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 2005-06. raising the following grounds of appeal:

1) "The Honourable CIT Appeals - IV, Hyderabad erred while confirming the order passed by Assessing officer 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 2,43,30,245/- on which he earned an amount of 7,44,908/- towards net profit which equals to 3.0% of net sales. The CIT Appeals - IV, Hyderabad erred while confirming the order passed by Assessing officer by estimating ITA No. 1390/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 A.O. 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 7,14,906/- 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 by making the addition of Rs.

5,15,000 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. Aslam Hussain and Mr. Mohd. Shameem 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 50,000/- for ITA No. 1390/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 I 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.

ITA No. 1390/Hyd/2010 :- 4 -: Sri Laxmi Narayan Agarwal

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

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 learned CIT (A) erred in sustaining the addition of Rs. 3,00,000/- made towards unaccounted loan.

9. The learned CIT (A) erred in sustaining the addition Rs. 2,15,000/- made towards unaccounted loan.

10. The CIT (A) erred confirming the disallowance of claim of deduction u/s. 80U of the Act of Rs. 40,000/-.

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 on 27-08-2009 disclosing income of Rs. 9,06,320/-. 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. 21,86,226/-. While doing so, the AO made an addition of Rs. 3 Lakhs by holding that the appellant had advanced a sum of Rs. 3 Lakhs as a loan to one Mr. I. Hussain. This is based on the Xerox copies of the cheques and promissory notices obtained from the said Hussain, seized vide page No. 29 to 35 of Annexure A/LNA/RES/01. During the course of assessment proceedings, it was submitted by the appellant that the said ITA No. 1390/Hyd/2010 :- 5 -: Sri Laxmi Narayan Agarwal

Hussain was expired on 02-08-2008 and also in support of which he furnished the copy of death certificate. However, the AO had concluded that the appellant is engaged in money lending business and advanced a sum of Rs. 3 Lakhs and made addition of amount as unexplained investment.

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

4. 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.

5. We heard the rival parties and perused the material on record. It is clear from the material on record that what is seized is only photo copies of blank cheques and promissory notes executed by one Mr. I. Hussain. Obviously, the original documents were not brought on record nor traced and since the person who is supposed to have executed ITA No. 1390/Hyd/2010 :- 6 -: Sri Laxmi Narayan Agarwal

document has died, no corroborative evidence could be brought by the Revenue. Hence, no addition can be made without corroborative evidence. Hence, we delete the addition. This ground of appeal accordingly is allowed.

6. The next ground relates to the addition of Rs. 2,15,000/- based on the blank singed original cheques belonging to the following persons:

S.No. Date of Cheque Name of person Amount cheque No. issued the chequementioned on cheque 1. 12.04.2004 499869 M/s. Diamond 1,15,000 Steel Corporation 2. 23.07.2004 300051 Md. Shameem 1,00,000 Total: 2,15,000

Marked as Annexure A/LNA/Res/01. During the course of assessment proceedings, the explanation of the appellant was that he never advanced any loans to the above persons and cheques were obtained since they intend to borrow money from the appellant. However, actual advancing of money had never taken place. However, on examining the proprietor of Diamond Steel Corporation, Aslam Hussain, he stated that he borrowed money of Rs. 1,15,000/- and the cheques were given as a security for the said amount. During the course of assessment proceedings, AO also examined Mr. Md. Shamim, wherein he stated that the cheque was issued by him to the appellant for purchase of scrap. However, the transaction of purchase of scrap never took place. However, cheque was lying with the appellant and the AO observed that in the balance sheet of the appellant for the year ending 31-03-2005 Mr. Shamim is reflected his debtor for Rs. 1 lakh. Thus, he concluded that in view of the contradictory statements made by both the parties, made addition of Rs. 2,15,000/-.

ITA No. 1390/Hyd/2010 :- 7 -: Sri Laxmi Narayan Agarwal

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

8. 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.

9. We heard the rival parties. We noticed that the addition was made by the AO based on the Xerox copies of blank signed cheques and promissory notes issued by the following:

S.No. Date of Cheque Name of person Amount cheque No. issued the chequementioned on cheque 1. 12.04.2004 499869 M/s. Diamond 1,15,000 Steel Corporation 2. 23.07.2004 300051 Md. Shameem 1,00,000 Total: 2,15,000

The statement given by the proprietor of M/s. Diamond Steel Corporation was not confronted with the appellant and whereas the ITA No. 1390/Hyd/2010 :- 8 -: Sri Laxmi Narayan Agarwal

statement given by Mr. Md. Shamim that no loan was obtained by him remains un-controverted. Thus, there is no conclusive evidence on record in support of the allegation that the appellant had advanced the money to these two parties and the original seized photo copies and material are not brought on record nor traced. In these circumstances, we are not in a position to uphold the addition. Hence, this ground of appeal is deleted.

10. The next ground of appeal relates to the estimation of profits on the sales reported at 6%. The AO observed that there are no bills in support of the purchases made or sales made. Accordingly, rejected the book results and estimated the profit at 6% on the turnover. Therefore, difference of Rs. 7,14,906/- was added to the returned income. Aggrieved by this addition, on appeal before the CIT(A), the ground of appeal was dismissed on the ground that the appellant had not brought any material on record to say that estimation of profit at 6% is on higher side. Aggrieved, the present ground of appeal was filed before us.

11. It was argued by the Ld. AR that the AO travelled beyond the scope of Section 153A by making the impugned addition and there was no incriminating material found as a result of search and seizure operations indicating that the Books of Accounts are defective or un- reliable. Therefore, no addition should be made. On the other hand Ld. DR placed reliance on the orders of lower authorities.

12. 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 ITA No. 1390/Hyd/2010 :- 9 -: Sri Laxmi Narayan Agarwal

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.

13. 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.

14. 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 No. 1390/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.