2023 (4) TMI 1419 - AT - Income Tax

Unexplained credits - proceeding against the assessee was triggered on account of search and seizure operation in the cases of BSBK Group including the assessee - HELD THAT - When the AO himself his alleging that the assessee is providing accommodation entry then if the debit and credit side of account is taking together then only a very small account would remain that is element of commission income accrued to the assessee. In our humble view the entire amount of credit entries cannot be added to the taxable income of the assessee ignoring the debit side entries and as when the assessee is receiving cash and issuing cheques then said cheque of almost same amount then the assessee cannot be held beneficiary of entire amount or entire amount of credit entries treating the same as unexplained. Therefore the addition made by the AO and uphold the CIT(A) on account of unexplained credits cannot be held as sustainable and we direct the AO to delete the same. Addition on account of commission income at the rate of 2.5% - We are of the view that the earning of commission income at the rate of 2.5% is very high and the assessee s claim for charging commission at the rate of 0.15% is also not sufficient to cover all possible leakage of revenue. We find that the charging of commission at the rate of 0.5% would be sufficient and appropriate. Therefore the addition made by the AO on account of commission charged on the credit entries is reduced to 0.5% and AO s directed to recalculate the commission income accordingly. Addition pertaining to claim of expenses on account of service charges paid to proprietor - HELD THAT - We are of the view that it was the duty of the assessee to substantiate its claim towards expenses incurred by him on account of service charges paid to proprietors of ten firms and listed in para 4.6 of the assessment order. However despite proper opportunity of hearing the assessee failed to provide names and address of the onus of these firms to whom he paid the service charges. The Assessing officer also noted that the assessee did not provide any supporting evidence like bills/vouchers etc. to support said contention and claim of payment of service charges. In such a situation we are inclined to hold that the AO was right in making disallowance and Ld. CIT(A) was also correct in upholding the same. Disallowance 50% expenses claimed - the assessee has not provided even names of his staff members and also failed to provide any supporting evidence like bills/vouchers etc. - HELD THAT - We are of the view that the onus lay on the shoulders of the assessee to substantiate his claim on account of office expenses etc. but in the absence of names of staff member s bills/vouchers entire claim of assessee cannot be held as allowable keeping in view a fact that without incurring such expenses the assessee cannot operate his business. In our humble understanding the AO was right in allowing 50% of claim and disallowing remaining 50% of claim of assessee on account of other expenses. We are unable to see any ambiguity perversity or any other valid reason to interfere with the same hence the ground no. 3(c) of assessee for A.Y. 2010-11 is disallowed. Unexplained cash found in search - HELD THAT - In a family of four members when the assessee has wife and two major children then the amount of cash out of savings and receipts during social and religious occasions cannot be ruled out and in such a situation when the assessee is explaining that the part amount belong his wife son and daughter then the amount of Rs. 7.5 lakh viz Rs. 3.5 lakh pertaining to wife to Rs. 2 lakh each pertaining to son and daughter has to be held as properly explained. One cannot expected to maintain or procure any documentary evidence in this regard. So far as receipt of Rs. 15 lakhs on account of sale of assessee rights in the Flat no. 11 Second Floor Vandana Apartment is concerned the assessee has not placed any documentary evidence in this regard to substantiate that he received Rs. 15 lakh against sale of his rights which could be easily established by way of filing documentary evidence of purchase sale of flat. In absence of such documentary evidence the reply of assessee to question no. 9 as noted by the AO in para 5 in the assessment order cannot be held as causable and acceptable. Hence remaining part of Rs. 5 lakh seized by the search team remained unexplained therefore the addition made by the AO on account cash seized during the course of search and seizure operation is reduced to Rs. 5 lakh. Jewellery found and seized from residence during the course of search and seizure operation - As per CBDT circular 1916 it is advised to the search parties that in the case of a person not assessed to wealth-tax gold jewelry and ornaments to the extent of 500 grams per married lady 250 grams per unmarried lady and 100 grams per male member of the family need not to be seized. We are of the considered opinion that no addition is called for in the hands of assessee on account gold jewellery found and seized from his residence during the course of search and seizure operation weighing total 850 gram in a peculiar factual situation of the family of the assessee where he has total five members out of which one married lady one unmarried girl and three male members. These five members of assessee s family are sufficient to cover 850 gram gold jewellery found and seized during the course of search and seizure operation as per said CBDT instruction of 1994 dated 11.05.1994. Accordingly sole ground of assessee for A.Y. 2014-15 is allowed and AO is directed to delete the addition.

Summary

The core legal questions considered by the Tribunal in these appeals relate primarily to the validity and quantum of additions made by the Assessing Officer (AO) under various provisions of the Income Tax Act, 1961, following search and seizure operations. The issues span assessment years 2007-08 to 2014-15 and include:

1. Whether the AO rightly invoked jurisdiction under section 153A of the Income Tax Act, 1961, and passed orders under section 143(3) read with section 153A for the relevant assessment years.

2. Legitimacy of additions made on account of unexplained credits in the assessee's bank accounts and whether such credits can be treated as income of the assessee.

3. Appropriateness of additions made on account of commission income estimated by the AO at rates higher than those claimed by the assessee.

4. Validity of disallowance of expenses claimed by the assessee, specifically service charges paid to proprietors of firms and office-related expenses, in absence of supporting evidence.

5. Whether the AO was justified in making additions on account of unexplained cash found during search and seizure operations, considering the explanations offered by the assessee.

6. Treatment of jewellery found during search proceedings and whether the same was properly explained by the assessee in light of CBDT instructions.

7. Charging of interest under sections 234A, 234B, and 234C of the Act on the assessed income.

Issue-wise Detailed Analysis

1. Jurisdiction under Section 153A and Passing of Assessment Orders under Section 143(3) r.w.s. 153A

The Tribunal noted that the proceedings were initiated following search and seizure operations, triggering the jurisdiction of the AO under section 153A. The assessee challenged the assumption of jurisdiction; however, the Tribunal did not find any infirmity in the AO's jurisdictional exercise, as the search operation was conducted in the group entities including the assessee. Hence, the invocation of section 153A and consequent assessment under section 143(3) r.w.s. 153A was upheld implicitly by the Tribunal by proceeding to examine the substantive additions.

2. Additions on Account of Unexplained Credits

The AO made substantial additions treating certain credit entries in the assessee's books as unexplained income, amounting to Rs. 4,78,01,414/- for AY 2007-08. The assessee contended that all beneficiaries were identifiable from seized documents, and the assessee was merely a beneficiary of commission income at a small percentage (claimed 0.15%), not the entire transaction amounts. The assessee argued that the entire credits could not be attributed to him as income.

The AO's approach was to treat the entire credit entries as unexplained income because the assessee failed to provide satisfactory explanations and details of beneficiaries. The Tribunal carefully analyzed that the AO ignored the debit entries corresponding to these credits. Given that the assessee was issuing cheques corresponding to the cash receipts, the AO's treatment of the entire credits as income was held to be erroneous.

The Tribunal held that when both debit and credit entries are considered together, only a small portion representing commission income accrues to the assessee. The AO's addition of the entire credit amount as unexplained income was therefore unsustainable. The Tribunal directed deletion of the addition on account of unexplained credits.

3. Additions on Account of Commission Income

The AO estimated commission income at 2.5% of the unexplained credits, whereas the assessee claimed commission income ranging between 0.05% and 0.15%. The Tribunal found the AO's rate of 2.5% to be excessive and the assessee's claimed rate too low to cover possible revenue leakage.

Balancing these positions, the Tribunal held that a commission rate of 0.5% was appropriate and directed the AO to recompute the commission income accordingly. This principle was applied mutatis mutandis to all relevant assessment years.

4. Disallowance of Service Charges and Office Expenses

The AO disallowed service charges paid to proprietors of ten firms and 50% of office expenses claimed by the assessee, citing lack of supporting evidence such as bills, vouchers, and details of the payees (names and addresses). The assessee failed to substantiate these claims despite opportunities.

The Tribunal upheld the AO's disallowances, emphasizing the burden on the assessee to substantiate expense claims. The absence of documentary evidence and inability to furnish particulars justified the disallowance. This finding was consistently applied across multiple assessment years.

5. Additions on Account of Unexplained Cash Found During Search

During the search, cash amounting to Rs. 13,92,500/- was seized. The assessee explained that portions of the cash belonged to his wife and two major children, with the balance allegedly received from sale of flat rights. However, the assessee failed to provide documentary evidence for the sale transaction.

The AO disbelieved the explanation and made addition for the entire amount. The Tribunal, however, accepted the explanation regarding cash belonging to family members, noting that no documentary proof is expected for personal savings and receipts on social occasions. The Tribunal held that Rs. 7.5 lakh (Rs. 3.5 lakh for wife, Rs. 2 lakh each for son and daughter) was properly explained.

Regarding the Rs. 5 lakh allegedly received from sale of flat rights, the Tribunal found the assessee's failure to produce documentary evidence fatal and upheld addition for this amount. Thus, the addition was reduced to Rs. 5 lakh.

6. Addition on Account of Jewellery Found During Search

Jewellery weighing approximately 850 grams was found during search. The assessee claimed the jewellery belonged to family members: 350 grams to wife, 200 grams to daughter, and 100 grams each to himself, his father, and his son. The assessee relied on CBDT Instruction No. 1916 dated 11.05.1994, which provides guidelines on presumptive limits of jewellery held by family members not to be seized or treated as unexplained.

The AO rejected the claim due to lack of documentary evidence. The Tribunal, however, observed that the total jewellery weight was within permissible limits as per the CBDT circular, considering the family composition. The Tribunal held that no addition was warranted and directed deletion of the addition on jewellery.

7. Charging of Interest under Sections 234A, 234B, and 234C

The assessee challenged the levy of interest under sections 234A, 234B, and 234C. The Tribunal did not specifically address these grounds in detail, implying acceptance of the interest charges as per the statutory provisions, given the adjustments and additions upheld.

Significant Holdings

"The entire amount of credit entries cannot be added to the taxable income of the assessee ignoring the debit side entries... the assessee cannot be held beneficiary of entire amount or entire amount of credit entries treating the same as unexplained."

"Charging of commission at the rate of 2.5% is very high and the assessee's claim for charging commission at the rate of 0.15% is also not sufficient to cover all possible leakage of revenue... charging of commission at the rate of 0.5% would be sufficient and appropriate."

"In absence of supporting evidence like bills/vouchers and names of payees, the AO was right in making disallowance of service charges and office expenses claimed by the assessee."

"Cash found during search belonging to family members, being personal savings and receipts on social occasions, cannot be expected to be supported by documentary evidence and is held properly explained."

"Jewellery found during search weighing 850 grams is within permissible limits as per CBDT Instruction No. 1916 dated 11.05.1994 considering the family composition; hence, no addition is called for."

In conclusion, the Tribunal allowed the appeals for AYs 2007-08 and 2014-15 fully, while partly allowing the appeals for AYs 2008-09 to 2013-14, primarily by reducing the commission income addition to 0.5% and upholding disallowances where the assessee failed to substantiate claims with evidence. The Tribunal emphasized the importance of considering both debit and credit entries in unexplained credit cases, the need for substantiation of expense claims, and the application of CBDT guidelines in search-related jewellery cases.