COMMISSIONER OF INCOME-TAX, PANCHKULA V. M/S KHOSLA ICE AND GENERAL MILLS, AMBALA CITY

ITA/208/2011

AI Insights

The case revolves around an appeal by the Commissioner of Income Tax, Panchkula, against M/s Khosla Ice & General Mills concerning the assessment of undisclosed income for the block period from April 1, 1988, to October 7, 1998. The primary contention was about the validity of certain additions made to the assessee's income based on physical inventory discrepancies and documents seized during a search operation. The Tribunal and CIT(A) had scaled down some additions and deleted others, which the revenue challenged. The High Court, after reviewing the arguments and evidence, upheld the lower authorities' decisions, emphasizing the lack of concrete evidence linking the seized documents to undisclosed income of the assessee.

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 759048 (HC-CHANDIGARH)
• Appeal Type: Others
• Pronouncement Date: 12-09-2012
• Assessment Year: misc
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: S K MUKHI
• Assessee Lawyers: YOGESH PUTNEY
• Keywords: Block period; Dumb Document; Expenditure; Presumption; Search and seizure; Undisclosed income; Physical inventory
• Section: 158BC; 260A; 292C; 132(1); 132(4A)

Judgement Text

"ITA No. 208 of 2011 -1- IN THE HIGH COURT OF PUNJAB & HARYANA AT CHANDIGARH ITA No. 208 of 2011 Date of Decision: 12.9.2012 Commissioner of Income Tax, Panchkula ....Appellant. Versus M/s Khosla Ice & General Mills ...Respondent. CORAM:- HON'BLE MR. JUSTICE AJAY KUMAR MITTAL. HON'BLE MR. JUSTICE G.S. SANDHAWALIA. PRESENT: Mr. Yogesh Putney, Advocate for the appellant. Mr. S.K. Mukhi, Advocate for the respondent. AJAY KUMAR MITTAL, J. 1. This appeal has been preferred by the revenue under Section 260A of the Income Tax Act, 1961 (in short “the Act”) against the order dated 9.9.2010 passed by the Income Tax Appellate Tribunal, Chandigarh Bench “A”, Chandigarh (hereinafter referred to as “the Tribunal) in IT (SS)A No. 44/Chandi/2002, for the block period from 1.4.1988 to 7.10.1998, claiming the following substantial questions of law:- i) Whether on the facts and circumstances of the case, the Hon'ble ITAT have erred in law in confirming the order of the Ld. CIT(A) in scaling down addition of ITA No. 208 of 2011 -2- Rs.83,287/- to Rs.33,200/- despite accepting revenue's contention that physical inventory of stock was taken in the presence of the assessee or its representatives and there is no material on record to show that any objection has been raised by the assessee at the earliest opportunity against such inventory? ii) Whether on the facts and circumstances of the case, the Hon'ble ITAT have erred in law by not appreciating the provisions of section 132(4A) of the Income Tax Act, 1961 when the document forming the basis of addition of Rs.5,95,900/- and Rs.11,17,596/- was seized (D. No. 22 of Annexure A-18) from the residence of the assessee and contains the particulars of business dealings and it is not a dumb document? iii) Whether on the facts and circumstances of the case, the Hon'ble ITAT have erred in law by not appreciating the provisions of section 132(4A) of the Income Tax Act, 1961 when the document forming the basis of addition of Rs.8,20,065/- was seized (D. No. 24) from the residence of the assessee and contains the particulars of business dealings and it is not a dumb document? iv) Whether on the facts and circumstances of the case, the Hon'ble ITAT have erred in law by not appreciating the provisions of section 132(4A) of the ITA No. 208 of 2011 -3- Income Tax Act, 1961 when the document forming the basis of addition of Rs.27,500/- was seized (D. No.4 of Annexure A-22) from the assessee? Besides the aforesaid, the following amended substantial questions of law have been claimed:- Amended Substantial Questions of Law: v) Whether on the facts and the circumstances of the case, the Ld. ITAT was right in law in ignoring the provisions of section 292C of Income Tax Act 1961 by virtue of which any documents/Books of accounts found from the possession of the assessee belongs to such persons and contents of such documents are true? vi) Whether on the facts and the circumstances of the case, the Ld. ITAT has erred in law by not appreciating the provisions of section 292C of the Income Tax Act inserted by the Finance Act, 2007 with retrospective effect from 01.10.1975? 2. Put shortly, the facts necessary for adjudication of the present appeal as narrated therein are that the assessee is a partnership firm consisting of two partners, namely, Shri Rajesh Khosla and Shri Ved Parkash Khosla holding 95% and 5% shares respectively in the profits and losses of the firm which is engaged in the running of rice sheller. A search and seizure operation under Section 132(1) of the Act was conducted on 7.10.1998 at the residential and business premises of 'Khosla Group'. Notice under Section 158BC of the Act was issued on ITA No. 208 of 2011 -4- 21.6.1999 and in pursuance thereto, the assessee filed its return declaring nil income. During search, certain documents and material were found and the same were seized vide a Panchnama. The Assessing Officer vide order dated 30.10.2000 (Annexure A-1) completed the assessment at a total income of ` 27,65,690/-, after making various additions, as undisclosed income for the block period from 1.4.1988 to 7.10.1998. The particulars of additions made are as follows:- “i) Addition of Rs.83,283/- on account of excess stock found at the time of search – A.Y. 1999-2000. ii) Addition of Rs.5,95,900/- on account of unaccounted sale of rice – A.Y. 1998-99 iii) Addition of Rs.11,17,596/- on account of unaccounted sale of broken rice – A.Y. 1998-99 iv) Addition of Rs.34,500/- on account of unaccounted purchase of scooter– A.Y. 1998-99 v) Addition of Rs.50,283/- on account of unexplained investment in the purchase of paddy – A.Y. 1998-99 vi) Addition of Rs.8,20,065/- on account of unaccounted purchase of paddy – A.Y. 1998-99 vii) Addition of Rs.36,575/- on account of unaccounted sale of Rice Bran – A.Y. 1999-2000 viii) Addition of Rs.27,500/- on account of unexplained expenditure – A.Y. 1997-98.” 3. Feeling aggrieved by the assessment order, the assessee filed an appeal before the Commissioner of Income Tax (Appeals) [in short ITA No. 208 of 2011 -5- “the CIT(A)”]. The CIT(A) vide order dated 19.3.2002 (Annexure A-2) partly allowed the appeal by deleting some of the additions and confirming some of the additions made by the Assessing Officer as noted hereunder:- “i) Addition on account of excess stock found at the time of search and reduced to Rs.33,200/- and a relief of Rs.50,087/- was allowed to the assessee. ii) Addition of Rs.5,95,000/- and Rs.11,17,596/- made on account of sale of rice and broken rice respectively have been confirmed. iii) Addition of Rs.34,500/- made on account of undisclosed investment in the purchase of scooter has been upheld. iv) Addition of Rs.8,20,065/- made on account of unaccounted purchase of paddy has been deleted. v) Addition of Rs.27,500/- on account of unexplained expenditure has been deleted.” 4. Against the order dated 19.3.2002 (Annexure A-2), the assessee as well as the revenue filed appeals before the Tribunal. The Tribunal vide a common order dated 9.9.2010 (Annexure A-3) partly allowed the appeal of the assessee and dismissed that of the revenue. Hence, the present appeal by the revenue. 5. Learned counsel for the revenue vehemently contended that a perusal of the documents D.No.22 of Annexure A.18, D.No.24 and D.No.4 of Annexure A.22 found during the course of search from the ITA No. 208 of 2011 -6- residence of Shri Pardeep Khosla, son of one of the partners of the assessee-firm clearly depicted that there was undisclosed income to the extent of ` 5,95,900/- and ` 11,17,596/- on the basis of D.No. 22, `8,20,065/- on the basis of seized document D. No. 24 and ` 27,500/- on the basis of D.No. 4. The deletion thereof was unjustified. Scaling down of addition of ` 83,287/- to ` 33,200/- on account of inventory of stock was also assailed. 6. It was pointed out that Section 132(4A) of the Act provides for certain presumptions where the documents, books of account, money, bullion, jewellery and other articles are found during the course of search from the possession and control of any person. According to the aforesaid sub-section, presumption arises that the document recovered during search and seizure from a person belongs to him. It has further been provided that the contents of such books of account and other documents shall be true. By virtue of Section 292C of the Act which has been inserted by Finance Act, 2007 retrospectively from 1.10.1975, the presumption available under Section 132(4A) is available even during the assessment proceedings. On the strength of this amendment, it was urged that the Tribunal was not right in holding the documents D.No.-22 of Annexure A.18, D. No.24 and D-4 of Annexure 22 to be dumb documents and sustained the deletion of the addition in the hands of the assessee. 7. On the other hand, learned counsel for the assessee supported the order passed by the Tribunal. 8. After hearing learned counsel for the parties, we do not find ITA No. 208 of 2011 -7- any merit in the appeal. On the basis of arguments advanced by learned counsel for the parties, the following issues are required to be adjudicated in this appeal:- a) Whether scaling down of additions from `83,287/- to ` 33,200/- on account of discrepancy of physical inventory of stock was justified ?; b) Whether the Tribunal was right in deleting the addition of ` 5,95,000/- and ` 11,17,596/-?; c) Whether the deletion of ` 8,20,065/- discarding the document D.No.24 had been rightly done ?; d) Whether ` 27,500/- was liable to be added on account of unexplained expenditure ?; e) Whether the documents D.No.22 of Annexure A.18, D.No.24 and D.No.4 of Annexure A.22 found during the course of search from the residence of Shri Pardeep Khosla, son of one of the partners of the assessee-firm could be held to be relevant documents on the basis of which presumption under Section 292C of the Act was available to the revenue? 9. Taking up the issue relating to scaling of addition of `83,287/- to ` 33,200/-, it may be noticed that at the time of search on 7.10.1998, it was found that there existed difference in physical stock of rice viz-a-viz the stock depicted in the books of account. The Assessing officer took the quantity of rice to be 75.37 quintals and applied the rate of ` 2251/- per quintal calculating the difference at ` 83,287/-. On ITA No. 208 of 2011 -8- appeal, CIT(A) scaled down the addition to 40 quintals of rice at the rate of `830/- per quintal amounting to ` 33,200/- The CIT(A) recorded that no actual physical verification of the stock of rice had been carried out at the time of search and it was on the basis of estimation and in such circumstances, the excess stock at 40 quintals of rice would be appropriate after considering various factors like yield rate of rice from paddy etc. It was further taken that the stock of rice was 'Parmal Grade A' and not 'Basmati Rice' and thus rate of ` 830/- per quintal was applied. On appeal by the assessee as well as the revenue to the Tribunal, the addition was maintained at ` 33,200/-. The relevant findings noted by the Tribunal read thus:- “11. We have carefully examined the rival stands on this aspect. From the orders of the authorities below, it is evident that the impugned addition has been made on account of excess stock found at the time of search in comparison to the stock position in the books of account. The primary contention of the assessee is that the physical verification of stocks was carried out on estimation and therefore, the difference in stock does not establish any undisclosed income in the hands of the assessee. On this point, in our considered opinion, the learned CIT-DR has rightly contended that the physical inventory was tabulated in the course of search proceedings in the presence of the assessee firm or its representative and there is no material on record to show that any objections have been raised by ITA No. 208 of 2011 -9- the assessee at the earliest opportunity against such inventory. Even otherwise, we find ample force in the observation of the CIT(Appeals) that since there was loose heaps of rice and paddy, certain element of estimation in physical inventory could not be ruled out. Considering the fact position, we therefore are not inclined to entertain the present objection of the assessee that the physical inventory during search did not reveal any excess stock. Regarding the quantification of the addition, it is seen that the Assessing officer estimated the excess stock at 75.37 qtls. of rice and applied a rate of ` 2251/- per quintal to compute the addition at ` 83,287/-. The CIT(Appeals) has scaled down the estimation of excess stock to 40 qtls. and has adopted a rate of ` 830/- per quintal to work out an addition of ` 33,200/-. In our view, rate of ` 830/- adopted by the CIT(Appeals) is quite justified because the assessee pointed out that the rate adopted by the Assessing officer was of Basmati Rice, whereas admittedly, in this case the excess stock found was of Parmal Rice Variety, whose sale rate is ostensibly lower. At page 30 of the Paper Book is placed copy of the sale bill of the assessee which corroborates the adoption of the rate of ` 830/- per quintal by the CIT (Appeals). Considering the overall circumstances, we hereby affirm the order of the CIT(Appeals) on this aspect. Accordingly, Ground No.2 in the appeal of the assessee and ITA No. 208 of 2011 -10- Ground No.(ii) in appeal of the Revenue are dismissed.” The findings of CIT(A) and upheld by the Tribunal on this addition were not shown to be perverse or erroneous in any manner warranting interference by this Court. 10. Considering the deletion in respect of ` 5,95,900/- and `11,17,596/- added on the basis of document D-22 of Annexure A-18, it would be appropriate to refer to the findings of the Tribunal. The Tribunal while rejecting the contention of the revenue in paras 17 to 20 of the order had recorded as under:- “17. In this background, we may now consider the facts of the instant case. A copy of the seized document in question has been placed at page 95 of the Paper Book. The entries found noted on the front- side as well as on the back-side have been enumerated by the Assessing Officer in para 8.1 of assessment order. Even a cursory glance at the impugned document shows that there is no description of the nature of entries made therein. It does not indicate as to whether the entries reflect purchases effected by the assessee or sales effected by the assessee, in fact it does not even contain the name of the assessee firm. It is also clear that the document is unsigned. In nut- shell, a perusal of the document indicates that there is no language used to decipher the figures and the entries made therein. The Assessing Officer has ITA No. 208 of 2011 -11- presumed that entries on the front-side reflect sales of rice while the entries on the back-side reflect sales of broken rice. Pertinently, we find no corroborative evidence on record to support the inference of the Assessing Officer that the entries in the said document reflect sales of rice and broken rice. Neither is there any material to show that such sales have been undertaken by the assessee outside the books of account. 18. Notably, the said document was found from the residence of Shri Pardeep Kumar Khosla, son of one of the partners of the assessee firm. In the course of hearing, learned CIT-DR has furnished a report of the Assessing Officer dated 14.10.2009 whereby it is pointed out that the said document was confronted to Shri Pardeep Kumar Khosla also during the course of search proceedings on 07.10.1998. A copy of the statement of Shri Pardeep Kumar Khosla recorded on 07.10.1998 has also been placed on record. In reply to a question, it has been deposed by Shri Pardeep Kumar Khosla that he had no knowledge about the document. No further questions have been put to Shri Pardeep Kumar Khosla on the stated document. During assessment proceedings, assessee firm was confronted with the said document and in response, it ITA No. 208 of 2011 -12- was contended that the said document did not pertain to the assessee firm. It was further contended that the entries made in the said document were neither in the handwriting of any of the partners nor of the 'Munim' of the assessee firm. It was also contended that the same does not bear the name of the assessee firm. Clearly, the assessee firm denied the ownership of the document and also the inference sought to be drawn by the Assessing Officer. Clearly, in the face of denials by the person from whom the seized document was found (i.e. Shri Pardeep Kumar Khosla) and the assessee firm and considering that there is no clinching narration of the entries made in the document to link the assessee firm, the burden was on the Revenue to establish that the seized document reflected any income in control and possession of the assessee firm. In our considered opinion, assessee rightly contended that the impugned document was a dumb document inasmuch as it does not contain any intelligible narration in support of the inference drawn by the Assessing Officer that it reflected sales carried out by the assessee outside the regular books of account. 19. When a dumb document, like the present before us, is to be made the basis to fasten tax liability on the assessee, the burden is on the Revenue to establish ITA No. 208 of 2011 -13- with corroborative evidence that the nature of entries contained therein reflect income and also that such income was in the control of the assessee. Thus, in this case, Revenue has to establish, with necessary corroborative evidence, that various entries contained in the seized document reflect sales of rice and broken rice effected by the assessee. Ostensibly, no cogent evidence or material has been brought out by the Assessing Officer to support his inference that the entries recorded in the seized document reflect sales effectuated by the assessee outside the books of account. In fact, strictly speaking the said document cannot be said to have been found in the possession of the assessee firm as it has neither been recovered from the business premises of the assessee firm nor from any of its partners. On the contrary, it has been found from Shri Pardeep Kumar Khosla, son of one of the partners of the assessee firm. Curiously, when Shri Pardeep Kumar Khosla was questioned about the seized document, he has merely denied knowledge about it. Without any further questioning, it is inexplicable as to what prompted the Assessing Officer to conclude that the document pertained to the assessee firm. 20. Considering the entirety of circumstances, in the ITA No. 208 of 2011 -14- absence of any material to support the nature and ownership of the entries found in the seized document, no addition is permissible in the hands of the assessee as undisclosed income by merely arithmetically totaling various figures jotted down on such document. Thus, we are inclined to agree with the contentions raised by the assessee that the impugned addition is untenable. We hold so.” 11. The Tribunal noted that the document D-22 of Annexure A- 18 did not give any clear picture about the nature and ownership of entries therein and, therefore, any addition in the hands of the assessee on the basis thereof would not be tenable. Learned counsel for the revenue made feeble attempt to show that document D-22 of Annexure A-18 clearly depicted undisclosed income but was unable to substantiate his plea. In the absence of any clear deciphering of document D-22 of Annexure A-18, the deletion of ` 5,95,900/- and `11,17,596/- from undisclosed income cannot be held to be unjustified. 12. An addition of ` 8,20,065/- was made by the Assessing Officer on account of purchases of paddy made by the assessee outside the books of account as per document seized from the residence at Circular Road, Ambala City. CIT(A) and the Tribunal deleted the addition holding that seized document belonged to Shri Sudesh Jain, Broker-cum-Auctioneer who had made purchases from Commission Agents on behalf of the assessee-firm and other concerns. The Assessing Officer had verified the entries contained in this document showing ITA No. 208 of 2011 -15- assessee-firm as purchaser which were duly reflected in the books of account maintained by the assessee and no adverse inference was drawn in respect thereof. Similarly, the entries relating to other purchasers were also excluded. However, where there were no names of purchasers specified those were sought to be added in the undisclosed income of the assessee. It has been recorded that no justification has been given for treating the same to be undisclosed income of the assessee in the absence of any deposition in that behalf by the Broker or any other material available on record. The findings recorded by the Tribunal in para 37 of its order are relevant, which read thus:- “37. We have considered the rival submissions carefully. After having perused the orders of the lower authorities, in our considered opinion, the CIT(Appeals) made no mistake in deleting the addition made by the Assessing Officer, as the following discussion would show. It is quite clear that the seized document A-24 belonged to Shri Sudesh Jain, Broker-cum-Auctioneer, who made purchases from commission agents on behalf of the assessee firm and other concerns. It also transpires from the record that Shri Sudesh Jain was examined by the Assessing Officer on 25.9.2000 during the course of assessment proceedings, who admitted the aforesaid position. The Assessing officer has also accepted the position that the entries found in the seized documents were made by Shri Sudesh Jain, which contained ITA No. 208 of 2011 -16- purchases made by him on behalf of the other concerns including the assessee firm. The entries contained in this document showing assessee firm as purchaser, were duly verified by the Assessing officer with the books of account maintained by the assessee and no adverse view has been drawn by the Assessing Officer. The entries which contained the names of other purchasers have also been left out by the Assessing Officer. The entries in the said document which did not contain the name of any purchaser, have been considered by the assessing officer to be reflecting purchases made by the assessee outside the books of account. In the assessment order, we do not find any reason advanced by the Assessing officer to infer that such entries reflect purchases effected by the assessee outside the books of account. There is neither a reference to any such deposition by the broker nor any other material has been referred by the assessing officer to support his hypothesis that such entries pertained to the assessee. On this basis itself, we find no justification for the impugned addition. Even otherwise, as per the factual appraisal made by the CIT(Appeals), the purchases in question do not pertain to the assessee firm. Though the learned CIT-DR may be correct in submitting that such explanation was not before the Assessing Officer, but the reasons of the same are not far to seek. Evidently, after ITA No. 208 of 2011 -17- having verified the entries in the seized document viz-z- viz the books of account maintained by the assessee firm, there is nothing to show that the Assessing Officer show- caused the assessee to explain any further entries of the seized document and in any case, the document belonged to Shri Sudesh Jain and it was his duty to explain the contents of the same. Therefore, the impugned addition has been made by the Assessing Officer in violation of the principles of natural justice. Further, in respect to each of the impugned entries, assessee explained before the CIT (Appeals) and the same could not be attributed to the assessee. Before us, there is no material to negate the factual findings arrived at by the CIT(Appeals) in this regard, therefore, there is no justification to interfere with the decision of the CIT(Appeals). Therefore, considering the entirety of circumstances, we find that the CIT (Appeals) made no mistake in deleting the impugned addition. Accordingly, the Ground No.(iii) raised by the revenue is dismissed.” Learned counsel for the revenue was unable to demonstrate that the entries where there were no names of purchasers should have been added to the undisclosed income of the assessee alone particularly when the document related to entries concerning other purchasers mentioned therein as well. The findings of CIT(A) and the Tribunal, thus, could not be faulted. ITA No. 208 of 2011 -18- 13. The addition of ` 27,500/- on account of unexplained expenditure was deleted by CIT(A) and upheld by the Tribunal on the ground that there was no evidence to corroborate that the assessee had incurred such an expenditure of making any contribution to Rice Miller Association. The relevant observations recorded are:- “45. We have considered the rival submissions carefully. Before an addition under Section 69C of the Act can be made for unexplained expenditure, it has to be established that expenditure has been incurred. In this case, the document in question does not prove incurrence of expenditure by the assessee. The document in question, a copy of which is placed at page 17 of the Paper Book filed by the revenue, is a plain paper and is unsigned and unauthenticated on behalf of the Rice Association and therefore it does not establish incurrence of expenditure by the assesasee. There is no corroborative evidence to prove incurrence of expenditure by the assessee and therefore, in our view, the CIT(A) rightly deleted the impugned addition. The conclusion of the CIT(A) is hereby affirmed and Ground No.(v) raised by the Revenue is dismissed.” The aforesaid finding could not be dispelled by the learned counsel for the revenue by referring to any material on the basis of which it could be concluded that it was erroneously deleted. 14. In view of the findings as noticed above and recorded by the ITA No. 208 of 2011 -19- Tribunal, we find that on the basis of documents D.No.22 of Annexure A.18, D.No.24 and D.No.4 of Annexure A.22 which were seized from the possession of Shri Pardeep Khosla, son of the partner of the firm did not disclose any material to establish that undisclosed income, as deleted by the Tribunal, had arisen in this case. Thus, the plea relating to presumption available under Section 292C of the Act in respect of documents etc. seized under Section 132(4A) of the Act being available to the revenue, yet the revenue is unable to derive any benefit therefrom in the light of the findings recorded by the CIT(A) and the Tribunal while deleting certain additions made by the Assessing Officer. 15. Accordingly, there is not merit in this appeal and the same is hereby dismissed. (AJAY KUMAR MITTAL) JUDGE September 12, 2012 (G.S. SANDHAWALIA) gbs JUDGE "