2025 (2) TMI 122 - AT - Income Tax

Addition u/s 69A - unaccounted sales/cash transactions - Based on incriminating evidence obtained during the search DGCEI concluded that assessee had made unaccounted sales and received sale consideration in cash - AO rejected the assessee s statements and relied on corroborative evidence such as seized materials third-party statements and judicial precedents to justify the addition under Section 69A - CIT(A) upheld the existence of unaccounted sales but restricted the addition to 6% of the total turnover treating it as the embedded profit in such transactions. HELD THAT - It is a well-accepted principle that transactions conducted in cash particularly those intended to remain outside the purview of taxation generally lack formal documentation. AO rightly observed that the absence of such documentation is intrinsic to unaccounted transactions and that the assessee s argument of maintaining proper excise and stock records does not negate the possibility of clandestine sales. Absence of a transaction in official records does not imply its non-existence especially when corroborative evidence exists in the form of seized materials and thirdparty admissions. AO s rejection of the assessee s contention is supported by judicial precedents where unaccounted transactions are inferred from circumstantial evidence and cash trail analysis. The acceptance of such indirect evidence particularly in cases involving tax evasion is consistent with the principle laid down in the case of Sumati Dayal 1995 (3) TMI 3 - SUPREME COURT and Collector of Customs vs. Bhoormull 1974 (4) TMI 33 - SUPREME COURT which emphasize that the test of human probabilities must be applied in determining the nature of unexplained income. Estimation of income/profit determination - As settled legal principle that only the profit element in unaccounted turnover can be subjected to tax not the entire sales figure. As decided in the case(s) President Industries 1999 (4) TMI 8 - GUJARAT HIGH COURT and Panna Corporation 2014 (11) TMI 797 - GUJARAT HIGH COURT held that when unaccounted turnover is detected only the embedded profit is taxable. In the absence of any detailed verification of the industry s actual margins and considering that the CIT(A) has relied on the financials within the accounting period under review we find the estimation of 6% profit to be a reasonable and fair approximation of the assessee s profit from these unaccounted sales. Assessee s appeal is partly allowed

Summary

ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment are:

1. Whether the reassessment proceedings initiated under Section 147 of the Income Tax Act, 1961 were valid.

2. Whether the addition of Rs. 7,51,35,438/- under Section 69A of the Income Tax Act, 1961, based on alleged unaccounted sales, was justified.

ISSUE-WISE DETAILED ANALYSIS

1. Validity of Reassessment Proceedings under Section 147

- Relevant legal framework and precedents: Section 147 of the Income Tax Act allows for reassessment if the Assessing Officer (AO) has reason to believe that income has escaped assessment. The principles established in precedents such as CIT vs. Kelvinator of India Ltd. emphasize the necessity of tangible material for reopening assessments.

- Court's interpretation and reasoning: The Tribunal found that the information from the Director General of Central Excise Intelligence (DGCEI) constituted fresh tangible material, providing the AO with a valid reason to believe that income had escaped assessment. The Tribunal noted that the assessee did not demonstrate any procedural infirmity in the reassessment process.

- Key evidence and findings: The AO relied on seized diary entries and corroborative statements from third parties, which indicated unaccounted cash transactions linked to the assessee.

- Application of law to facts: The Tribunal upheld the validity of the reassessment proceedings, finding that the AO acted on specific, credible information rather than mere suspicion or conjecture.

- Treatment of competing arguments: The assessee argued that the reassessment was based on unreliable third-party statements, but the Tribunal found that the AO had sufficient grounds to initiate the proceedings.

- Conclusions: The Tribunal dismissed the grounds challenging the reassessment proceedings under Section 147.

2. Addition under Section 69A for Alleged Unaccounted Sales

- Relevant legal framework and precedents: Section 69A pertains to unexplained money, and its application requires credible evidence. Precedents such as CIT vs. Durga Prasad More and Sumati Dayal vs. CIT emphasize the acceptance of circumstantial evidence in tax matters.

- Court's interpretation and reasoning: The Tribunal agreed with the lower authorities that the seized diary and corroborative statements provided sufficient evidence of unaccounted sales. However, it held that only the profit element in such sales should be taxed.

- Key evidence and findings: The AO relied on diary entries and statements from individuals involved in the transactions, which were consistent with the findings of the DGCEI.

- Application of law to facts: The Tribunal upheld the existence of unaccounted sales but limited the taxable amount to the profit component, as determined by the CIT(A).

- Treatment of competing arguments: The assessee contended that all transactions were recorded in audited books, while the Revenue argued for taxing the entire unaccounted sales. The Tribunal found a middle ground, taxing only the profit margin.

- Conclusions: The Tribunal upheld the CIT(A)'s decision to restrict the addition to 6% of the unaccounted sales, amounting to Rs. 45,08,126/-.

SIGNIFICANT HOLDINGS

- Preserve verbatim quotes of crucial legal reasoning: The Tribunal noted, "The information from DGCEI-evidencing cash payments through seized diary (A/8), corroborated by multiple statements-constituted fresh tangible material. This suffices to form the requisite 'reason to believe' that income had escaped assessment."

- Core principles established: The judgment reaffirms that reassessment proceedings require tangible material and that only the profit component of unaccounted sales should be taxed.

- Final determinations on each issue: The Tribunal dismissed the challenge to the reassessment proceedings and upheld the addition under Section 69A, restricted to the profit margin of 6% on unaccounted sales.