PRAKASH KAPOORCHAND KOTHARI,MUMBAI vs. DEPUTY COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE 2(1), MUMBAI

4. The learned CIT(A) erred in not appreciating the fact that the income from other sources of Rs. 1,40,00,000/- has been offered for tax in the return of income filed u/s. 139(1) as well as u/s.153A of the Act for the A.Y. 2018-19 and on the facts of the case does not tantamount to undisclosed income and thus the provisions of Section 115BBE of the Act are not applicable.”

2.1. Assessee has also raised additional grounds challenging legal issues vide application dated 21.09.2024 which are reproduced as under:

Additional Grounds:

“1.0 On the facts and in circumstances of the case, the Ld. AO erred in making the additions u/s 69A in the year under consideration as unexplained jewellery in the assessment order which is confirmed by the L.d. CIT(A). 2.0 On the facts and in circumstances of the case, the order passed by Ld. CIT(A) confirming the additions made in the assessment order passed by Ld. AO is bad-in-law. 3.0 That on the facts and in the circumstances of the case, the approval granted u/s 153D by Ld. Addl. CIT is bad in law and mechanical in nature.”

3.1. Accordingly, a warrant u/s. 132 of the Act was issued by PDIT(Investigation), Panaji and was executed upon the assessee at the business premises belonging to entity M/s. Swapna Developers, T-15, Osia Mall, 3rd floor SGPDA Market Complex, Margoa, Goa on 10.04.2018 and gold weighing 4,525.92 grams valued at Rs. 1,32,79,048.80 was found and seized. This gold was found from a almirah in the office of M/s. Swapna Developers at the above address in the presence of the assessee who happens to be the managing partner in the said firm and the same was valued at Rs. 1,32,79,048.80 by Shri Vivek Jain, a government approved valuer, excluding making charges of the seized ornaments.

3.2. Assessee is found to have filed his regular returns of income from his Mumbai address, although his business was conducted in Goa. Accordingly, the case was centralised to the undersigned vide Centralisation order No. CCIT (Central)-1/Centralisation/2018-19 dated 27.03.2019.

3.3. Assessee filed his return u/s. 139 on 05.10.2018 reporting total income at Rs. 2,86,97,720/-. Notice u/s. 153A was issued on 05.02.2020 and duly served upon the assessee Thereafter, assessee filed his return in response to the said notice on 03.03.2020, reporting Rs. 2,86,64,850/-.

4.1. In the course of assessment, ld. Assessing Officer took note of statement recorded on oath u/s.132(4) on 10.04.2018 of the assessee. In his answer to question No.15 and 16, as reproduced in the impugned order at para-6, assessee clarified about carrying out his real estate business through partnership firm and proprietary concern as already already stated above. Assessee also clarified about the business entity P.K. Jewellers Pvt. Ltd., which is managed and run by his son, Shri Rahul Prakash Kothari which runs its business from premises outside Goa. In answer to question no.21, as reproduced in para-3, assessee confirmed that jewellery found during the course of search is his personal asset which were purchased by him in cash, from income earned during the year under consideration, i.e., from 01.04.2017 onwards. In answer to question no.26, he explained the source of investment in gold jewellery to be brokerage and commission income earned during the year, Assessment Year 2018-19.

4.2. After considering the statement of the assessee recorded during the course of search and both the returns filed by the assessee, i.e., u/s. 139(1) as well as pursuant to notice u/s.153A, ld. Assessing Officer observed that unaccounted jewellery weighing 4525.92 grams valued at Rs.1,32,79,048.80 belongs to assessee as personal asset and represents unaccounted/undisclosed investment at the time of search. He also noted in para – 8 that income offered amounting to Rs.1.40 crores is more than the value of jewellery seized on which assessee has paid the required tax along with interest on or before the specified date. He took note of the fact that assessee has furnished the income-tax return for the specified previous year, i.e., Assessment Year 2018-19 declaring the undisclosed income on or before the specified date. Ld. Assessing Officer also observed that assessee is required to prove with evidence from whom the cash was received towards commission and brokerage income. According to him, since no books of accounts were maintained, merely stating income is generated out of commission and brokerage do not suffice the fact and therefore cannot fall under the head “income from other sources”.

4.3. Another show cause notice was issued which was replied by the assessee, contents of the which are reproduced in the impugned assessment order. Assessee reiterated the above stated facts and further submitted that income of Rs.1.40 crores was generated out of liaisoning and facilitating real estate transactions which is casual and non recurring activity. It was further, asserted that on the date of search action, return for the year under consideration, i.e., Assessment Year 2018-19 was due by 31.10.2018, as the financial year ending on 31.03.2018 had just ended before the search action, i.e., 10.04.2018.

4.4. After considering the submissions made by the assessee, ld. Assessing Officer made following observation to conclude that income shown from commission and brokerage is not an income to be excluded from the head “business and profession” and so cannot be included in “income from other sources”- i. Activity undertaken by the assessee is in the nature of adventure and falls within the purview of Section 28 liable to audit. ii. For income earned out of casual and non recurring activity received in cash, no party would undertake transactions in cash of such volume. iii. No evidence are placed on record to substantiate earning of income from brokerage and commission. iv. Assessee has controverted the provisions of Section 44AA and Section 44AB regarding maintenance of books of accounts and audit thereof. v. Assessee’s regular business activity is that of real estate development and the ancillary income also revolves around his own business activity and therefore income from commission and brokerage cannot be excluded from the head “business and profession” so as to put it under the head “income from other sources”.

4.5. Based on these observations, ld. Assessing Officer resorted to provisions of Section 69A, since according to him, assessee has shown that the source of purchase of gold jewellery amount is out of cash receipts from brokerage and commission income. According to him, since assessee is found to be the owner of money/jewellery not recorded in the books of accounts and nature and source of which is not identifiable, it was added as deemed income u/s.69A. For this, ld. Assessing Officer relied upon the decision of Hon'ble Supreme Court in the case of Sumati Dayal Vs. CIT(A) [1995] 214 ITR 801 (SC).

4.6. In the conclusion, ld. Assessing Officer noted in the para as reproduced below: “……assessee purchased jewellery amounting to Rs. 1,40,00,000/- and failed to explain satisfactorily the source of this cash receipts. Accordingly, this purchase of jewellery amounting to Rs. 1,40,00,000/- so credited is deemed to be the income of the assessee for A.Y. 2018-19 under Section 69A of the Act. The assessee has offered the income as income from other sources offering to tax at the maximum marginal rate of 30%. But since the income offered falls as per the provisions of section 68 and 69A, the total Income assessed is taxed u/s 115 BBE of the Act at the rate of 60%.”

6.1. On this, ld. Counsel for the assessee asserted that what is found in the course of search is in the year Assessment Year 2019-20, since the date of search is 10.04.2018. Ld. Assessing Officer has proceeded to make the addition by holding that purchase of jewelry amounting to Rs.1.40 crores is deemed to be income u/s.69A relevant to Assessment Year 2018-19 which is not in accordance with the provisions of law and cannot be sustained. Further, Ld. Counsel submitted that the nature and source of making investment in the jewelry has been adequately explained which has been offered to tax in the return filed for Assessment Year 2018-19 which was due by 31.10.2018. Assessee has adequately complied with the statements made by him during the course of search by reporting the income in both, his regular return as well as return in response to notice u/s.153A. Furthermore, ld. Counsel pointed out to observations made by ld. Assessing Officer, in para 10(E) at page 15 of the impugned order, whereby he has categorically noted that regular business activity of the assessee is none other than real estate development and the ancillary income earned also, revolves around his own business activity and cannot be culminated out of business or professional income. Ld. Assessing Officer thus, concluded that income from commission and brokerage is not an income to be excluded from the head “business and profession” and so cannot be included in the “income from other sources”.

6.2. According to the ld. Counsel, addition made by applying provisions of section 69A is not sustainable in the year under consideration, i.e. Assessment Year 2018-19, since the impugned gold ornaments were found and seized in the course of search conducted on 10.04.2018 for which the relevant Assessment Year is 2019-20.

6.3. Also, case of ld. Assessing Officer of re-characterizing the income already offered by the assessee in his both, original return filed u/s.139(1) and in the return in response to notice u/s.153A by applying the provisions of section 68 and 69A, to bring it under the provisions of section 115BBE for subjecting it to higher rate of tax at 60% is not tenable. The basis adopted by ld. Assessing Officer is his surmises and conjectures and by applying the judgement of Hon'ble Supreme Court in the case of Sumati Dayal (Supra). Thus, according to him, addition both, on account of applying provisions of section 69A to hold that assessee is found to be the owner of the money/jewelry in Assessment Year 2018-19 as well as re-characterizing the income already offered under the head “income from other sources” and subjecting it to provisions of section 68 and 69A are un-sustainable. Moreover, it is in stark contradiction to the observation of the ld. Assessing Officer made in para – 10(E) at page 15 whereby, the income already offered by the assessee in his return as committed in his statement recorded during the course of search to fall under the heard “profits and gains of business professions”.

7.1. From the perusal of the statement recorded of the assessee u/s.132(4) in the course of the search, assessee did explain the necessary details relating to the gold ornaments found and seized from the premises. It was in the course of search itself that assessee explained he had earned income in the form of brokerage and commission during the year under consideration, i.e., Assessment Year 2018-19, all of which was received in cash and was invested by him in purchasing gold ornaments, forming part of his personal asset. In the same statements, he committed to report the said income in the return which is to be filed in due course of time u/s.139(1) due by 31.10.2018, which he complied with. Assessee reported Rs.1.40 Crores as income from brokerage and commission for liaisoning and facilitating real estate transactions under the head “income from other sources” and paid applicable taxes along with interest. Against this, the value of gold ornaments found and seized in the course of search was Rs.1,32,79,048.80. This income was also reported in his return filed u/s.153A.

7.2. We find that observations made by ld. Assessing Officer as noted above, treats the activity undertaken by the assessee in the nature of adventure and falls within the purview of section 28. He has also observed that earning of this income is ancillary to the regular business activity of the assessee in real estate development and therefore it cannot be excluded from the head “business and profession” so as to report in the head “income from other sources”. It is merely on the preponderance of human probability and in absence of adequate documentary evidences, by applying the decision of Hon'ble Supreme Court in the case of Sumati Dayal (supra), ld. Assessing Officer has treated the income so offered, as income u/s.69A, applied for purchase of jewelry by holding that assessee failed to explain satisfactorily the source of cash receipts. Ld. Assessing Officer has also observed in para 15, that this income has been unearthed and found only when the search u/s.132 took place at the premise of assesse. Thus, there exists a dichotomy in the approach adopted by the ld. Assessing Officer, while applying provisions of section 69A on the gold ornaments found and seized during the course of search for which the relevant Assessment Year happens to be Assessment Year 2019-20, whereas assessee has already offered and reported the income of Rs.1.40 crores in the year under consideration explaining its nature and source which has ultimately being invested in the form of gold ornaments and jewelry. In the year under consideration, ld. Assessing Officer has held the said income to form part of the income under the head “profits and gains of business and profession” to which provisions of audit as required u/s.44AB applies.