2025 (11) TMI 982 - AT - Income Tax

s.69A reduced unexplained income to 10% lump-sum gross profit addition of Rs.15 lakh; relief of Rs.1.35 crore

ITAT Delhi reduced an unexplained income addition under s.69A to a lump-sum gross profit addition of 10% amounting to Rs.15 lakh (expressly without ... Addition u/s 69A - income from un-disclosed sources being the amount kept in the safe custody of Sh. Vinod - HELD THAT:- We wish to emphasize here that both the learned lower authorities have discussed the entire overwhelming supportive material at length to reject the assessee's explanation seeking to delete the impugned addition in principle. The fact also remains that the impugned entire addition could not be added as unexplained once it is prima facie found to be part of the assessee's business turnover though neither reconciled nor successfully verified before both the learned lower authorities. We therefore deem it appropriate in this factual backdrop that a lumpsum GP addition @ 10%; coming to Rs.15 lakhs only, would be just and proper with a rider that the same shall not be treated as a precedent. The assessee gets relief of Rs. 1.35 crores in other words. Necessary computation shall follow as per law. Unexplained stock and 6 kg. gold - Ld' counsel could hardly dispute that the CIT(A) herein has very fairly directed the same to be assessed in the name of M/s. HP & Sons (supra). Meaning thereby, that the assessee herein Sh. Pawan Kumar Agarwal has already been granted relief on both these issues in the CIT(A)'s lower appellate findings. That being the case, we find no merit in the assessee's instant latter twin substantive grounds which are rejected in very terms. ISSUES PRESENTED AND CONSIDERED 1. Whether cash of Rs. 1.50 crores found at the searched premises, said to have been kept in safe custody of a third person (Vinod) and claimed to be proceeds of sales of a related partnership, is liable to be treated as income from undisclosed sources under section 69A or is otherwise explained. 2. Whether cash of Rs. 1,27,00,000/- and stock (6 kg gold valued at Rs. 1,54,48,608/-) found at the searched premises but claimed to belong to a distinct partnership operating from the same premises ought to be assessed in the hands of the proprietor/appellant or in the hands of that partnership. 3. Whether the unexplained cash addition of Rs. 3,32,00,000/- and the addition for unaccounted gold stock (6 kg valued at approx. Rs. 1.54 crores) deleted by the first appellate authority should be restored by revenue. 4. Whether hedging loss of Rs. 22,48,580/- is disallowable as speculative (and therefore not allowable against non-speculative profits) or is a genuine non-speculative business loss allowable under the Act (interplay with section 43(5)). 5. Whether a lump-sum gross profit (GP) addition by way of compromise (10% GP addition of Rs.15 lakhs) is an appropriate remedial measure where cash is prima facie business turnover but cannot be fully reconciled or verified. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Treatment of Rs. 1.50 crores found in custody of a third person (section 69A) Legal framework: Section 69A treats amounts found in the possession of a taxpayer as income from undisclosed sources where explanations are not satisfactory; onus lies on taxpayer to satisfactorily explain source and ownership. Court/Tribunal may accept documentary/ corroborative evidence including books, delivery challans, invoices and statements. Precedent treatment: No authority or earlier decision was specifically applied or overruled in the reasoning; decision rests on evaluation of facts and documentary material on record. Interpretation and reasoning: The Tribunal accepted that much of the cash found at the premises was prima facie traceable to business sales and purchases supported by delivery challans, invoices and cashbooks for other portions (notably Rs. 2.05 crores). However, the explanation for the specific Rs. 1.50 crores - that it had been handed over to a third person for safe custody and stemmed from sales at a Jaipur branch of the related partnership - lacked corroboration: particulars of the third person were not disclosed, the third person was not produced, and no direct documentary proof was produced to verify that the amount actually belonged to the partnership and was merely held in custody. Given absence of verification and failure to produce the custodian or corroborating particulars, the explanation for that tranche was not accepted in full. Ratio vs. Obiter: Ratio - in absence of corroborative particulars or production of the alleged custodian, an explanation of custody of cash by a third person can be rejected and section 69A addition sustained to the extent unexplained; however, where sales and purchases are supported by verifiable delivery challans and contemporaneous books, the cash so explained cannot be wholly treated as unexplained income. Obiter - the choice of a 10% lump-sum GP compromise (see Issue 5) is discretionary and not to be treated as a precedent. Conclusion: The Tribunal confirmed an addition but mitigated the amount by accepting that the bulk of the cash related to verifiable business sales; it sustained a limited addition equivalent to a 10% GP on the disputed portion (resulting in net confirmation of a small lump-sum addition of Rs.15 lakhs), treating the remainder as satisfactorily explained for present purposes. Issue 2 - Allocation of Rs. 1.27 crores cash and Rs. 1.54 crores gold stock to a separate partnership operating from same premises Legal framework: Income and assets are to be assessed in the hands of the person/entity that is the beneficial owner; where distinct entities operate from same premises, additions should be made in respect of the correct assessee after examining ownership and source. Precedent treatment: No prior binding authority was invoked; the approach follows principle of assessing the correct taxable person based on ownership and operation. Interpretation and reasoning: The appellate authority (CIT(A)) had directed that cash of Rs. 1.27 crores and the 6 kg gold stock be examined and, if warranted, assessed in the hands of the partnership said to be M/s. HP & Sons, which was found to be operating from the same premises and claimed ownership. The Tribunal found that no material on record contradicted that claim; the assessee had furnished stock registers, sales ledger and audited balance sheet for the partnership. Accordingly, it was appropriate that any substantive addition in respect of these sums be made after considering the partnership's explanation, not by charging them to the proprietor/appellant. The Tribunal upheld the CIT(A)'s allocation direction. Ratio vs. Obiter: Ratio - where a separate assessable entity claims ownership and operates from the same premises and there is no contrary material, the tax officer must examine and, if necessary, make additions in the hands of that entity rather than attributing the amounts to the proprietor; such re-allocation is permissible and proper. Obiter - procedural details on how AO should proceed (remand, verification steps) are incidental. Conclusion: The Tribunal rejected the proprietor's challenge to the allocation and sustained the CIT(A)'s direction that those amounts be assessed in the hands of the partnership M/s. HP & Sons; the proprietor's appeal on these points was dismissed. Issue 3 - Revenue challenge to deletion of unexplained cash Rs. 3.32 crores and gold stock addition Legal framework: Appellate review requires consideration of documentary evidence taken on record at assessment and remand stages; revenue must demonstrate that appellate findings ignoring officer's additions are unreasonable or unsupported. Precedent treatment: No specific precedents cited; decision rests on evaluation of records and remand report acknowledging documentary evidence. Interpretation and reasoning: The Tribunal noted that the CIT(A) had thoroughly examined the cashbook, delivery challans, invoices and AO's remand report which accepted purchase of 37 kg gold from verifiable sources and noted that the stock was not found because it had been sold. Given these verifiable materials and the direction to assess disputed sums in HP & Sons' hands, the revenue could not sustain its challenge to reinstate additions in the proprietor's hands. Similarly, the hedging loss matter (Issue 4) was resolved on the basis that documentary contract notes showed non-speculative character under section 43(5). Ratio vs. Obiter: Ratio - revenue's appeal cannot succeed where appellate authority's factual conclusion is supported by verifiable documentary material and the matter is remitted to the correct taxable entity; additions should not be mechanically restored. Obiter - emphasis on completeness of verification on remand. Conclusion: Revenue's appeals to revive the deletions were dismissed; the appellate factual findings were affirmed. Issue 4 - Allowability of hedging loss (Rs. 22,48,580) - speculative vs. non-speculative Legal framework: Section 43(5) distinguishes speculative transactions; hedging transactions evidenced by contract notes and genuine trading documentation are generally non-speculative and losses are allowable against business profits. Precedent treatment: Decision proceeds on factual evaluation of contracts and remand report; no novel precedent engagement. Interpretation and reasoning: The AO's remand report and documents produced (contract notes, etc.) demonstrated the hedging transactions were genuine and not speculative in nature. On that basis, the loss was correctly held to be allowable and deletion of the addition was sustainable. Ratio vs. Obiter: Ratio - hedging losses supported by contractual documentation and falling outside the definition of speculative transactions under section 43(5) are allowable; such losses should not be disallowed merely on general characterisation as speculative. Obiter - the particular documents in the record validated that conclusion. Conclusion: The Tribunal dismissed the revenue's contention and upheld the deletion of the hedging loss addition. Issue 5 - Appropriateness of a lump-sum GP addition (10% GP @ Rs.15 lakhs) as remedial measure Legal framework: Tribunal has discretion to determine additions having regard to evidentiary record and to make equitable/computational adjustments where full verification is impracticable; such adjustments are fact-specific and not precedential. Precedent treatment: No cited case law; the Tribunal expressly disclaimed the addition as a precedent. Interpretation and reasoning: The Tribunal found the bulk of cash to be prima facie business turnover supported by invoices and delivery challans but acknowledged incomplete reconciliation/verification by revenue. Balancing evidentiary gaps and the assessee's partial proof, the Tribunal exercised discretion to allow most of the amount as explained while imposing a modest lump-sum GP addition of 10% (Rs.15 lakhs) to cover the unexplained element - a pragmatic compromise reflecting the mixed quality of proof. Ratio vs. Obiter: Ratio - where cash is prima facie explained as business receipts but cannot be fully reconciled, a limited lump-sum GP addition by the Tribunal may be appropriate as a fact-specific remedial measure. Obiter - such compromise is not to be treated as precedent. Conclusion: The Tribunal reduced the section 69A exposure substantially by accepting explained portions and levying a 10% GP addition (Rs.15 lakhs) on the residual contention, granting net relief to the assessee while confirming a limited addition.