2025 (10) TMI 96 - AT - Income Tax

Tax authority treats 'Ghat' ledger as alloy additions, deletes additions, confirms partial receipts and allows set-off against unexplained assets

M/s. Mohanlal Jewellers Pvt. Ltd. Versus The DCIT, Central Circle-3 (3), Chennai. And (Vice-Versa)

ITAT upheld CIT(A)'s findings that entries in the 'Ghat' ledger represented alloy additions, not metal receipts, and deleted the related additions. ... Assessment u/s 153A - Goldsmiths - Additions made on a/c of ‘Ghat’ - entire Ghat receipts represented income of the assessee and that there were no Ghat payments - seized electronic a data maintained in ‘J-Pack’ Software - entries therein comprised of both accounted and unaccounted transactions - Due to non-availability of data / source documentation, the AO was not able to segregate or identify the unaccounted transactions included in the consolidated entries, as there was no ledger-wise or entity-wise data in the J-pack software, which would have enabled such bifurcation. The AO is therefore found to have proceeded on the presumption that, all the transactions recorded in the Jpack software was unaccounted for - Further, The AO was of the view that, the wastage gold generated in this conversion process was recorded by way of receipt entries in this ‘Ghat’ Ledger which entirely represented the assessee’s profit, and that such wastage gold was used outside the books to make new ornaments which was sold through unaccounted means. HELD THAT:- the Ld. CIT(A) had undertaken an elaborate factual exercise and has given his well-reasoned findings for arriving at his conclusion that the entries in ‘Ghat’ ledger was relating to ‘alloy’ addition and not ‘metal’ addition. We thus concur with the Ld. CIT(A) that the entire case made out by the AO was factually erroneous and based on wrong assumption of facts and therefore the impugned addition was unsustainable. Apart from the unsubstantiated statements of Shri Kothari and Shri Khatri, no independent corroborative material has been brought on record by the AO which would show that the receipt entries in ‘Ghat’ ledger comprised of ‘metal’ received by the assessee. Rather, the contemporaneous facts as discussed above, proves the contrary viz., the entries related to ‘alloy’ additions to the gold ornaments. Hence, having examined of the gamut of facts placed on record, we find that the ‘Ghat Jama’ entries only related to the quantities of alloy added for conversion of 24 carat bullion into 22 carat gold ornaments and does not involve any gold entries. No reason to interfere with the order of CIT(A) deleting the impugned addition across all the AYs 2017-18 to 2021-22. Additions made on a/c of making charges (MC Khata) - assessee being a wholesale manufacturer of gold ornaments, inter alia takes up orders from his customers to manufacture gold ornaments on job work basis, for which the customers pay making charges - HELD THAT:- We find merit in the assessee’s submission that the hypothetical extrapolation sought to be made by the Revenue on the basis of this entry found at the premises of M/s Sarvana Stores (0.1% of the total value of making charges) was perse arbitrary and un-reasonable. Further, it is an admitted fact that the assessee is in the business of rendering job work services for its customers and therefore the making charges earned by it cannot arbitrarily be disbelieved as non-genuine, particularly when no such contrary material or evidence was found or seized in the course of search. Rather, the verification exercise done by the AO & Ld. CIT(A) is found to support the assessee’s case. Assuming for a moment that there is some credence in the statement of Shri Julian, then by that logic, the receipt of making charges from M/s Super Saravana Stores (Jewel) Super LLP as credited in the P&L A/c is to be treated as not genuine, then such income ought to have been excluded from the computation of the assessable income, which has not been done by the Revenue. Hence, the action of the Revenue itself is found to be contrary to the statement of Shri Julian, which they seek to rely upon. According to us therefore, the statement of Shri Julian is of no assistance to the Revenue. We therefore uphold the order of Ld. CIT(A) deleting the addition(s) made on account of making charges, as it was already accounted in the regular books of accounts and assessed to tax as well. Additions made on a/c of ‘Byaj’ & ‘Vatav’ - HELD THAT:- AR was unable to show any infirmity in the calculation of the ‘byaj’ & ‘vatav’ receipts by the Ld. CIT(A) and therefore we are of the view that, this quantification is indeed correct. The entries in the J-Pack software pertained to the entire group and there was no specific identification or demarcation to attribute specific unaccounted entries to any specific entity or individual. We therefore are of the considered view that, when Shri Mohanlal Khatri had admitted to the ‘byaj’ & ‘vatav’ receipts to the extent respectively in his individual hands, then to that extent, the same amount cannot be brought to tax again in the hands of the assessee and the same is directed to be deleted. So far as the remaining ‘byaj’ & ‘vatav’ as it is not clearly discernible from the entries as to whom it pertains to and even Shri Mohanlal Khatri had not admitted and offered these remaining entries to tax as his personal income. Hence, for the above reasons, and to meet the ends of justice and, in all fairness to the Revenue and with a view to protect their interests as well, we accordingly confirm the addition on account of ‘byaj’ & ‘vatav’ to the extent of Rs. 12,13,66,358/- and Rs. 1,45,54,166/- in the hands of the assessee across AYs 2017-18 to 2021-22. Estimation of unaccounted sales - HELD THAT:- Onus is on the assessee to rebut the Revenue’s case by bringing on record some material to show that, the remaining unidentifiable entries in the Cash ledger, which have been quantified as unaccounted sales by the Ld. CIT(A) inter alia included consolidated entries or entries relating to goods which were sent on approval. The assessee cannot get away by citing their inability to undertake this voluminous exercise or due to non-availability of daily reports, which have since been destroyed. For the aforesaid reasons, we thus reject the assessee’s plea seeking further reduction in the quantification of unaccounted sales. Estimation of profit on the unaccounted sales - We hold that, the profit on unaccounted sales found in the ‘Cash’ ledger to the extent already taxed in the hands of Shri Mohanlal Khatri, is to be excluded from the profit on unaccounted sales estimated by Ld. CIT(A), to arrive at the correct value of addition which is to be added and taxed in the hands of the assessee. We concur with the Ld. AR that, if the additional income on account of profit from unaccounted business [‘Cash’ ledger of J-Pack Software] which has already been taxed in hands of Shri Mohanlal Khatri is not excluded, then it would result in impermissible double taxation of the same amount. Addition made on account of unexplained stock, unaccounted receivables, unexplained cash & silver etc. - As decided in K. S. M Guruswamy Nadar and Sons [1983 (6) TMI 17 - MADRAS HIGH COURT] as held that when there are two separate additions viz., one on account of suppression of profit and another on account of cash credit, then it is open to the assessee to explain that, the suppressed profits had been brought in as cash credits and has to be telescoped into the other. Gainful reference may also be made to the decision of J.J. Gandhi [1983 (10) TMI 17 - BOMBAY HIGH COURT] as approved the theory of telescoping and held that it could be applied in cases where additions in relation of unexplained money/investment are sought to be made in the hands of the assessee. The Hon'ble Court explained that if an addition towards undisclosed income was made and the AO also seeks to make certain addition in relation to unexplained investment then, it can be treated by the assessee that the unexplained investment is sourced out of the undisclosed income already taxed. The principle which emerges from the above is that, the same income should not be taxed twice i.e. once at the time of generation and thereafter at the time of application for making investment or any undisclosed asset. Having regard to this settled legal position, we now come back to the facts of the case. From the discussions set out above, we find that, the additions on account of ‘byaj’, ‘vatav’ & ‘profit on unaccounted sales’ as confirmed in the hands of the assessee. CIT(A) had upheld the judicially approved principle of telescoping and had directed that the benefit of telescoping the unaccounted income being assessed in the hands of the assessee across AYs 2017-18 to 2021-22 be allowed against the value of these unaccounted assets. This finding of the CIT(A) has not been disputed by the Revenue before us. We are therefore of the considered view that, the assessee is undoubtedly entitled to the benefit of telescoping qua the unaccounted income assessed in their hands i.e. Rs. 86,15,72,422/- against the value of the impugned unexplained asset(s). Whether the unaccounted income so assessed in the hands of Director of the assessee could also be telescoped against the impugned unexplained assets found in the course of search? - As assessee has been generating income from unaccounted sale transactions, ‘byaj’ & ‘vatav’ receipts etc. over the years and therefore it is safe to presume that, the excess stock found in the course of search would have been gradually acquired over the years and it cannot be solely out of the unaccounted income derived in the year of search i.e. FY 202021. Applying the theory of human conduct and circumstantial evidences, we find merit in the Ld. AR’s contention that, the excess stock found in JPack software should be appropriately apportioned across years and ought to be valued with reference to the market rates prevailing in those years. We thus do not countenance the action of the lower authorities in assuming that the impugned excess stock was purchased entirely during FY 2020-21 so as to be valued at the rate prevailing on the date of search i.e. 10.11.2020. In light of the above, we find it fit and reasonable to apportion the excess stock found in J-Pack software in the ratio of the unaccounted income taxed in the hands of the assessee and Shri Mohanlal Khatri with reference to the entries found in the same J-Pack Software and, accordingly revise the value the excess stock at the market rates prevailing in those years. Aggregate unaccounted income as quantified above, which has been taxed in the hands of the assessee and Shri Mohanlal Khatri is sufficient to be telescoped / set-off against the above aggregate value of unexplained assets of Rs. 157,90,76,296/-. Hence, applying the principle of telescoping therefore, the separate addition(s) made by the AO on account of excess stock, unaccounted cash receivables, unexplained cash & silver is hereby directed to be deleted. All other objections raised by the assessee on the merits of the addition made on account of impugned unexplained asset(s) and also the quantification & valuation of other assets (apart from excess stock) have become academic and infructuous and is therefore not being separately adjudicated upon and is being left open. Overall therefore, these grounds of the assessee stands allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether entries in a seized customized inventory software ('J-Pack') can be treated as unaccounted income of the assessee where consolidated, non-entity specific stock movement entries exist and source daily reports are partly unavailable. 2. Whether 'Ghat' ledger entries in J-Pack represent unaccounted metal (wastage gold) retained as profit or merely alloy adjustments recorded for inventory control; whether additions based on statements recorded during search are sustainable without corroborative documents. 3. Whether entries in 'MC Khata' ledger represent unaccounted making-charges receipts/payments and whether those entries, if reflected in regular books and offered to tax, can be added again. 4. Whether amounts in 'Byaj' (interest) and 'Vatav' (commission/rate differences) ledgers are taxable in the assessee's hands when substantial portions of those amounts were disclosed and assessed in the hands of the key controlling individual; extent to which telescoping applies. 5. Whether aggregate 'Cash' ledger entries in J-Pack can be treated as unaccounted cash sales; proper method for (a) quantifying unaccounted sales from consolidated entries, and (b) estimating gross profit rate to compute taxable profit. 6. Whether unexplained physical stock, receivables, cash and silver found/seized can be taxed in the assessee's hands when (a) the same or related unaccounted income has been offered to tax by the group's controlling individual or other group entities, and (b) valuation/apportionment across years is required. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Nature of J-Pack data (Legal framework) Legal framework: Assessments under Section 153A deal with undisclosed income detected on search; statements under search (e.g., Section 132(4)) require corroboration and cannot, alone, form the sole basis for additions. Burden lies on Revenue to establish that seized records correspond to unaccounted transactions of the assessee. Precedent treatment: Principles requiring documentary corroboration of statements and caution in relying solely on post-search statements are applied (see discussion of High Court authority in text). Interpretation/reasoning: J-Pack was found to be a consolidated inventory/control software used across group entities to record stock movements (not an accounting software). Entries were consolidated, non-entity specific, and source daily reports were destroyed/partly unavailable; thus AO could not segregate entries to a particular juridical entity without source slips. Ratio vs. Obiter: Ratio - consolidated inventory records cannot be mechanically equated to unaccounted income of a single entity where source documents and entity-wise ledgers are absent; statements alone are insufficient. Conclusion: Entries in J-Pack require corroboration and ledger-wise segregation before being treated as unaccounted income of the assessee; inability of AO to segregate defeats assumption that all entries are unaccounted for assessee alone. Issue 2 - 'Ghat' ledger (alloy vs metal) Legal framework: AO may make additions based on seized material, but factual findings must be supported by corroborative documentary evidence; admissions under Section 132(4) are not conclusive if inconsistent or contradicted by seized contemporaneous documents. Precedent treatment: Authorities restated that statements recorded during search need corroboration; where seized rough-estimation slips/daily reports reconcile ledger entries, those documents control the meaning of ledger items. Interpretation/reasoning: AO initially treated 'Ghat' receipts as wastage gold retained as income relying on statements. On remand the AO's own sample verification and appellate verification of seized daily reports, yellow/white slips and corresponding Tally entries showed 'Ghat' entries represented alloy added in converting 24-carat bullion to 22-carat ornaments; corresponding purchases/sales and making charges were recorded in regular books and received by bank transfer. Contradictory statements of witnesses were found unreliable. Ratio vs. Obiter: Ratio - where contemporaneous source documents seized at search reconcile J-Pack 'Ghat' entries to alloy adjustments and regular books reflect corresponding purchases/sales and making charges, additions treating 'Ghat' as unaccounted metal/income are unsustainable. Obiter - credibility issues of witnesses affect weight of their statements. Conclusion: Addition on account of 'Ghat' entries deleted; AO erred in relying solely on unreconciled statements and failing to verify seized documents. Issue 3 - 'MC Khata' (making charges) Legal framework: Income for making charges is taxable if received; AO must distinguish receipts from payments and corroborate with books. Double taxation is impermissible where amounts are already credited and offered to tax. Precedent treatment: Remand verification and cross-checking of J-Pack 'MC Khata' with Tally party ledgers and P&L is valid and decisive. Interpretation/reasoning: Although initial statements suggested cash back/payments, AO's remand verification found MC Khata entries reflected receipts in party ledgers and Tally and amounts were credited to P&L and offered to tax. Notebook entries seized at another group's premises did not show corresponding cash payments from assessee in J-Pack; emails/ledgers showed bank receipts. Small isolated notebook entries cannot justify treating entire large ledger as unaccounted. Ratio vs. Obiter: Ratio - where entries in J-Pack MC Khata reconcile with books (Tally) and bank receipts, they cannot be treated as unaccounted income; addition not sustainable and would be double taxation. Obiter - stray notes elsewhere are insufficient to overturn book records. Conclusion: Additions deleted; MC Khata receipts already offered and assessed and cannot be added again. Issue 4 - 'Byaj' and 'Vatav' ledgers; telescoping with director's disclosures Legal framework: Additions based on seized ledgers must be quantified reasonably; principle of telescoping (Apex and High Court precedents) permits set-off of previously assessed undisclosed income against later additions attributable to same source/asset to avoid double taxation. Statements under Section 132(4) require corroboration. Precedent treatment: Telescoping doctrine (Anantharam Veerasinghaiah and High Court decisions) applied where undisclosed/ intangible additions already assessed can be treated as source for application (investments/assets) found later; statements unsupported by documents cannot alone sustain additions. Interpretation/reasoning: AO quantified entire Byaj & Vatav ledgers and added to assessee. Ld. CIT(A) corrected quantification (excluded squaring entries, used year-wise market rates). Key individual (control person) had declared and offered to tax substantial portions of Byaj/Vatav (with breakup) in his 153A filings; AO accepted those returns and assessed him. J-Pack entries related to group as whole; no exclusive link to assessee. To the extent director had admitted/offered these amounts, those portions could not be taxed again in assessee's hands. Remaining unadmitted portions attributable to assessee were sustainble additions after quantification by Ld. CIT(A). Ratio vs. Obiter: Ratio - (a) where a controlling individual voluntarily offers and is assessed on amounts traceable to seized ledgers, same amounts cannot be added again in company hands; (b) where ledgers contain balancing/squaring entries, those should be excluded from gross totals; valuation of metal receipts must use year-specific market rates. Obiter - allocation between group entities depends on available evidence; absence of entity-specific markers favors attribution to the person exercising control unless proved otherwise. Conclusion: Portions of Byaj/Vatav already offered and assessed in director's hands are to be deleted in assessee's assessments; remaining quantified amounts confirmed and sustained. Issue 5 - 'Cash' ledger: quantification of unaccounted sales and profit estimation Legal framework: AO may estimate unaccounted turnover from seized records, but estimation must be reasonable, supported by rationale; gross profit rate used for computing taxable profit should reflect business realities and book results where books are not rejected. Precedent treatment: Tribunal/HC authorities allow adopting assessee's book GP% or realistic GP where books are not discredited; AO must not apply arbitrary percentages without justification. Interpretation/reasoning: Cash ledger contained consolidated entries including bank receipts, proforma (approval) entries, notional movements and genuine cash sales. AO excluded several sub-ledgers but applied an 8% GP uniformly without rationale. Ld. CIT(A) re-quantified unaccounted sales after exclusions and examined J-Pack GP patterns and assessee's audited GP rates (0.74%-1.85% YRs). Considering unaccounted transactions often yield higher margins and J-Pack indicated 2-3% GP on many transactions, Ld. CIT(A) adopted 2.5% GP - a reasoned figure between book GP and J-Pack observed GP - and AO's unsubstantiated 8% was rejected. Further, director had already offered substantial unaccounted profit on unaccounted sales in his 153A filings; that amount is to be excluded (telescoped) from profit computed in assessee's hands to avoid double taxation. Where director's offer < total Ld. CIT(A) quantified profit, balance confirmed as addition in assessee's hands. Ratio vs. Obiter: Ratio - GP on unaccounted sales should be estimated on reasoned basis (comparable book GP, seized ledger patterns); arbitrary adoption of high flat percentage without rationale is unsustainable. Telescoping applies to exclude previously taxed profit portions. Obiter - when daily/source reports are destroyed, AO's inability does not shift onus to assessee to fully reconstruct consolidated entries beyond feasible limits. Conclusion: Ld. CIT(A)'s quantification of unaccounted sales and adoption of 2.5% GP upheld; profit already taxed in director's hands excluded; net additions confirmed for AYs 2017-18 to 2020-21 and AY 2021-22 addition deleted as covered by director's disclosures. Issue 6 - Unexplained stock, receivables, cash & silver; valuation and telescoping Legal framework: Additions for unexplained assets found on search can be made, but where undisclosed income has been previously assessed (intangible/additional offers by group entities/individuals), telescoping permits set-off of such assessed income against later additions representing application of that income. Valuation of seized stock should reflect year-wise acquisition where stock is cumulative over years; valuation at search date can overstate gains. Precedent treatment: Courts/tribunals approve telescoping and apportionment across years where undisclosed income has been accepted for earlier years and the unexplained asset arises from group activity; allocation must be reasonable and connected to seized source documents. Interpretation/reasoning: AO added unexplained stock/receivables/cash/silver based on J-Pack party balance sheet and market rate at search date. Ld. CIT(A) partially reduced stock but denied telescoping of director's assessed income. Tribunal finds J-Pack entries group-wide, director had disclosed substantial additional income referencing same J-Pack entries and AO accepted in director's assessments; therefore director's additional income is available for telescoping. Excess stock represents cumulative accumulation and must be apportioned across years in proportion to unaccounted income taxed in assessee and director combined; year-specific metal rates applied for valuation. After apportionment and using year rates, aggregate unexplained assets reduced and fully absorbed by telescoped unaccounted income of assessee+director; resulting additions deleted. Ratio vs. Obiter: Ratio - (a) where seized records relate to group and unaccounted income has been assessed in the hands of group entities/individuals based on same records, that previously assessed income is available to be telescoped against unexplained assets; (b) valuation of cumulative stock should be apportioned across years and valued at prevailing year rates to avoid taxing notional appreciation. Obiter - AO's inability to verify every entry due to destroyed source material cannot be used to penalize assessee where reasonable reconciliations exist. Conclusion: Telescoping allowed - aggregate unaccounted income of group entities (assessee + director) set off against unexplained assets after apportionment and year-wise valuation; separate additions for excess stock, receivables, cash and silver deleted.