2025 (12) TMI 1690 - AT - Income Tax

Seized diary cash-and-cheque entries with common codes u/s 68: addition reduced, net inflows assessed, 1% commission applied

Whether cash entries in seized records could be treated as unexplained cash credits u/s 68 was determined by construing the diary as a whole: where cash ... Addition u/s 68 - unexplained transactions - cash transactions with the parties having common code - working of peak credit - HELD THAT:- We find that these transactions were carried out with the same entry code as was appearing against the corresponding entries of transactions through cheques. Both the entries of cheques and cash with common code were found noted in the same diary. Once the Revenue has accepted the contention that the code appearing against the cheque transaction is related to the persons who had issued the cheque, same analogy should be adopted for cash transactions found noted under same code and it must be presumed that the cash appearing against the same code be also related to such person. It is settled law that paper has to be read as a whole and parties are not allowed to consider that part of the paper which suits them. In the instant case, admittedly the common code is appearing against both the cheque as well as cash transactions. Once the Revenue has accepted cheque entries, the corresponding entries in cash under same code should also be considered as pertaining to such party. AO had the information about the person who had issued the cheques, therefore, adverse inference in respect of the cash entries, could be taken against those persons to examine the source of such cash. As against this, AO proceeded to treat the said cash as belonged to the assessee which is not permitted under the circumstances of the case. Accordingly, we direct the AO to reduce the amount of INR 5,34,60,686/- related to common code entries found noted for cheques and cash. With respect to the remaining entries, as per the directions of the Co-ordinate Bench of the Tribunal, we find that AO has taken one side of the fund flow statement as unexplained income of the assessee. Once fund flow statement is prepared where inflow fund is taken as source and outflow fund is taken as the application only the peak balance available could be treated as undisclosed income of the assessee by treating the amount received subsequently as source. However, this theory could be applied where the name/ particulars of persons from whom receipts and payments were claimed as source and application in fund flow statements are not known. In the instant case, from the perusal of the fund flow statement we find that inflow and outflow of funds are from different persons i.e. the code are different. This fact is further established from the peak working filed by the assessee where on 05.04.2011, INR 36 Lakhs were taken as out flow under the name of “MKS” and on 07.04.2011, a sum of INR 15 Lakhs and INR 20 Lakhs were taken as inflow of funds i.e. “MKS” thus these can be treated as from the same party and necessary deduction could be allowed. From the perusal of working of peak credit filed by the assessee, it is clear that the recipients of outflow of funds as well as the person who gave the funds are not the same person as they are having different code, except with regard to the inflow and outflow of funds under the code “MKS” where entries are appearing both for inflow and outflow of funds. Therefore, in our considered opinion, only the inflow of funds is to be taken the undisclosed income of the assessee. As per the peak working filed by the assessee in Annexure A-2 before us, total inflow was of INR 2,57,67,300/- which can be at most could be held as unexplained income of the assessee however, it includes INR 35.00 Lakhs on 07.04.2011 under the code “MKS” to whom funds of more than INR 1 crore were given prior to such date. Therefore, credit to this extent should be given and accordingly, out of total inflow of funds of INR 2,57,67,300/-, credit of INR 35 Lakhs is to be given and balance amount of INR 2,22,67,300/- is held as unexplained income of the assessee. In view of the above discussion as against total addition of INR 10,08,34,389/- we uphold the addition of INR 2,22,67,300/-. Deletion of addition by CIT(A) by allowing deduction for duplicate entries, we find no error in the observations of Ld. CIT(A) who after making necessary verification of the seized documents allowed deduction for those duplicate entries. Estimation of commission income @ 3 % - As against the gross value of INR 4,72,20,275/- on which commission is applied by the AO, same should be increased by the figure of INR 5,34,60,686/- being the amount of cash transaction and thus total amount of INR 10,06,80,961/- would be considered as the funds provided by the assessee on which it had earned the commission income only. Now coming to the question of reasonable rate of commission, in our considered opinion in these type of transactions, One [01] % commission would be fair and reasonable to meet the end of justice. Accordingly, we direct the AO to apply One [01] % commission on such transaction - Assessee ground partly allowed. 1. ISSUES PRESENTED AND CONSIDERED (i) Whether cash inflows recorded in seized diaries under the same code as cheque transactions (already accepted as belonging to third parties) should also be treated as belonging to those third parties, thereby warranting reduction of the unexplained cash addition. (ii) Whether, for the remaining coded cash transactions, the assessee was entitled to assessment only on a peak basis under a fund-flow approach, or whether the addition should be confined to inflows (with limited set-off only where inflow and outflow are shown to relate to the same code). (iii) Whether the relief granted for duplicate/mistaken entries in computing incoming funds was sustainable. (iv) What is the appropriate rate and base for estimating commission income on the transactions treated as intermediary/entry-providing activity. 2. ISSUE-WISE DETAILED ANALYSIS Issue (i): Common-code cash entries vis-à-vis accepted cheque entries Legal framework (as discussed): The Court applied the principle that seized papers/diaries must be read as a whole, and selective acceptance of favourable parts is impermissible. Interpretation and reasoning: The seized diary contained both cheque and cash entries under identical codes. Since the Revenue had accepted that the code in cheque entries related to the cheque-issuing persons (and not to the assessee), the Court held that the same presumption must apply to cash entries bearing the same code. The Court reasoned that the Assessing Officer had the identity trail through the cheque issuers and could have examined those persons regarding the cash source; treating the cash as belonging to the assessee, despite the common coding and context, was not justified. Conclusion: The Assessing Officer was directed to reduce the unexplained cash addition by the cash inflow amount attributable to common-code entries, namely ?5,34,60,686. Issue (ii): Applicability of peak theory / fund-flow approach to remaining entries Legal framework (as discussed): The Court considered the fund-flow/peak approach in the context of directions requiring preparation of a fund-flow statement and treatment of unexplained amounts accordingly. Interpretation and reasoning: The Court held that a pure peak-credit approach is generally workable where receipts and payments are from the same party or where parties are unknown, permitting later receipts to be treated as recycling of earlier outflows. On the facts, the fund-flow showed that inflows and outflows largely bore different codes, meaning they could not be presumed to be recycling between the same persons. Therefore, the assessee's claim to compute addition solely on combined positive and negative peak could not be accepted in full. However, the Court identified a specific instance where both outflow and subsequent inflow related to the same code ('MKS'), and allowed credit/set-off to that limited extent. Conclusion: For the remaining entries, the Court held that only inflows could be treated as unexplained, subject to limited credit where inflow/outflow matched the same code. From the remaining inflow total of ?2,57,67,300, credit of ?35,00,000 was allowed (same-code adjustment), and the sustained unexplained income was fixed at ?2,22,67,300. Consequently, out of the larger addition, only ?2,22,67,300 was upheld on this component. Issue (iii): Deduction for duplicate/mistaken entries in incoming funds Legal framework (as discussed): The Court proceeded on factual verification from seized material. Interpretation and reasoning: The Court accepted the appellate finding that the relief for identified mistakes/duplicate entries was granted after verification of seized documents. The Revenue failed to controvert those verified findings before the Court. Conclusion: The deletion/relief granted for such duplicate/mistaken entries was upheld, and the Revenue's challenge on this aspect was rejected. Issue (iv): Reasonable rate and base for commission estimation Legal framework (as discussed): The Court accepted that the assessee acted as an intermediary in arranging funds/entries and earned commission income on such activity. Interpretation and reasoning: The Court held that commission estimation should align with the finding that (a) cheque transactions pertained to third parties with only commission taxable in the assessee's hands, and (b) the common-code cash transactions (?5,34,60,686) were also intermediary transactions on which only commission could be taxed. Accordingly, the base on which commission was to be applied had to be expanded to include those cash transactions, making the aggregate base ?10,06,80,961. On rate, the Court found 3% to be excessive in the circumstances and determined that 1% would be fair and reasonable. Conclusion: The Assessing Officer was directed to apply 1% commission on ?10,06,80,961, replacing the earlier 3% estimation and revising the commission addition accordingly.