The Chennai Bench of Income Tax Appellate Tribunal (ITAT) ruled that circular transactions within group entities would not be considered income for the assessee.
V.V. Titanium Pigments Pvt.Ltd ,the appellant-assessee, was established in 1994 and engaged in the manufacturing and sale of anatase grade Titanium dioxide.Following a search action on the assessee group on 25-10-2018, notices under section 153 were issued for AYs 2013-14 to 2018-19 on 16-07-2019. The assessee then filed returns of income, which were scrutinized by the Assessing Officer (AO).
The AO, based on the search findings, proposed additions for (i) suppressed sales, (ii) unexplained investments, (iii) income from unaccounted scrap sales, (iv) bogus expenses, (v) unaccounted cash receipts, and (vi) other related items.
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The issue of unaccounted sales and scrap sales arose for AYs 2015-16 to 2019-20. The AO based these additions on five notebooks and diaries seized during the search, along with sworn statements and WhatsApp conversations. These documents indicated that the assessee had engaged in unaccounted sales of scrap and rutile, leading the AO to propose significant additions to the income for those years.
However, during the appellate proceedings, the CIT(A) identified several errors in the AO’s calculations, such as totaling mistakes for AY 2016-17 amounting to Rs.30.55 lakhs, and a double addition of Rs.66 lakhs for AY 2017-18. For AY 2018-19, the CIT(A) noted additional totaling mistakes, resulting in a total deletion of Rs.102.17 lakhs from the original additions. Furthermore, the CIT(A) observed that Rs.732.30 lakhs represented circular transactions between the assessee and its group entity, M/s V.V. Minerals. These transactions involved funds sent for payments on behalf of the group entity, which were later returned, and were not treated as unaccounted income.
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The CIT(A) also applied the gross profit (GP) rates declared by the assessee for AYs 2015-16 to 2019-20 to estimate the profit from the remaining unaccounted sales. This method acknowledged the unaccounted expenditures incurred by the assessee from these receipts.
The tribunal upheld the CIT(A)’s findings, stating that while there was sufficient evidence for the revenue to make an addition, both unaccounted sales and expenditures were present. It agreed with the CIT(A) that the application of GP rates was logical and reasonable.
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The bench also emphasized that the circular transactions between group entities do not constitute income for the assessee, thereby affirming the exclusion of Rs. 732.30 lakhs from unaccounted sales receipts. Consequently, the AO was directed to exclude these amounts when calculating profits for the respective years, leading to the dismissal of the revenue’s corresponding ground and a partial allowance of the assessee’s grounds.
The two member bench comprising Mahavir Singh(Vice President) and Manoj Kumar Aggarwal(Accountant Member) consequently directed the AO to exclude these amounts when calculating profits for the respective years, leading to a partial allowance of the assessee’s appeal.
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