HOTEL VYSALI AND MAYOORI BAR,THODUPUZHA vs. DCIT CENTRAL CIRCLE-2, KOCHI

This appeal is against the order of CIT(A), Kochi – 3, dated 03.02.2022, for the Assessment Year 2014-15. The assessee raised the following grounds:

The assessee is a Partnership firm. For the Assessment Year 2014-15, the assessee filed the return of income declaring an income of Rs.10,49,522/- on 28.11.2014. There was a search under section 132 of the Income Tax Act, 1961 (hereinafter called ‘the Act’) conducted on 18.02.2015 in the case of Shri. Jayakrishnan who is one of the partners of the assessee. During the course of search, a document with the heading “DEMO VYS” with details of assets, capital and liabilities was seized. The AO noticed that as per this seized material the net profit of the assessee for the year under consideration was seen to be Rs.1,14,72,883 and based on the same, the AO issued a notice under section 148 of the Act on 01.11.2017. In response to the notice, assessee filed the return on 14.06.2018 declaring the same income as in the original return. The assessee submitted before the AO that the documents seized does not belong to the assessee and the details contained therein also do not pertain to the assessee. The assessee also submitted that for the year ended 31.03.2014, the assessee’s purchase of liquor was Rs.2,67,81,157/- which was supported with Form 26AS and the assessee, after claiming the relevant expenses, had declared the actual profit in the return of income filed. The profit as seen in the material seized cannot be treated as profit of the assessee since no bar hotel can achieve such a Page 3 of 6 huge profit. The AO did not accept the contentions of the assessee. The AO found some of the entries contained in the seized document matching with the actual financial statement of the assessee and therefore concluded that the assessee has declared a net profit of Rs.10,49,522/- as against the profit in the seized material to be of Rs.1,14,72,883/-. The AO accordingly considered the same to be the income of the assessee while concluding assessment under section 147 of the Act.

The assessee preferred further appeal before the CIT(A). The CIT(A) did not accept the submission of the assessee stating that the seized document does not belong to the assessee and held that the AO has established by matching the entries and that the assessee has not placed any material to show that the seized evidence does not belong to the assessee. Therefore, the CIT(A) upheld the addition made by the AO. Aggrieved, the assessee is in appeal before the Tribunal. 4. The learned AR submitted that the order of the lower authorities is against law and principles of natural justice since the assessment is completed based on net profit appearing in a document which was seized at the time of search in the premises of Shri. A. Jayakrishnan which does not have any nexus with the actual financial statement of the assessee. The learned AR submitted that the AO has taken some of the figures contained in the seized materials based on which he has arrived at a figure as the profit of the assessee which is not correct since no bar hotel in Kerala would make such huge profits in any financial year. The learned AR further submitted that the assessee has Page 4 of 6 been showing profits in the same range as in the year under consideration for several years now and therefore it is in line with what is the correct income earned by the assessee from the business. The learned AR submitted that the addition is made based on a seized material from one of the partners of the firm and no opportunity was given to the other partners to contradict or make their submissions with regard to addition. Accordingly, the learned AR prayed that the order of the AO as confirmed by the CIT(A) is against the principles of natural justice. 5. Learned DR relied on the orders of the lower authorities. 6. We heard the rival submissions and perused the material on record. The AO had concluded the net profit of the assessee to be at Rs.1,14,72,883/- based on a material seized CHN/S&S/14- 15/RKH/A4 on 18.02.2015. The AO had done a comparison of certain line items mentioned in the impounded material to be same as per the audited accounts of the assessee and therefore stated that the impounded material is extremely credible and accordingly profit shown in the impounded material is actual profit of the assessee. We notice that other than matching certain line items, the lower authorities have not brought anything on record to establish the amount mentioned in the seized document is the actual profit of the assessee. We see merit in the argument that the total revenue of the assessee as substantiated by Form 26AS is Rs.2,67,81,157 and on that earning such huge profit as assessed by the AO is not possible and that this submission is not considered by the AO/CIT(A). We notice that the Page 5 of 6 lower authorities did not call for any further details with regard to actual profits earned by the assessee which is declared as per return of income filed and the addition is made merely based on certain line items in the impounded material being same as what is reflected in the audited financials of the assessee. At best only estimation of income based on past history of assessee’s case or comparable business can be made in the circumstances of the case. We also notice that before the CIT(A), the assessee had submitted that proper opportunity was not given by the AO to make submissions. However, the CIT(A) had rejected the claim stating that the written submissions of the assessee were considered by the AO. We further notice that the claim of assessee with regard to the nexus between the impounded material and the business of the assessee was not considered by the lower authorities. We also see merit in the submissions of the learned AR that the other partners who are involved in the business of the assessee were not given opportunity to make their submissions and that the addition is based on what is found in the premises of one of the partners. In view of these discussions, in our considered view the additions are made without bringing any concrete material on record and without examining any materials to establish that the assessee has earned such huge profits more so when the assessee has been consistently showing the profits in the same range as declared in the return of income. Instead the additions are made by comparing certain line items between the seized document and the audited financials which in our view is not correct. We, therefore, set aside the order of the CIT(A) and allow the appeal by deleting the additions made.

In the result, appeal is allowed in favour of the assessee. Pronounced in the open court on the date mentioned on the caption page.