[2005] 3 SOT 277 (MUM.

IN THE ITAT MUMBAI BENCH ‘H’

Harshad L. Thakker

v.

Assistant Commissioner of Income-tax, Circle-18(2)

K.C. SINGHAL, JUDICIAL MEMBER AND D.K. SRIVASTAVA, ACCOUNTANT MEMBER

IT APPEAL NO. 3922 (MUM.) OF 2000 [ASSESSMENT YEAR 1997-98]

APRIL 29, 2005

Section 133A of the Income-tax Act, 1961 - Survey - Assessment year 1997-98 - Whether
Income-tax Inspector is an income-tax authority for purpose of recording statement of any
person in course of survey proceedings under section 133A - Held, no - Whether assessee
would still be liable to explain discrepancy in stock inventory prepared in course of survey
even though statement recorded was non est because incriminating material found in course
of illegal search is an admissible evidence - Held, yes

Section 69 of the Income-tax Act, 1961 - Unexplained investments - Assessment year 1997-98
- Whether if assessee can demonstrate that valuation of stock adopted by survey party
during survey proceedings under section 133A was wrong with reference to material on
record, then addition under section 69 on account of unexplained investment in excess
stock could not be justified merely on ground that said addition was offered by assessee
during survey proceedings - Held, yes

FACTS

The assessee was engaged in the manufacture of wire mesh and poultry equipments. The income-
tax authorities carried out a search under section 133A at the business premises of the assessee
and found that the closing stock of the assessee as per the trading account was of Rs. 14,42,082
while the stock as per the inventory prepared was of Rs. 22,45,941 and, thus, there was excess
stock of Rs. 8,03,859. The statement of the assessee was recorded on oath on the same date in
which the assessee expressed his inability to explain the discrepancies found in the stock and
offered the amount of Rs. 8,10,000 for the purpose of taxation. However, in the return of income
filed for the relevant assessment year, the assessee did not include the amount of Rs. 8,10,000
offered for taxation. In the course of assessment proceedings, the assessee submitted that he had
retracted the statement since he was completely exhausted and nervous due to other pressure at
the time of survey, and that he being a technical person did not have the accounting knowledge and
also explained the discrepancies to the Assessing Officer. The Assessing Officer rejected the
explanation of the assessee and made an addition of Rs. 8,10,000 on account of unexplained
investment in excess stock to the income of the assessee. On appeal, the Commissioner (Appeals)
upheld the addition.

On second appeal :

HELD

Section 133A confers power on the income-tax authorities to make survey at the business premises
of the assessee and for that purpose such authority may enter any place within the limit of area
assigned to him, occupied by any person in respect of whom he exercises his jurisdiction. In the
course of such survey, he may inspect the books of account or other documents, which are found at
such places; may verify the cash, stock or other valuable articles found in that place. Such authority
may also record the statement of any person, which may be useful for or relevant to any
proceedings under the Act. The power to record the statement is given in clause (iii ) of sub-section
(3) of section 133A. For the purpose of this section, the expression ‘income-tax authorities’ has
been defined in the Explanation at the end of the section according to which, it means a
Commissioner, a Joint Commissioner, a Director, a Joint Director, an Assistant Director or a Dy.
Director or an Assessing Officer and for the purpose of clause (i ) of sub-section (1), clause (i) of
sub-section (3) and sub-section (5), includes the Inspector, if so authorized by any such authority. A
perusal of this definition clearly shows that clause (iii) of sub-section (3) is not included in the
definition under clause (a) of the Explanation. That means an Income-tax Inspector is not
authorized to record the statement of any person in the course of survey proceedings under section
133A. In the instant case, despite various opportunities given to the revenue, the latter had not been
able to demonstrate as to who recorded the statement of the assessee. However, the stock
inventory was prepared on the date of survey by the Income-tax Inspector, as was apparent from
the seal put on the stock inventory. Hence, the statement was perhaps recorded by the Income-tax
Inspector. However, the Income-tax Inspector is not an income-tax authority for the purpose of
recording statement under section 133A. Therefore, the statement was not recorded by an
authorized officer and, consequently, such statement became non est in law. Hence, no addition
could be sustained merely on the ground that disclosure was made by the assessee in the
aforesaid statement. However, the assessee would still be liable to explain the discrepancy in the
stock inventory prepared in the course of survey even though the statement recorded was non est
because it is the settled legal position that incriminating material found in the course of illegal
search is an admissible evidence. [Para 5]

The assessee on merits submitted that ‘Safex System PVC Pipes with Nipple and other
accessories’ had been overvalued at Rs. 10,52,000 as against actual cost of Rs. 7,46,481. In that
connection, he drew attention to ‘Bill of entry for home consumption’ which was presented before
the customs authorities. It was also submitted that G.I. Pipes were part of the system as might be
seen from the actual invoice. He also submitted that in the invoice pipes were mentioned as conduit
pipes while in the inventory it was stated as G.I. Pipes which were in reality one and the same. He
also stated that two days before the date of survey, he had shown the same as part of stock
statement furnished to bank authorities. Therefore, it was a case of overvaluation. [Para 6]

The Commissioner (Appeals) had simply rejected the explanation of the assessee merely on the
ground that valuation was accepted by the assessee before the survey party and difference was
offered for taxation. If the assessee could demonstrate that valuation adopted by the survey party
was wrong with reference to the materials on record, then addition could not be justified merely on
the ground that it was offered for taxation. In the course of search/survey, every assessee is under
mental pressure and factual errors may be committed. Though the admission of the assessee is a
piece of evidence, yet the assessee can demonstrate that admission was wrong. In the instant
case, the assessee had been able to demonstrate that it was a case of overvaluation. There was no
narration given by the survey party in respect of the system found at the premises. The assessee
had shown that it was purchased for Rs. 7,46,481 as was apparent from the ‘Bill of entry for home
consumption’. That item remained in the stock and was also duly shown in the stock statement
furnished to bank, just two days before the date of survey. That showed that there was no
discrepancy in the quantitative details. The only other objection of the Assessing Officer was that
G.I. Pipes found were in addition to the system. That also was not correct. The invoice showed that
the system was inclusive of conduit pipes which are commonly known as G.I. Pipes. Therefore,
there was no discrepancy so far as quantity was concerned. Therefore, overvaluation, if any, had to
be deleted. Stock valuation has to be done on cost basis. Therefore, valuation taken by survey
party over and above cost price would be unjustified. However, the actual cost of the system found
was not before the Tribunal. ‘Bill of entry for home consumption’ gave the cost price at Rs. 7,46,481
but that price might not include the expenditure which the assessee might have incurred after the
goods had reached the port. It was not clear whether customs duty paid on such item was included
in that price. He also would have incurred other expenditure in bringing the goods to his godown. It
had not been shown as to what price had been debited in the books of account. Therefore, the cost
debited in the books of account should be adopted as it would be inclusive of all expenses.
Accordingly, the order of the Commissioner (Appeals) on that aspect of the matter was set aside
and the matter was remitted to the file of Assessing Officer with the direction to substitute the
valuation of Rs. 10,52,000 taken by survey party by the value shown by the assessee in his books
of account and, consequently, delete the difference between these two figures. [Para 7]

The next contention of the assessee was that the survey party had included the stock of Geared
Motor with chain feeding system twice. According to him, the entire system could not be stored in
his small premises and in fact it was to be assembled and commissioned only at the customer’s
poultry farm. The assessee could only store in the shape of components which were already
included in the list of inventories prepared by the survey party. Therefore, valuation of stock should
be reduced by Rs. 5,38,000. That aspect of the matter required fresh adjudication in the light of
materials on record. Therefore, the order of the Commissioner (Appeals) on that aspect of the
matter was set aside and the matter was restored to the file of the Assessing Officer for fresh
adjudication after giving reasonable opportunity to the assessee. [Paras 8 and 9]

CASES REFERRED TO

Pullangode Rubber Produce Co. Ltd. v. State of Kerala [1973] 91 ITR 18 (SC) (para 4) and R.R.
Gavit v. Smt. Sherbanoo Hasan Daya [1986] 161 ITR 793/ 28 Taxman 349 (Bom.) (para 5).

Deepak Tralshwala for the Appellant.

M.B. Reddy for the Respondent.

ORDER

K.C. Singhal, J.M. - The only issue arising in this appeal relates to the addition of Rs. 8,10,000
made by the Assessing Officer on account of unexplained investment in excess stock.

2. Briefly stated the facts are, that the assessee was the Proprietor of M/s. Quality Wire Products,
manufacturing wire mesh and poultry equipments. A survey action was carried out at the business
premises of the assessee on 4-12-1996 in the course of which, the stock inventory was prepared.
The Closing Stock as per the Trading Account was worked out to Rs. 14,42,082 while the stock as
per the inventory prepared amounted to Rs. 22,45,941. Thus, according to the survey party, there
was excess stock of Rs. 8,03,859. The statement of the assessee was recorded on oath on the
same date in which the assessee expressed his inability to explain the discrepancies found in the
stock. Accordingly, the assessee offered the amount of Rs. 8,10,000 for the purpose of taxation.
However, in the return of income filed on 31-10-1997 for the year under consideration, the assessee
did not include the amount offered for taxation, i.e., Rs. 8,10,000 even though he had agreed in his
statement on oath recorded on the date of survey.

3. In the course of assessment proceedings, the assessee was asked to explain as to why the sum
of Rs. 8,10,000 should not be added to the income of the assessee. The assessee vide letter dated
23-2-2000 submitted that he has retracted from the statement since he was completely exhausted
and nervous due to other pressure at the time of survey. It was also submitted that he being a
technical person did not have the accounting knowledge. On facts, he explained the discrepancies
as under :—

"Stock statement of Geared Motor with chain feeding system was shown at Rs. 5,38,000, which
he claimed that such stock never existed. It was merely duplication of the same items that
covered in the entire stock statement. Moreover, such machines could only be assembled at
poultry and not in the factory.

The assessee also stated that the survey team overvalued certain items of stock (watering
system PVC Pipes with nipples and other accessories). The entire invoice of M/s. Val Products
was for Rs. 7,34,674. Hence by taking this item at Rs. 10,52,000 the stock had been overvalued
by Rs. 3,17,325.88.

Hence stock statement prepared by the survey team is erroneous to the extent of Rs. 8,03,850,
being Rs. 5,88,000 on account of duplicate of stock and Rs. 3,17,325.68 due to over valuation."
However, the Assessing Officer rejected the explanation of the assessee by observing as under :—

"(a)The assessee has stated that certain items of stock (watering system PVC Pipes with
nipples and other accessories) has been over-valued by Rs. 3,17,325.68, thereby
increasing the total value to Rs. 10,52,000, whereas as per the invoice of M/s. Val
Products, the amount totals to Rs. 7,84,674. However, on perusal of the invoice of M/s. Val
Products, it is found that GI Pipes of 10" which is placed at Item No. 3 of stock inventory
prepared by the survey team and signed by Mr. H.L. Thakker, is not included in the above-
mentioned invoice.

(b)Moreover, in the statement of stock as on 30-11-1996, the assessee which has been filed on
record, the water system PVC pipes with nipples and other accessories, 10" (91 boxes) has
been valued at Rs. 7,50,000 whereas the G.I. Pipes 10" is not included in the stock
statement prepared by the assessee.

(c )This clearly shows that the assessee has made some unaccounted purchases of stock
besides his books of account which are not recorded in his statement of stock prepared as
on 30-11-1996. On perusal of the stock inventory prepared by the survey team, it is seen
that Rs. 10,32,000 has been attributed to both water system PVC Pipes - 91 boxes along
with accessories to G.I. Pipes 10". Thus, going by the stock statement of the assessee as
on 30-11-1996, if the water system PVC Pipes 91 boxes and as stated above is valued at
Rs. 7,50,000. Thus the remaining amount of Rs. 3,02,000 represents the amount for G.I.
Pipes 10" as per stock statement prepared by the survey team on 4-12-1996. Hence, there
has been no overvaluation of stock by Rs. 3,17,365.68 as claimed by the assessee.

(d)The assessee’s contention that the Geared Motor with chain feeding system Rs. 5,38,000 is
simply hypothetical figures and never existed also cannot be accepted. It has not appeared
in the statement of stock of the assessee as on 30-11-1996, filed during the time of
hearing. However, it figures at item No. 30 in the stock inventory prepared by the survey
team on 4-12-1996 and signed by Mr. H.L. Thakker. His contention that it is merely
duplication of item already listed in the stock statement cannot be accepted at this point of
time.

(e )Assessee’s retraction after a gap of more than three years is not acceptable as it is not
possible to verify at this point of time the genuineness of the claim of the assessee as to
whether the stock existed or not. Moreover, statement on oath of the assessee dated 4-12-
1996 where he has accepted the additional excess stock along with scrap at Rs. 8,10,000
existed for which he had no explanation, and it was offered as additional income for the
assessment year 1997-98 is proof enough of the excess stock declared by the assessee at
the time of survey. Assessee other reasons like not knowing accounts well and he was
under tremendous pressure is not also acceptable as one cannot simply make such
frivolous confession, while making statement on oath. This action of the assessee amounts
to disregard for the sanctity of statement on oath."

In view of the above reasonings, the Assessing Officer made the addition of Rs. 8,10,000 vide order
dated 30-3-2000. The addition made by the Assessing Officer has been upheld by the learned CIT
(Appeals). Aggrieved by the same, the assessee is in appeal before the Tribunal.

4. The learned counsel for the assessee has assailed the orders of the lower authorities by raising
various contentions. The first contention of the learned counsel for the assessee is that the
statement recorded by the Income-tax person in the course of survey is illegal and non est since it
was not recorded by the authorised officer. He drew our attention to the provision of section 133A of
the Act to point out that the statement of assessee can be recorded only by an income-tax authority
under sub-section (3) of the said section. Further, the Explanation attached to this section defines
income-tax authorities as a Commissioner, a Jt. Commissioner, a Director, a Jt. Director, an
Assistant Director or a Dy. Director or an Assessing Officer or a Tax Recovery Officer and for the
purposes of clause (i) of section 1, clause (i) of sub-section (3) and sub-section (5) includes the
Inspector of Income Tax. It was, therefore, pleaded that Income-tax Inspector cannot record the
statement of the assessee since such power is derived from clause (iii) of sub-section (3). He drew
our attention to the statement recorded to point out that there is nothing on record to show as to
who recorded the statement. He also pointed out that the Bench had directed the Learned
Departmental Representative from time to time to bring any material to establish as to who recorded
the statement. Despite the various opportunities given, the Learned Depart-mental Representative
has not been able to prove that the statement was recorded by an authorised officer. Alternatively,
he has raised two submissions (i) that the assessee was under pressure to go back to home to
attend Pooja on the death anniversary of his father and the lady staff was also to go home, and (ii)
the assessee is entitled to retract from the statement if he can prove that the contents of statement
are wrong. Reliance was also placed on the judgment of the Hon’ble Supreme Court rendered in the
case of Pullangode Rubber Produce Co. Ltd. v. State of Kerala [1973] 91 ITR 18 . On the other
hand, the Learned Departmental Representative simply supported the orders of the lower
authorities but he could not inform the Bench as to who recorded the statement at the time of
survey.

5. After considering submissions of both the parties, we find merit in the main contention raised by
the Learned Counsel for the assessee. Section 133A of the Act confers powers on the income-tax
authorities to make survey at the business premises of the assessee and for that purpose such
authority may enter in any place within the limit of area assigned to him, any place occupied by any
person in respect of whom he exercise his jurisdiction. In the course of such survey, he may inspect
the books of account or other documents, which are found at such places; may verify the cash,
stock or other valuable articles found in that place. Such authority may also record the statement of
any person, which may be useful for or relevant to any proceedings under this Act. The powers to
record the statement is given in clause (iii) of sub-section (3) of section 133A of the Act. For the
purpose of this section, the words "Income-tax Authorities" has been defined in the Explanation at
the end of the section according to which, it means a Commissioner, a Jt. Commissioner, a Director,
a Jt. Director, an Assistant Director or a Dy. Director or an Assessing Officer and for the purpose of
clause (i) of sub-section (1), clause (i) of sub-section (3) and sub-section (5) includes the Inspector
of Income-tax, if so authorised by any such authority. Perusal of this definition clearly shows that
clause (iii) of sub-section (3) is not included in the definition under clause (a) of the Explanation.
That means, in Income-tax Inspector is not authorised to record the statement of any person in the
course of survey proceedings under section 133A of the Act. In the present case, despite various
opportunities given to the Learned Departmental Representative, the revenue has not been able to
demonstrate as to who recorded the statement of the assessee. We have also gone through the
statement of the assessee, which has been placed at pages 40 to 42 of the Paper Book, but from
this statement it does not appear as to who recorded the statement inasmuch as name or
designation of the person, who recorded the statement, has not been mentioned. However, we find
that the stock inventory was prepared on the date of survey by the Income-tax Inspector, as is
apparent from the seal put on the stock inventory. The only inference, which can be drawn from the
materials placed before us is that the statement was perhaps recorded by the Income-tax Inspector.
As stated above, Income-tax Inspector is not an Income-tax authority for the purpose of recording
statement under section 133A of the Act. Therefore, considering the material on record, we are of
the view that the statement was not recorded by an authorised officer and consequently such
statement becomes non est in law. This view is also fortified by the judgment of the Hon’ble Bombay
High Court in the case of R.R. Gavit v. Smt. Sherbanoo Hasan Daya [1986] 161 ITR 7931 . In that
case, the Income-tax Officer recorded the statement of assessee under section 132(4) of the Act
prior to the commencement of the search. The Hon’ble Bombay High Court held that the Income-tax
Officer had no authority to record such statement prior to the commencement of search and,
therefore, the same had no evidenciary value. Similar view has been taken by the Hon’ble Andhra
Pradesh High Court in the case of CIT v. Ramdas Motor Transport 138 ITR 177 (sic). In that case,
no incriminating material was found from the possession of the assessee in the course of search but
the statement under section 132(4) of the Act was recorded. The Hon’ble High Court held that the
Income-tax Officer was not authorised to record a statement where no incriminating material was
found and, therefore, the statement so recorded, had no evidenciary value. Considering the above
legal position, we further hold that no addition can be sustained merely on the ground that
disclosure was made by the assessee in the aforesaid statement. Since the main contention of the
Learned Counsel for the assessee is accepted, we need not adjudicate the alternate plea raised by
him. However, before parting with this issue, we would like to mention that assessee would still be
liable to explain the discrepancy in the stock inventory prepared in the course of survey even though
the statement recorded was non est because it is the settled legal position that incriminating
material found in the course of illegal search is an admissible evidence.

6. Coming to the merits of the case, it has been submitted by the Learned Counsel for the assessee
that "Safex System PVC Pipes with Nipple and other accessories" has been overvalued at Rs.
10,52,000 as against actual cost of Rs. 7,46,481. In this connection, he drew our attention to "Bill of
entry for home consumption" which is presented before the Custom authorities (Page 38 of Paper
Book). It was also submitted that G.I. Pipes are part of the system as may be seen from the actual
invoice (Pages 35 to 38 of Paper Book). He also submitted that in the invoice, pipes are mentioned
as Conduit Pipes while in the inventory it is stated as G.I. Pipes, which are in reality, one and the
same. He also stated that two days before the date of survey, the assessee had shown the same as
part of stock statement furnished to bank authorities. Therefore, it is a case of overvaluation. On the
other hand, the Learned Departmental Representative has relied on the orders of lower authorities.

7. In our opinion, the above explanation of the assessee appears to be plausible. The learned
CIT(Appeals) has simply rejected the explanation of the assessee merely on the ground that
valuation was accepted by the assessee before the survey party and difference was offered for
taxation. In our opinion, if the assessee can demonstrate that valuation adopted by the survey party
was wrong with reference to the materials on record, then addition cannot be justified merely on the
ground that it was offered for taxation. In the course of search/survey, every assessee is under
mental pressure and factual errors may be committed. Though, the admission of the assessee is
piece of evidence but the assessee can demonstrate that admission was wrong - Pullangode
Rubber Produce Co. Ltd.’s case (supra). In the present case, the assessee has been able to
demonstrate that it is a case of overvaluation. There is no narration given by the survey party in
respect of the system found at the premises. The assessee has shown that it was purchased for Rs.
7,46,481 as is apparent from the "Bill of entry for home consumption" appearing at Page 38 of the
Paper Book. This item remains in the stock and was also duly shown in the stock statement
furnished to Bank, just two days before the date of survey. This shows that there was no
discrepancy in the quantitative details. The only other objection of the Assessing Officer was that
G.I. Pipes found were in addition to the system. This also is not correct. The invoice at Pages-35 to
38 of Paper Book, shows that the system was inclusive of Conduit Pipes which are commonly
spoken as G.I. Pipes. In view of the above discussions, we are of the view that there was no
discrepancy so far as quantity is concerned. Therefore, overvaluation, if any, has to be deleted.
Stock valuation has to be done on cost basis. Therefore, valuation taken by survey party over and
above cost price would be unjustified. However, the actual cost of the system found is not before us.
"Bill of entry for home consumption" gives the cost price at Rs. 7,46,481 but this price may not
include the expenditure which the assessee might have incurred after the goods have reached the
port. It is not clear whether Custom Duty paid on such item is included in this price. He also would
have incurred other expenditure in bringing the goods to his godown. It has not been shown as to
what price has been debited in the books of account. In our opinion, the cost debited in the books of
account should be adopted as it would be inclusive of all expenses. Accordingly, we set aside the
order of the learned CIT (Appeals) on this aspect of the matter and remit the same to the file of
Assessing Officer with the direction to substitute the valuation of Rs. 10,52,000 taken by survey
party by the value shown by the assessee in his books of account and consequently delete the
difference between these two figures.

8. The next and last contention of the assessee’s counsel is that survey party has included the stock
of Geared Motor with chain feeding system twice. According to him, this entire system cannot be
stored in small premises of assessee and in fact it is to be assembled and commissioned only at the
customer’s Poultry Farm. He also showed us copies of some photographs to point out that it is
physically impossible to store in the business premises. The assessee can only store in the shape
of components, which are already included in the list of inventories prepared by the survey party.
Therefore, valuation of stock should be reduced by Rs. 5,38,000. On the other hand, the Learned
Departmental Representative has reiterated the stand of the Assessing Officer by submitting that
inventory was prepared in the presence of assessee and, therefore, cannot be disputed.

9. In our opinion, this aspect of the matter requires fresh adjudication in the light of materials on
record. The Assessing Officer has rejected the explanation of assessee merely on the ground that
this item did not appear in assessee’s own stock statement as on 30-11-1996. If assessee’s version
is correct, then naturally it would not appear in the stock statement of assessee as it must be in the
shape of component only. The learned CIT (Appeals) has observed that the assessee has not
shown that this system was included in the form of components in the stock list prepared by the
assessee as on 30-1-1996. It appears that these observations were made without examining the
nature of system and components involved in such system. The case of assessee is that the system
comes into existence only when it is assembled at customer’s premises and, therefore, it cannot be
valued separately. It has to be valued only in the form of component. This explanation of the
assessee appears to be reasonable but cannot be accepted unless it is shown that all the
components of this system were already included in the stock inventory prepared by the survey
party. Mere submission that it is included in the inventory is not sufficient. The onus is on the
assessee to prove that such system is included in the stock inventory in the form of component. In
the interest of justice, we set aside the order of the learned CIT (Appeals) on this aspect of the
matter and restore the same to the file of the Assessing Officer for fresh adjudication after giving
reasonable opportunity to the assessee.

10. In the result, the appeal is allowed pro-tanto.