When the assessee fails to rebut the unexplained investment in the purchase of fuits, and the CIT(A) and Tribunal fail to record the fact that such entries were made in the books, the addition made by the AO is sustainable

CIT  Vs Sanjay Chhabra ( Chandigarh HC)- The sole point for consideration in this appeal is that once the Revenue had come to the conclusion that the assessee had made sales of apples amounting to Rs. 5,75,654/- to one Jagdish Chawla, whether it was the entire amount, or the 5% profit thereof, being commission on such sale, that was to be added to the income of the assessee. According to the Revenue, the judgment of the Gujarat High Court reported in President Industries’s case (supra), was not applicable and the entire sale amount was assessable in the hands of the assessee.On the other hand, learned counsel for the assessee on the strength of the aforesaid decision argued that only 5% profit on the sale amount as commission was exigible to tax.  10. We find force in the contention of the learned counsel for the Revenue.

 Reference is now made to judgment reported as President Industries’s case (supra). In that case, the CIT(A) and the Tribunal had found as a fact that there was no material on record to indicate that any investment was made outside the books of accounts to make the sales and in such circumstances the entire sale proceeds could not be added as undisclosed income of the assessee but the addition could be only of the profits embedded in the sales. The High Court in the light of the aforesaid finding of fact while dismissing the reference application under Section 256(2) of the Act filed by the Revenue had held that no question of law arose for consideration. In the present case, in the absence of any clear cut and unambiguous finding recorded by the CIT(A) and the Tribunal on the basis of the material on record, that the investment in the apples was accounted for in the books of accounts of the assessee, no advantage or support can be gathered by the assessee from the said decision.

Accordingly, the substantial question of law is answered in favour of the Revenue and against the assessee.

Decided By- Chandigarh High Court

Income Tax Appeal No. 489 of 2005

Date of decision: 31.3.2011

ORDER

AJAY KUMAR MITTAL, J.

This appeal under Section 260A of the Income-Tax Act, 1961 (for short “the Act”) has been filed by the Revenue against the order dated 28.4.2005, passed by the Income Tax Appellate Tribunal Chandigarh Bench ‘B’, Chandigarh (in short “the Tribunal”) in ITA No. 264/CHANDI/2004, relating to the assessment year 1999-2000.

2. The appeal was admitted by this Court for determination of the following substantial question of law:

“Whether the Tribunal erred in law in taking only profit of unexplained transactions as undisclosed income instead of taking investment in the said transactions into account.”

“3.1 As per document No.1, the assessee has a debit balance of Rs. 4,20,856/- as on 6.10.1998 in the name of Sh. Jagdish Chawla. As per document Nos. 1 & 3, the assessee has sold apples worth Rs. 1,30,540/- and Rs. 74,528/- on 6.10.1998and 26.12.1998, respectively. The total sales were made at Rs.6,25,654/-. The assessee has also received Rs. 50,000/-on 6.10.1998 from Sh. Jagdish Chawla against the salesmade. Since these sales were not recorded in the books ofaccounts, vide order sheet entry dated 21.3.2002,   the assessee was asked to explain as to why addition amounting to Rs. 6,75,654/- to the extent of peak investment may not be made to the returned income on account of unaccountedsales of apples to Shri Jagdish Chawla. On 21.3.2002, ShriSanjay Chhabra attended this office and his statement was recorded. The extract of his statement is as follows:-

Question: As per documents found during the course of survey operation carried out at the business premises of Sh. Jagdish Chawla, Prop. M/s. Sai Baba Fruit Company, SCF 23, Sector 26, Chandigarh on 6.11.1998, you have sold apples worth Rs. 5,75,654/-.   An examination ofbooks of accounts shows that all the sales made to Sh. Jagdish Chawla have not been entered. I am also showing you the documents which are on the writing pad of your concern, M/s. Sanjay Chhabra Traders. All the sales made to Sh. Jagdish Chawla are entered on these documents. What you have to say in this regard?

Answer: In this regard I am to submit that from SCF 22, Sector 26, Chandigarh, my father Sh. Mangal Sain and brother Sh. Hemant Kumar were also running business besides my business. The detail of which are as under:-

Sr. No .	Name of Proprietor	Name of the concern
1.	Sh.       Mangal      Sain      (Prop) (Father)	M/s. Mangal Sain & Sons, SCF 22, Sector 26, SM, Chandigarh
2.	Sh.     Sanjay    Chhabra    (Prop) (Myself)	M/s. Sanjay Chhabra Traders, SCF 22, Sector 26, SM, Chandigarh
3.	Sh. Hemant Kumar (Brother)	M/s. Hemant Kumar & Sons, SCF 22, Sector 26, SM, Chandigarh

The writing pads of all the above concerns are kept together. Any person who needs the writing pad can use the writing pad of another concern. As far as these documents which are shown to me today are concerned. I have not made any sale of apples to Sh. Jagdish Chawla, Prop. M/s. Shri Sai Baba Fruit Company, SCF 22, Sector 26, Chandigarh. Hence, these transactions are not entered in mybooks of accounts, however, my father Sh. Mangal Sain has made sale of apples during the F.Ys. 1997-98 & 1998-99 to Sh. Jagdish Chawla. My father has surrendered the income on these transactions in his return of income filed in your office.”

11.         The CIT(A), however, upheld the finding that the transactions entered by the assessee with Jagdish Chawla had taken place but held that only profit on sale at 5% of the total value could be taxed in the hands of the assessee. The observations recorded by the CIT(A) in paras 2.2 and 2.3 of the order read thus:

“2.2 The submissions of the appellant have been considered carefully and I have gone through the facts of the case. It is observed that the appellant has not been able to discharge the onus by bringing any concrete evidence to substantiate the claim that the transactions were not made by him. However, at the same time, I find force in the contentions of the appellant that at best, it is only the profit arising from the sale of the goods, which can be added. In this context, the appellant has rightly drawn my attention to the judgment of the Hon’ble Gujarat High Court in the case of CIT v. President Industries reported in 258 ITR 654, wherein it has been held that:

“The amount of sales could not represent the income of the appellant who had not disclosed the sales. The sales only represented the price received by the seller of the goods only the realisation of the excess over the cost incurred could form part of the profit included in the consideration for the sales.”

2.3 In the instant case, the appellant is a commission agent and gets 7% commission on sales. From this, 2% is passed on to the market committee and the balance 5% remains in the hands of the appellant as income. Respectfully, following the latest judgment of Hon’ble Gujarat High Court, quoted supra and after considering the totality of the facts, I am of the considered view that the profit on sales at 5% may be taxed in the hands of the appellant. This is so because the sales are outside books and in my view expenses against sales have duly been taken care of in the regular P&L account prepared by the appellant.”

12. The aforesaid findings were affirmed by the Tribunal.

13. A perusal of the order passed by the assessing officer clearly establishes that the assessee had made unexplained investment in the purchase of apples which he had sold to Jagdish Chawla and in such circumstances, it was not justified that only 5% profit` on sale consideration was taxed in the hands of the assessee. The CIT(A) and the Tribunal had reversed the order of the assessing officer holding that the commission on the sales made to Jagdish Chawla could be added. The CIT(A) and the Tribunal had no where, after appreciation of material on record, concluded that the investment in the purchase of apples was accounted for in the books of accounts of the assessee. Learned counsel for the assessee was asked to show whether the amount which was involved in value of the apples i.e. Rs. 5,75,654/-, was entered in the books of accounts or whether the father of the assessee, Shri Mangal Sain had made sales of apples during the financial years 1997-98 and 1998-99 to Jagdish Chawla and had surrendered the income earned by means of those transactions, in his return of income filed with the income-tax Department. The learned counsel was unable to substantiate his claim and to show that the amount was either entered in thebooks of accountss or was ever surrendered by Shri Mangal Sain as claimed by him. Accordingly, the findings recorded by the CIT(A) and the Tribunal are vitiated and are set aside.

14. Reference is now made to judgment reported as President Industries’s case (supra). In that case, the CIT(A) and the Tribunal had found as a fact that there was no material on record to indicate that any investment was made outside the books of accounts to make the sales and in such circumstances the entire sale proceeds could not be added as undisclosed income of the assessee but the addition could be only of the profits embedded in the sales. The High Court in the light of the aforesaid finding of fact while dismissing the reference application under Section 256(2) of the Act filed by the Revenue had held that no question of law arose for consideration. In the present case, in the absence of any clear cut and unambiguous finding recorded by the CIT(A) and the Tribunal on the basis of the material on record, that the investment in the apples was accounted for in thebooks of accounts of the assessee, no advantage or support can be gathered by the assessee from the said decision.

15. Accordingly, the substantial question of law is answered in favour of the Revenue and against the assessee.