ACIT, CC-3, LUDHIANA, OPP. BVM SCHOOL, KITCHLU NAGAR, LUDHIANA vs. GURDIP CYCLE INDUSTRIES, LINK ROAD

Appeal in these cases have been filed by the Assessee and Revenue against the order dated 25.09.2023 respectively of the ld. Commissioner of Income Tax (Appeals)-5, Ludhiana [herein referred to as ‘CIT(A)’.

Since the issues involved in both the appeals are identical, they have been heard together and are being disposed of by this common and consolidated order. First, we shall deal with the appeal of the Assessee it ITA No. 705/Chd./2023. (Assessee’s appeal) 3. The Assessee in its appeal has taken following Revised Grounds:

Brief facts of the case are that there was a search and seizure operation u/s 132 of the Income Tax Act, 1961 (in short 'the Act') at the business and residential premises of the Assessee on 21.10.2021. During search, there was no seizure of cash, jewellery or any evidence of investment in the shape of immovable or movable asset was found. The stock was tallied and there was no shortage or excess stock found during the search operation. However, during the course of search, statement of one Shri Satya Parkash Tiwari who has been working and looking after the sales and billing of the firm was recorded on the basis of Whatapp Chat extracted from the mobile phone. Mr. Tiwari in his statement on oath stated on the basis of one Whatapp Chat found in the phone stated that there was suppression of sales to the tune of 25% to 30% in the case of one M/s Dhanawat Enterprises. The statement of Shri Satya Parkash Tiwari was later confronted to Mr. Amarjit Singh, who is partner of M/s Ashoka Industrial Fastners, which is a sister concern of the Assessee firm and he accepted that the statement given by Mr. Satya Parkash Tiwari was correct. Further, a statement of Mr. Gurjit Singh, Partner of the Assessee firm was also recorded and he also confirmed that the statement of Mr. Satya Parkash Tiwari was correct. On the basis of above facts and statement, the Assessing Officer (A.O.) issued a show cause notice pertaining to the sales outside the books.

On the other hand, the ld. Counsel of the Assessee submitted that before the ld. CIT(A) that the rates of the items on which cycle parts were sold to M/s Dhanawat Enterprises were the same on which such items were sold to other parties. The ld. Counsel further stated that it was only in the case of M/s Dhanawat Enterprises that 30% of sales were not recorded in the books of account but it was not a case with other enterprises, therefore, the Counsel submitted that the action of extrapolation of sales outside books of account on the basis of few Whatsapp Chat were not justified and hence, should be deleted. It was brought on record that 30% sales outside books of account as it was 705 & 753-Chd-2023 Gurdip Cycle Industries, Ludhiana reflected in the Whatsapp Chat which were made on the request of M/s Dhanawat Enterprises and, therefore, on the basis of such isolated incident, extrapolating the entire turn over recorded in the books of account was uncalled for. It was also stated that no corroborative evidence was found in respect of such allegation on the basis of Whatsapp chat nor any evidence of payment by other parties or receiving of payments by the Assessee was found. Even no corresponding asset was found during the course of search justifying the allegation of addition on the basis of exploitation. It was also submitted before the ld. CIT(A) that in respect of sales outside the books of account, only gross profit rate as disclosed to the tune of 8.60% can be applied since total receipts could not be the profit of the Assessee.

The ld. CIT(A) after considering the detailed submissions filed by the Assessee and going through relevant Whatsapp Chat in respect of M/s Dhanawat Enterprises, M/s Ashoka Trading Co. and A.K. Sales India gave his findings that there was under invoicing in respect of three parties only during the year under consideration. The ld. CIT(A) further gave his findings that since there was no evidence in respect of under invoicing in the case of other parties found during the year, therefore, he hold that under invoicing at best could be in respect of sales as per

Aggrieved with the addition of Rs. 26,58,600/-, made on the basis of sale made outside of the books of account, the Assessee has filed this appeal before the Tribunal.

During the proceedings before us, the ld. Counsel of the Assessee explained the modus operandi of the business carried on by the Assessee and argued that the Assessee was engaged in the business of manufacturing and trading of different cycle parts. He submitted that bulk sales were made and majority of items out of total turnover of Rs. 63 crores for the year under consideration were sold to major cycle manufacturers such as Hero Cycle Ltd, T.I. Cycle of India, Neelam Cycle Industries etc. The ld. Counsel further argued that the addition and conclusion drawn by the A.O. of under invoicing was confirmed by the ld. CIT(A) for three parties was against the Whatapp Chat and that Whatapp Chat, in fact, had been misread. He vehemently described in detail and concerned Whatapp Chat as extracted from the mobile of Shri Satya Parkash Tiwari, which was reproduced in assessment order also. He also brought it on record that as per the Whatapp Chat, total order as received in respect of each item, supplied as per different bill numbers were items supplied outside the books of account were at the same rates. So, there was no difference in rates in the sales of items either inside or outside the books. He further explained on the basis of Whatapp Chat that only in the case of M/s Dhanawat Enterprises, 70% of such sale of cycle parts were recorded in the regular books of account and 30% remained unrecorded. He also submitted that the 705 & 753-Chd-2023 Gurdip Cycle Industries, Ludhiana A.O. himself has commented in the assessment order that goods were supplied to other parties at the same rates as per the billing made in the case of M/s Dhanawat and since as per Assessing Officer, there was possibility of suppression of sales or sales outside the books to other parties also, therefore, on the basis of this assumptions, the A.O. extrapolated on the basis of entire turn over and made addition accordingly. The ld. Counsel also argued that apart from M/s Dhanawat Enterprises, the ld. CIT(A) had accepted the sales made to M/s Ashoka Trading Company and M/s A.K. Sales India pertaining to the year under consideration and sales made to other parties according to CIT(A) pertained to other assessment years, therefore, ld. CIT(A) restricted himself to only three parties that are M/s Dhanawat Enterprises, M/s Ashok Trading Company and A.K. Sales India and calculated 30% of sales made to them as sales made outside the books of account and confirmed the addition of Rs. 22,77,606/-. Finally, the ld. Counsel of the Assessee concluded that even sales made out to M/s Ashoka Trading Company and M/s A K Sales India were not made out the books on the basis of Whatsapp Chat and he vehemently argued that there was no case of under invoicing of three parties as tabulated by the ld. CIT(A) in his order and accordingly he requested the Bench to delete the addition of Rs. 22,77,606/- confirmed by the ld. CIT(A)

Ground No.2: Appeal on Ground Nos 2 is against the addition of Rs. 26,58,600/- and its confirmation by the ld. CIT(A) taking 30% of the total sales to three parties M/s Dhanawat Enterprises, Ashoka Trading Company and A.K Sales India. The ld. Counsel for the Assessee argued that though, the assessee in order to avoid the litigation has accepted Rs. 26,58,600/- as the sales outside the books of accounts and argued that only appropriate gross profit rate, which in the case of assessee, during the year under consideration was 8.60% could be applied and further argued that total sales/receipts cannot be taken as profit, because, only profit embedded in such sales amount could be taxed. This is because of the fact that during the course of search, no case of negative or excess stock have been made out found by the Department and under such circumstances, the only appropriate gross profit rate @ 8.60% could at best be applied on the sales at Rs. 26,58,600/- and the entire receipts cannot be taken as profit and for which, the reliance was placed on the following case laws for which gist of following judgments were filed:

After the conclusion of the arguments by the ld. Counsel of the Assessee, the ld. DR invited our attention to the assessment order wherein, Satya Parkash Tiwari had confirmed that the transaction in respect to sales to M/s. Dhanawat Enterprises had been made on the direction of the management and further confirmed that he was unable to produce the bills and vouchers or other supporting documents, since these transactions have not been entered in the regular books of accounts. The ld. DR further invited our attention to 'Whatsapp chat', wherein, it has been mentioned about billing 60% and similarly, again

Further, ld. DR referred to 'WhatsApp chat', which is dated 04.01.2020 and 09.01.2020 wherein, there is certain details of sale outside the books of accounts. Finally, ld. DR read out the statement of Sh. Satya Parkash Tiwari, where he had agreed that unaccounted cash component of 30% of actual sales was made over and above the sales as per books of accounts for Financial Years 2016-17 to 2021-22. Similarly, ld. DR referred to statement of Sh. Amarjit Singh, wherein, he has in answer to question No. 8, acknowledged the statement of Sh.

Further, by referring to the various Whatsapp chat, it was argued by the ld. DR that there is a regular transaction of the sales having been made outside the books of accounts. The ld. DR also referred to the statement of Sh. Gurjit Singh, Partner, recorded during the assessment proceedings in the assessment order and argued that when Gurjit Singh was confronted with the statement of Sh. Satya Parkash Tiwari and Sh. Amarjit Singh, he confirmed such statement by stating that he agrees with the statement of Sh. Satya Parkash Tiwari and Sh. Amarjit Singh recorded during the search proceedings. Then by way of various Whatsapp chat, which were not related to the year under consideration, the ld. DR argued that there was regular trend of sales outside the books of accounts and also referred to the assessment order, wherein the A.O. has calculated the sales outside the books of accounts to the tune of Rs. 26,58,600/- and argued that total addition was rightly made by the Assessing Officer and confirmed by the ld. CIT(A) since, all

The ld. DR concluded his arguments by saying that there was a regular trend over the years with regard to the sales outside the books of accounts and under invoicing and thus, the Assessing Officer , had rightly extrapolated the sales by 30% of the book turnover and the CIT(A) has erred in restricting the addition only in respect of three parties as per page 56 of his order and heavily relied up*on the order of the AO in respect of the extrapolation.

The ld. DR relied upon the judgment of Hon'ble Delhi High Cour' in the case of ‘Chetan Das Laxman Das’, reported in 25 Taxmann.com 227 (Delhi), wherein it was held that the seized material can also be relied upon to draw inference that there was a similar transaction throughout the period of six years covered u/s 153A. The ld. DR also relied upon the case of 'Smt. Dayawanti', reported at 75 taxmann.com 308, wherein on the basis of certain material, documents, agreement, invoices, the books of accounts were rejected and addition was made by estimating the sales and gross profit. The ld. DR also relied upon the 705 & 753-Chd-2023 Gurdip Cycle Industries, Ludhiana judgment of Supreme Court in the case of ‘Orma Marbles Palace Pvt. Ltd.,' reported in 110 taxmann.com 436, wherein, there was a under invoicing of the sale bills and it was held that the Assessing Officer was fully justified to make estimation for the block period. Regarding the retraction made by the Sh. Satya Parkash Tiwari and Sh. Gurjit Singh by filing affidavits before the CIT(A), the ld. DR argued that, since the retraction was made after the assessment order was passed by the Assessing Officer, the same was an afterthought and no reliance could be placed on such retraction. Thus, in the nutshell, the ld. DR concluded his argument by stating that the A.O. had rightly rejected the books of accounts and confirmed by the CIT(A) and also stated that since there were regular transactions of sales outside the books of accounts, the Assessing Officer has rightly extrapolated the sales by 30% of the turnover disclosed in the regular books of accounts and also making the total addition of Rs. 26,58,600/- on account of sales made outside the books of account.

In Rejoinder, to the arguments to the ld. DR, the ld. Counsel of the assessee argued vehemently that even from the same 'Whatsapp chat' as relied upon by AO/CIT(A), it is not a case of under invoicing at all and stressed that when the documentary evidence is pitted against

The ld. Counsel of the Assessee also referred to various WhatsApp chats and argued that the AO having separately computed sales outside

Finally, the Ld. Counsel argued that no cash, jewellery or other unaccounted investment have been found during search and no case of 705 & 753-Chd-2023 Gurdip Cycle Industries, Ludhiana excessive or negative stock have been made out by the Assessing Officer and, if it all, the contention of the ld. DR, is to be taken into consideration, that all the expenses have been debited in the trading account, then there would have been very substantial shortage of stock, as per physical verification at the time of search, which is apparently not and, thus, only gross profit element embedded in the sales outside the books of accounts to the tune of Rs. 26,58,600/- @ 8.60% was to be considered and relied upon the judgments of various High Court and different benches of the coordinate benches as cited 'supra'.

Regarding the judgments cited by the ld. DR in the case of 'Chetan Das Laxman Dass', (supra) , it was argued that in the cited case, a clear cut case of 'under invoicing' was found and there was suppression of production and, whereas, in the case of the assessee, no such evidence was found. Similarly, the facts in the case of 'Dayawanti' was stated to be different in, as much as, surrender of Rs. 3.5 crore was made of additional income and substantial 'Kacha Papers', containing calculations and the amount routed to the bank account of various members of family, some receivable towards business, documents relating to the purchase of the property outside the books of accounts

With regard to the judgment of the 'Orma Marbles Palace Pvt. Ltd.'(supra) , it was stated that in that case also, there was a clear cut case of under invoicing of sale bills, evidence of unaccounted purchases was found, NRI gift, loan and also that undisclosed income was in excess of undisclosed investment and also certain 'unexplained investments', for which, the agreements found from the assessee and, as such, it was argued that any decision would have its judgment on the basis of facts of that case and, as such, reliance placed by the ld. DR was not proper.

The Ld. Counsel in rejoinder invited our attention to the judgment of the jurisdictional Punjab & Haryana High Court in the case of ‘VM Spinning Mills vs. CIT(A) Ludhiana', reported in 16 taxmann.com 199, in which, it was held by the Hon'ble Punjab & Haryana High Court, that no extrapolation could be made in respect of the some evidence of sales outside the books of accounts and the addition could be restricted only to the evidence found during the course of search and in this case, unaccounted 17 sales bills were found and it was held that Gross Profit

Our attention was also drawn to the Judgment of Hon'ble Delhi High Court in the case of 'Saksham Commodities Ltd.' reported in 161 taxmann.com 485, in which by referring to the judgment of 'Abhisar Buildwell Pvt. Ltd.' of the 'Apex Court' wherein, it was held that there is a requirement of incriminating material for the purpose of estimation of income of the block period and, as such, no extrapolation was possible and it was held in that case, the assessment of total income for a particular assessment year is not intended to set-off a chain reaction or have a water fall effect on all the assessment year. The relevant para of the judgement is being reproduced as under:-

Similarly, reliance was placed on the various other judgments for the preposition that on the basis of 'on-money' receipt for one year, no addition could be sustained in any of the subsequent years on the basis of evidence in another year as per the judgment in the case of 'Standard Tea Processing Co. Ltd.' reported in 34 taxmann.com 31 (Gujarat High Court). Similar reliance was placed on the judgment of Gujarat High

Reliance was also placed on the judgment of Delhi High Court in the case of ‘Anand Kumar Deepak Kumar’ reported in 294 ITR 497, in which, it has been held that merely because some discrepancies were found in the assessee's books of accounts in the pre search period, it could not be presumed that such discrepancy continued even in the post search period and the addition could not be made that the assessee had made unaccounted transactions throughout the unaccounted period. Same view was held by the Hyderabad Bench of the ITAT in the case of ‘Dr. S. Surendra Nath Reddy’ reported in 72 ITD 205, in which, it has been held that the undisclosed income could not be determined on estimation basis and it could only be determined only to the extent of material seized at the time of search. Same was held by the ITAT Pune Bench 'Third Member' case in ‘Samrat Bear Bar vs. ACIT’ reported in 251 ITR (AT) 1 Pune. Similar reliance was placed by the Ld. Counsel on the other case laws and regarding the argument of the ld. DR about total addition of the sales outside the books of accounts, it was stated by the ld. Counsel that for making the sales outside the books of 705 & 753-Chd-2023 Gurdip Cycle Industries, Ludhiana accounts, purchases were made separately in small lots not accounted for in the books of accounts on credit basis as the assessee has goodwill in the market and then out of sales realization, the amount was rotated over a period of time and, as such, appropriate gross profit only could be applied on that and the various judgements of the High Court, and the different benches of the Tribunal, clearly laid down that the total receipts cannot be profit.

We have considered the findings of the ld. CIT(A) in his order, arguments put forward by the ld. Counsel of the Assessee and the written submissions filed by him during the proceedings before us. We have also considered the different case laws brought on record by the ld. Counsel of the Assessee. Similarly, we have heard the ld. DR and considered his arguments also. After considering all the facts brought on record both by the ld. counsel of the Assessee and the ld. DR, we find that in appeal on Ground No.1 where the ld. CIT(A) has rejected the extrapolation made by the Assessing Officer in the assessment order on the basis of a few Whatsapp Chat on total turnover of the Assessee is very logical and justified. It is because, in our opinion, if in case there is sales made outside the books of account to certain parties, on this basis the entire turnover of the Assessee cannot be taken as a 705 & 753-Chd-2023 Gurdip Cycle Industries, Ludhiana suppressed turn over and 30% addition on over and above the turn over without bringing any documentary evidence for the same on record is not justified. We have also considered the finding given by the ld. CIT(A) that it is a case of under-invoicing in respect of three parties i.e., M/s Dhanawat Enterprises, Ashoka Trading and A.K. Sales. In our considered view, it is not a case of under-invoicing. Rather it is a clear- cut case of sales made outside the books of account. Further, since the Assessing Officer has already taken outside the books sales in the case of Ashoka Trading Company and M/s A.K. Sales (on the basis of Whatsapp Chats) therefore, addition in the case of outside the book sales in respect of M/s Dhanawat for Rs. 6,11,043/- (being 30%) of the undisclosed sales out of books may only be considered for calculating G.P. ratio. It is true that on the basis of Whatsapp chat, the A.O. has brought out some of the parties on record to whom the Assessee has made sales outside the books of account. As no other incriminating document was found in the case of other parties, therefore, action of the ld. CIT(A) in restricting the addition to the parties whose names figure in Whatsapp chat is very much logical and justified. We have also considered the various case laws brought on record by the Counsel of the Assessee as well as ld. CIT(A) on this issue in support of their arguments. After considering all the facts and arguments brought

On the other hand, the ld. Counsel of the Assessee argued in favour of the adoption of GP ratio of such sales. We have taken into consideration Whatsapp chat and statement recorded of Mr. Satya Parkash Tiwari as well as the partners of the firm and we have also considered all other documents and evidences brought on record by the Assessing Officer as well as discussed by the ld. CIT(A) in their respective orders. We find that there is no evidence that sales made to other parties are from the same procurement and purchase of raw material shown by the Assessee in its books of account. In this regard, no such evidence has either been brought on record by the A.O. nor any findings have been given by the ld. CIT(A) in his order. Therefore, it is logical to infer that the sales made to these parties outside the books of account must be from the purchases and procurements made outside the books of account only. Accordingly, the confirmation of addition of entire amount of sales made outside the books of account to other parties by the ld. CIT(A) does not look logical or justified. It is because whatever sales of cycle parts have been made to these parties outside the books of account, must have been procured / purchased / manufactured by the Assessee firm outside the books of account only. In this case, the addition of GP ratio of 8.60% of such sales of Rs.

Accordingly, we confirm the addition of 8.60% ( GP ratio declared by the Assessee) on total sales of Rs. 26,58,600/- + Rs. 6,11,043/- as calculated and confirmed by the ld. CIT(A). Thus, Assessee’s appeal on this Ground is partly allowed.

In the result, Assessee’s appeal is partly allowed.

The Revenue, it its appeal, has taken the following Revised Grounds of appeal:-

7 20,36,809 6,11,043 Dhanawat Enterprises 2. 12 26,85,133 8,05,540 Ashoka Trading Co. 3. 17 28,70,078 8,61,023 AK Sales India Total 22,77,606

The DR argued vehemently that the ld. CIT(A) has ignored the finding given by the Assessing Officer that over all sales made by the Assessee was not recorded in the books of account and approximately 30% of the total sales were outside the books of account. The DR also argued that the action of restricting addition to Rs. 22,77,606/- by taking into account sales made to only three parties namely M/s Dhanawat Enterprises, M/s Ashoka Trading Company and A.K. Sales India was not justified. He also emphasized on the fact that the extrapolation made by the Assessing Officer on the entire turnover of the Assessee company during the year should be accepted and the addition made thereon should be confirmed.

On the other hand, ld. Counsel for the Assessee relied heavily on the finding given by the ld. CIT(A) in the appellate order and pointed out that Whatsapp messages which are the basis for addition contain that sales which was made to only three parties pertain to the year under consideration or sales made outside the books of account. He also brought on record the finding given by the ld. CIT(A) in his order on this issue, which is as under: -

We have considered the discussion on this issue by the Assessing Officer in the assessment order and finding given by the ld. CIT(A) in his appeal order. We have also considered the arguments of the DR pertaining to all the three grounds of appeal filed by the Revenue and considered the written submissions filed by the Counsel of the Assessee on this issue. We find that the ld. CIT(A) has given a very categorical

In our considered view, the findings given by the ld. CIT(A) on this issue is very logical and justified and needs no interference. Accordingly, we confirm the action of the CIT(A) in restricting extrapolation and deleting the addition of Rs. 26,78,81,912/-. Regarding legal position, the discussion made by the DR as well as by the Counsel of the Assessee have already been discussed by us in our order in ITA No. 705/Chd/2023. Accordingly, over and above the addition of Rs. 26,58,600/-, addition of Rs. 6,11,043/- pertaining to M/s Dhanawat Enterprises is also confirmed for calculating GP ratio addition as per our findings given in para 27 above.

In view of the findings given above, the appeal filed by the Revenue is partly allowed.

In the result, both the appeals are partly allowed.