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TMI Blog2022 (2) TMI 278X X X X Extracts X X X X X X X X Extracts X X X X ..... therefore, the same would warrant being set-off. Reference in this regard be made to para 7 ( infra ) of the order. Unaccounted Sales (u/s. 28) - addition for sale out-of-books could only be to the extent of gross profit thereon - HELD THAT:- The gross profit on unaccounted sales shall be taken as per the gross profit rates disclosed per the assessee s regular accounts for the relevant years. Even as the sales outside books also fetches saving on sales-tax (or VAT), there is nothing on record to indicate the extent of that benefit, which may also have been shared with the customer, who is generally explained by a retailer to be visited with the said levy if he wants a sale bill. The amount of sales for each of the years under reference would be computed on the basis of unaccounted purchases, as found; or unaccounted sales, as found, taking the higher of the two. The reason is simple. Unaccounted purchases could only be sold out-of-books, with the carry-over stock neutralizing the impact of the time lag between a purchase and sale, i.e., the period, on an average, after which a good purchased is sold. That is, though a good purchased is understandably not sold immediately ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ingly, confirmed Telescoping/Set-off - HELD THAT:- This telescoping (of additions), which represents the set-off of the source of profit and its application, so that addition/s for both cannot obtain, and is necessarily to be only at the higher of the two, can, however, only be in respect of the profit realized and, concomitantly, qua application/s of profit subsequent to its realisation. The set off afore-referred cannot therefore be extended to the gross profit for AY 2004-05 as the dates of unaccounted sales corresponding to the unaccounted purchases for the relevant year cannot be ascertained. In fact, the earliest such purchase is in end-April, 2003 (at ₹.43,490), so that even qua this purchase, applying an average stock period of six months that obtains for this year, would imply the corresponding sale as in end-October, 2003, well past the payment of on-money. In fact, the withdrawal of ₹.80,000 which forms part of the on-money of ₹.9.75 lacs, from bank on 18/7/2003, itself shows lack of sufficient unaccounted liquid funds with the assessee for payment. No case for telescoping the gross profit for AY 2004-2005 is thus made out. As regards the iss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction in the assessee s regular accounts. Further, it is only the net profit on unaccounted sales that could be added in assessment while the Assessing Officer (AO) has added both purchases and sales, making it a case of double addition. Reliance was placed by him on the decision in CIT v. Balchand Ajit Kumar [2003] 263 ITR 610 (MP), reading out the head-note thereof. In fact, the characteristic feature of the assessee s business is that while the sales are in cash, the purchases are on credit, covering almost the entire stock held. There is thus no payment by the assessee toward the unaccounted purchases, addition for which could be made u/s. 69C, i.e., for the unexplained nature and source of an expenditure. Reference, toward these, was made by him to the assessee s balance-sheets as on 31.3.2003 31.2.2004 (at PB-3, pgs.16-24 35-44), the end of the two years under reference. Further, an addition for ₹.9.75 lacs has been made toward investment in shop, the assessee s business premises, purchase of which had in fact been completed way back in July, 1999. How could, he asseverated, drawing attention to the sale deed dated 31.3.2012 in favour of Smt. Sangeeta Jain (PB-2, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with in fact most of the entries having been accepted as unaccounted by the assessee. In respect of the addition for ₹.9.75 lacs, the relevant pages of the Diary, inasmuch as the inference/s stands also drawn on the basis of the manner in which the same stand written and regarded by the assessee, have been scanned and made part of the assessment order. The second, which is rather incidental to the first issue, is the quantum of the said additions, as it may well be that the assessee has been able to satisfactorily explain some of the entries, i.e., a part of the addition/s made, which may thus be imbued with some errors of calculation or even algorithm. Discussion/Findings 5.1 My first observation in the matter is that there has been no improvement in her case by the assessee subsequent to the assessments, which remains substantially the same, i.e., as during the assessment proceedings, whereat Shri Sunil Kumar Jain, the proprietor of the business, who expired on 02/02/2008, was alive and participated in the proceedings, admitting most of the transactions, recorded date-wise, as unaccounted. The record (viz. Diaries), systematically maintained by him, are not only adm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accounted sale for ₹.100 (say), costing ₹.90, it would result in an addition for ₹.90 (u/s. 69C) and ₹.10 (u/s.28). A single addition for ₹.100, as made by the AO, cannot thus be said to be arithmetically incorrect or resulting in a higher addition. A double or, rather, a higher addition can be said to have been made where an addition is made both for ₹. 100 as well as for ₹. 90, even as deleting the excess in such a case would necessarily require correlating the sales and purchases, which exercise has, much less done, not even been attempted at any stage. In fact, considering that transactions for both unaccounted sales and purchases have been found, and admittedly additions made for both, a more systematic manner for computing the same, so as to avoid the possibility of a higher addition, would be required to be adopted. This explains the statement hereinbefore that the addition/s made could suffer from an error of computation, i.e., in terms of calculation or algorithm. The assessment of income under the Act, it needs to be borne in mind, is to be of the real income, subject though to the provisions of the Act, for which reference may be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agitated was whether, in the facts and circumstances of the case, the entire undisclosed sale could be added as income, or is the addition to be restricted to the income comprised therein, and which the Hon ble Court had no difficulty in answering in favour of the latter. Surely, it could be nobody s case that the entire sale represents the assessee s income, i.e., without deducting the cost of the goods sold, which, by definition, is the excess of sale (receipt) over cost. The Hon ble Court followed the decision in CIT v. President Industries [2002] 258 ITR 654 (Guj), reproducing its relevant part at pgs. 612-613 of its decision, which is as: It cannot be a matter of an argument that the amount of sales by itself cannot represent the income of the assessee who has not disclosed the sales. The sales only represented the price received by the seller of the goods for the acquisition of which it has already incurred the cost. It is the realization of excess over the cost incurred that only forms part of the profit included in the consideration of sales. Therefore, unless there is a finding to the effect that investment by way of incurring the cost in acquiring the goods whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... representing the direct expenditure qua sale thereof, which is by virtue of the deeming fiction of s. 69C, could only be for the unexplained source thereof. As argued in the instant case, the assessee has not invested any sum toward purchases, being made on credit, so that, where it is indeed so, there could be no addition for the unexplained source thereof u/s. 69C, and it is only the profit that would stand to be added u/s. 28. The pleading as to sourcing being through market credit, both before me as also at the earlier stages, has, however, been only qua purchases, and not qua indirect expenditure. It would also be, in the absence of any clear evidence, presumptuous to hold that the unaccounted indirect expenditure stands incurred qua unaccounted sales in the same ratio as that of accounted such expenditure to the accounted sales. In fact, there is no reason to incur such expenditure outside books as the same is tax-deductible, so that it goes against tax motivation which is the prime reason for earning income outside books. The addition qua profit, which is to be u/s. 28, would thus be, in the facts and circumstances of the case, only for gross profit; it being alr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be taken as per the assessee s financials, i.e., annual accounts. A comparison of the figures at (b) and (d) would show the extent to which the goods (purchases) are unpaid and paid , i.e., on an average, during the relevant year/s. The addition qua unaccounted purchases u/s.69C would be restricted to the latter, i.e., to the extent paid for . To further clarify, if the average stock holding and the average credit period are at 120 days and 90 days respectively, the assessee s capital invested in unaccounted purchases is equivalent to 30 days (120 90) days thereof. Assuming unaccounted purchases for the year at ₹. 20 lacs (say), a 30 day sum would be at ₹.1,64,384 (i.e., 20 lacs * 30/365). It is this sum that gets rolled over again and again, i.e., for each subsequent purchase, on being realized through sale, so that it is this sum (₹.1.64 lacs, going by the example) that would therefore stand to be added u/s. 69C. Each sale would though generate profit, and which would stand to be separately added u/s. 28. Reference in this context may also be made to the discussion at para 5.5 ( infra ). A similar computation would stand to be made for AY 2004-05, even ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l be worked out accordingly, which, representing the source of profit, would be available for being set off against additions representing the application of profit. (see para 7 ( infra )) C. Unexplained Investment (u/s. 69/69A): The addition stands confirmed in view of the discussion at para 5.2; the assessee being unable to make out any case in respect of admitted payment for Furniture, which appears to have been fabricated, so that payments presumably would also have been made for labour, for which no specifics though have been brought on record by the Revenue, nor indeed for the payments made for Furniture during the following year. D. Unaccounted Expenditure u/s. 69C: No addition for the same shall survive in view of, as afore-explained, addition of gross profit, which subsumes indirect expenditure. (also see paras 5.2, 7) 5.5 I am acutely conscious that the addition on account of unexplained purchases has been substantially made in respect of payments made therefor, being in fact mostly through bank DDs the same, as also reference to bank payments elsewhere (as D-9), leading the AO to state that the assessee is maintaining bank accounts other than that di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which cannot be ignored. This aspect could also be explained or understood with reference to the assessee s regular accounts, which reveal a paid-up stock (i.e., stock-in-trade minus trade creditors) at ₹.2.86 lacs and ₹.7.69 lacs as on 31/3/2003 and 31/3/2004 respectively. The purchases for the relevant years being at ₹.95.64 L and ₹.45.94 L respectively, the capital involved works to 3 % and 16.7 % of the relevant purchases. The unaccounted/unexplained capital involved in unaccounted purchases would, accordingly, be also in the same ratio. This amount/s may though not be equal to the amount/s worked as per the method stated at para 5.4(A) above as the same is taken at an average of the opening and closing capital, which is thus without doubt superior, and the approximate working stated here is only to clarify the point being sought to be emphasized. The argument though is valid in principle, and would become applicable, as where, for example, addition is being made for unaccounted stock as found on stock-taking during survey, which would be u/s. 69/69A. The argument of the corresponding purchases having been made on credit would, in such a case, not be av ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al (supra), while Smt. Jain had paid ₹.1.50 lakhs for the said shop, i.e., the amount recorded and paid per cheque/s to Shri Rajkumar Agrawal, the latter confirmed to have received ₹.4.50 lakhs for the said shop, and whose statement, on being confronted to Smt. Jain, was not denied by her, furnishing no specific reply. d). no compliance was made by the other three persons, being the owners of the shops in the said locality, to whom summons u/s.131(1) were similarly issued by the AO to verify the truth as to the obtaining purchase price, as well as the practice of payment of on-money in respect, of the said property. The AO inferred the non-compliance to be not a coincidence, but only an avoidance on the part of the purchasers to be confronted in the matter. e). that, therefore, on-money stood indeed paid for the purchase of shops at Dulari Haat, Jawaharganj, Jabalpur, and which was being accepted for and on behalf of the owners, by Sh. Rajkumar Agrawal, managing partner, Rajkumar Agrawal Constructions, Jabalpur. 6.3 Coming to the specifics of the assessee s case, the entries at page 4 of D- 9 aggregate to ₹ 8.85 lakhs and that at pg. 5 thereof to ₹ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nevertheless explain the said entries, made in his own hand, in D-9. The same clearly represent payments. If, therefore, not for the said property, what, one may ask, have the same been made for ? To no answer by Shri Seth. The same may be for another property, similarly purchased from Shri Agrawal who is the connecting link, as again observed during hearing, between the payments under reference and the assessee s shop, or for any other purpose. Further, the amount at page 4 (₹. 8.85 lakhs) and at pg. 5 (₹.90,000, which includes ₹.80,000, admittedly withdrawn from bank on 18/7/2003) of D-9, total to ₹. 9.75 lakhs (pg. 8), stated to be paid in settlement in presence of Mamaji (Shri Manulal Jain) on 19/8/2003, who vide his statement on oath dated 22/5/2006 admits to be present at the assessee s shop on that date. Though the stated purpose is different, i.e., stock-taking at the counter at the first floor of the shop, the same stands thoroughly assailed by the AO as incorrect and baseless, and only rightly so inasmuch as he admittedly had no knowledge, understanding or connection with the assessee s business. That apart, the entry at pg. 8 (D-9) clearly stat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it indeed stood concluded. Nobody would ordinarily make full and final payment without securing title to the property acquired, putting himself in jeopardy as well as fetters to his right to transfer the same. Then, again, it is only for the assessee to explain as to for what purpose the payment stood made (in the presence of Mamaji) on 19/8/2003, concluding the transaction. 6.5 There is another aspect of the matter, which may therefore be discussed. The assessee s shop, surprisingly, is not shown as an asset in his balance-sheets on record (i.e., as on 31/3/2003 and 31/3/2004), which rather reflect a sum of ₹. 3 lacs as Advance to M/s. Rajkumar Agrawal Constructions. Now, surely, the payment of ₹.3.60 lacs thereto in 1999 being per two cheques of ₹.2.0 lacs and ₹.1.60 lacs, it cannot be related to, in whole or in part, this sum of ₹.3 lacs. There is also no account with Punjab National Bank (PNB) in the said balance-sheets, which may though have been closed since, or it could be that the said bank account stands not disclosed. Though it appears unlikely, payments by cheque/bank are also stated at pg. 4/D-9 (for ₹.8.85 lacs), as well as for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted such expenditure to accounted sales. In fact, there is no reason why such expenditure, which is tax- deductible, should at all be incurred out-of-books as there is no motive tax or otherwise, therefor. The position is different for direct expenditure inasmuch as the same yields unaccounted profit, to the same or even higher (due to savings on sales-tax) extent, without incurring the liability to income-tax thereon. In fact, even if this is incorrect to any extent, no separate addition for indirect expenditure is called for inasmuch as the entire unaccounted gross profit, wherefrom such expenditure is incurred, stands brought to tax, and which explains the deletion of addition qua the same (para 5.4(D)). The reason for referring to this aspect here again is that the gross profit, to the extent it is not utilized (or regarded as so) for incurring expenditure, is available for being utilized by the assessee for some other purpose. The gross profit for AY 2003- 2004 would accordingly be regarded as utilized for and, thus, the following additions set-off there-against, neutralizing the said additions to the extent of the said gross profit: a) toward indirect expenditure (S ..... 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