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CASE LAW
2017-TIOL-1000-HC-DEL-IT - Story
PR CIT Vs FERNS 'N' PETALS: DELHI HIGH COURT (Dated: May 25, 2017)
Income Tax - Section 132, 153A & 153C.
Keywords - Books of account - incriminating material - sale of flowers - search & seizure - franchise commission s - re-opening assessment - undisclosed income.
The Assessee, is the proprietor of M/s. Ferns 'N' Petals which is engaged in the sale of fresh flowers and other related products. A search and seizure operation was conducted in the premises of the Ferns N Petals Group. On the basis of documents recovered during the search and seizure operation, a notice u/s 153A was issued to the Assessee. Thereafter, another notice along with questionnaire u/s 143(2) and 142(1) were also issued. AO passed separate assessment orders in respect of the AYs 2000-01, 2001-02, 2002-03, 2003-04 and 2004-05. The AO dealt with the issue of 'franchisee commission'. He noted that as per the P & L Account for the AY 2004-05, the Assessee had claimed Rs. 60,066. It was noted that as in the preceding years, a substantial amount was claimed on account of franchisee commission which was debited to the P&L Account i.e., the franchisee commission paid to various parties, the Assessee was thus asked to furnish copies of accounts of the franchisees with their complete addresses. The AO noted that the addresses of the franchisees were not revealed and on a perusal of the copy of the accounts of the said franchisees, there were glaring discrepancies in the details filed. During the course of search, the Assessee made a disclosure of Rs.110 lakhs on account of change in the method of accounting of franchisee fees and undisclosed franchisee fees for the Financial Year during which the search was conducted. On the basis of the said statement, the AO surmised that the number of outlets for which franchisee fee was received must have more or less remained the same in all AYs from 2001-02 to 2006-07. He estimated the undisclosed income at a certain percentage of the amount of disclosure made by the Assessee in her statement u/s 132(4). At this stage, it must be noted that no statement was made by the Assessee herself. A statement was made u/s 133A by Shri Pawan Gadia who was working at M/s. Satya Farms as Vice-President since August, 2001 and was supervising the work of the various companies/concerns of the assessee.
Five separate appeals were filed by the Assessee before the CIT(A) relatable to each of the AYs in question and the same was partly allowed deleting most of the additions made by the AO. Assessee produced additional evidence under Rule 46A which included copies of franchisee agreement. The CIT(A) analyzed this additional evidence thoroughly. On the issue of the franchisee commission paid by the Assessee, it was noted that the accounts of the Assessee had been tax audited and no adverse comments had been made by the Tax Auditors. The AO had also not rejected the books of accounts of the Assessee. It was accordingly held that the disallowance of the franchise commission paid was not sustainable. Accordingly, the disallowance was deleted. A separate issue concerned additions on account of 'undisclosed franchisee commission' (fee) that had been received by the Assessee. The additions made by the AO were found by the CIT(A) to be based on surmises and suspicion. Aggrieved by the order of the CIT(A), appeals were filed both by the Revenue and the Assessee before the ITAT. The ITAT first dealt with one common ground raised by the Assessee in all its appeals which concerned the jurisdictional issue of the validity of the invocation of Section 153A of the Act by the Revenue. It was contended that for the AYs 2000-01 to 2003-04, there was no incriminating material seized during the course of search and, therefore, the assessment order in respect of those AYs ought to be quashed. The ITAT, following the decisions of this Court in Kabul Chawla and Pr. CIT v. Lata Jain, accepted the above grounds urged by the Assessee and held that the assumption of jurisdiction u/s 153A for the said AYs was bad in law. As regards AY 2004-05, the ITAT noted that the addition for the said AY was based on the seized documents. Accordingly, it was held that the assessment for the AY 2004-05 u/s 153A was valid. The ITAT then proceeded to examine the appeal filed by the Revenue for the said AY. Each of the five grounds was rejected by the ITAT. Consequently, Revenue's appeal for AY 2004-05 was dismissed on merits and the corresponding appeal of the Assessee was dismissed for non-prosecution since none appeared for the Assessee before the ITAT.
Having heard the parties, the High Court held that,
Whether there can be addition made for a particular AY without there being an incriminating material qua that AY which would justify such an addition - NO: HC
++ It appears that the seized cash was added to the income during the year of search and not in relation to any of the other AYs i.e., AYs 2000-01 to 2004-05. The documents as stated by the Revenue in its Memorandum of Appeal pertain to AY 2003-04, 2005-06, 2004-05, and 2006-07 respectively have neither been described as such or in any detail by the Revenue either in these appeals. They have not been referred to or discussed in any of the orders of the AO or the CIT(A). Although it was repeatedly urged that there were "hundreds of seized documents", what is necessary to examine is whether they were in fact 'incriminating documents'. Any and every document cannot be and is in fact not an incriminating document. The legal position is that there can be no addition made for a particular AY without there being an incriminating material qua that AY which would justify such an addition. Therefore, the mere fact that there may have been documents pertaining to the above AYs does not satisfy the requirement of law that there must be incriminating material. In any event, the aforementioned documents pertain to only some of the AYs with which we are concerned i.e., AYs 2003-04, and 2004-05. The Court is unable to accept the submissions of that there was incriminating material other than what has been discussed in the orders of the AO, CIT(A) and the ITAT for the AYs in question.
Whether statement made during a survey u/s 133A(3)(iii) can be taken as incriminating material for the purpose of making additions in respect of a search operation when it is evident that only a statement made during a search u/s 132(4) can be taken on oath & used as evidence whereas statement made during a survey need not be on oath - NO: HC
++ the main plank of Revenue's submission was that the disclosure made by Mr. Pawan Gadia in his statement under Section 133A was sufficient to be construed as incriminating material qua all the aforementioned AYs, the assessment for which could be re-opened by invoking Section 153A of the Act. The statement was in fact not u/s 132(4) but u/s 133A of the Act. There is a difference between a statement made during a survey under Section 133A of the Act and that made during the course of search under Section 132 (4) of the Act. Section 132(4) of the Act states that the authorized officer may, during the course of search and seizure, "examine on oath any person who is found to be in possession or control of any books of account, documents, monies, bullion, jewellery..."and that any statement made during such examination may be used thereafter in evidence in any proceeding under the Act. On the other hand, Section 133A does not talk of the recording of any statement on oath. Under Section 133A (3) (iii), the Income Tax Authority acting under the said provision could "record the statement of any person which may be useful for, or relevant to, any proceeding under this Act." Therefore, there is a considerable difference in the nature of the statement recorded under Section 132(4) and that recorded under Section 133A(3)(iii) of the Act. Thus, in the present case, it would be wrong on the part of the Revenue to characterize the statement of Mr. Pawan Gadia as by itself an incriminating material that could be used for making additions in all the AYs in question apart from the year of search.
Whether Revenue's contention that, incriminating material qua each of the AYs could not be verified as assessee did not produce its books of accounts, could be accepted when Revenue had access to the entire books of accounts of the assessee which were maintained in soft form on assessee's computers which were already seized by the Revenue during search operations - NO: HC
++ Revenue contended that since the Assessee never produced the books of accounts, it was not possible for the AO to record a specific finding regarding each of the seized documents. In this regard it was note that the books of accounts of the Assessee were not rejected by the AO. Even in the audit report u/s 44AB, no defect in the books of accounts maintained by the Assessee was pointed out. In the circumstances, it is not possible to accept the plea of the Revenue now made that the so-called additional incriminating material qua each of the AYs could not be verified and, therefore, not discussed by the AO because the Assessee did not produce its books of accounts. It appears that the Revenue did have access to the entire books of accounts of the Assessee which were also shown to have also been maintained in soft form on the computers of the Assessee which were already seized by the Revenue during search operations.
Whether addition for undisclosed franchisee fee should be deleted if AO had presumed that the number of outlets remained constant in all the AYs in question - YES: HC
++ The offer of Rs. 1.10 chores as undisclosed franchisee fee was made only for the year of search and not for the earlier years. In fact, there was no material on the basis of which the franchisee income could have been added for the earlier years. What the AO did, as was noted by the CIT(A), was to proceed on the basis as if there should have been such undisclosed franchisee income in the earlier AYs as well because the modus operandi of the Assessee during those was the same. The AO also presumed that the number of outlets remained constant in all the AYs from 2000-01 to 2006-07. He proceeded to estimate the undisclosed income at a certain percentage of the amount disclosed by the Assessee in the year of search. The AO presumed that the Assessee had 52 owned/controlled franchisee outlets during October to December, 2007 and would have had the same numbers during the earlier years as well. Whereas the Assessee filed an affidavit before the CIT(A) pointing out that there were different numbers of owned/controlled outlets and franchisee outlets during the various AYs. From that affidavit, it would be seen that for AY 2004-05, there were only 4 owned outlets and 21 franchisee outlets. In the remand proceedings, the AO could not dispute the above information. For this reason the CIT(A) held that the estimated additions made by the AO from AYs 2001-02, 2002-03, 2003-04 and 2004-05 were unsustainable in law. It has been categorically found by the CIT(A) on facts that no incriminating material in relation to the AYs in question i.e., 2001-02 to 2003-04 had been brought on record which could support such presumption.
Whether in terms of Section 153A Revenue can re-open at least six years of assessments earlier to the year of search only if incriminating material was found during the course of search in respect of the issue - YES: HC
++ On the legal aspect of invocation of Section 153A in relation to AYs 2000-01 to 2003-04, the central plank of the Revenue's submission is the decision of this Court in Dayawanti Gupta. Section 153A is titled "Assessment in case of search or requisition". It is connected to Section 132 which deals with 'search and seizure'. Section 153A enables the Revenue to re-open at least six years of assessments earlier to the year of search. It is only if during the course of search under Section 132 incriminating material justifying the re-opening of the assessments for six previous years is found that the invocation of Section 153A qua each of the AYs would be justified. In Kabul Chawla, the Court took note of the decision of the Bombay High Court in Commissioner of Income Tax v. Continental Warehousing Corporation (Nhava Sheva) Ltd. [2015] 58 taxmann.com 78 (Bom) which accepted the plea that if no incriminating material was found during the course of search in respect of an issue, then no additions in respect of any issue can be made to the assessment under Section 153A and 153C of the Act. A number of High Courts have concurred with the decision of this Court in Kabul Chawla.
++ In the Dayawanti Gupta case the statement recorded was u/s 132(4) and not u/s 133A. It was a statement by the Assessee himself. Therefore, there was a clear admission by the Assessees in Dayawanti Gupta case that they were not maintaining regular books of accounts and the transactions were not recorded therein. By contrast, there is no such statement in the present case which can be said to constitute an admission by the Assessee of a failure to record any transaction in the accounts of the Assessee for the AYs in question. On the contrary, the Assessee herein stated that, he is regularly maintaining the books of accounts. The disclosure made in the sum of Rs. 1.10 crores was only for the year of search and not for the earlier years. As already noticed, the books of accounts maintained by the Assessee in the present case have been accepted by the AO. In Dayawanti Gupta, by contrast, there was a chart prepared confirming that there had been a year-wise non-recording of transactions. In Dayawanti Gupta, on the basis of material recovered during search, the additions which were made for all the years whereas additions in the present case were made by the AO only for AY 2004-05 and not any of the other years. Even the additions made for AYs 2004-05 were subsequently deleted by the CIT(A), which order was affirmed by the ITAT. Even the Revenue has challenged only two of such deletions. The above distinguishing factors in Dayawanti Gupta, therefore, do not detract from the settled legal position in Kabul Chawla which has been followed not only by this Court in its subsequent decisions but also by several other High Courts. For all of the aforementioned reasons, the Court is of the view that the ITAT was justified in holding that the invocation of Section 153A by the Revenue for the AYs 2000-01 to 2003-04 was without any legal basis as there was no incriminating material qua each of those AYs.
Revenue's appeal dismissed
