These cross appeals arise out of the common order dated 12-10-2012 passed by Ld CIT(A)-III, Kochi and they relate to the assessment years 2003-04 to 2009-10. Since these appeals were heard together, they are being disposed of by this common order, for the sake of convenience.
2. The assessee is challenging the order of Ld CIT(A) on two issues in all the seven years, viz., I.T.A. Nos. 331-337 & 366-372/Coch/2012 2 (a) Whether the Ld CIT(A) was justified in holding that the validity of search cannot be examined in the appellate proceedings before him. (b) Whether the Ld CIT(A) was justified in partially sustaining the addition made by the Assessing officer.
3. The revenue is assailing the decision of Ld CIT(A) in granting substantial relief in the addition made by the AO in all the years.
4. The facts relating to the case are discussed in brief. The assessee herein is a partnership firm consisting of two partners viz., Shri G.Venkatesan and his mother Smt. Muthulakshmi Ammal. It is engaged in the business of trading in gold and silver ornaments at Muvattupuzha. The revenue carried out search and seizure operations in the business premises of the assessee and also at the residential premises of its partners on 09-04-2008. During the course of search, it was noticed that the assessee did not keep any accounts for its business for the period from 01-04-2008 to 09-04-2008. It was also found that the purchase and sale entries were not made in the purchase register, sales register or stock register. The search party also stumbled upon excess stock of 2032 grams of gold and 7901 grams of silver ornaments. The search officials recorded a statement from the Managing partner of the firm Shri G.Venkatesan. According to the assessing officer, he admitted that the assessee firm did not maintain accounts for the period from 01-04-2008 to 09-04-2008 and had also accepted the fact that the assessee has carried on transactions of purchase and sales outside the books of account. It was further noticed that the assessee firm was effecting sales on the basis of estimate slips and they were not accounted for in the books of accounts, which has led in suppression of sales. During pre- search enquiries, it was found that 2.02 grams of gold locket sold on 11.03.2008 on the basis of an estimate slip for a value of Rs.2,787/- was not found accounted for in the books of account. During the course of search, the estimate slips issued for a period of 15 days were found. The average quantity of gold ornaments sold per day, as per those estimate slips, was 175.174 grams, where I.T.A. Nos. 331-337 & 366-372/Coch/2012 3 as the assessee had accounted for a sale quantity of 17 grams only in its books of account per day. Accordingly, the assessing officer came to the conclusion that the assessee is accounting for only 10% of its sales in its books of account. The search officials also found the documents relating to purchase of property and construction of a residential building in the name of partners. Accordingly, the assessing officer opined that the fact of suppression of sales stands corroborated by the investments made by the partners of the firm. The assessing officer noticed that the assessee had declared gross profit in the range of 36.55% to 48.08% in its books of account for the financial years 2001-02 to 2006-07. The AO took the view that the GP rate normally works out 20% in this kind of trade and the assessee has been declaring higher GP rate to make up the profit realized on suppression of sales. In view of the various reasons discussed above, the AO held that the accounts maintained by the assessee are not reliable and accordingly rejected the same. Accordingly, the AO estimated the turnover of the assessee at ten time of the declared turnover and estimated the GP thereon @ 20%. The difference between the GP so calculated and the GP declared by the assessee was assessed as undeclared/concealed income in all the years.
5. The assessee challenged assessment orders of all the years by filing appeals before Ld CIT(A). Before the first appellate authority, the assessee claimed that the panchas were not present during the course of search and in support of the said claim; it filed affidavits obtained from the Panchas. Accordingly, it was contended that the search becomes illegal and consequently, the impugned assessment orders passed in pursuance of the illegal search are invalid. The Ld CIT(A), after obtaining remand report from the assessing officer on the new claim made before him, held that the assessee is not entitled to raise the issue relating to the validity of search. For this proposition, the Ld CIT(A) placed reliance on the decision of the Delhi Special bench of ITAT in the case of Promain Ltd Vs. CIT( 281 ITR (AT) 107). However, the Ld CIT(A) also rejected I.T.A. Nos. 331-337 & 366-372/Coch/2012 4 the said ground on merits also, i.e., he held that the new claim of non-presence of panchas is not valid since the copies of panchanamas were duly signed by the Panchas and the copies thereof were given to the assessee during the search proceedings and the assessee did not raise any objection at that point of time or during the course of assessment proceedings. The Ld CIT(A) further observed that the assessee is raising this claim for the first time before him and it did not give any reason for not raising the same before the AO or the investigation wing. The Ld CIT(A) further held that the assessee is debarred from raising this issue in any further proceeding in view of the provisions of sec. 292B and 292 BB of the Act. With regard to the additions made by the AO in respect of suppressed sales, the ld CIT(A) directed the AO to estimate the income at 5 times of the declared turnover, estimate the Gross Profit @ 20% thereon and make the additions accordingly. Aggrieved by the order of Ld CIT(A), both the parties are in appeal before us.
6. With regard to the issue relating to the validity of search, the Ld A.R strongly placed reliance on the decision of Honble Karnataka High Court in the case of C.Ramaiah Reddy Vs. ACIT (2011)(339 ITR 210) to contend that the assessee is entitled to urge the issue relating to the validity of search before the appellate authorities and the appellate authorities are also entitled to adjudicate the same. We agree with the contentions of the assessee on this view, in view of the decision of Karnataka High Court (referred supra) and accordingly set aside the relevant observations made by Ld CIT(A) in this regard.
7. The assessee is questioning the validity of search proceedings on the plea that the panchas were not present during the course of search, as mandated by the provisions of sub rule (6) and (7) of Rule 112 of Income tax Rules. The assessee has raised the claim of non-presence of panchas by filing affidavits dated 24.1.2011 obtained from them. The Ld A.R, by placing reliance on the decision dated 08-05-2003 rendered by the Co-ordinate bench of Cochin Tribunal I.T.A. Nos. 331-337 & 366-372/Coch/2012 5 in the case of ACIT Vs. Dr. George Philip Modayil in ITA No. 389 (Coch)/98 & others, submitted that the non-presence of panchas during the course of search proceedings would invalidate the assessment order passed in consequence to the said search. The Ld A.R placed reliance on some other decisions also in support of his contentions.
8. On the contrary, the Ld D.R submitted that the Panchanama is the record of search proceedings. The panchanama in the instant case clearly record the search proceedings and it has been signed by the panchas. Thus the panchanama prepared under the signature of panchas constitutes conclusive proof that they were present during the course of search proceedings. The Ld D.R further pointed out that the search took place on 09-04-2008 and the assessment orders were passed u/s 153A of the Act on 31.12.2010. However, the assessee has filed affidavits obtained from the panchas on 24.01.2011 before the Ld CIT(A) only, i.e., after a gap of almost three years from the date of search. Further the contents of the affidavits given by both the panchas are identical and it gives an impression that they have been tutored in giving the affidavits. Further, they have not cited any reason for the considerable delay in retracting from the position taken earlier. Accordingly, the Ld D.R contended that the present claim is only an after thought aimed to protect the assessee. The Ld D.R further submitted that the assessee did not take this plea of non- presence of panchas either before the search officials or before the assessing officer. He also did not complain about any misbehaviour or improper actions of search party. Accordingly, the Ld D.R contended that the present plea of the assessee deserves to be rejected. The Ld D.R further pointed, the lapse, if any, in this regard is only a technical or procedure lapse and hence it would not vitiate the search proceedings, which was otherwise validly initiated.
9. We have heard the rival contentions on this issue and carefully perused the record. Admittedly, the assessee has urged this issue for the first time before I.T.A. Nos. 331-337 & 366-372/Coch/2012 6 the Ld CIT(A) after a gap of almost three years from the date of search. The Panchas, by filing affidavits, have, in effect, retracted from their stand taken earlier. It is well settled proposition that the retraction should be made at the earliest possible opportunity. The search in the hands of the assessee took place on 09-04-2008. As pointed out by Ld CIT(A), the copies of Panchanama, duly signed by the Panchas, were given to the assessee during the course of search proceeding. There after the assessee also participated in the assessment proceedings and the assessment was completed on 31.12.2010, i.e., after a period of about 2 years and 8 months from the date of search. Only when the assessee filed appeals in the month of January, 2011 before Ld CIT(A), it urged the issue of validity of search proceedings due to non-presence of panchas. Thus, it is seen that considerable time has elapsed in making the above said claim. Further as pointed out by Ld D.R, the assessee has not pointed out any laxity or misbehaviour or improper action on the part of the search party. In the case of ACIT Vs. Dr. George Philip Modayil (referred supra), we notice that the assessee has agitated about the non-presence of panchas at the earliest possible opportunity, i.e., before the assessing officer and other tax authorities, but they failed to respond to the letters written by the assessee. However, in the instant case, the assessee did not complain about the alleged non-presence of panchas either before the search party or before the assessing officer or before any other tax authority. Hence, in our view, the decision rendered by the co-ordinate bench in the case of Dr. George Philip Modayil (referred supra) could not be applied in the present case. In view of the considerable time gap, in our view, the retraction on the part of panchas cannot be considered as a valid retraction and accordingly, in our view, no credence could be given to the affidavits filed by them. Accordingly, in our view, the assessee is not entitled to challenge the validity of search on the strength of the affidavits given by the panchas at this stage and accordingly reject all the grounds relating to the same. I.T.A. Nos. 331-337 & 366-372/Coch/2012 7
10. The Ld A.R, by placing reliance on the decision of Honble High Court of Allahabad rendered in the case of MD Overseas Ltd Vs. DGIT (2011)(245 CTR (All) 108) submitted that the reasons to believe for authorizing search has to be informed to the assessee. We have gone through the said decision and notice that the facts prevailing in that case are totally different. In the present case, the assessee has not sought for any such information from the department. The assessee is questioning the validity of search only on the plea of non-presence of panchas during the course of search proceedings. Hence, in our view, the decision rendered in the case of MD Overseas Ltd (supra) in a different context, will not come to the help of the assessee herein.
11. The assessee has also raised a ground relating to limitation, i.e., according to the assessee, the assessment order is barred by limitation. According to the assessee, as per the provisions of sec. 153B of the Act, the assessing officer shall make an order of assessment or reassessment u/s 153A of the Act within 21 months from the end of the financial year in which the last of authorization was executed. In the instant case, the search took place on 09.04.2008 and hence the limitation period expires on 31.12.2010. According to the assessee, the impugned assessment orders were served upon him only on 03-01-2011, even though they were dated 31-12-2010. According to the assessee, the assessment order takes effect only on communication and since the impugned orders were communicated to the assessee only on 03-01-2011, they were barred by limitation. The assessee placed reliance on the decision of Honble High Court of Kerala rendered under Agricultural Income tax Act in the case of The Agricultural Income tax Officer and another Vs. K. Joseph Jacob (1995)(3 KTR 224). On the contrary, the Ld D.R submitted that the impugned assessment orders have been dispatched on 31.12.2010 itself. Accordingly the Ld D.R submitted that since the impugned assessment orders have left the hands of the assessing officer by 31.12.2010, there was no possibility of making any change or modification therein and accordingly, the mandate of law stands complied with. I.T.A. Nos. 331-337 & 366-372/Coch/2012 8
12. We have heard the rival contentions on this issue. The Honble jurisdictional High Court, in its later decision in the case of Cochin Plantations Ltd Vs. State of Kerala (227 ITR 38) has dealt in detail regarding the legal position on the question of effective date of assessment order under Kerala Agricultural Income tax Act. For the sake of convenience, we extract below the relevant head notes given in ITR:-
The order of any authority cannot be said to be passed unless it is in some way pronounced or published or the party affected has the means of knowing it. It is not enough if the order is made, signed and kept in the file, because such order may be liable to change at the hands of the authority who may modify it, or even destroy it, before it is made known, based on subsequent information, thinking or change of opinion. To make the order complete and effective, it should be issued, so as to be beyond the control of the authority concerned, for any possible change or modification therein. An assessment order becomes effective only when it is issued from the office of the assessing authority. An assessment will not be over until the assessment is communicated to the assessee. The assessment order becomes operative only on service on the party intended to be affected thereby. A careful perusal of the above said order of the jurisdictional High court would show that the assessment order would become complete and effective, if it is issued, so as to be beyond the control of the authority concerned, for any possible change or modification therein, meaning thereby, the assessment order should leave the hands of the assessing officer. The date of service of the same is the date on which it becomes operational or takes effect for the consequences arising there from. In the instant case, the impugned assessment orders were passed on 31.12.2010. It is not shown to us that the said orders remained in I.T.A. Nos. 331-337 & 366-372/Coch/2012 9 the hands of the assessing officered even after 31.12.2010. On the contrary, the Ld D.R has submitted that they have been dispatched on that date itself leaving them beyond the control of the assessing officer to make any change or modification. Under these set of facts, the impugned assessment orders have become complete and effective on 31.12.2010 itself, in which case, they cannot be considered as barred by limitation. Accordingly, we reject the grounds raised by the assessee on this issue.
13. The assessee has taken a ground that the rejection of book results was not valid, since the assessing officer did not point out any defect in the books of account maintained by the assessee. The assessee has pointed out that the defects pointed out relate to the period from 01.04.2008 to 09-04-2008 and they cannot be extrapolated to other years. In this regard, the Ld A.R placed reliance on the following case laws:- (a) CIT Vs. Paradise Holidays (2010)(325 ITR 13)(Delhi) (b) CIT Vs. Bindal Apparels (2011)(332 ITR 410)(Delhi) (c) CIT Vs. Smt. Poonam Rani (2010)(326 ITR 223)(Delhi) However, the case of the department is that the assessee has been selling the gold and silver articles through estimation slips only, i.e., with out preparing proper bills and consequently not accounting for such kind of sales. The Ld D.R submitted photocopies of certain seized documents, which included estimation slips dated 12-12-03, 20-07-07. Accordingly, the Ld D.R submitted that the assessee has been resorting to the practice of making sales through estimation slips in all the years under consideration and thereby suppressing major portion of both purchases and sales. The Ld D.R further submitted that the assessee has been declaring Gross profit at abnormal rates, i.e., in the range of 36.55% to 48.08%, while the normal rate of G.P realized in this trade is around 20% only. The Ld D.R further pointed out that the very fact that the excess stock of gold and silver ornaments found during the course of search clearly shows that the accounts maintained by the assessee are not reliable. I.T.A. Nos. 331-337 & 366-372/Coch/2012 10
14. We have heard the rival contentions on this issue. Though the assessing officer has not brought on record any basis for determining the normal rate of gross profit @ 20%, yet the gross profit rate of 36.55% to 48.08% declared by the assessee in the gold jewellery business, in our view, appears to be certainly on the higher side. Since there is transparency in the rate of gold, which is guided by the world market, the assessee cannot intervene in the price of gold and accordingly, the margin on the sale price of the gold cannot be hiked. The assessee could gain further profit on the value addition, but part of the value addition has to be ceded to gold smiths and other merchants. The rate of value addition is also now-a-days advertised widely by the jewellery show rooms and hence it would be difficult to hike the profit on that count also. Under these set of facts, the rate of profit declared by the assessee is certainly on the higher side, which clearly shows that all is not well in the accounts of the assessee. Further, the department has established the fact that the sales are being made through estimation slips, which means that there was suppression of sales and consequently there is suppression of purchases also. During the course of search, excess stock of gold and silver ornaments was also found. Though the assessee claims that the excess stock actually belong to the partner of the assessee firm, veracity of which requires examination, yet the fact remains that the assessee did not account for the same in its books of account, even as per its claim. This fact further reinforces the decision reached by the assessing officer to the effect that the books of account are not reliable.
15. The gold and silver ornaments are high valued items and hence all traders are vigilant over the stock kept by them. Hence, at any point of time, a gold merchant would be in a position to tell the aggregate quantity of stock held by him. If a prudent business man follows a systematic method of accounting only a portion of purchase and sales, then it would be difficult for anybody to find any defect in the books of accounts. For example, as pointed out by the A.O., if the I.T.A. Nos. 331-337 & 366-372/Coch/2012 11 an assessee has followed the practice of accounting for only 10% of the purchase and sales, the accounts systematically prepared in that fashion would not show any defect. But the fallacy could be found on the basis of surrounding circumstances. Hence the books of accounts prepared in a particular methodology would become unreliable. In the instant case also, even if the AO did not point out any defect in the books of accounts, other factors discussed above show that the books of accounts maintained by the assessee are not reliable. Hence, in our view, the Ld CIT(A) was justified in confirming the action of the AO in rejecting the books of accounts of the assessee for all the years.
16. Now we are left with the issue of estimation of income of the assessee. The AO has estimated the turnover at 10 times of the declared turnover and calculated the Gross Profit thereon @ 20%. However, the Ld CIT(A) has determined the turnover at five times of the declared turnover in the place of 10 times estimated by the AO. The Ld CIT(A) has taken support from the decision rendered by Honble Supreme Court in the case of Commissioner of Sales tax Vs. H.M. Eusuf Ali (90 ITR 271) to the decision taken by him and by the AO for extrapolating the suppression. According to the assessee, the Ld CIT(A) should not have placed reliance on the said decision, since it was rendered under Sales tax Act. However, we do not find force in the said contention. In the present case also, the tax authorities have only tried to determine the correct sales figure on the basis of available material and in that connection only, they have placed reliance on the ratio of the said decision. The decision rendered by the Honble jurisdictional High Court in the case of Hotel Maria, Pala in ITA No.551 of 2009 dated 26.05.2010, which was taken support of by Ld CIT(A), was also renders the ratio that the method of computation may be made on the basis of evidences gathered during the course of search.
17. We further notice that the assessee has taken the stand that the excess stock of gold and silver ornaments actually belong to the Managing Partner Shri I.T.A. Nos. 331-337 & 366-372/Coch/2012 12 G.Venkatesan in his personal capacity and not to the assessee firm. It was also contended that Shri Venkatesan has given the statement u/s 132(4) in his personal capacity only and not as a partner of the firm. We do not find force in the said arguments. The assessee firm consists of only two partners viz., Shri G.Venkatesan and his mother Smt. Muthulakshmi Ammal. Shri G. Venkatesan is the Managing partner and for all practical purposes, the entire business transactions would have been carried out by him only. Under the Partnership Act, the firm is only compendium of partners, though for taxation purposes, it is recognized as a separate entity. However, even under the Income tax Act, the questions relating to the partnership firm can be put to the partner only. The excess stock was found at the business premises of the assessee firm only and hence the questions relating to the same were put to the Managing Partner Shri G. Venkatesan, since the assessee firm is responsible to explain the excess stock found during the course of search. The assessee has not established that Shri G.Venkatesan was indulging into the gold and silver business in his personal capacity even prior to the date of search. Only after the search operations, it appears that the assessee has tried to explain the excess stock of gold and silver ornaments by furnishing a cash flow statement of Shri G. Venkatesan. Further the assessee has not brought on record to show that the excess stock actually belonged to Shri G.Venkatesan. It is well settled proposition of law that the strict rule of evidence would not be applicable to Income tax proceedings and the transactions could be decided on the basis of surrounding circumstances and human probabilities. Though the Ld A.R placed reliance on the decision of Honble Supreme Court in the case of ITO Vs. Ch. Atchiah (218 ITR 239) to contend that the assessment should be framed on right person, in our view, the said decision is not applicable in the instance case, since, in our considered view, the facts available on record show that the excess stock of gold and silver ornaments does belong to the assessee firm only. I.T.A. Nos. 331-337 & 366-372/Coch/2012 13
18. Both the parties are assailing the decision of Ld CIT(A) in determining the total turnover at five times of the declared turnover and estimating the Gross profit thereon @ 20%. According to the revenue, the AO has estimated the G.P. rate @ 20%, even though the assessee was declaring the G.P. at 36% to 40%, only for the reason that the total turnover was estimated by him at 10 times of the declared turnover. Accordingly, it was contended by the revenue that the Ld CIT(A) should have increased the rate of G.P, if he proposed to reduce the total turnover. On the contrary, the assessee has contended before us that the Ld CIT(A) was not justified in determining the turnover at five times of the declared turnover, since no defects was pointed out by the AO in the books of accounts maintained by him. Further, it was contended that the search assessments should be based on the material seized during the course of search only and for that proposition, the Ld A.R placed reliance on the decision of jurisdictional High Court in the case of CIT Vs. Smt. C. Sabira (2011)(338 ITR 226). However, we find that the said decision was rendered under Chapter IX-B relating to block assessment and hence it is not applicable to the instant case, since the assessment orders in the instant case were passed under sec. 153A of the Act.
19. We have already held that the AO was justified in rejecting the books of accounts for the details reasons discussed by us in the earlier paragraph. Hence, we do not find any merit in the contention of the assessee that there was no defect in the books of account maintained by the assessee. Hence, in our view, the assessing officer was justified in estimating the total turnover and the Gross profit thereon. However, the quantum of turnover estimated by the tax authorities needs to be examined here. We notice from the assessment order that the AO has ascertained the average quantity of gold sold per day by collating information found in the estimation slips for a period of 15 days (as per seized document numbered as SJK-1) at 175.174 grams. The AO further noticed that the assessee has accounted for sale of only 17 grams per day. Accordingly, the AO came to the conclusion that the assessee has been accounting for only I.T.A. Nos. 331-337 & 366-372/Coch/2012 14 10% of actual sales and accordingly determined the total turnover at 10 times of declared turnover. Even though, the assessee was declaring the G.P rate in the range of 36.55% to 48.08%, the AO held that Gross profit at that rate could not be earned in the jewellery business. Accordingly, the AO came to the conclusion that the assessee has been inflating the Gross Profit to account for the part of profit realized on suppressed sales. Though the AO did not bring on record any basis for determining the rate of Gross profit @ 20%, yet he has come to the conclusion that a normal business man can achieve gross profit at that rate only.
20. Though the Ld CIT(A) has held that the estimation made by the AO was on the higher side and accordingly reduced the total turnover to five times of the declared turnover, yet he also did not bring any material on record to substantiate his decision.
21. The fact remains that the AO has arrived at his conclusion on the basis of estimate slips found for a period of 15 days. Though the same can be considered as evidence towards suppression of sales, which fact was further re- inforced by the statement given by the Managing partner to the effect that the said estimation slips are given to the customers, yet, in our view, it may not be correct to presume that the assessee has been resorting to the practice of accounting for only 10% of the actual sales at all points of time. The jewellery sale mainly depended upon festival and marriage seasons. It is also a fact that the AO did not bring on record any other material was brought on record except the estimation slips referred supra, yet there is some basis in the estimate made by the AO, though they cannot be considered as conclusive proof. The Ld CIT(A), however, has not brought on record any material to support his view to reduce the estimated turnover to five times of the declared turnover. Under these circumstances, we are also forced to estimate the total turnover on a via media manner. Accordingly, on a conspectus of the matter, in our view, the I.T.A. Nos. 331-337 & 366-372/Coch/2012 15 total turnover may be estimated at six times of the declared turnover and in our view; it would meet the ends of justice. We order accordingly.
22. Since the AO has himself has determined the rate of Gross profit @ 20% as against the G.P. declared by the assessee at higher rates on the reasoning that a normal business man could realize Gross Profit to that extent only, we do not find it necessary to interfere with the decision of Ld CIT(A) in upholding the rate of gross profit @ 20%.
23. In the result, the appeals filed by the assessee as well as revenue are partly allowed. Pronounced accordingly on 24-05-2013. sd/- sd/- (N.R.S.GANESAN) (B.R.BASKARAN) JUDICIAL MEMBER ACCOUNTANT MEMBER Place: Kochi Dated: 24th May, 2013 GJ Copy to:
1. M/s. Rajan Jewellery, Kacherithazhan, Muvattupuzha.
2. The Deputy Commissioner of Income-tax, Central Circle-1, Kottayam.
3. The Commissioner of Income-tax(Appeals)-III, Kochi.
4. The Commissioner of Income-tax, Central, Kochi.
5. D.R., I.T.A.T., Cochin Bench, Cochin.
4. Guard File. By Order (ASSISTANT REGISTRAR) I.T.A.T, COCHIN
