2025 (8) TMI 1184 - AT - Income Tax

Only estimated profit on undisclosed cash plastic-bag sales taxed; 2% profit treated as business income, interest allowed.

Arihant Enterprise Versus Income Tax Officer, Ward-7 (2) (1), Ahmedabad.

Arihant Enterprise Versus Income Tax Officer, Ward-7 (2) (1), Ahmedabad. - TMI ISSUES PRESENTED AND CONSIDERED 1. Whether books of account can be rejected under section 145(3) of the Act on the basis of variations from past trends, alleged non-maintenance of day-to-day stock register and delayed furnishing of supporting details. 2. Whether cash deposits/sales during the demonetization period amounting to unexplained cash credit can be treated as unexplained loan/credit under section 68 when sales are recorded in books and supported by sales registers, stock summaries and VAT returns. 3. Where books are rejected under section 145(3), whether addition should be made on entire sales value or restricted to the profit element embedded in the sales; and relatedly, the applicability of section 115BBE (taxation of unexplained credits) to such additions. 4. Whether interest expense claimed on unsecured loans is disallowable under section 36(1)(iii) when funds are shown to have been used to give advances to relatives/related parties and whether commercial expediency permits allowance of interest. 5. Miscellaneous: treatment of smaller suppressed sales addition (not pressed) and consequential reliefs (interest/penalty grounds raised but not separately adjudicated on facts in the order). ISSUE-WISE DETAILED ANALYSIS - Rejection of books under section 145(3) Legal framework: Section 145(3) permits the Assessing Officer to deem books unreliable if material discrepancies or defects are found; rejection requires recorded material defects affecting correctness of income. Precedent treatment: The Court relied on prior decisions holding that mere variation from past trends, or non-maintenance of day-to-day records alone, does not justify rejection absent material defects (authority examples cited by parties). Interpretation and reasoning: The Tribunal examined theAO's reasons-reduction in cash sales & closing stock compared to prior year, transactions concentrated around demonetization period, and absence of day-to-day stock register-and found that business transactions need not follow past trends. Non-maintenance of a day-to-day stock register per se was not a material defect warranting rejection. However, the Tribunal also considered the totality of discrepancies (delayed furnishing, unexplained cash sales, incomplete corroboration) in relation to genuineness of certain transactions. Ratio vs. Obiter: Ratio - Books cannot be rejected merely because of variations from historical patterns or non-maintenance of specific registers, unless material defects affecting correctness of income are shown. Obiter - Observations on the effect of late furnishing of some registers in impairing AO's ability to verify genuineness. Conclusion: The Court accepted that mere deviations and failure to maintain a day-to-day stock register are insufficient for blanket rejection; however, it proceeded to treat certain sales as suspect for purposes of estimation based on the specific evidence gaps (see cross-reference to s.68 and estimation of profit). ISSUE-WISE DETAILED ANALYSIS - Treatment of cash sales / unexplained cash credits under section 68 Legal framework: Section 68 treats unexplained cash credits as income unless the assessee satisfactorily explains identity, capacity and genuineness; where sales are offered to tax and substantiated by books/evidence, double taxation should be avoided. Precedent treatment: The Tribunal relied on authorities recognizing that sales recorded in books and supported by documentary evidence and VAT returns cannot be treated as unexplained merely on the basis of assumptions; also cited authorities that additions under s.68 should not tax entire sales already offered to tax. Interpretation and reasoning: Revenue pointed to sharp variations in stock/sales, late/failure to furnish stock register, and lack of supporting bills/delivery challans for some transactions as undermining genuineness. Assessee produced cash book, sales register, item-wise stock summaries and VAT returns; some corroboration from purchase parties differed marginally. The Tribunal found that while certain transactions raised suspicion given timing and incomplete corroboration, the correct approach where books are rejected (or transactions are suspected) is to estimate and tax the profit element rather than the entire sales amount. Ratio vs. Obiter: Ratio - Unexplained cash credits in the form of sales cannot be taxed at full sale value where sales are recorded; addition should be restricted to estimated profit on turnover when books are rejected or transactions are treated as bogus. Obiter - Emphasis on avoidance of double taxation where sales already reflected in VAT/IT returns. Conclusion: The Tribunal held that only 2% of the sale value of the relevant plastic bag sales (i.e., the profit element) is taxable as business income rather than treating Rs. 43,88,500 as unexplained cash credit in full; accordingly, additions under s.68 were restricted to the estimated profit element and not the entire turnover. ISSUE-WISE DETAILED ANALYSIS - Applicability of section 115BBE to additions Legal framework: Section 115BBE prescribes taxation of unexplained credits at a specified rate (with amendments affecting rates); its applicability depends on whether the addition constitutes unexplained income/credit as envisaged by that provision. Precedent treatment: The Tribunal referenced authorities holding that where additions under s.68 are sustained as unexplained credits, the corresponding special taxation provisions may apply; however, courts have also emphasized limiting taxation to profit element where sales are substantiated. Interpretation and reasoning: Given the Tribunal's conclusion that only the profit element could be fairly brought to tax (on estimation basis) and that entire sales had been recorded and in part reconciled with VAT/third-party information, invoking the full rigour of section 115BBE on the entire sale value would result in double taxation and was inappropriate in the facts. Ratio vs. Obiter: Ratio - Section 115BBE cannot be applied to tax the entire value of sales already reflected in books where only the profit element is legitimately taxable; application of s.115BBE must be consistent with the nature and quantum of the addition upheld. Obiter - Comments on retrospective amendment and rate computation (raised by assessee) were not determinatively applied in detailed ratio beyond the principle above. Conclusion: The Tribunal confirmed taxability but limited it to the estimated profit portion (2%); consequent invocation of s.115BBE on the whole sales value was not sustained in substance as it would overreach and amount to double taxation. ISSUE-WISE DETAILED ANALYSIS - Disallowance of interest under section 36(1)(iii) Legal framework: Section 36(1)(iii) disallows interest on borrowed capital to the extent funds are applied for purposes other than business; advances to related parties may attract disallowance unless advances are for bona fide commercial reasons. Precedent treatment: The Tribunal relied on binding precedent that advances made for commercial expediency (i.e., bona fide business reasons) do not justify disallowance of interest; cases were cited to the effect that where advances arise out of commercial transactions between related entities, interest remains allowable. Interpretation and reasoning: The AO disallowed interest on grounds that borrowed funds were used to make interest-free advances to relatives/related entities. The assessee demonstrated pre-existing purchase/sale relationships with the concerned parties and that advances were made in the ordinary-course commercial context. The Revenue did not dispute those underlying business relations. On the material, the Tribunal accepted that advances were made for commercial expediency and therefore interest expenditure could not be disallowed. Ratio vs. Obiter: Ratio - Interest on borrowed funds is allowable where advances to related parties are shown to be for bona fide commercial expediency; disallowance under s.36(1)(iii) is not called for merely because recipient is related if commercial purpose is established. Obiter - None significant beyond reliance on established principle. Conclusion: Disallowance of interest of Rs. 21,35,502 under section 36(1)(iii) was set aside; interest expenditure allowed. OTHER POINTS / PROCEDURAL CONTENTIONS Smaller suppressed sales addition (Rs. 1,90,470) was not pressed by the assessee and therefore dismissed as not pressed. Grounds asserting breaches of principles of natural justice and challenge to levying of interest/penalties were raised but the Tribunal's operative conclusions addressed the primary quantification issues above; consequential adjustments flowing from the Tribunal's findings were implied rather than separately elaborated in ratio. FINAL CONCLUSIONS The appeal was partly allowed: books could not be rejected solely on deviations from past trends or non-maintenance of day-to-day stock register; additions in respect of suspected cash sales were to be restricted to the profit element (fixed at 2% in the facts) rather than the entire turnover; and interest disallowance under section 36(1)(iii) was set aside because advances were sustained as made for commercial expediency.