2021 (9) TMI 1241 - AT - Income Tax

Estimation of net profit from Trading in Scraps and Granules - Profit on unrecorded sales of scraps - estimation of net profit @25% on unaccounted sales - Certain diaries inventorized as A-1 to A-8 were found and seized by the search party - As argued the unrecorded sales of scrap was not effected by the appellant only in one previous year relevant to A.Y. 2011-12 but factually it was effected by him in two previous years relevant to A.Y. 2011- 12 and A.Y. 2012-13 - HELD THAT - AR failed to demonstrate with any positive evidence that the jottings made in these diaries pertain to two financial years. Since the assessee himself is claiming that he had commenced the unaccounted business of scrap trading during the financial year relevant to A.Y. 2011-12 only and further since from the seized diaries the assessee has failed to demonstrate that these transactions were also carried out by him during the subsequent financial year too we find absolutely no infirmity in the views taken by the authorities below that the transactions of unrecorded trading of scrap were carried out by the assessee during the financial year relevant to A.Y. 2011-12 only and consequently the entire income arising from carrying out such unrecorded transactions is liable to be taxed in the hands of the assessee for the A.Y. 2011-12 only. Accordingly the Ground No. 1(b) of the assessee is dismissed. Determination of undisclosed income from the undisclosed and unrecorded trading transactions in scrap carried out by the assessee - HELD THAT - Considering the facts that the assessee has carried out only a trading business on wholesale basis which was commenced by him only in the financial year under consideration and further considering the amount of investment rate of return on investment etc. in our view the estimation of the net profit rate so made by the CIT(A) at 25% is quite at a higher side. In all the fairness to both the parties we restrict the estimation of net profit at 10% of the undisclosed sales. Before us the assessee has also taken two separate grounds bearing nos. 1(c) and 1(d) for allowing him the benefit of telescoping of the total undisclosed income shown in the return against the net undisclosed income/investment finally determined. We are of the considered view that an assessee is eligible for claim of set-off of the undisclosed income voluntarily shown by himself in the return of income filed u/s. 153A against any undisclosed income/undisclosed investment finally determined. Accordingly the AO is directed to work out the net profit at the rate of 10% on the unaccounted sales and after giving due benefit of telescoping of the undisclosed income already shown by the assessee in his return of income (other than those undisclosed income for which a separate specific claim for set-off is made by the assessee) re-compute the total income of the assessee. Unexplained Expenditure being Purchase of Scraps and Granuels - HELD THAT - It would be fair and reasonable to estimate that the assessee had made initial investment for carrying out undisclosed trading business of scrap equivalent to a half month s sales of the entire sales made during the period under consideration. Accordingly in our considered view the undisclosed investment of the assessee in the initial capital of the business should be computed at 1/24th of the total annual sales of Rs. 9, 30, 89, 378/- found recorded in the seized diaries which works out to be at Rs. 38, 78, 724/- as against the same determined by the Ld. CIT(A) at Rs. 55, 28, 966/-. We also direct the Ld. AO that assessee would be eligible to set off of this amount of Rs. 38, 78, 724/- against the total income of Rs. 3, 60, 00, 000/- surrendered in the return of income furnished under s.153A. Advance payment by the assessee to one Mr. Rahul by invoking the provisions of s.69 - HELD THAT - We find that the amount of Rs. 29, 90, 000/- has already been considered by both the authorities below while making/ restricting the addition as aforesaid in our considered view no further addition is required on account of advances amounting to Rs. 29, 90, 000/- made by the assessee to Mr. Rahul. It is well known maxim of the law that the same addition cannot be made twice. Since while making the separate addition of Rs. 7, 83, 60, 000/- which includes the advances amounting to Rs. 29, 90, 000/- given by the assessee to Mr. Rahul the AO has separately determined the interest amounting to Rs. 1, 25, 23, 200/- in our considered view no separate addition is required even in respect of receipt of interest on advance to Mr. Rahul. Accordingly the Ground Nos. 3(a) 3(b) of the assessee are allowed. Benefit of telescoping to the assessee in respect of advances given to Mr. Rahul against the additional income surrendered and shown by the assessee himself in his return of income - HELD THAT - Once the CIT(A) has confirmed the addition under s.69 of the Act it has to be necessarily held that the advances were given by the assessee during the year under consideration only and not in the earlier years for the reason that under the provisions of s.69 of the Act an addition can be made only for the year in which the assessee has been found to have made undisclosed investment. In our view the Ld. CIT(A) was not correct in sailing on two boats inasmuch while confirming the addition he has presumingly affirmed that the assessee had made the investment only during the year under consideration but while considering the benefit of telescoping the Ld. CIT(A) has presumed that the assessee might have made such investments by giving advances to Mr. Rahul in earlier years. In our considered view since we have fully deleted the addition so made by the AO as aforesaid the question of telescoping has become academic in nature only. Accordingly the Ground No. 3(c) of the assessee is allowed. Addition u/s 69 - sale proceeds of land - HELD THAT - Having held that the assessee had derived income amounting to Rs. 12, 60, 000/- from partial sale of land it has to be necessarily held that the sales proceeds of such land amounting to Rs. 40, 80, 000/- was available with the assessee. We find that the transaction of purchase of land has its nexus with the letter dated 12.01.2011. Business of trading in scrap and other related activities are since the beginning of the year and another seized paper showing loans and advance is having a date of December. Therefore this plea of the assessee that sale proceeds of land was used in giving loans and advances and used in the business of scrap has no merits. Accordingly the ground no. 5 of the assessee appeal for A.Y. 2011-12 is dismissed.

Summary

Issues Involved:
1. Estimation of net profit from trading in scraps and granules.
2. Unexplained expenditure on purchases of scraps and granules.
3. Alleged advance payment to Mr. Rahul.
4. Estimated interest on advance to Mr. Rahul.
5. Unexplained investment in land and profit on sale thereof.
6. Unexplained loans and advances to various persons.
7. Interest earned on the unexplained loans and advances.
8. Business loss disallowance.

Detailed Analysis:

1. Estimation of Net Profit from Trading in Scraps and Granules:
The primary issue was the estimation of net profit from unrecorded sales of scraps. The AO determined a net profit of Rs. 8,30,89,378 based on unrecorded sales of Rs. 9,41,47,310 and unrecorded purchases of Rs. 1,10,57,932. The CIT(A) revised this by applying a flat net profit rate of 25%, resulting in a net profit of Rs. 2,35,36,828, and after giving credit for Rs. 1,00,00,000 already offered by the assessee, confirmed an addition of Rs. 1,35,36,828. The Tribunal found the rate of 25% excessive and revised it to 10%, resulting in a net profit of Rs. 94,14,731. The Tribunal allowed the benefit of telescoping against the undisclosed income of Rs. 3,60,00,000 already shown by the assessee.

2. Unexplained Expenditure on Purchases of Scraps and Granules:
The AO added Rs. 1,10,57,932 as unexplained expenditure under section 69C. The CIT(A) revised the initial capital investment to Rs. 55,28,966, confirming an addition of Rs. 31,11,201. The Tribunal further revised the initial investment to Rs. 38,78,724, allowing set-off against the surrendered income, thus partially allowing the assessee’s appeal.

3. Alleged Advance Payment to Mr. Rahul:
The AO added Rs. 3,00,00,000 as unexplained investment under section 69 based on a letter indicating an advance to Mr. Rahul. The CIT(A) upheld this addition. The Tribunal, however, found that the actual advance was only Rs. 29,90,000, as corroborated by other seized documents, and deleted the addition of Rs. 3,00,00,000. The Tribunal also noted that the amount of Rs. 29,90,000 was already considered in another addition, thus no further addition was warranted.

4. Estimated Interest on Advance to Mr. Rahul:
The AO estimated interest of Rs. 9,00,000 on the alleged advance of Rs. 3,00,00,000. The Tribunal, having deleted the principal addition of Rs. 3,00,00,000, also deleted the interest addition.

5. Unexplained Investment in Land and Profit on Sale Thereof:
The AO added Rs. 52,00,000 as unexplained investment in land and Rs. 12,60,000 as profit on its sale. The CIT(A) allowed the benefit of telescoping against the surrendered income. The Tribunal upheld the CIT(A)’s decision, confirming the addition but allowing set-off against the undisclosed income.

6. Unexplained Loans and Advances to Various Persons:
The AO added Rs. 10,43,60,000 based on a seized document listing loans and advances. The CIT(A) found decoding errors and reduced the addition to Rs. 2,31,95,000, allowing partial telescoping. The Tribunal concurred with the CIT(A) and confirmed the addition of Rs. 2,31,95,000.

7. Interest Earned on the Unexplained Loans and Advances:
The AO added Rs. 1,25,23,200 as interest on loans and advances. The CIT(A) directed recalculating interest on Rs. 2,31,95,000. The Tribunal, considering the date on the seized document (27.12.2010), recalculated the interest for 4 months, confirming an addition of Rs. 9,27,800.

8. Business Loss Disallowance:
The AO disallowed a business loss of Rs. 10,27,036. The CIT(A) allowed the loss, noting that the books were audited and no defects were pointed out. The Tribunal upheld the CIT(A)’s decision.

Conclusion:
The Tribunal provided partial relief to the assessee by revising the net profit estimation, deleting the addition related to Mr. Rahul, and recalculating the interest on loans and advances. The Tribunal also upheld the CIT(A)’s decisions on unexplained investments and business loss, allowing appropriate telescoping benefits, resulting in a final taxable addition of Rs. 15,99,768 for AY 2011-12. The appeals for AY 2011-12 were partly allowed for the assessee and dismissed for the Revenue, while the appeal for AY 2012-13 was dismissed for the Revenue.