2014 (8) TMI 1259 - AT - Income Tax

Addition under s.69C capped at Rs.36,50,000 for undisclosed cash purchases; daily peak Rs.18.50 lakh, declared Rs.30 lakh

Assistant Commissioner of Income-tax, C.C. XII, Kolkata Versus Shri Ashok Kumar Agarwal

ITAT upheld CIT(A)'s restriction of addition under s.69C in respect of undisclosed cash payments, finding that daily unaccounted purchases peaked at ... Addition u/s. 69C - undisclosed cash payments - HELD THAT:- Payments on various dates as found in F1/Office-6 and F1/Office-7 are only the amounts on any given day as unaccounted purchases, which does not exceed Rs. 18.50 lacs i.e. on 15th January, 2010. The assessee has already surrendered a sum of Rs. 30 lacs. If we take peak amount the addition will be only at Rs. 18.50 lacs but as the assessee has already declared a sum of Rs. 30 lacs in the return of income, we feel that the CIT(A) has rightly restricted the addition at Rs. 36,50,000/- being the declared amount of Rs. 30 lacs plus the profit @ 5%. We find no infirmity in the order of CIT(A) and hence, we confirm the same. The appeal of revenue is dismissed. 1. ISSUES PRESENTED AND CONSIDERED 1. Whether the Assessing Officer was justified in treating the entire cash payments totaling Rs. 66,05,000 as unexplained deposits/undisclosed income under section 69C where seized papers recorded cash inflows and outflows and the assessee admitted purchases and disclosed part of the income. 2. Whether acceptance by the Department of corresponding sales recorded in seized papers in respect of another taxpayer (HUF) can be relied upon to infer that corresponding purchases and sales by the assessee were genuine, for purposes of disallowance under section 69C. 3. Whether the principle of peak cash balance and declared/surrendered amount limits the quantum of addition under section 69C where cash payments occurred on multiple dates and the assessee has disclosed/surrendered a portion of the income. 4. Whether the material on record (seized documents, statements under section 131/132, peak cash calculation) constituted contrary material sufficient to displace the assessee's explanation of rotation of unaccounted funds and trading profits. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Validity of addition under section 69C of the Act treating Rs. 66,05,000 as unexplained cash payments Legal framework: Section 69C permits the Assessing Officer to treat money found as unexplained cash payments/deposits as income of the assessee unless the assessee explains the source. The AO bears the burden to show the amount is unexplained; the assessee may explain with supporting material. Precedent Treatment: No binding precedent was cited; the Tribunal and CIT(A) applied statutory principles to facts-acceptance or rejection depends on documentary and testimonial evidence. Interpretation and reasoning: The seized documents (F1/Office-6/7) recorded cash inflows and outflows linked to trading in pig iron. Statements recorded under section 131/132 showed the assessee admitting purchases aggregating Rs. 66,05,000 and explaining that purchases were funded by rotation of unaccounted sale proceeds; the assessee voluntarily disclosed/surrendered Rs. 30,00,000 and included it in the return. AO rejected the rotation explanation and treated the full Rs. 66,05,000 as unexplained. CIT(A) found that, given the seized papers and related admissions, the AO lacked contrary material to disbelieve that corresponding sales had occurred and that the assessee had already made a reasonable disclosure. The Tribunal noted that where purchases are shown and corresponding sales are accepted in related records, it is unreasonable to treat the entire purchases as unexplained without specific contrary evidence. Ratio vs. Obiter: Ratio - Where seized documents and admissions explain the flow of cash and the assessee surrenders/discloses a portion, it is not open to the AO to treat the entire cash payments as unexplained under section 69C absent contrary material. Obiter - Observations on the assessee's theory of rotation of funds as a factual explanation. Conclusions: The AO was not justified in treating the full Rs. 66,05,000 as unexplained income under section 69C. The Tribunal upheld the CIT(A)'s reduction of the addition, confirming that factual documentary/material evidence accepted in the record undermined the AO's blanket disallowance. Issue 2 - Reliance on acceptance of sales in seized papers for another taxpayer to infer corresponding purchases/sales by the assessee Legal framework: Evidence and consistency of seized records can be used to corroborate transactions; admission by one taxpayer and acceptance of figures in assessment of another can inform findings in related assessments, subject to consideration of distinct evidentiary burdens and absence of contrary material. Precedent Treatment: The authorities treated acceptance of sales in the HUF's assessment as relevant factual material for assessing the veracity of the seized papers and the corresponding entries in the assessee's records. Interpretation and reasoning: CIT(A) observed that the AO accepted sales recorded in the seized papers in the assessment of the other taxpayer (HUF) for the same assessment year and therefore those sales being accepted supported the genuineness of the corresponding purchases shown in the seized papers for the assessee. Given that acceptance, the Tribunal reasoned it was logical to accept that the assessee had both made purchases and effected sales, particularly where there was no evidence that goods remained in stock. Ratio vs. Obiter: Ratio - Acceptance by the Department of seized-paper sales in a related assessment is relevant corroborative material that can support acceptance of corresponding purchases in the assessee's assessment, absent contrary evidence. Obiter - The extent to which cross-assessment acceptances might be determinative in different factual matrices. Conclusions: Reliance on departmental acceptance of sales in the related HUF case was legitimate corroboration supporting the assessee's position that the purchases and sales recorded in the seized papers were genuine; accordingly, full disallowance was not warranted. Issue 3 - Application of peak cash balance principle and effect of voluntary disclosure/surrender on quantum of addition Legal framework: Peak cash balance methodology is used to determine unexplained cash by identifying the maximum cash holding on any day; voluntary disclosure/surrender and amounts disclosed in the return are relevant in quantifying taxable unexplained income. Precedent Treatment: The CIT(A) and Tribunal applied the peak cash principle factually to the sequence of day-wise payments recorded; they also gave effect to the assessee's voluntary disclosure and further enhancement to arrive at a reasonable addition. Interpretation and reasoning: The seized daily payment entries showed that on no single day did unaccounted purchases exceed Rs. 18.50 lakhs (peak on 15 January 2010). The assessee had already surrendered Rs. 30 lakhs and disclosed it in the return; the CIT(A) accepted an enhanced disclosure up to Rs. 36.50 lakhs (30 lakhs declared plus profit @ 5% on turnover as accepted in the HUF case). The Tribunal found this calculation reasonable and held the CIT(A)'s restriction of addition to Rs. 36.50 lakhs consistent with the peak cash approach and the voluntary disclosure. Ratio vs. Obiter: Ratio - Quantum of addition under section 69C must take into account peak cash position and voluntary disclosures; where peak cash and disclosed amounts yield a lower unexplained quantum, the AO cannot sustain a larger addition without contradicting material. Obiter - Specific numeric application (5% profit) informed by the HUF case. Conclusions: The CIT(A)'s limitation of the addition to Rs. 36.50 lakhs (surrendered Rs. 30 lakhs plus profit) based on peak cash analysis and accepted profit margin was justified and confirmed by the Tribunal. Issue 4 - Sufficiency of contrary material on record to displace the assessee's explanation of rotation of funds and trading profits Legal framework: The AO must produce material that contradicts the assessee's explanation to sustain an addition; mere scepticism is insufficient. The presence of seized documents and corroborative admissions limit the scope for an AO to disregard explanations without positive contrary evidence. Precedent Treatment: The Tribunal and CIT(A) applied fact-specific scrutiny, requiring the AO to point to contrary material if he sought to disbelieve admissions and documentary records. Interpretation and reasoning: The AO did not place on record any material showing that goods purchased were lying as stock, nor any evidence disproving the sales accepted in the HUF assessment. In absence of such countervailing evidence, the CIT(A) correctly declined to accept AO's contention that the entire amount was unexplained. The Tribunal agreed there was no infirmity in the approach of CIT(A). Ratio vs. Obiter: Ratio - Absence of contrary material means admissions and seized documentary entries explaining transactions should be accepted for assessment purposes; additions under section 69C cannot be sustained merely by the AO's disbelief. Conclusions: The AO failed to produce contrary material sufficient to displace the assessee's explanation; therefore the CIT(A)'s and Tribunal's refusals to sustain the full addition were legally sound.