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Facts
The assessee, engaged in trading artificial jewellery and cosmetic goods, faced a search operation under Section 132 of the Income Tax Act, 1961, which led to allegations of unaccounted sales and purchases, and an admission from the assessee, later retracted. The Assessing Officer made substantial additions for gross profit on suppressed sales, unexplained expenditure for unaccounted purchases, unaccounted loans and advances, and 'on-money' investment. The CIT(A) provided partial relief by reducing or deleting some additions, applying principles like peak credit theory and telescoping, which the Revenue subsequently appealed against, while the assessee filed a cross-objection.
Held
The Tribunal largely upheld the CIT(A)'s view that only the net effect of unaccounted purchases and sales should be taxed and confirmed the application of peak credit theory for unexplained loans/advances and telescoping for unexplained investment. It determined a Gross Profit rate of 13% for unaccounted sales, finding the AO's and CIT(A)'s higher rates arbitrary. The Tribunal dismissed the Revenue's appeal, partly allowed the assessee's cross-objection, and ruled that a cross-objection filed solely to support a lower authority's finding is non-maintainable.
Key Issues
Quantification of gross profit on alleged unaccounted sales and the appropriate GP rate; deletion of additions for unexplained expenditure on unaccounted purchases; applicability of peak credit theory for unaccounted loans and advances; deletion of additions for unexplained 'on-money' investment; evidentiary value and admissibility of digital records (WhatsApp chats, DML reports); and the maintainability of a cross-objection filed merely to support a lower authority's finding.
Sections Cited
28, 69C, 69, 69A, 115BBE, 143(2), 144B, 132, 131, 65B, 145(3), 253(4)
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Income Tax Appellate Tribunal, CHANDIGARH BENCH “A”, CHANDIGARH
Before: SHRI. RAJPAL YADAV, VP & SHRI. KRINWANT SAHAY, AM
Order
PER KRINWANT SAHAY, AM:
The present appeal has been filed by the Revenue against the order of the Ld. Ld. CIT(A)-5, Ludhiana dt. 19/07/2024 pertaining to Assessment Year 2022-23. On receipt of notice in Revenue’s appeal, assessee has filed Cross Objection bearing No. 42 of 2024.
In Revenue’s appeal following grounds have been raised by the Department:
1. Whether upon facts and circumstances of the case and in law, the Ld. CIT (A) was justified in restricting the addition of Rs.
2 3,36,14,297/- u/s 28 of the Income Tax Act, 1961 to Rs. 1,20,90,623/-made on account of Gross Profit on unaccounted sale by not only reducing the unaccounted turnover but also reducing the gross profit levied on the same when the addition was made on scientific analysis of the software used by the assessee? 2. Whether Id. CIT(A) was justified in estimating the sale suppression @ 26.75% by taking average of sale suppression @ 14.71% calculated by CIT(A) in appeal order and @ 38.77% worked out by Assessing Officer in assessment order? 3. Whether ld. CIT(A) was justified in enhancing the GP rate by 5% without any basis as against enhancement of GP rate by 18% by AO based on account of evasion of GST on out of books sale? 4. Whether upon facts and circumstances of the case and in law, the Ld. CIT (A) was justified in deleting the addition of Rs. 5,78,25,348/- u/s 69C of the Income Tax Act, 1961, unexplained expenditure on account of unaccounted purchases by giving telescoping benefit by ignoring the fact that no cash flow statement or flow of fund was provided by the assessee? 5. Whether upon facts and circumstances of the case and in law, the Ld. CIT (A) was justified in deleting the addition of Rs. 1,29,00,000/- u/s 69/69A of the Income Tax Act, 1961 on account of unaccounted loan & advances by applying peak credit theory & by giving telescopig benefit when no cash now was submitted by the assessee? 6. Whether upon facts and circumstances of the case and in law, the Ld. CIT (A) was justified in deleting the addition of Rs. 2,25,00,000/- u/s 69A of the Income Tax Act, 1961 on account of unaccounted money from Sh. Rajat Batra by holding that the AO has not identified nature of transaction ignoring the fact that in para 12.2 of the assessment order the AO has clearly identified that the transaction pertains to sale of immovable property? 7. The appellant craves leave to add, amend, modify, vary, omit or substitute any of the aforesaid grounds of appeal at any time before or at the time of hearing of the appeal.
3. Following grounds have been raised by the Assessee in its Cross Objection:
1. That the Worthy CIT (A-5), Ludhiana has erred in law and facts of the case in failing to appreciate that the proceedings initiated from the impugned notice under Section 143(2) of the IT Act dated 22.06.2023 are void ab initio, as they contravene the 3 mandatory requirement of faceless proceedings stipulated by the Income Tax Act post its amendment on 29.03.2022 u/s 144B, thereby rendering the notices and proceedings issued by the Department illegal and unsustainable.
2. That the Worthy CIT (A-5), Ludhiana has rightly deleted the addition u/s 28 of the Income Tax Act, 1961 to the tune of Rs. 2,15,23,674/- on account of alleged Gross profit on alleged unaccounted sale. Further that the addition sustained of Rs.1,20,90,623/- is bad in law and without any base and thus deserves to be deleted. 2.1 That the addition cannot be sustained since the revenue authorities erred in law & facts in passing assessment order without following the mandatory Digital Evidence Investigation Manual issued by CBDT while conducting search and seizure. 2.2 That the addition cannot be sustained by placing reliance on the statement of the appellant Sh. Aman Batra which was recorded under duress and coercion, is wholy uncalled for. 2.3 That the addition cannot be sustained by relying upon material which is Inadmissible at first place. 2.4 That the addition cannot be sustained by relying on the unconfronted and uncorroborated departmental working on the seized material extracted at the back of assessee. 2.5 That no addition can be sustained considering the detailed reply of assessee with regard to change or modification of bills due to genuine and bonaifde reasons. 2.6 That the rejection of books of accounts u/s 145(3) is against the facts and circumstances of the case. That the rejection of books without pointing out any defects in the audited books, purchase/sale being fully vouched and duly accounted for in the regular books is uncalled for. 2.7 That the application of enhanced GP rate without any evidence is uncalled for. That the application of enhanced GP rate gives improbable and impossible trading results and deserves to be deleted.
3. That the Worthy CIT(A-5), Ludhiana has rightly deleted addition of Rs.5,78,25,348/- u/s 69C of the Income Tax Act 1961 on account of unexplained expenditure on account of unaccounted purchase.
4 3.1 That the addition cannot be sustained as reliance on the ‘whataspp chat’ without complying with the provisions of section 65B of the Evidence Act and considering that there is no evidentiary value of 'Whatsapp chat' as per the judgment of 'Hon'ble Apex Court' is against the facts and circumstances of the case and other judgements of different Benches of the ITAT. 3.2 That the addition cannot be sustained by treating deaf and dumb documents without any corroborative evidence whatsoever to be the basis of so called out of books purchase of the assessee. 3.3 That the addition cannot be sustained by placing reliance on the whatsapp chat whereas in most of the chat there is no positive evidence regarding making of payment. 3.4 That the addition cannot be sustained on account that various estimates of the invoices received were superseded by approved invoices duly entered in the books for which payment is made by account payee cheque. 3.5 That the addition cannot be sustained, as arbitrary words such as "KG" or figures without any currency designation cannot be interpreted as amounts in lakhs. 3.6 That without prejudice to the above the CIT (Appeal-5), Ludhiana has rightly and correctly held that no separate addition with regard to alleged unaccounted sale and unaccounted purchase can be made whereas as per the assessment order itself both are connected and inter-related. 3.7 That without prejudice to the above the CIT(Appeal-5), Ludhiana has correctly and rightly allowed the benefit of telescoping of alleged unaccounted purchase against the alleged unaccounted sale. 4 That the Worthy CIT(A-5), Ludhiana has erred in law & facts in sustaining the addition of Rs. 5,00,000/-u/s 69 r.w.s 115 BBE of the Income Tax Act on account of alleged “On-Money” without any base and reason thereof. 4.1 That the addition cannot be sustained as the Worthy CIT(A- 5), Ludhiana failed to appreciate that the Ld. AO placed reliance on the 'Whatsapp chat' without complying with the provisions of section 65B of the Evidence Act and considering that there is no evidentiary value of 'Whatsapp chat' as per the judgment of 'Hon'ble Apex Court' is against the facts and circumstances of the case and other judgements of different Benches of the ITAT. 4.2 That the addition cannot be sustained as the Worthy CIT(A- 5), Ludhiana failed to appreciate that the Ld. AO erred in law & facts in treating deaf and dumb document without any 5 corroborative evidence whatsoever to be the basis of so called out of books investment/receipt of the assessee. 4.3 That the addition cannot be sustained as the Worthy CIT(A- 5), Ludhiana failed to appreciate that the Ld. AO erred in law & facts in misconstruing the whatsapp chat whereas in most of the chat there is no positive evidence regarding making or receiving of payment. 4.4 That the addition cannot be sustained as the Worthy CIT(A- 5), Ludhiana failed to appreciate that the Ld. AO erred in law & facts in assuming payment of “On Money” without any corroborative evidence to that effect. 4.5 That the addition cannot be sustained as the Worthy CIT(A- 5), Ludhiana failed to appreciate that the Ld. AO erred in law & facts in assuming the consideration value of property to be over and above the registered value without any base and reason thereof. 4.6 That the addition cannot be sustained as the Worthy CIT(A- 5), Ludhiana failed to appreciate that the Ld. AO has misconstrued the statement given by the assessee and co-sellers which infact substantiates the case of assessee. 4.7 That the addition cannot be sustained as the Worthy CIT(A- 5), Ludhiana failed to appreciate that the Ld. AO has wrongly placed reliance on whatsapp chat which is neither related to the year under consideration nor substantiates even remotely payment of any “On Money”.
5. That the Worthy CIT(A-5), Ludhiana has correctly deleted the addition of Rs. 1,29,00,000/- u/s 69/69A of the Income Tax Act, 1961 on account of unaccounted loan & advances. 5.1 That the addition cannot be sustained as the Ld. Assessing Officer placed reliance on the 'Whatsapp chat' without complying with the provisions of section 65B of the Evidence Act and considering that there is no evidentiary value of 'Whatsapp chat' as per the judgment of 'Hon'ble Apex Court' is against the facts and circumstances of the case and other judgements of different Benches of the ITAT. 5.2 That the addition cannot be sustained by treating deaf and dumb chat without any corroborative evidence whatsoever to be the basis of so called out of books receipt of the assessee. 5.3 That the addition cannot be sustained by placing reliance on the whatsapp chat whereas in most of the chat there is no positive evidence regarding making of payment.
6 5.4 That the addition cannot be sustained by placing reliance on the whatsapp chat and treating the figures to be in lakhs and crores and payment to be in cash without any base and reason thereof. 5.5 That the provisions of section 69A are not applicable in absence of money/bullion/jewellery or other valuable articles. Thus the Ld. AO erred in law & facts in invoking provisions of section 69A to the facts of the case. 5.6 That without prejudice to the above the CIT(Appeals-5), Ludhiana has rightly held that peak investment should be considered as unexplained and not the aggregate of the credit amounts. 5.7 That without prejudice to the above the CIT(Appeal-5), Ludhiana has correctly and rightly allowed the benefit of telescoping after applying peak theory on alleged unexplained investments.
That the Worthy CIT(A-5), Ludhiana has correctly deleted the addition of Rs. 2,25,00,000/- u/s 69A of the Income Tax Act, 1961 on account of unaccounted money. 6.1 That the addition cannot be sustained as the Ld. Assessing Officer placed reliance on the 'Whatsapp chat' without complying with the provisions of section 65B of the Evidence Act and considering that there is no evidentiary value of 'Whatsapp chat' as per the judgment of 'Hon'ble Apex Court' is against the facts and circumstances of the case and other judgements of different Benches of the ITAT. 6.2 That the addition cannot be sustained by treating deaf and dumb chat without any corroborative evidence whatsoever to be the basis of so called out of books receipt of the assessee. 6.3 That the addition cannot be sustained by placing reliance on the whatsapp chat whereas in most of the chat there is no positive evidence regarding making of payment. 6.4 That the Worthy CIT(A-5), Ludhiana has rightly held that there is no evidence that any money has exchange hands and there is absence of nature of transaction identification. 6.5 That the Worthy CIT(A-5), Ludhiana has rightly held that in absence of corroborative evidence invoking provisions of section 69A is illegal and bad in law. 7 Notwithstanding the above said facts and circumstances, the approval as given by the WorthyAddl. Commissioner of 7 Income-Tax, Central Range, Ludhiana have been recorded in a mechanical manner without any application of mind and, as such, the assessment proceedings are not valid. 8 Alternatively even there being no provisions in the Income tax for according any approval from the Worthy ACIT, thus, the order as passed with prior approval of ACIT is bad in law. 9 That the Appellant craves, leave to vary, alter or add any grounds of appeal
4. Whereas the first cross objection of the assessee pertains to a legal issue regarding the jurisdiction of notice being issued u/s 143(2) r.w.s 144B of the Income Tax Act, 1961. During the course of hearing the Ld. Counsel for the assessee has categorically stated that no legal issue regarding jurisdiction is being taken or being pressed. So the first ground of cross objection is being dismissed as not pressed.
The first, second and third ground of appeal of the department and second ground of cross objection of the assessee pertains to application of gross profit on alleged unaccounted sale. The brief facts of the case are that the assessee is engaged in the business of trading In artificial jewellery and cosmetic goods by the name of M/s. Mani Ram Balwant Rai & Sons. A search u/s 132 of the Income Tax Act, 1961 was conducted at the premises of the assessee on 24.11.2022. During the course of search certain incriminating material and digital evidence were said to be found which suggested that the assessee is indulged in practice of unaccounted sale. Further even the statement of assessee were recorded u/s 131 of the Income Tax Act, 1961 in which the assessee has agreed to the practice of unaccounted sale.
8 6. Based upon the said information and evidence the AO proceeded to allege that the assessee has done significant amount of unaccounted sale. As per the AO, the quantum of total unaccounted sale was 38.77% i.e. Rs. 11,46,85,420/-. Thereafter the AO has applied a GP Rate of 29.31% to arrive at a gross profit of Rs. 3,36,14,297/-.
When the matter travelled to the CIT(A) he after a very detailed and elobrated discussion has restricted the amount of alleged sale suppression to 26.75% which amounts to Rs. 7,41,30,123/-. Thereafter on analysis of the financials of the assessee concern the CIT(A) was of opinion that the applicable GP Rate should be determined at the rate of 16.31%. Accordingly, the net profit was determined at Rs. 1,20,90,623/-. Now the department is in appeal regarding the relief of Rs. 2,15,23,674/- granted to the assessee whereas the assessee is in cross appeal on account of addition of Rs. 1,20,90,623/- sustained by the Ld. CIT(A).
The brief note or line of argument submitted by the assessee through its AR regarding the alleged unaccounted sale and the applicable gross profit on the same is being reproduced here as under: 1. The summary of additions made during the assessment proceedings and their outcome in the first appeal proceedings are as under: Issue Addition Addition Remarks made by sustained AO by CIT(A) Sale suppression 3,36,14,297/- 1,20,90,623/- The CIT(A) upheld sale suppression but quantified the GP at Rs. 1,20,90,623/- wherein the GP was computed 9 @16.31%. Unaccounted 5,78,25,348/- NIL The CIT(A) held that source of purchases purchase is unaccounted sale and it is only the net result of sale and purchase which can be brought to tax. Unexplained 5,00,000/- 5,00,000/- The CIT(A) upheld the Investment in additions sustained on the property basis of a deaf and dumb slip measuring 522 found. sq. yds situated at Maharishi Dayanand Road, adjoining MRBR, Ludhiana Cash Loan 1,29,00,000/- NIL The CIT(A) held that only the given/received peak amount of investment to Sh. RajanPuri can be brought to tax. The and Others said peak for the year under consideration was NIL. Unexplained 2,25,00,000/- NIL The CIT(A) deleted the Money received addition with a finding that from Cousin of there is no corroborative assessee Sh. evidence qua the transaction Rajat Batra and none of the ingredients of Section 69A are available.
2. The department is in appeal against the relief granted by the CIT(A) and the assessee in CO against the additions sustained by the CIT(A). A. ISSUE OF ALLEGED SALE SUPPRESSION The AO has made the following additions on account of alleged sale suppression which is confirmed to some extent by CIT(A) as detailed hereunder: Authority Alleged sale Alleged GP Amount of Relevant suppression on addition page of Suppressed made/confirmed the Order Sale by the Authority of the Authority Assessing It was The declared The same was Officer alleged that GP was quantified at Rs. 38.77% of the 11.31% which 3.36 Crore by the Total sale is was AO. (i.e. 29.31% suppressed. enhanced of Rs. 11.46 The same by 18% on Crore) was grossed allegation of up to pocketing quantify the GST on sale suppressed suppression sale and 10 at Rs. 11.46 determined Crore. at 29.31% by the AO CIT(Appeal) The alleged The declared The same was sale GP of 11.31% recomputed at suppression was Rs. 1.21 Crore i.e. was worked enhanced (16.31% of Rs. out at by 5% in view 7.41 Crore) 26.75%. The of detailed same was finding of grossed up to CIT(A) to compute the determine alleged sale the GP Rate suppression of 16.31%. at Rs. 7.41 Crore.
The primary contentions of the AO a) DML Report, the Document Modification Report said to be extracted form the Logic ERP server of the assessee was heavily relied upon by the AO to allege sale suppression of Rs. 11.46 Crore. b) ULB Report, the User Log Book report was referred by the AO for the period where there was no DML report. c) 1-2 Slips said to be taken from customers prior to search were said to be compared with sale recorded in Logic software to allege sale suppression being done. d) Statement of the assessee u/s 131(1A) was heavily relied wherein the assessee made an admission of sale suppression qua the purported slips. (though the amount of sale suppression as per purported slip was Rs. 10,000/- approx. only) Findings of CIT(A) a) CIT(A) gave due emphasis to the fact that DML report suggest significant number of sale addition or increase in the value of sale. b) CIT(A) appreciated that it is merely billing software and due to compelled business circumstances like on the request of the customer/sale return etc. The modification is required to be made in due course of business. c) However, considering the other circumstances, the CIT(A) was of the view that it cannot be said that there is no sale suppression considering the same he quantified the sale suppression at 26.75% or Rs. 7.41 crore. Prayer/argument of Assessee a) Unconfronted material. The entire basis of addition is unconfronted material in form of DML report and ULB report as evident from Page no. 243 of the paperbook. The submission of 11 assessee is that such unconfronted material cannot be any basis whatsoever to make or sustain any addition. Reliance is placed upon: Decision of Hon’ble Supreme Court in the case of C. - Vasantlal& Co. (45 ITR 206 SC) b) Unreliable material. The DML report per se is unreliable and cannot be basis of any addition. As per page no. 13 & 14 of the assessment order, The DML report contains vouchers of Bar Code, Stock Transfer etc. It does not contain merely alleged GST sale modification. Thus DML report per se should not be basis of any quantification of alleged sale suppression. Moreover, as per the version of department itself one bill was generated in logic software of 171 Crore which proves that the software is unreliable. Refer paperbook page no. 439. c) Business rationale:-The assessee is in business of artificial jewellery and cosmetic goods. There are compelling business circumstances and situations which justifies that the modification made is in due course of business and is not actually sale suppression. - Modification or deletion on customer’s request: Customers, often selecting multiple items, frequently request deletions or modifications due to payment issues. Such changes are routine and do not indicate suppressed sales. This explanation also remains unrebutted by the AO. - Sale return: The assessee offers a 15-day exchange/return policy and, due to limited IT skills, modifies original invoices instead of passing sale return entries, leading to deletions. Though the AO acknowledged sale returns in para 8.3.3, no benefit was given. Sale addition: Modifications are often made to increase - quantity and value, not just to reduce sales. The assessment record clearly shows addition of new items and increased sales value. Thus, modifications were bona fide and not for suppression, though the AO ignored this during assessment. Regarding the statement of assessee recorded u/s 131(1A) - of the Income Tax Act, 1961 it is submitted that the same has been extracted merely qua alleged sale suppression of approximately Rs. 10000/- and with no rhym or reason be interpreted to justify sale suppression of Rs. 7.41 crore as sustained by Worthy CIT(A). Further it is submitted that the assessee has already filed a retraction to confession statement since it was made under mistaken belief of law/facts and duress. Reliance is placed upon the judgement of M/s Atop Fasteners Pvt. Ltd. (ITA No. 1616/Chd/2019, ITAT Chandigarh) (Refer page no. 336 of Judgement Set) d) Regarding the slips confronted to the assessee, the stand of revenue is that the said slips were taken from the customers with regard to sale made prior to the date of search. The stand of 12 assessee as confirmed in a duly sworn affidavit is that the purported slips were infact collected from the floor. Not only the department has failed to identify any customer to whom it was issued but also the stand of department is contrary to the CBDT search manual which states that the search team will first offer itself for search. The mere presence of old, cancelled bills within the premises — without proof of their issuance to customers — cannot justify any addition. The denial of cross-examination and disregard of the affidavit render the conclusions drawn by the Ld. AO unsustainable. e) Quantification of Sale The AO has quantified the alleged sale suppression merely on the basis of DML report. He has quantified the sale suppression at 38.77% or 11.46 Crore. The CIT(A) has correctly noted that every modification cannot be said to be suppression. After giving due emphasis to the fact that there are number of case of sale addition and also considering bonafide of the submission of the assessee, the alleged sale suppression was computed at 26.75% or Rs. 7.41 Crore. The prayer of the assessee is that either the sale suppression be deleted in totality or be computed in a more rational manner as detailed here under: i) The sale suppression may kindly be computed at maximum rate of 14.71% as per working of CIT(A) himself at page no. 120 of the paperbook. The CIT(A) after due consideration of facts has done working of 14.71% but thereafter arbitrary applied the average so as to increase alleged sale suppression to 26.75%. ii) In alternative the DML by no means be considered as a reliable document to arrive at a conclusion for quantification of alleged sale suppression. The sale suppression may at best be worked out on the basis of alleged unaccounted purchase if so determined by the Hon’ble Tribunal. The said approach of working of sale suppression on the basis of purchase would be more consistent as done by the CIT(A) himself in case of cousin of the assessee who is part of same family and in same business i.e. Sh. Rajat Batra whose appellate order is annexed herewith. f) Quantification of GP: The AO has quantified GP at 29.31% under a wrong and mistaken belief that the declared GP is 11.31% which needs to be enhanced by 18% on account of GST pocketed on alleged unaccounted sale by the assessee. The said action of the AO is sans any show cause and without reference of any material much less corroborative material to reach at consensus of arbitrary GP of 29.31%.
13 The CIT(A) was of the view that the purchases are tax paid since no input has been received on alleged unaccounted purchases. The CIT(A) also appreciated the fact that many items in the trade of assessee are exempt from GST. The CIT(A) further noted that application of almost 29% GP will give very improbable and unacceptable trading results. The CIT(A) however still enhanced GP Rate by 5% of declared GP to levy the G.P Rate of 16.31%. PRAYER In view of the above submissions, it is respectfully prayed that the addition made on account of alleged sale suppression and profit enhancement be appropriately reconsidered. The DML report in any circumstance cannot be a basis for quantification of alleged sale suppression. It is submitted that the assessee is liable to pay GST only on the value addition or margin earned, not on the gross turnover. During the year under consideration, the assessee has actually paid GST in cash to the tune of Rs. 10,42,791/- against total disclosed sales of ₹20,29,91,832/-, which is equivalent to only 0.5% of the turnover — clearly indicating the thin margin structure typical of the cosmetic and jewellery retail business. The copy of GST credit ledgers are challans are annexed at page no. 625 to 629 of the paperbook. The arbitrary enhancement of gross profit (GP) rate by 18% or even by 5%, as done by the lower authorities, is wholly unwarranted, disproportionate, and unjustified. It is most humbly submitted that in these circumstances, **any increase in the GP rate, if at all warranted, should be restricted within a reasonable range of 0% to 1% over the declared GP, and not beyond. Accordingly, it is prayed that the addition made on this account may kindly be deleted or substantially reduced as deemed just and proper in the facts and circumstances of the case.
We have considered the arguments of the Ld. Counsel of the assessee alongwith the paper books and the judgement set filed before us and also the brief synopsis, the arguments of Ld. CIT(DR), assessment order and the order of CIT(A). The facts of the case are not in dispute that there was a search and seizure operation on 24.11.2022. The department has vehemently argued that the 14 assessee is engaged in the practice of unaccounted sale. The case of the revenue is primarily built around the analysis of digital data in the form of DML report and ULB report. The department has also strongly relied upon purported slip of sale said to be issued to a customer before the date of search and then compared it with the sale as recorded in the logic ERP billing software. The revenue has further relied upon the confession made by the assessee during the course of search which the AR of the assessee opposed by stating that the same stands already retracted. Though the assessee has given some explanation regarding each of the contention of the revenue but it is important for this tribunal to look into totality of facts and circumstances. We are of the opinion that though a single document/report/evidence do not conclusively demonstrate that the assessee has indulged in practice of sale suppression but when totality of facts is considered it cannot be denied that assessee has actually or indeed indulged in practice of sale suppression. The confession statement made by the assessee coupled with the purported slip issued to a customer before search viz. a viz. being recorded in logic ERP software, the digital record being found on logic ERP software of the assessee and also plethora of digital and physical evidences suggesting possibility of unaccounted purchase all points out towards a conclusion that the assessee has indeed indulged in unaccounted purchase and sale.
Having held so, the most important issue now is the quantification of the unaccounted sales. It is important to highlight that both the Assessing Officer and the CIT(A) have treated the 15 DML report (Document Modification Log report), generated from the Logic ERP Billing Software of the assessee, as gospel truth for quantifying the alleged unaccounted sales. The AO was of the opinion that the assessee suppressed sales to the extent of 38.77%, amounting to Rs. 11,46,85,420/-, whereas the CIT(A), based on an analysis of items like sales additions and applying certain averages, worked out the sale suppression at 26.75%, amounting to Rs. 7,41,30,123/-.
We find merit in the assessee’s argument that the DML report, by itself, should not form the sole basis for making or sustaining the addition. The DML report contains various entries such as Bar Codes, Stock Transfers, etc., as demonstrated in pages 13 and 14 of the assessment order. Furthermore, it cannot be ignored— whether remotely or otherwise—that modifications reflected in the DML report may have arisen due to genuine business reasons, such as customer requests, sales returns, or sales additions. Therefore, no logical or conclusive inference can be drawn to quantify sale suppression merely on the basis of DML report analysis.
The only logical and accurate method, considering the facts and circumstances of the case, is to quantify the alleged sale suppression through a detailed analysis of unaccounted purchases—especially since the pattern of unaccounted purchases is a critical factor in arriving at any finding of unaccounted sales. Accordingly, we hold that unaccounted sales must be determined in proportion to the established quantity of unaccounted purchases.
Another important issue is regarding quantification of gross profit. The Gross Profit as declared in the trading results of the assessee concern was 11.31%. The same was enhanced by 18% on the allegation that the assessee has pocketed the GST component on alleged unaccounted sale. The contention of the AR was that neither a show cause was issued in assessment proceedings for this issue, nor it is correct to allege that the assessee has pocketed the GST without reference to any material whatsoever. The CIT(A) concurred with the view of assessee to some extent and also stated that the purchases are tax paid in the sense no GST input is available on unaccounted purchase and the embedded input becomes part of the cost. Also after due analysis of the figures of the assessee concern the CIT(A) came to a conclusion that application of 29.31% GP will give result to distorted and unbelievable trading results. Thus he had enhanced the GP rate by only 5% by stating that the same will take care of the embedded cost of GST paid on accounted purchases for which no input is available and shall also result in more appropriate trading results. Before us the AR further argued that the arbitrary increasing GP rate by 5 or 18% without reference to any material or figures is uncalled for. The AR drew our attention to page no. 625 of the paperbook to demonstrate that the actual GST paid through cash ledger was Rs. 10,42,791/- against a declared turnover of Rs.20,29,91,832/- in the audited financial statements. The contention of the AR was that the GST liability settled in cash accounts for merely 0.50% of the total turnover and even if it is believed for sake of argument that the GST component 17 on unaccounted sale was pocketed by the assessee, the same cannot be said to be more than 0.50%.
We do find force in the argument of the assessee that the estimation should be based upon some tangible material or with reference to certain information or figures. The application of enhanced rate of 5% or 18% by the revenue is not permissible in the eyes of law since the same is arbitrary and very excessive. The AR has demonstrated that the liability settled in cash with regard to GST is merely 0.50%. Thus to meet the ends of justice we are inclined to levy a GP rate of 13%, though the same is more than the declared GP of 11.31% but it will safeguard the interest of revenue in so far as any pocketed GST on unaccounted sale is concerned and shall also result in acceptable GP rate which shall be at par with the Industry norms.
Once the GP rate is determined it is relevant to determine the exact quantum of determined unaccounted sale with reference to quantum of unaccounted purchase. In the succeeding paragraphs of this order we have determined the unaccounted purchase at Rs. 5,78,25,348/- keeping the same as base and applying GP rate of 13% the unaccounted sales is worked backwords at Rs. 6,64,65,917/-. After applying Gross Profit of 12% on the same the Gross Profit is determined at Rs. 86,40,569/- against Rs. 1,20,90,623/- determined by the CIT(A). Thus assessee gets partial relief. Ground No.2 of the Cross Objection is partly allowed and Ground No. 1, 2 and 3 of Departmental appeal are dismissed.
18 16. The Fourth Ground of Appeal in the revenue’s appeal and fourth Ground in Cross Objection of the assessee pertains to deleting of addition of Rs. 5,78,25,348/- u/s 69C of the Income Tax Act, 1961 on account of unexplained expenditure on account of unaccounted purchase by giving the benefit of telescopping. The assessee in ground no. 3 of the cross appeal has supported the action of the CIT(A) and has further raised other grounds on admissibility of the material. The facts of the issue are that the assessee is engaged in the business of sale of artificial jewellery in cosmetic goods. During the course of search u/s 132 of the I.T Act, 1961, the phone of the assessee was cloned. The whatsapp data of the assessee was retrieved from which the Assessing Officer has reached at a conclusion that during the year under consideration, the assessee has made out of books purchases of Rs. 5,76,75,647/-. As per the assessment order, the assessee did not furnish any reply during the course of assessment proceedings. Further addition of Rs. 18,040/- has been made on the basis of Page no. 133 of the Annexure A-2 and addition of Rs. 1,31,661/- has been made on the basis of Page no. 1 of Annexure A-8 found from the business premises of the assessee. During the course of appellate proceedings, the CIT(A) was of the view that it cannot be held that assessee did not indulge in any unaccounted purchase but the assessee is entitled to the benefit of telescoping against the funds generated from unaccounted sale. The CIT(A) was of the view that doctrine of source of and application of the fund is one of the cardial principle of the search assessment.
17. After going through the arguments of the AR, the arguments of CIT(DR), the assessment order and the order of CIT(Appeal), we 19 are of the opinion that the collective analysis of all the documents and the pattern do suggest that assessee was indeed involved in unaccounted sale and purchase. Though we do find force in the arguments of the assessee that some of the chat is in the form of deaf and dumb documents etc. but it is pertinent to note that during the course of assessment and appeal proceedings, the AR has merely given a generic and general statements without giving complete detail in tabulated form for each and every chat when the entire chat was duly confronted to the assessee. More importantly, we do not find any fault in the reasoning of the Ld. CIT(A) who has held that it is only the net result of unaccounted purchase and unaccounted sale which needs to be brought to tax. For preposition the Ld. AR drew our attention to the judgements of ITAT Calcutta Bench in the case of Shri J.K Ramesh Gandhi, vs. The Dy. Commissioner of Income Tax, Cuddalore Circle, Income Tax Office. in which comes to the support of the assessee. The relevant portion of the same is reproduced here as under: 6……… Moreover, it is only net result of unaccounted purchases & unaccounted sales, needs to be taxed. Since, the Department had already taxed profit earned out of unaccounted transactions, the question of making further additions towards unaccounted purchases does not arise. In this case, the facts remain that the assessee has offered additional income of Rs.38,37,921/- for two assessment years towards unaccounted sales, whereas the total unaccounted purchases for the impugned assessment year is Rs.75,67,705/-. Therefore, it is difficult to accept the arguments of the assessee that income earned out of unaccounted sales is plugged back into the business and which is source for unaccounted purchases, because, unaccounted purchases noticed by the Department is more than the amount of additional income offered by the assessee. Therefore, we are of the considered view that the assessee could not able to explain source for unaccounted purchases over and above what was disclosed during the course of survey. Hence, to cover up the deficit in source for unaccounted purchases, we direct the AO to estimate 25% of gross profit on unaccounted purchases 20 amounting to Rs.75,67,705/- and delete the balance additions made towards unaccounted purchases.
18. It is pertinent to note that admittedly the stock found physically was on lower side than the stock as per the books of accounts. So the only logical conclusion is that the alleged unaccounted purchase has already been sold thus on the appreciation of facts of the case also the addition of GP on unaccounted sale will take care of the profit embedded in transaction of purchase and sale. Further the principle of source and application of fund is one of the cardinal principle of search assessment. The CIT(A) has rightly held that the proceeds from unaccounted sales were available for investment in unaccounted purchase for which no separate addition is required. Therefore we find no error in the order of CIT(A) wherein it was held that the receipt from unaccounted sale was available and benefit of telescoping is to be given against theses unaccounted purchases. Thus the unaccounted purchase is computed at Rs. 5,78,25,348/- which is based both on Physical and electronic evidence for which CIT(A) has rightly held that only the net result of the two can be brought to tax. Thus, there is no need in interfering with the order of CIT(A).
19. The next issue is regarding addition of Rs. 5 Lacs on alleged unexplained investment. The said issue arises in ground no. 4 of the cross objections raised by the assessee. The said issues has been decided against the assessee where in the addition has been confirmed by the CIT(A). In the background, as is evident from record the assessee entered into a transaction for purchase of property measuring 522 sq. yds situation at Maharishi Dayanand 21 Road, Adjoining Mani Ram Balwant Rai, Civil Lines, Ludhiana. It has been alleged that the total consideration for said deal is Rs. 12.60 Crore which was registered merely for Rs. 2.57 Crore wherein substantial amount is alleged to be paid in cash by the AO but denied by the Assessee. During the year under consideration addition of Rs. 5 Lacs has been made on account of alleged unexplained investment and the balance addition of approximately Rs. 10 Crore has been made by the AO in A.Y 2023- 24 and said matter is subjudice before CIT(A)-5, Ludhiana. During the course of argument and before going into the facts of the case it was admitted both by AR and DR that the issue primarily belongs to A.Y 2023-24. That almost entire transaction needs to be considered in A.Y 2023-24 and it would be premature at this stage to adjudicate on this issue without having appeal of A.Y 2023-24 before us for consideration.
On the other hand, in alternate the AR for sake of argument submitted that even if the purported transaction is believed to be have taken place to the tune of Rs. 5 Lacs in A.Y 2022-23, the assessee is entitled to the benefit of telescoping against the income determined on alleged unaccounted sale if any. We find force in the arguments of the assessee. We have already worked out gross profit on alleged unaccounted sale at Rs. 86,40,569/-. The purported investment of Rs. 5 Lacs even if made is said to be made on 10.03.2022. It is can be reasonably be presumed that income earned as Gross Profit on unaccounted sale was available with the assessee to make investment of Rs. 5 Lacs on 10.03.2022. The law of telescoping has been rightly laid by the Hon’ble 22 Bombay High court in the case of Commissioner of Income Tax vs. Golani Brothers reported in [2017] 85 taxmann.com 355. The relevant portion of the same is reproduced here as under:
When it was disturbed and interfered with, the Tribunal found that there was indeed a justification for such interference. If the unaccounted expenditure is determined, then, necessarily the question which would arise for consideration before the Tribunal is whether the Assessing Officer was justified in making addition under Section 69C for the years under consideration. The Tribunal, in para 39 of the order under challenge, found that the explanation as derived from the records and placed by both can be traced to the 'on money' received at the time of booking/sale of shops. The statement of the senior partner is referred. The senior partner admitted that the sums have been received as 'on money' and at the stage aforesaid. Therefore, both the amounts, namely the 'on money' as well as the unexplained expenditure cannot be brought to tax, according to the Tribunal. If the unaccounted expenditure so incurred was from the 'on money' received by the assessee, then, the question of making any addition under Section 69C does not arise because the source of the expenditure is duly explained. It is only the 'on money' which can be considered for the purpose of taxation. That is what the Tribunal therefore concluded and once the 'on money' is considered as revenue receipt, then any expenditure out of such money cannot be treated as unexplained expenditure, for that would amount to double addition in respect of the same amount. 21. We would like to make it clear that we have not adjudicated on merits of this issue and any finding in this order of Tribunal would not act to the prejudice of the assessee or that of department. The CIT(A) shall be at liberty to decide the issue on merits after affording due opportunity of hearing to the assessee. However, the assessee gets relief of Rs. 5 Lacs on account of telescoping. The ground no.4 of Cross Objection is partly allowed.
The next issue is regarding deletion of addition of Rs. 1,29,00,000/- u/s 69/69A r.w.s 115BBE of the Income Tax Act, 1961. The said issue is arising out of Ground No. 5 of the Appeal of Department and also Ground No.5 of the Cross Objections filed by 23 the assessee. The facts of the issue are that the AO observed that the assessee is engaged in giving cash loan to Sh. RajanPuri and Smt. Dinky Batra. Admittedly Sh. RajanPuri is a cousin brother of the assessee and Smt. Dinky Batra is sister-in-law of the assessee. During the course of search conducted on 24.11.2022, the whatsapp chat of the assesee was seized and subsequently analysed by the AO to come at a conclusion that assessee has indulged in giving and taking back of cash loans. The quantum of allegation regarding amount invested during the year and amount received back is as under:
Particulars Amount Invested Amount Received Back RajanPuri 54,00,000/- 1,27,00,000/- Dinky Batra 14,40,637/- 2,00,000/- Total 68,40,637/- 1,29,00,000/-
The Assessing Officer has added higher of the two i.e. Rs. 1,29,00,000/- as income u/s 69A of the Income Tax Act ,1961. Whereas the CIT(A) was of the opinion that receiving back of loan cannot be termed as an income specially when the ingredients of section 69A are not fully satisfied. The CIT(A) has further held that it is only the peak amount of investment which can be brought to tax. The CIT(A) further relied upon the working of peak credit to comfortably come to a conclusion that during the year under consideration the alleged peak amount was NIL.
During the course of argument the DR relied upon the order of AO. The AR has relied on the order of CIT(A) and made following submission in form of brief note/synopsis.
24 Whereas the AO made addition of Rs. 1,29,00,000/- being the higher of two amounts by invoking provisions of section 69A of the Income Tax Act, 1961 and holding that the purported whatsapp chat represents actual transactions of Money. The CIT(A) on other hand was of considered view that the entire amount of investment or receipt cannot be brought to tax but it is only the peak investment which is chargeable to tax. The CIT(A) then relied upon the working of peak credit which is simply drawn on basis of data of AO himself to come at consensus that the peak amount was NIL so as to not make any addition. The submission of the assessee is as under: A) The entire addition and the purported transaction of giving and taking back of loan is merely made on the basis of whatsapp chat. The said whatsapp chat is uncorroborated and is in the form of heresay. The same is neither admissible nor can be basis of any addition in isolation. Reliance is placed upon A. Johnkumar v. DCIT CC 1(4) [ITA No. 3028 (Chny) of 2019, dated 13-5-2022] (Refer page no. 195 of Judgement set) B) Regarding facts it is submitted that the AO has wrongly concluded that the purported transaction or chat in KG represents transaction in lacs of Rupees. The assessee in statement recorded u/s 131(1A) of the Income Tax Act, 1961 has specifically explained that the chat is with regard to floor. It is wrongly assumed that when RajanPuri wrote that 500 KG is given it represents 5 Crore paid to assessee without any evidence in this regard.
C) Money received back is not an income. The CIT(A) was of the considered opinion that if a loan was given and the said loan is repaid by the other party it do not represents an income. Also the ingredient of section 69A does not stand fulfilled. The said principle is also upheld by the AO herself in Assessment Proceedings for A.Y 2021-22 for which the relevant copy is attached at page no. 728 of the paperbook. D) Applicability of peak theory. Even the worthy CIT(A) has concurred with the contention that even if the said transaction is said to be taken place it is only the peak amount of investment which can be brought to tax. The assessee has given a detailed working of alleged peak which is at page no. 499 of the paperbook. The revenue has not pointed out any fault in working of peak. The peak for the year under consideration is zero. The peak investment has already been brought to tax when the same was positive i.e. 25 in A.Y 2019-20 by the Worthy CIT(A). Accordingly, there is no merit to make or sustain any addition during the year under consideration. Reliance is placed upon CIT-VI, Hyderabad v. PurushottamJhawar [2013] 40 taxmann.com 533 (Andhra Pradesh HC) (Refer page no. 521 of the Judgement set).
E) In view of the above, it is respectfully submitted that, as rightly held by the Ld. CIT(A), no addition can be sustained either under the computation provisions of the Income Tax Act or under the principles of peak theory, which have been duly applied to the facts of the case. Therefore, whether or not the alleged transactions actually took place becomes merely an academic issue, as no taxable amount arises even if assumed to be true. It is the earnest prayer of the assessee that this academic issue may be left open to be argued on merits, if so required, in collateral proceedings that may arise in the case of the assessee’s cousin Sh. RajanPuri or sister-in-law Smt. Dinky Batra.
After carefully perusing the assessment order, the order of CIT(A) and the arguments advanced by both the sides we find no fault in the approach of CIT(A) in applying peak theory even if the purported transaction has taken place. The principle of peak theory has been laid down by Hon’ble High Court of Andhra Pardesh in the case of Commissioner of Income-tax -VI, Hyderabad vs. PurushottamJhawar reported in [2013] 40 taxmann.com 533. The relevant portion of the same is reproduced here as under: 3. It appears that the learned Tribunal has decided by its judgment and order three appeals in all. The first appeal was filed by the department, second appeal was filed by the respondent herein against the appellant and the third appeal was filed by the department in the case of connected assessee M/s. G.K. Cold Storage, Mahabubabad. The appellant/respondent filed cross appeal against the judgment and order of the Assistant Commissioner of Income Tax in which the application of principle of peak credit method in quantifying the undisclosed income was considered. The learned Tribunal on this issue has found that the lower authority came to the fact finding that the peak credit concept has to be applied and it cannot be disputed that the concept of peak credit is one of the accepted methods of accounting principles for the purposes of computing the real profit, and 26 came to the conclusion that there is no fault with the view taken by the Commissioner of Income Tax (Appeals) unless and until the method adopted by the lower authority is contrary to the provisions of the Income Tax Act, 1961 (for short, "the Act"). We are in agreement with the views expressed by the learned Tribunal on this issue. . . . . 13. Next ground of the assessee's appeal was with regard to addition of Rs. 1,80,000/- on account of repayment of loan from undisclosed sources in the case of B. Sriram Reddy. The learned Tribunal on this contention found that when the Commissioner of Income Tax (Appeals) has followed the peak credit concept, there is no need to make any separate addition in respect of Rs. 1,80,000/- and that the assessee has explained the sources for repayment. Under such circumstances, the learned Tribunal found that there was no justification for separate addition. In our view this is also a question of fact, which this Court cannot decide.
Further during the course of arguments also the DR did not point out any defect in the working of peak. We do find force in the finding of CIT(A) and also in the arguments of AR that Loan received back cannot be treated as income specially when the ingredients of section 69A are not fulfilled. Since the peak is admittedly NIL during the year under consideration no addition is warranted on this issue in said year. The AR has also pointed out that the addition of peak was made in earlier years like in A.Y 2019-20 by CIT(A). Thus we find no reason to interfere with the order of CIT(A) deleting the addition of Rs. 1,29,00,000/-. Before we part it is important to highlight that the AR has submitted that this matter is subjudice qua the transaction having taking place or not in the hands of Sh. RajanPuri and Smt. Dinky Batra. We have granted relief to the assessee by applying the peak theory even if the purported transaction has taken place. Whether or not the transaction has taken place and whether or not the material is 27 admissible becomes academic issue for discussion at this stage. The findings on this issue shall not prejudice the rights of respective assessee i.e. Sh. RajanPuri and Smt. Dinky Batra or the revenue who are left open to argue the issue or decide the issue on merits if so advised.
The last issue pertains to addition of Rs. 2,25,00,000/-. Based upon whatsapp chat between the assessee and his cousin Sh. RajatBatra. As per AO Sh. Rajat Batra has paid huge cash of RS. 2.25 Crore to the assessee for some property related transaction. The CIT(A) has deleted this addition against which the revenue is in appeal and has taken the said issue as ground no.6 of the departmental appeal. The assessee has supported the order of CIT(A) by taking ground no.6 of Cross Objection. The ground no.6 of Cross Objection is in the support of CIT(A) finding. If we peruse sub-clause (4) of Section 253 of the Income Tax Act, it provides that the AO or the assessee, as the case may be, on receipt of notice that an appeal against the order of the CIT(A) has been preferred under sub-section (1) or sub-section (2) by the other par ty, may notwithstanding that he may not be appealed against such order, or any part thereof, within 30 days of receipt of the notice, file a Memorandum of Cross Objection and in other words, a respondent could file a Cross Objection within 30 days on receipt of notice in an appeal. This clause further contemplates that this Cross Objection should be against any part of the order of the CIT(A). It means it is to be filed aggrieved with any part of the order. No Cross Objection is maintainable qua in support of the order.
Thus Ground No. 6 of Cross Objection merely to support the finding of CIT(A) is dismissed as non-maintainable. On careful consideration of the assessment order, the CIT(A) order and also argument of both the sides we are of the view that no addition can be made merely on basis of some uncorroborated chat. The said chat or purported transaction is totally uncorroborated and at best here say. The entire transaction was contingent upon some registry. The AO has not brought on record any registry or any details of property whatsoever. There is neither corroborative evidence regarding the transaction actually taking place nor underlining property or currency is identified. The CIT(A) has rightly relied upon the decision of ITAT Chennai in the case of Mr.A. Johnkumar vs. The Deputy Commissioner of Income Tax, Central Circle -1 (4), Chennai reported in ITA No. 3028/Chny/2019. The Tribunal held that the addition under Section 69C made by the Assessing Officer (AO) on the basis of WhatsApp messages and photo identity cards was unjustified and based purely on suspicion. The WhatsApp messages were vague, unintelligible, and lacked corroborative evidence. The Tribunal found the reasoning of the AO to be speculative and unsupported, and concluded that no valid addition could be sustained in law on the basis of suspicion or surmise.
Thus in absence of any evidence or corroboration the CIT(A) has rightly deleted the addition. We find no reason to interfere in the findings of CIT(A) in deleting the said addition. This ground of Departmental Appeal stands dismissed.
In result the departmental appeal is dismissed and Cross Appeal of the assessee is partly allowed.