Case Law Details
Kailash Ramavatar Goenka Vs ACIT (ITAT Ahmedabad)
ITAT Ahmedabad held that once the unaccounted receipts from the sale of properties are subjected to taxation as part of the capital gains computation, the related unaccounted expenditures stand explained and cannot be taxed separately as unexplained expenses. Accordingly, addition u/s. 69C unwarranted.
Facts- The assessee is an individual and a resident of India. He is a key person in the Sankalp Group of Concerns, engaged in the hospitality and real estate sectors.
A search u/s. 132 of the Act, was conducted on 30.10.2018 in the case of the Sankalp Group of Ahmedabad, covering entities related to Kailash Goenka Group and Robin Goenka Group. Incriminating materials, including handwritten diaries, loose papers, unrecorded bills, and other documents, were seized during the operation. During the course of search evidence of on-money transactions in real estate projects, unaccounted cash sales in the restaurant and hotel businesses were found which were not recorded in the books of accounts. Unexplained cash payments for land purchases, brokerage, salaries, and personal expenses were also observed. During the course of search unaccounted cash and jewellery were seized and statements of key employees of the group handling cash transactions were recorded.
Notices under Section 153A of the Act were issued, requiring the assessee to file returns for multiple years. Accordingly, the assessee filed returns of income, and the assessments were completed by the AO. In case of additions relating to unaccounted cash receipts and expenses including investments, the AO calculated the tax as per the provisions of section 115BBE of the Act.
CIT(A) provided relief in areas involving double taxation and adopted a pragmatic approach by confirming selective additions based on profits. Being aggrieved, both revenue and assessee has preferred the present appeal.
Conclusion- The principle that source and application of funds must be viewed together has been upheld by various judicial precedents, which recognize that if an assessee is able to demonstrate that unaccounted expenditures were met out of unaccounted receipts, then such expenditures cannot be taxed independently under Section 69C. Therefore, we concur with the CIT(A) that once the unaccounted receipts from the sale of properties are subjected to taxation as part of the capital gains computation, the related unaccounted expenditures stand explained and cannot be taxed separately as unexplained expenses. Accordingly, no further addition under Section 69C is warranted.
We also emphasize that the seized material must be interpreted as a whole rather than selectively. The AO’s approach of taxing receipts while ignoring corresponding payments distorted the factual position. We endorse the CIT(A)’s approach of basing conclusions solely on the seized material and existing records without introducing fresh evidence.
Held that once the receipts have been taxed, the source of the expenditure is no longer unexplained. The business nexus becomes immaterial for personal expenses funded from taxed income. While the AO rightly placed the burden of proof on the assessee under the Evidence Act, the assessee sufficiently demonstrated that the expenditures were outflows from already-taxed inflows. The nexus between the taxed receipts and personal expenditures was reasonably established. The CIT(A) correctly applied the set-off principle by ensuring that the net effect of taxing unaccounted receipts and corresponding expenditures did not lead to double taxation.
FULL TEXT OF THE ORDER OF ITAT AHMEDABAD
This bunch of eight appeals by the Assessee and the Revenue are directed against the common order of the Commissioner of Income Tax (Appeals)-11, Ahmedabad (hereinafter referred to as “the CIT(A)”) for the Assessment Years (AYs) 2016-17 to 2019-20, arising out of the assessment orders passed by the Assessing Officer (AO) under Section 153A r.w.s.147 of the Income Tax Act, 1961 (hereinafter referred to as “the Act”), 153A r.w.s.143(3) & 143(3) of the Act.
2. Although these appeals pertain to different assessment years, the primary issues are identical except for the assessment years and quantum. Therefore, all these appeals were heard together. For the sake of convenience, we proceed to dispose of all these appeals of the Assessee and the Revenue by this consolidated order.
Facts of the case:
3. The assessee is an individual and a resident of India. He is a key person in the Sankalp Group of Concerns, engaged in the hospitality and real estate sectors. The businesses managed include Restaurants under brands such as Sankalp, Sam’s Pizza, and Saffron, Hotels under the names Ramada and Taj Skyline, Real estate projects in Ahmedabad. A search under Section 132 of the Act, was conducted on 30.10.2018 in the case of the Sankalp Group of Ahmedabad, covering entities related to Kailash Goenka Group and Robin Goenka Group. Incriminating materials, including handwritten diaries, loose papers, unrecorded bills, and other documents, were seized during the operation. During the course of search evidence of on-money transactions in real estate projects, unaccounted cash sales in the restaurant and hotel businesses were found which were not recorded in the books of accounts. Unexplained cash payments for land purchases, brokerage, salaries, and personal expenses were also observed. During the course of search unaccounted cash and jewellery were seized and statements of key employees of the group handling cash transactions were recorded. The Assessment Year wise unaccounted cash receipts and payments, as summarized by the AO, is given below for the sake of clarity:
Particulars |
A.Y. 2016-17 |
A.Y. 2017-18 |
A.Y. 2018-9 |
A.Y. 2019-20 |
Total |
Unaccounted on Money Receipts |
11,77,25,900 |
25,78,79,409 |
47,63,87,060 |
24,73,11,320 |
1,09,93,03,689 |
Unaccounted Expenses |
13,30,54,407 |
23,56,97,233 |
47,33,86,785 |
22,15,26,118 |
1,06,44,45,543 |
Total |
25,07,80,307 |
49,35,76,642 |
94,97,73,845 |
46,88,37,438 |
2,16,37,49,232 |
3.1. In reply to the notice of AO, the assessee provided a summary of categorized working of unaccounted receipts and payments which is presented below:
Receipts |
A.Y. 2016-17 |
A.Y. 2017-18 |
A.Y. 2018-9 |
A.Y. 2019-20 |
Total |
1.Silver Harmony – A-902 – Advance |
– |
– |
74,92,000 |
– |
74,92,000 |
2.Internal Circulation of Funds |
7,21,80,220 |
12,18,20,000 |
29,76,27,650 |
19,71,65,320 |
68,87,93,190 |
3.Plot Improvement Receipts |
– |
5,80,05,600 |
2,85,00,000 |
3,17,35,000 |
11,82,40,600 |
0. Unexplained Receipts |
4,55,45,680 |
7,80,53,809 |
14,27,67,410 |
1,84,11,000 |
28,47,77,899 |
1. Personal Expenditure |
– |
||||
Total Receipts |
11,77,25,900 |
25,78,79,409 |
47,63,87,060 |
24,73,11,320 |
1,09,93,03,689 |
Payments |
|||||
1.Silver Harmony – A-902 – Purchases and Improvement Expenses |
4,80,000 |
– |
12,27,604 |
24,66,410 |
41,74,014 |
2.Internal Circulation of Funds |
7,22,71,200 |
12,21,35,500 |
29,84,43,700 |
19,59,00,000 |
68,88,50,400 |
3.Plot Improvement Payments |
3,38,050 |
3,14,74,000 |
2,30,06,000 |
6,02,000 |
5,54,20,050 |
2. Unexplained Payments |
4,64,61,650 |
7,45,07,478 |
14,46,47,732 |
1,94,62,000 |
28,50,78,860 |
3. Personal Expenditure |
1,35,03,507 |
75,80,255 |
60,61,749 |
30,95,708 |
3,09,22,219 |
Total Payments |
13,30,54,407 |
23,56,97,233 |
47,33,86,785 |
22,15,26,118 |
1,06,44,45,543 |
3.2. Amounts relating to A.Y. 2015-16 are not part of the above summarized tables as we are not dealing with the appeal of the said A.Y.
3.3. Notices under Section 153A of the Act were issued, requiring the assessee to file returns for multiple years. Accordingly, the assessee filed returns of income, and the assessments were completed by the AO. The Summary of return filed, additions made and income assessed is given below:
| Sr | Particulars | A.Y. 2016-17 | A.Y. 2017-18 | A.Y. 2018-19 | A.Y. 2019-20 |
| 1 | Total Income as per original return of income | 1,90,62,210 | 85,85,650 | 1,71,38,860 | 1,78,02,440 |
| 2 | Date of filing Original Return of Income | 30-Sep-2016 | 17-Oct-2017 | 28-Sep-2018 | 30-Sep-2019 |
| 3 | Total Income as per return of income filed in response to notice u/s 153A | 1,90,62,210 | 85,85,650 | 1,71,38,860 | NA |
| 4 | Additions on account of – | ||||
| A | – Unaccounted cash receipts in respect of internal circulation of funds | 12,83,92,220 | 13,33,20,000 | 49,03,02,650 | 31,62,65,320 |
| b | – Personal Expenditure | 1,35,03,507 | 75,80,255 | 60,61,749 | 30,95,708 |
| c | – Unaccounted cash expenses in respect of A-902, Silver Harmony | 4,80,000 | NIL | 12,27,604 | 24,66,410 |
| d | – Unaccounted cash investment in respect of A-902, Silver Harmony | NIL | NIL | 74,92,000 | NIL |
| e | – Unexplained expenditure u/s 69C | 30,00,000 | 10,00,000 | NIL | 4,68,00,000 |
| f | – Unaccounted cash investment in respect of Kharoj and Shilpgram | 3,38,050 | 3,14,74,000 | 2,30,06,000 | 6,02,000 |
| g | – Unaccounted cash Receipts in respect of Kharoj and Shilpgram | NIL | 5,80,05,600 | 2,85,00,000 | 3,17,35,000 |
| h | – Unaccounted cash receipts | 4,55,45,680 | 7,80,53,809 | 14,27,67,410 | 1,84,11,000 |
| i | – Unaccounted cash payments | 4,64,61,650 | 7,45,07,478 | 14,46,47,732 | 1,94,62,000 |
| 5 | Total Assessed Income | 25,67,83,317 | 39,25,26,792 | 86,11,44,005 | 45,66,39,878 |
| 6 | Rounded off | 25,67,83,320 | 39,25,26,790 | 86,11,44,000 | 45,66,39,880 |
3.4. In case of additions relating to unaccounted cash receipts and expenses including investments, the AO calculated the tax as per the provisions of section 115BBE of the Act.
4. The assessee preferred an appeal before CIT(A). The CIT(A) provided relief in areas involving double taxation and adopted a pragmatic approach by confirming selective additions based on profits. The CIT(A) identified and dealt with the following categories of transactions in his order:
- Transactions Related to Immovable Properties: Unaccounted sale of immovable properties, including land parcels and flats, with receipts of on-money (unrecorded cash). These were related to properties such as Khoral Land (Survey 38/1/1), Shilpgram Land (Jaspur – 651) and Flat advances for A-902 Silver Harmony. The CIT(A) concluded that the transactions were capital in nature and are to be taxed under capital gains. The CIT(A) allowed deduction for unaccounted expenses related to these transactions for calculating taxable gains and restricted indexation benefits to the year of receipt of sale consideration.
- Internal Circulation of Funds: Such transactions include Fund transfers within group entities treated as unexplained income by the AO. The CIT(A) recognised these as internal fund movements and treated as not taxable income. The CIT(A) deleted the entire addition to prevent repetitive taxation.
- Unexplained Cash Receipts and Payments: Seized documents showed unexplained cash receipts and payments, not recorded in books of accounts. AO added the gross receipts as income, without considering the related expenses or fund circulation. The CIT(A) deleted fund circulations within the group entities to avoid double taxation and applied a 30% profit rate on unexplained cash receipts instead of taxing the gross amount. These amounts also included unaccounted franchise fees and royalty income related to hospitality businesses which were identified as part of unaccounted receipts and taxed only the profit element embedded in these transactions along with other unaccounted receipts.
- Personal Expenditure: Such transactions include Purchase of Gold, Home Renovations and other miscellaneous expenses. The CIT(A) concluded that these expenditures were funded from unaccounted income already taxed during assessments and deleted additions to avoid double taxation.
5. Aggrieved by the order of CIT(A), both assessee and revenue are in appeals with following grounds of appeal(s):
I. Grounds of Appeal in IT(SS)A No.1/Ahd/2023 for AY 2016-17 (Assessee’s appeal):
“1. The learned CIT(A) has erred in law and on facts of the case in confirming the assessment order u/s 153A r.w.s. 143(3) of the Act which is passed in violations of provisions of the Act and against the scheme of assessment related to search cases.
2. The learned CIT(A) has erred in law and on facts of the case in confirming the additions made by learned Assessing Officer which are not emanating from any of the incriminating material found during the search.
3. The learned CIT(A) has erred in law and on facts of the case in not accepting the peak balance theory with respect to alleged unexplained receipts and payments found during the search proceedings.
4. The learned CIT(A) has erred in law and on facts of the case in confirming an addition of Rs. 79,26,000/- by estimating profit margin at the rate of 30% of the gross receipts. In the facts and circumstances of the case, such estimation is highly excessive and does not reflect the real income earned by the appellant.
Grounds of Appeal
5. Both the lower authorities have passed the orders without properly appreciating the facts and they further erred in grossly ignoring various submissions, explanations and information submitted by the appellant from time to time which ought to have been considered before passing the impugned order. The action of the lower authorities is in clear breach of law and Principles of Natural Justice and therefore deserves to be quashed.
6. The learned CIT(A) has erred in law and on facts of the case in confirming action of the Id. AO in initiating penalty under various sections of the Act.
7. The appellant craves leave to add, amend, alter, edit, delete, modify or change all or any of the grounds of appeal at the time of or before the hearing of the appeal.”
II. Grounds of Appeal in IT(SS)A No.2/Ahd/2023 for AY 2017-18 (Assessee’s appeal):
“1. The learned CIT(A) has erred in law and on facts of the case in confirming the assessment order u/s 153A r.w.s. 143(3) of the Act which is passed in violations of provisions of the Act and against the scheme of assessment related to search cases.
2. The learned CIT(A) has erred in law and on facts of the case in confirming the additions made by learned Assessing Officer which are not emanating from any of the incriminating material found during the search.
3. The learned CIT(A) has erred in law and on facts of the case in not accepting the peak balance theory with respect to alleged unexplained receipts and payments found during the search proceedings.
4. The learned CIT(A) has erred in law and on facts of the case in confirming addition of Rs. 1,67,91,000/- by estimating profit margin at the rate of 30% of the gross receipts. In the facts and circumstances of the case, such estimation is highly excessive and does not reflect the real income earned by the appellant.
5. Both the lower authorities have passed the orders without properly appreciating the facts and they further erred in grossly ignoring various submissions, explanations and information submitted by the appellant from time to time which ought to have been considered before passing the impugned order. The action of the lower authorities is in clear breach of law and Principles of Natural Justice and therefore deserves to be quashed.
6. The learned CIT(A) has erred in law and on facts of the case in confirming action of the Id. AO in initiating penalty under various sections of the Act.
7.The appellant craves leave to add, amend, alter, edit, delete, modify or change all or any of the grounds of appeal at the time of or before the hearing of the appeal.”
III. Grounds of Appeal in IT(SS)A No.3/Ahd/2023 for AY 2018-19 (Assessee’s appeal):
“1. The learned CIT(A) has erred in law and on facts of the case in confirming the assessment order u/s 153A r.w.s. 143(3) of the Act which is passed in violations of provisions of the Act and against the scheme of assessment related to search cases.
2. The learned CIT(A) has erred in law and on facts of the case in confirming the additions made by learned Assessing Officer which are not emanating from any of the incriminating material found during the search.
3. The learned CIT(A) has erred in law and on facts of the case in not accepting the peak balance theory with respect to alleged unexplained receipts and payments found during the search proceedings.
4. The learned CIT(A) has erred in law and on facts of the case in confirming an addition of Rs. 3,50,93,295/- by estimating profit margin at the rate of 30% of the gross receipts. In the facts and circumstances of the case, such estimation is highly excessive and does not reflect the real income earned by the appellant.
5. Both the lower authorities have passed the orders without properly appreciating the facts and they further erred in grossly ignoring various submissions, explanations and information submitted by the appellant from time to time which ought to have been considered before passing the impugned order. The action of the lower authorities is in clear breach of law and Principles of Natural Justice and therefore deserves to be quashed.
6. The learned CIT(A) has erred in law and on facts of the case in confirming action of the Id. AO in initiating penalty under various sections of the Act.
7. The appellant craves leave to add, amend, alter, edit, delete, modify or change all or any of the grounds of appeal at the time of or before the hearing of the appeal.”
III. Grounds of Appeal in ITA No.19/Ahd/2023 for AY 2019-20 (Assessee’s appeal):
“1. The learned CIT(A) has erred in law and on facts of the case in confirming the assessment order u/s 143(3) of the Act which is passed in violations of provisions of the Act and against the scheme of assessment related to search cases.
2. The learned CIT(A) has erred in law and on facts of the case in confirming the additions made by learned Assessing Officer which are not emanating from any of the incriminating material found during the search.
3. The learned CIT(A) has erred in law and on facts of the case in not accepting the peak balance theory with respect to alleged unexplained receipts and payments found during the search proceedings.
4. The learned CIT(A) has erred in law and on facts of the case in confirming an addition of Rs. 54,19,596/- by estimating profit margin at the rate of 30% of the gross receipts. In the facts and circumstances of the case, such estimation is highly excessive and does not reflect the real income earned by the appellant.
5. The learned CIT(A) has erred in law and on facts of the case in not granting the indexation benefit up to the year of transfer of the underlying properties (Land atShilpgram and Land at Khoraj) while computing long term capital gain.
6. The learned CIT(A) has erred in law and on facts of the case in not accepting the contention of the appellant that the amount of Rs. 1,00,00,000 received from Mr. Pawan Jalan was part of internal circulation and therefore, not unexplained receipt at all.
7. Alternatively and without prejudice, such a sum of Rs.1,00,00,000/- ought to have been treated as gross receipts and only a profit element embedded therein ought to have been brought to tax.
8. Both the lower authorities have passed the orders without properly appreciating the facts and they further erred in grossly ignoring various submissions, explanations and information submitted by the appellant from time to time which ought to have been considered before passing the impugned order. The action of the lower authorities is in clear breach of law and Principles of Natural Justice and therefore deserves to be quashed.
9. The learned CIT(A) has erred in law and on facts of the case in confirming action of the Id. AO in initiating penalty under various sections of the Act.
10. The appellant craves leave to add, amend, alter, edit, delete, modify or change all or any of the grounds of appeal at the time of or before the hearing of the appeal.”
V. Grounds of Appeal in IT(SS)A No.5/Ahd/2023 for AY 2016-17 (Revenue’s appeal):
“1. In the facts and on the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition of Rs. 12,83,92,220/- made on account of cash receipts in respect of internal circulation of funds, holding that the said amounts has merely changed hands within the group persons and the same have already tax in the hands of respective entities, without appreciating the fact that during the course of assessment proceedings the assessee has failed furnish the cash flow statement and also several entries are not pertained to group entities, but outside parties.
2. In the facts and on the circumstances of the case and in law, the Ld. CIT(A) in deleting the addition towards unaccounted receipts of Rs.3,76,19,680/- out of total addition of Rs. 4,55,45,680/-.
3. In the facts and on the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the Addition of unexplained cash payments (expenses) u/s 69C of Rs.4,64,61,650/- after giving set off of unaccounted income in the form cash receipts.
4. In the facts and on the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the Addition of unexplained cash expenses u/s 69C of Rs. 30,00,000/-after giving set off of unaccounted income in the form cash receipts.
5. In the facts and on the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the Addition of unexplained expenses towards personal expenditure of Rs. 1,35,03,507/-.
6. In the facts and on the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the Addition of unaccounted cash expenses in respect of A- 902 Silver Harmony of Rs.4,80,000/-.
7. In the facts and on the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the Addition of unaccounted investment in respect of Khoraj and Shilpgram of Rs.3,38,050/-.
8. In the facts and on the circumstances of the case and in law, the Ld. CIT(A) erred in calculating capital gain after providing benefit of indexation to the assessee as on the unaccounted on-money payments to the seller for acquiring the plots, Shilpgram, Jaspur 651 and Khoraj Survey 381/1 and received on-money on sale of said plots.
9. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) ought to have upheld the order of the A.O.
10. It is, therefore, prayed that the order of the Ld. CIT(A) be set aside and that of the A.O. be restored to the above extent.”
VI. Grounds of Appeal in IT(SS)A No.6/Ahd/2023 for AY 2017-18 (Revenue’s appeal):
“1. In the facts and on the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition of Rs. 13,33,20,000/- made on account of cash receipts in respect of internal circulation of funds, holding that the said amounts has merely changed hands within the group persons and the same have already tax in the hands of respective entities, without appreciating the fact that during the course of assessment proceedings the assessee has failed furnish the cash flow statement and also several entries are not pertained to group entities, but outside parties.
2. In the facts and on the circumstances of the case and in law, the Ld. CIT(A) in deleting the addition towards unaccounted receipts of Rs.6,02,62,809/- out of total addition of Rs.7,80,53,809/-.
3. In the facts and on the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the Addition of unexplained cash payments (expenses) u/s 69C of Rs. 7,45,07,478/- after giving set off of unaccounted income in the form cash receipts.
4. In the facts and on the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the Addition of unexplained cash expenses u/s 69C of Rs. 10,00,000/-after giving set off of unaccounted income in the form cash receipts.
5. In the facts and on the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the Addition of unexplained expenses towards personal expenditure of Rs. 75,80,255/-.
6. In the facts and on the circumstances of the case and in law, the Ld. CIT(A) erred in restricting the total addition to Rs. 1,43,82,753/-, out of addition of Rs.3,14,74,000/- towards unaccounted investment and addition of Rs.5,80,05,600/-towards on money receipts in Khoraj and Shilpgram land.
7. In the facts and on the circumstances of the case and in law, the Ld. CIT(A) erred in calculating capital gain after providing benefit of indexation to the assessee as on the unaccounted on-money payments to the seller for acquiring the plots, Shilpgram, Jaspur 651 and Khoraj Survey 381/1 and received on-money on sale of said plots.
8. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) ought to have upheld the order of the A.O.
9. It is, therefore, prayed that the order of the Ld. CIT(A) be set aside and that of the A.O. be restored to the above extent.”
VII. Grounds of Appeal in IT(SS)A No.7/Ahd/2023 for AY 2018-19 (Revenue’s appeal):
“1. In the facts and on the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition of Rs.49,03,02,650/- made on account of cash receipts in respect of internal circulation of funds, holding that the said amounts has merely changed hands within the group persons and the same have already tax in the hands of respective entities, without appreciating the fact that during the course of assessment proceedings the assessee has failed furnish the cash flow statement and also several entries are not pertained to group entities, but outside parties.
2. In the facts and on the circumstances of the case and in law, the Ld. CIT(A) in deleting the addition towards unaccounted receipts of Rs. 10,76,74,115/- out of total addition of Rs. 14,27,67,410/-.
3. In the facts and on the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the Addition of unexplained cash payments (expenses) u/s 69C of Rs. 14,46,47,732/- after giving set off of unaccounted income in the form cash receipts.
4. In the facts and on the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the Addition of unexplained expenses towards personal expenditure of Rs.60,61,749/-.
5. In the facts and on the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition of Rs.74,92,000/- on account of cash investment in A- 902, Silver Harmony.
6. In the facts and on the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition on account of unaccounted cash expenses of Rs. 12,27,604/-in A-902, Silver Harmony.
7. In the facts and on the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the Addition of on-money receipts of Rs. 2,85,00,000/- in Khoraj and Shilpgram.
8. In the facts and on the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the Addition for payment of Rs. 2,30,60,000/- u/s 69 of the Act in Khoraj and Shilpgram
9. In the facts and on the circumstances of the case and in law, the Ld. CIT(A) erred in calculating capital gain after providing benefit of indexation to the assessee as on the unaccounted on-money payments to the seller for acquiring the plots, Shilpgram, Jaspur 651 and Khoraj Survey 381/1 and received on- money on sale of said plots.
9. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) ought to have upheld the order of the A.O.
10. It is, therefore, prayed that the order of the Ld. CIT(A) be set aside and that of the A.O. be restored to the above extent.”
VIII. Grounds of Appeal in ITA No.67/Ahd/2023 for AY 2019-20 (Revenue’s appeal):
“1. In the facts and on the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition of Rs.31,62,65,320/- made on account of cash receipts in respect of internal circulation of funds, holding that the said amounts has merely changed hands within the group persons and the same have already tax in the hands of respective entities, without appreciating the fact that during the course of assessment proceedings the assessee has failed furnish the cash flow statement and also several entries are not pertained to group entities, but outside parties.
2. In the facts and on the circumstances of the case and in law, the Ld. CIT(A) in deleting the addition towards unaccounted receipts of Rs. 1,29,91,404/-out of total addition of Rs. 1,84,11,000/-.
3. In the facts and on the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the Addition of unexplained cash payments (expenses) u/s 69C of Rs. 1,94,62,000/- after giving set off of unaccounted income in the form cash receipts
4. In the facts and on the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the Addition of unexplained expenses towards internal circulation under payments (unexplained expenses) of Rs.4,68,00,000/- after giving set off of unaccounted income in the form cash receipts.
5. In the facts and on the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the Addition of unexplained expenses towards personal expenditure of Rs.30,95,708/-
6. In the facts and on the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition of Rs. 24,66,410/- on account of cash investment in A-902, Silver Harmony
7. In the facts and on the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the Addition of cash investment of Rs.6,02,000/- in Khoraj and Shilpgram.
8. In the facts and on the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the Addition on account of cash receipts of Rs. 3,17,35,000/- in Khoraj and Shilpgram.
9. In the facts and on the circumstances of the case and in law, the Ld. CIT(A) erred in calculating capital gain after providing benefit of indexation to the assessee as on the unaccounted on-money payments to the seller for acquiring the plots, Shilpgram, Jaspur 651 and Khoraj Survey 381/1 and received on-money on sale of said plots.
10. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) ought to have upheld the order of the A.O.
11. It is, therefore, prayed that the order of the Ld. CIT(A) be set aside and that of the A.O. be restored to the above extent.”
6. Now, we deal with each category of transactions and the grounds related with the same raised by both Assessee and Revenue in their respective appeals. The same are categorized under heads and are dealt as follows:
A. Unaccounted Transactions relating to Sale of Immovable Properties
7. Following revenue’s grounds of appeal are covered by this category of transactions:
| A.Y(s) | Appeal No(s). | Ground No(s). |
| 2016-17 | IT(SS)A No.5/Ahd/2023 | 6 to 8 |
| 2017-18 | IT(SS)A No.6/Ahd/2023 | 6 to 7 |
| 2018-19 | IT(SS)A No.7/Ahd/2023 | 5 to 9 |
| 2019-20 | ITA No.67/Ahd/2023 | 6 to 9 |
8. During the course of assessment proceedings, the AO observed that there were certain unaccounted receipts and payments in respect of Flat A902, Silver Harmony, Land at Khoraj and Land at Shilpgrom – 651 spreading across various assessment years. The details these transactions are:
| Year | Receipts (₹) | Payments (₹) |
| A.Y. 2016-17 | – | 4,80,000/- |
| A.Y. 2018-19 | 74,92,000/- | 12,27,604/- |
| A.Y. 2019-20 | – | 24,66,410/- |
| Total | 74,92,000/- | 41,74,014/- |
9. The assessee submitted that Flat No. A-902 was purchased on 21-08-2018 and the same was sold on 26-04-2019 and the capital gain has been offered for taxation in the return of income for A.Y. 2020-21.
9.1. The AO highlighted that the evidence, which included noting from seized documents and statements from key individuals, confirmed the unaccounted nature of these transactions. The assessee claimed the payments were made for improvements to the flat, which was later sold. However, the AO concluded that the payments were part of the flat’s purchase consideration and not for improvements, as claimed by the assessee. The AO emphasized that the taxability of unaccounted payments arises in the years when such receipts/payments occur, irrespective of the accounting method adopted by the assessee. The AO acknowledged that the capital gain from the sale of the flat had been offered for taxation in AY 2020-21. However, the unaccounted payments related to its purchase were treated as separate and unexplained.
10. Before the CIT(A), the assessee contended that the unaccounted receipts pertain to the transfer of capital assets and, therefore, should be taxed under the head “Capital Gains” in the year of transfer only. The assessee further claimed that the unaccounted expenses have been sourced from the same receipts and thus no separate addition under Section 69C is warranted. The CIT(A) concluded that the unaccounted cash receipts sufficiently explain the unaccounted expenses incurred by the assessee and no separate addition under Section 69C is required for unexplained expenses, as the remaining portion of receipts is deemed to cover such expenses. The CIT(A) emphasized that taxation must be limited to the real income, and no arbitrary additions can be made in the absence of supporting evidence. CIT(A) referred to several judicial precedents, including Kedarnath Jute Manufacturing Co. Ltd. v. CIT (82 ITR 363), CIT v. Gurubachan Singh J. Juneja (171 Taxman 406), and Jay Builder v. ACIT (33 taxmann.com 62), to emphasize that only real income or profits should be subjected to tax. The CIT(A) relied on the principle that only the profit element from unaccounted sales or receipts can be brought to tax. Referring to decisions in cases like Greenfield Realty P. Ltd. v. DCIT, (IT(SS) A No.320,321,322 and 329/Ahd/2018) the CIT(A) opined that the remaining portion of unaccounted receipts may cover unexplained expenses, leaving no room for separate addition of expenses under Section 69C. The CIT(A) dealt with the issue of capital gains comprehensively by analysing the unaccounted receipts from the sale of capital assets and the corresponding unaccounted expenditures incurred by the assessee. The CIT(A) examined capital gains arising from the properties such as Land at Shilpgram 651 (Short-Term and Long-Term Gains), Land at Khoraj (Long-Term Gain) and Flat at Silver Harmony (Short-Term Gain). The total taxable capital gains computed at Rs. 6,61,31,749/- by the CIT(A) across properties and assessment years were as follows:
- Short-Term Capital Gains (Shilpgram – AY 2017-18): Rs. 1,43,82,753/-.
- Long-Term Capital Gains (Shilpgram – AY 2019-20): Rs. 1,07,53,755/-.
- Long-Term Capital Gains (Khoraj – AY 2019-20): Rs. 3,76,77,305/-.
- Short-Term Capital Gains (Silver Harmony – AY 2020-21): Rs. 33,17,936/-.
10.1. Accordingly, the AO was directed to tax the capital gains year-wise under the appropriate heads and provide relief for the disallowed expenses that were explained by the unaccounted receipts. While restricting the benefit of indexation to the year of receipt of sale proceeds the CIT(A) observed that the assessee received sale consideration well in advance and incurred major expenditure from such unaccounted sale proceeds thus no undue hardship in terms of cost inflation was faced by the assessee.
11. During the course of hearing before us, the Departmental Representative (DR) relied on the order of AO and stated that the assessee has failed to establish a direct nexus between the unaccounted receipts and unaccounted expenses and the payments were neither supported by any documentary evidence, nor was there any proof to demonstrate that the expenses were incurred out of unaccounted receipts. The Authorised Representative (AR), on the other hand, relied on the order of CIT(A) and stated that the CIT(A) has rightly followed the settled law that only real income can be taxed in the hands of assessee out of the given set of transactions.
12. Relating to ground No.5 of the ITA/19/Ahd/2023, the AR contended that while the CIT(A) rightly held that only capital gains can be taxed, restricting the benefit of indexation to the year of receipt of sale proceeds is erroneous. Instead, the benefit of indexation must be granted up to the year of transfer of the asset as per section 48 of the Act.
13. Considering the rival contentions of the parties, the material on record, and the findings of the lower authorities, it is evident that the core issues revolve around the computation of taxable capital gains arising from the sale of properties, the applicability of indexation benefits under Section 48 of the Act, and the taxability of unaccounted receipts and expenses. While the CIT(A) has rightly upheld the principle that only real income in the form of net capital gains can be taxed, the contentions regarding the treatment of unaccounted receipts, expenditures, and the restriction of indexation benefits to the year of receipt of sale proceeds warrant a detailed examination in light of statutory provisions and judicial precedents.
13.1. After a detailed examination of the submissions made by the assessee and the revenue, and a thorough review of the material on record, we conclude that the CIT(A) correctly held that only the net capital gains arising from the sale of properties can be brought to tax. The CIT(A)’s approach aligns with the settled legal principle that only real income, and not arbitrary or notional amounts, can be taxed. The provisions of the Income Tax Act, particularly Section 48, mandate the computation of capital gains by deducting the cost of acquisition and improvement (duly indexed in the case of long-term capital assets) from the sale consideration. Therefore, once the transaction is accepted as a capital gains transaction, only the resultant net gains—after necessary statutory adjustments—can be subjected to taxation. In contrast, the AO attempted to separately tax both the unaccounted sale receipts and the corresponding unaccounted expenditures under Section 69C. This approach effectively treated the unaccounted receipts as income in their entirety, while simultaneously disallowing the unaccounted expenditures linked to the same transaction, thereby inflating the taxable amount artificially. Such an approach is not only contrary to the statutory scheme of capital gains taxation but also results in double taxation, as the same funds are effectively being taxed twice—first as unexplained income and then as unexplained expenditure. The unaccounted expenses incurred by the assessee, as reflected in the seized documents, pertain directly to the properties in question and are adequately explained by the corresponding unaccounted sale proceeds. The principle that source and application of funds must be viewed together has been upheld by various judicial precedents, which recognize that if an assessee is able to demonstrate that unaccounted expenditures were met out of unaccounted receipts, then such expenditures cannot be taxed independently under Section 69C. Therefore, we concur with the CIT(A) that once the unaccounted receipts from the sale of properties are subjected to taxation as part of the capital gains computation, the related unaccounted expenditures stand explained and cannot be taxed separately as unexplained expenses. Accordingly, no further addition under Section 69C is warranted. This ensures that only the net real income is taxed, in line with the statutory provisions and the principles of equity and justice.
13.2. On the specific issue of indexation benefit, we agree with the assessee’s contention that once the capital gains arising from the transfer of the asset are accepted, its computational mechanism, including the benefit of indexation, must also be adopted in accordance with Section 48 of the Act. Clause (iii) of the Explanation to Section 48 clearly defines “indexed cost of improvement” to include indexation up to the year in which the asset is transferred, irrespective of the timing of the receipt of sale proceeds or the incurrence of expenditure. By restricting the benefit of indexation to the year of receipt of sale proceeds, the CIT(A) failed to adhere to the statutory provisions governing the computation of long-term capital gains. Therefore, we allow this ground in favour of the assessee and directs the AO to re-compute the long-term capital gains for both Shilpgram and Khoraj properties by applying the Cost Inflation Index (CII) of the year of transfer while determining the indexed cost of acquisition and improvement.
13.3. The Revenue’s contention that there is no nexus between unaccounted receipts and expenses is rejected. The CIT(A) has correctly analysed the seized evidence and noted that the unaccounted receipts adequately explain the unaccounted payments. The DR’s reliance on the AO’s findings is unsupported by evidence, as no contrary material was presented to dispute the CIT(A)’s conclusions.
14. The assessee’s ground no. 5 of appeal in ITA No. 19/Ahd/2023 is allowed to the extent of granting indexation benefit up to the year of transfer of the assets and the Revenue’s grounds of appeal, as specifically mentioned hereinabove, are dismissed in their entirety. The AO is directed to re-compute long-term capital gains for the Shilpgram and Khoraj properties by applying indexation up to the year of transfer, and tax the capital gains year-wise as computed and directed by the CIT(A).
B. Grounds relating to Addition in respect of Internal Circulation of Funds and Unaccounted Receipts and Payments
15. The issue involved under these grounds pertain to unaccounted cash receipts and unaccounted cash payments, as reflected in the seized documents during the search operation. The AO made substantial additions based on these receipts and payments, rejecting the assessee’s claim of internal circulation of funds. The AO noted that the assessee received unaccounted cash receipts totaling to Rs. 106,83,80,190/- during the relevant period, as per the seized documents. Similarly, an amount of Rs. 5,08,00,000/- was identified as unexplained payments under internal circulation. Assessment year-wise details of these receipts and payments are:
| A.Y(s). | Receipts (Rs.) | Payments (Rs.) |
| A.Y. 2015-16 | 1,00,000 | – |
| A.Y. 2016-17 | 12,83,92,220 | 30,00,000 |
| A.Y. 2017-18 | 13,33,20,000 | 10,00,000 |
| A.Y. 2018-19 | 49,03,02,650 | – |
| A.Y. 2019-20 | 31,62,65,320 | 4,68,00,000 |
| Total | 1,06,83,80,190 | 5,08,00,000 |
15.1. These receipts were meticulously recorded with details such as dates, amounts, and noting in the diaries maintained by group members. The AO concluded that these cash receipts represented unaccounted and undisclosed income of the assessee, as the source of the cash remained unexplained. The AO added these receipts in income of respective assessment years as undisclosed income for the year under consideration and taxed it under Section 115BBE without allowing deductions.
15.2. The AO also observed that the seized records detailed substantial unaccounted cash payments made to various external parties. These payments were not reflected in the regular books of accounts and were claimed by the assessee to represent internal circulation of funds within the group. The AO rejected the claim of internal circulation, pointing out that the recipients of these payments were outsiders and not part of the assessee’s group entities. The AO concluded that these were unexplained cash outflows and invoked Section 69C (Unexplained Expenditure), deeming the payments as the assessee’s income since no satisfactory explanation was provided for their source.
15.3. The CIT(A)’s order focuses on determining the taxability of unexplained receipts and payments found in the seized material. The issue revolved around whether these amounts represented unaccounted business income, internal circulation of funds, or transactions with outsiders that warranted addition under Sections 69C and 115BBE of the Act. The CIT(A) observed the following based on the seized documents:
| Particulars | Receipts Rs. |
Payments Rs. |
| Internal Circulation of Funds | 46,03,60,220 | 46,08,09,220 |
| Unexplained Transactions | 22,84,32,970 | 22,80,41,200 |
| Total | 68,87,93,190 | 68,88,50,420 |
15.4. The assessee argued that the entries in the seized material represented cash inflows and outflows within the group arising out of the hospitality business, franchisee operations, real estate, and advances. It was submitted that taxing these amounts would lead to double taxation since the same funds had already been subject to tax in the hands of respective entities. The assessee acknowledged that some entries could not be attributed to specific entities and proposed to consolidate such receipts as business income at a reasonable profit rate of 25%. The assessee submitted the bifurcation of unexplained transaction as:
| Category | Receipts Rs. | Payments Rs. | Net Amount Rs. |
| Within the Group (Internal Circulation) | 21,74,32,970 | 14,07,88,700 | 7,66,44,270 |
| With Outsiders | 1,10,00,000 | 8,72,52,500 | -7,62,52,500 |
| Total | 22,84,32,970 | 22,80,41,200 | 3,91,770 |
15.5. Relating to Internal Circulation of Funds (Rs.46,03,60,220 in Receipts and Rs.46,08,09,220 in Payments), the CIT(A) noted that the transactions categorized as “internal circulation” merely represented the flow of cash between different entities and individuals within the group. He also noted that evidence from diaries and records showed that these transactions primarily involved transfers between the same parties (e.g., Jigar, Hemedrabhai, KRG, and Kailash Goenka). The CIT(A) also noted assessee’s claim that such movements of funds represented cash management rather than any unaccounted business income. The CIT(A) emphasized that taxing these transactions separately, in addition to the amounts already taxed in the hands of respective entities, would lead to double taxation.
15.6. Apart from these receipts and payments of internal circulation, following unexplained receipts and payments were noted by the AO:
| Particulars | A.Y. 2016-17 | A.Y. 2017-18 | A.Y. 2018-19 | A.Y. 2019-20 |
| Unaccounted / Unexplained cash receipts | 4,55,45,680 | 7,80,53,809 | 14,27,67,410 | 1,84,11,000 |
| Unaccounted / Unexplained cash payments | 4,64,61,650 | 7,45,07,478 | 14,46,47,732 | 1,94,62,000 |
15.7. The AO noted that the transactions in the seized diaries included both cash receipts and cash payments. The unaccounted receipts pertain to various sources such as real estate sales, franchise fees, royalty, and hospitality-related income. The payments were primarily towards operational expenses, repayment of advances, and investments, but remained unrecorded in the books. The AO rejected the assessee’s claim for peak credit by citing that the peak theory can be applied only if the unaccounted cash transactions form a continuous cycle of inflow and outflow. In this case, the assessee failed to establish any link between receipts and payments. The AO also concluded that the assessee did not furnish complete details, such as the source of cash received and details of counterparties.
16. The CIT(A) applied the principle of taxing only the net income from the unaccounted transactions and recognized that many receipts were offset by corresponding payments. The CIT(A) observed that the transactions were business-related and that ignoring the payments while taxing the receipts would result in excessive taxation. The CIT(A) also deleted the additions related to internal circulation, holding that the amounts had already been taxed within the respective group entities. It was held that without independent evidence proving these amounts as fresh income, treating them as unexplained receipts was unjustified.
16.1. Relating to Unexplained Receipts and Payments (Rs.22,84,32,970 in Receipts and Rs.22,80,41,200 in Payments), the CIT(A) noted the contention of the assessee that these transactions were part of regular business activities, such as franchise fees, hospitality receipts, restaurant sales, and advances related to real estate. However, due to the large number of entries in the seized documents, the assessee could not correlate all transactions to specific group entities. The CIT(A) found that most entries appeared consistent with the nature of the group’s businesses but acknowledged the absence of conclusive evidence to attribute specific receipts to particular business entities. To address the issue fairly, the CIT(A) adopted a profit rate of 30% on the total receipts, based on the profit margins typically observed in similar group businesses. The CIT(A) noted that this approach aligned with the principle of taxing real income and avoided the risk of overestimating the taxable income. The final addition confirmed was Rs.6,52,29,891 (i.e., 30% of Rs.21,74,32,970 as detailed below:
| Assessment Year (AY) | Receipts Rs. |
Profit Rate
(30%) |
Addition Confirmed Rs. |
| 2016-17 | 2,64,20,000 | 30% | 79,26,000 |
| 2017-18 | 5,59,70,000 | 30% | 1,67,91,000 |
| 2018-19 | 11,69,77,650 | 30% | 3,50,93,295 |
| 2019-20 | 1,80,65,320 | 30% | 54,19,596 |
| Total | 21,74,32,970 | 6,52,29,891 |
16.2. Relating to Transactions with Pawan Jalan (Rs.1,10,00,000), the assessee contended that payments of Rs. 1 crore and Rs. 1.5 crores were made to Pawan Jalan in 2017 and 2018, and Rs. 1 crore was received back in 2018. The CIT(A) observed that the repayment of Rs. 1 crore could not conclusively be linked to earlier payments due to the time gap. The CIT(A) treated Rs. 1.10 crore as unexplained receipts over two assessment years (Rs. 10 lakhs in AY 2017-18 and Rs. 1 crore in AY 2019-20).
17. During the course of the hearing, the DR relied heavily on the findings of the AO and argued that there was no discernible nexus between the unaccounted receipts and payments as noted in the seized diaries and documents. The DR contended that the assessee had failed to provide crucial details or confirmations from the persons whose names appeared in the diary entries, such as Mr. Jigar Mandaviya and Mr. Pawan Jalan, among others. The absence of such confirmations, according to the DR, was a significant shortfall in the assessee’s case. The DR further asserted that the CIT(A) failed to address the AO’s concerns regarding the absence of supporting evidence for the transactions and accepted the bifurcation of internal circulation of funds without any corroborative material. The DR pointed out that the CIT(A) relied on the “real income theory” to eliminate unaccounted receipts and payments related to internal circulation, but such reliance was misplaced as the assessee had not produced documentary evidence to establish the genuineness of the transactions. With regard to the estimation of profit at 30% of receipts, the DR argued that the assessee had not explained the entries in detail or demonstrated that the corresponding expenses were wholly and exclusively incurred for business purposes. The DR emphasized that, in the absence of such an explanation, adopting an arbitrary percentage for profit estimation was unjustified. Additionally, the DR pointed out that the assessee failed to provide a detailed cash flow statement reconciling the receipts and payments to substantiate the nature of the transactions, which could have been crucial in assessing the movement of funds.
18. On the other hand, the AR defended the order of the CIT(A) by reiterating the key contentions of the assessee and providing a detailed explanation supported by factual analysis and legal precedents. The AR submitted that the noting in the seized diaries pertained to unaccounted “receipts” and “payments” directly linked to the business activities of the assessee’s group, such as franchisee operations, hospitality services, real estate dealings, and cash advances. The AR emphasized that these entries did not point to any undisclosed source of income outside the scope of regular business operations. The AR argued that the unaccounted payments reflected in the seized materials were incurred out of the same pool of unaccounted receipts. Therefore, it was logical and necessary to allow a set-off between the two. Citing the real income theory, the AR contended that only the net surplus or “real income” derived from unaccounted transactions should be subjected to tax. The AR submitted that failing to allow such set-off would result in the artificial inflation of taxable income. To bolster this contention, the AR relied on several judicial precedents. The AR argued that these decisions consistently upheld the principle that only the profit embedded in unaccounted receipts is taxable and that gross receipts cannot be taxed without corresponding adjustments for expenditures. The AR further contended that the AO’s mechanical application of Section 69C led to double taxation, which is against established judicial principles. The AR objected to the AO’s approach of selectively treating unaccounted receipts as taxable income while disregarding the corresponding unaccounted payments. It was emphasized that the seized material must be interpreted holistically rather than selectively, as adopting a “pick and choose” approach distorts the factual position. The AR submitted that when considered in totality, the seized materials clearly indicated that the unaccounted receipts and payments were interrelated transactions within the same business framework. The AR clarified that the CIT(A)’s findings were based solely on the seized material and existing records, without any reliance on fresh evidence or additional claims. It was submitted that the CIT(A) meticulously analyzed the seized diary entries and financial records to arrive at a just conclusion. The AR highlighted those entities within the group, such as Sujan Infrastructure Pvt. Ltd. and Sankalp Inn, had already offered the relevant unaccounted income during reassessment proceedings. Thus, taxing the same amount in the hands of the assessee individually would result in double taxation, which is impermissible under the law. In response to the DR’s contention regarding the Rs.1 crore transaction involving Mr. Pawan Jalan, the AR reiterated that the seized diary entries confirmed that Rs.1.5 crore was handed over to Mr. Jalan earlier and Rs.1 crore was later returned. The AR argued that this was not fresh income but merely the return of previously disbursed funds. Therefore, the AO’s addition of this amount as unexplained income was unjustified.
19. The AR raised the issue of the CIT(A) adopting a profit rate of 30% on unaccounted receipts instead of the offered rate of 25%. This ground is raised by the assessee in appeals – IT(SS) No. 1/AHD/2023 – Ground No. 4, IT(SS) No. 2/AHD/2023 – Ground No. 4, IT(SS) No. 3/AHD/2023 – Ground No. 4 and ITA No. 19/Ahd/2023 – Ground No. 4. The AR submitted that the assessee had voluntarily offered 25% as a reasonable rate of profit to determine the taxable component embedded in the unaccounted receipts. It was argued that the CIT(A) did not provide any substantive reasoning for rejecting the 25% rate and adopting 30% instead. The AR emphasized that discretionary powers must be exercised judiciously and that the offered 25% rate was consistent with industry standards and the actual nature of business operations. The AR contended that the CIT(A)’s adoption of a higher profit rate of 30% was arbitrary and lacked a factual basis, especially considering that the group entities had declared profit rates ranging from 10% to 50% depending on their business segments. The AR further argued that the offered 25% rate appropriately captured the “real income” arising from unaccounted transactions across business segments such as hospitality, franchise operations, and real estate. In the absence of any evidence to show that the profit margin was higher than 25%, the CIT(A) should have accepted the rate proposed by the assessee in the interest of justice. The AR urged the Tribunal to uphold the principle of fairness and adopt the offered 25% profit rate, as it was in line with judicial precedents that only real income should be taxed. The AR referred to Sankalp Recreation Pvt. Ltd. v. ACIT (IT(SS)A 65/Ahd/2022) and other judicial pronouncements, emphasizing that the taxation of unaccounted receipts must be based on realistic profit margins rather than arbitrary estimations.
19.1. The AR emphasized that the addition of Rs.1,00,00,000/- in respect of unaccounted receipts from Mr. Pawan Jalan is based solely on assumptions made by the AO. The AR reiterated that the seized material clearly shows that the assessee had advanced Rs.1,50,00,000/- to Mr. Jalan on 03.05.2018, out of which Rs.1,00,00,000/- was returned to the assessee on 11.06.2018. Both transactions occurred within the same financial year, which supports the contention that the receipt was not a fresh inflow of income but merely a return of funds previously advanced. The AR further argued that the CIT(A) failed to provide any cogent evidence to challenge the genuineness of these transactions or to prove that the receipt represented new unaccounted income. Instead, the addition was made based on mere conjecture without considering the entries in the seized diaries in their entirety. In the alternative, the AR submitted that if the addition is to be sustained, it should be restricted to the “profit element” embedded within the receipt by applying the same 25% rate of profit offered by the assessee, consistent with the principle of taxing real income.
20. The grounds under consideration involve the issue of unexplained receipts and payments and are broadly categorized under two components – (1) internal circulation of funds, and (2) unaccounted business receipts and payments involving outsiders. The grounds cover different assessment years (AYs), each with specific grounds raised by both the Revenue and the assessee.
21. The assessee sought the application of peak credit to compute the net unaccounted cash transactions, asserting that frequent inflows and outflows of cash warranted a peak balance adjustment. The AO rejected this claim, arguing that the peak theory is applicable only when cash transactions form a continuous cycle of inflow and outflow recorded in the books. We observe that the assessee failed to provide a cash flow statement or reconciliation to support the claim of peak credit and in the absence of detailed evidence linking cash inflows and outflows, the peak credit theory could not be applied. (Ground No. 3 in IT(SS)A No. 1,2,3 and 19/Ahd/2023) We concur with the CIT(A) for the reason observed above and dismiss these grounds of assessee.
22. We also emphasize that the seized material must be interpreted as a whole rather than selectively. The AO’s approach of taxing receipts while ignoring corresponding payments distorted the factual position. We endorse the CIT(A)’s approach of basing conclusions solely on the seized material and existing records without introducing fresh evidence.
23. Based on detailed submissions, seized material, and judicial principles, we adjudicate for each category of components as follows:
C. Internal Circulation of Funds:
24. The assessee contended that the amounts categorized as “internal circulation” represented intra-group transfers for cash management, not fresh income. The Revenue argued that the CIT(A) erred in deleting these additions without corroborative evidence supporting the assessee’s claim. The seized material, including diary notings, indicated that the transactions involved known individuals and group entities such as Jigar Mandaviya, Hemedrabhai, KRG, and Kailash Goenka. We concur with the CIT(A) that the amounts represented cash transfers within the group, which had already been taxed in the hands of the respective entities. The CIT(A) emphasized that taxing the same amounts again in the assessee’s hands would result in double taxation, which contravenes the principle of taxing “real income”. CIT(A)’s deletion upheld for all assessment years, confirming that the amounts categorized as internal circulation should not be taxed in the hands of the assessee.
D. Unaccounted Business Receipts and Payments:
25. The AO taxed the gross receipts under Section 115BBE without allowing any set-off for corresponding payments, contending that these were unexplained cash inflows from undisclosed sources. The assessee claimed that the payments were business-related expenses, such as operational costs and repayments of advances, and must be set off against the receipts to compute net taxable income. We note that the unaccounted receipts pertained to business activities, such as real estate sales, franchise fees, royalty income, and hospitality-related services. The payments, though unaccounted for in the books, were related to operational expenses and loan repayments. We agree with the CIT(A) that the principle of taxing “real income” necessitates taxing only the net surplus from unaccounted transactions. We reject the Revenue’s approach of taxing gross receipts and held that a set-off of payments against receipts is justified to avoid over-taxation.
25.1. The assessee contested the 30% profit rate adopted by the CIT(A) for unaccounted receipts, arguing that the rate was excessive and lacked factual justification. The assessee proposed a 25% profit rate as reasonable, stating that it was consistent with the group’s business nature and historical profit margins. The unaccounted receipts included franchise fees, royalties, real estate advances, and hospitality income. The Revenue supported the CIT(A)’s determination of a 30% profit rate, contending that franchise and royalty fees generally yield higher profit margins compared to other revenue streams. It was also contended that no specific bifurcation of amounts relating to Franchise Fees and Royalties, was provided by the assessee.
26. We carefully examined the profit percentages from appellate orders and the financial statements of the assessee’s group entities. It was noted that the profit margins varied significantly, ranging from 10% to 50% across different segments. We observe that franchise fees and royalties typically have higher margins compared to income from hospitality operations and Reality business where expenses are relatively higher. The seized records indicated that a considerable portion of the unaccounted receipts pertained to franchise fees and royalties. We agree with the Revenue that these revenue streams inherently carry larger profit margins due to minimal operating costs compared to hospitality services or real estate projects. In absence of quantified information on Franchise Fee and Royalty, we hold that while the assessee’s offer of 25% profit was conservative, the CIT(A)’s adoption of a 30% rate was justified based on the nature of the business activities and available profit data. We emphasize that the chosen rate must reflect the average profit embedded in the unaccounted receipts, especially for high-margin streams such as franchise fees and royalties. We also emphasize that judicial discretion in determining profit rates must be exercised within the bounds of factual evidence and judicial precedents. The 30% rate was consistent with past assessments of the group and reflected the diverse income streams of the business, especially Franchise Fees and Royalty. It is also observed that revenues such as Franchise Fees and Royalty were not present in case of other group entities. Accordingly, the addition of Rs.6,52,29,891 across the relevant assessment years calculated at the rate of 30% of receipts is confirmed.
E. Issue of Transactions with Pawan Jalan:
27. In this case the dispute revolves around the addition of Rs.1,10,00,000/- pertaining to cash transactions with Mr. Pawan Jalan. The assessee’s records show that Rs.1,50,00,000/- was advanced to Mr. Jalan on 03.05.2018, out of which Rs.1,00,00,000/- was returned on 11.06.2018 during the same financial year. The AO treated the receipt of Rs. 1 crore as unexplained income, citing a lack of direct evidence linking it to the earlier advance due to the time gap. The CIT(A) partially accepted the assessee’s submission but ultimately confirmed the addition, dividing the amount across different assessment years.
28. The assessee submitted that Rs.1 crore received from Mr. Jalan was a return of previously advanced funds, not fresh income and seized diary entries clearly recorded both the advance and return of funds. The Revenue contended that the return of Rs.1 crore could not be conclusively linked to the earlier advance and in the absence of supporting confirmations from Mr. Jalan, the receipt was rightly treated as unexplained income. We note that the seized materials included specific diary entries recording both the advance of Rs. 1.5 crore and the subsequent return of Rs.1 crore. There was no indication of any fresh undisclosed source. The AO did not bring any independent evidence to contradict the assessee’s claim or to establish that the Rs.1 crore was a fresh inflow of income. The addition was primarily based on assumptions and a mechanical reading of Section 69C. We once again emphasize that taxation should be based on real income rather than notional or gross receipts. Judicial precedents consistently advocate that only the profit component in unaccounted transactions should be taxed. Considering the detailed submissions, we accept the assessee’s alternative proposal to tax the transaction at 25% of the receipts. We observe that this approach balanced fairness and legal compliance, ensuring that only the embedded profit was taxed while avoiding double taxation.
29. Thus, the respective revenue’s grounds (Ground No.1-4) in appeals IT(SS) A No. 5,6,7 and 67/AHD/2023 are dismissed. In case of assessee’s grounds in appeal No. 1,2,3 and 19/Ahd/2023, corresponding to adopting rate of profit at 25% is dismissed whereas ground relating to addition of Rs.1 Cr in respect of receipt from Pawan Jalan in A.Y. 2019-20 is partly allowed.
F. Additions in respect of personal Expenditure:
30. During assessment proceedings the AO noted that cash payments totalling to Rs.3,09,22,219/- related to personal expenses, such as the purchase of gold and jewellery, home renovation expenses, and other personal expenses, were meticulously documented in the seized records but were not recorded in the books of accounts. The details of unaccounted personal expenditure, assessment year-wise, are as follows:
Particulars – A.Y. -> |
2015-16 |
2016-17 |
2017-18 |
2018-19 |
2019-20 |
Total Rs. |
Gold & Jewelry Purchase |
76,000 |
22,83,573 |
10,17,750 |
14,10,214 |
8,00,000 |
55,87,537 |
Home Renovation Expenses |
74,000 |
59,69,107 |
13,99,000 |
3,90,540 |
1,93,971 |
80,26,618 |
Other
|
5,31,000 |
52,50,827 |
51,63,505 |
42,60,995 |
21,01,737 |
1,73,08,064 |
Total |
6,81,000 |
1,35,03,507 |
75,80,255 |
60,61,749 |
30,95,708 |
3,09,22,219 |
30.1. The AO emphasized that these expenses, acknowledged by the assessee, were personal in nature and incurred in cash. The AO invoked Section 69C, noting that the assessee failed to provide sufficient documentary evidence regarding the nature, source, and necessity of these cash payments. The AO rejected the assessee’s claim for any allowance under Section 37(1), observing that the expenses were not related to the business, the payments were not incurred wholly and exclusively for business purposes and no nexus was established between the cash outflows and revenue generation. The AO highlighted that payments exceeding Rs.10,000/- (Rs.20,000/- before the relevant amendments) were made in cash, violating Section 40A(3). Since these payments were not made through account-payee cheques or demand drafts, they were disallowed. Citing Sections 101-104 and 106 of the Indian Evidence Act, the AO placed the burden of proof on the assessee. Despite being given opportunities, the assessee failed to produce corroborative evidence, such as PANs and addresses of recipients, or documentation demonstrating the business necessity of the expenditure.
31. Before CIT(A), the assessee contended that the personal expenditures were funded from unaccounted receipts already taxed in the hands of the group entities. The assessee argued against double taxation, emphasizing that the same source of funds had already been brought to tax in assessments of entities like Sujan Infrastructure Pvt. Ltd. (SIPL) and Sankalp Inn. The CIT(A) noted that substantial additions on account of unaccounted receipts had already been confirmed in the assessments of group entities, including Rs. 41.05 crores for Kailash Goenka and Rs. 96.75 crores for Sankalp Inn. It was concluded that taxing personal expenditures sourced from already-taxed receipts would result in double taxation.
32. The CIT(A) directed the deletion of the addition of Rs. 3,09,22,219/- on account of personal expenses across all assessment years.
33. The AR reiterated that taxing personal expenditures funded from receipts already brought to tax in related entities would lead to double taxation. The AR submitted that the group had disclosed substantial taxable income, and the same funds could not be taxed twice merely because they were used for personal expenses. Conversely, the DR relied on the AO’s order, contending that the assessee failed to produce supporting evidence to substantiate the source and nature of the expenses, justifying their addition under Section 69C of the Act.
34. It is observed that significant additions of unaccounted receipts have already been made in the assessments of the group entities. The seized records indicated that the personal expenses were sourced from these unaccounted receipts, which were already taxed. Taxing the same funds again, merely because they were utilized for personal expenditure, would lead to double taxation, which is contrary to the principle of taxing real income. The AO invoked Section 69C and disallowed the expenses under Section 40A(3) due to cash payments. However, once the receipts have been taxed, the source of the expenditure is no longer unexplained. The business nexus becomes immaterial for personal expenses funded from taxed income. While the AO rightly placed the burden of proof on the assessee under the Evidence Act, the assessee sufficiently demonstrated that the expenditures were outflows from already-taxed inflows. The nexus between the taxed receipts and personal expenditures was reasonably established. The CIT(A) correctly applied the set-off principle by ensuring that the net effect of taxing unaccounted receipts and corresponding expenditures did not lead to double taxation.
35. In view of the above findings, we uphold the order of the CIT(A) deleting the respective additions made by the AO on account of personal expenditures for the assessment years under consideration. The revenue’s appeals on this ground are dismissed (Ground No. 5 in IT(SS)A Nos. 5 & 6/Ahd/2023, Ground No.4 in IT(SS)A No.7/Ahd/2023 and Ground No. 4 in ITA No. 67/Ahd/2023).
36. Grounds which are generic in nature and consequential in nature are not adjudicated specifically.
37. In the combined result, all the four appeals of assessee and all the four appeals of revenue are decided as tabulated below:
| Sl. No(s) | AY(s) | ITA/ IT(SS)A/Nos. | Type of Appeals | Result |
| 1. | 2016-17 | IT(SS)A Nos: | Assessee | Partly Allowed |
| 1/Ahd/2023 | ||||
| 2. | 2017-18 | 2/Ahd/2023 | Assessee | Partly Allowed |
| 3. | 2018-19 | 3/Ahd/2023 | Assessee | Partly Allowed |
| 4. | 2016-17 | 5/Ahd/2023 | Revenue | Dismissed |
| 5. | 2017-18 | 6/Ahd/2023 | Revenue | Dismissed |
| 6. | 2018-19 | 7/Ahd/2023 | Revenue | Dismissed |
| 7. | 2019-20 | ITA Nos: | Assessee | Partly Allowed |
| 19/Ahd/2023 | ||||
| 8. | 2019-20 | 67/Ahd/2023 | Revenue | Dismissed |
Order pronounced in the Open Court on 10th January, 2025 at Ahmedabad.
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