ITA No. 670 of 2009 -1- IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH ITA No. 670 of 2009 Date of Decision: 20.7.2010 The Commissioner of Income Tax-II, Ludhiana ....Appellant. Versus M/s V.M. Spinning Mills ...Respondent. CORAM:- HON'BLE MR. JUSTICE ADARSH KUMAR GOEL. HON'BLE MR. JUSTICE AJAY KUMAR MITTAL. PRESENT: Mr. Vivek Sethi, Advocate for the appellant. ADARSH KUMAR GOEL, J. 1. This appeal has been preferred by the revenue under Section 260A of the Income Tax Act, 1961 (in short “the Act”) against the order of the Income Tax Appellate Tribunal, Chandigarh Bench 'B', Chandigarh (hereinafter referred to as “the Tribunal”) passed on 29.4.2009 in ITA Nos. 127/Chandi/2009 and 143/Chandi/2009, for the assessment year 2005-06, proposing to raise the following substantial questions of law:- “(i) Whether on the facts and in law, the Hon'ble ITAT was legally justified in holding that the action of the A.O. in extrapolating of ITA No. 670 of 2009 -2- unrecorded sales to Rs.3,08,64,562/- on the basis of undisputed unrecorded sales of Rs.1,11,99,427/- for 127 days, by adopting the said amount of unrecorded sales as the measure for determining the quantum of unrecorded sales for the whole year, was illegal, unjustified or excessive? (ii) Whether on the facts and in law, the Hon'ble ITAT was legally justified in restricting the unrecorded sales for whole of the financial year to the extent of Rs.1,11,99,427/- i.e. the amount of sales represented by 17 unrecorded sale bills for 127 days only though the best judgment assessment was made under section 144 of the Income-tax Act, 1961 by the A.O.? (iii) Whether on the facts and in law, the Hon'ble ITAT was legally justified in deleting the addition of Rs.21,00,000/- made by the A.O. on account of unexplained cash credits under section 68 of the Act though the best judgment assessment was made under section 144 of the Act and the assessee failed to discharge its onus of proving identification, creditworthiness, genuineness of the transaction?” 2. The assessee is a partnership firm and engaged in manufacturing yarn from wool top and fibre. The return declaring nil ITA No. 670 of 2009 -3- income was filed on 16.8.2005. The case of the assessee was taken up for scrutiny and assessment was framed under Section 144 of the Act at an income of Rs.1,21,55,500/-. The additions inter alia were made on account of unrecorded sales and unexplained cash credit entries. The CIT (A) on appeal by the assessee, upheld the plea of the assessee in respect of unexplained cash credits by holding that since the partner had confirmed the entry, addition had to be made in the account of such partner and not the firm. As regards addition on account of unrecorded sales, the CIT (A) upheld the view of the Assessing Officer. On further appeal, the Tribunal held that to the extent the addition related to the bills, the same was justified but the rest of addition based on inference was not justified. Accordingly, to that extent the addition was deleted. 3. We have perused the findings on both the aspects. The finding recorded by the CIT (A) on the aspect of addition on account of unexplained cash credits is as under:- “3. I have carefully considered the contention of learned counsel for appellant and perused the relevant record. As no explanation with regard to sources of this credit have been filed by the appellant during the assessment proceedings the Assessing Officer cannot be faulted for taking an adverse view against the appellant. However, there is considerable force in the alternative contention of the learned counsel. The partner Shri Vipin Kumar Mahajan, HUF is an existing assessee with PAN: AADHV5131L. In view of the ratio of decision of the ITA No. 670 of 2009 -4- Hon'ble Jurisdictional High Court of Punjab & Haryana in the case of Shanti Devi (supra) which has been relied upon by the learned counsel, addition to the capital account of the partner being duly admitted by the said partner who is an independent assessee, adverse inference, if any, under the provisions of Section 68 of the Act could be drawn only in the hands of that partner. Therefore, though in principle, stand of the Assessing Officer for considering this amount for addition u/s 68 is held to be justified considering the ratio of decision of the Hon'ble Jurisdictional High Court mentioned above, from legal point of view such an inference could only be drawn in the hands of Shri Vipin Kumar Mahajan, HUF the partner. The addition of Rs.21,00,000/- made in the hands of the appellant is, therefore, not sustainable and the same is accordingly deleted.” 4. With regard to the setting aside of addition by drawing an inference of there being unrecorded sales, the observations of the Tribunal are as under:- “.... It is abundantly clear that the records produced by the assessee in the course of assessment proceedings contained 17 sale bills amounting to Rs.1,11,99,427/- which were not found recorded in the regular books of account. Notably, the assessee could not furnish any explanation in this regard ITA No. 670 of 2009 -5- before the Assessing Officer. The explanation furnished before the Commissioner of Income-tax (A), to say the least, is totally inexplicable. According to the assessee, these were fake bills issued only to obtain bank facilities. In our view, the explanation has been rightly rejected by the Commissioner of Income-tax (A) as unreliable. In fact, the conduct of the assessee itself bears testimony that the explanation furnished was lacking in bonafides. We, therefore, find no reasons to interfere with the conclusion drawn by the lower authorities on this issue, in principle. However, in so far as the issue relating to the quantification of the unrecorded sales concerned, we find the approach of the Assessing Officer unjustified. As seen earlier, the only evidence found was with regard to the existence of unrecorded sales to the tune of Rs.1,11,99,427/-. There is no justification to infer that the assessee would have undertaken sales outside the books of account during rest of the financial year also. Therefore, in our view, the assessment of unrecorded sales be limited to Rs.1,11,99,427/- represented by 17 unrecorded sales bills found. As a consequence, we set aside the order of the Commissioner of Income-tax (A) and direct the Assessing Officer to restrict the addition by applying GP rate of 10.35% to unrecorded sales ITA No. 670 of 2009 -6- computed at Rs.1,11,99,427/-. As a result, the assessee partly succeeds on this Ground.” 5. We have heard learned counsel for the revenue. 6. The CIT (A) as well as the Tribunal have relied upon the judgment of this Court in Smt. Shanti Devi v. CIT, 171 ITR 532 for holding that once partners acknowledged the cash credit entries, addition had to be made in their hands and not in the hands of the firm. Learned counsel for the appellant is unable to distinguish the said judgment. No question of law has been claimed on this aspect. 7. As regards unrecorded sales being made the basis for drawing inference for addition, the Tribunal has clearly recorded a finding of fact that addition beyond unrecorded sales evidenced by 17 sale bills was without any basis. The said finding has not been shown to be perverse. 8. Learned counsel for the revenue relies upon the judgment of the Hon'ble Supreme Court in Commissioner of Sales Tax v. H.H. Esufali H.M. Abdulali, 90 ITR 271 to submit that in a proper case, the Assessing Officer could make addition by seeing the pattern of undisclosed income even without material. 9. The proposition of law propounded in the judgment of Hon'ble Supreme Court in H.H. Esufali H.M. Abdulali's case (supra) is undisputed. Where an assessee suppresses the particulars of assessable income, appropriate inference can be drawn in a fact situation. It is not always necessary that there should be tangible material. Inference itself can be basis to justify addition. Whether or not a case is made out for addition being a question of fact, the view taken ITA No. 670 of 2009 -7- by the Tribunal is a possible view. 10. No substantial questions of law as claimed arises in this appeal. 11. Accordingly, we find no merit in this appeal. Dismissed. (ADARSH KUMAR GOEL) JUDGE July 20, 2010 (AJAY KUMAR MITTAL) gbs JUDGE