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Facts
A search and seizure operation uncovered unaccounted receipts and payments related to the assessee's real estate and hospitality businesses. The Assessing Officer (AO) added the entire unaccounted receipts as income and treated unaccounted payments as expenditure. The Commissioner of Income Tax (Appeals) [CIT(A)] partly confirmed the additions, estimating profit margins.
Held
The Tribunal held that only the profit element embedded in unaccounted receipts should be taxed, not the entire amount. They also noted that unaccounted expenses should be set off against unaccounted receipts. The profit margins estimated by the CIT(A) for both hospitality and real estate businesses were modified by the Tribunal.
Key Issues
Whether entire unaccounted receipts should be taxed or only the profit element, and whether unaccounted expenses can be set off against unaccounted receipts.
Sections Cited
132, 143(3), 153A, 69C, 145, 68, 37(1), 234A, 234B, 234C, 131(1A), 143(2), 147, 148
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Income Tax Appellate Tribunal, AHMEDABAD “C” BENCH
Before: Shri T.R. SENTHIL KUMAR & Shri NARENDRA PRASAD SINHA&
आदेश / ORDER PER BENCH:-
These cross appeals are filed by the Revenue and Assessee as against the common order dated 31-10-2022 passed by the Commissioner of Income Tax (Appeals)-11, Ahmedabad [hereinafter referred to as “CIT(A)”] arising out of the separate assessment orders passed under sections 143(3) r.w.s. 153A and 143[3] of the Income Tax Act, 1961 (hereinafter referred to as “the Act”) relating to the Assessment Years 2015-16 to 2019-20. Since the issues involved herein are common and facts are identical, for the sake of brevity and convenience they are decided together by this common order.
Assessee is a Partnership firm engaged in the real estate business and also earns income in the form of franchisee fees from various restaurants run on franchisee basis in the name and style of Sankalp, Sams Pizza and Saffron. A Search and Seizure action under section 132 of the Act was carried out in “Sankalp Group” on 30.10.2018 and on subsequent dates inter-alia covering “Kailash Goenka Group” and “Robin Goenka Group”. During the course of the search, certain incriminating material in the form of handwritten diaries, loose papers, printed forms/bills etc. were found and seized. Perusal of such seized material revealed that the group was involved in charging huge on-money on sale of flats and commercial units as well as cash sales in restaurant and hotel business. Such seized material further indicated that the group has incurred huge unaccounted cash payments in relation to the hotel to 48/Ahd/2022 & Ors. A.Ys. 2015-16 & 2019-20 Page No 3 ACIT Vs. Sankalp IN and restaurant business. Various premises of the assessee group were covered during the search. Statements of various persons were also recorded during the course of search.
2.1. During the course of search action certain incriminating material was found and seized which revealed there were certain “unaccounted receipts” and “unaccounted payments” in relation to hotel and restaurant business carried out by the assessee. Details of “unaccounted receipts” and “unaccounted payments” for the period relevant to the Assessment Years 2015-16 to 2019-20 were as follows:
Unaccounted Receipts Unaccounted Royalty, On-money Assessment Payments franchisee fees received from Years & reimb real-estate ursement business (A) (B) (C) Page & Pgs.98-99 Pg.99 Pg.99 Para of AO Para 8.6 (i) Para 8.6 (ii) Para 8.6 (iii)
2015-16 16,16,503 5,48,15,614 5,05,24,943 2016-17 1,34,22,571 -- 3,67,09,973 2017-18 2,47,13,691 5,49,95,360 2,69,24,405 2018-19 1,49,92,837 25,83,72,790 18,92,69,450 2019-20 82,98,516 53,63,23,745 70,73,65,161 Sub-total 6,30,44,118 90,45,07,509 101,07,93,992 Total Rs.96,75,07,509/- (A + B) 101,07,93,992 2.2. Accordingly, assessee was called upon to show cause as to why amount of Rs.96,75,51,627/- being “unaccounted receipts” should not be treated as undisclosed income and amount of Rs.101,07,93,932/- being “unaccounted payments” incurred in to 48/Ahd/2022 & Ors. A.Ys. 2015-16 & 2019-20 Page No 4 ACIT Vs. Sankalp IN cash should not be treated as unaccounted expenditure u/s 69C of the Act.
Assessee furnished a detailed reply to the SCN wherein, the assessee claimed that as regards receipts pertaining to franchisee business from which, assessee earns royalty income, franchisee fees, reimbursements, etc., certain component of such receipts are received in cash due to business exigencies in order to meet certain expenses to be incurred in the course of business. For instances employees were given mere advances for traveling, boarding and lodging expenses. Such expenses are considered as payments and on settlement of such advances, excess advance is returned back. It is a well-known fact that in the restaurant business (being a part of hospitality industry), attrition level of labor is very high, and the work force is reluctant to accept payments by cheque. Thus, even from the noting in the seized material, it is clear that such expenses have been incurred for the purpose of business. Therefore the entire receipts and entire payments cannot be subject to additions. Rather, only “profit element” (approx. 8 to 10%) may be applied to the receipts. Only the “real income” can be taxed in the hands of any assessee by the Income-tax department.
3.1. However the Ld AO, was not convinced with the reply furnished by the assessee. Accordingly, “entire unaccounted receipts” and “entire unaccounted payments”, appearing in the seized material, were added as income of the respective assessment years and demanded taxes thereon. to 48/Ahd/2022 & Ors. A.Ys. 2015-16 & 2019-20 Page No 5 ACIT Vs. Sankalp IN
Aggrieved against the assessment orders assessee filed appeals before the Commissioner of Income Tax [Appeals] who has decided the two issues for all the assessment years as below.
4.1. First Issue namely ‘Unaccounted receipts’ as well as ‘unaccounted expenses’ in relation to the ‘franchisee/ hospitality business’:
Assessee received unaccounted receipts from hospitality/franchisee business and has also incurred unaccounted expenditure from such income. It is well settled that “taxes” must be levied on “real Income”. No taxes can be levied in an arbitrary manner. Neither AO was fully correct in making impugned addition, nor assessee is fully correct in explaining reasons for deletion of such addition. The Assessee has generated unaccounted receipts from business which, in turn, have been utilized for making unaccounted payments in relation to business. Therefore, unaccounted income and unaccounted expenses need to be telescoped in order to determine the real income of the assessee. On perusal of records average profit ratio of the assessee firm as per the regular books of accounts stands at 36.21%. Considering the unaccounted business transactions and in order to pluck the leakage of revenue, books of accounts are rejected by invoking the provisions of section 145 of the Act. It is well-settled that in the case of unrecorded sales, profit margin remains higher than recorded sales. Accordingly, average profit margin was adopted at 50% as against the average profit margin as per books being 36.21%. Resultantly, addition on account of unaccounted receipts from the franchisee/hospitality to 48/Ahd/2022 & Ors. A.Ys. 2015-16 & 2019-20 Page No 6 ACIT Vs. Sankalp IN business was partly confirmed by Ld. CIT(A) to the extent of Rs.3,15,22,059/= (i.e. 50% of additions made by AO)
4.2. ‘Unaccounted receipts’ as well as ‘unaccounted expenses’ in relation to the Real-estate business:
Assessee received ‘unaccounted on-money’ from its Real estate business and also incurred ‘unaccounted expenses’ out of such receipts. Profit ratio as per the regular books of account stands at 12.98%. Further, profit ratio vis-à-vis unaccounted transactions stands at 6.75%. Considering the unaccounted business transactions and in order to pluck the leakage of revenue, books of accounts are rejected by invoking the provisions of section 145 of the Act. a. As regards ‘Project SS-IIIA’: Assessee has suo-moto extrapolated on-money receipts on accrual basis aggregating to Rs.73,91,41,058/- as against the addition to Rs.52,74,51,509/- made by the learned AO on receipts basis. Thus, the assessee has adopted much higher figure for estimating the real income. Assessee has suo-moto, in its Return of Income filed for Asst Years 2021-22 & 2022-23, included income arising from on-money receipts for the said project. b. As regards ‘Project SS-IIIB’: Amount received by assessee falls under the category of ‘advances’ therefore it does not fall under the category of ‘income accrued or due’ in the years in which additions have been made by AO. Thus the amount pertaining to the said project (i.e. Rs.37,70,56,000/-) will be taxable as per the accrual system of accounting followed by assessee and in the years when to 48/Ahd/2022 & Ors. A.Ys. 2015-16 & 2019-20 Page No 7 ACIT Vs. Sankalp IN corresponding sales have been offered for tax in the regular books of accounts. c. As regards ‘Project SS-IV’: No income can be brought to tax as of now for the simple reason that the amounts received by the assessee are only advances which does not fall under the category of income accrued or due. Further, no agreements have been executed till date. It is a fact that till the date of search and seizure action, no formal agreement for purchase of land has been entered into or any approvals for construction activities have been received. Thus looking to the nature of various businesses, various discrepancies found during search, various judicial pronoun- cements as well as keeping in mind the fact that in case of unrecorded sales, profit margin remains higher as compared to recorded sales, net income of the assessee in relation to the real estate business is taken at 17% which works out to Rs.12,56,53,980/=.
Aggrieved against the common appellate orders both the Revenue and Assessee are in appeals before us raising the following Grounds of Appeal, which are inter connected. Since identical grounds are raised by both parties for all the asst. years except change in figures, therefore for the sake of brevity the Grounds of Appeal raised for the Asst. year 2015-16 are as follows:
5.1. The Grounds of Appeal filed by the Revenue in IT(SS)A No. 45/Ahd/2022 reads as under: to 48/Ahd/2022 & Ors. A.Ys. 2015-16 & 2019-20 Page No 8. ACIT Vs. Sankalp IN 1. In the facts and on the circumstances of the case and in law, the Ld. CIT(A) erred in restricting the addition on account of Royalty, Franchises Fees, Reimbursement, etc to Rs.8,08,300/- out of total addition of Rs. 16,16,503/- after giving set off of expenses, despite the assessee derived Royalty. Franchises Fees, Reimbursement, which do not hold any substantial expenses nor the assessee has proved the nexus of corresponding expenses.
2. In the facts and on the circumstances of the case and in law, the Ld. CIT(A) erred in estimating the net income out of Real estate business at 17%.
3. In the facts and on the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the Addition on account of on-money receipts Rs.5,48,15,614/- for the year under consideration, after accepting the extrapolation given by the assessee and fixing the income @ 17% for A.Y. for Α.Υ. 2020-21, 2021-22 & 2022-23, without appreciating the addition made on account of seized incriminating materials.
4. In the facts and on the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the Addition of unexplained cash payments (expenses) u/s. 69C of Rs.5,05,24,943/- after giving set off of unaccounted income in the form cash receipts.
5. In the facts and on the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the alternative addition of unexplained business expenditure u/s.37(1) of Rs.5,05,24,943/- after giving set off of unaccounted income in the form cash receipts.
6. In the facts and on the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition of unexplained cash credit u/s 68 of Rs.1,03,00,000/- even though Sh. Jigar Trivedi, has filed affidavit of having paid commission @ of 0.60% on the unsecured loan of Rs. 1,03,00,000/-
7. In the facts and on the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition of unexplained commission expenses of Rs.61,800/- even though Sh. Jigar Trivedi, has filed affidavit of having paid commission @ of 0.60% on the unsecured loan of Rs. 1,03,00,000/-
8. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) ought to have upheld the order of the A.O. to 48/Ahd/2022 & Ors. A.Ys. 2015-16 & 2019-20 Page No 9 ACIT Vs. Sankalp IN
9. It is, therefore, prayed that the order of the Ld. CIT(A) be set aside and that of the A.O. be restored to the above extent.
5.2. The Grounds of Appeal filed by the Assessee in IT(SS)A No. 70/Ahd/2022 reads as under:
1. The learned CIT(A) has erred in law and on facts of the case in confirming the assessment order u/s 153A r.w.s. 143(3) of the Act which is passed in violations of provisions of the Act and against the scheme of assessment related to search cases.
2. The learned CIT(A) has erred in law and on facts of the case in confirming the additions made by learned Assessing Officer without any incriminating material found during the search.
3. The learned CIT(A) has erred in law and on facts of the case in rejecting the books of accounts of the appellant u/s 145 of the Act.
4. The learned CIT(A) has erred in law and on facts of the case in confirming an addition of Rs. 8,08,300/- by estimating profit margin at the rate of 50% for hospitality/franchisee business. In the facts and circumstances of the case, such estimation is highly excessive and does not reflect the real income earned by the appellant.
5. The learned CIT(A) has erred in law and on facts of case in directing to confirm the addition made on account of alleged unaccounted receipts on the basis of seized documents in real estate business for AYs. 2020-21 to 2022-23. He further erred in applying rate of 17% on gross receipts to compute net income which is highly excessive and not commensurate with the real income.
6. Both the lower authorities have passed the orders without properly appreciating the facts and they further erred in grossly ignoring various submissions, explanations and information submitted by the appellant from time to time which ought to have been considered before passing the impugned order. The action of the lower authorities is in clear breach of law and Principles of Natural Justice and therefore deserves to be quashed.
to 48/Ahd/2022 & Ors. A.Ys. 2015-16 & 2019-20 Page No 10 ACIT Vs. Sankalp IN
7. The learned CIT(A) has erred in law and on facts of the case in confirming action of the Id. AO in levying interest u/s. 234A/B/C of the Act.
8. The learned CIT(A) has erred in law and on facts of the case in confirming action of the Id. AO in initiating penalty under various sections of the Act.
9. The appellant craves leave to add, amend, alter, edit, delete, modify or change all or any of the grounds of appeal at the time of or before the hearing of the appeal.
Ld Senior Counsel Sri. Thusar Hemani appearing for the Assessee submitted that the assessee firm is engaged in the real estate business and also earns income in the form of franchisee fees from various restaurants run on franchisee basis. The seized material in question contained noting in respect of unaccounted receipts as well as unaccounted expenses.
6.1. Unaccounted receipts (appearing in the seized material) were generated in the course of business activities. It is not the case of the AO that such receipts were not related with the business activities of the assessee. Also there is nothing on record to demonstrate that the assessee had any other source of income from which, such receipts could have been generated. Further, the very same seized material in question contained notings in respect of “unaccounted expenses” as well. Perusal of the particulars mentioned against such expenses would make it clear that such expenses have also been incurred in the course of normal business activities. Perusal of seized material would indicate that a part of receipts generated in the normal course of business are kept outside the books of accounts and similarly, certain part of to 48/Ahd/2022 & Ors. A.Ys. 2015-16 & 2019-20 Page No 11 ACIT Vs. Sankalp IN expenses are also being incurred in cash in the normal course of business which are kept outside the books of accounts. Under such facts and circumstances of the present case, question that falls for consideration of this Hon’ble Tribunal is as follows:
A. Whether AO was justified in making separate additions in respect of “unaccounted receipts” as well as “unaccounted expenses” in relation to the “business activities” carried on by the assessee ? OR B. Whether CIT(A) was justified in restricting the impugned additions made by AO to the extent of “real income” earned in relation to the unaccounted “business activities” carried on by the assessee by adopting reasonable Gross Profit rate and applying the same to the total unaccounted receipts reflected in the seized material ?
6.2. Ld Senior Counsel Sri. Thusar Hemani thus submitted that it is well settled legal proposition that entire unaccounted receipts cannot be added. Rather, only the profit element embedded therein can be added in the hands of the assessee. Reliance is placed on following decisions for the said legal proposition:
* Sankalp Recreation P. Ltd. vs. ACIT – IT(SS)A 65/Ahd/2022; * CIT vs. President Industries – (2002) 258 ITR 654 (Guj.); * CIT vs. Balchand Ajit Kumar – (2003) 263 ITR 610 (MP); * CIT v. Gurubachhan Singh – (2008) 302 ITR 63 (Guj); * Man Mohan Sadani vs. CIT – (2008) 304 ITR 52 (MP); * CIT v. Samir Synthetics Mill – (2010) 326 ITR 410 (Guj); * DCIT v. Panna Corporation – Tax Appeal 323 of 2000 (Guj); * Chetan C. Patel v. ACIT – IT(SS)A 522/Ahd/2011 and others; * CIT v. Jay Builders – (2013) 33 taxmann.com 62 (Guj); * Greenfield Reality P. Ltd.– IT(SS)A 289/Ahd/2018 & others; to 48/Ahd/2022 & Ors. A.Ys. 2015-16 & 2019-20 Page No 12 ACIT Vs. Sankalp IN 6.3. The next logical step is to determine the quantum of income element embedded in such unaccounted receipts. Considering the actual profit ratio as per the books of accounts as well as actual unaccounted transactions and in order to pluck the leakage in Revenue, Ld CIT(A) adopted Franchisee/hospitality business at 50% and Real estate business at 17% rates of profit to determine real income, which is substantially on higher side. Therefore in the interest of justice, some reasonable rate of profit may be decided. Further it is well settled that only real income has to be taxed in the hands of the assessee. Reliance is placed on Godhra Electricity Co. Ltd. -Vs- CIT (1997) 225 ITR 746 (SC). Further it is well settled principle of law that AO is duty bound to give relief to an assessee wherever due, even if it has not been claimed by the assessee. Reliance is placed on decision in the case of S. R. Koshti -Vs- CIT (2005) 276 ITR 165 (Guj).
6.4. Thus Ld Senior Counsel pleaded that the methodology adopted by Ld CIT(A) is not absolutely scientific and leaves room for arbitrariness. It is further submitted that the very same seized materials contain noting of ‘unaccounted receipts’ and ‘unaccounted payments’. Such receipts as well as payments are relating to the business of the assessee and hence, as a natural corollary, such unaccounted expenses would have been incurred out of unaccounted receipts. Accordingly, AO was not justified in denying set-off of such unaccounted expenses against unaccounted income. It is well settled that seized material has to be read in its entirety. Pick and choose theory cannot be adopted while to 48/Ahd/2022 & Ors. A.Ys. 2015-16 & 2019-20 Page No 13 ACIT Vs. Sankalp IN interpreting seized material and reliance is placed on following decisions: * Navjivan Oil Mills vs. CIT – (2002) 252 ITR 417 (Guj); * Glass Line Equipments Co. vs CIT – 253 ITR 454 (Guj); * Mehta Parikh & Co. v. CIT – (1956) 30 ITR 181 (SC); * Kantilal & Bros. vs. ACIT – (1995) 52 ITD 412 (Pune); * Chander Mohan Mehta v ACIT – (1999) ITD 245 (Pune); * Biren V. Savla vs. ACIT – (2006) 155 Taxman 270 (Mum); * Madhav Corpn. vs ACIT– (2017) 85 taxmann.com 238 (Ahd); * DCIT v Kankakia Hospitality P Ltd. – (2019) 179 ITD 1 (Mum); 6.5. In view of the above, it is clear that Ld CIT(A) has taken utmost care while determining the income based on seized material. Consequently, balance additions have been rightly deleted. Hence, revenue’s appeals deserve to be dismissed and assessee’s appeals be allowed with Franchisee/hospitality business and Real estate business be estimated at some reasonable rate of profits.
Per contra Ld CIT-DR Shri A.P.Singh appearing for the Revenue submitted that the assessee was involved in substantial unaccounted cash transactions, which were only discovered due to the search and seizure operations. The assessee had not provided any satisfactory explanation for the unaccounted receipts and expenses which led to the invocation of Sections 68 (unexplained credits) and 69C (unexplained expenditure) of the Act. Further the Ld DR stated that there are violations of provisions of the Act and the assessee has not provided the details of expenses which will determine whether they are incurred wholly and exclusively for the purpose of business; whether they are of capital or revenue in nature and therefore, such expenses incurred in to 48/Ahd/2022 & Ors. A.Ys. 2015-16 & 2019-20 Page No 14 ACIT Vs. Sankalp IN violation of the provisions of the Act cannot be allowed as a deduction under section 37(1) of the Act. Further the assessee failed to demonstrate any nexus between the unaccounted receipts and expenses. In the above circumstances, Ld CIT(A) made ad-hoc estimation of the net profit rate and urged to sustain the additions made by the AO.
We have heard rival submissions at length and perused the materials available on record including the paper books and case laws compilation filed by the parties. The mechanism to calculate profit is provided under sections 28 to 40 of the Act and when the books of accounts are rejected, invoking section 145 the estimation has to be resorted to. Various judicial precedents including the judgements of Hon’ble Gujarat High Court in case of DCIT Vs. Panna Corporation in Tax Appeal No. 323 of 2000 which has followed series of judgements rendered by Jurisdictional High Court in the case CIT -Vs- President Industries Ltd (2002) 258 ITR 654; CIT -Vs- Gurubachhan Singh [2208] 302 ITR 63; CIT -Vs- Samir Synthetics Mill [2010] 326 ITR 410, etc. wherein it was held that even upon detection of unaccounted cash receipt or on-money receipt, what can be brought to tax is the profit embedded in such receipts and not the entire receipts themselves by observing as follows:
“… 9. Having heard the learned counsel for the parties and having perused the orders under consideration, what emerges is that the findings arrived at by the Assessing Officer that the respondent – partnership firm received on money of Rs.62 lakhs during the block period for sale of the flats, is not seriously in dispute. The Tribunal confirmed such findings arrived at by the Assessing Officer. However, the Tribunal did not permit to 48/Ahd/2022 & Ors. A.Ys. 2015-16 & 2019-20 Page No 15 ACIT Vs. Sankalp IN the revenue to collect the tax on the entire receipt believing the it was only the income embedded in such receipt which can be subjected to tax.
As pointed out by the counsel for the respondent, this Court in the case of Commissioner of Income Tax v. President Industries, reported in (2002) 258 ITR 654 had taken a similar view. In the said case, during the course of survey conducted on the premises of the assessee, from the excise records found, an inference was drawn by the Assessing Officer that sales accounting to Rs.29 lakhs and odd had not been disclosed in the books of account. The Assessing Officer made addition of the entire sum of the said undisclosed sales as income of the assessee for the assessment year 1994-95. Such addition was confirmed by the Commissioner (Appeals). The Tribunal, however, held that the entire sales could not have been added as income of the assessee, but only to the extent the estimated profits embedded in the sales for which the net profit rate was adopted entailing addition of income on the suppressed amount of sales. Such decision was carried in appeal by the revenue before the High Court. The High Court rejected the appeal, observing that unless there is a finding to the effect that investment by way of incurring the cost in acquiring the goods which have been sold has been made by the assessee and that has also not been disclosed, such addition could not be sustained. It was observed that in absence of such findings of fact, the question whether the entire sum of undisclosed sale proceeds can be treated as income of the relevant assessment year answers by itself in the negative. The High Court rejected the appeal holding that no question of law which requires to be referred arises.
In the case of Commissioner of Income Tax v. Gurubachhan Singh J. Juneja, reported in (2008) 302 ITR 63 (Guj.), once again a somewhat similar issue came up before this Court. In the said case, the assessee was engaged in the business of trading of tyres. Search proceedings were carried out at the residential and business premises of the assessee. On the basis of loose sheets which were seized during such search operation, the Assessing Officer held that sales to the extent of Rs.10.85 lakhs was not found in the books of account. Such amount was included in the total income of the assessee. The Commissioner (Appeals) gave substantial relief to the assessee and reduced the income on the basis of gross profit rate. The Tribunal confirmed the order of the Commissioner (Appeals). On further appeal before the High Court by the revenue, the High Court refused to refer any question holding that in absence of any material on record to show that there was any unexplained investment made by the to 48/Ahd/2022 & Ors. A.Ys. 2015-16 & 2019-20 Page No 16 ACIT Vs. Sankalp IN assessee which was reflected by the alleged undisclosed sales, the finding of the Tribunal that only the gross profit on the said amount can be brought to tax does not call for any interference.
12. Counsel also relied on the decision in the case of Commissioner of Income Tax v. Samir Synthetics Mill, reported in (2010) 326 ITR 410, wherein the High Court confirmed the view of the Tribunal accepting only the profit of unaccounted sale for the purpose of collecting tax.
13. Our attention was also drawn to the decision of the M. P. High Court in the case of Man Mohan Sadani v. Commissioner of Income Tax, reported in (2008) 304 ITR 52, wherein referring to and relying upon the decision of this Court in the case of Commissioner of Income Tax v. President Industries (supra) and other decisions of other High Courts, the M.P. High Court had also taken a similar view. It was observed that entire sale proceeds of the assessee should not be added in his income and that the Tribunal has erred in doing so.
14. We may recall that the Tribunal, in the impugned judgement, relied on its previous judgement in case of Kishor Mohanlal Telwala. The said judgement of the Tribunal was apparently carried in appeal by the revenue. The High Court by a speaking order dated 24.4.2000, dismissed the appeal holding that no question of law was involved. Significantly, in case or Kishor Mohanlal Telwala, the assessee was engaged in the business of construction. In his case, unaccounted receipt of Rs.1.47 crores was detected. In this background, the Division Bench confirmed the view of the Tribunal and did not accept the contention of the revenue that as no accounts had been maintained to substantiate the expenditure incurred by the assessee, the entire amount received by the respondent should be treated as income. The Court concluded that the Tribunal was justified in considering that the respondent – assessee ought to have spent reasonable amount for the purpose of receiving such gross receipt.
15. It can, thus, be seen that consistently, this Court and some other Courts have been following the principle that even upon detection of on money receipt or unaccounted cash receipt, what can be brought to tax is the profit embedded in such receipts and not the entire receipts themselves. If that be the legal position, what should be estimated as a reasonable profit out of such receipts, must bear an element of estimation.
In view of the legal position that not the entire receipts, but the profit element embedded in such receipts can be brought to tax, in our view, no to 48/Ahd/2022 & Ors. A.Ys. 2015-16 & 2019-20 Page No 17 ACIT Vs. Sankalp IN interference is called for in the decision of the Tribunal accepting such element of profit at Rs.26 lakhs out of total undisclosed receipt of Rs.62 lakhs. In other words, we accept the legal proposition, the Tribunal accepting Rs.26 lakhs disclosed by the assessee as profit out of total undisclosed receipt of Rs.62 lakhs, would not give rise to any question of law.”
8.1. Thus, the primary issue under consideration is whether the entire unaccounted receipts should be taxed as income or whether only the profit element embedded in these receipts should be considered. The assessee has relied on the Gujarat High Court’s judgement in President Industries (cited supra), where it was held that the entire amount of unaccounted sales cannot be treated as income. In that case, the Hon’ble Court have ruled that only the net profit element should be taxed, as the sales represent receipts from which the cost of goods sold must be deducted. In the present case, similar facts exist where the AO has not provided any evidence of undisclosed investments used to generate the unaccounted receipts. Whereas the Ld CIT(A) followed the principle established in President Industries, by estimating the profit embedded in the unaccounted receipts at 50% rather than taxing the entire amount. The judgement of Hon’ble Gujarat High Court in the case of President Industries was based on the absence of any findings indicating that the assessee had incurred costs outside the books to generate the unaccounted sales, and the same logic applies in the present case. The Ld CIT(A) has adopted the year wise income under the head business both the book turnover and unaccounted turnover as follows: to 48/Ahd/2022 & Ors. A.Ys. 2015-16 & 2019-20 Page No 18 ACIT Vs. Sankalp IN Sr. No. Particulars 2015-16 2016-17 2017-18 2018-19 2019-20 Total A 2,64,04,021 2,89,72,014 2,51,89,364 2,89,98,908 3,39,36,775 14,35,01,082 Book Turnover B 1,25,93,060 1,13,44,081 77,20,495 97,33,842 1,05,74,124 5,19,65,602 Profit as per Profit & Loss A/c 47.69 % 39.16 % 30.65 % 33.57 % 31.16 % 36.21 % C= Profit Ratio B/A* (%) 100 D 50.00 % 50.00 % 50.00 % 50.00 % 50.00 % - Higher of C or 50% E 16,16,503 1,34,22,571 2,47,13,691 1,49,92,837 82,98,516 6,30,44,118; Unaccounted Turnover 8,08,252 67,11,286 1,23,56,846 74,96,419 41,49,258 3,15,22,059 F = E Taxable * D% Profits (Income) G 8,08,300 67,11,300 1,23,56,900 74,96,500 41,49,300 3,15,22,300 Rounding off to 8.2. Thus the percentage of profit as per the books of accounts is ranging from 47.69% to 31.16% for the asst. years 2015-16 to 2019-20 and the average of the same is 36.21% whereas the CIT[A] estimated the profit margin at 50% on the unaccounted sales, which in our considered view is a higher figure when the Revenue failed to prove any evidence of undisclosed investments by the assessee in terms of Assets. After the search and seizure action on 30-10-2018 the profit margins as per books are 33.57% and 31.16% respectively. In the above circumstances, we deem it to estimate 40% as profit margin will be found reasonable considering the facts and figures in the present case. Thus the Jurisdictional Assessing Officer is directed to adopt 40% profit margin in the place of 50% as directed by the Ld CIT[A]. In the result the Grounds raised by the assessee is partly allowed and the Grounds raised by the Revenue is hereby dismissed. to 48/Ahd/2022 & Ors. A.Ys. 2015-16 & 2019-20 Page No 19. ACIT Vs. Sankalp IN
Next issue namely ‘Unaccounted receipts’ as well as ‘unaccounted expenses’ in relation to the Real-estate business: The Ld CIT[A] considered this issue and held that assessee received unaccounted on-money from its real estate business and also incurred unaccounted expenses out of such receipts. Profit ratio as per the regular books of account stands at 12.98% whereas, profit ratio vis-à-vis unaccounted transactions stands at 6.75%. Looking to the nature of various businesses, discrepancies found during search, various judicial pronouncements as well as keeping in mind the fact that in case of unrecorded sales, profit margin remains higher as compared to recorded sales, net income of the assessee in relation to the real-estate business is determined at 17% which comes to Rs.12,56,53,980/-. Assessment year-wise breakup confirmed by CIT(A) are as follows:
Income @ 17% of Asst. Show Rooms Office unaccounted Total Years (A) Units receipts (C = A + B) (B) (C * 17%) AY 2020-21 --- Rs.2,40,64,653 Rs.2,40,64,653 Rs.40,90,991
AY 2021-22 Rs.7,35,08,800 Rs.28,28,37,026 Rs.35,63,45,826 Rs.6,05,78,790
AY 2022-23 Rs.1,82,50,350 Rs.34,04,80,228 Rs.35,87,30,578, Rs.6,09,84,198
Total (Rs.) Rs.9,17,59,150 Rs.64,73,81,908 Rs.73,91,41,057 Rs.12,56,53,979 9.1. Accordingly, additions made on account of unaccounted receipts in respect of Sankalp Square IIIA were modified by ld. CIT(A) as follows: to 48/Ahd/2022 & Ors. A.Ys. 2015-16 & 2019-20 Page No 20 ACIT Vs. Sankalp IN ‘Receipts’ Addition Addition Addition made brought to tax confirmed in deleted in the Asst. by AO & extrapolated the hands of hands of the Years by assessee the assessee assessee (A) (B) (C = B * 17%) (D = A – C) 2015-16 Rs.5,48,15,615 - - Rs.5,48,15,615 2016-17 - - - - 2017-18 Rs.5,49,95,363 - - Rs.5,49,95,363 2018-19 Rs.25,83,72,785 - - Rs.25,83,72,785 2019-20 Rs.15,92,67,748 - - Rs.15,92,67,748 2020-21 - Rs. 2,40,64,653 Rs. 40,90,991 - 2021-22 - Rs.35,63,45,826 Rs.6,05,78,790 - 2022-23 - Rs.35,87,30,578 Rs.6,09,84,198 - Total Rs.52,74,51,511 Rs.73,91,41,057 Rs.12,56,53,979 9.2. We have heard rival submissions at length and perused the materials available on record, it is undisputed fact that the seized materials contain noting of both unaccounted receipts and unaccounted payments and they are relating to the business of the assessee. It cannot be denied that such unaccounted expenses would have been incurred out of unaccounted receipts. It is well settled principle of law that seized material has to be read in its entirety. Accordingly, Ld AO was not justified in denying set-off of such unaccounted expenses against unaccounted income. Further the methodology adopted by Ld CIT(A) is not absolutely scientific and leaves room for arbitrariness.
9.3. It is well settled principle of law by the Jurisdictional High Court in the case of Navjivan Oil Mills -Vs- CIT reported in (2002) 252 ITR 417 (Guj) that seized material has to be read and accepted as a whole and it is not permissible to Pick and Choose theory or make further estimates therefrom unless and until there is cogent material in support of undertaking such an exercise. to 48/Ahd/2022 & Ors. A.Ys. 2015-16 & 2019-20 Page No 21 ACIT Vs. Sankalp IN 9.4. The Hon’ble Supreme Court in the case of Godhra Electricity Co. Ltd. -Vs- CIT reported in [1997] 225 ITR 746 held that only real income has to be taxed in the hands of the assessee by observing as follows:
“….
The question whether there was real accrual of income to the assessee-company in respect of the enhanced charges for supply of electricity has to be considered by taking the probability or improbability of realisation in a realistic manner. If the matter is considered in this light, it is not possible to hold that there was real accrual of income to the assessee-company in respect of the enhanced charges for supply of electricity which were added by the ITO while passing the assessment orders in respect of the assessment years under consideration. The AAC was right in deleting the said addition made by the ITO and the Tribunal had rightly held that the claim at the increased rates as made by the assessee- company on the basis of which necessary entries were made represented only hypothetical income and the impugned amounts as brought to tax by the ITO did not represent the income which had really accrued to the assessee- company during the relevant previous years. The High Court, in our opinion, was in error in upsetting the said view of the Tribunal.
In the result, the appeals are allowed, the impugned judgment of the High Court is set aside and the questions referred by the Tribunal for opinion are answered in favour of the assessee-company and against the revenue. But in the circumstances, there will be no order as to costs.
9.5. In these backdrops it is seen on record that the assessee has suo-moto extrapolated on-money receipts on accrual basis aggregating to Rs.73,91,41,058/- (Pg.94 of CIT(A)’s order) as against the addition of Rs.52,74,51,509/- made by the ld AO on receipts basis (Pg.351 of Assessment Order). Thus, the assessee has adopted much higher figure for estimating the real income. Further No income can be brought to tax as of now for the simple reason that the amounts received by the assessee are only advances, which does not fall under the category of income accrued to 48/Ahd/2022 & Ors. A.Ys. 2015-16 & 2019-20 Page No 22 ACIT Vs. Sankalp IN or due and no agreements have been executed till date. It is undisputed fact that till the date of search and seizure action, no formal agreement for purchase of land has been entered into or any approvals for construction activities have been received by the assessee.
9.6. Further the Assessee has suo-moto, in its Returns of Income and Computation of Income filed for the Asst. Years 2021-22 and 2022-23 [copies placed at page nos. 13 to 72], included income arising from on-money receipts for the said project (Pg.94, Para.8.13.1 of CIT(A) Order). The above Returns were filed on 31- 03-2022 and 21-10-2022 respectively which was much after the search action taken place on 30-10-2018. Considering the actual profit ratio as per the books of accounts at 12.98% as well as profit ratio on actual unaccounted transactions at 6.75%. Therefore in the interest of justice, we deem it to estimate 13% as the reasonable profit margin considering the facts and figures in the present case. Thus the Jurisdictional Assessing Officer is directed to adopt 13% profit margin on real estate business in the place of 17% as directed by the Ld CIT[A]. In the result the Ground Nos 1 to 5 raised by the assessee are partly allowed and the Ground Nos. 1 to 5 raised by the Revenue are hereby dismissed.
10. Next Ground Nos. 6 & 7 raised by the Revenue are [relating to the Asst. years 2015-16 & 2016-17 only] that the Ld. CIT(A) erred in deleting the addition of unsecured loan of Rs.1,03,00,000/ made u/s.68 even though Sh. Jigar Trivedi, has filed affidavit of having paid commission @ of 0.60% on the unsecured loan. to 48/Ahd/2022 & Ors. A.Ys. 2015-16 & 2019-20 Page No 23 ACIT Vs. Sankalp IN
11. The AO made the following additions in respect of unsecured loans (treating the same to be bogus) as well as commission expenses alleged to have been incurred to avail bogus unsecured loans: Commission Asst Unsecured loans expenses @ 0.60% Years (A) of loan (B = A * 0.60%) 2015-16 Rs.1,03,00,000/- Rs.61,800/- 2016-17 Rs. 7,00,000/- Rs. 4,200/- Total Rs.1,10,00,000/- Rs.66,000/- 11.1. Ld CIT [A] deleted the impugned additions after finding that the impugned additions are not based on any incriminating material found during search carried out in the case of assessee on 30.10.2018. (Pg.101, Para 9.2 of CIT(A)’s order) by observing as follows: “… 9.4. On careful consideration of relevant facts along with Assessment Order, it is observed that the appellant had filed original return of income on 25.09.2015 declaring income of Rs.1,25,93,080/- and thereafter, scrutiny assessment order u/s.143(3) of the Act was passed on 04.05.2017 determining assessed income of Rs.1,25,93,080/-. Further, a search action u/s. 132 of the Act was conducted on 30.10.2018 in the case of Sankalp Group including the appellant's residential premises. It is an undisputed fact that on the date of search, time limit for issuing notice under Section 143(2) of the Act for current Assessment Year had expired (scrutiny assessment order u/s. 143(3) of the Act was passed on 04.05.2017) which means that present year is unabated year for the purpose of making assessment under Section 153A of the Act. The AO had made entire addition of addition of Rs. 1,03,61,800/- (Rs.1,03,00,000/- on account of unexplained cash credit u/s.68 + Rs.61,800/- on account of bogus commissian payment) and not referred to any incriminating material found and seized during the course of search, which prove alleged addition made. It is observed that no live nexus with the incriminating material found in the course of search in the case of the appellant was established by AO related to the alleged additions. It is pertinent to note that the Hon'ble Jurisdictional High Court of Gujarat in case of CIT Vs. Saumya Construction Pvt Ltd reported in 387 ITR 529 has considered the decisions given by various Courts and held as under:- to 48/Ahd/2022 & Ors. A.Ys. 2015-16 & 2019-20 Page No 24 ACIT Vs. Sankalp IN
Ld Senior Counsel Sri. Thusar Hemani submitted that the Asst. Years 2015-16 and 2016-17 are unabated assessment years, as is evident from the following undisputed dates:
Date of “Last date” for Date of Asst “original ITR” issuing “notice u/s “search” u/s Years 143(2)” 132 2015-16 25.09.2015 30.09.2016 30.10.2018 2016-17 30.09.2016 30.09.2017 30.10.2018 12.1. Further our attention was drawn to the reply filed by the assessee before the Ld AO as follows:
“… Vide para 3 and 3.2 of the show cause notice, we have been required to furnish the copies of confirmation for various unsecured loans taken from time to time. The same are enclosed as Annexure Il. It is humbly requested that no negative inference be accordingly drawn thereof. Further with regards to specific observation of loans taken from Biraj Manimpex Pvt. Ltd, Boaston Tradelink Pvt. Ltd and Vansh Glass Industries Pvt. Ltd in AY 2015-16 and AY 2016-17, it is humbly submitted that we are again enclosing the copy of confirmations. It is also humbly stated that with regards to AÝ 2015-16, the assessment proceedings for AY 2015-16 has been completed vide order u/s 143(3) of the Act vide order dated 4-5-2017 wherein no such negative inference has been drawn. At this juncture we are unaware under what circumstances Mr Jigar Trivedi as mentioned in the notice has given such statement and also to the fact as to whether his statement has any bearing or relevance on us. Hence we request not to draw any further negative inference in any case.”
12.2. Ld Senior Counsel submitted that it is well settled that assessment u/s.143(3) r.w.s. 153A of the Act is to be framed strictly on the basis of material found during the course of search. Reliance is placed on followings:
• PCIT vs. Abhisar Buildwell P. Ltd. – (2023) 454 ITR 212 (SC); • PCIT vs. Saumya Construction – (2017) 387 ITR 529 (Guj) to 48/Ahd/2022 & Ors. A.Ys. 2015-16 & 2019-20 Page No 25 ACIT Vs. Sankalp IN • PCIT vs. Kabul Chawla – (2015) 380 ITR 573 (Del.); • PCIT vs. Backbone Projects Ltd. – TA 88 & 205 of 2023 (Guj); • PCIT vs. Kutch Salt and Allied Industries Ltd. – TA 283 of 2023 (Guj); 12.2. In view of the above judicial precedents, Ld CIT(A) has rightly deleted the impugned additions, the same does not require any interference and Revenue’s Ground Nos.6 & 7 are liable to be dismissed.
Per contra Ld CIT-DR appearing for the Revenue supported the order passed by the Assessing Officer wherein on the basis of material gathered on enquiries and self confession in statement recorded u/s.131(1A) of the Act and affidavit/declaration filed by Jigar Trivedi, it is found that accommodation entries are received by the assessee from the concerns operated & controlled by Jigar Trivedi. Further the investigation carried out makes it clear that the above entities were used to provide bogus unsecured loans/ advances to various entities. These three companies do not have capacity to advance loans to any concerns and assessee is one such beneficiary who has obtained accommodation entry in the form of unsecured loan appearing in the books of accounts of assessee in AY 2015-16 & 2016-17. Further, unequivocal admission by Jigar Trivedi in statement recorded on oath u/s. 131(1A) that no business activity has been carried out by any of three companies and unsecured loans were advanced in lieu of commission and he had also suo-moto affirmed in affidavit filed on 27.12.2019 that there are no fixed assets with three companies and all the transaction appearing in the bank accounts of these to 48/Ahd/2022 & Ors. A.Ys. 2015-16 & 2019-20 Page No 26 ACIT Vs. Sankalp IN companies were made in lieu of commission. Therefore, the AO was right in treating unsecured loans to the tune of Rs.1,03,00,000/- from above three concerns which were operated and managed by Jigar Trivedi are treated as unexplained credit u/s.68 of the Act, and added to total income of the assessee.
14. We have given our thoughtful consideration and perused the materials available on record. It is undisputed fact that the Ld AO made entire addition of addition of Rs.1,03,00,000/- on the unsecured loan u/s.68 of the Act and Rs.61,800/- on account of bogus commission payments for the A.Y. 2015-16 and Rs.7,00,000 as addition u/s.68 and Rs.42,000/ as bogus commission payments for A.Y. 2016-17, though there is no seized material during the course of search proceedings.
14.1. The Hon’ble Supreme Court in the case of Abhisar Buildwell (supra) has held that no addition can be made in respect of completed assessments in the absence of any incriminating material. The conclusion recorded by the Apex Court in Para 14 of the judgement reads as follows:
“14. In view of the above and for the reasons stated above, it is concluded as under:
(i) that in case of search under section 132 or requisition under section 132A, the AO assumes the jurisdiction for block assessment under section 153A; (ii) all pending assessments/reassessments shall stand abated; (iii) in case any incriminating material is found/ unearthed, even, in case of unabated/completed to 48/Ahd/2022 & Ors. A.Ys. 2015-16 & 2019-20 Page No 27 ACIT Vs. Sankalp IN assessments, the AO would assume the jurisdiction to assess or reassess the 'total income' taking into consideration the incriminating material unearthed during the search and the other material available with the AO including the income declared in the returns; and (iv) in case no incriminating material is unearthed during the search, the AO cannot assess or reassess taking into consideration the other material in respect of completed assessments/unabated assessments. Meaning thereby, in respect of completed/unabated assessments, no addition can be made by the AO in absence of any incriminating material found during the course of search under section 132 or requisition under section 132A of the Act, 1961. However, the completed/unabated assessments can be re-opened by the AO in exercise of powers under sections 147/148 of the Act, subject to fulfilment of the conditions as envisaged/mentioned under sections 147/148 of the Act and those powers are saved.
14.2. The Hon’ble Apex Court has categorically held that the AO would assume the jurisdiction to assess or re-assessee the “total income” by taking into consideration the incriminating material unearthed during the search and the ‘other material’ available with the AO, including the income declared in the returns. The ratio of the judgement is that the incriminating material found during the search gives the AO the jurisdiction to assess or reassess the ‘total income’ u/s.153A of the Act of the unabated/completed assessment. In the absence of any incriminating material unearthed during the search, the AO would not have the jurisdiction to proceed in the unabated/completed year(s), only on the basis of other material. In the present case, during the search action certain incriminating materials were found and to 48/Ahd/2022 & Ors. A.Ys. 2015-16 & 2019-20 Page No 28 ACIT Vs. Sankalp IN seized which revealed there were certain unaccounted receipts and unaccounted payments in relation to hotel, restaurant and real estate business carried out by the assessee firm. The present additions made on account of unsecured loans and commission thereon are ‘other materials’ available with the AO, including the income declared in the returns for the Asst. years 2015-16 and 2016-17. Thus the findings arrived by the Ld CIT[A] is against the verdict of Hon’ble Supreme Court in Abhisar Buildwell. Therefore the findings arrived by the Ld CIT[A] is liable to be reversed and the additions made by the Ld AO is to be upheld, since assessee failed to make any submissions on merits of the case. In the result Revenue’s Ground Nos.6 & 7 [relating to the Asst. years 2015-16 & 2016-17 only] are hereby allowed.
15. In the combined result the appeals filed by the assessee in IT[SS]A Nos. 70 to 73/Ahd/2022 and Revenue appeals in IT[SS] A Nos. 45 & 46/ Ahd/2022 are partly allowed and IT[SS] A Nos. 47 & 48/Ahd/2022 and are dismissed.
Order pronounced in the open court on 31-01-2025