Dy. CIT,Central Circle, Kolhapur V. Tushar Oil packing Co., Kolhapur

ITA 576/PUN/2008

• Counselvise Citation: 57624514 RSA 2008
• Duration Of Justice: 3 year(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-05-2011
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 14-03-2011
• Assessment Year: 2005-2006
• Appeal Filed On: 28-04-2008
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: H C LEUVA
• Keywords: Business income; Block assessment

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH B , PUNE BEFORE SHRI I.C. SUDHIR (JM) AND SHRI G.S. PANNU (AM) ITA NO. 576 /PN/ 2008 (ASSTT. YEAR : 2005 - 06 ) THE DY.COMMISSIONER OF INCOME - TAX CENTRAL CIRLCE KOLHAPUR .. APPELLANT V. TUSHAR OIL P ACKING CO DAFALE MALA, UCHAGAO N .. RESPONDENT KOLHAPUR PAN : AACFT6248D C.O. NO. 06/PN/2010 (ARISING OUT OF ITA NO. 576/PN/2008) (ASSTT.YEAR : 2005 - 06) TUSHAR OIL PACKAGING CO., CROSS OBJECTOR DAFALE MALA, UCHAGAON KOLHAPUR PAN : AACFT6248D V. THE DY.COMMISSIONER OF INCOME - TAX RESPONDENT CENTRAL CIRLCE KOLHAPUR AS SESSEE BY: SHRI. M.K. KULKARNI DEPARTMENT BY : SHRI. H.C. LEUVA ORDER PER I.C. SUDHIR JM ITA NO. 576/PN/2008 THE REVENUE HAS QUESTIONNED FIRST APPELLATE ORDER ON THE FOLLOWING GROUNDS : TUSHAR OIL PACKING CO. A.Y. 2005 2 1. THE LD. C IT(A) ERRED DELETING AN ADDITION OF RS.6,45,876/ - ON ACCOUNT OF UNDISCLOSED INCOME FROM UNRECORDED BUSINESS TRANSACTIONS. 2. THE LD. CIT(A) ERRED IN GIVING A FINDING THAT EXTRAPOLATION OF SALES IS NOT POSSIBLE IN A SEARCH ASSESSMENT, SPECIALLY WHEN THE ASS ESSEE DID NOT OBJECT TO THE EXTRAPOLATION OF SALES EITHER DURING THE COURSE OF ASSESSMENT PROCEEDINGS OR DURING THE COURSE OF APPELLATE PROCEEDINGS. 3. THE LD. CIT(A) HAS ERRED GIVING A FINDING THAT INITIAL INVESTMENT COMPUTED BE @ 1.56% ON UNRECORDED SA LES FOUND DURING THE COURSE OF SEARCH WORKS OUT TO LESS THAN THE FIGURE COMPUTED FROM ANNUAL BALANCE SHEET FIGURES AS DONE BY THE ASSESSING OFFICER, SPECIALLY WHEN THE ASSESSEE DID NOT OBJECT TO THE WORKING OF UNDISCLOSED INCOME BY THE ASSESSING OFFICER ON THE BASIS OF ANNUAL BALANCE SHEET FIGURES. 4. THE LD. CIT(A) ERRED IN DELETING THE ADDITION OF RS.1,72,877/ - ON ACCOUNT OF UNRECORDED WITHDRAWALS. 5. THE LD. CIT(A) ERRED IN DELETING THE ADDITION OF RS. 47,663/ - ON ACCOUNT OF GROSS PROFIT ON ACCOUNT SHO RTAGE OF STOCK FOUND. 2. WE HAVE HEARD AND CONSIDERED THE ARGUMENTS ADVANCED BY THE PARTIES IN VIEW OF THE ORDERS OF THE AUTHORITIES BELOW AND THE DECISIONS RELIED UPON. GROUND NO. 1, 2 & 3 3. THE RELEVANT FACTS ARE THAT DURING THE COURSE OF SEARCH, PAP ERS RELATING TO UN - RECORDED SALES AMOUNTING TO RS.19,66,28,438/ - TUSHAR OIL PACKING CO. A.Y. 2005 3 WERE FOUND. THESE PAPERS PERTAINED TO THE PERIOD 13.7.2004 TO 1.2.2005 I.E. 204 DAYS. ON THE BASIS OF THIS FIGURE, A.O ESTIMATED AND RECORDED SALES FOR THE REMAINING PERIOD FROM 1.4.2004 TO 1.2.2005 I.E. THE DATE OF SEARCH, AT RS.29,59,06,521/ - . THE FUNDS EMPLOYED IN THE BUSINESS DURING THAT PERIOD WAS WORKED OUT AT THE RATE OF 1.56%. BASED UPON THE ABOVE FORMULA, THE FOLLOWING AMOUNTS WERE WORKED OUT BY THE A.O. EXTRAPOLATED SALES FOR 10 MONTHS: - RS.29,59,06,52/ - % OF FUNDS INVESTED AT 1.56% RS. 46,16,142/ - PROFIT ON SALES @ 0.9% RS. 26,63,159/ - TOTAL RS. 72,79,301/ - THE A.O. TREATED THE ABOVE AMOUNT AS UNDISCLOSED INCOM E OF THE ASSESSEE. THE DIFFERENCE BETWEEN THE ABOVE AMOUNT AND THE AMOUNT DECLARED IN THE RETURN (RS.66,33,425/ - ) WHICH WAS RS.6,45,876/ - WAS ADDED AS UNDISCLOSED INCOME FROM BUSINESS. BEFORE THE LD CIT(A), IT WAS CONTENDED THAT THE PROFIT EARNED DURIN G THE YEAR, THAT GOES TO FINANCE THE WORKING CAPITAL CONSTITUTES OF OUTSIDE FINANCE AS WELL AS INCOME DECLARED DURING THE YEAR. THEREFORE, ENTIRE PROFIT CANNOT BE ADDED AS UNDISCLOSED INCOME IN THE COMPUTATION MADE BY THE A.O. IT WAS CONTENDED THAT ATLEA ST 50% OF THE INCOME CAN BE SAID TO HAVE BEEN UTILIZED TOWARDS TUSHAR OIL PACKING CO. A.Y. 2005 4 WORKING CAPITAL. TAKING 50% OF THE NET PROFIT, THE UNDISCLOSED INCOME CALCULATED USING THE METHOD FOLLOWED BY THE A.O WORKS OUT TO LESS THAN AMOUNT DECLARED BY THE ASSESSEE. THEREFORE, THERE SHOULD NOT HAVE BEEN ANY ADDITION ON THIS ISSUE. CONSIDERING THIS CONTENTION, THE LD CIT(A) HAS DELETED THE ADDITION OF RS. 6,45,876/ - MADE TO THE TOTAL UNDISCLOSED INCOME. THE REVENUE IS IN APPEAL QUESTIONNING THIS ACTION OF THE LD CIT(A). 4. IN SUP PORT OF THE GROUNDS, THE LD. D.R. SUBMITTED THAT SUFFICIENT EVIDENCE WAS FOUND DURING THE COURSE OF SEARCH TO JUSTIFY THE ADDITION MADE BY THE A.O. THE LD CIT(A) WAS THUS NOT RIGHT IN DELETING THE ADDITION. 5. THE LD. A.R., ON THE OTHER HAND, TRIED TO JUSTIFY THE FIRST APPELLATE ORDER. HE REITERATED THE SUBMISSION MADE BEFORE THE AUTHORITIES BELOW WITH THIS FURTHER CONTENTION THAT UNDISCLOSED INCOME OF THE BLOCK PERIOD HAS TO BE DETERMINED ON THE BASIS OF EVIDENCE FOUND AS A RESULT OF SEARCH OR REQUISIT ION OF BOOKS OF ACCOUNT OR OTHER DOCUMENTS AND SUCH OTHER MATERIALS OR INFORMATIONS AS ARE AVAILABLE WITH THE A.O AND RELATABLE TO SUCH EVIDENCE. IN BLOCK ASSESSMENT, THE A.O CANNOT COMPUTE THE INCOME ON THE BASIS OF BEST JUDGMENT. IN SUPPORT, HE PLACED RELIANCE ON THE DECISION OF HONBLE ALLHABAD HIGH COURT IN THE CASE OF CIT V/S. RML MEHROTRA (2010) 35 DTR (ALLAH.) 160. TUSHAR OIL PACKING CO. A.Y. 2005 5 6. CONSIDERING THE ABOVE SUBMISSIONS, WE FIND THAT LD CIT(A) AFTER DISCUSSING THE CASES OF THE PARTIES HAS COME TO THE FOLLOWING CO NCLUSION IN PARA NO. 8 AND 9 OF THE FIRST APPELLATE ORDER. FOR A READY REFERENCE, THESE PARAGRAPHS ARE BEING REPRODUCED HEREUNDER : 8. I HAVE CONSIDERED THE SUBMISSIONS. THE UNDISCLOSED INCOME COMPUTED BY THE A.O. CONSISTS OF TWO ELEMENTS (1) UNDECLARED INVESTMENT IN THE UNDISCLOSED BUSINESS (2) GROSS PROFIT ON UNRECORDED SALES. THE APPELLANTS ARGUMENT IS THAT EITHER OF THE ABOVE TWO ELEMENTS COULD BE SUBJECTED TO TAX NOT BOTH. NORMALLY THE HIGHER FIGURE IS BROUGHT TO TAX. IN ANY CASE ADDITION CANNOT BE MADE OF BOTH THE WORKING CAPITAL AS WELL AS THE INCOME. I DO NOT FULLY AGREE WITH THE APPELLANT. WHAT THE A.O HAS DETERMINED IS ACTUALLY THE SEED CAPITAL OR IN OTHER WORDS THE INITIAL INVESTMENT REQUIRED TO BE MADE IN THE BUSINESS. AFTER THIS INV ESTMENT IS MADE, THE INCOME EARNED BY SALE OF GOODS IS UTILIZED TO MAKE FUTURE PURCHASES AND SO ON. IT, THEREFORE, CANNOT BE SAID THAT EITHER THE WORKING CAPITAL OR PROFIT ON SALES SHOULD BE TAXED. IN THE INSTANT CASE, HOWEVER, THE INITIAL INVESTMENT HAS BEEN WORKED OUT ON THE BASIS OF END OF THE YEAR, BALANCE SHEET FIGURES. THE CORRECT PROCEDURE WOULD BE TO TAKE THE DAILY TURNOVER FOR A PERIOD OF, MAY BE, A MONTH, AND COMPUTE THE PEAK INVESTMENT NECESSARY. FURTHER THE A.O HAS THEN COMPUTED THE INITIAL I NVESTMENT AT 46,16,142/ - @ 1.56% OF THE EXTRAPOLATED SALES OF 10 MONTHS. THE GROSS PROFIT @ 0.9% HAS ALSO BEEN COMPUTED ON THE EXTRAPOLATED SALES. THE APPELLANTS OBJECTION TO THE ABOVE METHOD IS REPRODUCED IN THE ASSESSMENT ORDER (PAGE 4.1.4). THE APPEL LANT CONTENDED THAT AT LEAST 10% OF THE WORKING CAPITAL COULD BE ASSUMED TO HAVE COME FROM SALES OF GOODS. THE REPLY OF THE APPELLANT APPEARS TO BE SILENT ON THE ISSUE OF TOTAL SALES FIGURE BY EXTRAPOLATION. THIS HOWEVER CANNOT BE TAKEN TO BE A NO OB JECTION TO THE EXTRAPOLATED SALES FIGURE. THERE WAS IN FACT, NO NEED TO GO INTO THE SUBJECT TUSHAR OIL PACKING CO. A.Y. 2005 6 SINCE IF THE CONTENTION WAS ACCEPTED, THEE WOULD BE NO NEED FOR ANY ADDITION, SINCE THE AMOUNT SHOULD FALL BELOW THE TOTAL AMOUNT DECLARED. THE APPELLANT HAS SHO WN THAT THE TOTAL UNDISCLOSED INCOME WOULD BE ONLY RS.48.37 LACS IF THE ACTUAL UNRECORDED SALES ARE TAKEN INSTEAD OF AN EXTRAPOLATED FIGURE. SALES UNRECORDED RS.19,66,28,438/ - INITIAL INVESTMENT @ 1.56% RS. 30,67,404/ - G.P. @ 0.9% RS. 1 7,69,656/ - RS. 48,37,060/ - 9. THE RATIONALE BEHIND THE CONTENTION THAT 50% OF THE G.P. SHOULD BE TAKEN AS UTILIZED TO FINANCE WORKING CAPITAL WAS EXPLAINED TO BE THE VERY SHORT TURNOVER PERIOD IN THE BUSINESS. THE PRODUCTION CYCLE IS SHORT AND OUR PRODUCE IS SOLD WITHIN A DAY OR TWO. THE SHORT TURNOVER PERIOD IS THE REASON FOR A LOW INITIAL CAPITAL. THE REQUIREMENT OF CAPITAL IS MET OUT OF SALES PROCEEDS. THE CASH SALES ARE SIGNIFICANT AT ALMOST 40% OF THE TOTAL TURNOVER. THE SALES FOR THE MONTHS OF THE YEAR ARE AS UNDER : - JULY 2004 121,32,134 1,89,261 AUGUST,2004 223,28,852 3,48,330 SEPTEMBER, 2004 116,77,213 1,82,164 OCTOBER,2004 255,92,077 3,99,236 NOVEMBER, 2004 327,31,389 5,10,609 DECEMBER,2005 361,55,353 5,64,023 JANUARY,2005 3 89,60,161 6,07,778 FEBRUARY 5,15,307 8,038 THE ABOVE CHART SHOWS THAT THE INITIAL INVESTMENT COMPUTED AT 1.56% WORKS OUT TO LESS THAN THE FIGURE COMPUTED FROM THE ANNUAL BALANCE - SHEET FIGURES. THE AMOUNT, RS. 46.16 LACS WORKS OUT TO MOVE THAN 30% OF THE TOTAL MONTHLY SALES OF THE TUSHAR OIL PACKING CO. A.Y. 2005 7 INITIAL MONTHS AND 12% OF THE HIGHEST MONTHLY TURNOVER. SINCE THE BUSINESS HAS A SHORT TURNOVER CYCLE, THE INITIAL INVESTMENT CANNOT BE AS HIGH AS 30% OR EVEN 12% OF A FULL MONTHS SALES. IN ADDITION, THE EXTRAPOLATION OF S ALES FOR COMPUTING THE INITIAL INVESTMENT DOES NOT STAND ON FIRM FOOTING. SUCH EXTRAPOLATION IS NOT POSSIBLE IN A SEARCH ASSESSMENT AS IT IS NOT BASED ON EVIDENCE FOUND DURING SEARCH. WITHOUT THE EXTRAPOLATED AMOUNT, THE INITIAL INVESTMENT AGGREGATED WIT H THE GROSS PROFIT FIGURE WORKS OUT TO LESS THAN THE DECLARED AMOUNT OF RS.66,33,425/ - . IN VIEW OF THE ABOVE, THE ADDITION OF RS. 6,45,876/ - MADE TO THE TOTAL UNDISCLOSED INCOME IS DELETED. 7. HAVING GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW, WE FIND THAT THE LD CIT(A) HAS PASSED A COMPREHENSIVE AND REASONED ORDER ON THIS ISSUE . A S DISCUSSED HEREIN ABOVE , THE LD . CIT(A) HAS HELD THE ACTION OF THE A.O UNJUSTIFIED MAINLY ON THE BASIS THAT (I) THE AMOUNT OF RS.46.16 LACS WORKS OUT TO MORE THAN 30% OF THE TOTAL MONTHLY SALES OF THE INITIAL MONTHS AND 12% OF THE HIGHEST MONTHLY TURNOVER; (II) SINCE THE BUSINESS HAS A SHORT TURNOVER CYCLE, THE INITIAL INVESTMENT CANNOT BE AS HIGH AS 30% OR EVEN 12% OF A FULL MONTH SALES; AND (III) SUCH EXTRAPOLATION IS NOT POSSIBLE IN A SEARCH ASSESSMENT AS IT IS NOT BASED ON EVIDENCE FOUND DURING SEARCH. WE THUS DO NOT FIND REASON TO INTERFERE THEREWITH. THE SAME IS UPHELD. GROUND NO. 1 TO 3 ARE ACCORDINGLY REJECTED. GROUND NO.4 8. THE A.O. MADE ADDITION OF RS.1,7 2,877/ - ON ACCOUNT OF UN - RECORDED WITHDRAWALS. HE NOTED THAT CERTAIN WITHDRAWALS BY TUSHAR OIL PACKING CO. A.Y. 2005 8 PARTNERS WERE FOUND RECORDED IN THE SEIZED CASH BOOKS. HOWEVER, THESE WITHDRAWALS WERE NOT ENTERED IN THE REGULAR BOOKS. EXPLANATION OF THE ASSESSEE IN THIS REGARD REMA INED THAT THE WITHDRAWALS WERE SUBSEQUENTLY RECORDED IN THE FINAL BOOKS OF ACCOUNTS. THE A.O DID NOT AGREE IN ABSENCE OF EVIDENCE INDICATING THE DATES ON WHICH SUCH WITHDRAWALS WERE RECORDED. 9. BEFORE THE LD CIT(A). THE ASSESSEE CONTENDED THAT CAS H ACTUALLY FOUND WAS SHORT OF THE CASH IN THE BOOKS. THE SET OFF AGAINST SHORTAGE SHOULD BE GIVEN FROM THE UNRECORDED WITHDRAWALS. CASH BALANCE WITH THE ASSESSEE COMPANY WAS RS.3,70,948/ - . CONSIDERING THIS SUBMISSION, THE LD CIT(A) CONCLUDED THAT WI THDRAWALS ARE EXPLAINED. THE LD CIT(A) HAS OBSERVED THAT AS PER PARA 4.4.4 OF THE ASSESSMENT ORDER, THE SEIZED ROUGH CASH BOOKS WAS SHOWING CASH OF RS.3,61,531/ - AS ON 29.1.2005. THE CASH BALANCE ON THE COMPUTERIZED CASH BOOK WHICH IS STATED TO BE MORE C OMPLETE ONE WAS ALSO FOUND DURING SEARCH, SHOWING RS. 3,64,700/ - . THE LD CIT(A) OBSERVED FURTHER THAT AS PER THE COMPLETED CASH BOOK SUBMITTED AT THE TIME OF ASSESSMENT PROCEEDINGS, THE BALANCE WAS RS. 3,70,488/ - . THE CASH FOUND IN THE SEARCH WAS ONLY RS .1084/ - . WITH THIS OBSERVATION, WE ARE OF THE VIEW THAT THE LD CIT(A) HAS RIGHTLY COME TO THE CONCLUSION THAT THE SHORTAGE OF CASH WAS MORE THAN WITHDRAWALS, WHICHEVER CASH BALANCE FIGURE IS TAKEN. THE LD CIT(A) WAS THUS JUSTIFIED IN HOLDING THAT THE WIT HDRAWALS ARE EXPLAINED. THE GROUND NO. 4 IS ACCORDINGLY REJECTED. TUSHAR OIL PACKING CO. A.Y. 2005 9 GROUND NO.5 10. THE A.O MADE ADDITION OF RS. 47,633/ - ON ACCOUNT OF GROSS PROFIT ON STOCK FOUND SHORT . STOCK WORTH RS.1,07,50,034/ - WAS FOUND SHORT DURING THE COURSE OF SEARCH. THE A SSESSEE HAD DEBTORS TO THE TUNE OF RS.1,08,00,000/ - IN ITS BOOKS. THE A.O ADDED G.P AT THE RATE OF 0.9% AND COMPUTED THE SALES TURNOVER WITH REFERENCE TO THE STOCK FOUND SHORT AT RS.1,08,47,663/ - , THE DIFFERENCE OF RS.47,663/ - WAS ADDED AS UNACCOUNTED PR OFIT AS STOCK SOLD OUTSIDE THE BOOKS. BEFORE THE LD CIT(A), THE CONTENTION OF THE ASSESSEE REMAINED THAT HE HAD AGREED TO THIS ADDITION ON THE CONDITION THAT NECESSARY SET OFF WOULD BE ALLOWED AGAINST ADDITION MADE ON ACCOUNT OF DEBTORS. THE STOCK SHORT AGE HAS BEEN SET OFF AGAINST THE UNACCOUNTED DEBTORS AND THE BALANCE DEBT OFFERED TO TAX. IF THE SHORTAGE AMOUNT IS TO BE COMPUTED INCLUDING THE GROSS PROFIT, THAT THE HIGHEST AMOUNT SHOULD BE SET OFF AGAINST UNACCOUNTED DEBTORS. THE LD CIT(A) AGREED W ITH THIS CONTENTION OF THE ASSESSEE AND HAS DELETED THE ADDITION OF RS. 47,663/ - WITH THIS OBSERVATION THAT SINCE THE SHORTAGE OF STOCK HAS BEEN ADJUSTED AGAINST THE DEBTORS, THE GROSS PROFIT AMOUNT SHOULD BE SIMILARLY SET OFF. HE OBSERVED FURTHER THAT THE STOCK IS SOLD AT SALE PRICE AND NOT AT THE COST PRICE. THE DEBTORS WOULD, THEREFORE, REPRESENT THE PRICE OF THE STOCK INCLUDING THE GROSS PROFIT. SINCE TOTAL DEBTORS HAVE BEEN OFFERED FOR TAX, THERE IS NO NEED TO MAKE A SEPARATE ADDITION. WE CONCUR W ITH THIS FINDING OF THE LD CIT(A). THE SAME IS UPHELD. GROUND IS ACCORDINGLY REJECTED. TUSHAR OIL PACKING CO. A.Y. 2005 10 11. IN RESULT, APPEAL PREFERRED BY REVENUE IS DISMISSED. C.O. NO. 06/PN/2010 12. CROSS OBJECTION S HAVE BEEN PREFERRED BY THE ASSESSEE ONLY IN SUPPORT OF THE FIRST APPELLATE ORDER IMPUGNED BY THE REVENUE. IN VIEW OF THE ABOVE FINDING, THE CROSS OBJECTIONS HAVE BECOME INFRUCTUOUS. THE SAME ARE DISMISSED AS SUCH. 13. IN SUMMARY, BOTH THE APPEAL AND C.O. ARE DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 13 TH M AY , 2011 SD/ - SD/ - ( G.S.PANNU ) ACCOUNTANT MEMBER (I.C. SUDHIR) JUDICIAL MEMBER PUNE: DATED: 13 TH MAY , 2011 US COPY OF THE ORDER IS FORWARDED TO : 1. THE APP ELLA NT 2. THE RESPONDENT 3. THE CIT - I/II , KOLHAPUR /CIT (CENTRAL),PUNE 4. THE CIT - (A), KOLHAPUR 5. THE D.R. ITAT, PUNE B BENCH, PUNE 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR INCOME TAX APPELLATE TRIBUNAL PUNE