2025 (7) TMI 1219 - AT - Income Tax

Addition u/s 68 - unaccounted receipts - Estimation of business income - assessee failed to provide name PAN address of the parties alongwith nature of transactions -addition by applying gross profit @ 6% on the alleged unaccounted receipts as per the seized documents HELD THAT - Estimation of business income on receipts of Rs. 204.57 Lacs is concerned we find that similar issue arose in AYs 2014-15 to 2016-17 wherein the bench has estimated profit rate of 3% on these receipts. Facts being pari-materia the same we restrict the impugned addition to the extent of 3% of receipts of Rs. 204.57 Lacs. The Ld. AO is directed to re-compute the same. The grounds raised by the revenue stand dismissed whereas the corresponding grounds raised in assessee s cross-objection stand partly allowed. Addition of loan allegedly granted is concerned we find that the same has merely been made on the basis of loose sheets without any corroboration thereof. These loose sheets do not bear the name of the assessee or his associated concerns. The loose sheets contain the ledger of M/s Triveni Rice Mills in the books of Company . The Trial balance of this entity by the name Company was also found. However none of the entry as contained therein has been found matching with the regular books as maintained by the assessee. There is no corroboration of any of the entry by way of third-party investigation. The name of the assessee or his concerns is nowhere been mentioned on these loose sheets. It is trite law that no addition could be made on the basis of mere presumptions assumptions or surmises . Pertinently as per the findings of Ld. AO the cash books as found during survey contained all the business transactions of the assessee whether in cheque or in cash and none of the entries as found noted in the loose sheet has been found recorded in the said cash books. Therefore this addition could not have been made in the hands of the assessee. Assessee has allegedly granted loan to the other party and it is not a case of unexplained cash credit in the regular books of the assessee - On these facts the provisions of Sec.68 would have no application and no addition could be made in the hands of the assessee by invoking these provisions. For all these reasons no addition of principle amount or interest amount as allegedly received by the assessee could have been made in the hands of the assessee. In other words the addition as sustained in the impugned order stand deleted. The addition of interest income has rightly been deleted. The grounds stand disposed-off accordingly. Addition of interest income stand deleted since all these additions have been made merely on the basis of loose sheets which were to be considered as dumb documents only. The name of the assessee was nowhere mentioned in these loose sheets. None of the entries as contained therein has been found recorded either in seized cash books or in regular books of accounts of the assessee. This being so the impugned additions could not be sustained in law. In the result the appeal of the revenue stand dismissed. The cross-objection of the assessee stand partly allowed.

Summary

ISSUES:

Whether unaccounted receipts can be treated as business transactions in absence of details such as name, PAN, address of parties and nature of transactions under section 68 of the Act'Whether applying a gross profit (GP) rate of 6% on unaccounted receipts is justified when the assessee fails to meet the requirements of section 68'Whether allowing benefit of unverifiable purchases and applying GP rate of 6% contradicts binding precedent from the Hon'ble High Court of Madras'Whether an amount surrendered by the assessee can be presumed as business income without the assessee establishing the source, in light of relevant High Court decisions'Whether the application of peak theory on cash loans given to a third party is justified without substantiation that receipts were used to make further advances'Whether allowing telescoping benefit on investment in advancing loans without evidence is proper'Whether deletion of addition on account of opening balance shown in incriminating documents is erroneous when the year to which the amount pertains is not identified'Whether deletion of addition for non-disclosure of interest income is justified when the assessee follows mercantile system of accounting'Whether additions based solely on loose sheets or documents not corroborated by regular books or third-party evidence can be sustained'Whether the provisions of section 68 apply to alleged loans not recorded in the assessee's regular books of accounts'Whether interest income additions based on notional calculations by software can be sustained?

RULINGS / HOLDINGS:

The Court held that unaccounted receipts cannot be treated as business transactions under section 68 where the assessee fails to provide particulars such as name, PAN, address, and nature of transactions, and mere presumptions or surmises are insufficient for addition.The application of a 6% GP rate on unaccounted receipts was found excessive; the Court restricted the estimation to a 3% profit rate consistent with prior years, directing recomputation accordingly.The Court rejected the application of unverifiable purchases and the 6% GP rate as contradicting precedent, emphasizing adherence to established judicial decisions.The Court affirmed that there is no presumption that surrendered amounts are business income absent evidence, placing the burden on the assessee to establish the source of income.The application of peak theory on cash loans was disallowed where the assessee failed to substantiate that receipts were used for further advances; additions based on uncorroborated ledger entries were deleted.The Court held that telescoping benefits cannot be allowed without evidence; such benefits were disallowed in the absence of supporting documentation.The deletion of addition on opening balance was upheld since the assessee failed to identify the relevant assessment year, preventing addition in the current year.Additions for non-disclosure of interest income were deleted where the assessee followed the mercantile system of accounting and interest was found to be calculated on a notional basis by software, supported by settlement order findings.Additions based solely on loose sheets or documents not corroborated by the assessee's regular books or third-party evidence were disallowed as "dumb documents" lacking evidentiary value.The provisions of section 68 were held inapplicable to alleged loans not recorded in the assessee's regular books of accounts; additions under section 68 were therefore unsustainable.Interest income additions based on notional calculations by software were deleted, supported by findings of the Interim Board of Settlement.

RATIONALE:

The Court applied the statutory framework of the Income Tax Act, particularly section 68 relating to unexplained cash credits and the principles governing estimation of income from unaccounted receipts.Precedents from High Courts, including the Punjab & Haryana High Court and the Madras High Court, were relied upon to emphasize that additions cannot be made on mere assumptions or uncorroborated documents, and the assessee bears the burden to establish the source of income.The Court recognized the mercantile system of accounting and accepted the findings of the Hon'ble Interim Board of Settlement regarding notional interest calculations, thereby excluding such income from taxable additions.The Court rejected the application of peak theory and telescoping benefits where the facts did not support such treatment, emphasizing the necessity of evidentiary support for such accounting adjustments.There was no doctrinal shift; the Court adhered to established legal principles requiring corroboration of evidence and proper substantiation before making additions under the Act.