1. This appeal by assessee is against the order dt. 24th Sept., 1999 of learned Dy. GIT, Central Circle, Visakhapatnam made under Section 143(3) r/w Section 158BD of the Act. Following grounds have been raised in appeal.
1. The block assessment made by the Dy. CIT, Central Circle, Visakhapatnam is illegal and improper.
2. The material seized in third party premises does not belong to the appellant. Hence issue of notice under Section 158BC r/w Section 158BD is not correct.
3. The valuation of variation of stock by the assessing authority is not correct.
4. (i) The addition towards unexplained investment in purchases is also not correct.
(ii) Moreover the AO is not correct in taking the material that was seized from the third party business premises as that of the appellant.
(iii) Alternatively it is contended that the AO is not correct in taking the total valuation of the purchase instead of peak amount.
(iv) The AO should have telescoping the addition to the stock deficit to stock purchase with that of the investment.
5. Any other grounds of appeal that may be urged at the time of hearing of the appeal.
1. Without prejudice to my contentions that the purchase bills found during the course of search proceedings of Mude Ramachandra Rao, does not belong to me. In the alternative it is also contended that (a) If at all any addition to be made in my hands relating to purchase bills found during the course of search proceedings of Mude Ramachandra Rao, the same should be allowed as expenditure in my hands.
(b) If at all any addition is to be made, it should be profit margin only and not the entire bill amounts.
2. Without prejudice to my contentions that there is deficit stock at all, in the alternative it is also to contend that (a) The very deficit stock arrived during the course of survey proceedings under Section 133A of IT Act does not come within the purview of block assessment as per the provisions of 158BA of IT Act.
(b) If at all any addition is to be made, it should be profit margin only and not the entire deficit stock.
3. Any other ground or grounds of appeal that may be urged during the course of hearing of appeal.
2. In the petition filed under Rule 11 of the ITAT Rules, 1963 praying for admission of additional ground, the assessee has stated that the aforesaid grounds could not be raised earlier due to inadvertent mistake. As no new facts are required to be investigated and the grounds being legal, the same may be admitted for adjudication. The Revenue, however, did not object to the petition. Accordingly, after hearing the parties, the additional grounds have been admitted for adjudication.
3. Briefly, the facts are that the assessee is proprietor of a concern viz. Bomanna Readymade Centre having its business at Hanumakonda and head office at Rajahmundry. An action under Section 132 of the Act was carried on 2nd Feb., 1996 at the business premises of M/s Bomanna Silks, Vijayawada and Sri Mude Ramachandra Rao at Vijayawada, partner of the firm. Certain incriminating documents consisting of purchase bills and other loose papers were found and seized by inventorising the same as Annexs. S3-31 and S3-32. On the same very day, a survey operation was carried out under Section 133A of the Act on the business premises of the appellant. Physical stock inventory was taken at Rs. 30,00,965. Since the assessee did not maintain the stock account on the day-to-day basis, the survey party also worked out the stock by applying profit rate of 20 per cent on the sales and thus determined the stock at Rs. 37,67,441 thereby working out the deficit stock at Rs. 7,66,475.
4. In response to notice issued under Section 158BC of the Act r/w Section 158BD of the Act on 29th Jan., 1998 calling for the return for undisclosed income for the block period, the assessee returned nil undisclosed income. During the course of assessment proceedings, the AO required the assessee to show cause as to why the addition as undisclosed income on account of unexplained investment in purchases found through the seized Annexs. S3-31 and S3-32 to the Panchnama dt.
2nd Feb., 1996 pertaining to the proprietorship of the assessee, be not added to the returned income. In response thereto, the assessee contended that the bills in question have been seized by the Department from the business premises of M/s Bomanna Silks, Vijayawada. The assessee does not have any connection with those bills as they do not relate to his business. It was, further contended that the appellant makes purchases only on credit basis. It is customary in his shop to mention the payment on the reverse of the bill along with the date of payment. If any bills relating to the Bomanna Group of cases are seized by the Department, they will confirm this fact. In the case of Bomanna Readymade Centre also the payment dates can be ascertained by verification of the bills. The fact of credit purchases will be evident from such verification. Therefore it is not proper to conclude that there are unexplained investments in the purchases.
5. The AO, however, was not satisfied with the explanation rendered by the assessee as per reasoning given in para 3.2 of his order reproduced as under and thus made an addition of Rs. 37,477 for asst. yr. 1995-96 and Rs. 3,59,892 for asst. yr. 1996-97 as undisclosed income forming part of the block period.
The first part of the assessee's objection disclaiming the bills as relating to his business is not tenable, as the bills are very much in the name of the assessee's business concern and were seized from the business premises of M/s Bomanna Silks, Vijayawada, which is a sister concern belonging to the same group and carries on similar business. As regards the claim that they were credit purchases, the assessee's claim has been verified with reference to the seized purchase bills. It is found that in the balance sheet attached to the return for the block period, none of the parties whose purchase bills were seized have been shown as creditors. Further, most of the purchase bills contain the payments made from time to time on the reverse. These payments are made either in cash or through bearer demand drafts, particulars of which are not recorded in the books of account of the assessee. Like the other assessees of the group, in this case also the unaccounted purchases mostly relate to parties in Calcutta, whose agents deliver the goods and collect the payments by bearer DDs. Evidence for such purchase of bearer demand drafts were also seized vide loose paper bundle MRR-2 from the possession of Mude Ramachandra Rao. In view of the same, the assessee's claim that they were credit purchases is rejected and in the absence of any material evidence submitted by the assessee to explain the sources of these payments, the sum of Rs. 3,97,369 representing the unexplained investment in purchases is considered as the undisclosed income of the block period relevant to asst. yrs. 1995-96 and 1996-97 in the following manner.
6. The assessee's counsel, Sri P. Prabhakara Murthy while assailing order of learned CIT(A) contends that the material seized from the premises of third party does not give jurisdiction for issuance of notice under Section 158BC r/w Section 158BD of the Act. The purchase bills do not belong to the appellant. The AO did not bring any material on record to show that the bills found from the premises of M/s Bomanna Silks, Vijayawada relate to the purchases made by the assessee. There was, thus no justification in treating the purchases recorded in these bills as unexplained investment made by the assessee. Furthermore, it was contended that even if the purchases were to be taken as unexplained deduction thereof ought to have been given in terms of additional grounds raised in appeal and only the profit margin could have been added to the income of the assessee. Alternatively, it has been contended that there is no justification in the action of assessing authority to take the total value of purchases as unexplained investment instead of taking peak amount for making addition as undisclosed income.
7. On the other hand, the learned Departmental Representative while supporting the decision of the assessing authority contends that action under Section 158BC r/w Section 158BD of the Act was initiated after forming requisite satisfaction from the seized documents found from the sister concern of the appellant that the undisclosed income belongs to the assessee. Furthermore, the assessee could not bring any material on record to show that he did not have any business transaction with the parties who have raised these bills in the name of assessee for purchases made by it and also stand paid as per writing at the back of the respective bills. The assessing authority has acted on the basis of evidence found as a result of search. If the appellant had to disapprove this fact, burden was on him to have brought material on record to say so. Furthermore, the purchases made through these bills were not accounted for in the books of account of the assessee nor any income on that account was shown so as to allow any expenditure as deductible in computation of assessable income of the assessee. The plea of the assessee for allowing deduction as unexplained investment is thus devoid of any merit.
8. The learned Departmental Representative, further contends that the addition has been made for investment made in purchases found through these bills. The assessee neither accounted for purchases nor stock on that account. Nexus has also not been proved to show that the purchases so made stood sold and the same amount has been reinvested in making further purchases so that the peak amount should be taken. As the assessee has failed to establish nexus, his plea for making peak addition or add profit only also does not carry any weight.
9. We have heard the parties and perused the material on record carefully. Admittedly, the assessee is an associate of M/s Bomanna Silks, Vijayawada who are engaged in the similar business as that of the assessee. The finding of the assessing authority that M/s Bomanna Silks, Vijayawada is a sister concern belonging to the same group and carries on similar business has not been shown to be perverse on facts.
The action taken under Section 132 of the Act on M/s Bomanna Silks revealed purchases made through various invoices found during the course of search which were seized and inventorised as S3-31 and S3-32.
The AO being satisfied that there is unexplained investment made by the assessee, issued notice under Section 158BC r/w Section 158BD of the Act calling for the return of undisclosed income for the block period.
The assessee did not produce copy of such seized material nor any such evidence to show that the AO did not entertain any satisfaction that undisclosed income belongs to him. Under the peculiar facts of this case, it, therefore, cannot be accepted that the AO did not have valid jurisdiction to initiate action under Section 158BD of the Act r/w Section 158BC of the Act for making assessment of undisclosed income of the assessee. The ground raised in appeal, therefore stands rejected.
10. The assessee has also raised a plea that the purchase bills drawn in his name in fact, do not belong to him. Such an assertion has been made orally whereas the AO acted on the basis of documentary evidence found and seized from the business premises of M/s Bomanna Silks, Vijayawada who are associates of the appellant doing the similar business as that of the assessee. The assessee was duly confronted with the seized material and his explanation rendered before the assessing authority was not found satisfactory; as also the assessee did not bring on record any reliable or legal material to prove his oral plea raised before the assessing authority. Before us also, no such material has been adduced from which it could be discerned that the assessee did not make purchases through the bills so found and seized from the premises of M/s Bomanna Silks. It has also been found by the assessing authority that the purchases made through these bills have not been accounted for in the books of account for the stock held by it for which no day-to-day record has been maintained. Thus, there was unexplained investment which has to be treated as undisclosed income of the block period. This action of the assessing authority bringing to tax the amount of unexplained investment in purchases for asst. yr.
1995-96 at Rs. 37,477 and for asst. yr. 1996-97 at Rs. 3,59,892 as undisclosed income forming part of the block period, therefore, calls for no interference.
11. We also do not find any merit in the contention raised by the assessee through the additional ground raised by it that the deduction for expenditure has to be allowed in terms of Section 69C of the Act.
The addition in this case has been made for unexplained investment in stock which cannot be termed as expenditure. The assessee has also not shown any sales of such stock nor any nexus has been established to show that the same amount is available with him for re-employing the funds for making unaccounted purchases so as to make addition for peak amount only. The assessee having failed to establish nexus and also for the aforesaid reasons, his ground for making peak addition or addition for profit on sales only, has no merit and as such, the same stands rejected.
12. The assessee has also challenged the addition of Rs. 7,66,475 made on account of unexplained stock found as a result of survey operations on 2nd Feb., 1996 by applying GP rate as the assessee did not maintain day-to-day stock account of the stock dealt by it. The learned Counsel contends that the deficit stock found during the course of survey does not constitute "such other material or information" as are envisaged under Section 158BB of the Act for the purpose of making assessment of undisclosed income. Reference has been made to the judgment of Madras High Court in the case of CIT v. G.K. Senniappan .
13. We have heard the parties with reference to material on record and precedent cited at bar. The Revenue has gathered in the course of survey proceedings under Section 133A of the Act that there was deficit stock of Rs. 7,66,475. This deficit stock has been worked out by taking physical inventory of the stock as the assessee did not maintain any day-to-day account of the stock dealt by it. The stock as per books was worked out by applying a profit rate on the sales made by the assessee during the year under consideration. The Revenue's stand is that the material gathered in the course of survey under Section 133A of the Act can also be regarded as the material for the purpose of block period for making assessment of undisclosed income under Section 158BB of the Act. A mere reading of the above provision clearly indicates that the sentence "such other materials or information" as are available with the AO can be taken for determining the undisclosed income of the block period. The expression "such other material or information" has to be relatable to the evidence found as a result of search. It does not take into its encompass the material gathered or information collected as a result of survey which is not relatable to material found as a result of search. The Hon'ble Madras High Court in the case of CIT v. G.K.Senniappan (supra) where the Revenue has used the material gathered as a result of survey under Section 133A of the Act as an evidence for the purpose of Section 158BB of the Act has held as under that such material cannot form basis for computation of undisclosed income: A mere reading of the above provision clearly indicates that the sentence 'such other materials or information as are available with the AO' cannot be bisected or taken in isolation for the purpose of computation. Such other materials or information as are available with the AO, should as per the section relatable to such evidence the word 'such' used as a prefix to the word 'evidence' assumes much significance in this provision, as it indicates only the evidence found, as a result of search or requisition of books of account or other documents, at the time of search. Any other material cannot form basis for computation of undisclosed income of the block period. Hence, we are of the view that the CIT as well as the Tribunal have the issue in accordance with the statutory provisions, and requires no interference. The appeal is accordingly dismissed.
14. Having regard to the mandatory provision and the aforesaid judgment of the Hon'ble Madras High Court in the case of CIT v. G.K. Senniappan (supra), we are satisfied that the material gathered during the course of survey cannot form basis for computation of undisclosed income of the block period of the assessee. We, therefore, do not find any justification in the action of assessing authority to have treated such amount as undisclosed income of the block period and accordingly direct the deletion thereof.
15. In the result, appeal of assessee stands partly allowed as announced in the open Court in presence of parties on1lth Sept., 2006.