2023 (4) TMI 180 - AT - Income Tax

Estimation of profit on purchase and sale transactions - statement given during the course of survey - importance to the retraction statement of the assessee - HELD THAT - We notice that the Ld CIT(A) has put the responsibility upon the AO and has observed that the AO has not brought on record any corroborative evidence, which is not justified. Accordingly, we are of the view that the retraction of statement by the assessee is liable to be rejected. There is one more reason for rejecting retraction, i.e., the reasoning given by the assessee for giving cheques to S R Co also defies logic. On the one hand, it is stated that the cheques were given to S R Co, so that the same can be used to strike good deal in diamond purchase. On the other hand, it is stated that the concerned bank accounts did not have enough bank balances. If the bank accounts did not have enough balances, how S R Co could have used the cheques to purchase diamonds on behalf of the assessee. Hence the reasoning given in the retraction statement about the cheques defies logic and hence on this count also retraction is liable to be rejected. The assessee could not bring any material to contradict the statement so given. On the contrary, the cheques were found with S R Co. Hence the legal principle that the statement given during the course of survey does not have evidentiary value will not apply to the facts and circumstances of the present case. There is merit in the submission made by the assessee before Ld CIT(A), i.e., mere mobilization of money on the security of cheques will not give rise to any income transaction liable to be taxed. The statement given by the assessee is that he has purchased diamonds by using the cash so mobilized and sold the same. Accordingly, the profit, if any, generated from the above said purchase and sale transactions is liable to be taxed. Profit generated from the above said purchase and sale transactions is required to be estimated in the facts and circumstances of the case. The normal profit rate adopted for diamond business is around 3% of the sale value. Profit from the sale of diamonds purchased out of the balance may be estimated @ 3% and the same, in our view, will meet the ends of justice. Appeal filed by the revenue is partly allowed.

Summary

Issues:
Revenue's appeal against deletion of addition of Rs.4,11,91,000 made by AO for AY 2007-08.

Analysis:
1. Facts and Background: The assessee, a partnership firm engaged in the jewelry business, was subjected to a survey operation by the revenue. During the survey, cheques issued by the assessee to another entity were found, totaling Rs.4,11,91,000. The partner of the assessee initially admitted to mobilizing cash through these cheques but later retracted the statement. The AO assessed the amount as income of the assessee, which was deleted by the Ld CIT(A), leading to the revenue's appeal.

2. Reasoning for Deletion by Ld CIT(A): The Ld CIT(A) based the deletion on various grounds:
- The assessee's admission of income under mental imbalance.
- Explanation that the cheques were for potential diamond purchases, corroborated by another individual.
- Lack of significant bank balances in the relevant accounts.
- Credible reasoning behind the retraction statement.
- Lack of evidentiary value of the original statement.
- Absence of transaction outside the books and absence of taxable income.

3. Judgment by ITAT: The ITAT found the retraction statement to be untimely and lacking corroboration, rejecting its validity. The reasoning provided by the assessee for issuing the cheques was deemed illogical, as it conflicted with the bank balances. The ITAT disagreed with the Ld CIT(A) regarding the evidentiary value of the original statement, emphasizing the lack of contradiction by the assessee. While acknowledging that mobilizing money through cheques does not necessarily generate taxable income, the ITAT directed the AO to estimate the profit from diamond sales at 3% of the mobilized amount, as the assessee failed to prove the absence of profit.

4. Conclusion: The ITAT partly allowed the revenue's appeal, setting aside the Ld CIT(A)'s order and instructing the AO to estimate the profit on diamond sales at 3% of Rs.4,11,91,000. This decision aimed to ensure the proper assessment of income generated from the transactions in question, aligning with the principles of taxation and evidentiary value in such cases.