The Pune Bench of Income Tax Appellate Tribunal ( ITAT ) directed the Assessing Officer (AO) to tax only the net profit from unaccounted cash receipts instead of treating 85% of the receipts as income.
Garware Technical Fibres Limited, appellant-assessee, manufactured aquaculture cage nets, fishing nets, sports nets, safety nets, and other related products. It filed its original return of income on October 31, 2018, declaring ₹124.08 crore.
A search and seizure operation was conducted on November 14, 2019. In response to a Section 153A notice, it filed a return on January 18, 2021, declaring the same income. Statutory notices were issued, and its representative appeared before the AO, submitting the required details.
During a search at the assessee’s head office on November 14, 2019, authorities found a pen drive in the Head-Cashier’s cabin containing Excel sheets of unaccounted cash transactions. These included receipts from scrap sales and payments for business development, sales incentives, and other expenses. The Head-Cashier admitted the transactions were unaccounted.
Understanding Common Mode of Tax Evasion with Practical Scenarios, Click Here
The AO calculated unrecorded cash receipts of ₹31.65 crore and payments of ₹32.27 crore for assessment years 2013-14 to 2020-21. The assessee argued that no unaccounted cash was found and that the Excel sheets were only cash flow estimates. It also claimed that, even if genuine, only net profit should be taxed, not the total cash receipts.
The AO rejected these claims, stating that Section 292C presumed the seized documents were authentic. Since the records showed illegal payments, related expenses were disallowed under Section 37(1). The AO treated ₹4.20 crore as unaccounted income and added it to the total income.
The AO also disallowed a deduction under Section 35(2AB) for R&D expenses, as the assessee failed to submit Form 3CL from DSIR.
Before the CIT(A), the assessee challenged the addition, arguing it was based on uncertified electronic evidence and lacked a Section 65B(4) certificate. It claimed the seized documents were uncorroborated and sought deletion of the ₹4.20 crore addition. Alternatively, it argued that business expenses exceeded receipts, making full taxation unjustified.
Understanding Common Mode of Tax Evasion with Practical Scenarios, Click Here
For Section 35(2AB), the assessee contended that the deduction was denied due to a delay in Form 3CL issuance by DSIR, which was beyond its control.
The CIT(A) rejected the Section 65B(4) challenge, treated 85% of unaccounted cash receipts as income, and granted partial relief under Section 35(2AB), limiting revenue expenditure to ₹7.17 crore. The AO was directed to restrict the disallowance to ₹40.41 lakh.
Aggrieved by the CIT(A) decision the assessee appealed before the tribunal.
The issue was whether 85% of the total cash receipts should be treated as income.
The assessee counsel argued that no discrepancies were found during the search, and the addition was based solely on excel sheets from a pen drive detailing cash receipts and expenses. She claimed only the profit from these receipts should be taxed, citing judicial precedents.
The revenue counsel supported the AO’s decision, stating the 85% addition was reasonable.
Read More: ITAT upholds Additions made on unaccounted Income received in Cash Towards Sale of Shares
The two member bench comprising Rama Kanta Panda ( Vice President ) and Astha Chandra ( Judicial Member ) reviewed the rival arguments, orders from the AO and CIT(A), and the paper book filed by the assessee. The AO added Rs. 4,20,44,000 as unaccounted cash receipts based on seized documents, citing unaccounted transactions admitted in a sworn statement. The CIT(A) reduced the addition to 85% of the unrecorded receipts from scrap sales, considering some related expenditure, despite illegal payments.
Understanding Common Mode of Tax Evasion with Practical Scenarios, Click Here
The tribunal found merit in the assessee’s argument that both receipts and expenditure in the seized documents should be considered. The AO had taxed the entire receipts without accounting for the expenditure. It concluded that the net receipts (gross receipts minus expenditure) should be taxed, with an addition for illegal payments.
The appellate tribunal referenced decisions from various High Courts, which held that only the profit element of receipts should be taxed. Citing the Delhi High Court’s decision in CIT vs. Indeo Airways, the ITAT directed the AO to recompute the income from unaccounted receipts using the net profit ratio declared by the assessee, modifying the CIT(A)’s order accordingly.
In short the appeal filed by the assessee was partly allowed.
Subscribe Taxscan Premium to view the JudgmentSupport our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates
