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TMI Blog2024 (12) TMI 1421X X X X Extracts X X X X X X X X Extracts X X X X ..... vant six assessment years and not on recorded purchases Disallowance of cash payment u/s.40A(3) - We direct the AO to delete this disallowance as in this case, the income of the assessee is assessed applying flat gross profit rate and assessee has not claimed any deduction with regard to the purchases made by him, hence the provisions of section 40A(3) cannot be invoked. We reverse the findings of the CIT(A) on this issue and accordingly, this issue of assessee s appeal on enhancement is allowed. Accordingly, interconnected issue with regard to applicability of section 40A(3) of the Act, is decided in favour of the assessee and as regards to application of profit rate, we direct the AO to apply gross profit rate of 2% in all the six assessment years. Addition of excess stock jewellery incorrectly added when there was no excess stock - We note that the assessee has specifically filed invoices and tried to correlate the excess gold stock and if these invoices are correct then it seems that there is no excess stock but these things need verification at the level of AO. Hence, we set aside the order of AO and CIT(A) on this issue and remand this issue back to the file of the AO for fre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10,17,517/- under section 40A(3) without giving the opportunity of cross examination in violation of the principles of natural justice. x. The Learned AO/CIT(A) ought to have seen that the above Rs. 10,17,517/- includes payments which were made through banking channels and thereby section 40A(3) is not applicable. xi. The Learned AO/CIT(A) ought to have seen that when the gross profit is calculated on presumptive or estimation basis of turnover, disallowances u/s 40A(3) cannot once again be made. xii. The Learned AO/CIT(A) ought to have noted that the same is already factored into the gross profit calculation. 3. Brief facts are that the assessee is a partnership firm engaged in the business of retail sale of gold in the name and style of M/s. Gold AIK. A search u/s.132 of the Act was conducted in the case of Mohalal Jewellers Pvt. Ltd., (in short MJPL ) and Shri Suresh Khatri Others on 10.11.2020. From the search conducted on MJPL, incriminating documents relating to assessee was found and information gathered there from, a search was conducted on the business premises of the assessee firm and the residential premises of Shri Amanullah, the Managing Partner of the assessee firm on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd seized. When these loose sheets was confronted to the Managing Partner of assessee firm, Shri Amanullah and accountant of Shri Mohammed Anees, both confirmed that Amanullah KDR refers to exchange of old gold and cash transactions entered with the assessee firm as on 08.11.2020. Subsequently, statement was recorded u/s.131 of the Act on 02.12.2020 of Shri Amanullah, the Managing Partner of the assessee firm, wherein he agreed that the transactions contained in Amanullah KDR belongs to assessee firm and admitted the consolidated transactions reflected in Amanullah KDR from Assessment years 2016-17 to 2020-21 as noted in J-Pack. The AO noted that Shri Amanullah, the Managing Partner of the assessee firm subsequently stated that the gold of 1010 Kgs was purchased from Shri Suresh Khatri of MJPL during the above mentioned period and also made payment of 1003 Kgs of old gold and cashofRs.108Crores with respect to purchases made from MJPL. Accordingly, the AO noted the consolidated transaction of gold, exchange of old gold, cash transaction of assessee firm with MJPL for Financial year 2016-17 to 2020-21 as per Amanullah KDR accounting J-Pack software, which the managing partner of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 17, of Rs. 10,17,517/- was made. Aggrieved, assessee preferred appeal before CIT(A). 4. The CIT(A) consolidated both the issues and deleted the addition of unexplained cash added by AO u/s.69A of the Act amounting to Rs. 10,17,517/- but sustained the addition of gross profit and directed the AO that only gross profit on unaccounted sales of unaccounted purchases is to be taxed by applying gross profit rate of 8.49% instead of net profit applied by AO at 12%. The CIT(A) recorded his findings in para 7.3 to 7.3.8 as under:- 7.3.1 Vide above Grounds, appellant has challenged addition made towards 'Unexplained Jewellery', Unaccounted cash' and 'net profit @12% on Gold purchased from M/s MJPL'. As the issues raised vide Grounds above are interrelated and intertwined in such a way that they can't be taken up independently. Hence, above Grounds are clubbed together and adjudicated as under. 7.3.2 During course of search in M/s MJPL, one J Pack software was found which was admittedly used to record unaccounted transactions entered into by M/s MJPL with retailers of Gold Jewellery like that of Appellant firm. During search, one ledger named 'Amanullah KDR' wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h KDR' Ledger account found in J Pack software. It is only claim of appellant that even payments made through RTGS are considered for arriving at unaccounted income in hands of appellant. Further appellant is questioning correctness of taxing the transactions u/s69A. During appeal proceedings, the appellant is asked to furnish copy of ledger account of M/s MJPL in its books which contains transactions entered into with M/s MJPL that are recorded in its regular books. It is noticed that the appellant has notfiled any ledger account as far as Assessment year 2016-17 is concerned. Therefore, it is considered that neither cash payment nor unaccounted purchase of Gold from M/s MJPL during the year are recorded in regular books of Appellant. 7.3.5 It is noticed that the AO in the assessment order mentioned that both employee of Appellant firm as well as Managing partner of Appellant firm claimed that sale consideration w.r.t. un accounted gold purchases from M/s MJPL are made by appellant in the form of old Gold, partly in cash and through RTGS also sometimes. Since Gold purchase transactions are not recorded in books, payment made for such purchases are also not recorded in books. C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome. 3. PCIT Vs Rameshwar Textiles Mills Ltd, Tax Appeal 527 528/2015Guj HC: Entire sales cannot be added as income of the assessee but addition can be made only to the extent of estimated profits embedded in the sales and that the income from suppressed sales should be determined by assessing the gross profit of the assessee. 4. Nikhil Garg Vs ITO, ITA No : 180/JPI2018: In case of unaccounted sales or purchases only percentage of profit involved in sales or purchases should be taken for the purposes of additions to the income of such person, and not the whole amount of sales or purchases should be added to the income while computing profits. 5. Nawal Kishore Soni Vs ACIT, ITA No. 1256, 1257, 1258/JPI2019 The gold purchased in period of demonetization was towards agreed sale to persons on receiving amount therefor from those persons in cash. Source of payment for purchase of gold is out of amount received from its sales. It is only profit on sale of said purchased gold which is income of assessee which was undisclosed income of assessee and the same could only be subjected to tax. It is settled law that in case of unaccounted sales only profit therefrom could only be taxed as inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the return filed for the year holding that unaccounted items purchased would have been sold during the year. 1. VR Narayanan (PAN AACPNO873G) 2. AmarJewellery Mart (PAN AAAFA1372P) 3. R M Jewellery (PAN AASFR3177R) 4.Rajans Rathna Jewllery Pvt Ltd., (PAN AADCR2271C) 5. STS Jewellery (PANAADFS5955L) 6. R N Appav Chettiar Jewellery Pvt Ltd (PAN AADCR621 1 R) 6.LKS Gold House P Ltd., (PAN AAACL7611F) 7. Fathima Jewellers (PANAAAFF1047L). 7.3.7 Therefore, in view of law laid down by various courts in cases cited above, it is held that unaccounted payment in cash can't be taxed separately for failure to explain source for two reasons 1. Unaccounted sale of gold purchased from M/s MJPL in previous years would have constituted source for such unaccounted payments in cash and gold -during the year 2. Unaccounted payment of cash constitutes unaccounted expenditure incurred in connection with un accounted sales of jewellery purchased from M/s MJPL. The only profit that appellant earns in this entire unaccounted purchase and sale transaction is Gross profit on unaccounted sale of such Unaccounted purchases made from M/s MJPL. That's why it appears that AO has charged only gross pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had held that once it is conceded that the profits and gains derived from the illegal business are liable to be taxed, then all the provisions of the IT Act must apply. It is not possible to hold that some of the provisions such as Section 40A(3) do not apply to the assessment of taxable income in the case of illegal business while some others do. It is not possible to draw a distinction between several provisions of the Act, one set applying to the assessment of income arising from illegal business and the other set not applying thereto. Maybe, in an illegal business such as smuggling, it may not be practicable to comply with the requirements of Section 40A(3). Similar view has been held by Hon'ble Gujarath High court in case of CIT Vs Hynuop food oil India(p) Ltd 290 ITR 702. Therefore, I am of considered view that cash payments made by appellant to the extent of Rs 10,17,517/- attracts provisions of section 40A (3)warranting disallowance of entire amount. The AO is directed to disallow cash payment made during the year of Rs 10,17,517/- u/s 40A (3) of IT Act. 7.3.10 Therefore, addition made on account of Unaccounted sales' Rs 16,32,616/-is to be restricted to the extent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt of gross profit on these unaccounted sales of unaccounted purchases from MJPL. 7. As regards to the issue of disallowance of cash payment u/s.40A(3) of the Act, the ld.counsel for the assessee stated that once the profit is estimated on unaccounted sales, the consequent cash payment cannot be disallowed by invoking the provisions of section 40A(3) of the Act. For this, he relied on the decision of Hon ble Madras High Court in the case of K.R. Ganesh Kumar vs. ACIT in Tax Case Appeal No.2408 of 2006. The ld.counsel for the assessee also relied on the decision of Hon ble Allahabad High Court in the case of CIT vs. Banwari Lal Banshidhar, (1998) 229 ITR 229 (All), Hon ble Punjab High Court in the case of CIT vs. Smt. Santosh Jain, (2008) 296 ITR 324 (Punjab), Hon ble Rajasthan High Court in the case of Principal CIT vs. Jadau Jewelers Manufacturers (P.) Ltd., (2018) 409 ITR 85 (Raj) and Gujarat High Court in the case of CIT vs. Ankleshwar Taluka ONGC Land Loser Travellers Co-operative Society, (2014) 362 ITR 92 (Guj) for this proposition and Co-ordinate Bench decision in the case of M.Shyamalanathan Co., in ITA Nos.117 to 122/CHNY/2023, order dated 16.06.2023. 7.1 The ld.Counsel ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... egular course recorded in the regular books of accounts as payment made through banking channel i.e., RTGS, etc., second transaction is exchange of old gold and third cash purchases on which the CIT(A) has directed gross profit on unaccounted sales on unaccounted purchases made through MJPL. We are of the view that a reasonable profit rate should be estimated and if the gross profit rate is to be added that can be added at the rate of 2%, going by the nature of business of the assessee and similar line of business only on the unaccounted part or payment made in cash for which cash was utilized for making purchases and consequent sale of MJPL. Hence, we are of the view that a reasonable estimate of gross profit of 2% will meet the ends of justice for both sides i.e., for the Department as well as for the assessee for all these six assessment years for unaccounted purchases only of gold from MJPL not recorded in the regular books of accounts. Hence, we direct the AO to apply gross profit rate of 2% on cash payment made for unaccounted purchases of gold from MJPL for these relevant six assessment years and not on recorded purchases. The assessee will file complete detail of purchases ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the view taken by the Appellate Tribunal that when the income of the assessee was computed applying the gross profit rate and when no deduction was allowed in regard to the purchases of the assessee, there was no need to look into the provisions of section 40A(3) and rule 6DD(j). No disallowance could have been made in view of the provisions of section 40A(3), read with rule 6DD(j) as no deduction was allowed to and claimed by the assessee in respect of the purchases. When the gross profit rate is applied, that would take care of everything and there was no need for the Assessing Officer to make scrutiny of the amount incurred on the purchases by the assessee'. 3.4 Similar view was taken by the same High Court in CIT v. GobindRam [2015] 229 Taxman 491 (P H). 10.1 There is a consistent view of High Courts that when an income of the assessee is computed applying flat gross profit rate and when no deduction is allowed in regard to purchases of the assessee, there is no need to invoke the provisions of section 40A(3) of the Act. Similar view is held by the Hon ble Madras High Court in the case of K.R. Ganesh Kumar, supra, wherein the question of law admitted by the Hon ble High Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the CIT(A) on this issue and accordingly, this issue of assessee s appeal on enhancement is allowed. Accordingly, interconnected issue with regard to applicability of section 40A(3) of the Act, is decided in favour of the assessee and as regards to application of profit rate, we direct the AO to apply gross profit rate of 2% in all the six assessment years. 10.3 Since the facts and circumstances and the issue are exactly identical in assessment years 2017-18 to 2021-22, taking a consistent view, we reverse the findings of CIT(A) in invoking the provisions of section 40A(3) of the Act in favour of assessee and also direct the AO to apply gross profit rate of 2% in all these six years. 11. The one more common issue in all these six appeals of assessee is as regards to the assumption of jurisdiction by the AO for framing assessment u/s.153A of the Act when there was no material found during the course of search on the appellant rather incriminating material relating to this assessee was seized from the search conducted on some other person and hence, assessment should have been framed u/s.153C of the Act. For this, assessee has raised the following grounds:- Order u/s 153A Bad in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts and gold bars have been found. The AO on verification of stock register, gold ornaments weighing 31830.510 grams and old gold weighing 3206 grams have been found mentioned in the stock register. When confronted on this aspect, the Managing Partner Shri Amanullah accepted that there is excess stock of 5971.150 grams available with the assessee and he offered the same to tax in the hands of the assessee firm. But subsequently during levying of prohibitory order proceedings stated that the assessee has received supply of stock from MJPL vide invoices as under:- 1. GJ/1446/20-21 dated 24.11.2020 for 2631.57 gms. 2. GJ/1913/20-21 dated 02.01.2021 for 2645.50 gms. 3. GJ/2860/20-21 dated 01.03.2021 for 2046.88 gms. The assessee firm further stated that the stock register is updated and after recording the same, it is noticed that the stock matches. The assessee further submitted that the profit for financial year 2020-21 relevant to assessment year 2021-22 includes stock of 5971.150 grams. Since the assessee admitted this as income, the AO added the excess stock and accordingly addition of Rs. 2,89,18,518/- was made. Aggrieved, assessee preferred appeal before CIT(A). 13.1 The CIT(A) a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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