2025 (5) TMI 279 - AT - Income Tax

Assessment u/s 153C - Unaccounted receipts - Estimation of income - CIT(A) granted relief by holding that 10% of the total receipts will be taxed as unaccounted income - HELD THAT - The seized materials and evidence are fair indication and have rational nexus with the unaccounted income of the assessee based on estimation of unaccounted sales turnover for the entire year. We find that the assessee has no objection to the unaccounted sales turnover being calculated on the basis of suppression factor that has been arrived at by the AO. In such a situation the legal jurisprudence would dictate that the estimation of income should have clear nexus with the material on the basis of which estimation is being made. We are of the opinion that it is legally permissible for making the estimate for the whole year on the basis of evidences and material found for a part of the year and we find support from the decision of H.M.Esufali H.M. Abdulai 1973 (4) TMI 49 - SUPREME COURT on the subject of estimating income CIT(A) has applied a scientific view gathered from the seized materials found in the course of search for arriving at the suppressed unaccounted turnover/receipts of the assessee. We are also inclined to accept that the net profit of 75% from such business is not a probable proposition from the business of renting space and catering. We are of the considered view that adopting the net profit ratio of 10% of turnover is a rational basis as it is based on the seized materials itself. CIT(A) has referred to the seized documents in the case of M/s Fourstar Hospitalities a group concern where the data as contained in Annexure A-12 and A-13 shows a working of profit and loss account for a period of FY 2017-18 and FY 2018-19 that the concern has had an average net profit of about 10% of the receipts outside the books of account. We also find that the CIT(A) has taken cognizance of the fact that the AO himself has accepted the profit rate of 10% on the unaccounted receipts in the case of Tristar Hospitalities and Kohli Tent House. Therefore under these facts we are inclined to agree with the CIT(A) that the net profit of 10% of unaccounted receipts is based on relevant facts emerging out of the seized materials during the course of search. We therefore are of the opinion that the additions sustained by the CIT(A) are based on seized materials/documents which remains uncontested by the assessee and hence such additions are sustainable. The above conclusions are supported by the decisions of TDI Infrastructure Ltd 2024 (12) TMI 44 - DELHI HIGH COURT where dealing with the assessment made u/s 153C it held that if no incriminating material was found during the course of the search in respect of an issue then no addition in respect of such an issue could be made in assessment under sections 153A and 153C that is to say that additions u/s 153C can only be made on the basis of incriminating materials. Delhi High Court referred to the other decisions in the case of Kabul Chawla 2015 (9) TMI 80 - DELHI HIGH COURT and Meeta Gutgutia 2017 (5) TMI 1224 - DELHI HIGH COURT in the context of assessment u/s 153A where it has laid down the principles that the additions in the cases of search should be based on the basis of seized materials and it can not be arbitrary or made without any relevance or nexus with the seized material. No reason to interfere with the decisions of the CIT(A) and accordingly uphold the addition sustained by him. The grounds of the appeal of the assessee is dismissed. We have upheld the decision of the CIT(A) and consequently the Revenue appeal is dismissed.

The core legal questions considered by the Tribunal in these appeals pertain to the validity and quantum of additions made to the income of the assessee on account of unaccounted business receipts discovered during a search and seizure operation. Specifically, the issues include:

1. Whether the assumption of jurisdiction and issuance of notice under section 153C of the Income-tax Act, 1961 was valid and whether principles of natural justice were complied with (though these were not pressed by the assessee in the final submissions).

2. Whether the additions made by the Assessing Officer (AO) based on seized incriminating documents and electronic evidence were justified and had a proper nexus with the material found during search.

3. The correctness of the method adopted by the AO in estimating unaccounted sales by applying a suppression factor of 2.9217 to the turnover as per books.

4. Whether the net profit rate of 10% applied by the Commissioner of Income Tax (Appeals) [CIT(A)] on the estimated unaccounted turnover to arrive at the taxable income was appropriate.

5. Whether the CIT(A) erred in granting relief by reducing the addition from the entire estimated suppressed turnover to 10% of that turnover as taxable income.

6. The correctness of the CIT(A)'s rejection of the assessee's contention that unaccounted sales should be estimated only proportionately based on the number of functions for which unaccounted cash receipts were found.

Issue-wise Detailed Analysis

1. Validity of Jurisdiction and Compliance with Natural Justice

Though initially contested, the assessee did not press grounds challenging the validity of notice issued under section 153C or the compliance with principles of natural justice. The Tribunal noted that the assessee accepted the legality of the assumption of jurisdiction and the issuance of the notice. Consequently, these issues were not adjudicated further.

2. Reliance on Seized Material and Nexus with Additions

The AO made additions based on incriminating documents and electronic data seized during search operations at various premises related to the assessee and associated concerns. The seized materials included excel files and images evidencing cash receipts not recorded in the books of account. The total unaccounted sales were estimated at Rs. 6,31,87,606/- for AY 2016-17, comprising unaccounted sales found in seized materials amounting to Rs. 1,31,50,660/- and estimated suppressed sales of Rs. 5,00,36,946/- computed by applying a suppression factor of 2.9217 to the turnover as per books.

The Tribunal found that the seized materials were relevant and had a direct bearing on the total income of the assessee. The AO's reliance on such materials to estimate unaccounted income was held to be permissible in law. The Tribunal referred to authoritative precedents emphasizing that additions in search cases must have a reasonable nexus with seized materials and cannot be arbitrary or without relevance.

The Tribunal observed that the assessee did not dispute the veracity or relevance of the seized documents or the suppression factor applied by the AO, thereby affirming the nexus between the additions and the evidentiary material.

3. Estimation of Unaccounted Sales Using Suppression Factor

The AO applied a suppression factor of 2.9217, derived by comparing accounted sales with unaccounted sales evidenced in seized documents, to the total turnover as per books to estimate the suppressed sales for the entire year. The assessee contended that the AO's estimate was excessive and proposed a proportionate estimation based on the number of functions for which unaccounted cash receipts were found (24 out of 66 functions held during January to July 2016). The assessee argued that unaccounted sales should be estimated only for functions where evidence of unaccounted receipts was found, and for the period April to December 2015, applying the suppression factor only to sales corresponding to 36% of functions.

The Tribunal rejected this contention, holding that it is improbable that unaccounted receipts existed only for some functions and not others. It emphasized the principle of preponderance of probability and the fact that the assessee accepted the suppression factor. The Tribunal held that it is legally permissible to extrapolate the suppression factor derived from part of the year to estimate unaccounted income for the entire year, provided there is a reasonable nexus with the seized material. This approach was supported by the Supreme Court's decision in CST Vs H.M. Esufali H.M. Abdulai, which held that an estimate based on a relevant basis, even if not the most appropriate, should not be disturbed if accounts are rightly rejected.

4. Application of Net Profit Rate of 10% on Estimated Unaccounted Turnover

The AO initially added the entire estimated suppressed sales turnover to the income of the assessee. The CIT(A), however, held that the suppression factor relates to turnover and not net income. The CIT(A) noted that the net profit ratio of 75.09% (income as per assessment order compared to turnover) was unrealistically high for the nature of the assessee's business (tent house, catering, and event management). Therefore, the CIT(A) applied a net profit rate of 10% on the total suppressed turnover to arrive at the taxable income from unaccounted sales.

The CIT(A) relied on seized documents from a group concern, M/s Fourstar Hospitality LLP, which showed an average net profit of about 10% on unrecorded receipts. The CIT(A) also noted that the AO himself had accepted a 10% profit rate in related cases involving the group concerns. Accordingly, the CIT(A) reduced the addition to Rs. 63,18,760/- (10% of Rs. 6,31,87,606/-) and disallowed separate additions on account of unrecorded business receipts found in seized materials, holding these were already subsumed in the estimated suppressed turnover.

The Tribunal agreed with the CIT(A)'s approach, finding the 10% net profit rate to be a rational and factually supported basis for estimating taxable income. The Tribunal emphasized that the CIT(A)'s decision was grounded in seized material and consistent with the nature of the business.

5. Treatment of Competing Arguments on Quantum of Addition

The assessee's argument for proportionate estimation based on the number of functions with detected unaccounted cash receipts was rejected for lack of logical and evidentiary basis. The Tribunal held that the presence of unaccounted receipts in some functions reasonably indicates the existence of such receipts in other functions as well. The Tribunal underscored that the assessee had not disputed the suppression factor or the seized evidence but only the quantum of additions, which was found to be justifiable.

The Revenue's contention to uphold the entire addition without reduction was also rejected, as the CIT(A)'s application of a net profit margin of 10% was found to be a fair and reasonable method to convert turnover into taxable income.

6. Applicability to Subsequent Assessment Years

The facts and circumstances for AY 2017-18 and AY 2018-19 were similar and mutatis mutandis the same conclusions were applied. The Tribunal upheld the CIT(A)'s decisions for these years, dismissing both the assessee's and the Revenue's appeals.

Significant Holdings

"In the case of 'best-judgment' assessments, the courts will have to first see whether the accounts maintained by the assessee were rightly rejected as unreliable. If they come to the conclusion that they were rightly rejected, the next question that arises for consideration is whether the basis adopted in estimating the turnover has a reasonable nexus with the estimate made. If the basis adopted is held to be a relevant basis even though the courts may think that it is not the most appropriate basis, the estimate made by the assessing authority cannot be disturbed."

The Tribunal established the core principle that additions based on seized materials must have a reasonable nexus with the estimate made, and that estimation of unaccounted income may be extrapolated from partial evidence if supported by relevant material.

The Tribunal held that the net profit rate applied to estimate taxable income from unaccounted turnover must be realistic and factually supported, rejecting unrealistically high profit margins inconsistent with the nature of business.

The Tribunal concluded that the CIT(A)'s approach of taxing 10% of the total suppressed turnover as unaccounted income was a rational and legally sustainable method, and that the assessee's contention for proportionate estimation based on functions was untenable.

Accordingly, the Tribunal dismissed the assessee's appeals and upheld the additions as modified by the CIT(A), and also dismissed the Revenue's appeals.

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