2024 (6) TMI 1538 - AT - Income Tax

WhatsApp hawala chat evidence and impounded unaccounted trading: s.69 addition cut to commission; GP-only profit upheld; excess stock deleted

WhatsApp chats relied on for s.69 unexplained investment were held to evidence only hawala cash transfers, entitling the assessee merely to commission ... Unexplained investment u/s 69 - whatsapp chat relied upon - observation by AO that the assessee was engaged in unaccounted purchases and sales to the extent of 60% of transactions - AO based on statement recorded during survey, proceeded to make addition as unaccounted investment u/s 69 on the ground that the assessee had, indeed, admitted for the same as unaccounted income - HELD THAT:- CIT(A) had given a categorical finding that the entries reflected in the whatsapp chats represent only transfer of money through Hawala to various parties for which the assessee could be entitled only for commission income. The finding that the assessee was involved in Hawala cash transactions for earning commission income has not been controverted by the Revenue before us with contrary evidences. The figure of Rs.300 per lakh to be the commission income adopted by CIT(A) was also not controverted by the Revenue before us with contrary evidences. Hence, we hold that only the commission involved in the aforesaid transfer of cash to various parties, which are reflected in the whatsapp chats in the total sum of Rs.67,10,000/- could be brought to tax in the hands of the assessee. This commission income has been adopted by CIT(A) at the rate of Rs.300 per lakh and sum of Rs.20,130/- had been added as commission income in the hands of the assessee. We do not find any infirmity in the said factual finding recorded by learned CIT(A). Addition made on account of impounded material LPI-1 representing unaccounted purchases - We find that CIT(A) had rationally arrived at the basis of working of unaccounted sales and also by placing a reliance on the decisions of CIT Vs. Balchand Ajit Kumar [2003 (4) TMI 76 - MADHYA PRADESH HIGH COURT] and Manmohan Sadani [2007 (10) TMI 246 - MADHYA PRADESH HIGH COURT] had concluded that only the profit element embedded in the unaccounted sale transaction should be brought to tax in the hands of the assessee. In the instant case before us, the assessee had made both unaccounted purchases as well as unaccounted sales. Hence, the profit element embedded thereon could alone be brought to tax. CIT(A) had applied the profit percentage declared by the assessee itself at the rate of 26.40% and made addition of Rs.9,44,138/ -. We concur with the findings given by learned CIT(A) that the statement recorded and the replies given thereon with regard to whatsapp chats (LPI-1, LPI-2 and LPI-4) pertain only to the assessee and his brother Sh. Rahul Ahuja and not pertaining to the business of M/s. Nitin Jewellers. Hence, arguments advanced by learned AR before us that the profit percentage shown by M/s. Shankar Lal Ahuja in his books of account should be adopted, has no basis and is devoid of merit. We do not find any infirmity in the said finding of learned CIT(A). Accordingly, the grounds raised by the assessee for assessment year 2018-19 are dismissed and the grounds raised by the Revenue for 2018-19 are dismissed. Validity of reassessment proceedings - Reasons recorded by AO for reopening the assessment were made based on incorrect assumption of facts. However, sum of Rs.30,000/- being unaccounted purchase does match with the statement recorded by the assessee, wherein, vide reply to question no. 23, the assessee, indeed offered Rs.30,000/- in the statement for assessment year 2019-20. Hence, prima facie, there exists reason to believe in the mind of AO that the income of assessee has escaped assessment. The law is very well settled that sufficiency of reasons need not be gone into at the time of recording of reasons and what is required is only a prima facie belief on the part of AO. Hence, ground no. 1 raised by the assessee for assessment year 2019-20 challenging the validity of reassessment is hereby dismissed. Addition made on account of excess stock - CIT(A) had given a categorical finding that the addition was made by the AO on the ground that the same was admitted as unaccounted income by the assessee during survey. But on perusal of the statement recorded during survey, it was found that no such admission was ever made by the assessee. The assessee had only stated that he would like to examine the books of accounts maintained by Shri Shyamlal Ji and then revert to the income tax department. Hence this addition made based on incorrect assumption of fact by the learned assessing officer cannot be sustained in the eyes of law. 1. ISSUES PRESENTED AND CONSIDERED (i) Whether amounts reflected in impounded WhatsApp chats representing 'money transfer/Hawala' could be assessed as unexplained investment for the full gross amounts, or only the commission income embedded therein. (ii) Whether additions based on unaccounted purchases detected during survey should be made for the entire purchase amounts, or only for the profit element embedded in corresponding unaccounted sales derived from those purchases. (iii) Whether reopening of assessment could be sustained where the recorded reasons partly proceeded on an incorrect assumption of admissions in the survey statement, but at least one item (unaccounted purchases) did match the statement, constituting a prima facie 'reason to believe'. (iv) Whether addition for excess stock found during survey could be sustained in full, and whether credit for opening stock disclosed in the return was required to be allowed while determining the taxable differential. 2. ISSUE-WISE DETAILED ANALYSIS (i) Taxability of WhatsApp-chat 'money transfer/Hawala' transactions: gross amount vs. commission Legal framework (as discussed): The Court examined the addition made as 'unexplained investment' on the footing of unaccounted cash payments, and adjudicated the proper quantification on the basis of impounded electronic material (WhatsApp chats) and factual findings as to the nature of the activity (money transfer for commission). Interpretation and reasoning: The Court noted that the assessment adopted a large figure for alleged unaccounted cash payments without providing any working or basis. The appellate authority, after supplying the impounded WhatsApp material and tabulating the chats year-wise, identified the relevant money-transfer figure for the year. The Court accepted that the WhatsApp chats constituted usable evidence for quantification and that the identified figure (as derived from tabulation) had a proper basis. It further affirmed the categorical factual finding that these entries represented transfer of cash for others through Hawala for earning commission, and that this finding was not rebutted by the Revenue with contrary evidence. The commission rate applied (per lakh) was also not controverted with any evidence. Conclusions: Only commission income embedded in the money-transfer/Hawala amounts was taxable, not the gross money-transfer figure. The Court upheld restriction of the addition to commission computed at the adopted rate on the quantified WhatsApp-based money-transfer amount, and rejected the Revenue's plea to restore the higher gross addition. (ii) Unaccounted purchases: full purchase value vs. profit element on unaccounted sales Legal framework (as discussed): The Court accepted the approach that where unaccounted purchases and corresponding unaccounted sales exist, taxation should be confined to the profit element embedded in such unaccounted turnover, applying the profit percentage emerging from the assessee's own declared results. Interpretation and reasoning: The Court found that the appellate authority rationally worked out unaccounted purchases from impounded material and then derived unaccounted sales by applying the sales-to-purchases ratio from disclosed figures. On such unaccounted sales, the declared profit percentage for the relevant year was applied to compute unaccounted profit. The Court agreed that, on the facts, the impounded chats and statement context related to the individual activity (and that of a family member) rather than the proprietary business; therefore, the argument that a different profit rate from the proprietary concern should be substituted was rejected. The Court found no infirmity in restricting the addition to the computed profit element. Conclusions: The addition on account of unaccounted purchases was properly restricted to the profit element derived from unaccounted sales computed using disclosed ratios and the declared profit percentage. The sustained addition on this basis was upheld, and challenges seeking either full deletion or restoration of higher addition were rejected. (iii) Validity of reopening where reasons partly rested on incorrect assumptions of survey admissions Legal framework (as discussed): The Court applied the principle that, at the stage of reopening, what is required is a prima facie 'reason to believe' that income has escaped assessment, and the sufficiency of reasons is not to be examined as long as such prima facie basis exists. Interpretation and reasoning: On reviewing the survey statement, the Court held that the recorded reasons incorrectly assumed admissions on multiple items; however, it found that the assessee did admit unaccounted purchases of a specific amount for the relevant year, matching one of the reopening items. This was sufficient to form a prima facie belief of escapement of income, and therefore reopening could not be invalidated merely because other items in the reasons were factually incorrect. Conclusions: The reassessment was held valid since at least one item (unaccounted purchases) supported the formation of 'reason to believe'; the challenge to reopening was dismissed. (iv) Excess stock found during survey: sustainability and allowance of opening-stock credit Legal framework (as discussed): The Court examined sustainability of a stock-difference addition where the assessment treated the full stock found as undisclosed based on alleged admission, and whether disclosed opening stock required credit while determining unexplained excess. Interpretation and reasoning: The Court agreed with the finding that no admission of undisclosed income for the entire stock was made in the survey statement; hence, the full addition premised on such admission was unsustainable. However, since physical stock of a stated value was found, and the assessee had disclosed opening stock in the return, the correct approach was to grant credit for the opening stock and sustain only the differential between the stock found and the opening stock figure. The appellate authority's computation of only the differential amount was accepted as factually and legally sound. Conclusions: Deletion of the full excess-stock addition was upheld, while sustaining only the differential after allowing opening-stock credit; the Revenue's challenge to this relief was dismissed.