. No. 18 While working out the undisclosed income out of the unaccounted receipts, you have deducted certain expenditure stated to be unaccounted. What type of evidence is available for the claim of such expenditure?
Ans. The books impounded only contain unaccounted receipts. There is one more book for the period December 2007 to January 2008 which is produced herewith for verification. This book also contains details of expenditure incurred from time to time. The nature of expenses are such that these expenses could not be accounted in regular books of accounts. Therefore we had to keep certain collection outside books of accounts to meet such expenses. This book will be produced for further verification as and when called for.’ This statement by the assessee, and particularly the reference to a note-book therein, as well as its’ production (for verification), has not been impugned or 6 & 3108/Mum/2011 (A.Ys. 2006-07 & 2007-08) Prabhat Jhunjhunwala vs. Asst. CIT contradicted by the Revenue in any manner. True, the nature of the unaccounted expenditure being the same, i.e., as of that accounted for, there is no justification for keeping the same outside books, and which in turn is stated to be the reason for suppression of turnover, leading the Revenue to infer that no such expenditure had in fact been incurred. The existence of the note-book is not questioned, nor is, consequentialy, its realibility. Why could not, we wonder, the Revenue question the assessee on the same, subjecting it to further examination – being produced for verification, impounding the same even at that stage. Why, for instance, was it not found during survey in February, 2008, being ostensibly maintained in the regular course of business and, further, not subject to theft, the police complaints filed being in fact in 2006 & 2009 (PB pg. 3). Further on, the assessee clearly states of taking into account the said expenditure while surrendering income (at Rs.5 lacs for A.Y. 2007- 08 and Rs.30 lacs for A.Y. 2008-09), tacitly admitting to the unaccounted expenditure being not to the same extent as the unaccounted receipt, as it seeks to project, even justifying the existence of the latter on the basis of the former. That the assessee’s books of account for each of these years, are, thus, neither correct nor complete and, consequently, not reliable for the computation of its business is, thus, admitted and proved.
4.2 We, therefore, consider it to be a proper and fit case for estimation of the assessee’s income, based on and taking into account all the relevant material. The assessee has toward the same tabulated its results for the last few years (at PB pg.1), as under: (Amount in Rs.) Assessment Year 2005-06 2006-07 2007-08 2008-09 2009-10 Gross Receipt(Note: a) 6254121 7986730 9825242 7750086 5046707 Expenses (Note: b) 5506683 7054316 8716499 7004378 4813915 Net Profit as worked 747438 932414 1108743 745708 232792 out Net Profit Ratio 11.95% 11.67% 11.28% 9.62% 4.61% 7 & 3108/Mum/2011 (A.Ys. 2006-07 & 2007-08) Prabhat Jhunjhunwala vs. Asst. CIT Status Assessed Now in Now in Assessed Before CIT(A) u/s.143(3) Appeal Appeal u/s.143(3) for some small disallowance Note: a Gross Receipt Includes receipt as per Profit & Loss account as increased by additional receipts as per note book found in Asstt. Years 2006-07 and 2008-09 Note :b Expenses includes Expenses as per Profit & Loss Account Plus expenses which are sought to be allowed now and not allowed before at Assessment & CIT(A) Level in Asstt. Years 2006-07 to 2008-09.’ It was, during hearing, on the Bench observing a decline in the business since A.Y. 2007-08, explained by the ld. AR, that with the advent of the organized sector in the cable TV sector, the business witnessed a consistent decline and, in fact, closed down subsequently. Our first observation in the matter is that the figures reported by the assessee do not apparently match with that stated in the assessment order/s (refer para 2), and would therefore require being verified, even as we may proceed in our exercise of estimation of profit on the footing that the same represent the profits of the assessee’s proprietary business (M/s. Micro Vision), i.e., taking into account all the receipts – accounted and unaccounted, as well as the entire expenditure. In other words, artificial disallowance, such as u/s. 40(a)(ia), which we observe for A.Y. 2007- 08 (at Rs.1,03,242/-/PB pgs.29, 30), which do not impact the operating results, have been segregated and would be given effect to separately, i.e., do not outlet the estimation process.
4.3 To begin with, we have examined and consider the assessee’s disclosure for A.Y. 2007-08 as inadequate. He claims an expenditure of Rs.42.12 lacs on an undisclosed turnover of Rs.47.03 lacs, offering thus Rs.4.91 lacs (and not Rs.5 lacs) as income. However, the expenditure includes Rs.18 lacs on STBs. Even assuming the 8 & 3108/Mum/2011 (A.Ys. 2006-07 & 2007-08) Prabhat Jhunjhunwala vs. Asst. CIT same to have been supplied without any margin, yielding no income, it would imply the STB sale at Rs.18 lacs, as in fact assumed by the A.O. That leaves a balance cost of Rs.24.12 lacs on an admitted turnover of Rs.47.03 lacs, implying an additional profit of Rs.22.91 lacs (Rs.47.03 lacs – Rs.24.12 lacs), while the assessee ‘discloses’ only Rs.5 lacs. Considering the said turnover to include STB sale at Rs.18 lacs is presumptuous on the part of the A.O., whose case is essentially of disallowance of expenditure. No disclosure has been made by the assessee for A.Y. 2006-07. We may next proceed to make our estimation. Firstly, the assessee’s total turnover would require being bifurcated into that from sale of STBs and other, i.e., by way of subscription to the cable TV. With regard to the turnover on the sale of STBs, stated as purchased for Rs.18 lacs (for A.Y. 2007-08), the assessee has reported on nominal margin of Rs.200 to Rs.300 on an average (in answer to Q. No. 13 of its statement dated 04.4.2008/PB pgs.5-9). The Revenue has not enquired further in the matter, so that the same is to be taken as accepted as such, so that the average margin works to Rs.250 per box. The assessee’s books of accounts (including note books and other documents) would indicate the purchase or the sale price and, therefore, yield the undisclosed profit, which may be worked either on the basis of the percentage or at Rs.250 per box. In this regard, we do note that the assessee has also stated vide his said answer that there is no margin ‘now’. This is firstly inexplicable in-as-much as the assessee performing an economic function, as also assuming business risk, should definitely stand to gain a margin, even if nominal. Secondly, the statement of ‘no margin’ is qualified by the word ‘now’, and which would only indicate a reference to recent months, while here the year under reference is the financial year 2006-07. Coming, next, to the turnover by way of subscription, the assessee’s operating results would first be required to be reckoned after elimination of the STB turnover, against which no profit has been admittedly disclosed by the assessee. We further observe that the expenses claimed by the assessee are in the nature of semi-variable expenditure, so that they would vary with the increase in the volume, though not in 9 & 3108/Mum/2011 (A.Ys. 2006-07 & 2007-08) Prabhat Jhunjhunwala vs. Asst. CIT linear proportion thereto. As such, to contend, as does the assessee, that its’ profit be estimated at 11.95%, i.e., as reported for A.Y. 2005-06, or justifying its results with reference thereto, is not acceptable in-as-much as the expenditure would not stand to increase in the same proportion (of sales). The turnover for A.Y. 2005-06, assuming the entire of it as of other than STBs, to our mind, represents a normative level (attained after over a decade of being in business), based on which the income for the subsequent years could be estimated. The expenditure can be said to have stabilized at 88% of the turnover. The excess turnover would therefore entail expenditure not to the extent of 88% (100-12) thereof. We estimate the same at 2/3 thereof, i.e., at say 58.66% or (say) 60%. As such, the additional turnover would entail a margin of 40%. The additional turnover (over that for A.Y. 2005-06), i.e., Rs.17.33 lacs (Rs.79.87 lacs – Rs.62.54 lacs) would yield a profit of 40%,while the balance turnover of Rs.62.54 lacs would a normative rate of 12%, i.e., at a total profit of Rs.14.44 lacs or at a net profit of a little over 18%. To this would stand to be added, of-course, the profit on the turnover on STBs, if any, as indicated above. Similarly for A.Y. 2007-08, the second year. We decide accordingly, and the assessee gets part relief.
4.4 Before parting though, we may clarify a few aspects. We have, in arriving at our assessment of the additional expenditure at 2/3 of the normative expenditure, also taken into account the fact that the additional turnover would include both primary (main) as well as secondary (additional) connections (subscriptions), and that the latter fetch a lower price. This in fact is only on account of the fact that the additional connects do not entail additional expenditure to the same extent, endorsing our estimation. Further, the matter, as evident, is primarily factual, so that reliance on case law, tabulated at PB pgs. 38-47, none of which was referred to during hearing, would be of little moment. We may though add that we have rather accepted the assessee’s case in principle, i.e., for estimation of profit of his business, and decided his appeals on that basis, issuing definite findings of fact.