The Deputy Commissioner of Income Tax, Central Circle-2, Rajkot V. M/s. Gopal Fisheries , Veraval

ITSSA 49/RJT/2018

AI Insights

The case involves the Deputy Commissioner of Income Tax, Central Circle-2, Rajkot as the appellant and M/s. Gopal Fisheries as the respondent. The dispute arose from a search and seizure operation under Section 132(1) of the Income-tax Act, 1961, conducted at the business premises of the assessee, leading to the discovery of various unaccounted expenditures. The Assessing Officer (AO) added these expenditures to the income of the assessee under Section 69C of the Act. However, the Ld. CIT(Appeals) reduced the addition by estimating the profit on these expenditures at 7.5%, a decision which was challenged by the Department. The Tribunal upheld the CIT(A)'s decision, emphasizing that only the profit element from the undisclosed expenditures should be taxed, aligning with the business nature and previous judicial decisions.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 138302 (ITAT-RAJKOT)
• Duration Of Justice: 5 year(s) 6 month(s) 25 day(s)
• Appeal Type: Income Tax (Search & Seizure) Appeal
• Pronouncement Date: 17-10-2023
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: DB
• Next Hearing Date: 07-08-2023
• Assessment Year: 2014-2015
• Appeal Filed On: 22-03-2018
• Other Referred Cases: Tirupati Earth Neerprima JV vs. 154 taxmann.com 197 (Bombay), Simit P. Sheth vs. 38 taxmann.com 385 (Gujarat), Vijay Trading Co. vs. 76 taxmann.com 366 (Gujarat), Subarna Rice Mill vs. 96 taxmann.com 286 (Calcutta), Bholanath Poly Fab (P.) Ltd. vs. 40 taxmann.com 494 (Gujarat)
• Laws Referred To: Income-tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Unexplained expenditure; Document seized; Documents seized
• Section: 271(1)(c); 69C; 143(3); 153A; 234B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL RAJKOT BENCH, RAJKOT (Conducted through E-Court at Ahmedabad) BEFORE SMT. ANNAPURNA GUPTA, ACCOUNTANT MEMBER & SHRI SIDDHARTHA NAUTIYAL, JUDICIAL MEMBER I .T ( S S) .A . N o .4 9 / R j t/2 0 1 8 ( A s se ss m e nt Y e a r : 20 14- 15 ) D e put y Co m m i ss io n er o f I nc o m e Ta x , C e ntr al C ir cle - 2 , R a j ko t V s . M/ s . G o pa l Fi sh er ie s , Fi s he r i e s H a r b o ur , Pl ot N o . 4 4 - 4 7 , B hi di ya Pl o t, So m n a t h R o a d, V er a va l [ P A N N o . A A FF G4 78 0 L ] (Appellant) .. (Respondent) Appellant by : Shri Mehul Ranpura, A.R. Respondent by: Shri Shramdeep Sinha, CIT DR D a t e of H ea r i ng 08.08.2023 D a t e of P r o no u n ce me nt 18.10.2023 O R D E R PER SIDDHARTHA NAUTIYAL, JM: This appeal has been filed by the Revenue against the order passed by the Ld. Commissioner of Income Tax (Appeals)-11, (in short “Ld. CIT(A)”), Ahmedabad in Appeal No. CIT(A)-11/269-R to 273R/CC- 2/2016-17 vide order dated 23.01.2018 passed for Assessment Year 2014-15. 2. The Revenue has taken the following grounds of appeals:- “1. On the facts and in the circumstances of the case and in law, the CIT(A) has erred in law and on facts in restricting the addition of unexplained expenditure of Rs.1,51,97,876/- to Rs.11,39,840/- by estimating the profit @ 7.5%. IT(SS)A No.49/Rjt/2018 DCIT vs. M/s. Gopal Fisheries Asst.Year –2014-15 - 2 - 2. On the facts and in the circumstances of the case and in law, the CIT(A) has erred in not appreciating the fact that there is no evidence of unaccounted receipts in the seized material itself. 3. On the facts and in the circumstances of the case and in law, the CIT(A) ought to have upheld the order of the A.O. 4. It is, therefore, prayed that the order of the CIT(A) be set aside and that of the A.O. be restored to the above extent.” 3. The brief facts of the case are that the assessee is a partnership firm engaged in the business of processing, freezing and export of various types of fishes and other sea foods products under the name and style M/s. Gopal Fisheries. Return of income for the assessment year under consideration was filed on 26.12.2014 declaring total income at Rs. 41,69,296/-. Search and seizure action under Section 132(1) of the Income-tax Act, 1961 (hereinafter referred to as "Act") was carried out at the business premises of the assessee on 03.03.2015. Simultaneously, search action was also carried out at the premises of partners of the firms / various group concerns / persons. 4. Consequent upon the above search, notice under Section 153A of the Act dated 12.10.2015 was issued requiring the assessee to file return of income and in response to which, return of income for the Assessment Year under consideration was filed on 16.07.2016 declaring therein total income of Rs. 91,69,300/-. In the above stated return of income, the assessee offered additional income of Rs. 50,00,000/- with a view to cover discrepancies found in vouchers seized during the course of search. It was also explained by the assessee that due to lack of trail, certain vouchers are not reconcilable and therefore to avoid litigation profit of IT(SS)A No.49/Rjt/2018 DCIT vs. M/s. Gopal Fisheries Asst.Year –2014-15 - 3 - Rs. 50,00,000/- is estimated and offered to tax. Thus, expenses found not reconcilable were taken care by the unaccounted sales and profit form unaccounted sales was offered to tax. In the assessment proceedings, the AO vide order us. 153A r.w.s. 143(3) of the Act dated 29.11.2016 assessed the total income of the assessee at Rs. 2,43,67,176/- wherein he made following variation to returned income: (i) Added ₹ 1,33,07,131/- (after given credit of ad-hoc income declared of ₹ 50,00,000/- by the appellant from total addition of ₹ 1,83,07,131/-) u/s.69C of the Act on account of alleged unexplained expenditure as per noting made in Annexure A-7 & A-8 found and seized from the business premises of appellant. (ii) Added ₹ 18,61,745/ - u/s.69C of the Act on account of alleged unexplained expenditure as per kacha bills/cash vouchers inventoried as Annexure A-1 to A-6 found and seized from the business premises of M/s. Gopal Sea Foods. (iii) Added ₹ 29,000/ - u/s.69C of the Act on account of alleged unexplained expenditures as per noting made in page no.39 to 51 of Annexure A-4 found and seized from the business premises of appellant. 5. In appeal, Ld. CIT(Appeals) allowed the appeal of the assessee with the following observations: IT(SS)A No.49/Rjt/2018 DCIT vs. M/s. Gopal Fisheries Asst.Year –2014-15 - 4 - “6. The submission of the appellant and the assessment order has been considered carefully. The only effective ground of appeal is against the additions made by the A.O. in respect of unexplained expenditures u/s. 69C on the basis of noting made in the cash-book (daybook) seized during the search and inventoried as Annexure A-7 and A-8. It is seen from the assessment order that, the assessee is engaged in the business of processing and selling fish. It is mainly into exports. During the course of search, various evidences showing expenditure incurred by the assessee towards its fish processing activities were found. Such expenses, as enumerated by the AO in the assessment order itself, were in the nature of cutting head and tail of fishes, peeling, procurement, labour incurred towards such expenses and wages paid for its business activities. Not a single expenditure of non-business nature was fund. It is also seen that, the group as such is a family owned enterprise comprising of various firms & persons and the key person being one Shri Lakhambhai Bhensla. During the course of search, his statement was recorded wherein he had made disclosure of unaccounted income in various hands, for various years. In this case, the fact is that, during the course of search, various evidences of unaccounted expenditure were found & seized. As a matter of fact, no denial of such evidence has been made by the assessee and hence, the veracity and authenticity of such evidence is not doubted. The dispute is that, the AO had treated the entire expenditure as unexplained expenditure within the meaning of Section 69C, and after giving benefit of disclosure made during the year, made addition of the balance amount. On the other hand, the contention of the appellant is that, what has to be taxed is the legitimate profit earned from the enterprise. This plea was also taken during the course of the assessment proceedings, which has been rejected by the AO, who had held that, no evidence of any unaccounted receipt has been found and hence, he cannot entertain this plea of the assessee. The AR contented that the evidences suggested that the entire expenditure has been incurred towards the business of processing of fish and that not a single evidence of expenses incurred other than business has been found. That what has to be taxed, is the profit earned from such enterprise. The AR further contended that the AO; while finalizing the assessment of Shri Lakhambhai Bhensla, had estimated profit on gross receipts as such evidence of receipts were found in the case of Shri Lakhambhai Bhensla. Thus, theoretically, the AO accepts the fact that, what has to be taxed is the profit earned from such enterprise. The AR argued that the spontaneous statement of Shri Mohanbhai Bhensla, made during the course of search u/s 132(4) of tie Act, wherein he stated that the appellant firm used to sell Tuna fish in cash, suggests that the appellant did generate cash from unaccounted sales. Such cash finds its application in meeting expenditure. Thus, the issue under consideration is an event where evidence of unexplained expenditure is found and no corresponding evidence of receipt is found, whether the entire expenditure is to be added or the profit earned from such activities. It is therefore imperative IT(SS)A No.49/Rjt/2018 DCIT vs. M/s. Gopal Fisheries Asst.Year –2014-15 - 5 - to have a brief discussion on Section 69C of the I T Act, which reads as under:- “Unexplained expenditure, etc 69C. Where in any financial year an assessee has incurred any expenditure and he offers no explanation about the source of such expenditure or part thereof, or the explanation, if any, offered by him is not, in the opinion of the Assessing Officer, satisfactory, the amount covered by such expenditure or part thereof, as the case may be, may be deemed to be the income of the assessee for such financial year.” 6.2.1 From the above, it can be seen that, in order to invoke this Section, there should be (a) incurring of expenditure; (b) the assessee fails to explain the source of the same and (c) such explanation of the assessee is not satisfactory to the AO. Here, it is undisputed that the assessee has incurred expenditure. Now coming to the second limb, viz., tie source of such expenditure, the assessee contended that the same has been met out of its unaccounted sales, though recorded in the seized materials but rejected by the AO. Similar type of unaccounted sales receipts were also found from the premises of the key member Shri Lakhambhai Bhensla and while finalizing his assessment, the AO had given due credit to such evidence wherein he made addition of profit on estimated basis only. What is important from the above provision is that, Section 69C refers to the 'source of the expenditure' and not the expenditure itself. If from documents it appears that there was an expenditure, unless its source is satisfactorily explained, the same would also be deemed to be the income of the assessee for such financial year. The question of addition depends on the simply because the expenditure was actually incurred. On the failure to explain the source of the expenditure, it is liable to be added as held in the case of CIT v. Bhagwati Developers (P.) Ltd. [2003] 261 ITR 658 (Cal.). So what is important here is the source and its genuineness and how far Satisfactory it is. 6.2.2 At this stage it is important to reproduce the finding of the AO in the case of Shri Lakhambhai Bhensla. Para 5.13 of the said order, in which the AO had taken cognizance of the unaccounted receipts and made addition out of estimated profit, is as under: - 5.13 Coming to the conclusion, from the documents seized during the search and statement recorded of the assessee during the search, it transpired the group is indulged in the unaccounted activities of cash purchase of various types of fishes from local supplier / fisherman. Therefore, fishes are brought for cutting and cleaning, wherein head / tail of fishes along with bones / skins are removed and then after, fishes are cleaned with water to make them fit for preservation. This IT(SS)A No.49/Rjt/2018 DCIT vs. M/s. Gopal Fisheries Asst.Year –2014-15 - 6 - entire job is carried out by various workers, known in the local language as "Mathiya", to whom salary / wages in cash are paid, which is evidenced from the cash payment vouchers seized. Finally, processed fishes are sold in the local market in cash, which is not accounted for in the books of account. Sometimes, the assessee received cheques from local buyers for security purpose and once, the payment is received in cash, such non-encashed cheques are returned to the buyers. Evidence of such modus operandi has also been found in seized records and also accepted by the assessee in his statement recorded u/s.132(4) of the Act. 5.14 Considering the above modus operandi of group and seized records, I agree with the contention of the AR that estimation of Profit on the unaccounted receipts shall take care all | Se discrepancies of seized documents... 6.2.3 What transpires from the above finding is a fact that the AO had accepted that the group has indulged in cash purchases of fishes from local catchers, processed them viz., but the head and tail, cleaned skins and bones and made the product fit for preservation and the processed fish are sold in the local market and such sales are not accounted for. The AO went on to hold that, the group also collected cheques as security and when cash is received, the cheques are returned back. According to the AO, in the case of Lakhambhai Bhensla, such receipts to the tune of Rs. 13.69 crores were found, which is tabulated by him in the body of the order. Therefore, it is clear that the group indulges in local purchases and sales, in cash. It is seen that, the entire transactions emanated from annexure A-7 and A-8. The copy of the same is forming part of the paper book. On verification of the same, it is noticed that, this is one type of kachha cash book. On the debit side there are various expenses whilst submitted that, the inflow is either through bank withdrawals or through cash sales, I have gone through the it on the credit side, there are sources of funds. The AR said piece of evidence in the form of annexure A-7 and A-8. It is seen that, in the in] pw side, .there are names of persons written and / or PNB denoting cash withdrawals from bank. However, the assessee could not establish one to one trail of the entries and hence, the appellant offered lump sum income or ad-hoc basis. Therefore, the source of inflow is available in the seized materials itself. 6.2.4 Another important piece of evidence is the statement on oath, recorded during search of Shri Mohanbhai Bhensla, who had categorically admitted sale of tuna fish in cash. This statement is made in reply to question No. 21 of his statement recorded u/s 132(4) dated 4.3.2015. He has also stated that, the firm is not maintaining any register in respect of cash sales and as such, the same are also not recorded in the regular books of accounts. It is also true IT(SS)A No.49/Rjt/2018 DCIT vs. M/s. Gopal Fisheries Asst.Year –2014-15 - 7 - that, Shri Lakhambhai Bhensla is the key person of the group and he is looking after the entire operation of the group. The evidences of sales found from his possession also includes that of the assessee. Rather, it indicates the modus operandi of the entire group. 6.2.5 Another important piece of evidence that there existed unaccounted cash receipts from sales of fish which generated cash is the fact that, fish being a perishable item, has to be disposed off fast. During the course of search, no excess stock was found. So obviously, the cleaned, peeled and processed fish has found its way as sales only. Hence, the contention of the appellant that sales are carried out in cash, can be treated as a satisfactory explanation for source of expenditure1 incurred in cash. 6.2.6 It also cannot be denied that, not a single evidence of expenses other than fishing related activities were found The AO has not quoted any such incident. Hence, the entire expenditure is quantifiable as being met from fishing activity of the appellant. This is clearly depictable from annexure A-7 and A-8. The decision in the case of CIT v. Bhagwati Developers Pvt. Ltd. [2003] 261 ITR 658 (Cal.) adequately emphasizes the fact that, Question of Addition depends on satisfactory explanation of source. - Section 69C deals with unexplained source of expenditure. If from documents it appears that there was expenditure, unless its source is satisfactorily explained, the same would also be deemed to be the income of the assessee for such financial year. The question depends on the satisfactory explanation of the source. From the above facts, it is clear that the assessee's source of expenditure is from the sales of perishable goods viz., fish. 6.2.7 It is also seen that, the appellant had offered income on the basis of such seized materials meaning thereby the appellant has earned income from such activities. The AO, while finalizing the assessment, had duly considered the income offered by the appellant. Therefore, theoretically, the AO acknowledges the fact that the appellant had carried out both purchase and sales and earned profit thereon. It is also an accepted fact that, while finalizing an assessment, a wholistic approach has to be made. Huge evidence of purchase of raw fish, its processing expenditure and relevant ancillary activities were found. When Courts are holding that, in the event of unaccounted transactions, only the profit element has to be taxed, it becomes relevant here also. The AR of the appellant also argued that, unlike common instances of unexplained expenditure like on money payment for purchase of property, incurring expenditure for marriages, foreign tours etc, here this is business expenditure and it is cyclical in nature, wherein the receipts are rotated as expenditure and vice versa. Hence, the rotation of funds has to be IT(SS)A No.49/Rjt/2018 DCIT vs. M/s. Gopal Fisheries Asst.Year –2014-15 - 8 - given due consideration. This argument has substantial force. My attention has also been drawn to the fact that, in other group cases, on the basis of one single loose paper containing details of receipt, the AO had made estimation of profit. If that be so, then in cases involving evidences of only unaccounted expenditure / purchase, the same formula has to be followed viz., taxation of profit only. There are evidences of receipts in the seized material itself and as stated by one of the group member in the statement u/s. 132(4) of the Act. The AO made the additions in the case of Shri Lakhambhai Bhensala by taking 10% of the total sales. In such situation, additions of total unexplained expenditure made by the AO found highly excessive. Only the profit on such unexplained transactions should be taxed, as there are business expenditure incurred on day to day basis for generation of receipts for the business. The appellant contended that in this line of business, the net profit margin is 2.5 % to 5% of the total receipts. But this is not found acceptable for the reason that during the course of search, the appellant & group concerns disclosed undisclosed income, earned income more than what net profit has been shown in the return of income filed. Therefore, it is considered just & reasonable to consider income @7.5% of the gross expenditure. For these 5 years, the total unexplained expenditure added and by taking 7.5% as net profit (income), the figures will be as under:- Sr.No. A.Y. Unexplained expenditure added by the AO 7.5% of col. C confirmed as addition 92.5% of additions ( Col. C) are deleted (a) (b) (c) (d) (e) i) 2011-12 64,49,915 4,83,743 59,66,172 ii) 2012-13 1,06,12,762 7,95,957 98,16,805 iii) 2013-14 1,44,80,052 10,86,003 1,33,94,049 iv) 2014-15 1,51,97,876 (13307131 + 1861745 1,40,58,035 + 29000) 11,39,840 1,40,58,035 v) 2015-16 1,0636,078 (10503578 + 68000 + 64500) 7,97,705 98,38,373 IT(SS)A No.49/Rjt/2018 DCIT vs. M/s. Gopal Fisheries Asst.Year –2014-15 - 9 - Thus, the additions of Rs.4,83,743/- Rs.7,95,957/-, Rs. 10,86,003/-, Rs. 11,39,840/- and Rs.7,97,705/- are confirmed for A.Y. 2011-12, 2012-13, 2013-14 2014-15 & 2015-16 respectively. The additions of Rs.59,66,172/-, Rs.98,16,805/- , Rs.1,33,94,049/-, Rs. 1,40,58,035/- and Rs.98,38,373/- are deleted for A.Y.2011-12, 2012-13, 2013-14, 2014-15 & 2015-16 respectively. This ground of appeal is partly allowed . 6. The Fifth ground of appeal relates to levy of interest u/s.234A, 234B & 234C of the Act. Since charging interest is mandatory in nature, accordingly, this ground of appeal is dismissed. 7. The Sixth Ground of appeal relates to initiation of penalty proceedings u/s 271(1)(c) of the Act. Since this ground of appeal is premature at this stage, accordingly, this ground of appeal is dismissed. 8. In the result, appeals are partly allowed for all the above mentioned five assessment years.” 6. The Department is in appeal before us against the order passed by Ld. CIT(Appeals). The Ld. DR placed reliance on the observations made by the assessing officer in the assessment order. In response, the counsel for the assessee reiterated the submissions made before Ld. CIT(Appeals). The limited issue for consideration before us is that whether the unexplained expenditure brought to tax under Section 69C of the Act should be taxed on gross basis or Ld. CIT(Appeals) was justified in holding that only the income/profit element embedded therein is liable to be taxed. Ld. CIT(Appeals) held that only 7.5% of the unexplained expenses is liable to tax erred in the assessee’s hands, looking into the facts of the instant, since this figure can be said to represent the profit element embedded in the undisclosed expenditure. In the case of Tirupati Earth Neerprima JV 154 taxmann.com 197 (Bombay), the High Court held that where Assessing Officer treated purchases made by IT(SS)A No.49/Rjt/2018 DCIT vs. M/s. Gopal Fisheries Asst.Year –2014-15 - 10 - assessee as bogus and made addition in respect of same, since assessee had maintained inventory of stock and payments for such purchases were made by account payee cheques and tax invoices were obtained, such purchases could not be rejected and addition to be restricted to extent of profit element. In the case of Simit P. Sheth 38 taxmann.com 385 (Gujarat), the High Court held that where purchases were not bogus but were made from parties other than those mentioned in books of account, not entire purchase price but only profit element embedded in such purchases can be added to income of assessee. In the case of Vijay Trading Co. 76 taxmann.com 366 (Gujarat), the High Court held that where purchase made by assessee was found bogus, not entire amount covered under such purchases but profit element embedded therein would be subject to tax. In the case of Subarna Rice Mill 96 taxmann.com 286 (Calcutta), the High Court held that when undisclosed purchases are discovered in course of assessment, it is only profit embedded in said transactions which can be added to total income under Section 69C. In the case of Bholanath Poly Fab (P.) Ltd. 40 taxmann.com 494 (Gujarat), assessee was engaged in business of trading in finished fabrics. The Assessing Officer found that concerned parties from whom material was purchased were not found at their addresses and held that purchases made by assessee were bogus. Accordingly, he made disallowance. The Tribunal found that though purchases were made from bogus parties, but purchases themselves were not bogus as entire quantity of stock was sold by assessee and held that only profit margin embedded in such purchases would be subjected to tax and not entire purchases. The IT(SS)A No.49/Rjt/2018 DCIT vs. M/s. Gopal Fisheries Asst.Year –2014-15 - 11 - order passed by Tribunal was upheld by the High Court. Accordingly, looking into the facts of the instant case, we are of the considered view that the Ld. CIT(Appeals) has not erred in facts and in holding that only the profit element embedded in the undisclosed expenditure can be brought to tax in the hands of the assessee and accordingly, we find no infirmity in the order passed by Ld. CIT(Appeals) so as to cause any interference. 7. In the result, the appeal of the Department is dismissed This Order pronounced in Open Court on 18/10/2023 Sd/- Sd/- (ANNAPURNA GUPTA) (SIDDHARTHA NAUTIYAL) ACCOUNTANT MEMBER JUDICIAL MEMBER Ahmedabad; Dated 18/10/2023 TANMAY, Sr. PS TRUE COPY आदेश क त ल प अ े षत/ Copy of the Order forwarded to : 1. अपीलाथ / The Appellant 2. यथ / The Respondent. 3. संबं धत आयकर आय ु त / Concerned CIT 4. आयकर आय ु त(अपील) / The CIT(A)- 5. वभागीय त न ध, आयकर अपील!य अ धकरण, राजोकट / DR, ITAT, Rajkot 6. गाड' फाईल / Guard file. आदेशान ु सार/ BY ORDER, उप/सहायक पंजीकार Dy./Asstt.Registrar) आयकर अपील य अ धकरण, राजोकट / ITAT, Rajkot 1. Date of dictation 16.10.2023(Dictation given on Dragon Software by Hon’ble Member on 15.10.2023) 2. Date on which the typed draft is placed before the Dictating Member 16.10.2023 3. Other Member..................... 4. Date on which the approved draft comes to the Sr.P.S./P.S 17.10.2023 5. Date on which the fair order is placed before the Dictating Member for pronouncement .10.2023 6. Date on which the fair order comes back to the Sr.P.S./P.S 19.10.2023 7. Date on which the file goes to the Bench Clerk 19.10.2023 8. Date on which the file goes to the Head Clerk.......................................... 9. The date on which the file goes to the Assistant Registrar for signature on the order.......................... 10. Date of Despatch of the Order..........................................