SRI LAKSHMI PRABHA JEWELLERS,TIRUNELVELI vs. DFCIT, CC-3(3), CHENNAI

The sole issue raised by the assessee in this appeal is relates to the addition made by the AO by way of estimated Gross profit (income) derived from unaccounted transactions with M/s.Mohanlal Jewellers Pvt. Ltd. (MJPL).

The brief facts of the case emanating from the records are that the assessee is a firm engaged in the business of trading and retail sale of gold jewellery and ornaments under the trade name M/s.Sri Lakshmi Prabha Jewellers, Tenkasi. For the Assessment Year 2021-22, the assessee filed the return of income on 15.03.2022 declaring a total income of Rs.18,460/-, which was processed u/s. 143(1) of the Act. A search u/s. 132 of the Act was conducted on 10.11.2020 in the case of M/s.Mohanlal Jewellers Pvt. Ltd. (MJPL) and other related persons. During the course of the search, certain electronic records including desktop data and pen drives containing information from the "J- Pack" accounting software were seized. Statements of certain persons including Shri Rajendra Kothari were recorded u/s.132(4) of the Act, wherein it was stated that the "J-Pack" software contained details of transactions relating to purchase and sale of gold outside the regular books of account. Further, Shri Suresh Khatri, in response to Q No. 27 of his statement recorded u/s 131 of the Act dated 04.12.2020, concurred with the statement given by Shri Kothari.

On examination of the data retrieved from the J-Pack software, the AO noticed a ledger account in the name "LAXMIPRABHA TENKASI", which was allegedly linked to the assessee. It is seen that, in order to verify the above transactions, summons u/s 131(1A) of the Act was issued on 07.12.2020 and the assessee through partner of the firm (Shri Muttuswamy) attended on 22.12.2020, wherein he accepted the unaccounted transactions with M/s MJPL. The relevant excerpts from his statement, as extracted in the assessment order, are noted to be as follows: -

During the search action u/s. 132 of the IT Act, 1961 at M/s. Mohanlal Jewellers Pvt. Ltd., software "J Pack", in that ledger named "LAXMIPRABHA TEKASHI" is maintained for the years 2016-17 to 2020-21. On questioning

It is seen from the ledger "LAXMIPRABHA TEKASHI" that you had given gold (Gross: 202191.7 grams and Net: 191120.9 grams) and cash Rs. 5,59,65,188/- to Shri. Suresh Khatri also Gross of Gold about 204466.5 grams and net gold 193178.1 grams received back from Shri. Suresh Khatri. Please explain. Ans: Yes, I have given gold (Gross: 202191.7 grams and Net: 191120.9 grams) in the form of gold ornaments and receive back gold ornaments (204466.5 grams and net gold 193178.1 grams). Also, I had paid Rs.5,59,65,188/- to Shri. Suresh Khatri. These are business transactions i.e. Sales & Purchases. I have not received any bills from Shri.Suresh Khatri for receiving the gold ornaments for purchase and after selling the gold ornaments. I will offer tax for the unaccounted gold and cash transactions done with Shri. Suresh Khatri."

The ledger reflected transactions of purchase of gold jewellery/ornaments. Based on the entries in the said ledger, the AO concluded that the assessee had transacted unaccounted purchases of gold weighing 11,272 grams from MJPL during the financial year relevant to A.Y.2021-22. The seized tally books of M/s.MJPL had shown receipt of gold of 1,674.31 grams, which also had bank payments made. The AO thereafter estimated the average purchase rate at Rs.4,463.05 per gram and treated the purchases amounting to Rs.5,03,07,500/- as unaccounted transactions. Applying a gross profit rate of 6.31%, the AO determined unaccounted income of Rs.31,74,847/-. Accordingly, the assessment was completed u/s. 144 of the Act on 27.03.2023, determining the assessed income at Rs.31,93,307/- as against the returned income of Rs.18,460/-.

Aggrieved by the addition of Rs.31,74,847/- towards alleged unaccounted purchases, the assessee preferred an appeal before the Id.CIT(A). The assessee contended before the Id.CIT(A) that the addition was made solely on the basis of entries in the J-Pack software and third-party statements, without corroborative evidence, without cross-examination of the persons whose statements were relied upon, and without establishing any nexus between the assessee and the alleged transactions. The Id.CIT(A), however, held that the J-Pack ledger contained entries matching with transactions recorded in the books of MJPL and therefore concluded that the ledger also reflected unaccounted purchases made by the assessee, thereby confirming the addition of Rs.31,74,847/- made by the AO. Consequently, the appeal of the appellant was dismissed by the Id.CIT(A) by passing an order dated 17.12.2025. 7. Aggrieved by the order of the Id.CIT(A) the assessee is in appeal before us with the following grounds of appeal:

The Id.AR for the assessee submitted that the impugned addition of Rs.31,74,847/- has been made by the AO solely on the basis of certain entries allegedly found in the J-Pack software seized during the course of the search conducted in the case of M/s.MJPL. The AO proceeded on the assumption that a ledger appearing in the name "LAXMIPRABHA TENKASI" in the said software pertained to the assessee and, on that basis, inferred that the entries represented unaccounted purchases of gold allegedly made by the assessee from MJPL. Relying on this presumption, the AO treated the entries appearing in the said ledger as undisclosed transactions of the assessee and presumed unaccounted purchases aggregating to Rs.5,03,07,500/-. Thereafter, by :-6-:

The Id.AR contended that the AO has placed substantial reliance on the statement of Shri Rajendra Kothari, who was working as an accountant in the case of M/s.MJPL. Such reliance is wholly misplaced and legally untenable. At the outset, Shri Rajendra Kothari is neither connected with nor associated with the assessee in any manner. His statement therefore constitutes nothing more than third-party evidence, which cannot be relied upon to fasten liability on the assessee in the absence of independent and cogent corroborative material establishing a nexus between the assessee and the alleged transactions.

The Id.AR further stated that in the present case, the AO has proceeded on a mere presumption that the ledger appearing in the name "LAXMIPRABHA TENKASI" pertains to the assessee and represents alleged transactions with the assessee. However, no material whatsoever has been brought on record to establish any such nexus between the said ledger and the assessee. There is no document or material evidencing that the ledger actually belongs to or relates to the assessee. Further, no confirmation has been obtained from M/s.MJPL to demonstrate that any transaction was entered into with the assessee. It is also pertinent to note that the AO has failed to produce any supporting evidence such as invoices, delivery challans, transport records, payment details, or any other documentary material that could substantiate the alleged transactions. In the absence of any such corroborative evidence, the mere appearance of a name in a ledger maintained by a third party cannot, by itself, be treated as proof of a transaction involving the assessee. Such an inference is based purely on conjecture and cannot form the basis for sustaining an addition in law.

The Id.AR submitted that it is a settled legal principle that statements recorded from third parties or documents seized from third-party premises cannot, by themselves, form the sole basis for making additions in the hands of another person, unless such material is corroborated by independent evidence linking the assessee to the alleged transaction. In this regard, reliance is placed on the decision of the Chennai Tribunal in the case of Kasthoori Raja Dhanush, wherein the Tribunal examined additions made based on loose sheets seized from the premises of a third party. The Tribunal held that mere notings found in documents seized from a third party cannot be used to fasten tax liability on another person in the absence of corroborative evidence demonstrating that the transactions recorded therein actually materialised. The Tribunal in the aforesaid decision further held that a loose sheet or document seized from the premises of a third party, in the absence of any corroborative material demonstrating that the transactions recorded therein had actually materialised, cannot be regarded as reliable evidence for the purpose of making additions in the hands of another person. The Tribunal further emphasised that the presumption available u/s.292C of the Act is confined only to the person from whose possession the material is seized and such statutory presumption cannot automatically be extended to any other person whose name may merely appear in the document. Consequently, it was held that entries found in loose sheets or documents seized from third-party premises cannot, by themselves, form the basis for making additions unless the Revenue brings on record independent and cogent evidence establishing that the transactions recorded therein actually took place and are attributable to the assessee. The Tribunal further observed that where the AO seeks to rely upon material seized from a third party, it is incumbent upon the Revenue to bring on record cogent evidence demonstrating actual flow of money and a clear nexus between the assessee and the alleged entries. In the absence of such corroboration, the seized material cannot be relied upon for the purpose of making additions.

The Tribunal further reiterated the settled legal position that the burden of establishing that income has in fact accrued to or arisen in the hands of the assessee lies squarely upon the Revenue. In the absence of such proof, no addition can be sustained merely on the basis of suspicion, conjecture or inference. The Tribunal also observed that although the strict rules of evidence may not apply to income-tax proceedings, the AO is nevertheless required to base the assessment on credible and cogent material. An assessment cannot be made on mere conjectures or pure guesswork without any supporting evidence demonstrating that the alleged transactions have actually resulted in taxable income in the hands of the assessee.

The Id.AR further submitted that the issue relating to the nature of entries recorded in the J-Pack software and the statement of Shri Rajendra Kothari has been specifically examined by the Tribunal in the case of M/s.MJPL. The Tribunal in the said decision has observed that Shri Rajendra Kothari was merely the accountant responsible for maintaining the J-Pack software and that his statement was limited to explaining the manner in which entries were recorded in the said software on the basis of daily operational reports prepared by the employees of the group. The Tribunal further noted that his statement related only to the procedural aspect of recording entries in the system, including the manner in which entries such as "Ghatjama" and "Ghatnamma" were posted in the software based on the information contained in the daily reports. Thus, the statement merely explains the mechanism of recording entries in the J-Pack software and does not, by itself, establish the nature, authenticity, or taxability of the underlying transactions recorded therein.

The Id.AR further contended that the statement of Shri Rajendra Kothari does not make any reference whatsoever to the assessee and at best, Shri Rajendra Kothari has merely explained the manner in which entries were recorded in the J-Pack software based on the information contained in the daily operational reports. He has nowhere stated, either directly or indirectly, that the :-9-:

Further, the Id.AR argued that the assessee was never afforded an opportunity to cross-examine Shri Rajendra Kothari, despite the AO placing reliance on his statement while making the impugned addition. It is a well- settled principle of law that any statement proposed to be used against an assessee must be subjected to cross-examination so as to satisfy the requirements of the principles of natural justice. In the absence of such an opportunity, the statement loses its evidentiary value and cannot be relied upon for making an addition. Accordingly, the reliance placed by the AO on the untested and uncorroborated statement of Shri Rajendra Kothari is legally unsustainable.

In support of the aforesaid submissions, the Id.AR placed reliance on the decision of the Tribunal in the case of M/s.MJPL [finding in page 17 of MJPL order] wherein the Hon'ble Tribunal has examined in detail the nature of the entries recorded in the J-Pack software as well as the evidentiary value of the statement of Shri Rajendra Kothari. The observations of the Tribunal in the said decision clearly demonstrate that the statement of Shri Rajendra Kothari merely explains the mechanism of recording entries in the software and does not, by itself, establish the existence of any unaccounted transactions.

The Id.AR further argued that the AO has sought to place reliance upon the statement recorded from the assessee during the course of assessment proceedings in order to draw an adverse inference against the assessee and to support the impugned addition. The Id.AR submitted that such reliance is wholly

The Id.AR submitted that a statement recorded during assessment or investigation proceedings cannot, by itself, constitute conclusive evidence of undisclosed income unless it is supported by independent corroborative material. The law is well settled that an admission, though relevant, cannot be treated as decisive unless it is substantiated by credible evidence demonstrating that the alleged transaction has in fact taken place. In the absence of such supporting material, a statement by itself cannot form the sole basis for making an addition. In the present case, the AO has relied upon certain portions of the statement recorded from the assessee while ignoring the surrounding circumstances and the explanations subsequently furnished by the assessee. The alleged admission has been interpreted in isolation and without reference to any documentary evidence that could establish the existence of the alleged unaccounted transactions. Significantly, no supporting material such as purchase invoices, delivery records, transport documents, payment records, or confirmation from M/s.MJPL has been brought on record to substantiate the inference drawn by the AO. The addition is therefore based entirely on an interpretation of the statement and entries appearing in the J- Pack software, which themselves are unverified operational entries maintained by a third party.

The Id.AR submitted that the Hon'ble Madras High Court in the case of Commissioner of Income Tax v. S.Jayalakshmi Ammal [390 ITR 189] has categorically held that a statement recorded u/s.132(4) of the Act, in the absence of corroborative documentary evidence, cannot by itself form the basis for making additions. The Hon'ble Court observed that if additions are permitted to be made solely on the basis of statements without any supporting material, it would lead to arbitrary exercise of power by the authorities and could result in serious prejudice to the assessee. The Hon'ble Court further emphasized that :-11-:

Applying the above legal principles to the present case, the Id.AR submitted that the statement relied upon by the AO does not establish the existence of any unaccounted transactions involving the assessee. The statement does not contain any specific admission that the assessee had entered into undisclosed purchases with M/s.MJPL nor does it quantify any alleged undisclosed income. Further the Id.AR contended that the Revenue has failed to produce any independent evidence demonstrating that the transactions recorded in the J-Pack software were actually carried out by the assessee. Therefore, in the absence of corroborative documentary evidence linking the assessee to the alleged transactions, the statement relied upon by the AO and cannot form the basis for sustaining the impugned addition. Accordingly, the reliance placed on the statement by the AO is legally unsustainable.

Further, the Id.AR submitted hat the approach adopted by the AO effectively casts upon the assessee the burden of proving that the entries appearing in the J-Pack software do not relate to him. Such an approach is fundamentally contrary to the settled principles governing burden of proof in taxation proceedings. It is a well-established legal principle that the burden of proving that income has accrued or arisen to the assessee lies squarely upon the Revenue. The Revenue must first bring on record credible and cogent evidence demonstrating that a particular transaction has actually taken place and that the same has resulted in taxable income in the hands of the assessee. Only after the Revenue discharges this primary burden does the onus shift to the assessee to explain the circumstances relating to such material. Conversely, an assessee cannot be compelled to establish a negative proposition, namely that a particular transaction did not take place or that certain

In the present case, the Id. AR stated that the AO has merely proceeded on the assumption that the ledger appearing in the name "LAXMIPRABHA TENKASI" in the J-Pack software pertains to the assessee. However, the Revenue has failed to bring on record any material establishing such linkage. In particular, the AO has not produced any evidence to demonstrate that the assessee had in fact entered into transactions with M/s.MJPL. No confirmation has been obtained from the said entity, nor have any supporting documents such as invoices, delivery records, transport documents, payment evidence, or bank entries been produced to substantiate the alleged transactions. Further, the Revenue has not established the flow of money, movement of goods, or any other tangible evidence indicating that a purchase transaction actually took place between the assessee and M/s.MJPL. In the absence of such foundational evidence, the presumption drawn by the AO that the ledger relates to the assessee remains purely speculative.

In these circumstances, calling upon the assessee to prove that the alleged transactions did not occur effectively requires the assessee to prove a negative fact, which is impermissible in law. The law does not contemplate placing such an impossible burden upon the assessee. Unless the Revenue first establishes, through reliable evidence, that the alleged transactions actually took place and that the same are attributable to the assessee, no adverse inference can be drawn against the assessee.

Accordingly, the addition made by the AO, which is founded solely on presumptions arising from unverified entries in a third-party software, and which :-13-:

The Id.AR also stated that the entries recorded in the J-Pack software primarily reflect the movement of goods and operational activities, such as dispatch of jewellery to customers on approval basis, return of unapproved goods, job-work related metal movements, and transfers of inventory between different entities of the group. The Id.AR submitted that such entries merely capture the physical movement of inventory and do not, by themselves, constitute financial transactions.

It is submitted that the prevalent business practice in the jewellery industry is that the wholesalers often send jewellery to retailers on an approval basis. Under this arrangement, the goods are supplied to retailers for display and sale to end customers, while the ownership of the goods continues to remain with the supplier until the retailer confirms the purchase. The Id.AR submitted that only upon retailer's acceptance the transaction is treated as a sale and recorded in the books of account. Consequently, the movement of goods under this approval system cannot be treated as a purchase or sale transaction. Therefore, it is submitted that even if an entry relating to such movement appears in the J-Pack software, it merely represents inventory movement for operational tracking purposes and does not, by itself, establish the existence of a financial transaction such as a purchase or sale. Thus, the entries recorded in the J-Pack software primarily reflect the movement of goods and operational activities, such as dispatch of jewellery to customers on approval basis, return of unapproved goods, job-work related metal movements, and transfers of inventory between different entities of the group

It is therefore submitted that the entries in J-Pack largely represent operational movements such as the issue and receipt of gold bullion, job-work related metal movements, dispatch of jewellery to customers on approval basis, return of unapproved goods, and other stock transfers. Such entries are merely indicative of the physical movement of inventory and may not necessarily have any financial implications. Consequently, these operational entries are not required to be recorded in the financial books of account maintained in Tally. Therefore, the very premise adopted by the Revenue that entries appearing in J-Pack automatically represent undisclosed or unaccounted transactions is fundamentally misconceived and contrary to the factual nature and purpose of the software.

Further it is submitted that the software did not maintain entity-specific financial ledgers, nor did it function as a system for recording purchases, sales, receipts or payments. The Id.AR contended that the actual financial transactions of the entities were maintained separately in the regular accounting software, namely Tally, which constituted the official books of account.

The Id.AR also submitted that the AO has proceeded on the assumption that the ledger appearing in the name "LAXMIPRABHA TENKASI" pertains to the assessee and represents alleged transactions involving the assessee. However, such an assumption is wholly unsupported by any material evidence. No document has been brought on record to establish that the said name in the ledger actually represents the assessee. Further, the AO has failed to demonstrate that any transaction was in fact carried out between the assessee and M/s.MJPL. No confirmation from M/s.MJPL has been obtained to substantiate the alleged transactions, nor has any supporting documentary evidence been produced. In these circumstances, the inference drawn by the :-15-:

The Id.AR further submitted that it is a well-settled principle of law that suspicion, however strong, cannot take the place of proof. In the present case, the impugned addition has been made solely on the basis of unverified electronic entries appearing in the J-Pack software, without any supporting material to substantiate the alleged transactions. The underlying source documents, on the basis of which such entries were purportedly recorded, are not available, and no independent enquiry or investigation has been carried out to verify the authenticity of the entries. In the absence of any corroborative evidence linking the assessee to the alleged transactions, the addition rests purely on presumption and conjecture. Accordingly, such an addition, lacking evidentiary support, cannot be sustained in law. In support of the aforesaid submissions, the Id.AR placed reliance on the decision of the Chennai Tribunal in the case of Kasthoori Raja Dhanush v. ACIT, rendered in ITA Nos. 3188 to 3192/Chny/2024. 31. In light of the above facts of the case and the submissions, the Id.AR submitted that the impugned addition of Rs.31,74,847/- made by the AO and sustained by the Id.CIT(A) is wholly unsustainable both on facts and in law. It is therefore prayed to delete the addition of Rs.31,74,847/- in its entirety.

Alternatively, the ld.AR prayed for restricting the additions to 2% of the alleged unaccounted transactions by relying on the decision of this Tribunal in cases of M/s.Gold AIK (ITA Nos. 1046 to 1051/Chny/2024) dated 06.11.2024 & DCIT Vs Sitaram Jewellers (ITA Nos.913 & 915/Chny/2025) rendered on similar facts and circumstances involving the ledgers extracted from Jpack software of MJPL, had estimated the profit at 2%.

Per contra, the Id.DR strongly supported the orders of the authorities. Further, the additions are made not only based on the statement recorded of Shri Rajendra Kothari of M/s.MJPL as asserted by the Id.AR but based on the statement recorded u/s.131 of the Act of Mr.Muthuswamy (Partner in Sri Lakshmi Prabha Jewellers, Tenkasi), who has accepted the unaccounted transactions with M/s.MJPL, as discussed in para 7.1 of the order of the AO. In view of the above, the Id.DR prayed for confirming the additions and dismiss the appeal of the assessee.

We have heard the rival submissions, perused the orders of the lower authorities and considered the material placed on record, including the judicial precedents relied upon by the Id.AR. The solitary issue arising for our consideration is whether the addition of estimated income @ 6.31% of GP to the tune of Rs.31,74,847/- made by the AO towards alleged unaccounted purchases with MJPL, based on entries found in the J-Pack software seized from a third party, is sustainable in law.

We find that the reliance placed by the Ld.AR on the decision of Kasthoori Raja Dhanush (supra) is found to be misplaced and factually distinguishable. The said decision was rendered in the context of validity of reopening of assessment u/s.153C of the Act and we find that the material facts involved in that decision was not factually distinguishable in as much as there was no such admission made by the assessee, as done in the present case.

In the present case, the AO has proceeded to assess the income based on the ledger appearing in the name "LAXMIPRABHA TENKASI" pertains to the assessee. Which was further supported by the statement recorded by the partner Mr.Muthuswamy(supra). However, the assessee failed to appear and submit any further details during the assessment proceedings till the conclusion of the assessment. Hence, the Assessing Officer had made additions by making an estimation of income @ 6.31% of GP on the alleged unaccounted

We find that the ld.CIT(A) on perusal of the statements recorded, ledger extracts of the assessee found in the JPack software and various case laws relied on by the assessee, found that part of the transactions of the assessee are clearly matching with the transactions shown in the seized JPack ledger. Therefore, the ld.CIT(A) decided that it is clearly proved that the said ledger pertains to the assessee in its entirety. Therefore, the ld.CIT(A) did not accept the option of the assessee to pick and choose the transactions as pertaining to it and denying the rest. Further, the ld.CIT(A) stated that when the GP rate offered on accounted sales has been accepted, then the additional income offered by adopting the same accounted GP rate on the suppressed sales is a practical and realistic approach. Therefore, we find no infirmity in the conclusion drawn by the ld.CIT(A) in confirming the order of the Assessing Officer in estimating the income on the basis of alleged unaccounted transactions with MJPL held by the assessee during the impugned assessment year.

Coming to the issue regarding estimation of profits on the value of unaccounted transactions, the Ld. AR pleaded that the G.P rate for this year cannot be adopted to be the profit from these unaccounted sales, if the addition was to be sustained. He stated that the adoption of the relevant year’s G.P rate on the accounted sales would not represent the profit earned from the sales made by the assessee outside the books of account. In this regard, it was brought to our notice that, this Tribunal in cases of M/s.Gold AIK (ITA Nos. 1046 to 1051/Chny/2024) dated 06.11.2024 & DCIT Vs Sitaram Jewellers (ITA Nos.913 & 915/Chny/2025) rendered on similar facts and circumstances involving the ledgers extracted from Jpack software of MJPL, had estimated the profit at 2%. In M/s Gold AIK (supra), this Tribunal directed the AO to adopt the G.P @ 2% on the unaccounted sale as below;

To consider this plea, the Bench queried the Ld. AR the basis for adoption of G.P @ 2% as opposed to the G.P as per the assessee’s books. In reply, the Ld.AR stated that the G.P rate as per the books of accounts is the result of retail sale of gold jewels, which involves incurring several expenses to make the product fit for sale, such as, making charges, wastage charges etc. Furthermore, the retail sale of gold and gold jewels is a wide market, and the demand for the products sold is high with various players involved in said line of business. In such a scenario with high demand, the assessee would be free to sell the goods at healthy prices, which at the same time need to be competitive.

He further submitted that the stock sold during the year is not restricted to purchases made during this accounting year and would include the opening stock, consisting of purchases made during the earlier years. This is further evidenced by the lack of disturbance of the stock figures by the AO. However, in case of sales made outside the books of accounts, the same involves transacting in gold in the form of bullion, without any improvement being made

The reasoning behind the same was explained by the Ld. AR. He stated that the market for such sales outside the books was not comparable to the market for the sale of accounted stock. Also, as opposed to various expenses being incurred to make the accounted stock of gold / gold jewels fit for sale, such expenses are not incurred when it comes to sale of unaccounted stock. The profit on the sale of such unaccounted stock depends purely on how quickly the stock is moved on, which results in very thin profits. The sale outside the books of accounts is akin to sale in the wholesale market, as it does not involve any charges being incurred to make the gold saleable as an item of jewellery, but in the nature of bullion.

The Ld. AR then brought to the notice of the Bench the “Industry Research Report on Indian Gems Jewellery Sector” by Care Edge- Research, which is a comprehensive and in-depth study of the jewellery sector in India. According to this study, the profit that is earned by the wholesalers is in the range of 0.9% to 2.15%. The same has been arrived at after a detailed study of the gold sector, enquiry into the demand for gold and the purchase power/patterns of the people. He thus prayed that the G.P for the unaccounted sales be fixed at 2%.

We have considered the plea regarding estimation of profits on the value of unaccounted transactions, the Ld.AR’s contention is that the transactions that have took place outside the books of accounts involve the purchase and sale

In light of our above discussions, the appeal of the assessee is partly allowed.