RASHI AGRO INDUSTRIES PRIVATE LIMITED,MUMBAI vs. COMMISSIONER OF INCOME TAX (APPEALS)-CIT(A) 51, MUMBAI

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ITA 4034/MUM/2025Status: DisposedITAT Mumbai07 July 2026AY 2016-1713 pages
AI SummaryPartly Allowed

What did the Tribunal hold?

The Tribunal held that only the net profit element embedded in unrecorded receipts should be taxed, not the entire gross receipt. Taxing 'real income' is the legal principle. The AO was directed to restrict additions to 14% of unexplained receipts.

What were the facts?

During a search, a diary containing unrecorded cash receipts and payments was found. The assessee's manager confirmed these transactions were not in the books. The Assessing Officer (AO) made additions based on these diary entries.

What were the issues?

Whether additions based solely on a seized diary with unrecorded transactions are justified, and if so, whether the entire amount or only the net profit should be taxed.

Which sections of the Income-tax Act were involved?

Section 153A,Section 69C,Section 133A,Section 131,Section 143(2),Section 142(1)

AI-generated summary — verify with the full judgment below

Heard together (2 matters)

ITA No. 4034/MUM/2025
ITA No. 4036/MUM/2025

Read from the judgment's own cause title. This page is filed under one of them.

PER PAWAN SINGH, JUDICIAL MEMBER:

1.

This group of four appeals by assessee is directed against the separate

orders of the ld. Commissioner of Income Tax (Appeals), 51, Mumbai, [for

short “CIT(A)”] all dated 24.04.2025, for the assessment years(AYs) 2015-

16, 2016-17, 2017-18 and 2018-19. In all the four appeals, the assessee

has raised certain common grounds of the appeal. Facts in all the appeals

are almost similar. Therefore, with the consent of both the parties, all

appeals were clubbed, heard together and decided by the common order

to avoid the conflicting decisions. For appreciation of the facts, facts in the A.Y. 2015-16 are treated as a lead case. In appeal for the A.Y. 2015-16,

the assessee has raised following grounds of the appeal:-

“(i) The Learned Commissioner of Income Tax (Appeals) [CIT(A)] erred in law and on facts by upholding the impugned assessment order passed u/s 153A of the Income Tax Act, 1961, without appreciating the fact that the proceedings were carried out without giving sufficient opportunity of being heard which is a blatant violation of principle of natural justice. The appellant was not given adequate time and a reasonable opportunity to reconcile and explain the diary entries. The statement of Mr. Purushottam Bhanushali was recorded on 20.09.2021 & 21.09.202, SCN was 24.09.2021 without providing the copy of the statement recorded & Order was passed on 30.09.2021. The total proceedings was completed in 9 working days and the time provided between SCN and date of submission was only 4 working days, which clearly states that adequate time was not provided to submit or explain the entries in the diary.

(ii) That the learned CIT(A) has erred in law and on facts in upholding the addition of Rs.1,76,84,320/- under section 69C of the Income Tax Act, 1961,& Rs. 3,70,206/- under section 69C of the Income Tax Act, merely on the basis of credit side of the loose sheets i.e. a loose diary found during the course of search conducted u/s 133A of the Income Tax Act, 1961 without any independent corroborative evidence or supporting material.

(iii) That the learned CIT(A) has erred in law and facts in confirming the entire addition without appreciating that the loose diary contains both cash receipts and payments, representing day-to day business- related transactions. Neither the learned A.O. nor the learned CIT(A) made any effort to ascertain the net real income.

(iv) That the learned CIT(A) has erred in law and facts in rejecting the appellant's submission for applying the peak credit theory, despite the appellant having furnished a detailed reconciliation and year-wise working substantiating the inflow & outflow of funds. The learned A.O. & learned CIT(A) failed to consider that only the real income should be taxed and not any hypothetical figure of credit side of the loose diary amounting to Rs.1,76,84,320/-. The fact that the diary clearly reflects rotation of funds and not actual income earned by the appellant, hence not considering the peak theory shall lead to double taxation and unjust inflation of the income of the appellant.

(v) The Ld. CIT(A) erred in law and in facts in failing to adjudicate that the learned A.O had adopted a selective and arbitrary approach by picking only credit entries from the loose diary and ignoring the context and the flow of all the transaction recorded in the loose diary, thereby resulting in a distorted, inflated and unsustainable addition amounting to Rs.1,80,54,526/-.

(vi) The Appellant craves leave to add, amend, alter and / or withdraw the aforesaid ground of appeal.

2.

Brief facts of the case are that, the assessee is engaged in the business of

processing of species and other related agro based products. The assessee

filed its return of income for the assessment year (A.Y.) 2015-16 on

29.02.2015, declaring income of Rs. 6,73,470/- under normal provision

and book profits under Section 115JB of Rs. 68,77,156/-. A search and

seizure action was carried out on 26.11.2019 onEverest Masala Group; the

assessee is a part of Everest Masala Group. In the search action, certain

incriminating material including a ‘Red diary’ was found and seized.

Consequent upon search action and seizure of material, notice under

Section 153A dated 22.09.2020 was served upon the assessee. In

response to the said notice, the assessee had filed return of income

declaring same income as filed originally. The Assessing Officer (‘AO’) after

serving the notice under Section 143(2) and 142(1) of the Income Tax Act,

1961, proceeded for the reassessment. During the assessment, the AO

noted that, in the search and seizure action on 26.11.2019, a red colour

diary was found at the premises of the assessee which was seized as

“Annexure A-4”, wherein, cash received and cash paid are hand written

respectively on the left hand pages of the diary. The AO scanned the copy

of certain page of “Annexure A-4” on page no 3 to 6 of the assessment

order. The assessee was asked to explain, how these transactions are

recorded in its books of accounts. The assessee was also asked to identify

the partiesto whom the cash payments were made by issuing detailed

show cause notice. The contents of the show cause notice are recorded on page no. 7 to 10 of the Assessment Order. The AO also summoned the

officials of the assessee for recording their statement. The AO on page no.

10 of the assessment order recorded that Purshottam Bhanushali, Manager

of the assessee’s firm appeared on 20.09.2021 and his statement was

recorded on oath under Section 131 of the Income Tax Act, 1961. During

the course of recording statement of Purshottam Bhanushali, the seized

material was confronted to him. In response to the question no. 06 of his

statement,Purshottam Bhanushali stated that left hand side pages of the

diary represents money received for business activities, whereas, the right

hand side pages of the diary shows expenses incurred. Such transactions

are not recorded in the books. The question and answer of question no.

06, 07, 09, 10, 13, 14 and their answer is extracted by AO on page no. 11

to 13 of the Assessment Order. On the basis of such statement, the AO

was of the view that the assessee failed to identify the parties from whom

the cash was received and to whom the cash was paid.

3.

The AO again issued a detailed show cause notice dated 23.09.2021 which

is scanned on page no. 14 and 15 of the assessment order. In the show

cause notice, the AO asked as to why the entire aggregate of amount

shown in the seized document “Annexure-A” should not be treated as

unexplained and unaccounted in the books of the assessee. The assessee

filed its reply dated 24.09.2021. The contents of the reply of the assessee

are recorded on page no. 16 to 18 of the Assessment Order. In reply, the

assessee stated that the assessee is in the business of the Masalaprocessing, like grinding, cleaning, sorting for local and nearby

parties which were noted on the left side of the diary from page no. 40 to

81.

It was also stated that the left side of the said diary has noted for bank

transactions and the said bank transactions are recorded in the books of

the assessee and the related entities. The assessee further explained that

the entries recorded on page no. 1 to 38 are the payment for renovation of

the factory premises and office premises. There are financial transactions

which were of the same amount and mentioned on the different pages of

the said diary i.e. the said entries were repetitive in nature. Further, there

were also certain financial transactions which were paid from the bank

account of Rashi Agro Industries Pvt. Ltd. and its related entities. The

aggregate of debit column of Rs. 1,80,54,526/- is not the total of money

received for the business activity. Similarly, the noting on the right hand

side of the diary from pages 40 to 81 are the cash payments for business

expenses and there are also noting for bank transactions and the said

bank transactions are recorded in the books of Rashi Agro Industries Pvt.

Ltd and the related entities. The assessee explained that there are also

noting for repayment of advances received and cancellation of the work

order which were repaid as the processing work could not be done for

various reasons, as products was of sub-standard, all raw materials

ingredients were not reaching in time. The assesseein without prejudice to

above and without admitting contended that by applying the peak theory,

the peak for the entry under consideration i.e. 2015-16 is Rs. 32,63,196/-.

4.

The assessee also stated that the net profit (NP) ratio for the year under

consideration was 13.78%. And even for considering hypothetically, the

total of debit column that is Rs. 1,80,54,526/- is considered as business

receipt, which is not the case as explained earlier, the entries are of

repetitive in nature and there are repayment, the applying the same net

profit ratio, the net profit will come to Rs. 24,88,645/-. However, if the

peak theory is applied, the peak comes to Rs. 32,63,196/- which is far

more than the hypothetical net profit calculated at Rs. 24,88,645/-. The

assessee also explained certain factual aspects of their business model

about making of majority of payment in cash, either to local farmers or

middle men or to the delivery persons or brokers, buyers forprocurement

of goods from growers.The submission of the assessee was not accepted

by the AO, and the AO by referring the answer to question no. 07, that

such details are not recorded in the books of accounts. Therefore, the

entry shown in the right hand side was treated as an unexplained

expenditure under Section 69C. Hence,the request of application of the

peak theory was rejected on the ground that the transaction are not

explained properly in two terms that recipient of cash and expenditure has

not been disclosed. So, the peak theory is not applicable. The AO in

paragraph no. 7.6recorded that the assessee received Rs. 1.80 Crores and

expenditure incurred in cash is Rs. 1.76 Crores. The AO treated Rs. 1.76

Crores as the unexplained expenditure under section 69C and difference

thereof that is Rs. 3,70,206/- [Rs. 1,80,54,562 – Rs. 1,76,84,320/-] is treated as ‘unexplained money’ under Section 69A of the Income Tax Act,

1961.

5.

Aggrieved, by the additions in the Assessment Order, the assessee filed an

appeal before the Ld. CIT(A). Before the Ld.CIT(A), the assessee filed its

detailed written submissions. The submissions of the assessee are

recorded in paragraph 7.3 of the order of the Ld.CIT(A). In the written

submissions, the assessee repeated almost similar submissions as made

before the AO. The assessee also relied upon the certain case law to

substantiate the plea for taxing net profit only on such debit and credit

entries. The assessee also relied on case laws that even if undisclosed sale

or receipt is found, only the income embodied in such disclosed receipts

can be brought to tax and specifically relied upon the decision of the The

Gujarat High Court in the case of CIT Vs President Industries(2002) 258

ITR 654 (Guj).

6.

The Ld.CIT(A) on considering the submissions of the assessee confirmed

the action of the AO. The ld CIT(A) while confirming the action of AO held

that manager of the assessee admitted in his statement that the

transactions are not recorded in the books of accounts and he was unable

to explain the source or parties’ details. The explanation given by the

assessee is not supported by any third party confirmation. The entry in the

red diary is corroborated with the statement and non-inclusion in the

books is a valid evidence for unaccounted income and unrecorded transactions. Further aggrieved, the assessee has filed the present appeal

before the Tribunal.

7.

We have heard the submissions of learned authorised representative (Ld.

AR) of the assessee and the learned Commissioner of Income Tax-

Departmental representative (ld.CIT-DR) for the revenueand with their

assistance perused the orders of lower authorities carefully. The ld AR of

the assessee submits that the assessee is in the business of the Masala

processing, like grinding, cleaning, sorting for local and nearby parties. A

search action was carried out by the investigation wing on the assessee

group.The search team seized a red diary allegedly containing certain

receipt and expenditure which were noted on the left side of the diary

from page no. 40 to 81. The AO relied on the statement of the manager of

the assessee for making addition. The ld AR of the assessee invited our

attention on the reply to question No. 20, wherein the manager specifically

stated that the impounded diary was maintained by ex-employee Yogesh

Mistry, and he was not in a position to explain at that time and stated to

explained in due course. During the assessment, the assessee explained

the contents of the noting on such diary and stated that the left side of the

said diary has noted for bank transactions and the said bank transactions

are recorded in the books of the assessee and the related entities. The

assessee explained that the entries recorded on page no. 1 to 38 are the

payment for renovation of the factory premises and office premises. There

are financial transactions which were of the same amount and mentioned on the different pages of the said diary i.e. the said entries were repetitive

in nature. It was also explained that there were also certain financial

transactions which were paid from the bank account of Rashi Agro

Industries Pvt. Ltd. and its related entities. The assessee explained that

aggregate of debit column of Rs. 1,80,54,526/- is not the total of money

received for the business activity. Similarly, it was explained that the noting

on the right hand side of the diary from pages 40 to 81 are the cash

payments for business expenses and there are also noting for bank

transactions and the said bank transactions are recorded in the books of

Rashi Agro Industries Pvt. Ltd and the related entities. The assessee

explained that there are also noting for repayment of advances received

and cancellation of the work order which were repaid as the processing

work could not be done for various reasons, as products was of sub-

standard, all raw materials ingredients were not reaching in time. The

assessee in without prejudice submissions prayed for applying the peak

theory, and stated that NP ratio for the year under consideration was

13.78% and on applying the same net profit ratio, the net profit will come

to Rs. 24,88,645/-. However, if the peak theory is applied, the peak comes

to Rs. 32,63,196/- which is far more than the hypothetical net profit

calculated at Rs. 24,88,645/-.The ld AR of the assessee submits that in

case where there is entry of cash receipt and the cash expenditure, in such

case only the income component is to be taxed as unexplained income and

not the entire transaction. Thus, a reasonable percentage of total alleged receipt would be sufficient to avoid the revenue leakage. To support his

submissions, the ld AR of the assessee relied on the decision of Gujarat

High Court in CIT Vs Samir Synthetic Mills (2010) 326 ITR 410 (Guj) CIT

Vs President Industries (2002) 258 ITR 654 (Guj) and decision of Jaipur

Tribunal in SMS-AAMW Toll ways (P.) Ltd.Vs DCIT (2022) 145 taxmann.com

143 (Jaipur-Trib).

8.

On the other hand, the ld CIT-DR for the revenue supported the order of

lower authorities. The ld SR for the revenue submits that in the search

action a red diary was seized as Annexure-A 4, which contained the details

of cash received and cash paid, such writing is in hand-written on the left

hand and right hand side of the diary respectively. During the assessment,

statement of Manager of the assessee was recorded who accepted that

such entry is not recorded in the books of the assessee. During

assessment the assessee failed to substantiate the entry recorded in the

diary. The AO issued detailed show cause notice and after allowing full

opportunity made addition of unexplained expenditure of Rs. 1,76,84,320/-

. The AO reasonably made addition of Rs. 3,70,206/- as unexplained

income, out of total receipt of Rs. 1,80,54,526/-. The principal of peak

theory in not applicable in the present case as has been categorically held

by the AO.

9.

We have considered the rival submissions of both the parties and have

gone through the orders of lower authorities carefully. We have also

deliberated on various case laws relied by the ld AR of the assessee. The findings of the AO which has been upheld by ld CIT(A) are recorded by us

in the preceding paras of this order. We find that the AO made addition on

the basis of entries recorded in the seized material. The AO made addition

of entire expenditure recorded in the diary, despite the facts there is

receipt of cash of almost of similar amount. Thus, there is entry of

unrecorded cash receipt and the unrecorded expenditure. The plea of

taxing peak of the amount was not accepted by AO by taking a view the

transaction is not explained properly in true terms that is recipient of cash

and expenditure has not been disclosed. We find that in sum and

substance the AO taxed the entire unrecorded receipt by disallowing the

entire expenditure minus

10.

We are conscious of the facts that when there is receipt (business has both

unrecorded receipts undisclosed sales or turnover and unrecorded

expenditures), only the net profit element embedded in those receipts can

be taxed, rather than taxing the entire gross receipt amount. Taxing the

"Real Income" under the income tax proceedings is the acceptable legal

principal. In other words, the Income Tax authorities is legally authorized

to tax only your actual or "real income" and not the gross receipts. The

gross receipt does not equate to taxable income because a business

cannot generate revenue without incurring corresponding operational costs

(e.g., manufacturing, raw materials, or labour).

11.

We find that Hon’ble Gujarat High Court in CIT Vs President Industries

(supra) held that when during survey it was found that assessee had not disclosed certain sales in books of account, the Tribunal was justified in

holding that unless there was a finding that investment by way of incurring

cost in acquiring goods which had been sold, had been made by assessee

and that had also not been disclosed, only net profits embedded in sales,

and not wholesale proceeds itself, would be treated as undisclosed income

of assessee. Further, Hon’ble High Court in CIT Vs Samir Synthetics Mill

(supra) held that when as a result of search by the Excise Department in

the business premises of the assessee, various discrepancies were noted in

the production of the assessee. The assessee could not even be able to

reconcile the production, sales and the closing stock although the specific

opportunity was provided by the AO. Accordingly, the addition to the

assessees income was made on account of suppression of sale

considerationbut only to the extent of profit.

12.

Now again adverting to the facts of the case in hand. The assessee has

declared NP at the rate of 13.78%, which is sufficiently good profit. Thus,

taxing the entire receipt is not justified, when there is entry of almost

similar expenditure. Therefore, applying the ratio of decisions referred

above, and further in order to avoid the revenue leakage, in view taxing

the cash receipt @ 14% would be sufficient to meet the end of justice.

Therefore, the AO is directed to restrict the addition @ 14% of the

unexplained/ unrecorded receipts only. That is @ 14% of Rs.

1,80,54,526/- and to delete the entire disallowances of unexplained expenditure. In the result, the grounds of appeal raised by the assessee

are partly allowed.

13.

In the result, the appeal of the assessee for AY 2015-16 is partly allowed.

ITA No.4034, 4035 & 4036/Mum/2025 (AY 2016-17 to 2018-19)

14.

We find that the in all these appeals the assessee has raised similar

grounds of appeal as raised in AY 2015-16, which we have partly allowed.

Thus, following the principal of consistency, the appeals for all three years

are partly allowed with similar directions. To be more specific the AO is

directed to tax @ 14% of Rs. 1,56,94,036/- in AY 2016-17. Addition @

14% of Rs. 19,00,000/- in AY 2018-19. As there is no cash received in AY

2017-18, hence, no addition will survive in this assessment year.

15.

In result, the appeal in ITA No.(s) 4033, 4034 & 4036/Mum/2025 are

partly allowed and appeal in ITA No. 4035/Mum/2025 is allowed.

Order pronounced in open court on. 07.07.2026

Sd/- Sd/- MAKARAND VASANT MAHADEOKAR PAWAN SINGH ACCOUNTANT MEMBER JUDICIAL MEMBER

Mumbai, Dated: 07/07/2026 Aditi Pandare, PS Aditi Pandare, PS Aditi Pandare, PS Aditi Pandare, PS Copy of the order forwarded to: (1) The Assessee; (2) The Revenue; (3) The PCIT / CIT (Judicial); By Order (4) The DR, ITAT (5) Guard file

Assistant Registrar/Sr Private Secretary ITAT, Mumbai

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