2025 (6) TMI 490 - AT - Income Tax

Unaccounted receipts and entire unaccounted payments appearing in the seized material - Addition as income of the respective assessment years and demanded taxes thereon - Whether Ld AO was justified in making separate additions in respect of unaccounted receipts as well as unaccounted expenses in relation to the business activities carried on by the assessee? Whether the entire unaccounted receipts should be taxed as income or whether only the profit element embedded in these receipts should be considered? - HELD THAT - It is undisputed fact that the seized materials contain noting of both unaccounted receipts and unaccounted payments and they are relating to the business of the assessee. It cannot be denied that such unaccounted expenses would have been incurred out of unaccounted receipts. It is well settled principle of law that seized material has to be read in its entirety. Accordingly Ld AO was not justified in denying set-off of such unaccounted expenses against unaccounted income. Further the methodology adopted by Ld CIT(A) is not absolutely scientific and leaves room for arbitrariness. It is well settled principle of law in the case of Navjivan Oil Mills 2001 (7) TMI 81 - GUJARAT HIGH COURT that seized material has to be read and accepted as a whole and it is not permissible to Pick and Choose theory or make further estimates therefrom unless and until there is cogent material in support of undertaking such an exercise. Considering the actual profit ratio as per the books of accounts at 12.98% as well as profit ratio on actual unaccounted transactions at 6.75%. Therefore in the interest of justice we deem it to estimate 13% as the reasonable profit margin considering the facts and figures in the present case. Thus the Jurisdictional Assessing Officer is directed to adopt 13% profit margin on real estate business in the place of 14 % as determined by the Ld CIT A . Further substantial real income has also been taxed in the hands of other entities namely Sankalp Ventures LLP Sankalp Organisers Pvt. Ltd. and Ginger Properties Pvt. Ltd. in respect of the Asst. Years 2013-14 to 2019-20. Thus Ld. CIT(A) was correct in allowing telescoping the unaccounted receipts. It is sell settled law that source of income and application of income cannot be taxed simultaneously. Since the assessee has been taxed on source of income the Ld. CIT(A) has rightly granted the benefit of telescoping of payments against receipts. Hence Grounds raised by the Revenue is devoid of merits. Addition on account of sale of shares as penny stock unsecured loan u/s.68 of the Act and disallowance u/s.14A rwr 8D though there is no seized material during the course of search proceedings - The Hon ble Supreme Court in the case of Abhisar Buildwell 2023 (4) TMI 1056 - SUPREME COURT has held that no addition can be made in respect of completed assessments in the absence of any incriminating material. AO would assume the jurisdiction to assess or re-assessee the total income by taking into consideration the incriminating material unearthed during the search and the other material available with the AO including the income declared in the returns. The ratio of the judgement is that the incriminating material found during the search gives the AO the jurisdiction to assess or reassess the total income u/s.153A of the Act of the unabated/completed assessment. In the absence of any incriminating material unearthed during the search the AO would not have the jurisdiction to proceed in the unabated/completed year(s) only on the basis of other material. Respectfully following the judicial precedents the additions made by the Ld AO without any seized materials are liable to be deleted. Assessee appeal allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment are:

• Whether the Assessing Officer (AO) was justified in making additions on the entire unaccounted receipts and payments found during search and seizure operations under section 132 of the Income Tax Act, 1961 ("the Act") or only the profit element embedded in such receipts should be taxed.
• Whether the AO was correct in denying set-off of unaccounted expenses against unaccounted receipts when both were found in the seized material related to the assessee's business activities.
• Whether the additions made in unabated assessment years under section 153A of the Act without any incriminating material found during search are sustainable.
• Whether the Commissioner of Income Tax (Appeals) [CIT(A)] was justified in restricting additions to a reasonable profit margin and allowing telescoping of unaccounted payments against unaccounted receipts to avoid double taxation.
• Whether protective additions made in the hands of an employee/accountant should be sustained when substantive additions have been made and owned up by the principal assessee and group entities.
• Whether penalty proceedings initiated under various sections of the Act are justified.
• Whether the principles established in various judicial precedents relating to taxation of unaccounted receipts and expenses, and the scope of assessment under section 153A, are correctly applied.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Taxability of Entire Unaccounted Receipts vs. Profit Element

Relevant legal framework and precedents: The Income Tax Act, 1961 sections 68 (unexplained credits) and 69C (unexplained expenditure) are invoked for taxing unaccounted receipts and payments. The principle that only the profit element embedded in unaccounted receipts can be taxed is well established in judicial precedents, including:

• CIT vs. President Industries (2002) 258 ITR 654 (Gujarat High Court)
• CIT vs. Gurubachhan Singh (2008) 302 ITR 63 (Gujarat High Court)
• CIT vs. Samir Synthetics Mill (2010) 326 ITR 410 (Gujarat High Court)
• Man Mohan Sadani vs. CIT (2008) 304 ITR 52 (MP High Court)
• Godhra Electricity Co. Ltd. vs. CIT (1997) 225 ITR 746 (Supreme Court)

Court's interpretation and reasoning: The Court reiterated that the entire unaccounted receipts cannot be treated as income. Instead, the profit embedded in such receipts, estimated on a reasonable basis, is taxable. The rationale is that unaccounted receipts represent gross receipts, from which cost of acquisition or expenditure must be deducted to arrive at real income. The Court emphasized the need to estimate a reasonable profit margin rather than taxing gross receipts.

Key evidence and findings: Seized materials contained noting of both unaccounted receipts and unaccounted payments related to the assessee's real estate business. No evidence suggested any other source of income for such receipts. The AO initially added the entire unaccounted receipts and payments as income and expenditure respectively. CIT(A) reduced the additions by estimating profit at 14%, which the Court found reasonable but adjusted to 13% based on actual profit ratios in accounts and unaccounted transactions.

Application of law to facts: The Court applied the principle that only profit embedded in unaccounted receipts is taxable, directing the AO to adopt 13% profit margin for estimation. The Court also noted that the unaccounted payments should be telescoped against unaccounted receipts to avoid double taxation.

Treatment of competing arguments: The Revenue argued for taxing the entire unaccounted receipts due to lack of satisfactory explanation and nexus between receipts and expenses. The assessee contended that both receipts and payments pertain to business activities and only profit should be taxed. The Court sided with the assessee's position, supported by judicial precedents.

Conclusions: The Court held that taxing only the profit element embedded in unaccounted receipts is the correct approach, and the AO's addition of entire receipts was erroneous. A 13% profit margin was directed to be applied.

Issue 2: Set-off of Unaccounted Expenses Against Unaccounted Receipts and Telescoping

Relevant legal framework and precedents: The principle of telescoping unaccounted payments against unaccounted receipts to avoid double taxation is recognized in income tax jurisprudence. Seized material must be read in entirety without "pick and choose" approach (Navjivan Oil Mills vs. CIT (2002) 252 ITR 417 (Gujarat High Court)).

Court's interpretation and reasoning: The Court found that the AO erred in making separate additions on both unaccounted receipts and unaccounted payments, which resulted in double taxation. CIT(A) rightly allowed telescoping of payments against receipts and restricted addition to net profit estimated at 14% (adjusted to 13% by the Court). The Court observed that since the unaccounted expenses were incurred from unaccounted receipts, they cannot be taxed separately.

Key evidence and findings: Seized material showed both unaccounted receipts and payments related to business activities. CIT(A) and the Court noted that the group entities had already been taxed on substantial real income, supporting the view that further additions on payments would be unjustified.

Application of law to facts: The Court directed the AO to delete additions on unexplained expenditure/payments that were already sourced from unaccounted receipts and confirmed the approach of telescoping.

Treatment of competing arguments: Revenue contended that expenses were not satisfactorily explained or linked to business, hence addition was justified. The Court rejected this, emphasizing the need to avoid double taxation when both receipts and payments arise from the same unaccounted source.

Conclusions: The Court upheld CIT(A)'s direction to telescope unaccounted payments against receipts and restrict additions to estimated profit only.

Issue 3: Validity of Additions in Unabated Assessment Years Without Incriminating Material

Relevant legal framework and precedents: Section 153A of the Act empowers the AO to assess income in search cases. However, the Supreme Court in PCIT vs. Abhisar Buildwell P. Ltd. (2023) 454 ITR 212 clarified that for unabated or completed assessments, additions can only be made on the basis of incriminating material found during search. No additions can be made solely on other material in absence of incriminating material.

Court's interpretation and reasoning: The Court found that for certain assessment years (2013-14, 2015-16 to 2017-18), the AO made additions without any incriminating material found during search. Since the limitation for issuing notice under section 143(2) had expired before the search date, these were unabated assessments. The Court held that additions in such years without incriminating material are not sustainable.

Key evidence and findings: The AO's assessment orders did not refer to any seized material for these years. The assessee had filed returns and the limitation period had expired prior to search. CIT(A) deleted the additions accordingly.

Application of law to facts: The Court applied the Supreme Court's ruling in Abhisar Buildwell and other High Court decisions to uphold deletion of additions in unabated years without incriminating material.

Treatment of competing arguments: Revenue argued that there is no restriction under section 153A for AO to assess on other material. The Court rejected this, relying on binding Supreme Court precedent.

Conclusions: The Court dismissed Revenue's appeals on this issue and upheld CIT(A)'s deletion of additions in unabated years without incriminating material.

Issue 4: Protective Additions in Hands of Employee/Accountant

Relevant legal framework and precedents: Protective additions are made to safeguard revenue interest pending final adjudication in principal assessee's case. When substantive additions are made and owned up by principal assessee and group entities, protective additions in employee's hands are liable to be deleted.

Court's interpretation and reasoning: The Court noted that protective additions made in hands of the accountant were deleted by CIT(A) because substantive additions were made and owned up by the principal assessee and group entities. The appeals by Revenue challenging deletion were dismissed as Revenue failed to show that substantive additions were not owned up.

Key evidence and findings: The principal assessee and group companies had accepted additions. No contrary evidence was placed by Revenue to sustain protective additions.

Application of law to facts: Protective additions were rightly deleted as per settled principles.

Treatment of competing arguments: Revenue contended that substantive additions were not owned up and appeals were pending. The Court found no material to support this and dismissed Revenue's appeals.

Conclusions: Protective additions in employee's hands were correctly deleted.

Issue 5: Penalty Proceedings

Relevant legal framework and precedents: Penalty provisions under the Act require valid grounds for initiation. The Court did not extensively discuss penalty but noted that the assessee challenged penalty initiation.

Court's interpretation and reasoning: The grounds relating to penalty were general and consequential and did not require separate adjudication in this order.

Conclusions: No specific ruling on penalty was made.

Issue 6: Application of Judicial Precedents and Legal Principles

The Court extensively relied on the following principles and precedents:

• Only profit embedded in unaccounted receipts is taxable, not entire receipts (President Industries, Gurubachhan Singh, Samir Synthetics Mill, Man Mohan Sadani, Godhra Electricity Co.).
• Seized material must be read in entirety; pick and choose approach is impermissible (Navjivan Oil Mills).
• In unabated assessments, additions can only be made on incriminating material found during search (Abhisar Buildwell, Saumya Construction).
• Protective additions must be deleted once substantive additions are made and owned up.
• AO must give relief to assessee even if not claimed (S. R. Koshti vs. CIT).

The Court applied these principles consistently to the facts of the case.

3. SIGNIFICANT HOLDINGS

The Court held:

"It is well settled law that even upon detection of unaccounted cash receipt or on-money receipt, what can be brought to tax is the profit embedded in such receipts and not the entire receipts themselves."

"Seized material has to be read in its entirety and it is not permissible to adopt pick and choose theory."

"In the absence of any incriminating material found during the course of search, the AO cannot assess or reassess income in unabated/completed assessments on the basis of other material."

"Protective additions made in the hands of an employee are liable to be deleted when substantive additions are made and owned up by the principal assessee and group entities."

"Source of income and application of income cannot be taxed simultaneously."

The final determinations on each issue are:

• Additions on entire unaccounted receipts are not justified; only profit element should be taxed at a reasonable rate (directed at 13%).
• Unaccounted payments/expenses should be telescoped against unaccounted receipts to avoid double taxation.
• Additions in unabated assessment years without incriminating material found during search are unsustainable and must be deleted.
• Protective additions in employee's hands must be deleted when substantive additions are made and owned up by principal assessee and group entities.
• CIT(A)'s orders partly allowing the appeals filed by the assessee and dismissing appeals filed by the Revenue are upheld.