K.S.S. Prasad Rao, J.M. These appeals are filed by assessee and Department having been aggrieved by order of learned CIT(A), Raipur dt. 3rd May, 2007 for asst. yr. 2004-05 in case of assessee. Since both these appeals arise out of same order of learned CIT(A), they were heard together and disposed of by this common order for sake of convenience. 2. assessee has raised following issues in its grounds of appeal : "1. On facts and in circumstances, learned AO grossly erred in determining net profit at Rs. 1.4 8 crores as income from undisclosed sales merely on presumption, surmises and suspicion having no material on record thereby making addition of Rs. 5 8 lakhs after excluding Rs. 90 lakhs on alleged ground of bogus share capital and premium to be separately added under s. 6 8 and learned CIT(A) further erred in sustaining same to extent of Rs. 3 8 lakhs thereby correcting arithmetical error after excluding Rs. 90 lakhs to be added under s. 6 8 . 2. On facts and in circumstances, learned AO further erred in treating genuine credits of Rs. 90,00,000 in respect of share capital and premium as sham, bogus and accommodation entries merely on presumption and suspicion and learned CIT(A) grossly erred in confirming same. 3. On facts and in circumstances of case, learned AO further erred in disallowing Rs. 52,470 arbitrarily considering revenue loss as capital loss and learned CIT(A) erred in confirming same." 3 . Department has taken following sole issue in its grounds of appeal : "On facts and in circumstances of case, learned CIT(A) was not justified in deleting disallowance of Rs. 17,70,240 made by AO under s. 40A(3) of IT Act, 1961." 4. Both parties were heard regarding issues raised by them in respective appeal and their legal implications. 5. First we shall take up assessee s appeal. first ground of appeal of assessee relates to determination of net profit at Rs. 1.4 8 crores as income from undisclosed sources merely on presumption without having any material on record. assessee is aggrieved by addition of Rs. 5 8 lakhs after excluding Rs. 90 lakhs to be added separately under s. 6 8 of IT Act, 1961 for alleged bogus share application and premium. 6. facts, in brief, relating to this ground of appeal are as under : 6.1 assessee is private limited company engaged in business of running steel re-rolling mill, trading of iron and steel etc. It came into existence in year 19 8 9. assessee filed return of income on 1st Nov., 2004 declaring total income of Rs. 22,46,03 8 . assessee maintained regular books of account and same were audited under s. 44AB of IT Act, 1961. factory premises of assessee was searched by Central Excise Department on 10th March, 2004 wherein documents relating to avoidance of excise duty were found, as concern is engaged in clandestine removal of M.S. ingot and hot re-rolled products as well as non-alloy steel. Consequentially excise duty of Rs. 25 lakhs has also been paid by concern. On perusal of copies of seized documents it was seen that from January, 2004 to March, 2004, assessee has purchased 346. 8 50 MT of raw material and sold 1133.195 MT of finished products out of books. 6.2 In return of income filed for asst. yr. 2004-05, assessee has shown amount of Rs. 50 lakhs under head other income from manufacturing and clubbed it under income in P&L a/c. In note No. 3 appended to audit report, it has been stated that above income has been shown on lump sum basis. This income of Rs. 50 lakhs shown as lump sum income is on account of unaccounted sales detected during action by Department of Customs and Excise. assessee has claimed on expenses side Rs. 25 lakhs paid to Excise Department on account of excise duty on unaccounted sales. 6 . 3 papers impounded during action by Department of Customs and Central Excise reveal themodus operandi of unaccounted sales undertaken by assessee for span of about two months. papers relate t o period from January, 2004 to initial week of March, 2004. On basis of papers impounded assessee was made to pay Central Excise duty of Rs. 25 lakhs. Furthersuo motu assessee has offered income of Rs. 50 lakhs for period on account of unaccounted sales based on seized papers. During proceedings under s. 14 3(2) of Act, assessee explained that out of Rs. 50 lakhs offered by him, about Rs. 34.5 lakhs has been offered on account of income of those months and about Rs. 14 .5 lakhs has been offered on account of peak investments. 6.4 assessee in its reply dt. 13th Nov., 2006 filed before AO has mentioned peak investments and profit on unaccounted sales as under : "That assessee has verified and finally prepared details of unaccounted sales, estimated expenses and profits thereon as per dummy ledger and cash book in computer. In this set of books enclosed herewith estimated manufacturing and other expenses of about 8 4 per cent have been shown on date of sale. As per this book there is net profit of about Rs. 34.50 lacs. Further it may be seen that maximum cash shortage works out to Rs. 14 .3 8 lacs on 6th Jan., 2006. Considering both these items assessee has declared total income of Rs. 50 lacs and credited same in books of accounts. Copies of dummy books of account are enclosed herewith which may be verified. assessee shall be obliged to respond to any other query in this regard." AO did not accept above explanation for reason mentioned in assessment order (on p. 4) as under : "The fact that assessee is showing very low profits and fact that unaccounted sales for more than two months detected combined with possibility that expenses incurred against unaccounted sales have been debited in P&L a/c indicate that assessee has indulged in such activities in earlier periods also. inference from impounded documents and time span involved forces one to ponder whether activities have continued for period for which papers have been found or activities have continued for longer span. Though at time of action only papers relating to transactions detailing two months of activities were found. It is beyond comprehension of human probabilities that assessee had not engaged itself in out of books trade when lucrative option of saving both indirect taxes and direct taxes existed. length of time to which paper relates also strengthens this assumption." 6.5 AO relied upon judgment of Hon ble Supreme Court in case ofCST vs. H.M. Esufali H.M. Abdulali 1973 CTR (SC) 317 : (1973) 90 ITR 271 (SC). On this basis as also taking recording on p. 8 1 of seized materials (by Customs and Central Excise Department) that there was opening balance with one of parties, learned AO issued show-cause notice dt. 13th Dec., 2006 asking assessee to explain as to why lump sum addition by extrapolation of income from unaccounted sales for months April, 2003 to December, 2003 be not made and added to total income of assessee. 6.6 assessee submitted reply to show-cause notice issued by him and extract of this reply has also been incorporated on pp. 6 and 7 of assessment order. learned AO, after considering various aspects found that amount of Rs. 1.4 8 crores is income of assessee from unaccounted sales. Out of this amount, Rs. 90 lakhs was considered to have been routed through Kolkata based companies in form of share capital and s h r e premium. AO accepted plea of assessee regarding telescoping to this extent. He, therefore, added only difference amount of Rs. 5 8 ,00,000 to total income of assessee as lump sum addition on basis of extrapolation. 7. Aggrieved by order of AO, assessee filed appeal before learned CIT(A) who confirmed action of AO by observing as under : "Hence it has been proved beyond any doubt that appellant indulged in out of books sales. When for entire period, appellant has disclosed gross turnover of Rs. 32.13 crores, then only for 56 days of relevant assessment year spreading over 14 th Jan., 2004 to 10th March, 2004, appellant has admitted [by itself] to have suppressed sales to extent of Rs. 2.21 crore. Hence, action of AO in treating that there was suppression of sales for initial 9 months is on valid ground and hence, sustained. Then production and subsequent removal has not been noted in RG-1 register, which is admitted fact and hence, on date of search, appellant had suppressed sales to extent of Rs. 2.21 crore only for 56 days for which documents could be detected. After establishing issue, now question would arise as to whether AO was justified to estimate that there was suppression of sale of Rs. 8 crores in first 9 months of assessment year. Now let us examine what are options left before AO to make calculation on estimation of suppressed sales for initial 9 months. He could have applied estimated income, on basis of 56 days as detected by another Government Department or else he could have estimated gross turnover and thereafter applying GP ratio he can arrive at figure. AO has resorted to later option. I could find in later option, AO had both figures of gross suppressed turnover for 56 days and ratio as taken by appellant for relevant period. I could further observe that estimation made by AO is as per provision of law. There is no evidence on record to suggest that he has acted capriciously or in biased manner. So long estimation is based on material evidence and without any bias, such estimation cannot be questioned. fact remains that appellant had suppressed its sales for which it has to pay Central Excise duty. fact further remains that it has admitted that it has made concealment for which it has prayed before adjudicating authority for exoneration from penalty and prosecution. It is also fact that there was opening entry by way of old balance, hence, AO is very much in his jurisdiction to make reasonable estimate, which he has done in instant case. On proportionate basis, suppressed turnover came at Rs. 9.50 crores but he has taken figure of Rs. 8 crores. There is no evidence to suggest that he has acted in defiance of law and hence, I sustain figure of Rs. 8 crores as suppressed sales for initial 9 months and profit @ 16 per cent of said amount i.e. 1.2 8 crores [wrongly noted by AO as 1.4 8 crores]. It has also been brought on record that appellant has not spent any extract expenditure, whatsoever nature for this concealed income of Rs. 12 8 crores and hence, action of AO treating same as concealed income for relevant period is sustained. However, AO has given benefit of Rs. 90 lakhs of introduction of share capital out of said amount. This was done at behalf of appellant itself because vide its letter dt. 22nd Dec., 2006 it was claimed same as alternate argument that income generated in first 9 months was reintroduced by way of share capital (with share premium) on last week of assessment year. Hence, concealment under this head should be restricted to Rs. 3 8 lakhs in place of Rs. 5 8 lakhs as computed by AO." 7.1 Aggrieved by order of CIT(A), assessee is further in appeal before Tribunal. 8 . learned counsel for assessee, Shri R.S. Khemka reiterated submissions made before learned CIT(A). He vehemently assailed action of AO. Firstly, he submitted that action of AO is based purely on guesswork without any basis or any material fact. He submitted that no details were available to AO to arrive at such figure. He submitted that had there been any concealed sales for first 9 months, it could have been detected by Central Excise authority during search operation. He invited our attention to reply of assessee dt. 1 8 th Dec., 2006 (which is filed on pp. 79 to 8 1 of paper book I of assessee) filed by assessee in compliance to show-cause notice issued by AO wherein it has been submitted that sales as per papers seized by excise authorities amounted to Rs. 221.36 lacs. papers also contained opening balance of one party of Rs. 1,16,700 at page No. 8 1. Since nature of this balance was not known same was treated as sales for sake of calculation. On total sales estimated GP rate of about 16 per cent was applied based on GP rate in regular accounts. Further peak investment was also worked out. This total amount estimated with surplus fund of company. Therefore, assessee accounted for amount of Rs. 50 lakhs as other income. Therefore, it is not correct to conclude that opening balance was due to unaccounted sale made earlier. He submitted that Excise Department has estimated unaccounted sales as per loose papers only and have not extrapolated sales beyond that period. He submitted that even opening balance was not treated as sales by Excise Department. 8 .1 He further submitted that learned AO has estimated turnover for 9 months (April to December, 2003) at Rs. 9.50 crores based on turnover of 2.21 crores for two months but adopted Rs. 8 crores on which applied GP @ 16 per cent on turnover and worked out income at Rs. 1.4 8 crores correct figure comes to Rs. 1.2 8 crores i.e. Rs. 8 crores @ 16 per cent, which is not correct. 9. Referring to p. 6 of assessment order, it was further submitted that AO, at one place proposed estimation at Rs. 90 lacs (Rs. 10 lacs per month for period from March to December, 2003 and at other place proposed Rs. 1.4 8 crores, which shows that AO was not of settled mind in regard to addition to be made on account of unaccounted sales for period of March to December, 2003. AO deducted Rs. 90 lacs from Rs. 1.4 8 crores on allegation of being unaccounted income generated by issue of shares to Kolkata based companies, which has been separately added under s. 6 8 and made addition of Rs. 5 8 lacs as lump sum addition on basis of extrapolation, which is arbitrary and unwarranted on facts in circumstances of case. assessee, during course of assessment filed reply on 22nd Dec., 2006 (page No. 19 of paper book I) wherein it was contended that assessment of income has to be made on available evidences as per s. 14 3(3)(ii), which empowers AO to go through following evidences for making assessment : (a) Evidences produced by assessee (b) Evidences required from AO to be produced (c) After taking into account all relevant material gathered by AO. It is therefore clear from plain reading of s. 14 3(3) that assessment of income should be based on relevant and gathered material and not beyond that, but learned AO has not given due consideration on this point raised by appellant. 1 0 . He further submitted that even in case of search by IT Department additions are restricted to be based on loose papers and other documents seized during course of search and not beyond this. AO has gone beyond period (January, 2004 to March, 2004) for which documents were seized by Central Excise authorities, which is not at all justified, particularly when assessee himself has declared sum of Rs. 50 lakhs as income on account of unaccounted sales and peak investments. 11. He distinguished judgment of Hon ble Supreme Court in case ofH.M. Esufali (supra) and submitted that ratio of aforesaid apex Court decision is not applicable to facts of case of assessee for following reasons : 11.1 That cited case pertains to sales-tax and Central Sales-tax Acts where best judgment is permissible under s. 1 8 under certain circumstances (specified in judgment). In IT Act, best judgment is permissible under s. 14 4 where it can be done under following circumstances : (a) If assessee has failed to file return. (b) If assessee has failed to comply with notice under s. 14 2. (c) If having made return fails to comply with all terms of notice issued under s. 14 3(2). He submitted that in assessee s case, return was filed under s. 139(1) and all compliances were made in terms of ss. 14 2(1) and 14 3(2). Therefore provisions of best judgment defer in sales-tax and income-tax proceedings. 1 1 . 2 He submitted that in case ofEsufali (supra) it was estimation of turnover whereas in assessee s case it is proposed to go further by estimating income also and that too without any material on records to suggest/estimate any escaped sale or any income resulting from escaped turnover. 11.3 He further submitted that in search conducted by Excise Department, no other loose papers were found to suggest that there was any escaped production or sale before that period i.e. 1st Jan., 2004. He stressed point that entire stocks were found in order. 11.4 Arguing further he submitted that if assessee had made any unaccounted sales before that period excise authorities would have got some or other materials from assessee s premises but there is no such material t o suggest that there was any escaped sale for rest of period commencing from 1st April, 2003 to 31st Dec., 2003. To apply any basis or estimation there must be some available material otherwise it will result in arbitrary assessment as has been exercised in present case. Thus, he submitted that entire exercise for estimation of income is against provisions of law. 11.5 He reiterated his stand that in case of assessee, immediately after search of Excise Department, amount of Rs. 50 lacs was offered under head other income from manufacturing and also paid Rs. 25 lacs towards excise duty. 11.6 He further submitted that assessee further made application to Settlement Commission, Mumbai Bench and vide order dt. 1 8 th May, 2005, immunity from prosecution and penalty was granted to appellant after due consideration of co-operation extended, full and true disclosure of unrecorded transactions and payment of excise duty. 11.7 He, therefore, vehemently submitted that orders of learned AO as well as CIT(A) were not in accordance with law. In support of contentions that such hypothetical calculations of turnover and estimation of GP merely on presumptions and surmises are not sustainable. learned counsel for assessee relied on following decisions : (1)Dhakeswari Cotton Mills Ltd. vs. CIT (1954) 26 ITR 775 (SC); (2)CIT vs. Mahesh Chand (1992) 104 CTR (All) 327 : (1993) 199 ITR 247 (All); (3)CIT vs. R.Y. Durlabhji (1995) 211 ITR 17 8 (Raj); (4)Mange Ram Mittal vs. Asstt. CIT (2006) 105 TTJ (Del)(SB) 594; (5)CIT vs. Dr. M.K.E. Memon (2001) 16 8 CTR (Bom) 1 8 4 : (2001) 24 8 ITR 310 (Bom); (6)CIT vs. C.J. Shah & Co. (2000) 246 ITR 671 (Bom); (7)CIT vs. Achal Alloys (P) Ltd. (1996) 130 CTR (MP) 22 : (1996) 21 8 ITR 46 (MP); ( 8 )Asstt. CIT vs. A.T. Associates (2006) 99 TTJ (Nag) 74; (9)Dr. Prakash Rathi vs. ITO (2006) 104 TTJ (Jd) 504; (10)Dy. CIT vs. Gandhar Oil Refinary (I) Ltd. (2006) 104 TTJ (Mumbai) 630; (11)CIT vs. Kashiram Textile Mills (P) Ltd. (2006) 202 CTR (Guj) 293 : (2006) 2 8 4 ITR 61 (Guj); (12)CIT vs. Chemifine (2004) 1 8 9 CTR (MP) 132 : (2004) 270 ITR 305 (MP); (13)CIT vs. Industrial Credit & Development Syndicate Ltd. (2006) 203 CTR (Kar) 413 : (2006) 2 8 5 ITR 310 (Kar); ( 14 )State of Kerala vs. K.T. Shaduli Yusuf 39 STC 47 8 (SC). In view of above facts, circumstances and judicial decisions, he prayed to kindly delete addition of Rs. 3 8 lakhs made by learned AO under presumptions and surmises to income returned by assessee. 11. 8 He further submitted that Courts are guardian of citizens in democratic set up, therefore justice be rendered. 12. On other hand, learned Departmental Representative strongly supported orders of Revenue authorities. 13. We have considered rival submissions in light of facts and circumstances of case. We have gone through records as well as paper books filed by assessee. We have also deliberated upon case law cited on behalf of both parties. On careful consideration of facts and circumstances, we find that action of AO is based purely on guesswork without any basis. assessee is in business of running of steel re-rolling mill and trading of iron and steel etc. since 19 8 9. Regular books are maintained and audited under s. 44AB of IT Act. Quantitative details are also maintained. search was conducted on 10th March, 2004 by Director General of Central Excise Intelligence, Raipur on factory premises of assessee. After verification of loose papers, unrecorded transactions were estimated at Rs. 57, 8 1,994 on purchase of 346. 8 50 MT of raw material viz., ingot and rails and Rs. 1, 8 4,10,126 on sales of 1,133.195 MT of finished goods, viz. CTD bar, square bar and ingots etc. After considering result of search, assessee computed such income at Rs. 50 lakhs as other income from manufacturing activities and paid Rs. 25,00,000 towards excise duty. It is seen from records that during course of assessment proceedings, assessee fully co-operated with learned AO and made all compliances as required from time to time for completion of assessment. papers impounded during action by Central Excise Department revealed unaccounted sales undertaken by assessee for span of about two months. papers relate to period from January, 2004 to initial week of March, 2004. On basis of papers impounded, assessee was made to pay Central Excise duty of Rs. 25,00,000. Further, assesseesuo motu has offered income of Rs. 50 lakhs for period on account of unaccounted sales based o n seized papers. During proceedings under s. 14 3(3), assessee explained that out of Rs. 50 lakhs offered by it, about Rs. 34.5 lakhs has been offered on account of income of those months and about Rs. 14 .5 lakhs has been offered on account of peak investment. assessee in its reply dt. 13th Nov., 2006 which is filed on p. 76 of paper book I has mentioned peak investment and profit on accounted sales as under : "That assessee has verified and finally prepared details of unaccounted sales, estimated expenses and profits thereon as per dummy ledger and cash book in computer. In this set of books, enclosed herewith estimated manufacturing and other expenses of about 8 4 per cent have been shown on date of sales. As per this books, there is net profit of about Rs. 34.50 lakhs. Further, it may be seen that maximum cash shortage works out to Rs. 14 .3 8 lakhs on 6th Jan., 2006. Considering both these items assessee has declared total income of Rs. 50 lakhs and credited same in books of accounts." 13.1 AO as well as learned CIT(A) did not accept above explanation. There is no material on record to prove that assessee has indulged in out of books sales. This assumption is purely based on suspicion without there being any basis. Although assessee has admitted that it has suppressed sales to extent of Rs. 2.21 crores only for 56 days during course of search by Central Excise Department but there was no such unrecorded transactions prior to 1st Jan., 2004. learned AO issued show- cause notice dt. 13th Dec., 2006 asking assessee to explain as to why lump sum addition by extrapolation of income for unaccounted sales for months April, 2003 to December, 2003 be not made and added to total income of assessee. In compliance to notice, assessee filed reply dt. 1 8 th Dec., 2004 on 22nd Dec., 2006 and extract of its reply has also been incorporated on pp. 6 and 7 of assessment order. However, learned AO recorded his finding on p. 8 of his order which reads as under : "The turnover out of books for two months stood at Rs. 2.21 crores. For 9 months (April to December, 2003) this would stand at figure of about Rs. 9.50 crores. Let me take this at Rs. 8 crores, for sake of reasonableness and practical realities in business. On this applying standard of assessee @ 16 per cent of turnover, income stands at Rs. 1.4 8 crores. Since no excise duty has been paid by assessee on this amount while other expenses like electricity etc. have been debited, addition to total income shall be taken at figure of Rs. 1.4 8 crores. It is essential to remember that assessee has taken deduction of Rs. 25 lakhs of excise duty paid on income of Rs. 35 lakhs declared to IT Department. Since extrapolation is on account of transaction out of books of accounts of assessee, I find no need to reject book results declared by assessee based on transactions recorded in books." 13.2 AO has estimated turnover for 9 months (April to December, 2003) at Rs. 9.50 crores based on turnover of Rs. 2.21 crores for two months but adopted Rs. 8 crores on which applied GP @ 16 per cent on turnover and worked out income of Rs. 1.4 8 crores. In this regard, it is pertinent to mention here that correct figure comes to Rs. 1.2 8 crores. This action of AO in our view is not correct since there is no material on record to support same. It is worthwhile to mention that at one place, AO proposed estimation at Rs. 90 lakhs i.e. Rs. 10 lakhs per month for period of nine months and at other place, proposed Rs. 1.4 8 crores which shows that AO was not certain in regard to addition to be made on account of unaccounted sales for period of nine months. In our opinion, addition of Rs. 5 8 lakhs (corrected figure is Rs. 3 8 lakhs) made by AO is arbitrary and unwarranted on facts and in circumstances of case. 14 . We find force in argument of learned counsel for assessee that as per s. 14 3(3)(iii) of Act, assessment of income has to be made on available evidence but learned AO as well as learned CIT(A) have not given due consideration to this argument raised by assessee before them. Even in case of search by IT Department, additions are restricted based on loose papers and other documents seized during course of search and not beyond this. Therefore, we are of opinion that AO is not justified in going beyond period i.e. January, 2004 to March, 2004 for which documents were seized by Central Excise authority particularly when assessee himself has declared sum of Rs. 50 lakhs as income on account of unaccounted sales and peak investment. 1 4 . 1 In our opinion, learned counsel for assessee has rightly distinguished judgment of Hon ble Supreme Court in case ofEsufali (supra) because said judgment is distinguishable on facts of present case. case ofH.M. Esufali (supra) was related to sales-tax and Central Sales-tax and where assessment was done under best judgment which is not in present case. 1 4 . 2 It is also seen from records that assessee has made application to Settlement Commission, Mumbai Bench and vide order dt. 1 8 th May, 2005, immunity from prosecution and penalty was granted to assessee after due consideration of co-operation extended, full and true disclosure of unrecorded transactions and payment of excise duty. 1 4 . 3 We are of considered opinion that hypothetical calculation of turnover and estimation of GP merely on guesswork and presumption is not sustainable in law. We, therefore, hold that no details were available to AO to arrive at such figure. Had there been any concealed sales for nine months, it could have been detected by Central Excise authority during their search operation. We are therefore of considered opinion that addition made by AO is purely based on guesswork, presumption and surmises and not on basis of any material found during course of search operation by Central Excise authority. learned CIT(A) completely failed to appreciate facts of case. In our view, such additions based on hypothetical calculation of turnover and estimation of GP on presumption and surmises are not sustainable. We direct AO to delete same. 15. Now coming to cases relied upon by learned counsel for assessee, we find that cases relied upon by learned counsel do support contentions of assessee. first ground of appeal of assessee is allowed. 16. second ground of assessee relates to addition of Rs. 90 lakhs made by AO under s. 6 8 of Act which was confirmed by learned CIT(A) in appeal. 17. basic facts and circumstances in regard to this ground have been discussedin extenso in ground No. 1 above. In nutshell, facts are that AO estimated income at Rs. 1.4 8 crores and deducted Rs. 90 lakhs from Rs. 1.4 8 crores on allegation of being unaccounted income generated by issue of shares to Kolkata based companies which has been separately added under s. 6 8 of Act. Thus, AO made addition of Rs. 90,00,000 under s. 6 8 treating amount received towards share capital and premium as sham bogus and accommodation entries. 1 8 . While making such huge addition under s. 6 8 , AO in page No. 13 of assessment order made his observations as under : "(i) assessee has raised funds through issue of shares during relevant financial year. There is increase of Rs. 1 8 lakhs in share capital account and Rs. 72 lakhs in share premium account. only source of this money is from four Kolkata based companies, whose details, quantum of investment and return of income are as follows : Name Returned Share Share Total of share- Address income Asst. capital (Rs.) premium (Rs.) (Rs.) holder yr. 2004-05 2- Sub Jogendra 10 Rs. Computing 2,00,000 8 ,00,000 Kaviraj Raw, lakhs 4,450 (P) Ltd. Kolkata 2- Alexcy Jogendra 5 Rs. Tracon (P) 1,00,000 4,00,000 Kaviraj Raw, lakhs 7,622 Ltd. Kolkata 2- Nandan Jogendra 45 Rs. Mercantiles 9,00,000 36,00,000 Kaviraj Raw, lakhs 10,154 (P) Ltd. Kolkata HC/10, Trident Ram Krishna 30 Rs. Lame Pack Sarani, 6,00,000 24,00,000 lakhs 7,945 (P) Ltd. Baguati, Kolkata (ii) It is evident that quantum of capital introduced by these companies is not commensurate with IT returns filed by them. Introduction of huge share premium by them in assessee company was very awkward and beyond comprehension. assessee was asked to produce balance sheets of these companies and to produce directors of these companies in person before undersigned. copy of balance sheet was submitted. copy of portion of bank statement of investor companies, wherein they have shown transfer of share capital and share premium amount to assessee company has also been submitted. (iii) In response to query letter dt. 15th Dec., 2006, assessee tried to contact executives of above companies, and obtained copy of their balance sheet, which were filed during assessment proceeding. learned O from very beginning raised doubts that investor companies are not actually investors. They are mere conduit companies and money of assessee has been routed through them, at year end around 25th March, 2004 just after search by Central Excise Department. For other queries assessee did not get any response from directors of above companies despite his best efforts. learned AO also made enquiries through Investigation Wing (Director of IT Inv.) at Kolkata and according to report submitted by their authorized Inspector. These companies do not exist at given address. Further one of address is of residential building . (iv) assessee vide its reply dt. 2nd Nov., 2006 had filed photocopy of IT return. Acknowledgment of above four companies and thereafter vide reply dt. 20th Nov., 2006 filed photocopy of audited balance sheet for financial year 2003-04 and copies of bank accounts in which above deposits have been reflected. During course of assessment proceedings, all these documents have been verified by learned AO. Thereafter learned AO came to conclusion that although furnishing of PAN, IT returns etc. can be said to be proof of identity, but other onus on assessee are yet to be discharged. fact that directors of these companies did not bother to come forward and explain source of their investment, has constrained me to take adverse view against their creditworthiness and genuineness of transactions undertaken by them. learned AO again raised his doubt and mentioned that above companies are mere conduits and money in form of share application money appears to be routed through them. Thus learned AO after relying upon judgments of various High Courts decided that assessee has been unable to discharge primary onus and made addition of Rs. 90 lakhs under s. 6 8 of IT Act, 1961." 19. On appeal, learned CIT(A) confirmed addition with following observations : "Considering matter in totality, I am of considered opinion that AO was able to make out case that genuineness of creditor was not proved. It is to be borne in mind that in case of establishing fact to be considered under s. 6 8 , not one criterion but all creiteria are to be established simultaneously and with this, ground of appellant is not sustainable and action of AO is upheld." 20. Aggrieved by order of learned CIT(A), assessee has filed present appeal before Tribunal. 21. learned counsel for assessee made elaborate submissions which are summarized as under : (1) It is submitted that after search by Central Excise Department, assessee paid Rs. 25 lakhs to Excise Department and thereafter due to need of fund for business, assessee sold its shares on premium to abovementioned four companies of Kolkata, by end of March, 2004. These companies are duly registered with RoC where address of registered office has been mentioned. above companies have also obtained their PAN at abovementioned address and also filed IT returns showing same address, at Kolkata. Thus existence of above companies is beyond doubt as doubted by learned AO. assessee is not supposed to know various activities of said companies before selling its shares. assessee due to need of funds offered to sale its shares, which above companies agreed to purchase at premium as mentioned above. (2) It is very much relevant to submit that at time of search by Central Excise Department, no such huge cash was found, hence doubts about introducing black money in system through share application and share premium route, is baseless. learned AO also could not prove that investor companies are mere conduit companies providing accommodation entries and unaccounted money of assessee is routed through them. learned AO before making addition on this point, should have issued notice under s. 131 as AO is empowered to enforce attendance of directors of companies before him during assessment proceeding for examining them on oath or could have issued commission but learned AO failed on his part in discharging his statutory obligations. (3) In view of facts mentioned above, it is submitted that learned AO has misled himself in this regard and made addition based on doubts and surmises which cannot be said to be justified. 22. In support of above, reliance is placed on ratio of decisions in cases ofDhakeswari Cotton Mills Ltd. vs. CIT (supra),Omar Salay Mohamed Sait vs. CIT (1959) 37 ITR 151 (SC)andLalchand Bhagat Ambica Ram vs. CIT (1959) 37 ITR 2 88 (SC)for proposition that there must be something more than mere suspicion in support of assessment and mere suspicion cannot take place of proof for purpose of passing order of assessment. Similarly decision of Hon ble Supreme Court in case ofMehta Parikh & Co. vs. CIT (1956) 30 ITR 1 8 1 (SC)may be usefully referred wherein it has been held that any addition not supported by any evidence will be erroneous in point of law. 23. While referring to s. 6 8 , it is submitted that where any sum is found credited in books of assessee and assessee offers no explanation about nature and source thereof or explanation offered by assessee is not satisfactory in opinion of AO, then sum so credited "may be charged" to income-tax as income of assessee of that previous year. In present case, assessee has issued shares only against crossed cheques/drafts given by shares subscribers. transaction relating to issue of shares and receipt of subscription and premium has been made through banking channel. InCIT vs. Steller Investment Ltd. (1991) 99 CTR (Del) 40 : (1991) 192 ITR 2 8 7 (Del), it was held as below : "It is evident that even if it is assumed that subscribers to increased share capital were not genuine, nevertheless, under no circumstances, can amount of share capital be regarded as undisclosed income of assessee. It may be that there are some bogus shareholders in whose names shares had been issued and money may have been provided by some other persons. If assessment of persons who are alleged to have really advanced money is sought to be reopened, that would have made some sense but we fail to understand as to how this amount of increased share capital can be assessed in hands of company itself." However, inCIT vs. Sophia Finance Ltd. (1993) 113 CTR (Del)(FB) 472 : (1994) 205 ITR 9 8 (Del)(FB), it was held that AO can look into existence of sharesholders and once shareholders exist AO need not do any further enquiry for taxing company. Sec. 72 of Companies Act restricts company in seeking information from shareholders and it cannot enquire as regards source of funds for shareholders in subscribing to shares. 24. In ss. 6 8 and 69A, discretion is given to AO by use of word "may" and AO even if not satisfied with explanation of assessee need not necessarily assess sum so credited or investment as income of assessee. power of discretion is given to AO and that discretion must be used keeping in view facts and circumstances of particular case CIT vs. Smt. P.K. Noorjahan (1999) 155 CTR (SC) 509 : (1999) 237 ITR 570 (SC). AO should not base his decision merely on suspicion howsoever it may be strong. 25. Even if explanation of assessee is not satisfactory, AO can use discretionary power vested in him for purpose of taxing or sparing such credit or investment as per decision in case ofMitesh Rolling Mills (P) Ltd. vs. CIT (2002) 177 CTR (Guj) 14 2 : (2002) 25 8 ITR 27 8 (Guj). InHindustan Tea Trading Co. Ltd. vs. CIT (2003) 1 8 2 CTR (Cal) 5 8 5 : (2003) 263 ITR 2 8 9 (Cal), similar issue came up before Court. following vital points emerge in this case : (i) In this case assessee furnished details about shareholders along with details of amounts received towards subscription by way of cheques. (ii) assessee obtained subscription through nationalized banks and after inviting subscription through public advertisement. (iii) assessee also gave list of share subscribers with their income- tax file numbers. (iv) AO issued notice to 37 subscribers, out of which 10 subscribers appeared and produced satisfactory evidence regarding genuineness and creditworthiness for investment. (v) 14 persons failed to respond. AO hence without looking into existence, creditworthiness of those persons whose details were available on record made addition without further enquiry. (vi) Court held that once assessee has placed materials before AO it is for AO to test and establish whether there is case for addition under s. 6 8 . Even where assessee has given details of income-tax numbers of subscribers along with cheque or draft numbers, AO can test genuineness of transaction. (vii) contention of assessee that decision ofCIT vs. Steller Investment Ltd. (2000) 164 CTR (SC) 2 8 7 : (2001) 251 ITR 263 (SC), that AO should not enquire into public subscription was negatived by Court on reasoning that Supreme Court dismissed appeal of Revenue on ground that finding of Tribunal was on facts and hence no interference was called for. Court hence held that Supreme Court has not laid any proposition on issue and has declined interference on ground that issue was decided by High Court on facts only. (viii) decision inCIT vs. Sophia Finance Ltd. (supra), is still valid and applicable. In this case Court held in page No. 105 as under : "It is neither necessary nor desirable to give examples to indicate under what circumstance s. 6 8 of Act can or cannot be invoked. What is clear, however, is that s. 6 8 clearly permits ITO to make enquiries with regard to nature and source of any or all sums credited in books of account of company irrespective of nomenclature or source indicated by assessee. In other words, truthfulness of assertion of assessee regarding nature and source of credit in its books of account can be gone into by ITO. In case ofCIT vs. Steller Investment Ltd. (1991) 99 CTR (Del) 40 : (1991) 192 ITR 2 8 7 (Del), ITO had accepted increased subscribed share capital. Sec. 6 8 of Act was not referred to and observations in said judgment cannot mean that ITO cannot or should not go into question as to whether alleged shareholders actually existed or not. If shareholders are identified and it is established that they have invested money in purchase of shares then amount received by company would be regarded as capital receipt and to that extent observations in case ofStellar Investment Ltd. (supra) are correct but if on other hand, assessee offers no explanation at all or explanation offered is not satisfactory then, provisions of s. 6 8 may be invoked. In latter case s. 6 8 , being substantive section, empowers ITO to treat such sum as income of assessee which is liable to be taxed in previous year in which entry is made in books of account of assessee." 25.1 That observation of learned AO on p. 16 that "the source of fund of above four companies is nothing but share premium amount and question as to why these companies would receive share premium" is totally immaterial and irrelevant in present case which has no bearing in present case. If affairs of above companies, on which appellant has no control, create any kind of doubt or suspicion then Department having long hands, should have no hesitation in making roving enquiries against above companies. 25.2 Thereafter it is incumbent on AO to make necessary enquiry on income-tax file numbers submitted and to arrive at conclusion but no such enquiry was made by learned AO. 26. Further reliance is placed on decision of : (i)CIT vs. Dolphin Canpack Ltd. (2006) 204 CTR (Del) 50 : (2006) 2 8 3 ITR 190/204 (Del); In its return assessee claimed to have received share application money of Rs. 62 lacks. Confirmations of persons in whose favour shares were issued were also filed, apart from evidence to show that share capital was paid by cheques in all cases. AO, all same, asked for certain further information and not being satisfied made addition of sum as cash credits. Tribunal, however, accepted assessee s explanation and deleted addition. Held that Delhi High Court inCIT vs. Stellar Investment Ltd.(supra) held that even if subscribers to increased share capital were on inquiry by AO found to be not genuine, nevertheless amount of share capital could in no circumstances be regarded as undisclosed income of assessee. ITO is indeed entitled to examine truthfulness of explanation. In cases where credit entry relates to issue of share capital, ITO is also entitled to examine whether alleged shareholders do in fact exist or not. Such inquiry was conducted by AO in present case. In course of said inquiry, assessee had disclosed to AO not only names and particulars of subscribers of shares but also their bank accounts and permanent account numbers issued by IT Department. Superadded to all this was fact that amount received by company was all by way of cheques. This material was, in opinion of Tribunal, sufficient to discharge onus that lay upon assessee. In absence of any perversity in view taken by Tribunal or anything to establish conclusively that finding regarding genuineness of subscribers and transaction suffered from any irrationality, no substantial question of law arose for consideration in appeal to warrant interference. (ii)Shree Barkha Synthetics Ltd. vs. Asstt. CIT (2006) 197 CTR (Raj) 432 : (2006) 2 8 3 ITR 377 (Raj) Where matter concerns money receipts by way of share application f r o m investors through banking channel, assessee has to prove existence of persons in whose name share application is received. Once existence of investor is proved, it is not further burden of assessee to prove whether that persons itself has invested said money or some other person has made investment in name of that person. burden then shifts on to Revenue to establish that such investment has come from assessee company itself. Once receipt of confirmation letter from creditor is proved and identity and existence of investor company has not been disputed, no addition on account of share application money in name of such company can be made in assessee s hands. (iii)CIT vs. First Point Finance Ltd. (2006) 206 CTR (Raj) 626 : (2006) 2 8 6 ITR 477 (Raj); Where it was not denied that all shareholders/share applicants were genuinely existing persons, it was also not denied that each of them was income-tax assessee and copies of returns of their income were also placed before AO by assessee which fact was also not denied : Held that no material had been brought on record except inferring that investors in opinion of AO were not creditworthy to link assessee with such investment of money made by those persons. In such cases merely because creditors had failed to prove their source of investment, same could not be added in income of assessee but it ought to be added by finding persons who had lent their names. There is no presumption that assessee is Benami owner of investment made by existing person. Thus, addition on account of share capital was not justified. Pran Land Housing & Finance Ltd. vs. ITO (sic) It is primarily duty of assessee to establish identity of shareholders. Onus under s. 6 8 is on assessee to prove identity of shareholders. (v)Uma Polymers (P) Ltd. vs. Dy. CIT (2006) 101 TTJ (Jd)(TM) 124 : (2006) 100 ITD 1 (Jd)(TM); In respect of share application money from investors, assessee company has to prove only existence of persons in whose name share application is received. No further burden is cast on assessee to prove whether that person himself has invested said money or some other person made investment in his name. Further, distinction between public and private limited company is not very material, so far as introduction of share capital money is concerned. Thus, where not only identity of creditor but even capacity to advance funds had been proved on record, creditors were also found to be assessed to tax, further investigation of matter was not necessary; if any shareholder was found to have made unexplained investment, then addition of such investment was required to be made in hands of shareholder and not in account of assessee. (vi)Nemi Chand Kothari vs. CIT (2003) 1 8 5 CTR (Gau) 635 : (2003) 264 ITR 254 (Gau); Held : That assessee had established identity of creditors. assessee had also shown, in accordance with burden, which rested on him under s. 106 of Evidence Act, that said amounts had been received by him by way of cheques from creditors which was not in dispute. Once assessee had established these, assessee must be taken to have proved that creditor had creditworthiness to advance loans. Thereafter burden had shifted to AO to prove contrary. failure on part of creditors to show that their sub-creditors had creditworthiness to advance said loan amounts actually belonged to, or were owned by, assessee. A O failed to show that amounts, which had come to hands of creditors from hands of sub-creditors, had actually been received by sub-creditors from assessee. Therefore, AO could not have treated same amounts as income derived by assessee from undisclosed sources. (vii)CIT vs. Nivedan Vanijya Niyojan Ltd. (2003) 1 8 2 CTR (Cal) 605 : (2003) 263 ITR 623 (Cal); Held "that in case of subscription to share capital of company, principal ingredient that has to be satisfied is to establish identity of subscribers and prove their creditworthiness and genuineness of transactions. (vii)Sreelekha Banerjee vs. CIT (1963) 49 ITR 112 (SC); Held that explanation should be considered objectively by AO before he takes decision to accept or reject. It was further held that if explanation given by assessee shows that receipt is not of income nature, Department cannot convert "good proof into no proof" or act unreasonably and reject it. (viii)Sona Electric Company vs. CIT (19 8 4) 43 CTR (Del) 2 8 7 : (19 8 5) 152 ITR 507 (Del);andRoshan Di Hatti vs. CIT 1977 CTR (SC) 200 : (1977) 107 ITR 93 8 (SC); Held that explanation should not be rejected arbitrarily or capriciously mere on suspicion. (ix)CIT vs. Metachem Industries (2000) 161 CTR (MP) 444 : (2000) 245 ITR 160 (MP); Held that "once it is established that amount has been invested by particular person, be he partner or individual, then responsibility of assessee is over. Whether that person is income-tax payer or not and where he had brought this money from, is not responsibility of firm". (x)Dy. CIT vs. Rohini Builders (2003) 1 8 2 CTR (Guj) 373 : (2002) 256 ITR 360 (Guj); Facts of case : "The assessee was firm engaged in business of dealings in land. During assessment year under consideration assessee had taken loans from various parties and during course of assessment proceedings, assessee had furnished loan confirming giving full addresses, GIR numbers/PANs, etc. of all depositors. AO however issued summons to some of creditors and also conducted inquiries into genuineness or otherwise of loans taken by assessee. After considering evidence, AO made addition of Rs. 12, 8 5,000 to returned income of assessee. This was confirmed by CIT(A). On further appeal to Tribunal Tribunal held that phraseology of s. 6 8 of IT Act 1961, was clear, that legislature has laid down that in absence of satisfactory explanation, unexplained cash credit may be charged to income-tax as income of assessee of that previous year, that legislative mandate is not in terms of words shall be charged to income-tax as income of assessee of that previous year , that unsatisfactoriness of explanation does not and need not automatically result in deeming amount credited in books as income of assessee. Tribunal found that assessee had discharged initial onus which lay on it in terms of s. 6 8 by proving identity of creditors by giving their complete addresses, GIR numbers/PANs and copies of assessment order wherever readily available, that it had also proved capacity of creditors by showing that amounts were received by assessee by account payee cheques drawn from bank accounts of creditors and assessee was not expected to prove genuineness of cash deposited in bank accounts of those creditors because under law assessee can be asked to prove source of credits in its books of account but not source of source. Thus taking into consideration totality of facts and circumstances of case, and, in particular fact that AO had not disallowed interest claimed/paid in relation to these credits in assessment year under consideration or even in subsequent years, and tax had been deducted at source out of interest paid/credited to creditors, Tribunal held that Department authorities were not justified in making addition of Rs. 12, 8 5,000. On appeal to High Court. Held that considering facts and circumstances of case narrated by Tribunal and law explained by it, appeal was liable to be dismissed. [The Supreme Court has dismissed Special Leave Petition filed by Revenue against this judgment (2002) 254 ITR (St) 275 ]. (xi)Dr. Sanjay Tiwari, ITA No. 245/Nag/2006 In above, onus laid on assessee was discharged therefore addition under s. 6 8 was held to be unwarranted and deleted. Photocopy of order is enclosed. 2 7 . learned counsel for assessee further submitted that in present case assessee has complied with all requirements to prove genuineness of amount received towards share application money and premium (i) identity of creditor, (ii) genuineness of transaction and (iii) creditworthiness of creditors by filing relevant documents. But on dissatisfaction learned AO failed to make necessary enquiries and relied on reports of Inspectors thereby rejecting explanation of appellant arbitrarily for making addition under s. 6 8 without having any positive and definite evidences to show that explanation is false Sriram Jhabarmull (Kalimpong) Ltd. vs. CIT (1967) 64 ITR 3 14 (Cal). 28 . learned counsel for assessee further submitted that inspite of proving identity, creditworthiness of companies who have subscribed to share capital with premium and rotation of amount through banking channel, learned AO and CIT(A) discarding judicial pronouncements made and confirmed addition under s. 6 8 of Act which is highly unjustified and unwarranted. He strongly placed his reliance on decisions reported in(1991) 99 CTR (Del) 40 : (1991) 192 ITR 2 8 7 (Del)(supra),(1993) 113 CTR (Del)(FB) 472 : (1994) 205 ITR 9 8 (Del)(FB)(supra),(2003) 1 8 2 CTR (Cal) 5 8 5 : (2003) 263 ITR 2 8 9 (Cal)(supra),Barkha Synthetics Ltd. vs. Asstt. CIT (supra) and(2006) 206 CTR (Raj) 626 : (2006) 2 8 6 ITR 477 (Raj)(supra),Jaya Securities Ltd. vs. CIT (200 8 ) 166 Taxman 7 (All), 8 ITJ 165 (Indore), CIT vs. Daulatram Rawatmull 1972 CTR (SC) 411 : (1973) 8 7 ITR 349 (SC)and(199 8 ) 230 ITR 500 (SC)(sic). In view of above facts, circumstances and judicial decisions, he submitted that impugned addition of Rs. 90,00,000 be deleted. 29. On other hand, learned Departmental Representative strongly relied on orders of Revenue authorities and submitted that all three criteria are not established simultaneously nor genuineness of creditor is proved. Hence authorities below are fully justified in making impugned addition under s. 6 8 of Act. 30. We have carefully considered facts and circumstances of case and material available on record. We have given our thoughtful consideration to case law relied on behalf of both parties. On careful consideration of facts and circumstances, we find that assessee has furnished details of companies in his paper book filed. It is case of assessee that after search by Central Excise Department, assessee paid Rs. 25 lakhs to Excise Department and thereafter, due to need of fund for business, assessee sold its share on premium to four companies of Kolkata by end of March, 2004. It is seen that these companies are duly registered with RoC where address of registered offices are mentioned. above companies are having PANs and have also filed IT returns at Kolkata. Thus, existence of above companies are beyond doubt. learned AO could not prove that investor companies are mere conduit companies providing accommodation entries and unaccounted money of assessee is routed through them. It is incumbent upon AO to issue summons under s. 131 before making addition which he failed to do so. Therefore, it is clear that addition made by AO is based on doubts and surmises which cannot be said to be justified. decisions relied upon by learned counsel for assessee reported in(1954) 26 ITR 775 (SC) (supra),30 ITR 1 8 2 (SC)(sic) and(1959) 37 ITR 2 88 (SC)(supra) clearly support case of assessee wherein principle laid down by apex Court is that there must be something more than mere suspicion in support of assessment and mere suspicion cannot take place of proof for purpose of passing order of assessment. It is well settled that AO should not base his decision merely on suspicion however it may be strong. 3 1 . Under s. 6 8 of Act, it is provided that where any sum found credited in books of account of assessee and assessee offers no explanation about nature and source thereof or explanation offered by assessee is not satisfactory in opinion of AO, then sum so credited may be charged to income-tax as income of assessee of that previous year. In present case, assessee has offered explanation explaining that assessee has issued shares only against crossed cheques/drafts given by shares subscribers and transactions relating to issue of shares and receipt of subscription and premium has been made through banking channel. 32. In present case, it is admitted fact that assessee has filed details of shareholders, their addresses, bank draft/cheque numbers for subscription and premium received along with their income-tax file numbers. assessee has filed details of all four companies. assessee also filed audited accounts of all four companies. It is also admitted fact that above companies have sufficient fund for investment in other companies. Before making addition, AO did not make any necessary enquiry on income-tax file numbers submitted by assessee. 3 3 . In our considered opinion, assessee has complied with all requirements to prove (i) genuineness of amount received towards share application money and premium, (ii) identity of creditor, (iii) genuineness of transaction and (iv) creditworthiness of creditor by filing relevant documents. AO failed to make necessary enquiries and only relied on report of Inspector thereby rejecting explanation of assesseee for making addition under s. 6 8 without having any evidence on record to show that explanation of assessee is false. In our view, AO is not justified in making addition since assessee has proved all three criteria simultaneously. In view of above, addition cannot be sustained. cases relied upon by learned counsel support case of assessee. addition of Rs. 90,00,000 made by AO and confirmed by learned CIT(A) is hereby deleted and appeal of assessee on this ground is allowed. 34. third ground of appeal of assessee relating to disallowance of Rs. 52,470 has not been pressed by learned counsel for assessee at time of hearing and hence this ground is dismissed as not pressed. In result, appeal of assessee is partly allowed. 35. Now coming to Revenue s appeal, Revenue has objected to order of learned CIT(A) against deletion of disallowance of Rs. 17,70,240 made by AO under s. 40A(3) of IT Act, 1961. 36. brief facts relating to this ground are that on perusal of documents of assessee received from Central Excise Department that assessee has incurred cash expenses to tune of Rs. 88 ,51,203 violating provisions of s. 40A(3) of IT Act, 1961. Vide questionnaire dt. 19th June, 2006, assessee was asked by AO to explain as to why 20 per cent of each expenditure executed in contravention to provisions in s. 40A(3) of IT Act, 1961 be not disallowed. In this connection, letter dt. 22nd Nov., 2006 was issued to assesseet which reads as under : "It has been accepted by you that you have indulged in cash purchases violating provisions of s. 40A(3) of IT Act, 1961 to tune of Rs. 88 ,51,203. You are hereby afforded opportunity to provide complete postal addresses of persons from whom you have made such purchases/made payments. If you fail to give complete addresses of such concerns it is to be assumed that your are not willing to allow undersigned to determine whether these sellers come under relief criterion provided by r. 6DD of IT Act, 1961 (sic Rules, 1962). In addition, you are also afforded final opportunity to explain as to why disallowance to tune of 20 per cent of said expense be not made and penalty provisions initiated suitably." 36.1 In response to aforesaid memo, reply dt. 1 8 th Dec., 2006 was filed which reads as under : "1. That expenditures/payments made as per seized records have not been actually claimed by assessee. No manufacturing or P&L a/cs have been prepared to derive profit or loss. Instead of that flat rate of profit of about 16 per cent has been estimated on unaccounted sales and same has been accounted and offered for taxation. 2. Since expenditure has not been claimed in P&L a/c, any part of it should not be disallowed. 3. When profit is estimated as percentage of sales it is clear beyond doubt that no particular purchase or expense is being specifically allowed from sales. Therefore there is no question of disallowance. same has been held by Allahabad High Court in case ofCIT vs. Banwarilal Banshidhar (199 8 ) 148 CTR (All) 533 : (199 8 ) 229 ITR 229 (All). 4. Without prejudice to above submission, there is one more aspect of case. From loose papers found it can be seen that expenditures in form of purchases from some parties are lower than payments made to them. Party- wise accounts of cash payments and purchases are enclosed with summary of cash payments which may be disallowable as proposed by your goodself. Only amount of payments relatable to purchases can be disallowed." 36.2 explanation of assessee did not find favour with AO. AO held that there is cash payment of Rs. 88 ,51,203 and hence he made 20 per cent disallowance of Rs. 88 ,51,203 which comes to Rs. 17,70,240. On appeal before learned CIT(A), it was argued on behalf of assessee that it pertains to unexplained income of Rs. 50 lakhs which has already been disclosed before Department. Sec. 40A(3) relates to disallowance of certain payments which are genuine in nature but only because of fact that such payments were made in cash in violation of provisions. As entire income is of unexplained nature which has been disclosed, Department has not additional option to disallow 20 per cent of such expenses. learned CIT(A) deleted disallowance by observing as under : "I do not agree with submission of AO. Firstly, AO has admitted that seized documents, record both figures of suppressed sales and purchases. It is also fact that AO has not added entire suppressed sales for initial 9 months. What he has done, he has taken only GP ratio on this suppressed sales which has been computed/estimated by him. If we rely on argument of AO that for arriving at figure of suppressed sales, expenditures have already been booked by way of electricity duty etc. then in all fairness, AO could have disallowed entire expenditures which were noted in seized documents for 56 days. But, in reality, learned AO has taken very peculiar stand. He has accepted expenditure and thereafter he has applied s. 40A(3) on such cases where it is in violation of r. 6DD. fact remains that once right side of figure of seized document is accepted by Department, there is no option for Department t o reject left side of figure of same seized material. seized document indicates suppression of sales and suppression expenses to arrive at such sales. Once consolidated figure by applying GP ratio of total concealment was arrived at Rs. 3 8 lakhs by AO, there is no further option left to him to invoke s. 40A(3) on such alleged unexplained expenditure. It is admitted that AO has applied s. 40A(3) only on such expenditures which were noted in seized document and not on other expenses figured in regular books of accounts. I find force in submission of learned Authorised Representative and action of AO is reversed." 3 7 . Aggrieved by order of learned CIT(A), Department has come up in appeal before Tribunal. 38 . learned Departmental Representative vehemently argued that expenditure was actually claimed by assessee because it has given only GP ratio on suppressed sales. He submitted that GP is resultant figure of difference between sales and purchase and other direct expenses. Now when GP on suppressed sales is applied then assessee is not entitled for other expenditure and hence there is no scope for entertaining claim of assessee that it will not come under mischief of s. 40A(3). He submitted that from GP, assessee has claimed payment of Central Excise duty. There is no occasion for assessee to claim other expenses such as electricity duty and other indirect expenses because it had already claimed it while booking such expenditure in its regular books of account. Hence, no more benefit of expenditure should be made admissible to assessee. He further submitted that assessee has given estimation of income to circumvent to provisions of law and hence, it is not entitled for extra benefit. He strongly relied on order of AO. 39. On other hand, learned counsel for assessee strongly relied on order of CIT(A) and reiterated his submissions made before learned CIT(A). He relied on decisions reported inCIT vs. Smt. Santosh Jain (200 8 ) 296 ITR 324 (P&H), CIT vs. Purshottamlal Tamrakar Uchehra (2003) 1 8 4 CTR (MP) 349 : (2004) 270 ITR 3 14 (MP), CIT vs. S.B. Industries (2006) 2 8 6 ITR 336 (Gau)andCIT vs. Banwarilal Banshidhar (199 8 ) 148 CTR (All) 533 : (199 8 ) 229 ITR 229 (All). 40. We have considered rival submissions in light of facts and circumstances of case and decisions relied upon by learned counsel for assessee. We have also carefully gone through orders of Revenue authorities. In case of assessee, disallowance under s. 40A(3) has been made by learned AO out of unrecorded purchases from records seized by excise authorities. Such records are not at all part of regular books of accounts therefore lump sum of Rs. 50 lacs as income was surrendered on account of unrecorded transactions discovered during raid by Excise Department. That s. 40A(3) was inserted by Finance Act, 196 8 w.e.f. 1st April, 1969. logic and philosophy behind enactment of above provision is designed to counter evasion of tax through claims for expenditure shown to have incurred in cash with view to frustrating proper investigation by Department as to identity of payee and reasonableness of payment. In present case, disallowance under s. 40A(3) has been made by AO out of unrecorded purchases from records seized by excise authorities. Such records are not at all part of regular books of accounts therefore lump sum of Rs. 50 lacs as income was surrendered on account of unrecorded transactions discovered during raid by Excise Department. As observed by AO that books of account have not been rejected. This observation of A O is also immaterial as there are no instances of payments exceeding Rs. 20,000 in violation of s. 40A(3) in regular books of accounts kept and maintained by appellant. violation of s. 40A(3) comes out of loose papers seized by Excise Department forming part of unrecorded transaction therefore ratio of judgments of Hon ble Allahabad High Court in case ofBanwarilal Banshidhar (supra) Hon ble P&H High Court in case ofSantosh Jain(supra) and Hon ble Madhya Pradesh High Court in case ofPurushottamlal Tamrakar (supra) are directly applicable to present case. 41. It is very much relevant to refer to decision of Hon ble Gujrat High Court in case ofHasanand Pinjomal vs. CIT 1977 CTR (Guj) 4 8 6 : (197 8 ) 112 ITR 134 (Guj). It was held that 40A(3) has been enacted with objective of checking tax evasion and to know whether transactions are genuine and has been made out of income from "disclosed sources". In present case, disallowance under s. 40A(3) has been made by learned AO out of unrecorded purchases therefore it is not accordingly to law and judicial decisions as stated above. 4 2 . It appears that this disallowance/addition has been made by learned AO under over enthusiasm to make high-pitched assessment discarding all factual position and judicial decisions as stated above. 43. Thus it is our considered opinion that where income is estimated, there is no question of application of s. 40A(3), when payment itself is not proved. Such estimation takes care of all provisions for disallowances under Act. This is anomalous situation arising out of s. 40A(3), since it applies only to case of genuine payment as held by Hon ble Gujarat High Court but where income is estimated, such payments get allowed. Similarly where net profit rate is applied, s. 40A(3) can have no application. case of assessee is supported by decision of Hon ble Punjab & Haryana High Court in case ofCIT vs. Smt. Santosh Jain (supra), relied upon by him, wherein it has been held that where income of assessee has been computed by applying GP rate, there is no need to look into provisions of s. 40A(3) of IT Act, 1961 as applying GP rate takes care of expenditure otherwise than by way of crossed cheques also and decision of Hon ble Madhya Pradesh High Court inCIT vs. Purshottamlal Tamrakar (supra) wherein it was held that s. 40A(3) is not applicable when income is determined by AO applying net profit rate. 4 4 . In our considered view, learned CIT(A) has very correctly and judiciously deleted addition. No interference is called for in order of learned CIT(A) in deleting disallowance of Rs. 17,70,240 made by AO under s. 40A(3) of Act. order of learned CIT(A) is confirmed and ground of appeal of Revenue is dismissed. In result, appeal of Revenue is dismissed. 45. In result, appeal of assessee is partly allowed whereas appeal of Revenue is dismissed. *** CHHATTISGARH STEEL CASTING (P) LTD. v. ASSISTANT COMMISSIONER OF INCOME TAX