BALBIR GURNANI,MUMBAI vs. I.T.O., WARD-2(5), KALYAN

2.1 The return was selected for scrutiny, and notice under section The return was selected for scrutiny, and notice under section The return was selected for scrutiny, and notice under section 143(2) of the Act was issued on 18.09.2017, duly served upon the 143(2) of the Act was issued on 18.09.2017, duly served upon the 143(2) of the Act was issued on 18.09.2017, duly served upon the assessee. In the course of assessment proceedings, the Assessing assessee. In the course of assessment proceedings, the Assessing assessee. In the course of assessment proceedings, the Assessing Officer Officer Officer noticed noticed noticed substantial substantial substantial cash cash cash deposits deposits deposits aggregating aggregating aggregating to to to ₹43,37,200/- in various bank accounts maintained by the assessee. in various bank accounts maintained by the assessee. in various bank accounts maintained by the assessee. The particulars of such deposits, as recorded by the Assessing The particulars of such deposits, as recorded by the Assessing The particulars of such deposits, as recorded by the Assessing Officer, are as follows: Officer, are as follows:

S.No. Name of the bank Account no. Name of the bank Cash deposited (In Rs.) Cash deposited (In Rs.)

1 Bank of India Bank of India 007310100008990 20,75,600/ 20,75,600/- 2 State Bank of India 34928450433 State Bank of India 3,03,600/ 3,03,600/- 3 Dena Bank Dena Bank 045910027757 19,58,000/ 19,58,000/- Total 43,37,200/ 43,37,200/- 2.2 When called upon to explain, the assessee furnished a When called upon to explain, the assessee furnished a When called upon to explain, the assessee furnished a reconciliation statement attributing the deposits to the following reconciliation statement attributing the deposits to the following reconciliation statement attributing the deposits to the following sources:

Particulars Particulars Amount (In Rs.) (In Rs.) Out of opening cash balance Out of opening cash balance 14,56,355/-

Out of cash withdrawal from bank Out of cash withdrawal from bank 16,34,600/- Advances received against property Advances received against property 8,21,000/- Unsecured loan receipt Unsecured loan receipt 3,60,000/- Total Total 42,71,955/- 2.3 The Assessing Officer, however, was not satisfied with the The Assessing Officer, however, was not satisfied with the The Assessing Officer, however, was not satisfied with the explanation. In respect of the claimed opening cash balance of explanation. In respect of the claimed opening cash balance of explanation. In respect of the claimed opening cash balance of ₹14,56,355/-, he observed that in the return of income for A.Y. , he observed that in the return of income for A.Y. , he observed that in the return of income for A.Y. 2015-16, the assessee had declared gross receipts of only 16, the assessee had declared gross receipts of only 16, the assessee had declared gross receipts of only ₹6,50,000/- with a net profit of with a net profit of ₹1,30,700/- under section 44AD. under section 44AD. The Assessing Officer therefore concluded that the claim of a large The Assessing Officer therefore concluded that the claim of a large The Assessing Officer therefore concluded that the claim of a large opening cash balance was wholly inconsistent with the meagre opening cash balance was wholly inconsistent with the meagre opening cash balance was wholly inconsistent with the meagre turnover. It was also noted that the returns for A.Ys. 2015-16 and turnover. It was also noted that the returns for A.Ys. 2015 turnover. It was also noted that the returns for A.Ys. 2015 2016-17 had both been filed on the same date, suggesting, in his 17 had both been filed on the same date, suggesting, in his 17 had both been filed on the same date, suggesting, in his view, manipulation of figures of cash in hand. view, manipulation of figures of cash in hand.

2.4 Regarding the explanation of the assessee of cash withdrawal Regarding the explanation of the assessee of cash withdrawal Regarding the explanation of the assessee of cash withdrawal from the bank, he reproduced the details filed by the assessee as from the bank, he reproduced the details filed by the assessee as from the bank, he reproduced the details filed by the assessee as under:

Date of withdrawals te of withdrawals Amount withdrawn 17.08.2015 54,000/- 20.11.2015 20.11.2015 12,000/- 03.02.2016 03.02.2016 7,00,000/- 03.02.2016 03.02.2016 5,00,000/- 04.02.2016 04.02.2016 4,07,000/- Total 16,73,000/- 2.5 The Assessing Officer observed that most withdrawals were The Assessing Officer observed that most withdrawals were The Assessing Officer observed that most withdrawals were effected in February 2016, whereas significant deposits had been effected in February 2016, whereas significant deposits had been effected in February 2016, whereas significant deposits had been made in earlier months, particularly November and December 2015. made in earlier months, particularly November and December 2015. made in earlier months, particularly November and December 2015. He thus held that the withdrawals could not reasonably explain the He thus held that the withdrawals could not reasonably explain the He thus held that the withdrawals could not reasonably explain the source of deposits of Rs. of Rs. 16,34,600/-.

As regards the sum of ₹8,21,000/- claimed to have been 2.6 As regards the sum of claimed to have been received as advance against property, the Assessing Officer noted received as advance against property, the Assessing Officer noted received as advance against property, the Assessing Officer noted that the entire consideration of ₹25,00,000/- for the relevant that the entire consideration of for the relevant property transaction was property transaction was received through banking channels. received through banking channels. Accordingly, the claim of having received part consideration in cash Accordingly, the claim of having received part consideration in cash Accordingly, the claim of having received part consideration in cash was disbelieved for want of supporting evidence. was disbelieved for want of supporting evidence.

2.7 On the issue of unsecured loans of On the issue of unsecured loans of ₹3,60,000/ 3,60,000/-, the assessee failed to provide the necessary partic failed to provide the necessary particulars such as names, ulars such as names, addresses, or PAN of the alleged creditors. addresses, or PAN of the alleged creditors.

2.8 In view of the aforesaid infirmities, the Assessing Officer In view of the aforesaid infirmities, the Assessing Officer In view of the aforesaid infirmities, the Assessing Officer rejected the explanation furnished by the assessee and treated the rejected the explanation furnished by the assessee and treated the rejected the explanation furnished by the assessee and treated the entire cash deposits amounting to ₹42,71,955/- as unexplaine entire cash deposits amounting to as unexplained, adding the same to the total income of the assessee. adding the same to the total income of the assessee.

6.1 Before the learned CIT(A), the assessee altered his stand and Before the learned CIT(A), the assessee altered his stand and Before the learned CIT(A), the assessee altered his stand and submitted that the sum of ₹14,56,355/- be treated as opening cash submitted that the sum of be treated as opening cash balance and that the balance amount of balance and that the balance amount of ₹28,15,600/ 8,15,600/- may be considered as undisclosed business receipts. It was further considered as undisclosed business receipts. It was further considered as undisclosed business receipts. It was further submitted that profit at the presumptive rate of 8% under section submitted that profit at the presumptive rate of 8% under section submitted that profit at the presumptive rate of 8% under section 44AD of the Act be applied to such receipts. The learned CIT(A), 44AD of the Act be applied to such receipts. The learned CIT(A), 44AD of the Act be applied to such receipts. The learned CIT(A), however, found no merit in this plea and upheld however, found no merit in this plea and upheld the addition in full. the addition in full. 6.2 On due consideration, we find that the assessee has indeed On due consideration, we find that the assessee has indeed On due consideration, we find that the assessee has indeed shifted his explanation regarding the source of the deposits. In so shifted his explanation regarding the source of the deposits. In so shifted his explanation regarding the source of the deposits. In so far as the claim of an opening cash balance of ₹ ₹14,56,355/- is far as the claim of an opening cash balance of concerned, reference was made to the return of income filed for A.Y. concerned, reference was made to the return of income filed for A.Y. concerned, reference was made to the return of income filed for A.Y. 2015-16, which is available on Paper Book page 1 to 3 , which is available on Paper Book page 1 to 3 , wherein the which is available on Paper Book page 1 to 3 , assessee had declared business income under the presumptive assessee had declared business income under the presumptive assessee had declared business income under the presumptive scheme with gross turnover of ₹6,50,000/- scheme with gross turnover of and profit of ₹1,30,700/-. The return (PB . The return (PB-3) reflects a closing cash balance of 3) reflects a closing cash balance of ₹14,56,355/-. Similarly, in the return of income filed for AY 2016 Similarly, in the return of income filed for AY 2016 Similarly, in the return of income filed for AY 2016- 17 i.e. year under consideration also cash balance u/s 44AD is 17 i.e. year under consideration also cash balance 17 i.e. year under consideration also cash balance reported at Rs 26424 26424 (PB-6). In our opinion, once the assessee is e the assessee is regularly reporting cash balance at the year end regularly reporting cash balance at the year end, alb albeit, u/s 44AD of the Act where books of account are presumably not maintained, of the Act where books of account are presumably not maintained, of the Act where books of account are presumably not maintained, still it holds full evidentiary value and the assessee can’t be asked evidentiary value and the assessee can’t be asked evidentiary value and the assessee can’t be asked further to justify availability of c further to justify availability of cash balance. Accordingly, we delete ash balance. Accordingly, we delete addition of cash deposit to the extent of opening cash balance of addition of cash deposit to the extent of opening cash balance of addition of cash deposit to the extent of opening cash balance of ₹14,56,355/-.

6.3 As regards the remaining As regards the remaining amount of cash deposit of amount of cash deposit of ₹28,15,600/-, we note that before the Assessing Officer the assessee , we note that before the Assessing Officer the assessee , we note that before the Assessing Officer the assessee claimed the same to have arisen out of cash withdrawals, property same to have arisen out of cash withdrawals, property same to have arisen out of cash withdrawals, property advances and unsecured loans, but failed to furnish requisite advances and unsecured loans, but failed to furnish requisite advances and unsecured loans, but failed to furnish requisite particulars or proof. Before the learned CIT(A), the assessee shifted particulars or proof. Before the learned CIT(A), the assessee shifted particulars or proof. Before the learned CIT(A), the assessee shifted ground and sought to treat the same as undisclosed sales from ground and sought to treat the same as undisclosed sales from ground and sought to treat the same as undisclosed sales from business activity, taxable at presumptive profit activity, taxable at presumptive profit u/s 44AD of the Act u/s 44AD of the Act. The difficulty with this argument lies in the fact that the assessee The difficulty with this argument lies in the fact that the assessee The difficulty with this argument lies in the fact that the assessee had already declared his disclosed turnover under section 44AD had already declared his disclosed turnover under section 44AD had already declared his disclosed turnover under section 44AD and offered profit thereo and offered profit thereon. The present receipts, by his n. The present receipts, by his own admission, would therefore represent a parallel and undisclosed dmission, would therefore represent a parallel and undisclosed dmission, would therefore represent a parallel and undisclosed stream of business activity. stream of business activity.

6.4 It is well-settled that where undisclosed sales are effected out settled that where undisclosed sales are effected out settled that where undisclosed sales are effected out of purchases already recorded in the books, an addition limited to of purchases already recorded in the books, an addition limited to of purchases already recorded in the books, an addition limited to the profit element may suffi the profit element may suffice, since the source of purchases is ce, since the source of purchases is explained. However, where the entire transaction represents an explained. However, where the entire transaction represents an explained. However, where the entire transaction represents an undisclosed business, the assessee must demonstrate the source of undisclosed business, the assessee must demonstrate the source of undisclosed business, the assessee must demonstrate the source of investment in such purchases. In the present case, no explanation investment in such purchases. In the present case, no explanation investment in such purchases. In the present case, no explanation has been furnished as to has been furnished as to the source of goods purportedly sold to the source of goods purportedly sold to generate these undisclosed receipts. If, as the assessee suggests, generate these undisclosed receipts. If, as the assessee suggests, generate these undisclosed receipts. If, as the assessee suggests, the deposits represent turnover of such clandestine business, then the deposits represent turnover of such clandestine business, then the deposits represent turnover of such clandestine business, then the investment in undisclosed purchases would necessarily have to the investment in undisclosed purchases would necessarily have to the investment in undisclosed purchases would necessarily have to be accounted for.

6.5 In the present case, the quantum of unexplained purchases is In the present case, the quantum of unexplained purchases is In the present case, the quantum of unexplained purchases is required to be determined by a reverse working method. In the required to be determined by a reverse working method. In the required to be determined by a reverse working method. In the context of the assessee’s garment trading business, where a trade context of the assessee’s garment trading business, where a trade context of the assessee’s garment trading business, where a trade cycle ordinarily spans three to four months, it is apparent that two cycle ordinarily spans three to four months, it is apparent cycle ordinarily spans three to four months, it is apparent such cycles would have been completed by the time of cash deposits such cycles would have been completed by the time of cash deposits such cycles would have been completed by the time of cash deposits in October/November 2015. Treating the total cash deposits of in October/November 2015. Treating the total cash deposits of in October/November 2015. Treating the total cash deposits of ₹28,15,600/- as proceeds of undisclosed sales up to that period, as proceeds of undisclosed sales up to that period, as proceeds of undisclosed sales up to that period, and applying the profit margin of 8%, the net sales proceeds at the and applying the profit margin of 8%, the net sales and applying the profit margin of 8%, the net sales commencement of the second trade cycle would reduce to commencement of the second trade cycle would reduce to commencement of the second trade cycle would reduce to ₹23,90,035/-, representing the undisclosed turnover at the close of , representing the undisclosed turnover at the close of , representing the undisclosed turnover at the close of the first cycle. On a further application of 8% profit margin in the the first cycle. On a further application of 8% profit margin in the the first cycle. On a further application of 8% profit margin in the preceding cycle, the unexplained purchase compon preceding cycle, the unexplained purchase component is quantified ent is quantified at ₹23,70,912/- at the commencement of the first trade cycle. This at the commencement of the first trade cycle. This at the commencement of the first trade cycle. This computation demonstrates that, even assuming two business cycles computation demonstrates that, even assuming two business cycles computation demonstrates that, even assuming two business cycles during the year, the assessee was required to deploy approximately during the year, the assessee was required to deploy approximately during the year, the assessee was required to deploy approximately ₹23,70,912/- towards unaccounted purcha towards unaccounted purchases, exclusive of the ses, exclusive of the notional profit margin. The assessee has failed to substantiate the notional profit margin. The assessee has failed to substantiate the notional profit margin. The assessee has failed to substantiate the source of such investment or provide any cogent explanation. In source of such investment or provide any cogent explanation. In source of such investment or provide any cogent explanation. In these circumstances, the contention that only the profit element these circumstances, the contention that only the profit element these circumstances, the contention that only the profit element embedded in the cash deposits ought t embedded in the cash deposits ought to be taxed is unsustainable, o be taxed is unsustainable, as the substantial unexplained capital outlay on purchases remains as the substantial unexplained capital outlay on purchases remains as the substantial unexplained capital outlay on purchases remains wholly unaccounted for. wholly unaccounted for.

6.7 In the decision relied upon by the Ld. Counsel for the In the decision relied upon by the Ld. Counsel for the In the decision relied upon by the Ld. Counsel for the assessee, assessee, namely namely Shri Shri Jayesh Jayesh Jagat Jagat Parekh Parekh v. v. ITO, ITO 164 Taxmann.com 348 (Mumbai Taxmann.com 348 (Mumbai-Tribunal), the question of unexplained Tribunal), the question of unexplained purchases corresponding to sales was not examined. It does not purchases corresponding to sales was not examined. It does not purchases corresponding to sales was not examined. It does not appear from the record whether, in that case, the undisclosed sales appear from the record whether, in that case, the undisclosed sales appear from the record whether, in that case, the undisclosed sales were supported by explained sources of purchase. An addition were supported by explained sources of purchase. An addi were supported by explained sources of purchase. An addi limited to the net profit is warranted only in circumstances where limited to the net profit is warranted only in circumstances where limited to the net profit is warranted only in circumstances where undisclosed sales are derived from purchases already recorded in undisclosed sales are derived from purchases already recorded in undisclosed sales are derived from purchases already recorded in the books of account, obviating the need for a separate explanation the books of account, obviating the need for a separate explanation the books of account, obviating the need for a separate explanation of the source of such purchases. In the present case, however, the of the source of such purchases. In the present cas of the source of such purchases. In the present cas assessee admittedly claims that the entire undisclosed receipt assessee admittedly claims that the entire undisclosed receipt assessee admittedly claims that the entire undisclosed receipt arises from an independent, undisclosed business. Consequently, arises from an independent, undisclosed business. Consequently, arises from an independent, undisclosed business. Consequently, the onus lies squarely on the assessee to account for the source of the onus lies squarely on the assessee to account for the source of the onus lies squarely on the assessee to account for the source of purchases deployed in generating the said und purchases deployed in generating the said undisclosed sales. isclosed sales.

6.8 The Hon’ble Gujarat High Court in the case of The Hon’ble Gujarat High Court in the case of Commissioner of Income-tax tax vs. vs. President President Industries Industries (Gujarat (Gujarat High High Court)258 ITR 654 (Guj) (Guj) held that where the books of account are here the books of account are rejected and unaccounted sales are found, but the corresponding rejected and unaccounted sales are found, but the correspon rejected and unaccounted sales are found, but the correspon purchases are not proved to be outside the books, the addition purchases are not proved to be outside the books, the addition purchases are not proved to be outside the books, the addition should be restricted to the should be restricted to the net profit element embedded in the embedded in the undisclosed sales, as the entire gross amount of sales cannot be undisclosed sales, as the entire gross amount of sales cannot be undisclosed sales, as the entire gross amount of sales cannot be treated as undisclosed income. treated as undisclosed income. The relevant finding is reproduced The relevant finding is reproduced as under:

Having perused the assessment order made by the AO, the order made Having perused the assessment order made by the AO, the order made Having perused the assessment order made by the AO, the order made by the CIT(A) and the Tribunal, we are satisfied that the Tribunal was by the CIT(A) and the Tribunal, we are satisfied that the Tribunal was by the CIT(A) and the Tribunal, we are satisfied that the Tribunal was justified in rejecting the application under s. 256(1). It cannot be a justified in rejecting the application under s. 256(1). It cannot be a justified in rejecting the application under s. 256(1). It cannot be a matter of an argument that the amount of sales by itself cannot matter of an argument that the amount of sales by itself cannot matter of an argument that the amount of sales by itself cannot represent the income of the assessee who has not disclosed the sales. represent the income of the assessee who has not disclosed the sales. represent the income of the assessee who has not disclosed the sales. The sales only represented the price received by the seller of the goods The sales only represented the price received by the seller of the goods The sales only represented the price received by the seller of the goods for the acquisition of which it has already incur for the acquisition of which it has already incurred the cost. It is the red the cost. It is the realisation of excess over the cost incurred that only forms part of the realisation of excess over the cost incurred that only forms part of the realisation of excess over the cost incurred that only forms part of the profit included in the consideration of sales. Therefore, unless there is profit included in the consideration of sales. Therefore, unless there is profit included in the consideration of sales. Therefore, unless there is a finding to the effect that investment by way of incurring cost in a finding to the effect that investment by way of incurring cost in a finding to the effect that investment by way of incurring cost in acquiring goods w acquiring goods which have been sold have been made by the hich have been sold have been made by the assessee and that has also not been disclosed. In the absence of such assessee and that has also not been disclosed. In the absence of such assessee and that has also not been disclosed. In the absence of such finding of fact the question whether entire sum of undisclosed sale finding of fact the question whether entire sum of undisclosed sale finding of fact the question whether entire sum of undisclosed sale proceeds can be treated income of the relevant assessment year proceeds can be treated income of the relevant assessment year proceeds can be treated income of the relevant assessment year answers by itself in negative. The record goes to show that there is no self in negative. The record goes to show that there is no self in negative. The record goes to show that there is no finding nor any material has been referred about the suppression of finding nor any material has been referred about the suppression of finding nor any material has been referred about the suppression of investment in acquiring the goods which have been found subject of investment in acquiring the goods which have been found subject of investment in acquiring the goods which have been found subject of undisclosed sales undisclosed sales.

6.9 In the circumstances, for two distinct In the circumstances, for two distinct reasons reasons—firstly, the failure of the assessee to substantiate his original explanation of failure of the assessee to substantiate his original explanation of failure of the assessee to substantiate his original explanation of deposits as arising from withdrawals, property advances and loans, deposits as arising from withdrawals, property advances and loans, deposits as arising from withdrawals, property advances and loans, and secondly, the inability of the assessee to explain the source of and secondly, the inability of the assessee to explain the source of and secondly, the inability of the assessee to explain the source of investment in the alleged paral investment in the alleged parallel business—we are of the we are of the considered view that the entire amount of considered view that the entire amount of ₹28,15,600/ 28,15,600/- is liable to be taxed as undisclosed income. be taxed as undisclosed income.

6.10 In view of the reasons recorded hereinabove, we reasons recorded hereinabove, we delete the addition partly to the extent of Rs. addition partly to the extent of Rs. ₹14,56,355/ 14,56,355/- and balance addition ition of of Rs. Rs. ₹28,15,600/- sustained sustained by by the the learned learned Commissioner of Income Commissioner of Income-tax (Appeals) is upheld.