2025 (11) TMI 1601 - AT - Income Tax

Transfer jurisdiction challenge barred by section 124(3); section 127 upheld, most additions deleted, gross profit additions limited

ITAT dismissed the assessee's challenge to the transfer of jurisdiction under section 127, holding that participation in assessment without objection ... Transfer of Case - Validity of orders passed in 127 of the Act without giving opportunity of being heard to the assessee - HELD THAT:- DR at the time of argument relied on the provisions of sub-section 124(3)(c) wherein, the assessee could not challenge the question of jurisdiction of assessing officer after expiry of 1 month from the date of served of notice u/s. 153(a)(1) or (2) of 153(c) or after completion of assessment whichever is earlier. It is noted that the assessee practicpated in assessment proceedings without objecting to the transfer order passed u/s. 127 of the Act. DR filed the decision of Hon'ble Delhi High court in case of Abhishek Jain [2018 (6) TMI 211 - DELHI HIGH COURT] wherein analysed provision of section 127 read with section 124(3), notwithstanding the fact that there was a delay in raising the objection. Therefore, the objection to the jurisdiction of the assessing officer cannot be equated with the lack of subject matter of the jurisdiction. Respectfully following the above view, we do not find force in this ground raised by the assessee for all years under consideration. Estimating gross profit at 35 % as against the gross profit of 18.31% offered by the assessee - Applicability of the gross profit rate at 35%, it is observed that the said rate has been adopted having regard to the results of the preceding years. The assessee itself, in its original returns of income, had disclosed gross profit rates ranging between 32% and 37% for the Assessment Years 2004-05 to 2006-07, during which period instances of unaccounted sales were also noted. Accordingly, the adoption of a gross profit rate of 35% is considered reasonable and justified, being consistent with the assessee’s own past performance and the prevailing business circumstances. On a comparison of the computation furnished by the AR with that adopted by the Ld.CIT(A), it is observed that the assessee has already been granted benefit of telescoping in respect of the sales offered in the original returns of income for the Assessment Years 2005-06 and 2006-07. Reference in this regard is made to the table contained in paragraph 4.2. herein above which is the calculation by CIT(A) in para 10 of the impugned order. Accordingly, the alternate plea of telescoping raised by the Ld.AR for the Assessment Years 2005-06 and 2006- 07 does not survive for consideration. We therefore uphold the GP @ 35% for assessment year 2005-06 & 2006-07 as computed by the Ld.CIT(A). Percentage of stock vis-à-vis total sales while attributing a gross profit rate of 35% - As noted that the assessee had, in fact, disclosed higher sales during the relevant year. In view thereof, we are unable to fully subscribe to the reasoning adopted by the CIT(A). In our considered opinion, gross profit bears a direct nexus with sales, and sales, in turn, are influenced by the movement of stock. A reduction in stock would naturally correspond to an increase in sales. No material was found during the course of search to suggest any suppression or discrepancy beyond what was already recorded in the regular books of account. Accordingly, the presumption drawn by the CIT(A) does not appear to be justified in the facts and circumstances of the case. Further for assessment year 2007-08 the assessee filed the return of income post search, by considering the accounted as well as unaccounted sales and purchases. Accordingly, in our view, there is no reason to make any addition towards GP. The revenue’s perception to make the addition for assessment year 2007-08 as per para 21 of the impugned order is not tenable. Addition of unaccounted investment in stock - On a perusal of the profit and loss account, it is further noted that the assessee has disclosed income from other business activities as well, indicating the availability of regular business funds. In the absence of any evidence suggesting deployment of unaccounted capital for the purpose of unaccounted sales, the estimation made by the CIT(A) on a presumptive basis cannot be sustained. The addition therefore made on account of alleged initial investment is directed to be deleted. Unexplained investment in Mutha House based on DVO report - Admittedly, there are no seized materials on this issue. The assessment for A.Y. 2006-07 also had not abated as on the date of search. Thus in our opinion, the Ld.AO could not have made any addition in respect of this issue. Addition treating the same as unexplained advances without appreciating that the same were received against the sales and already assessee had offered gross profit @ 18.31% on entire sales - Admittedly, the entries appearing in the seized bundle pertaining to the year under consideration were duly recorded in the regular books of account. The assessee had accounted for all the credit purchases, sales, payments received against sales, payments made towards purchases, salary expenses, and advances received, etc. It is also an admitted position that the assessee conceded that the seized materials did not reflect the correct quantum of sales and, accordingly, offered an additional income of Rs. 7,43,067/- over and above what was recorded in the books as on the date of search. Once such income has already been brought to tax, any further addition u/s 69A of the Act on account of the same sales would be unsustainable in law, as it would result in taxing the same income twice. We, therefore, direct that the addition made on this account be deleted. Addition on account of Unaccounted Stock - only difference was in respect of Silver which amounted and therefore addition needs to be restricted to the same and further benefit of telescoping needs to be allowed - HELD THAT:- We find merit in the contention of the Ld.AR that such valuation does not represent the cost at which the stock was actually acquired, since the same was purchased and accumulated over a period of time. The consistent accounting policy followed by the assessee to value stock at cost (net of MVAT) has not been shown to be defective or incorrect. As further noted that in the preceding assessment years, the valuation method adopted by the assessee has been duly accepted by the revenue authorities, and no adverse finding has been recorded in this regard. Therefore, to substitute the cost-based valuation with the market rate as on the date of search, in the absence of any evidence of excess stock or suppression, would be unjustified. In view of these facts, and considering the admitted position that no excess quantity of stock was found, we hold that the addition made by the AO on account of alleged difference in the value of gold stock is unsustainable. Accordingly, the addition is directed to be deleted. Difference in the valuation of silver articles, we observe that the variation was limited to 50.82 kilograms as on the date of search. Even if such difference is valued at the prevailing market rate of Rs. 18,000 per kilogram, the total comes to Rs. 9,14,760/-, which stands duly covered by the additional cash flow statement furnished before the Ld.AO which has not been countered by the revenue. The Ld.AO thus failed to duly consider the same and, therefore, made an unwarranted observation that no cash flow statement had been filed by the assessee a finding contrary to the material on record. Addition in respect of certain loose papers found during the course of search - whether papers had no correlation with the assessee’s business or any personal expenditure, and therefore, the addition is devoid of merit? - HELD THAT:- As evident that the impugned addition has been made solely on the basis of certain noting on loose papers found during the course of search, without there being any corroborative evidence to establish that such noting represented actual expenditure incurred by the assessee. It is a settled principle of law that loose papers or documents, by themselves, do not constitute conclusive evidence of undisclosed income unless supported by independent material linking them to the assessee’s business or personal affairs. In the present case, no such nexus has been demonstrated by the Revenue. We also note that the nature of entries such as alleged purchase of 325 pyjamas and 85 caps, is wholly inconsistent with the line of business carried on by the assessee, who is engaged in the retail trade of gold jewellery. In the absence of any evidence to show that the said expenditure was actually incurred or that it was financed out of undisclosed sources, the inference drawn by the Ld. AO is purely conjectural. The addition made, therefore, cannot be sustained either in law on facts. As evident that the difference in the value of stock, as alleged by the Ld.AO, is minimal and fully explained through the additional cash generated and disclosed in the return of income filed under section 153A of the Act. Accordingly, the addition made by the Ld.AO is unsustainable and is directed to be deleted. Addition presuming it to be money lending transaction - appellant was not engaged in money lending business and no such material was found. Further the said document was in respect of some Roop Sangam which is a Saree Showroom, opposite the appellant's shop - HELD THAT:- It is observed that the impugned addition has been made merely on the basis of certain loose papers containing the name “Roop Sangam,” without any corroborative evidence to establish that the same pertained to the assessee or represented any expenditure incurred by him. The explanation offered by the assessee that Roop Sangam is a business establishment situated opposite his shop and that the said noting could have been left behind by a customer or third party is both reasonable and unrebutted. It is further evident that Roop Sangam is neither a supplier nor a customer of the assessee, and no corresponding entry is traceable in the regular books of account or in any other seized material. Mere presence of a stray loose paper bearing the name of a third party, found amongst several unrelated documents, cannot by itself constitute evidence of undisclosed expenditure. The settled position of law is that loose sheets, in the absence of any independent corroboration or nexus with the assessee’s business or personal affairs, do not possess evidentiary value sufficient to justify an addition. AO has not brought on record any material to demonstrate that the entries on the said paper had any connection with the assessee’s financial transactions. We therefore hold that the impugned loose paper is extraneous to the assessee’s business and cannot form the basis of an addition under section 69C or otherwise. The addition is therefore held to be devoid of any evidentiary foundation and is directed to be deleted. Addition in respect of Gold Received and Refunded back to M/s. Yash Gold - AR submitted that the seized document pertaining to M/s. Yash Gold represents a quantity account and not a monetary transaction - HELD THAT:- The figures noted therein merely indicate equivalent quantities of gold received and returned, and do not reflect any flow of money. The Ld.AO has not brought on record any evidence to suggest that the said entries represented cash transactions or that any monetary consideration passed between the parties. As further noted that the assessee has maintained quantitative records of gold movement, and the transactions reflected in the seized paper stand reconciled with the average stock balances appearing in the regular books of account. The entries on both sides being of matching quantity and value, there remains no outstanding balance receivable or payable, either in money or in kind. In these circumstances, treating such quantitative reconciliation as unexplained investment or expenditure is unsustainable. Accordingly, we find merit in the explanation of the assessee that the impugned entries pertain only to manufacturing activity involving the exchange of equivalent quantities of gold and not to any unaccounted financial transaction. The addition made by the AO and sustained by the Ld. CIT(A) is, therefore, devoid of factual or legal basis and is directed to be deleted. ISSUES PRESENTED AND CONSIDERED 1. Whether objection to assumption of jurisdiction by an Assessing Officer on account of a centralization/transfer order under section 127 can be raised for the first time before the Tribunal after participation in assessment proceedings and after prescribed time under section 124(3) has lapsed. 2. Whether gross profit from unaccounted sales can be estimated at 35% (based on preceding years) instead of accepting gross profit of 18.31% offered by the assessee - and whether telescoping/credit for profits already offered must be allowed - for assessment years 2005-06, 2006-07 and 2007-08. 3. Whether an addition of Rs.15,09,208 as initial unaccounted investment in stock (25% of cost of unaccounted sales) for AY 2005-06 is sustainable where no seized material supports deployment of unaccounted funds. 4. Whether addition of unexplained investment in construction of a house (Mutha House) based solely on a DVO report, where no seized material pertains to that investment and assessment had not abated at time of search, is tenable for AY 2006-07. 5. Whether additions characterised as unexplained advances (treated separate from sales) and additions in respect of unaccounted stock, loose papers, presumed money-lending entries, and gold received/refunded (various additions for AY 2007-08) are sustainable where the same transactions/values were recorded in regular books or explained by quantitative reconciliation and cash flow statements. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Jurisdiction under section 127 and challenge under section 124(3) Legal framework: Section 127 permits transfer/centralization of assessments; section 124(3) limits objection to jurisdiction after prescribed timelines. Principle that jurisdictional objections must be timely raised. Precedent treatment: Tribunal followed High Court view that objection to jurisdiction cannot be equated with lack of subject-matter jurisdiction once time under section 124(3) has expired; reliance placed on cited High Court analysis. Interpretation and reasoning: The assessee participated in assessment proceedings without objecting to the transfer order and raised the challenge first before the Tribunal. Given statutory bar and authoritative view, the objection was held time-barred and not maintainable. Ratio vs. Obiter: Ratio - procedural limitation under section 124(3) precludes raising jurisdictional objection belatedly where assessee participated in proceedings. Conclusion: Ground challenging assumption of jurisdiction under section 127 dismissed for all years. Issue 2 - Estimation of gross profit rate (35% v. 18.31%) and telescoping of offered profits Legal framework: Revenue may estimate income from unaccounted sales using reasonable basis; gross profit rate may be inferred from past years if reliable; principle against double taxation and concept of telescoping (credit for profits already offered). Precedent treatment: Authorities below applied gross profit based on average of immediately preceding years; Tribunal examined consistency with past disclosures and accounting records. Interpretation and reasoning: For AYs 2005-06 and 2006-07, assessee's own audited returns for preceding years showed GP in 32-37% range (average ~34.63%). Application of 35% to unaccounted sales was held reasonable; telescoping benefit already granted in respect of sales disclosed in original returns so alternative telescoping plea failed. For AY 2007-08, facts differ: return filed post-search incorporated seized materials into regular books, stock showed abnormal reduction and no search material indicated suppression beyond books; Tribunal found CIT(A)'s presumption (that low GP in books was manipulated by adjusting closing stock) not justified and that sales and stock movement did not support re-estimating GP. Tribunal directed AO to adopt GP 18.31% for AY 2007-08 to avoid unwarranted addition and to prevent taxing accounted income twice. Ratio vs. Obiter: Ratio - where historical and contemporaneous accounting records reliably show a consistent GP, estimating unaccounted GP at a rate derived from preceding years is lawful; but where return post-search includes seized materials and no evidence of suppression exists, revising GP upward is not justified. Also, telescoping must be examined to avoid double taxation. Conclusions: GP @35% upheld for AYs 2005-06 and 2006-07 (Grounds dismissed). For AY 2007-08, GP of 18.31% to be adopted and related Grounds allowed. Issue 3 - Addition of Rs.15,09,208 as initial unaccounted investment (AY 2005-06) Legal framework: Additions based on estimation require evidentiary basis; presumptive additions for use of unaccounted capital must be supported by seized material or unrebutted absence of regular funds. Precedent treatment: CIT(A) had estimated 25% of cost of unaccounted sales as initial unaccounted capital; Tribunal scrutinised record for supporting material. Interpretation and reasoning: No seized material established deployment of unaccounted capital; assessee had other business incomes indicating availability of regular funds; estimation as a presumption was unsustainable absent evidence. Tribunal rejected speculative addition as unsupported. Ratio vs. Obiter: Ratio - presumptive additions as initial unaccounted capital cannot be sustained without material evidence of unaccounted source or absence of regular funds. Conclusion: Addition of Rs.15,09,208 deleted; Grounds allowed for AY 2005-06. Issue 4 - Addition for unexplained investment in Mutha House (AY 2006-07) Legal framework: Addition against unexplained investment must be supported by seized material or other admissible evidence, particularly where assessment had not abated on date of search. Interpretation and reasoning: No seized material related to this investment; assessment for the year had not abated on date of search; AO could not validly make addition on that basis. Although the addition was admitted during assessment proceedings, Tribunal held that in absence of seized material and given abatement status, AO's action was not sustainable. Ratio vs. Obiter: Ratio - additions for unexplained investments premised on seized material cannot be made where no such material exists and procedural prerequisites are not met. Conclusion: Addition in respect of Mutha House disallowed; Ground allowed for AY 2006-07. Issue 5 - AY 2007-08: unexplained advances, unaccounted stock valuation, loose papers, presumed money-lending entry, and gold received/refunded Legal framework: Revenue must show nexus between seized documents/loose papers and assessee's undisclosed income; double taxation principle prevents treating same transaction twice; valuation of stock for addition must reflect cost/consistent accounting rather than market rate on search date unless evidence supports such revaluation; loose papers require independent corroboration to form basis for additions. Precedent treatment: AO and CIT(A) sustained several additions; Tribunal examined reconciliation, quantitative records, cash flow statements, and accounting policy history. Interpretation and reasoning: - Unexplained advances: Entries in seized bundle were already recorded in regular books and income component taxed via GP method; treating those as separate unexplained advances would double-tax identical income - addition unsustainable. - Unaccounted stock: No excess quantity of gold found; valuation differences arose from adopting market rate on search date rather than cost; consistent accounting policy (valuation at cost net of MVAT) was accepted in prior years; silver variation limited and fully explained by cash flow statements. Substituting market rate without evidence of excess stock or suppression improper. - Loose papers (Rs.3,61,344) and presumed money-lending entry (Rs.1,29,066): Loose stray sheets lacked nexus or corroborative material; entries inconsistent with assessee's business; explanations that papers could belong to third parties or customers unrebutted; additions speculative and unsustainable. - Gold received and refunded (Rs.3,59,989): Document was quantitative account reflecting receipt and issue of equivalent gold in regular manufacturing/conversion operations; no monetary flow or outstanding balance; reconciled with average stock - cannot be treated as unexplained investment. Ratio vs. Obiter: Ratio - when transactions are recorded in regular books and reconciled, or when loose papers lack independent corroboration linking them to assessee's affairs, additions cannot be sustained; valuation for stock additions must respect cost basis and consistent accounting unless evidence shows suppression. Conclusions: All contested additions for AY 2007-08 (unexplained advances, unaccounted stock, loose papers, money-lending presumption, Yash Gold entries) set aside/deleted; relevant Grounds allowed. Overall Disposition The Tribunal dismissed the procedural jurisdictional challenge; upheld estimation of GP at 35% for AYs 2005-06 and 2006-07 but directed deletion of speculative initial investment addition for AY 2005-06 and other unsupported additions; for AY 2007-08 directed adoption of GP 18.31% and deleted multiple specific additions where entries were recorded in books, reconciled, or unsupported by corroborative evidence, thereby partly allowing the appeals.