DEPUTY COMMISSIONER OF INCOME TAX, CHENNAI vs. SARAVANA STORES TEX, CHENNAI

4. The Ld. CIT(A) erred in determining "Undisclosed Income" of the appellant on estimation basis when the entire seized material gathered during the extensive searches carried out by the Department was before him and there was no scope to resort to estimation.

5. The Ld. CIT(A) erred in estimating the "Undisclosed Income" of the appellant@ 70% of the total receipts recorded in the seized material without any basis.

6. The Ld. CIT(A) erred in confirming the hypothetical addition made by the Assessing Officer (AO) on account of opening balance recorded in the seized material commencing from 26.08.2014 without ascertaining the exact assessment year to which it pertained to in violation of the mandatory charging provisions under section 4 of the Act.

7. The Ld. CIT(A) erred in rejecting the grounds raised by the appellant, about the absence of any findings relating to application of Income generated from such unaccounted transactions.

8. The Ld. CIT(A) erred to adjudicate all the grounds raised by the appellant. 1.3 The grounds as raised by the revenue read as under: -

1. The order of the ld. Commissioner of IT (Appeals) is opposed to law and facts of the case.

2. The ld. CIT(A) erred in allowing relief to assessee to the extent of 30% of total cash receipts as expenses incurred and directed to considered the balance 70% of the cash receipts as income against the total addition of Rs.9,51,06,502/-

3. The ld.CIT(A) erred in allowing relief to the assessee which was not based on any substantial corroborative evidence merely on estimated basis.

5. The Ld. CIT(A) failed to appreciate that during the assessment proceedings, the assessee neither explained the nature of these expenses nor identified the parties to whom the payments were made. . 6. For these grounds and any other ground including amendment of grounds that may be raised during the course of the appeal proceedings, the order of ld. CIT(A) may be set aside on this ground and that of the Assessing Officer be restored.

As is evident, the impugned issues arise out of a search conducted by the department in the case of assessee group on 01-12-2021. 1.4 The Ld. AR advanced arguments and supported the case of the assessee with various case laws and furnished various documents containing workings / computations etc. The Ld. CIT-DR also advanced arguments and supported the findings rendered by Ld. AO and likewise, relied on various case laws. Having heard rival submissions and upon perusal of case records, our adjudication would be as under. 1.5 The assessee being resident firm is stated to be engaged in wholesale and retail trading of textiles, groceries, household articles etc. The assessee filed its regular return of income u/s 139(1) on 28-09-2015 declaring income of Rs.49.85 Crores. Assessment Proceedings 2.1 Pursuant to search action on the assessee u/s 132 on 01-12-2021, certain incriminating material / documents were found on the basis of which the impugned assessment for AY 2015-16 has been framed. On the basis of seized material, it was alleged that the assessee received unaccounted cash from various sources during the course of its business. Accordingly, notice u/s 148 was issued to the assessee on 28- 03-2023. The assessee admitted same income in response to the same.

Notices u/s 143(2) and 142(1) were issued in due course calling for requisite information / explanation from the assessee. The Managing Partner, Shri Sabapathy was examined during search wherein he, inter- alia, admitted that payment was received back from the vendors, cash was generated from scrap sales and rental income was received in cash. 2.2 During search, small diaries were found and seized vide Annexure ANN/SR/SSSLLP/B&D/S-1 to S-11 containing various entries of cash receipts (a sample has been extracted on Page-2 of the assessment order) which were digitized during the course of search. The diaries were kept with an employee Shri A. Julian in his office at Saravana Store Jewel Super LLP on Pursaiwalakam and the entries were stated to be made by Managing Director (MD). 2.3 Upon analysis of entries, it was found that the cash was sourced out of multiple sources viz. cash received back for bogus RTGS payments, unaccounted cash receipts from weighing machines / toy machines, receipts towards bogus labour bills and rental receipts etc. The search findings revealed that the payment made to certain vendors through RTGS would be received back in cash by Shri Siva Perumal and given to Shri Gurunathan. One Mr. Anil acted as an agent who would arrange for supply of products to the assessee group from various vendors whose names were found mentioned in the seized material. It was also found that he also arranged bogus bills for which cash would be returned back. The rental receipts were nothing but rent earned out of spaces let out for stalls at assessee’s Textile Showrooms. The same was received in cash and not accounted for in the regular books of accounts. All these facts were confronted to the Managing Partner of the assessee- firm during the course of assessment proceedings. The additions for this year are based on entries founds in Book No.11 containing entries for the period 26-08-2014 to 02-08-2017. 2.4 The assessee stated that as per this book, the total receipts worked out to be Rs.787.08 Lacs and out of the same, payments made from the receipts were to be deducted and only the net receipts were to be considered. The same was summarized by the assessee as under: - Particulars Receipts Payments Net Receipts Cash receipts against Rs.430.98 Lacs Rs.219.27 Lacs Rs.211.70 Lacs RTGS Payments Rental Receipts Rs.119.35 Lacs Nil Rs.119.35 Lacs Other Income Rs.33.83 Lacs Nil Rs.33.83 Lacs (weighing machines, toy machine etc.) Sub-Total (A) Rs.584.17 Lacs Rs.219.27 Lacs Rs.364.89 Lacs Receipts not to be Rs.100 Lacs Rs.66.06 Lacs Rs.33.93 Lacs treated as income Mama / Sabapathy Jamai Rs.102.90 Lacs Nil Rs.102.90 Lacs Sub-Total (B) Rs.202.90 Lacs Rs.66.06 Lacs Rs.136.83 Lacs Grand Total (A+B) Rs.787.08 Lacs Rs.285.34 Lacs Rs.501.73 Lacs It was stated by the assessee that the transactions with narrations ‘mama / sabapathy’ were mere internal rotation of funds which were not out of any income sources whereas the entries with narrations ‘Jamai’ were stated to be pertaining to associated concern M/s Saravana Stores Foods Pvt. Ltd. (SFPL) and therefore, these entries could not be considered to be the income of the assessee. The net receipts were thus quantified at Rs.364.89 Lacs. It was further stated that certain payments were made for business expenditure such as purchases from grey markets, expenditure on interior decoration during festive season, staff welfare expenses which were not accounted for in the regular books and these payments formed part of seized material. Such expenditure for this year was quantified at Rs.357.89 Lacs, the deduction of which was sought by the assessee by way of expenditure out of net receipts. 2.5 The Ld. AO noted that book No.11 had opening cash balance of Rs.266.88 Lacs which was not considered by the assessee in its working whereas this much cash was available with the assessee as on 26-08- 2014 which was to be treated as unaccounted receipts. The plea that internal rotation of amount as found noted against mama / sabapathy were to be rejected since the assessee did not furnish any corroborative evidences with regard to this claim. The allowance of business expenditure was also not be granted since the assessee did not furnish additional supporting evidences in that respect. It was not established that such payments were made towards earning of receipts as noted in the notebooks. The parties who received such payments were not identified by the assessee. Therefore, this plea was also rejected. In para 7.6 of the assessment order, it was noted by Ld. AO that the assessee did not explain the nature of utilization of payments having the narrations ‘mama / sabapathy’ and merely stated that this was internal rotation of funds. However, the outflow of such entries was higher than the inflow of funds and this plea was also rejected. However, the assessee’s plea regarding entries pertaining to M/s SFPL was accepted and these transactions were excluded while making additions in the hands of the assessee. 2.6 In the above background, the balance receipts of Rs.951.06 Lacs (after excluding entries pertaining to M/s SFPL but including opening balances) was added to the total income of the assessee as unaccounted business income and the impugned assessment was framed which was subjected to assessee’s further challenge in first appeal. 2.7 Similar assessments were framed for AY 2016-17 & 2017-18. In AY 2018-19, Ld. AO did not even allow the benefit of entries pertaining to M/s SFPL and made addition of Rs.133.40 Lacs. 2.8. In AY 2019-20, the addition has been made on the basis of Book No.10 which contained entries from the period 16-04-2019 to 01-12-2021 (i.e., till the date of search). The opening balance of this book was Rs.555.06 Lacs which was also considered by Ld. AO to be pertaining to this year. The entries pertaining to M/s SFPL were excluded. 2.9 In AY 2020-21, entire cash receipts were treated as undisclosed income of the assessee. Similar was the assessment for AY 2021-22. 2.10 In AY 2022-23, Ld. AO made addition of entire gross receipts. Another addition was made for discrepancies in the stock. The net deficit of physical stock was worked out to be Rs.32.92 Lacs. The Ld. AO applied Gross Profit Rate of 26.39% on the same and made addition of Rs.8.68 Lacs. 2.11 Aggrieved as aforesaid, the assessee assailed all the assessments before first appellate authority which were disposed-off vide separate orders on similar lines. The adjudication of Ld. CIT(A) has led to present cross-appeals before us. The core issue in the first appeal was qua entries of receipts and payments as found noted in the seized notebooks. Appellate proceedings 3.1 The assessee contended that the entries were maintained by its employee in a haphazard manner and the notebooks merely contained various numbers without proper narration or date of transactions. Wherever date and narrations were mentioned, the same were not legible and no interpretation or conclusion could be arrived at based on such entries. It was further submitted that the seized notebooks contained entries regarding receipts as well as payments and only net receipts were to be considered after deducting payments found recorded therein against receipts as the payments were made towards various business expenditures viz. purchases from grey markets, expenditure incurred by the assessee on interior decoration of the showrooms during festive seasons, staff welfare expenses etc. which were not recorded in the regular books. The assessee also contended that the entries containing description like ‘Mama/Saba/Sabapathy’ were mere internal rotation of funds which were to be excluded altogether since the same would not have any element of income. Likewise, the entries having narrations like ‘Jamai’ were to be excluded since these entries pertained to another associated entity M/s Saravana Stores Foods Pvt. Ltd. (SFPL). The assessee made elaborate written submissions during first appeal which have already been extracted in the impugned order. In these submissions, the assessee, inter-alia, sought exclusions of those entries which were not in the nature of income. The assessee also pleaded for allowance of business expenditure as found noted in the notebooks. The assessee also opposed impugned additions in the absence of any corroboration of these entries. The receipts and payments under separate heads were tabulated and summarized in the written submissions. Reference was made to various judicial decisions to support the same. 3.2 The Ld. CIT(A) observed that the notebooks as seized from the premises of the assessee were maintained by its employee Shri Julian. He broadly deposed that few of the entries represented return of cash by some suppliers against bill amounts remitted through RTGS / NEFT, few of the entries represented unaccounted rent, collection of toy machines / weighing machines etc. The Managing Director also confirmed the correctness of the extract of entries and consolidation of the same. However, some of the entries were undated having no description about name of party or nature of transactions, some of the entries were blank in particulars whereas some names were mentioned in short form / abbreviations etc. However, these notebooks could not be treated as dumb document. In the said background, Ld. CIT(A) proceeded to adjudicate the impugned additions on merits. 3.3 For AY 2015-16, the additions were made on the basis of Notebook no.11 which pertained to period from 26-08-2014 to 02-08-2017 meaning that entries of cash receipt and corresponding payments for the earlier period 01-04-2014 to 25-08-2014 was not made in the book. No other material containing entries for the earlier period of this financial year was found. However, Ld. AO included the opening balance of Rs.266.88 Lacs as receipts of this year on the ground that the assessee was in possession of that much of cash as on 26-08-2014 and therefore, the same was to be treated as unaccounted receipt. As against this, the assessee contended that it could not be said that this amount pertained to this year and there could be various possibilities for the opening balance. The Ld. CIT(A) observed that the entry of opening balance was immediately followed by three payments without any further receipts. Since these were cash transactions, the cash payments were not possible without considering the opening balance of Rs.266.88 Lacs which would prove that the assessee was having cash balance of Rs.266.88 Lacs as on 26-08-2014. The same would support the stand of Ld. AO. Therefore, the opening cash balance was to be considered as receipts for this year only. 3.4 On the issue of internal rotation of funds in the name of mama / saba / sabapathy, Ld. CIT(A) noted that receipts found recorded in such names were more than the payments in some assessment years whereas it was lesser in few years. Therefore, no general inference could be drawn. These entries were to be considered at par with other receipts and payment found recorded in the notebooks. Accordingly, this plea of the assessee was rejected. 3.5 On the issue of telescoping of business expenditure, it was noted by Ld. CIT(A) in para 16.3 that the entries would show that cash was received on day-to-day basis and the receipts were used to make payments as represented by payment entries. No concrete inference would be drawn on most of such entries. Nevertheless, the presumption u/s 132(4A) was to be given to all the entries in the seized material. The contents of the incriminating seized material were to be considered as a whole and not in a piecemeal manner. The revenue could not pick and choose certain part of document and disbelieve the other part of the document. The Ld. AO could not ignore expenditure as reflected in the same seized material and when both receipts and expenses were found recorded in the same seized documents and therefore, entries relating to expenses should also be accepted. However, such expenditure ought to have relation with the receipts sides of the notebooks which was payment received from vendors, unaccounted rental receipts and collections from machines etc. The claim of expenditure was unsupported and the perusal of few expenditures would show that these entries were bearing abbreviations such as EB/CMD, CMDA, MLA etc. which prima-facie would be disallowable as not related to assessee’s business. The nature of these payments could not be explained by the assessee. In this situation, no specific expenditure could be directly correlated against receipts as found noted in the note-books. 3.6 The assessee also contended that entire payments recorded were meant for purchase of second and rejected goods from mills in grey market and therefore, the expenditure was incurred wholly and exclusively for the purpose of business. Further, the assessee had to incur expenditure on setting up of transformers on their own account which was reflected as EB payments, The assessee claimed to have made payment to staff on festivals and meeting other incidental expenses in cash which was not recorded in regular books. The expenses were stated to be incurred on regular maintenance and upkeep. However, all these claims were unsupported claims. No foolproof evidence was furnished by the assessee by way of bills, third- party confirmations etc. In the absences of specific correlation between receipts and payments, the only way of determining the income form such cash receipts was to estimate the income. The expenditure was finally estimated as 30% of receipts and Ld. AO was directed to tax the receipts to the extent of 70%. 3.7 For AY 2018-19, the assessee sought exclusion of entries having ‘Jamai’ narration since these receipts were excluded by Ld. AO for AYs 2015-16 to 2017-18 under identical facts and circumstances. These receipts were stated to be pertaining to other entity viz. M/s Saravana Stores Foods Pvt. Ltd. The ‘Jamai’ was brand name used by that entity. The Ld. CIT(A) observed that Ld. AO accepted assessee’s submissions and excluded these receipts for all the years except for AY 2018-19. No reason was given for such a deviation. Therefore, Ld. AO was directed to exclude these receipts for AY 2018-19 also. 3.8 For AY 2019-20, the assessee raised a plea that income for this year was already assessed in AY 2020-21. The Ld. CIT(A) concurred that same amount of Rs.920.55 Lacs (including opening balance of Rs.555.06 Lacs) was included in receipts for both AYs 2019-20 as well as for AY 2020-21. The Ld. AO could not have made addition of Rs.920.55 Lacs in AY 2019-20 since no entries pertaining to the period 01-04-2018 to 31-03-2019 was found in the seized material. Therefore, this addition for AY 2019-20 was directed to be deleted. At the same time, Ld. CIT(A) noted that the closing entry that was considered for AY 2018-19 had closing balance of Rs.130.54 Lacs whereas the next entry available on seized material which was considered for AY 2020-21 was Book No.10 which started from 16-04-2019. This book had opening balance of Rs.555.06 Lacs. Thus, there was a gap of Rs.424.52 Lacs which was not considered for any of the AYs. Though total receipts and payments were not available pertaining to the gap between this closing balance and the opening balance, the assessee had unspent cash balance of Rs.424.52 Lacs. As this cash balance available as on 16-04- 2019 could not be said to be earned after 01-04-2019 i.e., within a gap of 15 days in that financial year, the same was to be considered for AY 2019-20. Accordingly, this amount was directed to be treated as undisclosed income for AY 2019-20. The receipt of Rs.555.06 Lacs as considered by Ld. AO for AY 2020-21, was accordingly, directed to be excluded. 3.9 In AY 2022-23, the assessee challenged addition of Rs.8.68 Lacs as made on account of Gross Profit on value of stock deficit as found during the course of search. The stock deficit was found for Rs.32.92 Lacs out of physical stock of Rs.211.37 Crores on which Ld. AO applied GP rate of 26.39% to make impugned addition of Rs.8.68 Lacs. The assessee contended that difference was only to the extent of 0.17% of book stock value. The physical stock was taken in a haphazard manner and it was practically impossible to take physical quantity of stock of all the locations in 2-3 days’ time. There was more than 10 Lakh variety of items in various brands in all the locations on the date of search. Whatever stock was taken at the time of search could only be a tentative figure. The Ld. CIT(A) concurred that the margin of error was negligible and therefore, no adverse inference was to be drawn against the assessee. This addition was, accordingly, deleted. Finally, Ld. AO was directed to adopt 70% of gross receipts as assessee’s income except for AY 2019-20 wherein the unaccounted income was quantified at Rs.424.52 Lacs. 3.10 Accordingly, all the appeals of the assessee were partly allowed. Aggrieved, the assessee is in further appeal before us for AYs 2015-16 to 2022-23 whereas the revenue is in further appeals before us for AYs 2015-16 to 2017-18 and 2020-21 to 2022-23. The grounds as raised in respective appeals are substantially the same. Our findings and Adjudication 4. It emerges that the assessee is engaged in wholesale and retail trading of textiles, groceries, household articles etc. The assessee is dealing in numerous articles across its various sales outlets. The assessee is regularly assessed to tax. The quantum of turnover and Net Profit (NP) rate as reflected by the assessee, for various years, could be tabulated as under: - No. AY Turnover Returned Income NP Rate (Rs.in Crores) (Rs. in Crores) 1. 2015-16 839.02 49.85 5.94% 2. 2016-17 1064.59 63.15 5.93% 3. 2017-18 1102.21 59.55 5.40% 4. 2018-19 1245.83 69.00 5.50% 5. 2019-20 1419.25 76.40 5.39% 6. 2020-21 1336.48 72.12 5.40% 7. 2021-22 731.40 0.83 0.11% 8. 2022-23 888.81 9.38 1.06% Average NP Rate 4.63%

by the assessee for respective AYs are accordingly, partly allowed. The grounds as raised by the revenue stand dismissed.

13. In AY 2022-23, the revenue has assailed deletion of addition of stock deficit. Considering the fact that, the margin of deviation was merely 0.17%, we would hold that this addition has rightly been deleted by Ld. CIT(A). We order so. The corresponding grounds stand dismissed.

14. All the appeals of the assessee stand partly allowed. All the appeals of the revenue stand dismissed. Order pronounced on 27.06.2025 (ABY T. VARKEY) (MANOJ KUMAR AGGARWAL) "ाियक सद" /JUDICIAL MEMBER लेखा सद" / ACCOUNTANT MEMBER चे5ई Chennai; िदनांक Dated : 27.06.2025 आदेश की Iितिलिप अ$ेिषत / Copy of the Order forwarded to : 1. अपीलाथ"/Appellant 2. " थ"/Respondent 3. आयकरआयु>/CIT Madurai/Chennai. 4. िवभागीय"ितिनिध/DR 5. गाडCफाईल/GF