2025 (5) TMI 509 - AT - Income Tax

ITAT upholds electronic evidence under Section 132, confirms unaccounted cash but taxes only profit element, deletes salary disallowance

ITAT Chennai upheld electronic evidence seized during search under Section 132, rejecting assessee's challenge on Section 65B compliance grounds as proper ... Unaccounted cash collected from customers on sale of flats - Search u/s 132 was carried out at the business premises of the assessee in which electronic data was found and seized Admissibility of the electronic evidence relied upon by the AO to make the impugned additions - According to the assessee, the excel sheets found in the electronic data, the WhatsApp conversations between the employees were not admissible as it did not comply with Section 65B of the Indian Evidence Act, 1872 - HELD THAT:- We find that, the lower authorities had rightly observed that, the Authorized Officer had followed the due procedures mandated in law and had also obtained the necessary certificates u/s 65B of the Act prior to the seizure of such electronic records. The AO is noted to have extracted the said certificate obtained u/s 65B of Indian Evidence Act, 1872 in the impugned order as well. Before us, assessee was unable to controvert this certificate or point out the fallacy therein. We accordingly agree with the CIT(A) that there was no non-compliance with the provisions of Section 65B of the Indian Evidence Act, 1872 and therefore this preliminary contention of the assessee stands rejected. Contents of the seized material were not reliable and that the Managing Director had retracted his statement and therefore no addition was otherwise permissible on account of undisclosed cash receipts from sale of flats - We note that, submissions put forth by the Assessee had been examined by AO, and he negated the said plea, by observing that, the persons whose statements were being relied upon, had deposed their answers while recording their statements u/s 132(4) of the Act with reference to seized material. Accordingly, it is not the case that their statements were bald or not backed by any material. AO has noted that, above mentioned two employees never retracted their statements and that even the Managing Director had retracted from his statement after a long gap of time. Accordingly, the AO had rightly observed that, the assessee’s contention that, these statements were unreliable, was unacceptable. Moreover, before us also, the Ld. AR was unable to point out the mistaken fact admitted by the Managing Director in his statement which led to the retraction nor was the Managing Director able to disprove the facts admitted by him with relevant evidence. Hence, in our considered view, such bald retraction was rightly ignored by the lower authorities. As noted by the lower authorities, the electronic data including whatsapp conversations and excel sheets indeed related to the assessee's business activities and pertained to the actual units sold and therefore the contents thereof could not be discarded. The notings therein suggests that, it contained detailed project and unit-wise data, and the “EB” heading, in light of the statements of the employee/s, suggests the assessee collected cash payments over and above the declared sale consideration. The assessee was neither able to offer plausible explanation for these “EB” notings nor was the assessee able to demonstrate the purported extra work carried out in relation to these units. We thus countenance the following findings of the Ld. CIT(A) rejecting the assessee’s contention objecting to the reliability of these seized material and the statements given by the employees and Managing Director. Whether the entire value of these cash sales / receipts have to be brought to tax or only the profit element embedded therein has to be taxed? - The entire value of on-monies receipts shouldn’t be taxed but only the profit element embedded therein was to be taxed in its hands. On this aspect, it is noted that in the case of ITO Vs. Anand Builders [2009 (11) TMI 1039 - ITAT AHMEDABAD] Tribunal in similar circumstances had held that, 8% of the unaccounted on-money could be taxed in place of the entire unaccounted on-money receipts since there is always the unaccounted payments. Thus, we accordingly uphold the Ld CIT(A)’s view that only the profit element embedded in the on-monies ought to be assessed to tax. Estimating the profits of the assessee - DR appearing before us was unable to controvert the above estimation exercise conducted by the Ld. CIT(A). We also note that, the Constitutional Courts in their wisdom have generally estimated profit element in the range of 8% to 12.5% on the cash receipts involved in the business of real estate. In light of the foregoing, we thus agree with the Ld. CIT(A) that the assessee’s offer of 20% of the on-monies receipts in the return(s) of income filed u/s 148 of the Act was fair and reasonable. Hence, according to us, no further addition on the impugned issue is warranted. Overall, therefore, we uphold the above order of Ld. CIT(A). Hence, the grounds taken by both the assessee and Revenue on this issue stands dismissed. Addition made on account of cash collections from sale of plots in Project - AO is noted to have added the entire notings of cash on-monies by way of undisclosed income of the assessee. On appeal the Ld. CIT(A) restricted the addition to the profit element embedded in the on-monies which was estimated at 12.5% - HELD THAT:- As we hold that the notings contained in the impugned excel sheet under the heading “EB” indeed denoted cash collections upon sale of plots. Likewise, we also hold that, the AO’s action of adding the entire on-monies by way of income of the assessee was not justified and that only the profit element embedded therein ought to have been brought to tax. As noted by us, while adjudicating Issue No. 1 above, the judicial forums across India have generally estimated profit in the range of 8%-12.5% in relation to on-monies involved in real estate. Respectfully following the same, we thus countenance the Ld. CIT(A)’s action of estimating the profits embedded in the impugned cash receipts at 12.5%. Hence, we see no reason to interfere with the order of Ld. CIT(A) on this issue. Accordingly, these grounds raised by the Revenue and cross objections of the assessee are dismissed. Addition u/s.43CA - addition made by way of deemed sales consideration in relation to plots sold at the project “Residencia” - CIT(A) analyzed and compared the actual rates with the guideline rates, after allowing the benefit set out in first and second proviso to Section 43CA of the Act and found that the actual sale value of 15 plots fell within the tolerance limit and thus deleted the notional addition made u/s 43CA of the Act in relation thereto - HELD THAT:- Addition made u/s 43CA of the Act in relation to the 15 out of the 23 plots which were deleted by the Ld. CIT(A). Before us, the Ld. CIT, DR appearing for the Revenue was unable to controvert the factual finding of the Ld. CIT(A) that, the actual sale rates of these 15 plots in question fell within the tolerance range of 10% (20% for the period 12.11.2020 to 30.06.2021) as set out in first & second proviso to Section 43CA of the Act. We thus see no reason to interfere with the order of the Ld. CIT(A) deleting additions to this extent. Addition to the remaining eight (8) plots in AYs 2021-22 & 2022-23 - It is noted that the Hon’ble Calcutta High Court in the case of Sunil Kumar Agarwal [2014 (6) TMI 13 - CALCUTTA HIGH COURT] has held that, even if the assessee has not requested for reference to DVO, but there exists difference between the actual sales value and the guideline value, then the AO is duty bound to made reference to the DVO. The Hon’ble High Court has further held that, an assessee's failure in raising such a reference plea is not fatal in income tax proceedings as the Assessing Officer has to make statutory reference to the DVO u/s 50C of the Act. Thus we deem it appropriate to restore the instant issue back to the AO with a direction to refer the matters to the DVO and accordingly frame the assessment on this limited issue de novo and in accordance with law. Unaccounted cash sales of scrap - addition was based on loose sheets & statement(s) - HELD THAT:- As already upheld the evidentiary value of the contents of the excel sheets found in the pen drive found from the possession of Shri Ananda Padmanabhan and his statement recorded u/s 132(4) of the Act. It is also noted that, in the same excel sheet, there were notings of scrap sales whose payments were received in cheque and the same has been found to correlate with the entries in the regular books of accounts. This material fact corroborates the Revenue’s case that the notings of scrap sales made in cash found on the same excel sheet cannot be ignored or treated as a dumb noting. Accordingly, the plea of the assessee that the impugned addition was based on loose sheets & statement(s) having no evidentiary value is hereby rejected. Income attributable in relation to the unaccounted proceeds received from sale of scrap -CIT(A) correctly estimated the addition on account of unaccounted sale of scrap at 20%. Bogus purchase of steel - HELD THAT:- We agree in principle with the submission of the Ld. AR that an admission/ statement alone is not sufficient to justify an addition but at the same time the onus is on the assessee to rebut the statement with corroborative evidence. On the given facts, it is noted that the assessee has only been able to furnish the relevant tax invoices, ledgers and bank statements in support of purchases. The AO, on the other hand, is noted to have shown that, the supplier had also admitted to have issued bogus invoices and that these invoices were not supported by weighment slips and transportation challans and that the seized electronic data also suggested that these purchases were suspicious. Overall, therefore, we are in agreement with the authorities below that the assessee was unable to fully discharge the genuineness of the purchases which were identified to be bogus. Whether the entire value of payments made to the suppliers was to be disallowed or only the profit element embedded therein was to be taxed in hands of the assessee? - We uphold the action of Ld CIT(A) that only the profit element embedded in these bogus purchases ought to be assessed to tax. Coming to the issue of estimation of the profits, on the given facts according to us, the Ld. CIT(A) has rightly estimated it at 17% of the value of purchase, which is found to be fair & reasonable and therefore, no further addition was warranted in this regard. Addition on account of salary paid to Viswanathan without services - CIT(A) deleted addition - HELD THAT:- AR has however has rightly pointed out that, disallowance could not have been solely based on the statement of Smt.Viswanathan and that some corroborative evidence ought to have been brought on record to justify the impugned disallowance. We note that, the Ld. CIT(A) had taken cognizance of the educational qualification of Smt.Viswanathan and the work profile explained by the assessee. The Ld. CIT(A) having regard to her work profile, also noted that her daily attendance was not necessitated and that she could have indeed worked from home as well. He also took note of the Form 16 issued by the assessee and the PF contributions made from the monthly salary. Having taken note of these contemporaneous material and evidences placed on record by the assessee disproving on fact the statement obtained by the search team from Smt.Viswanathan, we are in agreement with the following reasoning given by the Ld. CIT(A) deleting the disallowance of salary paid to Smt.Viswanathan. The above findings of the Ld. CIT(A) are noted to be supported by the CBDT Instruction F.No. 286/98/2013-IT(Inv.II) wherein the Board has also directed that no addition/ disallowance should not made solely based on admissions obtained in course of search unless there is some corroborative material found to back the same. Disallowance u/s 40A(3) and 37 - HELD THAT:- Except relying on the statement recorded u/s 133A of the Act, the AO did precious little to bring on record any material to justify his conclusion that the addition of Rs.5,00,00,000/- was warranted u/s 37/40A(3) of the Act. The AO was unable to point out even a single instance where any specific item of expense found to be un-vouched for or that any particular expense in excess of Rs.20,000/- had been paid in cash. Accordingly, we countenance the above reproduced findings of the Ld. CIT(A) that the impugned addition made solely by relying on the bald admission made u/s 133A of the Act was not justified. In fact, the case of the assessee before us is on much better footing as there is no admission made u/s 132(4) of the Act, which otherwise carries evidentiary value. Rather, the impugned addition has been made based on admission made u/s 133A of the Act, which as held by us above, does not carry any evidentiary value. AO did not accept the plea of the assessee and made addition by relying upon the statement given during the course of survey. On appeal, the Hon’ble High Court upheld the order of the appellate authorities deleting the addition by holding that the addition could not have been made by solely relying on the statement obtained u/s 133A of the Act. We thus uphold the order of Ld. CIT(A) deleting the impugned addition. Accordingly, the grounds raised by the Revenue and the cross objections of the assessee are dismissed. The core legal questions considered by the Tribunal in this consolidated appeal arising from assessments for AYs 2016-17 to 2022-23 are as follows:1. Whether additions made on account of unaccounted cash collections ('on-monies') from customers in the sale of flats are justified and, if so, whether the entire amount or only the profit element embedded therein is taxable income of the assessee.2. Whether additions on account of cash collections from sale of plots in the 'Residencia' project are justified and the quantum of taxable income therein.3. Validity and correctness of additions made under Section 43CA of the Income Tax Act, 1961 ('the Act') on account of short admission of business income in respect of certain plots sold below guideline value.4. Legitimacy of additions on account of unaccounted cash sales of scrap material and the extent of taxable income therein.5. Disallowance of purchases from a steel supplier alleged to have issued bogus invoices and the quantum of addition to income on this account.6. Disallowance of salary paid to an individual without rendering services and the validity of such disallowance.7. Addition of Rs. 5 crores on account of alleged undisclosed income admitted during survey under Sections 40A(3) and 37 of the Act.8. Validity of reassessment notices issued under Section 148 of the Act.Issue-wise detailed analysis:Issue 1: Addition on account of unaccounted cash collections from sale of flatsThe search under Section 132 of the Act revealed electronic data including excel sheets and WhatsApp conversations evidencing cash receipts termed as 'EB' (Extra Budget/Extra Benefit) which were not recorded in the books of accounts. Statements recorded under Section 132(4) from various employees including Customer Relationship Managers, accounts staff, CFO, CEO, and Managing Director corroborated the existence of such unaccounted cash receipts from customers across multiple projects. The total unaccounted cash receipts from FY 2013-14 to 2022-23 were quantified at over Rs. 83 crores.The assessee admitted only 20% of these unaccounted cash receipts as taxable income, contending that the entire amount could not be treated as income. The AO rejected the assessee's plea and added the entire amount as undisclosed income. The assessee challenged the admissibility and reliability of the electronic evidence and statements, alleging coercion and retractions by employees and the Managing Director.The Tribunal upheld the admissibility of electronic evidence based on compliance with Section 65B of the Indian Evidence Act, 1872, noting that the AO had obtained the necessary certificates and followed due procedure. The Tribunal rejected the assessee's contention of unreliability and coercion, observing that the statements were recorded under oath and corroborated by seized material. Bald retractions after a lapse of time were held to be invalid.On the quantum of income, the Tribunal relied on judicial precedents including the Gujarat High Court's decision in CIT v. President Industries and the Kerala High Court in CIT v. C. Najeeb, which held that the entire sale proceeds cannot be treated as income, but only the profit element embedded therein. The Tribunal noted that the assessee had incurred expenses related to these cash receipts and that no unexplained investments or assets of corresponding magnitude were found during the search, supporting the view that the entire on-money receipts should not be taxed as income.The Tribunal further rejected the Revenue's contention that inability to substantiate expenses should lead to taxation of the entire amount, relying on judicial decisions which allow estimating reasonable expenses and profit element without requiring evidentiary proof of unaccounted expenditure.Following the ratio in Anand Builders (where 8% of unaccounted on-money was taxed) and other judicial pronouncements, the Tribunal agreed with the assessee's offer to tax 20% of the unaccounted cash receipts as reasonable profit and held no further addition was warranted. The Tribunal thus dismissed appeals of both parties on this issue.Issue 2: Addition on account of cash collections from sale of plots in Project ResidenciaSimilar to Issue 1, the AO added the entire cash receipts as undisclosed income. The CIT(A) restricted the addition to 12.5% of the cash receipts as profit element. The Tribunal upheld the CIT(A)'s approach and estimation, applying the same reasoning as in Issue 1 and judicial precedents, and dismissed appeals on this issue.Issue 3: Addition under Section 43CA for short admission of business incomeThe AO made additions by deeming sales consideration at guideline value where actual sale consideration was below such value for 23 plots in Project Residencia. The CIT(A) allowed benefit of tolerance limits of 10% (increased to 20% for a certain period) as per provisos to Section 43CA and deleted additions in respect of 15 plots falling within tolerance. For the remaining 8 plots, the CIT(A) upheld additions after recomputing short admission accordingly.The Tribunal upheld the CIT(A)'s factual findings and deletion of additions for plots within tolerance limit. However, the Tribunal held that the AO was obliged to refer the matter to the District Valuation Officer (DVO) as mandated by Section 43CA(2) of the Act, even if the assessee did not make such a request, relying on the Calcutta High Court decision in Sunil Kumar Agarwal v. CIT. The matter was remanded to the AO to refer to the DVO and complete assessment afresh on this limited issue.Issue 4: Addition on account of unaccounted cash sales of scrapElectronic data seized from an employee showed scrap sales with cash receipts not accounted for. The AO added the entire cash proceeds as income, while the CIT(A) restricted the addition to 20% of the cash proceeds considering the nature of scrap sales and likelihood of partial siphoning by employees.The Tribunal upheld the CIT(A)'s approach, noting the partial accounting of cheque receipts and the possibility that cash proceeds noted may not have fully reached the assessee's accounts. The estimation of 20% profit element was held to be fair and reasonable. Appeals were dismissed.Issue 5: Addition on account of bogus purchases of steelDuring search, data revealed that the supplier M/s PK Vaduvammal issued both genuine and bogus invoices for steel purchases. Statements of the assessee's employee and the supplier's partner confirmed the existence of bogus invoices aggregating over Rs. 31 crores for AYs 2020-21 to 2022-23. The assessee admitted 15% of the bogus purchase value as profit element but contested the disallowance of entire purchases.The AO disallowed entire value of bogus purchases. The CIT(A) held that only the profit element embedded in such purchases was taxable and estimated it at 17%. The Tribunal upheld the CIT(A)'s findings, relying on judicial precedents from Gujarat and Madras High Courts (CIT v. Bholanath Polyfab, CIT v. SPL Infrastructure Limited) which held that where purchases are made from grey market parties with bogus invoices but goods are actually received and consumed, only the profit element embedded in such purchases can be added to income.The Tribunal observed that the assessee failed to rebut the presumption of bogus invoices with corroborative evidence and that the AO's disallowance of entire purchases was unjustified. The estimation of profit element at 17% was held to be fair and reasonable. Appeals were dismissed.Issue 6: Addition on account of salary paid to Viswanathan without servicesThe AO disallowed salary paid to Smt. Laxmi Viswanathan on the basis of her statement during search that she did not render any services. The assessee submitted that the statement was coerced and produced evidence of her qualifications, work profile (literature, content creation, project pitching, digital marketing), Form 16, and PF contributions. The CIT(A) deleted the disallowance, holding that disallowance under Section 40A(2) requires proof of excessiveness or unreasonableness of payment, which was not established by the AO. The AO's reliance solely on the statement without corroborative evidence was held to be improper.The Tribunal upheld the CIT(A)'s deletion, noting the CBDT Instruction that admissions made during search cannot be sole basis for disallowance. The disallowance was therefore not justified and appeals were dismissed.Issue 7: Addition of Rs. 5 crores under Sections 40A(3) and 37 based on survey admissionDuring survey under Section 133A, the Managing Director admitted additional income of Rs. 10.18 crores including Rs. 5 crores for errors or omissions under Sections 37/40A(3). The AO added Rs. 5 crores as income. The CIT(A) deleted the addition, holding that statements under Section 133A are not recorded on oath and have no evidentiary value. Additions cannot be based solely on such admissions without corroborative evidence. The Tribunal upheld this view, relying on Supreme Court and High Court precedents (CIT v. Khader Khan Son, CIT v. S. Khader Khan & Son) and CBDT instructions advising against reliance on survey admissions alone.The AO failed to point to any specific unvouched expenditure or cash payments beyond prescribed limits. The Tribunal held the addition unjustified and dismissed appeals.Issue 8: Validity of reassessment notices under Section 148The assessee did not seriously contest the validity of reassessment notices and these grounds were dismissed as not pressed.Significant holdings and principles established:'The entire sale proceeds cannot be treated as the income of the assessee who has not disclosed the sales. The sales only represent 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... unless there is a finding to the effect that investment by way of incurring cost in acquiring goods which have been sold has been made by the assessee and that has also not been disclosed, the question whether entire sum of undisclosed sale proceeds can be treated as income of the relevant assessment year answers by itself in the negative.''The provisions of Section 40A(2) of the Act allow disallowance only to the extent that payments made to related parties are excessive or unreasonable compared to fair market value of services rendered. Disallowance cannot be based solely on statement recorded during search without corroborative evidence.''Statements recorded under Section 133A of the Act (survey) do not carry evidentiary value as they are not recorded on oath and cannot be sole basis for additions.''Where purchases are held to be bogus invoices but goods are actually received and consumed, only the profit element embedded in such purchases can be added to income, not the entire purchase value.''The Assessing Officer is duty bound to refer matters to the District Valuation Officer under Section 43CA(2) of the Act even if the assessee does not request such reference.''Electronic evidence seized in search, if obtained in compliance with Section 65B of the Indian Evidence Act, is admissible and statements recorded under Section 132(4) of the Act carry evidentiary value.''Estimations of profit embedded in unaccounted cash receipts or bogus purchases can be made by the authorities based on industry norms and judicial precedents, without requiring strict evidentiary proof of unaccounted expenditure.'In conclusion, the Tribunal upheld the additions only to the extent of the profit element embedded in unaccounted cash receipts and bogus purchases, rejected additions based solely on survey admissions, upheld the admissibility and evidentiary value of electronic evidence and statements recorded under search, and remanded the issue under Section 43CA for fresh assessment after reference to the DVO. The Tribunal dismissed all appeals and cross-objections except for remand on the Section 43CA issue.