Mere Material found during survey not gives any authorization to AO to make assessment U/s. 153C & 153A unless the same evidences Income understatement

From the above, it is observed that though the name of the firm is changed, there is no change in the partners except a small variation in the profit sharing ratio of the partners. Both the partners have run the above restaurants from 12-1-2005 till the date of assessment. Though for the sake of convenience or for obtaining the license, the name has been changed, there was no change in the partnership and the partners. The learned A.R did not place any evidence having filed the returns in the name of the different firms for the period of their existence. Both the firms are belonging to the same partners and the Partners are individually, severally and jointly liable as per the Partnership Act. Therefore, it is un disputed fact that though the name of the partnership firm is changed, the seized material found during the course of search was related to the partnership firm run by Shri MVKS Subba Raju and Shri Anumolu Jaswanth and the assessee has never disputed the jurisdiction and participated in the assessment proceedings. By participating in assessment proceedings and not disputing the jurisdiction the assessee made the assessing officer to believe that the proceedings are conducted on the right person. Therefore we are unable to accept the contention of the assessee that the seized material does not belong to the assessee.

8.1 As per 153C of Income Tax Act for invoking jurisdiction, there must be incriminating material found and seized during the course of search in form of money, bullion, jewellery or the evidences indicating the inflation of e expenditure or undisclosed investments or suppression of Income.etc. As per the satisfaction note, the notice under section 153C was issued basing on the material found and seized during the search in the residential premises of A.T. Rayudu and Group bearing No. ATR/B/21 page No. 27-31. On verification of the seized material it was an account copy of the State Bank of Hyderabad bank account for the period from 8-7-2006 to 16-8-2006 which was maintained by the assessee. The learned Authorised Representative argued that the seized material does not belong to the assessee. Though the contention of the learned Authorized Representative is not acceptable as discussed in earlier paragraphs, on going through the assessment order passed by the assessing officer, there was no reference to the seized material in the assessment order for making any addition. The assessing officer has made the following additions in the assessment order

(1) Business income estimated Rs. 15,84,291

(2) Unexplained expenses under section 69C towards pre operative expenses Rs. 7,98,101

(3) Unexplained expenses under section 69C towards rent payment of Rs. 6,48,000

8.2 All the above additions are made on the basis of loose sheets found during the course of survey conducted on 6-12-2007 which was found and impounded at the time of survey relating to M/s. SSLBR for the month of June 2007. The material found during the course of survey does not give any authorization to the assessing officer to make the assessment under section 153C read with s.153A of Income Tax Act. There should be material available evidencing the under statement of income in the premises of searched person relating to third party to assume the jurisdiction to make assessment under section 153C read with section 153A of Income Tax Act. This view is supported vide paragraph 50 of the judgment in the case of CIT v. IBC Knowledge Park (P) Ltd. (2016) 385 ITR 346 (Karnataka) :–

“Materials such as books of account, documents or valuable assets found during a search should belong to a third party which would lead to an inference of undisclosed income of such third party. Such an inference should be recorded by the assessing officer having jurisdiction over the searched persons and communicated to the assessing officer having jurisdiction over such third party along with the seized documents and other incriminating materials on the basis of which the assessing officer having jurisdiction over such third party would issue notice under section 153C. On receipt of the aforesaid material, the assessing officer having jurisdiction over such third party would proceed against the said third party. Thus, where no material belonging to a third party is found during a search, but only an inference of an undisclosed income is drawn during the course of inquiry, during search or during post-search inquiry, section 153C would have no application. Thus, the detection of incriminating material leading to an inference of undisclosed income is a sine qua non for invocation of section 153C of the Act.”

8.3 The Honorable Karnataka High Court in the case of Pr. CIT, Bangalore v. Lakshmi Singh in (IT Appeal No. 100059/2015, date 13-1-2017) held that in the absence of any evidence, the assessing officer is not justified in invoking his power under section 153C of Income Tax Act. Similar view taken by Honorable Karnataka High Court in the case of CIT v. Sunita Bai (IT Appeal No. 100058 of 2015, date 12-1-2017). Honorable Calcutta High court in Commissioner, Kolkata-III v. Veerprabhu Marketing Ltd. in (2016) 388 ITR 574 (Calcutta) also expressed that Existence of incriminating material which may be found during search/requisition/survey of third party is a prerequisite for assessment of a person other than person searched. Honorable Delhi High court on the similar facts in the case of CIT v. Refam Management Services (P) Ltd. (2016) 386 ITR 693 (Delhi) held that Proceedings initiated under section 153C against assessee in respect of assessment years 2003-04 to 2008-09 are not justified where only the document seized during search in question was a cheque book pertaining to assessee which reflected the issue of cheques during August 2008 to October 2008, relevant to assessment year 2009-10. In the judicial pronouncements cited (supra) held that in the absence of incriminating material, the assessing officer cannot invoke the provisions of power under section 153C of Income Tax Act. In the instant case, the seized material was the copy of the bank account and the revenue has not established that the seized material in question was incriminating evidences to invoke the provisions of 153C of Income Tax Act. The facts of the case are similar to that of the decision of Honorable Delhi High court in Refam Management Services (P) Ltd. supra Therefore, the assessment order as well as Commissioner (Appeals) order clearly evidences that no incriminating material was found which was taken as evidence or basis for framing the assessment and the revnue could not controvert the same with any other evidences. Therefore, we hold that the assessing officer has wrongly invoked the power under section 153C of Income Tax Act, accordingly, the orders passed by the lower authorities are set aside appeal of the assessee is allowed.

9. Ground No. 3 to 6 are related to the additions made by the assessing officer on the basis of evidences collected during the course of survey. In ground No. 2 we have held that the assessment order passed under section 153C read with section 153C as in valid. Hence we consider it is not necessary to adjudicate the grounds on merits and dismiss them as in fructuous.

ITA No. 495/VIZ/2012/2008-09

10. Ground Nos. 1 and 7 are general in nature which does not require specific adjudication.

11. Ground Nos. 2 and 3 are related to the rejection of books of accounts and estimating the income. A survey under section 133A of the Act was conducted in the business premises of the assessee and certain evidences were found during the survey. Basing on the evidences found during the course of survey the assessing officer has estimated the business profit of Rs. 21,12,384. In this case, survey under section 133A was conducted in the business premises of the assessee on 6-12-2007. During the course of survey, the evidences in the form of loose sheets were found and impounded by the assessing officer. The assessing officer recorded the statement regarding the contents of the loose sheets but the assessee has neither cooperated nor furnished the satisfactory explanation. The only reply given by the partner Mr. MVKS Subba Raju to the specific questions asked by the assessing officer was “as already stated, the statement is not a correct statement and I request you to ignore the entries in the said impounded statement”. The assessing officer attached the copy of the impounded loose sheets in page Nos. 4 and 5 of the assessment order. The statement found during the course of survey was titled as “M/s. supraja’s Sandy Lane Bar & Restaurant, Visakhapatnam, trading and profit and loss account for the month of June 2007”. The complete details of purchases, sales, other expenses and the abstract of the balance sheets as on 30-6-2007 were found during the course of survey. As per the statements found, it was noticed by the assessing officer that the total liquor sales was Rs. 9,92,826 for the mon-6-2007 and restaurant sales was Rs. 1,61,886, profit upto May was Rs. 19,74,787, June Profit was Rs. 1,37,602 and profit upto June was Rs. 21,12,389 (Average monthly profit i.e., 2112389/12=1760324). The entries in the above document was partially tallied with the books of accounts of the assessee. Since the above income and expenditure does not tally completely with the regular books of accounts maintained by the assessee, the assessing officer rejected the books of accounts and estimated the income at Rs. 1,76,032 per month which worked out to Rs. 21,12,384 for the whole year and brought the same to the tax. Aggrieved by the order of the assessing officer the assessee filed appeal before the Commissioner (Appeals) and the learned Commissioner (Appeals) confirmed the addition made by the assessing officer. The relevant part of the learned Commissioner (Appeals) order is extracted which reads as under :–

“8.2 I have considered the arguments of the assessee and have gone through the material impounded which is extracted in the assessment order. P&L account impounded clearly reflects net profit of Rs. 1,37,602 for the month of June 2007 and also shows profit up to May 2007 at Rs. 19,74,787. This P&L statement is found from the assessee’s premises. When the assessee was asked to explain this, only evasive replies were given time and again despite specific questions raised in this regard. Assessee’s explanation that this paper is prepared by some mediator to be submitted to banks is without any substance as the assessee in support of its contention did not furnish any evidence. Neither the whereabouts of the mediator who prepared this nor the banks to which it is furnished are submitted by the assessee The issues that need to be noted that is any calculation made to submit it to banks would be in proper format, signed and certified but not in the manner in which it is found. The impounded material seems as if it is made for internal consumption of the partners and is only meant to reflect the actual affairs of the assesee’s business for the sake of discussion amongst the partners. Assessee also stated that the figures of profits are inflated. If that is the intention of assessee, the actual rent of Rs. 82,000 would not have been reflected in the statement as against the rent as per lease deed of Rs. 8,000. Besides the above fact it also seems impossible that a big premises touching the sea would have been taken for a rent of Rs. 8,000. This itself reflects the intentions of the assessee not to show the actual affairs of the firm in the regular books of account. Therefore, despite some minor discrepancies which could not be reconciled, I am of the considered opinion that the statement found and impounded reflected the actual affairs of the assessee firm. Therefore assessing officer correctly held that the regular books of account cannot be relied upon. Hence assessing officer is justified in rejecting the books and estimating the net profit based on the impounded material. Therefore the estimation made by assessing officer is upheld.”

12. Appearing for the assessee, the learned Authorized Representative argued that the Commissioner (Appeals) has erred in confirming the addition made by the assessing officer on a simple paper which is not belonging to the assessee. The loose sheet cannot be a basis for estimation of income. Though the net profit was shown as Rs. 1,37,602 for the month of June and total sale of Rs. 9,92,826, every month sales cannot be the same. There may be ups and downs in the sales. The entire expenditure cannot be accounted in loose papers every month. The net profit arrived by the assessee for the month of June is purely an estimation without including all the expenses. Therefore, the learned Authorized Representative argued that the assessing officer has estimated the income for the entire year on the basis of one month profit which is purely a guess work. According to the learned Authorized Representative the addition required to be deleted

13. On the other hand, the learned Departmental Representative argued that the assessee is engaged in the liquor trade and bar & restaurant. In the liquor trade, the license is given from June to June and in the loose sheet found during the course of survey it was noted that the profit up to June was Rs. 21,12,389 and profit for the month of June was 1,37,602 net of all expenses. The average net profit on the total profit per month worked out to Rs. 1,76,032.Therefore, the assessing officer has rightly estimated the income basing on monthly profit @1,76,032 declared by the assessee up to June 2007. The learned Departmental Representative further argued that it is for the assessee to prove that the contents of loose sheets found during the course of search were incorrect. Therefore, the learned Departmental Representative argued that there is no error in the assessment order which was rightly confirmed by the Commissioner (Appeals) and no interference is called for.

14. We have heard the rival submissions and perused the material placed on record. A Survey under section 133A was conducted in the business premises of the assessee on 6-12-2007 and during the course of survey loose sheets found and impounded as page nos. 2 and 3 of impounded documents. The loose sheets are computer generated trading and profit and loss account for the month of June 2007 and balance sheet as on 30-6-2007 pertaining to M/s. SSLBAR. Statement was also recorded from the manager and partner Shri MVKS Subba Raju for which Shri Subba Raju has not explained the contents to the satisfaction of the assessing officer. The sales recorded in loose sheet were tallied for the month of June. As per the audited books of accounts, total sales for the month of 2007 were Rs. 9,92,826 which is in sync with the loose sheets. Similarly, some other expenses shown under transport, sales tax, telephone charges for the month of June were also in sync with the books of accounts and the computer generated trading and profit and loss account found at the time of survey which is not disputed by the Authorized Representative. Therefore, the assessing officer held that the trading and profit and loss account found was belonging to the assessee. As per section 292C of Income Tax Act, the burden is on the assessee to prove that the evidences found during the course of survey were not belonging to the person surveyed and the contents are not true. In this case, there was survey in the premises of the assessee and the evidences found in the survey premises were partly tallied with the audited books of accounts as discussed above and the assessee has not discharged its onus that the said profit and loss account and balance sheet does not belong to it and the contents are not true.. Therefore, we have no hesitation to agree with the assessing officer and the Commissioner (Appeals) that the loose sheet belongs to the assessee and the contents in the loose sheets are true and correct. It is for the assessee to prove that if any entry recorded in the loose sheet is not correct. In this case, the assessee has not proved with tangible evidences. Though the assessee has stated that certain expenses are not recorded, he did not bring it to our notice the expenses said to be not recorded. Therefore, we hold that profit worked out by the assessee for the month of June 2007 is correct. The assessing officer estimated the yearly profit by multiplying Rs. 1,76,032 the average monthly profit with 12 months for the assessment year 2008-09. The assessee did not furnish the true and correct financials before the assessing officer with correct amount of sales and the profit. In the circumstances of non cooperation of the assessee the assessing officer has no option except to estimate the profit. However the sales cannot be the same amount through the year. For the month of June 2007 the net profit was Rs. 1,37.602 on total sales of Rs. 9,92,826 which works out to 13.85% on total sales. Therefore we direct the assessing officer to estimate the net profit on total sales of the assessee @13.85% for the A.Y-2008-09 or to adopt the profit admitted by the assessee whichever is higher. Accordingly this ground of appeal of the assessee is partly allowed.

15. Ground No. 4 is related to the depreciation, interest on partners’ capital and remuneration to partners. No information is available with regard to the depreciation claimed by the assessee, Interest on partners capital and remuneration to partners from the assessment order. On verification of Form 35, it appears that the assessee has not raised this ground before the Commissioner (Appeals). However, unless the partnership deed permits the interest and remuneration it is not allowable deduction. The learned Authorized Representative also did not place any evidence regarding the claim of interest and remuneration claimed by the partners in the Return of Income. Therefore, the assessee’s appeal on interest on partners capital and the remuneration is not tenable and dismissed.

16. With regard to the depreciation, it is statutory allowance which required to be allowed by the assessing officer. It is seen from the loose sheets that while working the net profit for the month of June 2007, no depreciation was debited to the profit and loss account. Therefore, we direct the assessing officer to allow the depreciation as per the rules and allow the same from the income estimated as per the discussion made in the earlier paragraphs subject to providing the necessary evidences for the assets. This issue is allowed for statistical purpose.

Ground Nos. 5 and 6 are related to the unexplained cash credit in respect of Pushkara capital. As per the balance sheet found during the course of survey it is seen that the assessing officer found that a sum of Rs. 23,14,040 was shown as capital in Pushkara Capital account. The source was not explained by the assessee during the course of survey and before the Commissioner (Appeals). Since the source was not explained by the assessee, the assessing officer made the addition under section 68 of Income Tax Act. The assessee went on appeal before the learned Commissioner but failed to explain the source. Therefore, Commissioner (Appeals) confirmed the addition in para no. 9.3 of the order which is extracted as below :–

“9.3 Unexplained cash credit under section 68 (assessment year 2008-09) The impounded material showed that two persons viz Sri MVSK Subba Raju and one Sri Pushkara introduced capital of Rs. 21,79,106 and Rs. 23,14,040 respectively. From the regular books of account, it is seen that Sri Subba Raju’s capital account is only Rs. 7,45,980. Thus thee is a difference in the capital account of Sri Subbara Raju amounting to Rs. 14,33,136. As this reflects the individual income/ investment of Sri Subba Raju AC held that the same would be considered in Subba Raju’s individual assessment. However regarding capital of Pushkara amounting to Rs. 231440/–no satisfactory explanation is offered by the assessee. The second official partner as per partnership deed Sri A Jaswant did not comply to the notices I summons issued. The amount standing in the name of Sri A. Jaswant as per books is only Rs. 14,498/-. Hence AC after giving credit to the amount of Rs. 14,498 added back Rs. 22,99,542 in the hands of the firm for assessment year 2009-10. Against this addition it is argued by the assessee that the capital under the name of Pushakara is mythical and is shown to boost up the capital of the firm and to strengthen its financial status. In fact there is no such partner in the firm. The two partners viz., Subba Raju and Jaswant had capital balance of Rs. 7,00,867 and Rs. 14,498 as on 31-3-2007. Therefore it is contended that the addition made is not based on any facts and the same should be deleted. It is also argued relying on indwell Constructions, that once the net profit is estimated no further addition is warranted. I have considered the arguments of the assessee. The impounded statement reflects capital in the name of Pushkara. As stated by the assessee this name indeed seems to be a mythical name. However money does not come from mythical sources. Though the name may be pseudonym, the money shown as a source is definitely not pseudo as it has the matching assets shown in the balance-sheet. Therefore assessing officer is duty bound to examine the capital introduction in the name of Pushkara. As no explanation in this regard is forthcoming from the assessee AC rightly assessed the difference amount, after giving due credit to the second partner’s actual capital balance, as unexplained credit under section 68, Assessee reliance on Indwell case is also unfounded as the same applies to additions from section 29 to 43 only and not to addition under section 68. Therefore I confirm the addition made by assessing officer.”

18. We have heard both the parties and perused the material placed on record. There was a capital outstanding in the capital account of Pushkara amounting to Rs. 23,14,040. After reducing the loan account of Pushkara, the net balance was Rs. 22,99,542. It is settled issue that the assessee required to explain the source of cash credit made in the books of account with identity, capacity and the correctness of the entry with the tangible evidence. Though the assessee claimed that there was no such partner in the name of Pushkara, the assessee has shown the same as outstanding capital balance and also declared the matching assets. Therefore, the learned Commissioner (Appeals) upheld that the money does not come from mythical sources. Since the matching assets shown in the balance sheet, the money has come into the firm in the name of Pushkara, assessee is duty bound to explain the source with identification, genuineness and credit worthiness of the capital contributor. Since no explanation is forthcoming from the assessee, we hold that Commissioner (Appeals) has rightly confirmed the addition made by the assessing officer and the order of the Commissioner (Appeals) is upheld.

19. In the result, the appeal of the assessee for the assessment year 2007-08 is allowed and for the assessment year 2008-09 is partly allowed.