Delhi High Court

Cit vs Ajay Kapoor on 24 July, 2013

Author: Sanjiv Khanna

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*     IN THE HIGH COURT OF DELHI AT NEW DELHI


                                   Date of decision: 24th July, 2013


+                       ITA 155/2011



CIT                                                   ..... Appellant
                        Through     Mr. Sanjeev Rajpal, Sr. Standing
                                    Counsel.


                        Versus



AJAY KAPOOR                                      ..... Respondent
                        Through     Mr. Kaanan Kapur, Advocate.


CORAM:
HON'BLE MR. JUSTICE SANJIV KHANNA
HON'BLE MR. JUSTICE SANJEEV SACHDEVA


SANJIV KHANNA, J. (Oral)

This appeal by the Revenue under Section 260A of the Income

Tax Act, 1961 (Act, for short) raises the following the substantial

question of law:-

"Whether the Income Tax Appellate Tribunal was right and not perverse in holding that no addition should be made on account of unrecorded

purchases and sales as unaccounted income of Rs.21,90,685/- has been brought to tax?"

2. The impugned order passed by the tribunal is dated 16 th April,

2010 and relates to the block period ending 6th November, 2001.

3. Search and seizure action under Section 132 of the Act was

carried out in the residential and office premises of respondent-

assessee on 6th November, 2011. The respondent was a dealer in dyes

and chemicals. At the time of search, cash of Rs.17,43,180/- was

found in the residential and office premises of respondent. Out of the

said cash amount, Rs.16,14,200/- was seized. Jewellery worth Rs.

20,40,688/- was also found, but no seizure of jewellery was made.

4. In response to the notice under Section 158BC, the respondent

filed his return declaring undisclosed income of Rs.18,00,000/-. The

Assessing Officer in the assessment order dated 28th November, 2003

made several additions and assessed the total income of the

respondent-assessee at Rs.9,91,63,790/-. The aforesaid addition

included additions on the basis of a document mentioning undisclosed

sales of Rs.9,73,63,789/- between the period 1st April, 2001 to 6th

November, 2001. This document was accepted by the respondent-

assessee in their letter dated 6th June, 2000 as a record of their

unaccounted sales. The Assessing Officer made addition on account of

unrecorded purchases of Rs.4,50,17,616/- on the basis of the said

paper. The Assessing Officer held that the difference between

unrecorded purchases (Rs.450,17,616/-) and unrecorded sales figures

(Rs.9,73,63,789/-) i.e. Rs.5,23,46,173/- should be treated as undeclared

profit earned during the block period. Thus two additions of

Rs.4,50,17,616/- and Rs.5,23,46,173/- were made.

5. Respondent substantially succeeded in the first appeal as the

Commissioner of Income Tax (Appeals) in his order dated 5th

November, 2004 observed that the profits of the block period between

1st April, 2001 to 6th November, 2001 of Rs.5, 23, 46,173/- as

calculated by the Assessing Officer was abnormally high and gross

profit rate 53.76% (G.P. rate) had been applied on a turnover of

Rs.9.73 crores. He referred to the GP rate of the assessee during the

period 1996-97 to 2000-2001 which was between 1.92% to 2.83%

giving an average GP rate of 2.19%. In the preceding assessment year

i.e. 2001-02, the GP rate declared was 2.25%. By applying the GP rate

of 2.25%, CIT (Appeals) came to the conclusion that undisclosed

income from unrecorded sales was Rs.21,90,685/-.

6. CIT (Appeals) also deleted the entire addition of

Rs.4,50,17,616/- on account of investment in unaccounted purchases

observing that the assessee had been making unrecorded sales out of

the accounted stock kept by the assessee for his regular business. The

assessee used to replenish the stock by making unrecorded purchases

to make good the short fall in the accounted stock. The exact findings,

recorded by the CIT (Appeals) reads:

"5(iii) Now another question which is to be decided is the investment made by the appellant for effecting unrecorded sales. The AO has added a sum of Rs.4,50,17,616/- i.e. the entire purchases as worked out by the assessee from the seized material. The assessee's contention is that he had been making unrecorded sales out of the accounted stock kept by the assessee for his regular business. It has been explained that in the course of making unrecorded sales when the accounted stock falls below a limit the assessee used to replenish the stock by making unrecorded purchases to make good short fall in the accounted stock. This explanation was given to the AO. The AO has rejected the explanation on the ground that no day to day stock statements have been maintained by the assessee. It was also explained to the AO by the assessee that there was no necessity of making separate investment for effecting unaccounted sales because item dealt in by the assessee both for accounted sales and unaccounted sales are same and there is no distinction between the categories of sales on the basis of the items dealt. The explanation of the assessee was rejected by the AO on the ground that stock register is not maintained by the assessee on day to day basis. The argument of the Ld. AR that as the assessee was dealing in same items for making the recorded and unrecorded sales and the regular stock sold outside the books used to be replenished out of sales proceeds of unrecorded sales as some merit in it because no excess stock was found during the course of search operation. Also, no evidence or material has been referred to or relied upon for adopting the figure of Rs.4,50,17,616/- for making investment. Thus, there was no material before the AO to hold that

the assessee made an undisclosed investment to that extent. For any addition to be made in the block assessment it has to be based on material found during the course of search or in the course of post search proceeding. The addition in the block assessment cannot be made only on guess work basis or surmises. For the proposition that investment in stock has to be based on material found during the course of search or post search enquiries or any other positive material pointing to the factum of investment in stock, the following case law are relied upon:

      i)       Ashok Kumar Rastogi Vs. Gotan Lal Khanji
               Udyog CIT 100 CTR 204 (All)
      ii)      CIT Vs. Bal Chand Ajit Kumar 263 ITR 610
               (M.P.)
      iii)     CIT Vs. President Industria 258 ITR 654 (Guj.)
      iv)      S.M. Tomar 201 ITR 608
      v)       ITO Vs. Gurbachansingh Juneja 54 TTJ (Ahm.)

In these circumstances the addition made by the AO is deleted."

7. It is clear from the order of the CIT (Appeals) that he referred to

the explanation of the assessee and the stand of the Revenue and

thereafter observed that the addition was a guess work or surmises and

there should have been positive material to show that there was in fact

investment in stocks. Explanation of the assessee that there was no

necessity to make separate investment for unaccounted sales should be

accepted.

8. Tribunal in the impugned order has recorded the contention of

the Departmental Representative that the gross profit in unaccounted

business was always more than profits in the regular business recorded

in the books of account. Revenue had submitted that the assessee had

not maintained day-to-day stock book and, therefore, it was not

possible to accept that unrecorded sales were made out of regular

stock, which was later on replenished. He had also referred to the peak

investment which had occurred on 29th September, 2001 of

Rs.17,03,546/- and had stated that at least this amount should be added

and brought to tax as unaccounted investment. There was substantial

investment made in the form of unaccounted purchases as per seized

documents.

9. Tribunal in the impugned order has mentioned that the

unrecorded sales to the extent of Rs.9,73,63,789/- were made by the

respondent-assessee and this figure had not been challenged by the

respondent/assessee. This factum is recorded in para 5.1 and it was

observed that this figure had become final figure. The first question

examined by the tribunal was whether the GP rate applied by the CIT

(Appeals) was correct. They observed that the GP rate of the recorded

transactions of various years was a fair indicator of the gross profit,

which would have been earned by the respondent in unrecorded

transactions. The tribunal distinguished their earlier decision in the

case of Vijay Protein Ltd. on the ground that in the said case the

assessee had not been able to produce any evidence regarding

purchases made from 33 parties. The books of account were rejected

in the said case, with the tribunal holding that 25% of the purchase

price accounted for in the books through invoices could be disallowed

for working out the income. Tribunal accordingly affirmed the view

taken by the CIT (Appeals) directing the Assessing Officer to adopt

gross profit rate of 2.25% and thus upheld and maintained the addition

to the extent of Rs.21,90,685/- as against Rs.5,23,46,173/- made by the

Assessing Officer.

10. On reading the reasoning given by the tribunal, we are not

inclined to interfere with the said part of the order on the ground that it

is perverse. We may have some reservations, but the basic facts have

been noticed and form the core and foundation of the order. These

include the GP rate of the respondent-assessee as recorded in the books

of accounts for this year and the earlier years. We have some

reservations on the observation made by the tribunal that as it was a

case of unrecorded sales, benefit of tax was passed on the third parties.

Further, observation of the tribunal that the Assessing Officer had not

analyzed the item-wise purchase and sale price though the documents

seized reflect the item-wise sales and purchases is debatable.

Nevertheless, there are substantial and good reasons for adopting the

GP rate of 2.25%, as it is apparent that GP rate of 53.76% adopted by

the Assessing Officer is too high and unacceptable.

11. However, on the next issue whether any addition should have

been made on account of unaccounted investment, we are unable to

comprehend the reasoning and logic given by the tribunal. They have

recorded that the respondent-assessee did not maintain day-to-day

stock record/register and, therefore, it cannot be said that unrecorded

sales could not have been of accounted stock, which was later on

replenished from the sale proceeds of unrecorded sales. Thus, the

respondent-assessee had not made any investment for the unrecorded

transactions. It is held that no evidence of unaccounted investment

was found at the time of search. Once the stock register was not there

as recorded by the tribunal in its order, the said finding itself

apparently is contradictory. The finding that no incriminating

document regarding investment was found is contradictory because the

tribunal has accepted and admitted that the assessee had himself

confirmed that he had made sales of Rs.9.73 crores outside the books

of accounts. These were unaccounted sales. Thereafter, it was for the

assessee to explain and state the source/funds for conducting and

entering into the said transaction. In other words, the assessee had

unaccounted turnover of approximately Rs.5 lacs per day during the

period 1st April to 6th November, 2001. Transactions of such value do

require investment. Plea of the assessee that existing or available

investment in the books was sufficient, has to be made good with

material and proof by the assessee. The assessee had to explain that

purchases recorded in the books were sufficient after adjustment of the

recorded sales. In cases of unaccounted sales and purchases all

documents may not be available and certain amount of guess work is

always required as noticed earlier but a realistic and common sense

approach is required. To say that there was no evidence to show that

the assessee had made unexplained investment would be to write off

and erase the earlier finding of the tribunal that the assessee had made

unaccounted sales of Rs.9.73 crores. Unrecorded purchases as

mentioned in the seized document were more than Rs.4.50 crores. We

also do not agree with the finding recorded by the tribunal that proof of

unaccounted purchases did not prima facie indicate or show that

unaccounted investment was made, as there was other apparent

evidence to the contrary. Onus, in such cases, is on the assessee to

show that unaccounted investment was made out of accounted stock.

There cannot be any assumption or presumption that unaccounted sales

must be from accounted purchases. Unaccounted sales may result and

can contribute towards the investment, but there has to be initial

investment. Profits and income earned are also used for personal needs

and are taken out of business.

12. On the question whether the peak credit should be added and

brought to tax, tribunal has held as under:-

"6.1 Coming to the alternative submission that at least peak of unaccounted investment, worked out on the basis of unrecorded purchases should have been brought to tax, we have only to mention that the same could be taxed only if there is some evidence on record regarding undisclosed income in the seized material or otherwise. There is no such evidence and, therefore, in view of arguments in paragraph 6 (supra), the stand of the learned DR cannot be accepted. Notwithstanding this argument, the working of peak submitted by the ld. DR at Rs.17,03,546/- is lower than the unaccounted income brought to tax by the ld. CIT(Appeals) at Rs.21,90,685/-. The ld. DR has not been able to show that the peak exceeded the unaccounted profit in any year. Therefore, it is held that the assessee was in possession of money by way of profit on unrecorded sales, which could have been used for funding the purchases."

13. First part of the reasoning has been dealt with above and it has

been recorded that onus has been wrongly placed on the Revenue.

Once unaccounted for turnover of Rs.9.73 crores is accepted, then the

assessee must explain the source of investment. The true facts were in

his knowledge. We do not agree with the tribunal that as unaccounted

income of Rs. 21,90,685/- has been brought to tax, no addition on

account of peak investment of Rs.17,03,546/- is justified. This figure

of Rs. 21,90,685/- represents the gross profits earned in the block

period. Further, the profit earned from unaccounted transactions can

be and are used and consumed by the assessee for their own personal

uses. We do not think that the tribunal dealt with the second issue in

right perspective by placing the onus on the Revenue to explain the

source of investment made by the assessee though there were

unaccounted sale transactions. It has ignored relevant and material

facts and has gone on a tangent without examining the real issue and

the controversy, i.e., has the assessee explained the source of funds

required for making investment to have turnover of Rs.9.73 crores.

We are, therefore, constrained to hold that this part of the order is

perverse and cannot be accepted.

14. Perversity, in the present case, is occasioned due to two reasons:

firstly, by wrongly placing onus on the revenue though the facts were

in personal knowledge of the assessee, and secondly, by ignoring the

admission of the respondent that they had indulged in unaccounted

sales of Rs 9.7 crores. In spite of admission and the seized document,

it has been observed that there was no material with the revenue to

prima facie justify any addition towards unrecorded investment in

stock. Allegations, in the present case, are not based upon weighing of

evidence but for altogether a wrong decision. The decision suffers from

vice of irrationality, rendering it infirm in law. In Municipal Committee,

Hoshiarpur v. Punjab SEB (2010) 13 SCC 216 it has been held that:

"28. If a finding of fact is arrived at by ignoring or excluding relevant material or by taking into consideration irrelevant material or if the finding so outrageously defies logic as to suffer from the vice of irrationality incurring the blame of being perverse, then the finding is rendered infirm in the eye of the law. If the findings of the Court are based on no evidence or evidence which is thoroughly unreliable or evidence that suffers from the vice of procedural irregularity or the findings are such that no reasonable person would have arrived at those findings, then the findings may be said to be perverse. Further if the findings are either ipse dixit of the Court or based on conjecture and surmises, the judgment suffers from the additional infirmity of non-application of mind and thus, stands vitiated. (Vide Bharatha Matha v. R. Vijaya Renganathan [(2010) 11 SCC 483 : AIR 2010 SC 2685] .)"

15. Earlier in Dhirajlal Girdharilal v. CIT (1954) 26 ITR 736 (SC)

it was observed:-

"....if the court of fact, whose decision on a question of fact is final, arrives at this decision by considering material which is irrelevant to the enquiry, or by considering material which is partly relevant and partly irrelevant, or bases its decision partly on conjectures, surmises and suspicions, and partly on evidence, then in such a situation clearly an issue of law arise....

.....It is well established that when a court of fact acts on material, partly relevant and partly irrelevant, it is impossible to say to what extent the mind of the court was affected by the irrelevant material used by it in arriving at its finding. Such a finding is vitiated because of the

use of inadmissible material and thereby an issue of law arises."

16. In CIT v. Daulat Ram Rawat Mull (1973) 87 ITR 349 it has

been held that onus of proving what is apparent is not real is on the

party who claims it to be so. There should be direct nexus between the

conclusions of fact arrived at, or inferred, and the primary facts upon

which the conclusion is based. When irrelevant consideration and

extraneous materials form the substratum of an order, or the authority

has proceeded in a wrong presumption which is erroneous in law, as in

the present case, question of law arises and when the said contention is

found to be correct, then the order is perverse. A factual decision is

perverse when it is without any evidence or when the factual decision,

in view of the fact on record, cannot be reasonably entertained. Finding

based upon surmises, conjectures or suspicion or when they are not