2025 (7) TMI 43 - AT - Income Tax

Unaccounted Receipts / On-Money - incriminating documents were seized inter alia from the back office of Ananta Group and other premises - CIT(A) in restricting the additions - HELD THAT - CIT(A) relied on various judicial precedents where profit margin ranging from 8% to 16% was adopted. During the course of appellate proceedings when queried as to why the assessee accepted a higher profit margin of 20% despite judicial precedents suggesting acceptance of profit margins in the range of 8% to 16% in comparable cases the learned AR submitted that the assessee chose to accept such estimation in order to buy peace of mind and bring finality to the long-drawn controversy. It was submitted that the assessee while maintaining that only the embedded profit on verifiable on-money receipts could be brought to tax did not press for further reduction in the profit percentage so as to avoid protracted litigation. This submission in our considered view further reinforces the bona fides of the assessee s stand and lends credence to the reasonableness of the estimation adopted by the CIT(A). Revenue has challenged the finding of the CIT(A) to the effect that additions in search assessments u/s 153C must be based on incriminating material relatable to the assessment year in question - Though the word incriminating does not explicitly appear in the language of section 153A or section 153C the judicial interpretation rendered by various High Courts including the jurisdictional Hon ble Gujarat High Court has consistently held that where an assessment has already been completed and is not abated as on the date of search then additions in such reassessment can be made only on the basis of incriminating material seized during the course of search or requisition. This position has been affirmed in various authoritative pronouncements including PCIT v. Saumya Construction Pvt. Ltd. 2016 (7) TMI 911 - GUJARAT HIGH COURT and CIT v. Kabul Chawla 2015 (9) TMI 80 - DELHI HIGH COURT In the present case the CIT(A) having noted that the assessments for A.Ys. 2016 17 to 2018 19 were not abated on the date of search has rightly concluded that additions could not have been made in those years in the absence of any year-specific incriminating document. The only material seized namely Annexures BS-7 and BS-10 pertained to transactions verifiably relatable to A.Y. 2015 16 and there was no other document linking any unaccounted receipt to the later years. Thus the AO s action in extrapolating the findings of A.Y. 2015 16 to later years falls foul of the jurisdictional requirement under section 153C as interpreted by binding judicial precedents. We find no infirmity in the approach adopted by the CIT(A) in restricting the additions for A.Y. 2015 16 being 20% of the verifiable unaccounted cash receipts and in deleting the extrapolated additions made for A.Ys. 2016 17 2017 18 and 2018 19 in the absence of year-specific seized material. CIT(A) has rightly applied the settled principle that only the embedded profit in unaccounted receipts can be brought to tax. We therefore uphold the findings and conclusion of the CIT(A) on this issue and dismiss the Revenue s grounds relating to unaccounted cash receipts. Unaccounted Land Investment - Addition u/s 69 - CIT(A) deleted addition - HELD THAT - The presumption of unexplained investment u/s 69 cannot be invoked when the source is clearly traceable to income already taxed in the hands of the assessee. We find no rebuttal by the Revenue to the assessee s specific claim that these land payments were made out of unaccounted receipts already taxed. There is no material brought on record to show that the cash payments emanated from any independent or unexplained source. Nor has the AO shown that the timing or quantum of the payments was inconsistent with the flow of receipts assessed in the same year. CIT(A) in our considered view has rightly appreciated the factual matrix and allowed the assessee s claim by observing that taxing the land payments separately under section 69 would result in double taxation of the same income once as unaccounted receipts and again as unexplained investment. CIT(A) has further noted that the explanation of the assessee was not only plausible but supported by the very evidence relied upon by the AO i.e. seized Annexure BS-9 and BS-7 the cash flow pattern and the admitted fact that the land transactions were executed for the same real estate projects for which on-money receipts were assessed. Accordingly we find no infirmity in the decision of the CIT(A) in deleting the addition made u/s 69 of the Act. The conclusion reached is not only consistent with the facts and evidence on record but also in conformity with well-established legal principles governing telescoping and avoidance of double taxation. We accordingly uphold the order of the CIT(A) on this issue and dismiss the Revenue s ground. Addition on Account of Alleged Unaccounted Cash Expenditure for Bungalows in Ananta Savera Project - addition u/s 69C - said addition was based on the notings found in cash vouchers and loose sheets seized during the search and seizure action conducted under section 132 of the Act at the residential premises of Shri Nilay Chotai one of the group functionaries - CIT(A) deleted addition - HELD THAT - We find no infirmity in the decision of the CIT(A). The documents forming the basis of the addition were found from a third party s residence and lacked any express or implied connection to the assessee s business. AO has not examined the person from whose premises the vouchers were recovered nor made any enquiry with the listed payees to establish whether the payments were made by or for the assessee firm. There is no corroboration by way of entries in the assessee s books or statements of its partners. In such a situation the presumption that the impugned expenditure was incurred by the assessee is not legally sustainable. In the absence of nexus between seized documents and the assessee s income or business mere possession or recovery of such documents does not ipso facto justify an addition under section 69C. We are in agreement with the view taken by the CIT(A). The AO has failed to establish that the cash expenses reflected in the seized vouchers were incurred by the assessee firm. Accordingly the addition made u/s 69C cannot be sustained. The ground raised by the Revenue is dismissed.

Summary

Issues Presented and Considered

The core legal questions addressed by the Tribunal in these appeals arising from search-based assessments under sections 132, 153C, 143(3), 69A, 69, and 69C of the Income-tax Act, 1961 include:

• Whether additions on account of unaccounted cash receipts ("on-money") from sale of real estate units in the projects "Ananta Savera" and "Ananta Swagatam" for assessment years (AYs) 2015-16 to 2018-19 were justified, particularly considering the evidentiary value of seized documents and the statement of the sales executive.
• The legality and applicability of extrapolating unaccounted income findings from AY 2015-16 to subsequent years under section 153C, in absence of year-specific incriminating material.
• The quantum of addition under section 69A: whether the entire unaccounted receipt or only the embedded profit margin therein can be brought to tax.
• The evidentiary value and reliability of the statement recorded under section 131 of the sales executive, Shri Karan Thapa, and its role in corroborating seized documents.
• Whether the addition of Rs. 2.86 crore on account of alleged unexplained cash payments for land investment under section 69 for AY 2015-16 was sustainable, considering the source of funds.
• The validity of addition of Rs. 23.30 lakh under section 69C on account of alleged unaccounted cash expenditure for bungalow construction in AY 2018-19, based on vouchers seized from a third party's residence.
• The scope and interpretation of "incriminating material" requirement under sections 153A and 153C for reassessment proceedings post-search.

Issue-wise Detailed Analysis

1. Additions on Account of Unaccounted Receipts ("On-Money") under Section 69A

Legal Framework and Precedents: Section 69A deals with unexplained cash credits and additions thereto. The provisions empower the Assessing Officer (AO) to add unaccounted cash receipts to income where the assessee fails to satisfactorily explain such credits. Judicial precedents establish that only the embedded profit in unaccounted sales can be taxed, not the entire turnover, to avoid turnover taxation. The scope of section 153C requires that reassessment can be made only on the basis of incriminating material seized during search relating to the relevant AY.

Court's Interpretation and Reasoning: The Tribunal agreed with the CIT(A)'s observation that specific incriminating documents (Annexures BS-7, BS-10) containing decoded entries evidencing unaccounted cash receipts were available only for AY 2015-16. For subsequent years (AYs 2016-17, 2017-18, 2018-19), no year-specific incriminating material was found, rendering extrapolation of findings impermissible. The AO's methodology of decoding entries by multiplying figures by 100 and applying reverse Cost Inflation Index (CII) for estimating unaccounted receipts was scrutinized. While the AO's approach was partially based on seized documents and statements, the Tribunal held that extrapolation beyond the year for which material was seized lacked statutory support under section 153C.

Key Evidence and Findings: The AO relied heavily on the statement of Shri Karan Thapa, sales executive, recorded under section 131, who admitted receipt of on-money. The AO also used seized annexures with coded entries to quantify unaccounted receipts. For AY 2015-16, verified unaccounted receipts aggregated to Rs. 6.10 crore based on direct documentary evidence. The AO's larger extrapolated figure of Rs. 14.99 crore was rejected by the CIT(A) and upheld by the Tribunal.

Application of Law to Facts: The Tribunal concurred with the CIT(A) that only the embedded profit margin on the verifiable unaccounted receipts should be taxed. The CIT(A) applied a 20% profit margin on Rs. 6.10 crore, resulting in an addition of Rs. 1.22 crore for AY 2015-16. The Tribunal found this approach reasonable and consistent with judicial precedents. The statement of Shri Thapa was accorded limited evidentiary value due to lack of corroboration and his subordinate position.

Treatment of Competing Arguments: The Revenue contended that the AO's methodology was sound and the statement of Shri Thapa reliable. The Tribunal rejected this, noting the absence of corroborative evidence such as statements from partners or customers. The Revenue's reliance on extrapolation for later years was dismissed due to absence of incriminating material specific to those years. The assessee's arguments on lack of year-specific evidence and improper estimation methods were accepted.

Conclusion: Additions under section 69A were sustained only for AY 2015-16 to the extent of embedded profit on verifiable unaccounted receipts. Additions for AYs 2016-17, 2017-18, and 2018-19 were deleted due to lack of incriminating material and impermissibility of extrapolation.

2. Requirement of Incriminating Material under Sections 153A and 153C

Legal Framework and Precedents: Sections 153A and 153C provide for reassessment following search or seizure. Though the statute does not explicitly mention "incriminating material," judicial pronouncements have held that reassessment can be made only on the basis of incriminating material seized or requisitioned during search relating to the relevant AY, especially where assessments are not abated.

Court's Interpretation and Reasoning: The Tribunal upheld the CIT(A)'s reliance on binding precedents from the jurisdictional High Court and other courts, which require the presence of incriminating material specific to the AY for reassessment under section 153C. The absence of such material for AYs 2016-17 to 2018-19 rendered the AO's additions unsustainable.

Application of Law to Facts: Only for AY 2015-16 were decoded entries and seized materials directly relatable. For other years, no such documents were found. The AO's extrapolation was thus contrary to the statutory scheme and judicial interpretation.

Conclusion: The Tribunal affirmed that additions under section 153C must be based on incriminating material specific to the AY. Extrapolation without such material is impermissible.

3. Addition on Account of Unexplained Land Investment of Rs. 2.86 Crore under Section 69 (AY 2015-16)

Legal Framework and Precedents: Section 69 pertains to unexplained investments. However, the principle of telescoping prevents double taxation where the source of investment has already been taxed as income.

Court's Interpretation and Reasoning: The Tribunal agreed with the CIT(A) that the alleged cash payments for land acquisition were made in the same financial year (2014-15) relevant to AY 2015-16, coinciding with the year in which on-money receipts were assessed. Since the source of funds (on-money) was taxed, treating the land payments as unexplained investment would constitute double taxation.

Key Evidence and Findings: The AO's assumption that payments were "initial investments" prior to generation of on-money receipts was factually incorrect. The date-wise chart from seized Annexure BS-9 demonstrated payments occurred contemporaneously with on-money receipts.

Application of Law to Facts: The Tribunal held that in absence of contrary evidence, the explanation that land payments were made from already taxed on-money receipts was acceptable. The AO failed to disprove this nexus.

Treatment of Competing Arguments: The Revenue argued absence of proximate nexus and temporal disconnect. The Tribunal rejected this on factual grounds.

Conclusion: The addition of Rs. 2.86 crore under section 69 was rightly deleted to avoid double taxation.

4. Addition of Rs. 23.30 Lakh under Section 69C on Account of Alleged Unaccounted Cash Expenditure for Bungalows (AY 2018-19)

Legal Framework and Precedents: Section 69C deals with unexplained cash payments. However, additions must be based on clear nexus between seized material and assessee's business or income.

Court's Interpretation and Reasoning: The Tribunal concurred with the CIT(A) that the vouchers seized from a third party's residence did not bear the name of the assessee, nor were they linked to the assessee's books or projects. No enquiry was made to establish the identity of payees or connection to the assessee. Mere possession of such documents without nexus is insufficient for addition.

Application of Law to Facts: The vouchers related to a bungalow construction allegedly unconnected to the assessee's projects. The AO failed to establish that the expenditure was incurred by the assessee.

Treatment of Competing Arguments: The Revenue contended that the vouchers pertained to the Ananta Savera project and the assessee failed to explain. The Tribunal found this unsubstantiated.

Conclusion: The addition under section 69C was rightly deleted due to lack of nexus and corroboration.

5. Evidentiary Value of Statement of Shri Karan Thapa Recorded under Section 131

Legal Framework and Precedents: Statements recorded under section 131 are admissible but require corroboration to form basis for additions. Uncorroborated oral statements, especially by subordinate employees, are not conclusive.

Court's Interpretation and Reasoning: The Tribunal agreed with the CIT(A) that Shri Thapa's statement was general, lacked specific quantification, and was uncorroborated by contemporaneous documents or statements from partners or customers. His subordinate role diminished evidentiary weight.

Application of Law to Facts: The statement was used only as corroborative where documentary evidence existed, not as sole basis for additions.

Conclusion: The statement was accorded limited evidentiary value and did not justify additions beyond seized documents.

Significant Holdings

"Only the embedded profit in the unaccounted cash receipts can be brought to tax under section 69A, and not the entire gross receipt, to avoid turnover taxation."

"Additions under section 153C must be founded on incriminating material seized during search specifically relatable to the assessment year under consideration; extrapolation of findings to other years without such material is impermissible."

"Statements recorded under section 131, especially from subordinate employees, require independent corroboration by contemporaneous documentary evidence or other reliable material before being relied upon for making additions."

"Where the source of investment or expenditure has already been brought to tax as income, addition on account of such investment or expenditure under sections 69 or 69C cannot be made to avoid double taxation (principle of telescoping)."

"Mere possession or seizure of documents from third-party premises without establishing nexus to the assessee's business or income is insufficient to justify additions under unexplained expenditure provisions."

"The reverse Cost Inflation Index (CII) methodology adopted by the AO to compute unaccounted receipts lacks statutory or judicial sanction and cannot sustain additions in absence of direct corroborative evidence."

Final Determinations

• The additions on account of unaccounted on-money receipts for AY 2015-16 were restricted to Rs. 1.22 crore (20% profit margin on Rs. 6.10 crore verified receipts) and upheld.
• Additions for AYs 2016-17, 2017-18, and 2018-19 on account of unaccounted receipts were deleted due to lack of incriminating material specific to those years and impermissibility of extrapolation.
• The addition of Rs. 2.86 crore for unexplained land investment under section 69 for AY 2015-16 was deleted, accepting the explanation that the payments were made from already taxed on-money receipts.
• The addition of Rs. 23.30 lakh under section 69C for unexplained cash expenditure on bungalow construction for AY 2018-19 was deleted for lack of nexus and corroboration.
• The statement of the sales executive, Shri Karan Thapa, was given limited evidentiary value and could not sustain additions beyond seized documents.
• All grounds raised by the Revenue were dismissed, and the CIT(A) orders were upheld.