Satyanarayan U.Rathi, Surat vs Department Of Income Tax

Date of heari ng : 21-04-2015 Date of pronouncement : 29-05-2015 S. N. U. Rathi & ITO & S. N. U. Rathi & others (AOP) vs ACIT Page No 2 A.Y. 2003-04 to 06-07 Total 14 appeals

आदेश /ORDER

PER :- RAJPAL YADAV, JUDICIAL MEMBER:-

This is a bunch of 14 appeals involving four assessment years and two assessees. In order to appreciate the basic details in a more scientific way, we deem it appropriate to take note the details in a tabular form i.e., ITA Nos, Assessment Years, dated of CIT(A)'s order and date of assessment order etc. The same reads as under:-

IN THE CASE OF SHRI SATYANARAYAN U. RATHI

Sr. No. ITA No Appellant A.Y. Date of Date of CIT(A)'s AO's order order 1 2037/Ahd/2008 Deptt 2003-04 28-03- 25-06-

2008 2007 2 2807/Ahd/2011 Assessee Do Do Do 3 2038/Ahd/2008 Deptt 2004-05 Do Do 4 2808/Ahd/2011 Assessee Do Do Do 5 2039/Ahd/2008 Deptt. 2005-06 Do Do 6 2809/Ahd/2011 Assessee Do Do Do 7 2673/Ahd/2009 Deptt. 2006-07 08-07- 30-12- 2009 2008 8 2402/Ahd/2009 Assessee Do Do Do IN THE CASE OF SHRI S. N. U. RATHI & OTHER (AOP) 9 2548/Ahd/2009 Assessee 2003-04 10/07/2009 03/12/2008 (AOP) S. N. U. Rathi & ITO & S. N. U. Rathi & others (AOP) vs ACIT Page No 3 A.Y. 2003-04 to 06-07 Total 14 appeals 10 2652/Ahd/2009 Deptt. Do Do Do 11 2549/Ahd/2009 Assessee 2004-05 Do Do (AOP) 12 2653/Ahd/2009 Deptt. Do Do Do 13 2843/Ahd/2011 Assessee 2005-06 Do Do (AOP) 14 2654/Ahd/2009 Deptt. Do Do Do

2. Before we embark upon an inquiry on the individual grounds of appeal taken by the respective parties in their respective assessment year, it is pertinent to take note of the brief backgrounds which will show, as to how, the issues in each appeal are inter-connected with each other. Shri Satyanarayan U Rathi is running a proprietorship concern in the name and style of Druv Prints. A survey u/s. 133A of the Income Tax Act, 1961 was carried out in Rathi Group of Cases on the 31st January, 2006 at shop no.

1288-90, 1220-21, 4358-60 and 4430-37, Radhakrishna Taxtile Market, Ring Road, Surat.

3. During the course of survey action, inventory of cash, books of account and physical stocks found were prepared. At shop No. D-1288- 1290, 25 unaccounted bank accounts maintained by the Group with Shangali Co-operative Ltd were found. The AO has narrated 25 such bank accounts in the assessment order passed in the case of Satyanarayan U. Rathi in assessment year 2003-04. In Assessment Year 2006-07, the accounts are 32, there is no dispute that these accounts were in the names of employees, family members and other relatives, who has no concern with the actual business of Dhruv Prints. The Ld. AO, apart from confronting the Assessee, had proceeded to make protective assessment. He made 38 protective assessments. The list of such protective additions S. N. U. Rathi & ITO & S. N. U. Rathi & others (AOP) vs ACIT Page No 4 A.Y. 2003-04 to 06-07 Total 14 appeals has been placed by the assessee on page 14 of the paper book filed in A.Y. 2005-06. When the AO has confronted the assessee with regard to these unaccounted bank accounts detected during the course of survey, then the assessee took a stand that with the help of these bank accounts the business is being run by 3 brothers namely, Satyanarayan U Rathi, Vinodkumar alias Anil U Rathi and Shivprakash U Rathi. According to the assessee, it was difficult to ascribe a particular account to any-one person and therefore the assessee had offered the income in the hands of Satyanarayan U Rathi AOP which took into consideration the entire bank accounts.

4. The Ld. AO did not accept this stand of the assessee. He treated all these accounts as related to Satyanarayan U Rathi and passed four assessment orders in A.Y. 2003-04 to 2006-07. He also accepted the income returned by the AOP as it is.

5. The registry has pointed out that appeals of the assessee in Assessment Year 2003-04, 2004-05 and 2005-06 are time barred by 1252 days. In order to explain the delay in fling of the appeals, Shri S.N.U. Rathi has filed an affidavit dated 19th January, 2011. He deposed that income at the time of survey was declared in the hands of Shri S.N.U. Rathi and others (AOP). He filed the return in the status of AOP and offered the income. The Assessing Officer has assessed this income in his individual hand. The return filed in the case of AOP has also been accepted and taxes have been levied on the same income in two different hands. The tax consultant, Shri Pradeep Singi, CA did not advise him to challenge the orders of Commissioner of Income Tax(A) in appeal before the Tribunal. The assessee has challenged the orders of Commissioner of Income Tax(A) in the case of AOP. He remained under the impression that since S. N. U. Rathi & ITO & S. N. U. Rathi & others (AOP) vs ACIT Page No 5 A.Y. 2003-04 to 06-07 Total 14 appeals he is challenging the order of Commissioner of Income Tax(A) in AOP which will take care of the dispute in these cases also. When he changed his counsel for the purpose of handing these matters before ITAT only then he was advised to file appeal against the order of Commissioner of Income Tax(A) passed in his individual cases. Therefore, he filed the appeal. He further contended that there is no deliberate attempt at the end of assessee to make the appeals time barred. Learned counsel for the assessee while taking us through the affidavit contended that in case it is found that assessee failed to explain the delay then these appeals be treated as cross objections. He further contended that issues are inter- connected in all these appeals. Ld. counsel for the assessee further contended that rule 27 of ITAT rules 1963, provides that respondent, though, he may have not appealed may support the order appealed against on any of the grounds decided against him. Ld. Authorized Representative on the other hand contended that there is huge delay of 1252 days. The assessee has not given any plausible reasoning for filing the appeal after expiry of limitation.

6. We have duly considered the rival contentions and gone through the record carefully. The orders of Commissioner of Income Tax(A), in all the assessment years are subject to discussion, in the appeals of revenue. The challenge with regard to additions in the appeals of both parties are common. The asssessee was under an impression that once he has challenged the order of CIT(A) in the case of AOP then probably, that would take care of all these issues. In other words, if, appeals in the case of AOP are being allowed income is assessed in the case of AOP then, in his individual case, the issues will become academic. There is no deliberate intentional delay at the end of assessee. By making his appeals time barred, he will not get anything. He has not adopted any dilatory S. N. U. Rathi & ITO & S. N. U. Rathi & others (AOP) vs ACIT Page No 6 A.Y. 2003-04 to 06-07 Total 14 appeals strategy by filing the appeals after expiry of limitation. The appeals could not be filed well in time, because the tax consultant was unable to advise the assessee properly, therefore, after taking into consideration all these facts and circumstances and the issues agitated by the revenue found to be common with the assessees' grounds of appeal, we condone the delay in filing the appeals and proceed to decide them on merit.

7. Dissatisfied with the action of AO, the assessee carried the matter in appeal. It was alleged by the assessee that AO has erred in not accepting his stand that business was being run by AOP. Apart from this stand assessee has challenged the additions made by the AO on an estimate basis.

8. The Ld. CIT(A) has rejected the contention of assessee, with regard to existence of AOP, however, on merit Ld. CIT(A) has partly accepted the contention of the assessee and deleted the addition.

9. In ITA No. 2807, 2808, 2809, and 2409 assessee is challenging the confirmation of addition by the Ld. CIT(A). He has also challenged that the Ld. CIT(A) ought to have accepted the existence of AOP. The revenue has filed cross appeal and pleaded that Ld. CIT(A) has erred in partly deleting the additions by applying low rate of net profit. Thus in this way, these appeal have arisen.

10. First common issue involved in all these appeals is, whether income from unaccounted bank accounts and other material found during the course of survey is to be assessed in the hands of Shri S.N. Rathi, individual or in the hands of Shri S.N. Rathi, AOP.

S. N. U. Rathi & ITO & S. N. U. Rathi & others (AOP) vs ACIT Page No 7 A.Y. 2003-04 to 06-07 Total 14 appeals

11. With the assistance of Ld. representatives, we have gone through the record carefully. The assessee has not disputed that unaccounted bank accounts and other material did not belong to the persons in whose names these are existing, rather they are benami accounts of assessee. The stand of the assessee, Shri S.N. Rathi is that, he along with his two brothers namely; Shri Shivprakash U Rathi and Shri Vinodkumar alias Shri Anil U. Rathi were running the business jointly. A particular account cannot be ascribed to anyone person and, therefore, the income from such unaccounted accounts and material has been offered in the hands of AOP at 2% of the turnover. For buttressing this stand, it was pleaded that some of the accounts were operated by family members and even by employees. All these three brothers had operated number of benami accounts thus it exhibits that AOP was in existence.

12. Sub-section 31 of section 2 of the Income Tax Act provide the definition of expression "person", it includes I. xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx II. xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx III. xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx IV. xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx X an association of persons or a body of individuals, whether incorporated or not, Thus, the act recognizes an association of person as an individual taxable body. The question is, whether any material is available on record suggesting existence of AOP? Though the Ld. First Appellate Authority has decided the appeals of each assessment year by an independent order but the facts on vital points are common, therefore, we are taking up the facts basically form assessment year S. N. U. Rathi & ITO & S. N. U. Rathi & others (AOP) vs ACIT Page No 8 A.Y. 2003-04 to 06-07 Total 14 appeals 2003-04. Ld. First Appellate Authority while dealing with these pleas of the assessee, has recorded a finding that assessee failed to provide any evidence regarding the existence of AOP. The Ld. Assessing Officer while rejecting this claim of the assessee and taxing the income from the benami accounts in the hands of Shri S.N. Rathi, individual has assigned mainly following reasons:-

"-Shri Satyanarayan Rathi was the key person of the group and the mastermind behind the modus operandi of the benami concerns.

-The bank accounts were neither opened in the name of the AOP/members of the AOP nor in the name of the appellant's family members which itself proves that there was no concept of AOP prior to survey action.

-There was a common specimen signature in all the benami accounts and the handwritings in these signatures were similar to the handwriting of the appellant.

-The statue of AOP was not mentioned in the bank account opening card.

-The shares of profit of the members was also nowhere specified."

13. Before us, learned counsel for the assessee reiterated his contention as were raised before the revenues authorities below. The concurrent finding of fact recorded by the revenues authorities below on this issue are to the effect that the said benami accounts were neither in the name of AOP nor in the name of any alleged member of the AOP. The Ld. First Appellate Authority has specifically observed that from the material collected during the course of survey and in the post survey inquiry, it emerges out that said accounts have been operated by Shri S.N. Rathi.

S. N. U. Rathi & ITO & S. N. U. Rathi & others (AOP) vs ACIT Page No 9 A.Y. 2003-04 to 06-07 Total 14 appeals The specimen signatures are similar in all the accounts. The handwriting in respect of documents also resemble with writing of Shri S.N. Rathi. During the course of survey, Shri S.N. Rathi or any other member of AOP had not disclosed to the survey party about the existence of any AOP. They could not produce any evidence to demonstrate that profit was distributed in a definite ratio among alleged members of AOP. Therefore, taking into consideration the specific objections pointed out by the Assessing Officer (extracted supra) as well as finding of the Commissioner of Income Tax(A), we are of the view that assessee failed to establish the existence of AOP. This line of argument has been taken after the survey during the assessment proceeding. Thus, the income from the 25 benami unaccounted accounts is to be assessed in the hands of Shri S.N. Rathi, individual. This ground of appeal raised by the assessee in his appeals is rejected in all the years.

14. The next issues are common in all the four years. The learned counsel of the assessee at the time of hearing placed on record the details in tabular form exhibiting the additions made by the Assessing Officer on account of unaccounted income earned by the assessee from the benami source/benami bank accounts. The additions partly deleted by the Commissioner of Income Tax(A). The deletion has been challenged by the revenue in its appeals, whereas confirmation of additions has been challenged by the assessee in his appeals. In order to appreciate all these issues in a more scientific way, we deem it appropriate to take note of all these details. They read as under:-

Addition made by AO and Reduction granted by CIT(A) in the case of Satyanarayan U Rati Particulars Asst. Year Asst. Year 2004-05 Asst. Year 2005-06 Asst. Year 2003-04 2006-07 Additio Reduction Additions Reduction Additions Reductions Additions Reduction Total Total ns made granted by made by granted by made by granted by made by granted by Addition Reduction by the CIT(A) the AO CIT(A) the AO CIT(A) the AO CIT(A) AO 1 Addition 1395682 1053740 5933580 4479853 9667886 7299253 10960687 8877886 27957835 21710732 on A/c of unaccount S. N. U. Rathi & ITO & S. N. U. Rathi & others (AOP) vs ACIT Page No 10 A.Y. 2003-04 to 06-07 Total 14 appeals ed income earned in the names of unaccount ed concerns 2 Unaccount 335567 335567 1364801 1364801 5241181 5241181 9155224 9155224 16096773 16096773 ed income on unaccount ed turnover noticed as per impounded books 3 Unexplain 464196 464196 130720 130720 2857013 2857013 2737624 0 6189553 3451929 ed capital investment 4 Addition 0 0 636836 636836 203452 203452 364402 364402 1204690 1204690 on a/c of low GP 5 Unexplain 0 0 385000 385000 0 0 493375 0 1204690 385000 ed cash credit 6 Disallowa 0 0 16195 16195 10319 10319 0 0 26514 26514 nce out of interest 7 Telephone 0 0 0 0 9447 0 11748 0 21195 0 Expenses 8 GP of 0 0 0 0 1609314 0 844225 844225 2453539 844225 Unaccount ed turnover of unknown concerns sale Total 2195445 1853503 8467132 7013405 19598612 15611218 24567285 19241737 54828474 43719863

15. The first common issue in all 8 appeals is, at what rate, profit from the benami bank account had to be computed. The Assessing Officer has computed the profit by applying a rate of 10% to the total turnover. He made an addition of Rs. 13,95,682/-, Rs. 59,33,580/-, Rs. 96,67886/- and Rs. 1,09,60,687/- in Assessment Year 2003-04 to 2006-07 respectively. Ld. First Appellate Authority has upheld the ocmputionof profit @ 2.45% of the turn-over and granted a relief of Rs. 10,53,740/-, Rs. 44,79,853/- and Rs. 88,77,886/- in Assessment Year 2003-04 to 2006-07. The revenue is impugning the deletion of these amounts in each assessment year. On the other hand, in the cross appeal, assessee is challenging computation of profit @ 2.45% of the turn-over. According to the assessee, the profit rate ought to have been adopted at 2% of the total turnover as claimed by the assessee in the return of income filed, disclosing the income in the hands of AOP.

S. N. U. Rathi & ITO & S. N. U. Rathi & others (AOP) vs ACIT Page No 11 A.Y. 2003-04 to 06-07 Total 14 appeals

16. There is no dispute with regard to the facts that during the course of survey carried out at the business premises of the assessee on 31st January, 2006. Bank accounts, loose paper and other materials were found disclosing 25 benami bank accounts maintained with Shangali Co- operative Bank Ltd. The assessee, Shri S.N. Rathi had filed a return of income at 2% of the turn-over available in the benami bank account in the hands of AOP. The existence of AOP was not accepted by the Assessing Officer and income has been assessed in the hands of Shri S.N. Rathi, individual. The Commissioner of Income Tax(A) has also disbelieved the existence of AOP and upheld the assessment in the hands of Shri S.N. Rathi, individual. The grounds of appeal raised by the asssessee in his appeal, with regard to existence of AOP have been rejected by us in the forgoing paragraphs. The computation of turn-over is not in dispute. Now, the question before us is, what rate of profit to be applied on the turnover for computing the income from the benami accounts.

17. We have duly considered the rival contentions and gone through the

records carefully. Section 145 has a direct bearing on the controversy, therefore,

it is salutary upon us to take note of this provision.

"145(1) Income chargeable under the head 'Profits and gains of business or profession' or 'Income from other sources' shall, subject to the provisions of sub-section (2), be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee.

(2) The Central Government may notify in the official gazette from time to time accounting standards to be followed by any class of assessees or in respect of any class of income.

(3) Where the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of S. N. U. Rathi & ITO & S. N. U. Rathi & others (AOP) vs ACIT Page No 12 A.Y. 2003-04 to 06-07 Total 14 appeals accounting provided in sub-section (1) or accounting standards as notified under sub-section (2), have not been regularly followed by the assessee, the Assessing Officer may make an assessment in the manner provided in section 144."

18. From the bare reading of this section, it would reveal that it provides the

mechanism how to compute the income of the assessee. According to sub-

clause (i), the income chargeable under the head "Profits and gains of the

business or professions or income from other sources" shall be computed in

accordance with the method of accountancy employed by an assessee regularly

subject to the sub-section (2) of section 145 of the Act. Sub-section (2) provides

that the Central Government may notify in the Official Gazette from time to time

the accounting standard required to be followed by any class of assessee in

respect of any class of income. Thus, it indicates that income has to be computed

in accordance with the method of accountancy followed by an assessee, i.e.,

cash or mercantile. Such method has to be followed keeping in view the

accounting standard notified by the Central Government from time to time. Sub-

clause (3) provides a situation, i.e., if the Assessing Officer is unable to deduce

the true income on the basis of method of accountancy followed by an assessee

then he can reject the book results and assess the income according to his

estimate or according to his best judgment. The Assessing Officer in that case is

required to point out the defects in the accounts of assessee and require to seek

explanation of the assessee qua those defects. If the assessee failed to explain

the defects then on the basis of the book results, income cannot be determined S. N. U. Rathi & ITO & S. N. U. Rathi & others (AOP) vs ACIT Page No 13 A.Y. 2003-04 to 06-07 Total 14 appeals and Assessing Officer would compute the income according to his estimation

keeping in view the guiding factor for estimating such income.

19. Admittedly, there are no proper books, the details are worked out from unaccounted bank accounts. Thus, income of the assessee from unaccounted bank accounts has been determined on estimate basis. This action of the Assessing Officer i.e. estimation of income has been upheld by the Learned CIT(Appeals). The next question case arises, is that what should be the estimated addition required to be made by the Assessing Officer to the income of the assessee. For this purpose, sub-section (3) of section 145 contemplates that Assessing Officer makes an assessment in the manner provided in sec. 144 of the Income-tax Act, 1961. This section reads as under:

"Section 144.

(1) If any person -

(a) Fails to make the return required [under sub-section (1) of section 139] and has not made a return or a revised return under sub- section (4) or sub-section (5) of that section, or

(b) Fails to comply with all the terms of a notice issued under sub-

section(1) of sec. 142 [or fails to comply with a direction issued under sub-section (2A) of that section ] or

(c) Having made a return, fails to comply with all the terms of a notice issued under sub-section (2) of section 143, The [Assessing Officer], after taking into account all relevant material which the Assessing Officer has gathered, [shall, after giving the assessee an opportunity of being heard, make the assessment] of the total income or loss to the best of his judgment and determine the sum payable by the assessee on the basis of such assessment. S. N. U. Rathi & ITO & S. N. U. Rathi & others (AOP) vs ACIT Page No 14 A.Y. 2003-04 to 06-07 Total 14 appeals Provided that such opportunity shall be given by the Assessing Officer by serving a notice calling upon the assessee to show s\cause, on a date and time to be specified in the notice, why the assessment should not be completed to the best of his judgment :

Provided further that it shall not be necessary to give such opportunity in a case where a notice under sub-section (1) of section 142 has been issued prior to the making of an assessment under this section.] (2) The provisions of this section as they stood immediately before their amendment by the Direct Tax Laws (Amendment) Act, 1987 94 of 1988), shall apply to and in relation to any assessment for the assessment year commencing on the Ist day of April, 1988, or any earlier assessment year and references in this section to the other provisions of this Act shall be construed as references to those provisions as for the time being in force and applicable to the relevant assessment year.}"

20. A bare perusal of this section would suggest that in order to estimate

income, learned Assessing Officer has to exercise his discretion which

should be in consonance with best of his judgment. We are conscious of

the fact that in various authoritative pronouncements, it has been

propounded that in making a best judgment assessment, the Assessing

Officer must not act dishonestly or vindictively or capriciously. He must

make, what he honestly believe to be a fair estimate of the proper figure of

assessment and for this purpose he must be able to take into

consideration, local knowledge, reputation of the assessee about his S. N. U. Rathi & ITO & S. N. U. Rathi & others (AOP) vs ACIT Page No 15 A.Y. 2003-04 to 06-07 Total 14 appeals business, the previous history of the assessee or the similarly situated

assessee. It is also pertinent to mention that judgment is a faculty to decide

matter with wisdom, truly and legally. Judgment does not depend upon the

arbitrary, caprice of an adjudicator, but on settled and invariably principles

of justice. Thus, in a best judgment, even if, there is an element of guess

work, it should not be a wild one, but shall have reasonable nexus to the

available material and circumstances of each assessee.

21. In the light of above, let us take a note of the finding recorded by the Assessing Officer for computing the profit from these accounts at 10% of the turn-over. The finding of Assessing Officer in Assessment Year 2003- 04 read as under:

"Why G.P. is considered and not N.P. The benami concerns were created by the assesse to earn unaccounted income and to avoid tax incidence. The assesse had not maintained books of account and details of expenses. The Designated Auditor has also observed this issue at the time audit and has made qualifying remarks reproduced in foregoing para. It is most likely the administrative and overhead expenses have been debited to account of the regular concerns. Hence, G.P. is considered as unaccounted income of the assessee earned through aforesaid benami accounts instead N.P. disclosed by the assessee at 2% and proposed at 3.51% vide his office letter dated 6.6.2006. The total unaccounted turnover of the assessee through the aforesaid unaccounted concerns is worked out at Rs. 13956827/-. Unaccounted income of the assessee on this score is worked out at 10% at Rs. 1395682/- and added to the total income of the assessee treating the same as concealed income. Proceedings U/s. 274 r.w.s. 271(1) of the I.T. Act are initiated for levy of penalty u/s. 271(1)(C) of the Act."

22. Contrary to this finding, Ld. First Appellate Authority has upheld the rate required to be applied at 2.45% of the turn-over. The finding of the S. N. U. Rathi & ITO & S. N. U. Rathi & others (AOP) vs ACIT Page No 16 A.Y. 2003-04 to 06-07 Total 14 appeals Commissioner of Income Tax(A) in Assessment Year 2003-04 is also worth to note. It read as under:-

"I have gone through the facts of the case and the submissions made in this regard. It is seen that the Assessing Officer first issued a show cause notice suggesting to adopt NP rate of 3.51% as shown by the appellant's HUF in its regular books in the earlier year as against the NP of 2% offered by the appellant in the hands of AOP. The NP rate as achieved by the appellant in the year under consideration in his regular books is 1.07%. Even in the group concerns of the appellant the NP rate achieved is less than 2% i.e. 1.22% in the case of Shivprakash Rathi HUF, 1.35% in the case of Shivprakash Rathi and 2.21% in the case of Satyanarayan Rathi HUF. Regarding the Assessing Officer's allegation that GP rate is to be adopted and not NP rate it is seen that the turnover of the benami concerns is in crores of rupees and it is not possible that all the administrative expenses of this benami concerns would have been debited in the books of the regular concerns since if it had been so the Assessing Officer would have clearly detected such instances on scrutiny of the regular books.

Another important point in this regard is that during the course of assessment proceedings, the Assessing Officer got the benami accounts and books audited u/s. 142(2) of the Act, by a Special Auditor, viz. Shri Rupin R. Plachchigar, Chartered Accountant. The special auditor in his audit report suggested that average net profit @ 2.45% may be accepted in the case of the appellant, since other assessees engaged in similar line of business, derive similar rate of net profit. Thus, under the circumstances, when the books of accounts were made subject to special audit u/s. 142(2A) of the Act, in order to derive the correct profitability thereof, the profitability as reported in the Special Audit Report u/s. 142(2A) has to be considered and the Assessing Officer cannot ignore the same without pointing out any reason for doing so or without any material on record and thereby estimating the net profit of the appellant at a higher rate of 10%. Although it is true that the report of the special auditor is not binding on the Assessing Officer but in absence of any adverse material or adverse circumstances or sufficient or satisfactory reason for rejecting or discarding the special audit report, it has to be considered and relied upon. I am also of the considered view that a special auditor appointed by the Department is a kind of arbitrator between the Department and the appellant and if the decision of an arbitrator is contested by the Department, the sanctity and credibility of such a special audit would be lost. S. N. U. Rathi & ITO & S. N. U. Rathi & others (AOP) vs ACIT Page No 17 A.Y. 2003-04 to 06-07 Total 14 appeals

Therefore, I hold that the Assessing Officer was not justified in adopting the net profit of the appellant @ 10% without any basis instead of @ 2.45% as reported by the Special Auditor u/s 142(2A) of the Act. Accordingly, I hereby direct the Assessing Officer that the net profit of the benami accounts should be taken at Rs. 3,41,942/- i.e. @ 2.45% of turnover of Rs. 1,39,56,827/- and the appellant get a relief of Rs. 10,53,740/-."

23. As observed earlier, whenever an adjudicator used to estimate the income, element of guess work would always be involved. The discretion required to be exercised by the adjudicator should be in consonance with best of his judgment, circumstances, and the material available on the record, as well as conceived by the Assessing Officer about the assessee from the vicinity which will goad him to just conclusions. The Assessing Officer must not act dishonestly or vindictively. From perusal of the finding of Assessing Officer for adopting the profit rate at 10% in the finding (extracted supra), no reasons are discernable. The Assessing Officer was of the view that expenses must have been debited by the assessee in his regular books of accounts. In other words, the assessee has been doing business in his name for which regular books of accounts are being maintained and income has been offered, accounts are audited. Thus, Assessing Officer formed an opinion that expenses relatable to benami transaction must have been debited by the assessee in the regular business. Therefore, a straight gross profit rate to the turnover is to be applied for working out of the profit.

The Ld. Assessing Officer lost sight of the fact that turnover in the benami account is multi-fold than the whole business in the regular books of accounts. The expenditure to this magnitude cannot be adjusted in the regular books of accounts. The assessee has specifically pointed out that turnover of regular books of accounts would even less than packing expenses in the benami transaction. Therefore, Assessing Officer was not justified in applying GP S. N. U. Rathi & ITO & S. N. U. Rathi & others (AOP) vs ACIT Page No 18 A.Y. 2003-04 to 06-07 Total 14 appeals directly on turn-over for working of the income of assessee. The ld. Assessing Officer has not referred the case of any similarly situated assessee who ought to shown the profit at 10% without debiting the expenditure in this line of the business. The Ld. First Appellate Authority on the other hand has observed that special auditor was appointed by the Assessing Officer to work out the profit embedded in these benami transactions. The special auditor in his audit report suggested that an average net profit @ 2.45% may be reasonable profit in this case.

Thus, apart from this, the Ld. First Appellate Authority has also considered the case of other individual assessees where profit has been offered at 1.25%, 1.35% and 2.21%. Taking into consideration the comparable cases and the opinion of the special auditor, Ld. First Appellate Authority has upheld the application of profit rate at 2.45%, If we weigh the reasoning assigned by the Ld. First Appellate Authority vis-à-vis that of Assessing Officer in the findings extracted above, then scale would tilt in favour of Ld. First Appellate Authority, because Ld. First Appellate Authority has made reference to the comparable cases as well as the opinion of special auditor. On the other hand, Ld. Assessing Officer did not point out any comparable cases or any special material which has an influence for giving rise to such a profit. The other discussion made by Assessing Officer in assessment order relates to the issue, as to why alleged books of accounts should not be rejected. But after rejection of the books, the ld. Assessing Officer failed to substantiate his conclusion for computing the profit at @ 10% of the turnover.

Taking into consideration the finding of the Commissioner of Income Tax(A), we do not see any reason to interfere in his orders in all the assessment years. Thus, grounds of appeal of the assessee as well as by the revenue on this issue, in all these assessment years are rejected. The Ld. Assessing Officer shall compute the profit S. N. U. Rathi & ITO & S. N. U. Rathi & others (AOP) vs ACIT Page No 19 A.Y. 2003-04 to 06-07 Total 14 appeals from the benami bank accounts @ 2.45% of the turnover and assessed it in the hands of Shri S.N. Rathi individual.

24. The next common grievance of the revenue in all these Assessment Years is that Ld. Commissioner of Income Tax(A) has erred in deleting the additions of Rs. 3,35,567/-, Rs. 13,64,801/- Rs. 52,41,181/- and Rs. 91,55,224/- in Assessment Year 2003-04 to 2006-07 respectively. These grounds are inter-connected with ground no. 4 of assessee's appeal in Assessment Year 2005-06 (ITA No. 2809) whereby, assessee has pleaded that Ld. Commissioner of Income Tax(A) has erred in not deciding the issue regarding addition of Rs. 16,09,314/-

25. The brief facts in Assessment Year 2003-04 are that Assessing Officer has worked out suppressed sale/turnover of Rs. 33,55,673/-. These suppressed sales have been worked on the basis of entries found in the loose papers collected during the course of survey. The Assessing Officer has estimated income of Rs 3,35,567/- computed @ 10% of the turnover. In an identical manner, an addition of Rs. 13,64,801/-, Rs. 52,41,181/- and Rs. 91,55,224/- has been made in Assessment Year 2004-05 to 2006-07 respectively. Ld. First Appellate Authority has deleted these additions on the ground that sales as noted in the loose papers were already included in the turnover of the benami accounts found during the course of survey. Therefore, no separate unaccounted sale is to be estimated. In Assessment Year 2004-05; the Ld. Assessing Officer has made an addition of Rs. 16,09,314/-, the computed suppressed sale of Rs. 16,09,314/- from a pen drive and added 10% of it on the same logic as adopted in the case of loose paper.

S. N. U. Rathi & ITO & S. N. U. Rathi & others (AOP) vs ACIT Page No 20 A.Y. 2003-04 to 06-07 Total 14 appeals

26. Before us, the Ld. Income Tax officer has filed written submission vide letter dated 17th April, 2015. Ld. Departmental Representative has relied on the submissions made by the income tax officer Ward-2(2). He also pointed that it is not necessary that narration available in the loose papers must have been travelled to the bank account. The possibility of set of those transactions in cash without routing through bank cannot be ruled out. On the other hand, learned counsel of the assessee submitted that the transactions available in the bank accounts have been taken as a turnover of the assessee. It has taken care of material found during the course of survey. The calculation of the suppressed sale/turnover by the Assessing Officer amounts to double addition.

27. We have duly considered the rival contentions and gone through record carefully. The assessee has filed paper books, whereby the papers collected during the course of survey have been placed on record. The assesse has pointed out to the Assessing Officer that the transactions available in the loose paper were taken to the bank accounts. The Assessing Officer could not independently establish that alleged transactions collected from these loose papers are separate transactions. He has estimated the income on the basis of entries found in benami bank accounts. He has taken gross amount in those bank accounts as a turnover of the assessee. According to the Assessing Officer, certain transactions indicating the sale to unknown source, and assessee failed to give any explanation. The contentions of the assessee is that except one sale vide BF3/43 for a sum of Rs. 4,335/- all other sales are to its associate concerns. The amounts collected from these sales were taken to the bank accounts and have been considered in the total turnover. In our opinion, Ld. First Appellate Authority has appreciated the controversy in right perspective. The Assessing Officer could not establish that these S. N. U. Rathi & ITO & S. N. U. Rathi & others (AOP) vs ACIT Page No 21 A.Y. 2003-04 to 06-07 Total 14 appeals independent transactions have no connection with the total turnover computed on the basis of bank account. Ld. First Appellate Authority has rightly observed that notings of the sales on the loose papers were ultimately travelled to bank accounts of the benami concerns. Thus, it will amount a double addition. As far as addition of Rs. 16,09,314/- in Assessment Year 2005-06 is concerned, it ought to have been deleted on the same analogy. Ld. Commissioner of Income Tax(A), somehow, failed to record any finding on this issue. We find that, foundation of addition is similar, thus, this addition is not sustainable. We allow ground on. 4 of assessee's appeal and delete this addition. As far as other additions are concerned, ld. first Appellate Authority has rightly deleted the additions in all these assessment years and we do not find any force in the ground of appeal raised by the revenue.

28. The next ground raised by revenue in Assessment Years 2003-04 to 2005-06 is common with ground no. 2 of assessee's ground of appeal in Assessment Year 2006-07. The issue in all these grounds is, whether addition account of peak investment for seed capital in achieving the unaccounted turnover is to be made or not?

29. The brief facts of the case are that Assessing Officer has made an addition of Rs. 4,64,196/- in Assessment Year 2003-04 on the ground that assesse must have made some initial investment for achieving a huge turnover in these benami accounts. This amount has been worked by the ld. Assessing Officer on the basis of peak deposits in the benami account. The Ld. Commissioner of Income Tax (Appeals) has deleted this addition on the ground that Assessing Officer could not brought any material on record exhibiting suppression of investment in acquiring the goods which are subject to undisclosed sales.

S. N. U. Rathi & ITO & S. N. U. Rathi & others (AOP) vs ACIT Page No 22 A.Y. 2003-04 to 06-07 Total 14 appeals

30. With the assistance of ld. representatives, we have gone through the record carefully. It is an admitted fact that assessee has been doing business without disclosing it to the income tax authority. The bank accounts are benami of the assessee. For starting any business, some seed capital will always be required. The assessee has not disclosed initial capital in these accounts. He is bound to disclose the source of initial capital. Ld. Assessing Officer has worked the initial capital by taking a peak deposit and, therefore, to our mind ld. Assessing Officer has rightly made the addition at Rs. 4,64,196/- for Assessment Year 2003-04. The addition at Rs. 4,64,196/- is restored.

31. As far as Assessment Year 2004-05 is concerned, initial investment of Rs. 1,30,720/- has been worked out. To our mind, no addition can be made in this year because assesse has the benefit of availability of unexplained capital added in Assessment Year 2003-04 at Rs. 4,64,196/- + unexplained income from the benami account at Rs. 3,41,942/-. These two amounts can take care of the alleged unexplained investment at Rs. 1,30,720/-, therefore no addition is to be made in Assessment Year 2004-

05.

32. As far as Assessment Year 2005-06 is concerned, ld. Assessing Officer has worked unexplained investment of Rs. 28,57,013/-. In principle, we agree with the Assessing Officer that addition on account of unexplained investment for initiating the business has to be made but the telescoping of the unexplained income assessed in the hands of assesse for Assessment Year 2003-04, 2004-05 + additions made on account unexplained investment initially made in Assessment Year 2003-04 has to be granted. Ld. Assessing Officer shall give credit of Rs. 4,64,196/- + Rs. S. N. U. Rathi & ITO & S. N. U. Rathi & others (AOP) vs ACIT Page No 23 A.Y. 2003-04 to 06-07 Total 14 appeals 3,41,942/- i.e. the peak investment and income for Assessment Year 2003-

04. He shall further give credit of Rs. 14,53,727/- i.e. the income assessed for Assessment Year 2004-05. After setting these amounts against Rs. 28,57,013/-, he shall make addition of remaining amount in this Assessment Year on account of peak investment.

33. In Assessment Year 2006-07, Assessing Officer has made addition at Rs. 27,37,624/-. Ld. First Appellate Authority has confirmed this addition. The assessee is in appeal. We agree in principle with the Commissioner of Income Tax(A) that initial investment made by the assessee has to be added as unexplained investment of the assesse. because assessee failed to establish the source of investment. But over a period of time, the assessee has accumulated sufficient capital which can take care of this investment. In the immediately preceding year, we have noticed the investment of Rs. 28,57,013/-. The benefit of telescoping of this amount will be available to the assessee in Assessment Year 2006-07. This amount is more than the alleged peak investment worked out in this year, therefore, in this year no addition can be upheld. We allow ground of appeal raised by the assessee.

34. In Assessment Year 2003-04, no other grounds remains to be adjudicated in the appeal of revenue. Ground No. 4 and 5 are general grounds of appeals, they do not call for recording of any specific finding, hence rejected.

35. In view of the above discussion, this appeal of the revenue is partly allowed.

S. N. U. Rathi & ITO & S. N. U. Rathi & others (AOP) vs ACIT Page No 24 A.Y. 2003-04 to 06-07 Total 14 appeals

36. ITA No. 2038/Ahd/2008(Assessment Year 2004-05), in this year, we have already taken up ground no. 2,4,5,& 6 in the foregoing paragraphs. Ground no. 7 and 8 are general grounds of appeal which do not call for recording of any specific finding, hence they rejected.

37. Ground no. 1 & 3 are independent grounds of appeal not in any other appeal/year. In ground no. 1, grievance of the revenue is that Ld. Commissioner of Income Tax(A) has erred in deleting the GP addition of Rs. 6,36,836/-.

38. Brief facts of the case are that assessee has been doing business in his proprietorship concern. For this business, he has been maintaining proper books of accounts which are duly audited and the return of income has been filed regularly. On perusal of the accounts, Ld. Assessing Officer found that assessee has disclosed gross profit at Rs. 8,39,513/- @ 5.69% of the turnover as against GP at @ 11.34% declared in the immediately preceding year. The Assessing Officer was of the view that the GP declared by the assessee is on the lower side, therefore, he applied the GP rate of 10%, and addition of Rs. 6,36,836/- was made to the income of the assessee.

39. On appeal, Ld. Commissioner of Income Tax (Appeals) has deleted the addition. Ld. Commissioner of Income Tax (Appeals) has observed that turnover in this year has been increased to 150% to immediately preceding year which was at Rs. 53,52,843/- and the same has been increased to Rs. 14763497/-. According to Commissioner of Income Tax (Appeals), though total amount of the GP has been increased but in terms of percentage it has gone down. Ld. Commissioner of Income Tax(A) S. N. U. Rathi & ITO & S. N. U. Rathi & others (AOP) vs ACIT Page No 25 A.Y. 2003-04 to 06-07 Total 14 appeals further observed that Assessing Officer failed to point out any defects in the regular books of accounts maintained by the assessee.

40. On consideration of the facts and circumstances, we do not find any error in the order of Commissioner of Income Tax (Appeals), because the Assessing Officer failed to point the defects in the regular books of accounts maintained by the assessee. He simply compared the GP to ealier assessment year and then made the addition. This is not the right course provided u/s. 145(3)/144 of the income tax act. The Assessing Officer can estimate the GP only when it was not possible for him to deduce true income from the accounts of the assessee. He has not pointed out any such impossibility in the assessment order. In view of the above discussion, we do not find merit in ground no. 1. It is rejected.

41. In ground no. 2, the grievance of the revenue is that ld. Commissioner of Income Tax (Appeals) has erred in deleting the addition at Rs. 3,85,000/- which was added by the Assessing Officer with the help of section 68 of the income tax act.

42. Brief facts of the case are that assessee has received loans of Rs. 1,35,000/- from Om Textile and Rs. 2,50,00/- from Shri Sureshkumar D. Paliwal (HUF). The Assessing Officer has made the addition on account of unexplained cash credit u/s. 68 of the income tax act. The ld. Commissioner of Income Tax (Appeals) has deleted the addition on the ground that assessee has produced confirmation and permanent account no. of these persons. The loan from Shri Paliwal has been taken at Rs. 20,000/- and not 2,50,000/-. Ld. Commissioner of Income Tax (Appeals) was satisfied with the explanation of the assessee and deleted the addition.

S. N. U. Rathi & ITO & S. N. U. Rathi & others (AOP) vs ACIT Page No 26 A.Y. 2003-04 to 06-07 Total 14 appeals

43. With the assistance of ld. representatives, we have gone through record carefully. It emerges from the record that Assessing Officer has taken wrong figure of Rs. 2,50,000/- as credit appearing against the name of Shri Ruresh Paliwal (HUF). From the copy of affidavit considered by Commissioner of Income Tax (Appeals) and copies of the accounts, it reveals that amounts were only 20,000/-. With regard to Shri Om Textile, assessee has filed confirmation and PAN. Thus, he has explained cash credits appearing in his books of accounts. He has given the name, address of the creditor and also proved the genuineness of the transaction. The creditors are income tax assessee, therefore, their creditworthiness for small amount cannot be doubted. We do not find any error in the finding of Commissioner of Income Tax (Appeals), thus this ground of appeal is rejected.

44. In ground no. 3, the grievance of the revenue is that ld. Commissioner of Income Tax (Appeals) has erred in deleting the addition of Rs. 16,195/-. This addition has been made by making the disallowance out of interest expenses. The assessee has availed unsecured loans from members of Shri Joshi and Shri Paliwal family. On the strength of the details produced by the assessee, it was contended that these loans were availed in earlier years and expenses were not disallowed in those years, therefore, no disallowance can be made in this year. On due consideration of facts and circumstances, we do not find any error in the order of Ld. Commissioner of Income Tax (Appeals) because this year assessee has not taken fresh loan from the member of Joshi and Paliwal family. The genuineness of the loans was not doubted in earlier years and expenses were allowed. Therefore, no disallowance can be made in this year. We S. N. U. Rathi & ITO & S. N. U. Rathi & others (AOP) vs ACIT Page No 27 A.Y. 2003-04 to 06-07 Total 14 appeals don't find any error in the order of Ld. Commissioner of Income Tax (Appeals). This ground of appeal is rejected.

In the result, appeal of the revenue in Assessment Year 2004-05 is partly allowed.

45. ITA No. 2039/Ahd/2008 (Assessment Year 2005-06), in this year, we have already adjudicated ground no. 3, 4 & 5. Ground no. 6 & 7 are general grounds of appeal which do not call for any specific finding, therefore, rejected.

46. In ground no. 1, the grievance of the revenue is that ld. Commissioner of Income Tax (Appeals) has erred in deleting the GP addition of Rs. 2,03,452/-. The asessee has shown GP at 8.19%. The Assessing Officer after following his order in Assessment Year 2004-05 adopted the GP rate at 10% and made an addition at Rs. 2,03,452/-. On due consideration of facts and circumstances, we are of the view that Assessing Officer failed to point out any specific defects in the regular books of accounts of the assessee, we upheld the order of Commissioner of Income Tax (Appeals) in Assessment Year 2004-05 with regard to acceptance of GP at 5.69% of the turnover. The GP in this year is quite better, therefore, no addition is required to be made. Ld. Commissioner of Income Tax (Appeals) has rightly deleted the addition.

47. In ground no. 2, revenue has pleaded that Ld. Commissioner of Income Tax (Appeals) has erred in deleting the addition of disallowance of 10,319/-. This disallowance has been made by the Assessing Officer out of interest expenses. Assessee has paid interest to Joshi and Paliwal families. The Assessing Officer disallowed the interest expenses. After following his finding in Assessment Year 2004-05, ld. Commissioner of S. N. U. Rathi & ITO & S. N. U. Rathi & others (AOP) vs ACIT Page No 28 A.Y. 2003-04 to 06-07 Total 14 appeals Income Tax (Appeals) has deleted the disallowance. As we have upheld the order of ld. Commissioner of Income Tax (Appeals) in Assessment Year 2004-05 in the foregoing paragraphs, the addition with regard to unsecured loans made in Assessment Year 2004-05 has already been deleted by the Commissioner of Income Tax (Appeals) and we have upheld the order of Commissioner of Income Tax (Appeals), therefore, interest expenditure on unsecured loans cannot be disallowed. Ld. Commissioner of Income Tax (Appeals) has rightly deleted the disallowance, we do not find any reason to interfere in the finding of Commissioner of Income Tax (Appeals). This appeal of revenue is partly allowed.

48. ITA No. 2673/Ahd/2009, we have already decided ground no. 1,2,& 3 while disposing of common ground of appeal. Ground no. 5 & 6 are general grounds of appeal which do not call for recording of any specific finding. In ground no. 4, the grievance of revenue is that the ld. Commissioner of Income Tax (Appeals) has erred in deleting the GP addition at Rs. 3,64,402/-. We find that in the regular books of assessee, assessee has disclosed a GP of 8.19% which was not accepted by the Assessing Officer. He estimated the GP at 10% and made the addition. On appeal, Ld. Commissioner of Income Tax (Appeals) has deleted this addition. In view of our finding recorded in Assessment Year 2004-05, 2005-06 on this issue, we do not find any error in the order of Commissioner of Income Tax (Appeals), this ground of appeal is rejected. In the result, this appeal is treated as partly allowed.

49. Now, we take remaining grounds of appeal in the assessee's appeals. The first common ground assesse's appeal is that ld. Assessing Officer has erred in not giving credit for taxes paid in the case of Shri SN S. N. U. Rathi & ITO & S. N. U. Rathi & others (AOP) vs ACIT Page No 29 A.Y. 2003-04 to 06-07 Total 14 appeals Rathi and others (AOP). It is pleaded, when, he has assessed the income of Shri S.N. Rathi and other (AOP) in the hands of assessee (individual) then, he erred in charging interest u/s. 234B and 234C for the fault of advance tax. As observed earlier that assesse has offered the income in the status of AOP from the benami accounts, ld. Assessing Officer did not accept the existence of AOP and treated the income in the hand of assessee in his individual capacity. It is not in dispute that same income cannot be taxed twice in different hands. The moment Assessing Officer has changed status of taxability, then, the credit of taxes paid in one entity ought to be given to the entity in whose hand income is ultimately taxed, we have upheld the action of Assessing Officer that income from unaccounted transaction ought to be assessed in the hands of Shri S. N. Rathi (individual) because assessee failed to establish the existence of any AOP. In these circumstances, the credit of taxes paid in the status of AOP deserves to be given to the assessee. Therefore, we set aside this issue to the Assessing Officer with direction that ld. Assessing Officer shall re- examine this issue after hearing the assessee. This ground of appeal is allowed for statistical purposes in all the assessment years.

50. No other grounds remain to be adjudicated in Assessment Year 2003-04. The appeal of the assessee is treated as partly allowed for statistical purposes.

51 In the appeals for the Assessment Years, no other independent ground remains, all the grounds have been taken into consideration, therefore, these appeals are treated as allowed for statistical purposes.

52. As far as appeals in respect of Shri S.N. Rathi, and others (AOP) are concerned, these are consequential appeals. Once, we have held that no S. N. U. Rathi & ITO & S. N. U. Rathi & others (AOP) vs ACIT Page No 30 A.Y. 2003-04 to 06-07 Total 14 appeals AOP was exiting, there cannot be any assessment in the hands of Shri S.N. U. Rathi (AOP). The assessment orders are deserves to be quashed and accordingly we quash them. The credits of taxes paid by the assessee on the income which ultimately assessed in the individual hand is to be given to Shri S.N. U Rathi. We have given this direction while disposing of the appeals of the assessee, Shri S.N. U. Rathi. Consequently, all the appeals of the assessee are treated as allowed and that of revenue are dismissed. We summarize the result as under.

53. The appeals filed by assessee as well as revenue for assessment years 2003-04 to 2006-07 in respect of Shri S.N. U. Rathi, (individual) are partly allowed. The appeals filed by assessee for assessment years 2003- 4 to 2005-06 in respect of Shri S.N. U. Rathi & others (AOP) are allowed and the appeals filed by revenue for assessment years 2003-4 to 2005-06 are dismissed.

Order pronounced in the open court on 29-05-2015

Sd/- Sd/-

(G.D. AGRAWAL) (RAJPAL YADAV) VICE PRESIDENT JUDICIAL MEMBER Ahmedabad : Dated 29/05/2015 ak आदेश क त ल प अ े षत / Copy of Order Forwarded to:- 1. Assessee 2. Revenue 3. Concerned CIT 4. CIT (A) 5. DR, ITAT, Ahmedabad 6. Guard file.

By order/आदेश से, उप/सहायक पंजीकार आयकर अपील य अ धकरण, अहमदाबाद