2025 (8) TMI 1421 - AT - Income Tax

Appellate order deleting unexplained jewellery addition upheld where surrendered income tied to building, land, withdrawals and stock differences

The DCIT, Central Circle-1, Ludhiana. Versus Smt. Meena Singla

The DCIT, Central Circle-1, Ludhiana. Versus Smt. Meena Singla - TMI ISSUES PRESENTED AND CONSIDERED 1. Whether addition of Rs. 83,72,312/- on account of unexplained jewellery found during search is sustainable where the assessee traced the source to amounts withdrawn by partners from a firm that had surrendered income. 2. Whether, in a search assessment, unexplained income can be assumed without corresponding discovery of unexplained cash, assets or expenditure, when the same amount has been represented in the surrendered income of a related firm and allocated to specific items (building, land, partner withdrawals, stock difference, fixed assets). ISSUE-WISE DETAILED ANALYSIS Issue 1: Sustainability of addition for unexplained jewellery where source is alleged withdrawals from a firm that surrendered income Legal framework: Under the statutory scheme governing search and seizure and assessment, undisclosed income when found must be represented by assets or unexplained expenditure; additions can be made where the assessee fails to satisfactorily explain the source of assets/values found during search. Precedent Treatment: No specific judicial precedents were cited or relied upon in the impugned order; thus treatment of precedents is not applicable to the Tribunal's reasoning. Interpretation and reasoning: The Tribunal examined the surrendered income declared by the firm (Rs. 2,80,00,000/-) and the internal allocation of that surrendered amount to distinct heads including partner withdrawals aggregating Rs. 94,50,000/-. The assessee's explanation was that Rs. 83,80,000/- was withdrawn by a partner and made available to the assessee, and that the jewellery was purchased out of this withdrawn amount. The Tribunal emphasized that the firm's surrendered income must be represented by assets or expenditures and cannot be left as an unsupported assumption of income. Because the surrendered amount had been accounted for against specific assets/withdrawals in the firm's records, the portion attributable to partner withdrawals was available in the hands of partners and therefore capable of explaining acquisition of the jewellery. The Tribunal noted the absence of recovered cash or discovery of unexplained expenditure during the search which would have supported an independent assumption of unexplained income in the assessee's hands. Ratio vs. Obiter: Ratio - where a related entity has surrendered income and that surrender has been allocated to identifiable items (including withdrawals to partners), an assessee who traces acquisition of seized assets to withdrawals so allocated and can demonstrate plausibility is entitled to have additions deleted unless the Department demonstrates that cash/assets/expenditure directly contradict the explanation. Obiter - observations on the limits of the Department's ability to 'lay its hand on discovery of cash' are explanatory but supportive of the main ratio. Conclusion: The Tribunal found the assessee's explanation acceptable and held that the AO's addition was not sustainable; the deletion by the first appellate authority was upheld. Issue 2: Permissibility of assuming unexplained income in absence of discovery of cash/assets/expenditure during search Legal framework: Principle that income cannot be assumed in the air; assessments based on search material must link declared or alleged undisclosed income to tangible assets or expenditures discovered or to legally unsatisfactorily explained items. Precedent Treatment: No precedent was invoked to alter or apply contrary principles; Tribunal applied the established evidentiary principle that unexplained income requires representation by assets/expenditure. Interpretation and reasoning: The Tribunal reiterated that absent discovery of unexplained cash or expenditure during search proceedings, the Revenue cannot simply assume that surrendered income in a firm translates into unexplained income in a third party's hands. The correct approach is to examine the surrendered amount's allocation. If the surrendered income is shown to be set off against specific assets/withdrawals and that allocation explains the source of acquisition in the hands of the recipient, the AO cannot make additions merely on the basis of discovery of jewellery without disproving the link to the surrendered and allocated amounts. The Tribunal observed that the Department did not discover cash to the extent of the surrendered withdrawals, nor did it identify unexplained expenditure that would invalidate the assessee's explanation. Ratio vs. Obiter: Ratio - the Department may not presume unexplained income in an assessees' hands where a related entity's surrendered income is allocated and the assessee's acquisition is plausibly accounted for from those allocations, absent independent contradictory discovery. Obiter - commentary on how the Department might proceed if cash or unexplained expenditure were found (not applicable on facts) is incidental. Conclusion: The Tribunal concluded that where surrendered income of a firm is properly allocated and a partner's withdrawal traceably explains the asset acquisition, merely finding jewellery in a locker does not permit addition; thus deletion was justified. Cross-reference The conclusions on Issue 1 and Issue 2 are interdependent: the acceptability of the explanation for the jewellery (Issue 1) rests on the general evidentiary principle that unexplained income must be represented by assets/expenditure (Issue 2). The Tribunal's decision to uphold the deletion relies on both the successful tracing of funds to partner withdrawals and the absence of any discovered cash or unexplained expenditure contradicting that tracing. Final Conclusion The Tribunal affirmed the first appellate authority's deletion of the addition relating to unexplained jewellery, holding that the assessee's explanation, founded on withdrawals allocated from the firm's surrendered income, was satisfactory and that the Revenue failed to establish unexplained income in the assessee's hands by independent discovery of cash or unexplained expenditure.