M/S. Laxmi Narayan Agarwal, Hyderabad vs Assessee

This is an appeal filed by the assessee against the order of the CIT(Appeals)-IV, Hyderabad, dated 30-09-2010 for the AY 2007-08 raising the following grounds of appeal:

1) The Honourable CIT Appeals - IV, Hyderabad erred while confirming the order passed by Assessing officer erred by estimating the income of the assessee at 6% of the gross receipts without rejecting books of accounts. We would like to submit that the Assessing officer has not rejected the books of the assessee and unless the books are rejected the additions on the basis of estimation cannot be made.

2) The assessee made the sales during previous year amounting to Rs 48,66,136/- on which he earned an amount of 1,44,871/- towards net profit which equals to 2.9% of net sales. The assessing officer erred by estimating ITA Nos. 1391/Hyd/2010 :- 2 -: Sri Laxmi Narayan Agarwal

the income of the assessee at 6% of gross receipts without taking books of accounts into consideration which is not correct, not justified and bad in law.

3) The CIT Appeals - IV, erred by estimating the total income of the assessee at 6% since the margins in scrap business is 2% to 3% only. The said business is in unorganised sector with low margins and lot of competition from other dealers. Hence NP ratio will be only between 2% to 3%. We hereby request your good self to accept the said NP ratio as they are reasonable in this line of activity.

4) The CIT(A)-IV has erred while confirming the Order of the Assessing Officer wherein the AO. has failed to appreciate that the amount received as commission on sale transaction but considered the same as sale transaction of assessee which is not correct and not justified. We, hereby, submit you to kindly consider the commission income only and calculate tax on such Income.

5) A sum of Rs 76,600/- has been added towards difference between profit arrived on estimation basis and the amount of net profit as per the return of income which is not correct, not justified and bad in law.

6) The assessee maintains all the books of accounts which enable the assessing officer to compute the taxable income such as cash book, journal, ledger, receipts in respect of the expenditure incurred by assessee and the same may taken into consideration to decide the matter in favour of the assessee.

7) The CIT Appeals - IV, Hyderabad erred while confirming the order passed by Assessing officer by making the addition of Rs. 21,50,000 to the returned income relating to the advances received by the assessee towards sale of scrap without considering the explanation offered by the assessee which is not correct, not justified and bad in law.

8) The assessee has received the above Amount from persons engaged in the same line of business. And it is a common practice in business to give advances for purchase and sale of scrap. In the same manner assessee also received advances from said persons in the form of cheques as a part of prudent business practice. And during the course of assessment proceedings Mr.Wassem, Mr.Shaik Abdul Nayeem and Mr.Abdul Rehman also admitted that he did not received any amount towards the loan. Hence the assessee is praying to consider that the cheques were received as advance for scrap and to delete the addition made to assessed income.

9) The assessee has claimed the deduction under section 80U of Rs 50,0001- for ITA Nos. 1391/Hyd/2010 :- 3 -: Sri Laxmi Narayan Agarwal

physical disability and submitted a certificate issued by the civil surgeon, Gandhi Hospital in support of the claim. The CIT(A) erred by making the disallowance of said amount without considering the explanation offered by the assessee which is not correct, not justified and bad in law.

10) The assessee is praying to give a fresh opportunity to produce the certificate regarding the disability and to take the same in to account while assessing the total income of the assessee and to decide the matter in favour of the assessee.

11) The Order of the CIT Appeals may be set aside and sent back to Assessing officer for redoing the same.

12) The CIT Appeals - IV, Hyderabad erred while confirming the order passed by Assessing officer while not considering the explanation given by the Assessee Company and initiated penalty proceedings under section 271 (1)(c) which is not correct, not justified and bad in law.

13) We would like to submit that the Assessee has not concealed any income or not furnished inaccurate particulars to the A.O. Hence, the penalty proceedings U/S 271(1)(C) may not be initiated.

14) The Assessee may add, alter or substitute any other points to the grounds of appeal before or at the time of hearing of the case /appeal".

Precise and additional grounds of appeal:

"1. The learned CIT (A) erred in sustaining the additions made by the assessing officer for the assessment year under consideration.

2. The learned CIT (A) erred in upholding the additions made to the income of the assessee based on the loose sheets and dumb materials which has no evidential value.

3. The learned CIT (A) ought to have applied the principle of Telescoping of the income determined in the earlier years against the expenditure of subsequent years.

4. The learned CIT (A) ought to have applied the principle of Telescoping of unexplained expenditure against the income of the appellant.

5. The learned CIT (A) erred in confirming the order passed by the assessing officer by estimating the income of the assessee at 6%.

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6. The learned CIT (A) ought to have directed the assessing officer to accept the books of account of the assessee.

7. The learned CIT (A) ought to have appreciated the fact that once the business income has been estimated, no further additions can be made to the income of the assessee.

8. The CIT (A) erred in sustaining the addition of Rs. 9,50,000/- made towards unaccounted loan.

9. The learned CIT (A) erred in sustaining the addition Rs. 12,00,000/- made towards unaccounted loan.

10. The CIT (A) erred confirming the disallowance of claim of deduction u/s. 80U of the Act of Rs. 50,000/-.

11. The CIT (A) ought to have appreciated the fact that no additions can be made to the income of the assessee without there being any incriminating material in search assessment.

12. The assessee may add, alter or modify any of the points to the grounds of appeal at any time before or at the time of hearing of the appeal".

2. Briefly, the facts of the case are that, the assessee is an individual engaged in the business of trading in scrap. Search and seizure operations u/s. 132 of the Act were conducted on 07-11-2007. Subsequently, notice u/s. 153A was issued calling upon the appellant to file the return of income. In response to which, the appellant filed return of income for the assessment year under consideration admitting income of Rs. 5,14,040/-. Against the said return of income, assessment came to be completed u/s. 143(3) r.w.s 153A of the Act vide order dt. 30- 11-2009 at a total income of Rs. 25,11,950/-. While doing so, the AO made several additions by holding that the appellant is engaged in the business of money lending and rejected the book results.

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During the course of search, the following blank original signed cheques/promissory notes were found and Xerox copies of the same were seized:

S.N Date of Cheque Name of person issued the Amount Cheque No. cheque mentioned on cheque (Rs.)

1. 22-07-2006 255466 M/s. Hind Steel Traders 1,00,000

2. 31-05-2006 423094 M/s. Saif Steels 2,00,000

3. 24-04-2006 534217 Nayeem 10,00,000

4. 11-12-2006 NA P. Madhusudhan 20,000

5. 29-12-2006 NA Manish Agarwal 50,000 Total: 13,70,000

3. During the course of search, the assessee was asked to explain as to why the above original blank cheques were lying with him. The assessee stated that these cheques belong to those persons who were intending to obtain loans from him and also further deposed that he had not advanced any amount to them. However, while filing the return of income for the AY. 2007-08, the assessee reflected the cheque issued by M/s. Hind Steel Traders towards purchase of iron scrap and duly reflected in the sales. Out of the other advances, an amount of Rs. 20,000/- was made to Sri P. madhusudhan against purcahse of property and the same is reflected in the balance sheet filed by the assessee for the year under consideration. Further, an amount of Rs. 50,000/- was paid to Sri Manish Agarwal of Rs. 50,000/- as a loan through cheque and the same was also reflected in the balance sheet and therefore, these three transactions are accepted as business transactions.

As regard to the other two blank cheques for Rs. 2,00,000/- and Rs. 10,00,000/- issued by M/s. Saif Steels & Mr. Shaik Abdul Nayeem respectively, the assessee stated that no such loans were actually given by him and the same were kept with him against supply of iron scrap.

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The explanation offered by the assessee for the above two blank cheques was not accepted by AO by making reference to page No. 42 of seized annexure A/LNA/Res/01 dt. 07-11-2007, which is a Xerox copy of promissory note executed by Mr. Shaik Abdul Nayeem. Mr. Shaik Abdul Nayeem signed on a revenue stamp affixed on the promissory note but no amount or date was mentioned on this promissory note. Theefore, AO drawn inference that the assessee had advanced loan of Rs. 10,00,000/- to Mr. Shaik Abdul Nayeem and obtained a blank cheque along with promissory note towards security. Accordingly, this transaction was treated as loan transaction. The other cheque for Rs. 2,00,000/- was issued by Mr. Abdul Rehman, properties of M/s. Saif Steels.

4. During the course of assessment proceedings, summons have been issued to Mr. Shaik Abdul Nayeem and Mr. Abdul Rehman and their statements were recorded Us 131 of the Act. Mr. Shaik Abdul Nayeem is Prop. of M/s. Mount Steel Traders, which is dealing in purahse and sale of iron scrap. He confirmed that he had issued an account payee cheque along with a promissory note of the value of Rs. 10,00,000/- on 24-04-2006 to the assessee for supply of iron scrap. Mr. Nayeem also stated that he was not supplied with the iron scrap as promised by the assessee. Similarly, Mr. Abdul Rehman is Proprietor of M/s. Saif Steels, which is also dealing in purahse and sale of MS scrap. He also confirmed having issued cheque on 31-05-2006 for Rs. 2,00,000/- as a security against supply of MS scrap by the assessee. Mr. Rehman also stated that he was not supplied with a stock of scrap as promised by the assessee. From the above two statements, it can be observed that both of them are giving the same explanation for the cheque/promissory note found in possession of the assessee. Both Mr. ITA Nos. 1391/Hyd/2010 :- 7 -: Sri Laxmi Narayan Agarwal

Nayeem and Mr. Rehman had confirmed that they had not received the scrap against the issue of cheques based on the following:

i. If it is the case that the assessee did not supply the stock of scrap, then how the cheques/promissory note are still lying with the assessee which were issued in the year 2006.

ii. Moreover, if the transactions are not complete, the customers would have taken back their cheques/promissory note given to the assessee and no prudent businessmen will leave the same with the assessee. In the present case of the assessee, the cheques/promissory note are lying with the assessee as on the date of search i.e., on 07-11-2007.

iii. This gives support that the assessee had advanced loans against the above cheques/promissory note and the statements given by the above two persons seems to be influenced by the assessee.

AO had concluded that the appellant is engaged in money lending business and advanced a sum of Rs. 12,00,000/- and made addition of amount as unexplained investment.

5. On appeal before the CIT(A), it was submitted before the CIT(A) that those blank cheques were obtained from the persons, who intended to borrow from him. However, the appellant stated that he never advanced any money to the said person therefore, no addition was called for. The Ld.CIT(A) after examining the explanation had disbelieved the explanation offered by the appellant and finally held that the appellant was using his own unaccounted money in providing unaccounted loans ITA Nos. 1391/Hyd/2010 :- 8 -: Sri Laxmi Narayan Agarwal

against security of promissory notice and cheques and therefore, upheld the addition.

6. It was contended before us that the documents seized are only dumb documents and therefore, no addition can be made. On the other hand, Ld.CIT(A) had placed reliance on the lower authorities and submitted that the seized documents cannot be called dumb documents since the documents are duly signed and filled up. Since the assessee had failed to explain satisfactorily under what circumstances, the blank cheques came into his possession of the appellant, the addition should be upheld.

7. We heard the rival parties and perused the material on record. It is clear from the perusal of material on record that the seized material consist of blank cheques and promissory notes executed by various parties, which are discussed below:

i. M/s. Hind Steel Traders, ii. M/s. Saif Steels, iii. Shri Nayeem, iv. Shri P. Madhusudhan and v. Shri Manish Agarwal

All the above persons have confirmed that cheques have been handed over to the appellant only as a measure of security for supply of scrap or for the purpose of obtaining the loan, but all of them have denied having obtained any loan from the appellant. The statements given by those people remains uncontroverted. Though the AO is justified in entertaining doubt that the appellant is engaged in the business of money lending and the cheques have been obtained, only after the amounts were advanced since in the absence of any positive evidence in ITA Nos. 1391/Hyd/2010 :- 9 -: Sri Laxmi Narayan Agarwal

support of the appellant having lent money to the above persons, we are not in a position to confirm the addition. Accordingly, the additions are deleted.

8. As regards ground relating to estimation of profits, we heard the rival parties. Admittedly, there is no incriminating material seized as a result of search and seizure operation indicating that the Books of Accounts maintained by the assessee are either defective or appellant had inflated the expenditure or suppressed the sales resulting in lower returned income. It is trite law that in the absence of any incriminating material suggesting that book results should be rejected the addition cannot be made on estimate basis in the assessment made u/s. 153A. Accordingly, the addition is deleted. Hence, this ground of appeal filed by the assessee is allowed.

9. On the issue of claim of deduction u/s. 80U of the Act, we find that the claim was withdrawn before the AO and therefore, the CIT(A) is perfectly justified in rejecting the claim of the appellant. Hence, this ground of appeal is dismissed.

10. In the result, this appeal is partly allowed.

Order pronounced in the open Court on 17th June, 2015

Sd/- Sd/-

(ASHA VIJAYARAGHAVAN) (INTURI RAMA RAO) JUDICIAL MEMBER ACCOUNTANT MEMBER

Hyderabad, Dated 17th June, 2015

TNMM ITA Nos. 1391/Hyd/2010 :- 10 -: Sri Laxmi Narayan Agarwal

Copy to :

1. Sri Laxmi Narayan Agarwal, C/o. P. Murali & Co., Chartered Accountants, 6-3-655/2/3, 1st Floor, Somajiguda, Hyderabad.

2. The Asst. Commissioner of Income Tax, Circle-6(1), Hyderabad.

3. CIT(Appeals)-IV, Hyderabad.

4. CIT-III, Hyderabad.

5. D.R. ITAT, Hyderabad.

6. Guard File.