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2025 (4) TMI 468 - AT - Income TaxAssessment order u/s 153A - Unaccounted Transactions relating to Sale of Immovable Properties - HELD THAT - AO was directed to tax the capital gains year-wise under the appropriate heads and provide relief for the disallowed expenses that were explained by the unaccounted receipts. While restricting the benefit of indexation to the year of receipt of sale proceeds the CIT(A) observed that the assessee received sale consideration well in advance and incurred major expenditure from such unaccounted sale proceeds thus no undue hardship in terms of cost inflation was faced by the assessee. Departmental Representative (DR) relied on the order of AO and stated that the assessee has failed to establish a direct nexus between the unaccounted receipts and unaccounted expenses and the payments were neither supported by any documentary evidence nor was there any proof to demonstrate that the expenses were incurred out of unaccounted receipts. AR on the other hand relied on the order of CIT(A) and stated that the CIT(A) has rightly followed the settled law that only real income can be taxed in the hands of assessee out of the given set of transactions. Taxation on capital gain - benefit of indexation to the year of receipt of sale proceeds - HELD THAT - We concur with the CIT(A) that once the unaccounted receipts from the sale of properties are subjected to taxation as part of the capital gains computation the related unaccounted expenditures stand explained and cannot be taxed separately as unexplained expenses. Accordingly no further addition under Section 69C is warranted. This ensures that only the net real income is taxed in line with the statutory provisions and the principles of equity and justice. On the specific issue of indexation benefit we agree with the assessee s contention that once the capital gains arising from the transfer of the asset are accepted its computational mechanism including the benefit of indexation must also be adopted in accordance with Section 48. Clause (iii) of the Explanation to Section 48 clearly defines indexed cost of improvement to include indexation up to the year in which the asset is transferred irrespective of the timing of the receipt of sale proceeds or the incurrence of expenditure. By restricting the benefit of indexation to the year of receipt of sale proceeds the CIT(A) failed to adhere to the statutory provisions governing the computation of long-term capital gains. Therefore we allow this ground in favour of the assessee and directs the AO to re-compute the long-term capital gains for both Shilpgram and Khoraj properties by applying the Cost Inflation Index (CII) of the year of transfer while determining the indexed cost of acquisition and improvement. Revenue s contention that there is no nexus between unaccounted receipts and expenses is rejected. CIT(A) has correctly analysed the seized evidence and noted that the unaccounted receipts adequately explain the unaccounted payments. DR s reliance on the AO s findings is unsupported by evidence as no contrary material was presented to dispute the CIT(A) s conclusions. Internal Circulation of Funds and Unaccounted Receipts and Payments - AO made substantial additions based on these receipts and payments rejecting the assessee s claim of internal circulation of funds - HELD THAT - Application of peak credit to compute the net unaccounted cash transactions - AO rejected this claim arguing that the peak theory is applicable only when cash transactions form a continuous cycle of inflow and outflow recorded in the books. We observe that the assessee failed to provide a cash flow statement or reconciliation to support the claim of peak credit and in the absence of detailed evidence linking cash inflows and outflows the peak credit theory could not be applied. We concur with the CIT(A) for the reason observed above and dismiss these grounds of assessee. We also emphasize that the seized material must be interpreted as a whole rather than selectively. AO s approach of taxing receipts while ignoring corresponding payments distorted the factual position. We endorse the CIT(A) s approach of basing conclusions solely on the seized material and existing records without introducing fresh evidence. Internal Circulation of Funds - The seized material including diary notings indicated that the transactions involved known individuals and group entities such as Jigar Mandaviya Hemedrabhai KRG and Kailash Goenka. We concur with the CIT(A) that the amounts represented cash transfers within the group which had already been taxed in the hands of the respective entities. The CIT(A) emphasized that taxing the same amounts again in the assessee s hands would result in double taxation which contravenes the principle of taxing real income . CIT(A) s deletion upheld for all assessment years confirming that the amounts categorized as internal circulation should not be taxed in the hands of the assessee. Unaccounted Business Receipts and Payments - We agree with the Revenue that these revenue streams inherently carry larger profit margins due to minimal operating costs compared to hospitality services or real estate projects. In absence of quantified information on Franchise Fee and Royalty we hold that while the assessee s offer of 25% profit was conservative the CIT(A) s adoption of a 30% rate was justified based on the nature of the business activities and available profit data. We emphasize that the chosen rate must reflect the average profit embedded in the unaccounted receipts especially for high- margin streams such as franchise fees and royalties. We also emphasize that judicial discretion in determining profit rates must be exercised within the bounds of factual evidence and judicial precedents. The 30% rate was consistent with past assessments of the group and reflected the diverse income streams of the business especially Franchise Fees and Royalty. It is also observed that revenues such as Franchise Fees and Royalty were not present in case of other group entities. Accordingly the addition the relevant assessment years calculated at the rate of 30% of receipts is confirmed. Issue of Transactions with Pawan Jalan - AO did not bring any independent evidence to contradict the assessee s claim or to establish that the Rs. 1 crore was a fresh inflow of income. The addition was primarily based on assumptions and a mechanical reading of Section 69C. We once again emphasize that taxation should be based on real income rather than notional or gross receipts. Judicial precedents consistently advocate that only the profit component in unaccounted transactions should be taxed. We accept the assessee s alternative proposal to tax the transaction at 25% of the receipts. We observe that this approach balanced fairness and legal compliance ensuring that only the embedded profit was taxed while avoiding double taxation. Additions in respect of personal Expenditure - AO invoked Section 69C and disallowed the expenses u/s 40A(3) due to cash payments. However once the receipts have been taxed the source of the expenditure is no longer unexplained. The business nexus becomes immaterial for personal expenses funded from taxed income. While the AO rightly placed the burden of proof on the assessee under the Evidence Act the assessee sufficiently demonstrated that the expenditures were outflows from already-taxed inflows. The nexus between the taxed receipts and personal expenditures was reasonably established. The CIT(A) correctly applied the set-off principle by ensuring that the net effect of taxing unaccounted receipts and corresponding expenditures did not lead to double taxation.
1. ISSUES PRESENTED and CONSIDERED
The core legal questions considered in this judgment revolve around the taxability of unaccounted transactions found during a search operation under Section 132 of the Income Tax Act, 1961. The issues include:
2. ISSUE-WISE DETAILED ANALYSIS A. Unaccounted Transactions relating to Sale of Immovable Properties The legal framework involves the computation of capital gains under Section 48 of the Income Tax Act. The Court examined whether unaccounted receipts from property sales should be taxed as capital gains and whether unaccounted payments related to these transactions should be separately taxed under Section 69C. The CIT(A) concluded that only net capital gains should be taxed, allowing for deductions of unaccounted expenses explained by the receipts. The Court upheld this view, emphasizing that only real income should be taxed, and separate taxation of unaccounted payments would result in double taxation. B. Internal Circulation of Funds The issue involved determining whether intra-group cash transfers should be taxed as unexplained income. The CIT(A) recognized these as internal fund movements and not taxable income, preventing double taxation. The Court agreed, noting that taxing these transactions again would contravene the principle of taxing real income. C. Unaccounted Business Receipts and Payments The Court considered whether unaccounted receipts should be taxed at a gross level or net of corresponding payments. The CIT(A) applied a 30% profit rate on unaccounted receipts, aligning with the principle of taxing real income. The Court upheld this approach, rejecting the Revenue's contention to tax gross receipts without considering related expenses. D. Personal Expenditure The Court examined whether personal expenditures funded from already-taxed unaccounted receipts should be taxed again. The CIT(A) deleted these additions to avoid double taxation. The Court agreed, emphasizing that once the source of funds is taxed, the subsequent use for personal expenses does not warrant additional taxation. E. Peak Credit Theory The Court addressed the applicability of the peak credit theory for unexplained cash transactions. The CIT(A) rejected this theory due to the lack of evidence linking cash inflows and outflows. The Court concurred, noting the absence of detailed cash flow statements to support the application of peak credit. F. Profit Rate Determination The Court considered whether the CIT(A)'s adoption of a 30% profit rate on unaccounted receipts was justified. The CIT(A) determined this rate based on the nature of business activities and available profit data. The Court upheld this rate, noting its consistency with the group's historical profit margins and the nature of high-margin revenue streams like franchise fees and royalties. G. Transactions with Pawan Jalan The Court examined the addition of Rs. 1,10,00,000/- related to transactions with Mr. Pawan Jalan. The CIT(A) confirmed the addition, but the Court accepted the assessee's alternative proposal to tax the transaction at 25% of the receipts, ensuring only the profit element was taxed. 3. SIGNIFICANT HOLDINGS The Court upheld the principle that only real income should be taxed, emphasizing the need to avoid double taxation. It confirmed the CIT(A)'s approach of taxing net capital gains and applying a profit rate to unaccounted receipts. The Court also emphasized the importance of considering the nature of transactions and the evidence available, rejecting the Revenue's approach of taxing gross receipts without considering related expenses. The Court's final determinations include:
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