GOLD AK,TENKASI vs. ITO 3(3), CHENNAI

आदेश /O R D E R PER MAHAVIR SINGH, VICE PRESIDENT: These six appeals by the assessee are arising out of different orders of the Commissioner of Income Tax (Appeals), Chennai-20 in Order Nos.ITBA/APL/S/250/2024-25/1061380760(1), 1061388638(1), 1061388883(1), 1061389173(1), 1061389451(1)

to 1051/Chny/2024 The relevant grounds of the above two interconnected issues are as under:- vii.The Learned AO/CIT(A) erred in confirming the addition towards gross profit based on the evidences collected from the third party without giving the opportunity of cross examination. viii. The Learned AO/CIT(A) ought to have seen that the legal presumption u/s 132(4A) that the content of the seized material are true and correct is applicable only in respect of the searched person and not in respect of the other person. ix. The Learned AO/CIT(A) erred in directing the assessing officer to disallowRs.10,17,517/- under section 40A(3) without giving the opportunity of cross examination in violation of the principles of natural justice. x. The Learned AO/CIT(A) ought to have seen that the above Rs. 10,17,517/- includes payments which were made through banking channels and thereby section 40A(3) is not applicable. xi. The Learned AO/CIT(A) ought to have seen that when the gross profit is calculated on presumptive or estimation basis of turnover, disallowances u/s 40A(3) cannot once again be made. xii. The Learned AO/CIT(A) ought to have noted that the same is already factored into the gross profit calculation.

3.1 The AO also made addition of unaccounted cash pertaining to financial year 2015-16 relevant to this assessment year 2016-17 to 1051/Chny/2024 at a sum of Rs.10,17,517/- and added the same u/s.69A of the Act as unaccounted cash. The AO computed this cash on the basis of above chart where, according to AO, the entire unaccounted cash to the tune of Rs.108,08,59,041/- was given to MJPL during the period, financial years 2015-16 to 2020-21. Accordingly, addition of unaccounted cash on this assessment year 2016-17, of Rs.10,17,517/- was made. Aggrieved, assessee preferred appeal before CIT(A).

7.3.2 During course of search in M/s MJPL, one J Pack software was found which was admittedly used to record unaccounted transactions entered into by M/s MJPL with retailers of Gold Jewellery like that of Appellant firm. During search, one ledger named 'Amanullah KDR' was found. It was to 1051/Chny/2024 identified by MD of M/s MJPL, as account use to record gold sates to Gold AlK, Kadanallur whose managing partner is Sri Amanulah. As stated above employee of appellant firm and Managing partner of appellant firm during the course of search itself agreed that transactions recorded in 'Amanullah KDR pertain to Gold AIK and those transactions are not recorded in books. The appellant firm found to purchase Gold from M/s MJPL. Consideration is paid partly in the form of Old Gold, cash, payments RTGS. Only purchases for which payment is made through RTGS is recorded in books of appellant firm. The AO has added Cash paid to M/s MJPL as consideration which is not recorded in books as unaccounted cash u/s 69A.

7.3.3 It is the contention of appellant that provisions of section 69A are not applicable since the appellant is not found in possession of cash during search in its case. The appellant can't be treated as owner of cash basing on entries made in some third-party unaudited accounts. Further, sworn statements of employee and Sri Amanullah alone can't be relied upon to conclude that appellant is owner of cash without any other corroborative evidence. The AO has wrongly used statements recorded subsequent to search to conclude that transactions recorded in 'Amanullah KDR' ledger account in J pack software pertain to appellant. The AO has erroneously Considered RTGS transactions, gold transactions that are recorded in books also as Unexplained jewellery and unaccounted cash. Net profit of 12% adopted by AO to tax profit on Gold purchased from M/s MJPL İs without any basis. The AO ought to have adopted net profit of 1% only which is the usual net profit obtained by appellant. It is also argument of appellant that in case of other retailers who had similar cash and Gold transactions with M/s MJPL wrt unaccounted Gold purchases from that company, department has only taxed Gross profit on unaccounted sales on par with Gross profit admitted by those parties in previous years whereas appellant is discriminated having subjected total unaccounted payment of Gold as Unexplained jewellery and Unaccounted payment of cash as Unaccounted cash and 12% of Net profit on Unaccounted sales to tax. 7.3.4 I have carefully examined each of contentions of appellant. It is observed that the appellant is not denying transactions as per 'Amanullah KDR' Ledger account found in J Pack software. It is only claim of appellant that even payments made through RTGS are considered for arriving at unaccounted income in hands of appellant. Further appellant is questioning correctness of taxing the transactions u/s69A. During appeal proceedings, the appellant is asked to furnish copy of ledger account of M/s MJPL in its books which contains transactions entered into with M/s MJPL that are to 1051/Chny/2024 recorded in its regular books. It is noticed that the appellant has notfiled any ledger account as far as Assessment year 2016-17 is concerned. Therefore, it is considered that neither cash payment nor unaccounted purchase of Gold from M/s MJPL during the year are recorded in regular books of Appellant.

7.3.5 It is noticed that the AO in the assessment order mentioned that both employee of Appellant firm as well as Managing partner of Appellant firm claimed that sale consideration w.r.t. un accounted gold purchases from M/s MJPL are made by appellant in the form of old Gold, partly in cash and through RTGS also sometimes. Since Gold purchase transactions are not recorded in books, payment made for such purchases are also not recorded in books. Consequently, sale transactions of unaccounted Gold purchased from M/s MJPL are also not recorded in books. It is well established law that entire un accounted purchases or Unaccounted sales can't be subjected to tax. But only profit element embedded in it. In the present case, the appellant neither recording purchases from M/s MJPL in books nor sale of gold jewellery purchased from that company in books. Seized material shows that appellant did incur expenditure for unaccounted purchases in the form of gold as well as cash for other years. But for the year under consideration it is noticed that the payment is made in cash only of Rs10,17,517/- as far as transactions found in J Pack Sotware are concerned. Ultimately income for appellant in this entire transaction is Profit on sale of Unaccounted purchase of gold jewellery made from M/s MJPL. It is to be considered that sale receipts from unaccounted sales are utilised for payment of cash for subsequent purchases of Gold from M/s MJPL, similarly investment in old Gold/gold bars which is also used as purchase consideration is also funded by unaccounted sales. When both purchase and sale transactions are not recorded in books, Hon'ble courts in following cases held that only Gross profit from sale transactions is to be subjected to tax.

It is a well-established law that the entire undisclosed sales could not be added as income of the assessee but the addition could be made only to the extent of estimated profits embedded in such unaccounted sales.

7.3.6 Further, claim of appellant that in similar cases i.e retail traders whose ledger accounts containing unaccounted sale transactions, to 1051/Chny/2024 unaccounted gold and cash payments by retailers were found in J pack software, department has taxed only gross profit on unaccounted sales is examined and found that in following cases where their respective ledger accounts containing gold purchases from M/s MJP Land payment of consideration in cash and Gold are found in J pack software, the AO has taxed only Gross profit on unaccounted sales of Unaccounted purchases from M/s MJPL. Gross profit taken is gross profit admitted by those retailers in previous years.

7.3.7 Therefore, in view of law laid down by various courts in cases cited above, it is held that unaccounted payment in cash can't be taxed separately for failure to explain source for two reasons 1. Unaccounted sale of gold purchased from M/s MJPL in previous years would have constituted source for such unaccounted payments in cash and gold -during the year 2. Unaccounted payment of cash constitutes unaccounted expenditure incurred in connection with un accounted sales of jewellery purchased from M/s MJPL. The only profit that appellant earns in this entire unaccounted purchase and sale transaction is Gross profit on unaccounted sale of such Unaccounted purchases made from M/s MJPL. That's why it appears that AO has charged only gross profit on unaccounted sale of unaccounted purchases made from M/s MJPL in case of other retailers mentioned above. Therefore, I am of considered view that only Gross profit on unaccounted sale of unaccounted purchases is taxable. The AO may adopt Average annual value of RBI rate/ gm of 22 carat gold to arrive at value of unaccounted sales to the quantum of purchases. Consequently, additions made by AO on account of 'Unexplained cash' u/s 69A Rs 10,17,517/-is held to be not sustainable.

7.3.8 During appeal proceedings, the appellant has filed copies of trading and profit loss of appellant for the year. It is noticed that appellant itself has declared Gross profit of 8.49% on gold sales which is certified by chartered accountant. The AO is directed to adopt the gross profit percentage admitted by the appellant to arrive at unaccounted business income from Unaccounted sale of Unaccounted purchases from M/s MJPL for the Year. The AO may verify above accounts to arrive at correct number of Unaccounted purchases after excluding purchases already disclosed in the books.

The Revenue is not in appeal against the order of CIT(A) deleting the addition of unexplained cash added by AO u/s.69A of the Act, amounting to Rs.10,17,517/-.

4.1 The CIT(A) enhanced the assessment by disallowing cash payment made to the extent of Rs.10,17,517/- by invoking the to 1051/Chny/2024 provisions of section 40A(3) of the Act. The CIT(A) directed the AO to disallow cash payment of Rs.10,17,517/- u/s.40A(3) of the Act by observing in paras 7.3.9 & 7.3.10 as under:- 7.3.9 IT is undisputed that cash payment to the extent of Rs 10,17,517/- has been made for purchase of Gold from M/s MJPL. As per provisions of section 40A (3) of IT Act if any assessee incurs any expenditure in respect of which payment or aggregate of payments made to a person in a day, otherwise than by an account payee cheque drawn on a bank or account payee bank draft exceeds 10,000/-, no deduction can be allowed in respect of such expenditure. It is also not disputed that both the concerns have bank accounts. It could be seen from table reproduced above that in each instance payment in cash by appellant was in excess of Rs10,000/. Question is will the provisions of section 40A(3) for disallowance of cash expenditure apply to transactions outside the books. Hon'ble High court of AndhraPradesh in the S. Venkata Subba Rao (173 ITR 340) had held that once it is conceded that the profits and gains derived from the illegal business are liable to be taxed, then all the provisions of the IT Act must apply. It is not possible to hold that some of the provisions such as Section 40A(3) do not apply to the assessment of taxable income in the case of illegal business while some others do. It is not possible to draw a distinction between several provisions of the Act, one set applying to the assessment of income arising from illegal business and the other set not applying thereto. Maybe, in an illegal business such as smuggling, it may not be practicable to comply with the requirements of Section 40A(3). Similar view has been held by Hon'ble Gujarath High court in case of CIT Vs Hynuop food & oil India(p) Ltd 290 ITR 702. Therefore, I am of considered view that cash payments made by appellant to the extent of Rs 10,17,517/- attracts provisions of section 40A (3)warranting disallowance of entire amount. The AO is directed to disallow cash payment made during the year of Rs 10,17,517/- u/s 40A (3) of IT Act.

7.3.10 Therefore, addition made on account of Unaccounted sales' Rs 16,32,616/-is to be restricted to the extent of Gross Profit on unaccounted sales of unaccounted purchases from M/s MJPL. Gross profit to be adopted is gross profit admitted by appellant on gold sales in the return originally filed by it for the year. The AO is directed to disallow cash payment of Rs 10,17,517/- u/s 40A (3). Consequently, Grounds of appeal of appellant are Partly Allowed. to 1051/Chny/2024 Aggrieved against the directions of CIT(A) to the AO for assessment of gross profit on unaccounted sales of unaccounted purchases and enhancement on account of disallowance of cash payment u/s.40A(3) of the Act, the assessee came in appeal before the Tribunal.

5. Before us, the ld.counsel for the assessee argued that the profit estimation of gross profit directed by CIT(A) is not correct and actually net profit is to be estimated on the unaccounted sales. Even before us, the assessee has not contested that rather admitted that these amounts recorded in ‘Amanulla KDR’, one ledger found in the J-Pack of computer of MJPL, wherein the unaccounted cash is recorded. The assessee has not disputed the unaccounted sales of unaccounted purchases from MJPL by assessee, but only requested that net profit should be estimated and not the gross profit. The Ld.counsel for the assessee now before us filed the GP/NP ratio of the assessee from assessment years 2016-17 to 2021-22. The assessee filed the following chart:- Details 2016-17 2017-18 2018-19 2019-20 2020-21 2021-22 Gross Profit % 8.49% 14.04% 8.20% 6.17% 8.52% 8.05% Net Profit % 0.34% 1.64% 1.15% 0.67% 0.90% 1.10% Net Profit % (specific to to 1051/Chny/2024 transactions with Mohanlal Jewellers – 0.42% 0.69% 0.90% 0.96% 0.81% 0.72% MJPL) The ld.counsel for the assessee urged for a fair estimation of net profit on the sale recorded during financial years 2015-16 to 2020- 21 relevant to assessment years 2016-17 to 2021-22 for an amount of Rs.108 Crores but only the unrecorded not thr recorded or accounted for and for this particular year, the amount is Rs.16,32,616/-. The ld.counsel for the assessee stated that the gross profit directed by CIT(A) to the assessee to be assessed at 8.49% is much higher and that also specific to the transactions entered with MJPL only and that also unaccounted transactions.

6. On the other hand, the ld.CIT-DR supported the order of CIT(A) and stated that the CIT(A) has rightly directed the AO to sustain the addition of unaccounted sales of Rs.16,32,616/- to the extent of gross profit on these unaccounted sales of unaccounted purchases from MJPL.

7. As regards to the issue of disallowance of cash payment u/s.40A(3) of the Act, the ld.counsel for the assessee stated that once the profit is estimated on unaccounted sales, the consequent cash payment cannot be disallowed by invoking the provisions of to 1051/Chny/2024 section 40A(3) of the Act. For this, he relied on the decision of Hon’ble Madras High Court in the case of K.R. Ganesh Kumar vs. ACIT in Tax Case Appeal No.2408 of 2006. The ld.counsel for the assessee also relied on the decision of Hon’ble Allahabad High Court in the case of CIT vs. Banwari Lal Banshidhar, (1998) 229 ITR 229 (All), Hon’ble Punjab High Court in the case of CIT vs. Smt. Santosh Jain, (2008) 296 ITR 324 (Punjab), Hon’ble Rajasthan High Court in the case of Principal CIT vs. Jadau Jewelers & Manufacturers (P.) Ltd., (2018) 409 ITR 85 (Raj) and Gujarat High Court in the case of CIT vs. Ankleshwar Taluka ONGC Land Loser Travellers Co-operative Society, (2014) 362 ITR 92 (Guj) for this proposition and Co-ordinate Bench decision in the case of M.Shyamalanathan & Co., in ITA Nos.117 to 122/CHNY/2023, order dated 16.06.2023.

7.1 The ld.Counsel argued that when the income of the assessee is computed applying flat profit rate and when no deduction is allowed in regard to purchases of the assessee, there is no need to invoke the provisions of section 40A(3) of the Act. The ld.counsel argued that in the present case before us admittedly the assessee has made accounted purchases and unaccounted purchases both, accounted purchases are already disclosed on which profit is declared and those are payments through RTGS or through banking to 1051/Chny/2024 channel. Wherever unaccounted purchases and sale made to MJPL, for which no deduction is claimed by assessee and only net profit is applied, no disallowance u/s.40A(3) of the Act can be made. He stated that Revenue also admits that these purchases and consequent sale both are in cash and it is not accounted and no deduction has been claimed on this. He stated that when profit rate is applied, that will take care of everything and there is no need for AO to make scrutiny of the amount incurred on the purchases by the assessee. He relied on the above mentioned proposition for this issue.

3.1 The first issue is now covered by the decision of this court and the Tribunal has followed the same.

3.2 In that view of the matter, the Tribunal has not committed any error in deciding question No. 1.

3.3 Regarding question No. 2, the issue is covered by the decision of the Punjab and Haryana High Court in CIT v. Smt. Santosh Jain (2008] 296ITR 324 (P&H) wherein it has been held as under (page 325) :

“We are of the view that when income of the assessee was computed by applying a gross profit rate, there was no need to look into the provisions of section 40A(3) of the Act, as applying the gross profit rate takes care of the expenditure otherwise than by way of crossed cheque also. We are in agreement with the view taken by the Allahabad High Court in Banwari Lal Banshidhars case [1998] 229 ITR 229 (All) to the following effect (page 232) : The question for consideration is when no deduction was sought and allowed under section 40A(3), was there any need to go into section 40A(3) and rule 6DD(). We see force in the view taken by the Appellate Tribunal that when the income of the assessee was computed applying the gross profit rate and when no deduction was allowed in regard to the purchases of the assessee, there was no need to look into the provisions of section 40A(3) and rule 6DD(j). No disallowance could have been made in view of the provisions of section 40A(3), read with rule 6DD(j) as no deduction was allowed to and claimed by the assessee in respect of the purchases. When the gross profit rate is applied, that would take care of everything and to 1051/Chny/2024 there was no need for the Assessing Officer to make scrutiny of the amount incurred on the purchases by the assessee'. "

3.4 Similar view was taken by the same High Court in CIT v. GobindRam [2015] 229 Taxman 491 (P&H).

10.1 There is a consistent view of High Courts that when an income of the assessee is computed applying flat gross profit rate and when no deduction is allowed in regard to purchases of the assessee, there is no need to invoke the provisions of section 40A(3) of the Act. Similar view is held by the Hon’ble Madras High Court in the case of K.R. Ganesh Kumar, supra, wherein the question of law admitted by the Hon’ble High Court was as under:- “Whether the Tribunal is correct in confirming the order(s) of the Lower Authorities in invoking Section 40A(3) of the Act to make the disallowance which resulted in assessment of 'undisclosed income' in spite of the purchases were assessed on an estimated basis in the said block assessment order?” and the Hon’ble High Court answered this question as under:- “7. We are called upon to decide whether the invocation of the provisions of s.40A(3) in the aforesaid facts and circumstances of the present case is justified in law. There is no dispute that the provisions of s.40A(3) apply to block assessments in general. The provision however, would apply only where expenditure in question has been incurred and claimed in the computation of income. The Supreme Court, in the case of Attar Singh Gurmukh Singh Vs. Income Tax Officer, Ludhiana (191 ITR 667), reiterates this position as well. In the present case, the Tribunal confirms as a finding of fact at para 17 of its order that no expenditure has been incurred except the investment in gold. The consideration paid towards the investment has been duly brought to tax as unexplained income, such income not having been claimed as expenditure in the computation of income. The objection of the Revenue is that the valuation of the gold per gram is not Rs.500 but to 1051/Chny/2024 more as revealed by other disallowances made in the order of assessment and if the higher rate was taken into consideration, one could assume that certain expenditure has been incurred and claimed. We are not persuaded to accept this submission in so far as there is no necessity to consider any other valuation except that relating to the subject disallowance, being Rs.500 per gram adopted by the Assessing officer after due consideration and application of mind. We are thus of the view that the provisions of 40 A(3) are wholly inapplicable to the facts and circumstances of this case. The substantial question of law is answered in favour of the assessee and against the Revenue. No costs.”

10.2 In view of the above facts and circumstances, we direct the AO to delete this disallowance as in this case, the income of the assessee is assessed applying flat gross profit rate and assessee has not claimed any deduction with regard to the purchases made by him, hence the provisions of section 40A(3) of the Act cannot be invoked. We reverse the findings of the CIT(A) on this issue and accordingly, this issue of assessee’s appeal on enhancement is allowed. Accordingly, interconnected issue with regard to applicability of section 40A(3) of the Act, is decided in favour of the assessee and as regards to application of profit rate, we direct the AO to apply gross profit rate of 2% in all the six assessment years.

10.3 Since the facts and circumstances and the issue are exactly identical in assessment years 2017-18 to 2021-22, taking a consistent view, we reverse the findings of CIT(A) in invoking the to 1051/Chny/2024 provisions of section 40A(3) of the Act in favour of assessee and also direct the AO to apply gross profit rate of 2% in all these six years.

Incriminating Materials Seized Belong to a Different Assessment Year: v. The Learned AO/CIT(A) erred in holding that incriminating materials relating to this assessment year were seized in the case of the assessee and thereby confirmed the assessment order, even though it pertained to a totally different AY. vi. The Learned AO/CIT(A) ought to have seen that the electronic evidences seized from the mobile phone of the accountant of the partner of the assessee were not relating to this year and is inadmissible in law. to 1051/Chny/2024 11.1 During the course of hearing, the ld.counsel for the assessee has not made any argument on this issue and hence, it seems that the assessee is not interested in prosecuting this issue and hence, this common issue in all these six assessment years is dismissed.

xiv. The Learned AO/CIT(A) ought to have noted that there is no proper justification or explanation provided for the addition of the same in the books of account. xv. Without prejudice to the above, the Learned AO has not properly quantified the addition and has already included the same in the earlier additions and this would tantamount to double addition and ought to be quashed.

1. 1. GJ/1446/20-21 dated 24.11.2020 for 2631.57 gms. 2. GJ/1913/20-21 dated 02.01.2021 for 2645.50 gms. 3. GJ/2860/20-21 dated 01.03.2021 for 2046.88 gms.

The assessee firm further stated that the stock register is updated and after recording the same, it is noticed that the stock matches. The assessee further submitted that the profit for financial year 2020-21 relevant to assessment year 2021-22 includes stock of 5971.150 grams. Since the assessee admitted this as income, the AO added the excess stock and accordingly addition of Rs.2,89,18,518/- was made. Aggrieved, assessee preferred appeal before CIT(A).

13.1 The CIT(A) also confirmed the action of the AO but the CIT(A) has not given any finding regarding this addition of unexplained investment on account of excess stock although, there is discussion of excess stock found but there is no finding in the CIT(A)’s order and for this, the ld.counsel for the assessee now requested that to 1051/Chny/2024 matter can be restored back to the file of the AO, who will examine the vouchers i.e., invoices of MJPL and then will decide the issue afresh. To this, the ld.CIT-DR has not raised serious objection.

Order pronounced in the open court on 6th November, 2024 at Chennai.

(महावीर �संह ) (जगद�श) (MAHAVIR SINGH) (JAGADISH) उपा�य� /VICE PRESIDENT लेखा सद�य/ACCOUNTANT MEMBER चे�नई/Chennai, �दनांक/Dated, the 6th November, 2024 to 1051/Chny/2024