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TMI Blog2025 (4) TMI 468X X X X Extracts X X X X X X X X Extracts X X X X ..... sessment years and quantum. Therefore, all these appeals were heard together. For the sake of convenience, we proceed to dispose of all these appeals of the Assessee and the Revenue by this consolidated order. Facts of the case: 3. The assessee is an individual and a resident of India. He is a key person in the Sankalp Group of Concerns, engaged in the hospitality and real estate sectors. The businesses managed include Restaurants under brands such as Sankalp, Sam's Pizza, and Saffron, Hotels under the names Ramada and Taj Skyline, Real estate projects in Ahmedabad. A search under Section 132 of the Act, was conducted on 30.10.2018 in the case of the Sankalp Group of Ahmedabad, covering entities related to Kailash Goenka Group and Robin Goenka Group. Incriminating materials, including handwritten diaries, loose papers, unrecorded bills, and other documents, were seized during the operation. During the course of search evidence of on-money transactions in real estate projects, unaccounted cash sales in the restaurant and hotel businesses were found which were not recorded in the books of accounts. Unexplained cash payments for land purchases, brokerage, salaries, and personal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions made and income assessed is given below: Sr Particulars A.Y. 2016-17 A.Y. 2017-18 A.Y. 2018-19 A.Y. 2019-20 1 Total Income as per original return of income 1,90,62,210 85,85,650 1,71,38,860 1,78,02,440 2 Date of filing Original Return of Income 30-Sep-2016 17-Oct-2017 28-Sep-2018 30-Sep-2019 3 Total Income as per return of income filed in response to notice u/s 153A 1,90,62,210 85,85,650 1,71,38,860 NA 4 Additions on account of - A - Unaccounted cash receipts in respect of internal circulation of funds 12,83,92,220 13,33,20,000 49,03,02,650 31,62,65,320 b - Personal Expenditure 1,35,03,507 75,80,255 60,61,749 30,95,708 c - Unaccounted cash expenses in respect of A-902, Silver Harmony 4,80,000 NIL 12,27,604 24,66,410 d - Unaccounted cash investment in respect of A-902, Silver Harmony NIL NIL 74,92,000 NIL e - Unexplained expenditure u/s 69C 30,00,000 10,00,000 NIL 4,68,00,000 f - Unaccounted cash investment in respect of Kharoj and Shilpgram 3,38,050 3,14,74,000 2,30,06,000 6,02,000 g - Unaccounted cash Receipts in respect of Kharoj and Shilpgram NIL 5,80,05,600 2,85,00,000 3,17, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... receipts. * Personal Expenditure: Such transactions include Purchase of Gold, Home Renovations and other miscellaneous expenses. The CIT(A) concluded that these expenditures were funded from unaccounted income already taxed during assessments and deleted additions to avoid double taxation. 5. Aggrieved by the order of CIT(A), both assessee and revenue are in appeals with following grounds of appeal(s): I. Grounds of Appeal in IT(SS)A No.1/Ahd/2023 for AY 2016-17 (Assessee's appeal): "1. The learned CIT(A) has erred in law and on facts of the case in confirming the assessment order u/s 153A r.w.s. 143(3) of the Act which is passed in violations of provisions of the Act and against the scheme of assessment related to search cases. 2. The learned CIT(A) has erred in law and on facts of the case in confirming the additions made by learned Assessing Officer which are not emanating from any of the incriminating material found during the search. 3. The learned CIT(A) has erred in law and on facts of the case in not accepting the peak balance theory with respect to alleged unexplained receipts and payments found during the search proceedings. 4. The learned CIT(A) has erre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ught to have been considered before passing the impugned order. The action of the lower authorities is in clear breach of law and Principles of Natural Justice and therefore deserves to be quashed. 6. The learned CIT(A) has erred in law and on facts of the case in confirming action of the Id. AO in initiating penalty under various sections of the Act. 7. The appellant craves leave to add, amend, alter, edit, delete, modify or change all or any of the grounds of appeal at the time of or before the hearing of the appeal." III. Grounds of Appeal in IT(SS)A No.3/Ahd/2023 for AY 2018-19 (Assessee's appeal): "1. The learned CIT(A) has erred in law and on facts of the case in confirming the assessment order u/s 153A r.w.s. 143(3) of the Act which is passed in violations of provisions of the Act and against the scheme of assessment related to search cases. 2. The learned CIT(A) has erred in law and on facts of the case in confirming the additions made by learned Assessing Officer which are not emanating from any of the incriminating material found during the search. 3. The learned CIT(A) has erred in law and on facts of the case in not accepting the peak balance theory with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g properties (Land atShilpgram and Land at Khoraj) while computing long term capital gain. 6. The learned CIT(A) has erred in law and on facts of the case in not accepting the contention of the appellant that the amount of Rs. 1,00,00,000 received from Mr. Pawan Jalan was part of internal circulation and therefore, not unexplained receipt at all. 7. Alternatively and without prejudice, such a sum of Rs. 1,00,00,000/- ought to have been treated as gross receipts and only a profit element embedded therein ought to have been brought to tax. 8.Both the lower authorities have passed the orders without properly appreciating the facts and they further erred in grossly ignoring various submissions, explanations and information submitted by the appellant from time to time which ought to have been considered before passing the impugned order. The action of the lower authorities is in clear breach of law and Principles of Natural Justice and therefore deserves to be quashed. 9. The learned CIT(A) has erred in law and on facts of the case in confirming action of the Id. AO in initiating penalty under various sections of the Act. 10. The appellant craves leave to add, amend, alter, ed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... On the facts and in the circumstances of the case and in law, the Ld. CIT(A) ought to have upheld the order of the A.O. 10. It is, therefore, prayed that the order of the Ld. CIT(A) be set aside and that of the A.O. be restored to the above extent." VI. Grounds of Appeal in IT(SS)A No.6/Ahd/2023 for AY 2017-18 (Revenue's appeal): "1. In the facts and on the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition of Rs. 13,33,20,000/- made on account of cash receipts in respect of internal circulation of funds, holding that the said amounts has merely changed hands within the group persons and the same have already tax in the hands of respective entities, without appreciating the fact that during the course of assessment proceedings the assessee has failed furnish the cash flow statement and also several entries are not pertained to group entities, but outside parties. 2. In the facts and on the circumstances of the case and in law, the Ld. CIT(A) in deleting the addition towards unaccounted receipts of Rs. 6,02,62,809/- out of total addition of Rs. 7,80,53,809/ -. 3. In the facts and on the circumstances of the case and in law, the Ld. CIT( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cumstances of the case and in law, the Ld. CIT(A) erred in deleting the Addition of unexplained cash payments (expenses) u/s 69C of Rs. 14,46,47,732/- after giving set off of unaccounted income in the form cash receipts. 4. In the facts and on the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the Addition of unexplained expenses towards personal expenditure of Rs.60,61,749/ -. 5. In the facts and on the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition of Rs. 74,92,000/- on account of cash investment in A- 902, Silver Harmony. 6. In the facts and on the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition on account of unaccounted cash expenses of Rs. 12,27,604/- in A-902, Silver Harmony. 7. In the facts and on the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the Addition of on-money receipts of Rs. 2,85,00,000/- in Khoraj and Shilpgram. 8. In the facts and on the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the Addition for payment of Rs. 2,30,60,000/- u/s 69 of the Act in Khoraj and Shilpgram 9. In the facts and on the circumsta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd in law, the Ld. CIT(A) erred in deleting the Addition of cash investment of Rs. 6,02,000/- in Khoraj and Shilpgram. 8. In the facts and on the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the Addition on account of cash receipts of Rs. 3,17,35,000/- in Khoraj and Shilpgram. 9. In the facts and on the circumstances of the case and in law, the Ld. CIT(A) erred in calculating capital gain after providing benefit of indexation to the assessee as on the unaccounted on-money payments to the seller for acquiring the plots, Shilpgram, Jaspur 651 and Khoraj Survey 381/1 and received on-money on sale of said plots. 10. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) ought to have upheld the order of the A.O. 11. It is, therefore, prayed that the order of the Ld. CIT(A) be set aside and that of the A.O. be restored to the above extent." 6. Now, we deal with each category of transactions and the grounds related with the same raised by both Assessee and Revenue in their respective appeals. The same are categorized under heads and are dealt as follows: A. Unaccounted Transactions relating to Sale of Immovable Properties 7. Foll ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deemed to cover such expenses. The CIT(A) emphasized that taxation must be limited to the real income, and no arbitrary additions can be made in the absence of supporting evidence. CIT(A) referred to several judicial precedents, including Kedarnath Jute Manufacturing Co. Ltd. v. CIT (82 ITR 363), CIT v. Gurubachan Singh J. Juneja (171 Taxman 406), and Jay Builder v. ACIT (33 taxmann.com 62), to emphasize that only real income or profits should be subjected to tax. The CIT(A) relied on the principle that only the profit element from unaccounted sales or receipts can be brought to tax. Referring to decisions in cases like Greenfield Realty P. Ltd. v. DCIT, (IT(SS) A No.320,321,322 and 329/ Ahd/2018) the CIT(A) opined that the remaining portion of unaccounted receipts may cover unexplained expenses, leaving no room for separate addition of expenses under Section 69C. The CIT(A) dealt with the issue of capital gains comprehensively by analysing the unaccounted receipts from the sale of capital assets and the corresponding unaccounted expenditures incurred by the assessee. The CIT(A) examined capital gains arising from the properties such as Land at Shilpgram 651 (Short-Term and Long-T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd expenses. While the CIT(A) has rightly upheld the principle that only real income in the form of net capital gains can be taxed, the contentions regarding the treatment of unaccounted receipts, expenditures, and the restriction of indexation benefits to the year of receipt of sale proceeds warrant a detailed examination in light of statutory provisions and judicial precedents. 13.1. After a detailed examination of the submissions made by the assessee and the revenue, and a thorough review of the material on record, we conclude that the CIT(A) correctly held that only the net capital gains arising from the sale of properties can be brought to tax. The CIT(A)'s approach aligns with the settled legal principle that only real income, and not arbitrary or notional amounts, can be taxed. The provisions of the Income Tax Act, particularly Section 48, mandate the computation of capital gains by deducting the cost of acquisition and improvement (duly indexed in the case of long-term capital assets) from the sale consideration. Therefore, once the transaction is accepted as a capital gains transaction, only the resultant net gains-after necessary statutory adjustments-can be subjecte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns. 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. 13.3. The Revenue's contention that there is no nexus between unaccounted receipts and expenses is rejected. The CIT(A) has correctly analysed the seized evidence and noted that the unaccounted receipts adequately explain the unaccounted payments. The 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. 14. The assessee's ground no. 5 of appeal in ITA No. 19/Ahd/2023 is allowed to the extent of granting indexation benefit up to the year of transfer of the assets and the Revenue's grounds of appeal, as specifically mentioned hereinabove, are dismissed in their entirety. The AO is directed to re-compute long-term capital gains for the Shilpgram and Khoraj properties by applying indexation up to the year of transfer, and tax the capital gains year-wise as computed and directed by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d business income, internal circulation of funds, or transactions with outsiders that warranted addition under Sections 69C and 115BBE of the Act. The CIT(A) observed the following based on the seized documents: Particulars Receipts Rs. Payments Rs. Internal Circulation of Funds 46,03,60,220 46,08,09,220 Unexplained Transactions 22,84,32,970 22,80,41,200 Total 68,87,93,190 68,88,50,420 15.4. The assessee argued that the entries in the seized material represented cash inflows and outflows within the group arising out of the hospitality business, franchisee operations, real estate, and advances. It was submitted that taxing these amounts would lead to double taxation since the same funds had already been subject to tax in the hands of respective entities. The assessee acknowledged that some entries could not be attributed to specific entities and proposed to consolidate such receipts as business income at a reasonable profit rate of 25%. The assessee submitted the bifurcation of unexplained transaction as: Category Receipts Rs. Payments Rs. Net Amount Rs. Within the Group (Internal Circulation) 21,74,32,970 14,07,88,700 7,66,44,270 With Outsiders 1,10,00,000 8 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT(A) also deleted the additions related to internal circulation, holding that the amounts had already been taxed within the respective group entities. It was held that without independent evidence proving these amounts as fresh income, treating them as unexplained receipts was unjustified. 16.1. Relating to Unexplained Receipts and Payments (Rs. 22,84,32,970 in Receipts and Rs. 22,80,41,200 in Payments), the CIT(A) noted the contention of the assessee that these transactions were part of regular business activities, such as franchise fees, hospitality receipts, restaurant sales, and advances related to real estate. However, due to the large number of entries in the seized documents, the assessee could not correlate all transactions to specific group entities. The CIT(A) found that most entries appeared consistent with the nature of the group's businesses but acknowledged the absence of conclusive evidence to attribute specific receipts to particular business entities. To address the issue fairly, the CIT(A) adopted a profit rate of 30% on the total receipts, based on the profit margins typically observed in similar group businesses. The CIT(A) noted that this approach aligne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fit estimation was unjustified. Additionally, the DR pointed out that the assessee failed to provide a detailed cash flow statement reconciling the receipts and payments to substantiate the nature of the transactions, which could have been crucial in assessing the movement of funds. 18. On the other hand, the AR defended the order of the CIT(A) by reiterating the key contentions of the assessee and providing a detailed explanation supported by factual analysis and legal precedents. The AR submitted that the noting in the seized diaries pertained to unaccounted "receipts" and "payments" directly linked to the business activities of the assessee's group, such as franchisee operations, hospitality services, real estate dealings, and cash advances. The AR emphasized that these entries did not point to any undisclosed source of income outside the scope of regular business operations. The AR argued that the unaccounted payments reflected in the seized materials were incurred out of the same pool of unaccounted receipts. Therefore, it was logical and necessary to allow a set-off between the two. Citing the real income theory, the AR contended that only the net surplus or "real income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aised by the assessee in appeals - IT(SS) No. 1/AHD/2023 - Ground No. 4, IT(SS) No. 2/AHD/2023 - Ground No. 4, IT(SS) No. 3/AHD/2023 - Ground No. 4 and ITA No. 19/Ahd/2023 - Ground No. 4. The AR submitted that the assessee had voluntarily offered 25% as a reasonable rate of profit to determine the taxable component embedded in the unaccounted receipts. It was argued that the CIT(A) did not provide any substantive reasoning for rejecting the 25% rate and adopting 30% instead. The AR emphasized that discretionary powers must be exercised judiciously and that the offered 25% rate was consistent with industry standards and the actual nature of business operations. The AR contended that the CIT(A)'s adoption of a higher profit rate of 30% was arbitrary and lacked a factual basis, especially considering that the group entities had declared profit rates ranging from 10% to 50% depending on their business segments. The AR further argued that the offered 25% rate appropriately captured the "real income" arising from unaccounted transactions across business segments such as hospitality, franchise operations, and real estate. In the absence of any evidence to show that the profit margin w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ow 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. (Ground No. 3 in IT(SS)A No. 1,2,3 and 19/ Ahd/2023) We concur with the CIT(A) for the reason observed above and dismiss these grounds of assessee. 22. We also emphasize that the seized material must be interpreted as a whole rather than selectively. The 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. 23. Based on detailed submissions, seized material, and judicial principles, we adjudicate for each category of components as follows: C. Internal Circulation of Funds: 24 The assessee contended that the amounts categorized as "internal circulation" represented intra-group transfers for cash management, not fresh income. The Revenue argued that the CIT(A) erred in deleting these additions without corrobo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ific bifurcation of amounts relating to Franchise Fees and Royalties, was provided by the assessee. 26. We carefully examined the profit percentages from appellate orders and the financial statements of the assessee's group entities. It was noted that the profit margins varied significantly, ranging from 10% to 50% across different segments. We observe that franchise fees and royalties typically have higher margins compared to income from hospitality operations and Reality business where expenses are relatively higher. The seized records indicated that a considerable portion of the unaccounted receipts pertained to franchise fees and royalties. 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 unaccoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unaccounted transactions should be taxed. Considering the detailed submissions, 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. 29. Thus, the respective revenue's grounds (Ground No.1-4) in appeals IT(SS) A No. 5,6,7 and 67/ AHD/2023 are dismissed. In case of assessee's grounds in appeal No. 1,2,3 and 19/ Ahd/2023, corresponding to adopting rate of profit at 25% is dismissed whereas ground relating to addition of Rs. 1 Cr in respect of receipt from Pawan Jalan in A. Y. 2019-20 is partly allowed. F. Additions in respect of personal Expenditure: 30. During assessment proceedings the AO noted that cash payments totalling to Rs. 3,09,22,219/- related to personal expenses, such as the purchase of gold and jewellery, home renovation expenses, and other personal expenses, were meticulously documented in the seized records but were not recorded in the books of accounts. The details of unaccounted personal expenditure, assessment year-wise, are as follows: Particulars A.Y. - > 2015 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ars. 33. The AR reiterated that taxing personal expenditures funded from receipts already brought to tax in related entities would lead to double taxation. The AR submitted that the group had disclosed substantial taxable income, and the same funds could not be taxed twice merely because they were used for personal expenses. Conversely, the DR relied on the AO's order, contending that the assessee failed to produce supporting evidence to substantiate the source and nature of the expenses, justifying their addition under Section 69C of the Act. 34. It is observed that significant additions of unaccounted receipts have already been made in the assessments of the group entities. The seized records indicated that the personal expenses were sourced from these unaccounted receipts, which were already taxed. Taxing the same funds again, merely because they were utilized for personal expenditure, would lead to double taxation, which is contrary to the principle of taxing real income. The AO invoked Section 69C and disallowed the expenses under Section 40A(3) due to cash payments. However, once the receipts have been taxed, the source of the expenditure is no longer unexplained. The b ..... X X X X Extracts X X X X X X X X Extracts X X X X
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