ITAT Mumbai on Cash Investment in Shops and Stock Shortage in Section 153A Search Cases

Background of the Dispute

The Income Tax Appellate Tribunal, Mumbai Bench, adjudicated a batch of cross-appeals in the case of Rajesh Mafatlal Vs DCIT (also referred to in the cause title as Rajesh Jain Vs DCIT), arising out of a common appellate order dated 25.08.2023 passed by CIT(A)-52, Mumbai. The controversy related to four assessment years, namely AY 2018-19 to AY 2021-22.

The assessee was engaged in the business of trading in mobile accessories under the proprietorship concern M/s Raj Telecom. A search under Section 132 of the Income Tax Act 1961 was carried out in the case of Rubberwala Group on 17.03.2021. In the course of that search, the assessee was also subjected to search proceedings. Consequently, assessments for all relevant years were completed in the hands of the assessee under Section 143(3) read with Section 153A.

The entire controversy revolved around two broad issues:

1. Alleged cash component in purchase of shops in “Platinum Mall” and whether such cash could be assessed as unexplained investment under Section 69 in the hands of the assessee.
2. Shortage of stock detected during the search for AY 2021-22 and whether such shortage represented unaccounted sales.

Both the Revenue and the assessee filed cross-appeals, contesting different facets of the order of the CIT(A).

Discovery of Alleged Cash Payments for Shops at “Platinum Mall”

Search Findings in Rubberwala Group

During the search on the Rubberwala Group, the department unearthed material showing that the group had developed a commercial project named “Platinum Mall” and sold multiple shops therein. According to documents seized from one staff member, Shri Imam Ansari, the developer had allegedly received:

• Cash components outside the books of account,
• In relation to 21 shops,
• Aggregating to Rs.5,21,01,155/- over FY 2017-18 to FY 2020-21.

The material also indicated the year-wise bifurcation of cash purportedly received from the assessee in connection with these 21 shops booked in his name:

The Assessing Officer (AO) treated the above figures as unexplained investments under Section 69, assuming that the assessee funded the entire cash consideration for all 21 shops.

The assessee categorically denied having made any cash payments toward these shops.

Findings of the CIT(A) on Shop Investments

Assessee’s Explanation Before CIT(A)

In appeal, the assessee asserted that:

• He had personally purchased only one shop, i.e. Shop No.36 in “Platinum Mall”, on 30.09.2019.
• The remaining 20 shops were acquired by his family members and other individuals, all of whom were independently assessed to tax.
• Therefore, any alleged unaccounted cash component relating to those other shops could not be taxed in his hands.

Restricted Addition for Shop No.36

The CIT(A) accepted this factual position and held:

• Only the cash component linked to Shop No.36 could be examined in the assessee’s hands.
• As per the seized data, the cash figure recorded in respect of Shop No.36 was Rs.18,64,200/-, incurred in the year relevant to AY 2020-21.
• Accordingly:
  • The addition of Rs.18,64,200/- was sustained in AY 2020-21.
  • The entire additions made in AYs 2018-19, 2019-20 and 2021-22 in relation to other shops were deleted.

This led to:

• Revenue’s appeals for all four years (challenging the relief for other shops), and
• Assessee’s appeal for AY 2020-21 (challenging the sustained amount of Rs.18,64,200/-).

ITAT on AY 2018-19 & 2019-20: Unexplained Investment Must Be Taxed in the Right Hands

Tribunal’s View on Additions for Other Persons’ Shops

For AYs 2018-19 and 2019-20, the AO had added:

• Rs.1,67,25,100/- (AY 2018-19), and
• Rs.1,87,62,150/- (AY 2019-20)

as unexplained investment in the assessee’s hands.

The Tribunal noted the CIT(A)’s factual finding that:

• The assessee did not acquire any shop in his own name during these two years.
• The shops were acquired by family members or other connected individuals, each of whom had separate PANs and was separately assessed.
• It was neither established nor demonstrated that the assessee had financed the cash portion for those buyers.

On this basis, the Tribunal endorsed the approach of the CIT(A) that:

• Unaccounted investment is taxable in the hands of the person who actually makes the investment, not a facilitator.
• Income-tax must be levied on the “right person” and not a “wrong person”, as clarified by the Hon’ble Supreme Court in ITO Vs. Ch. Atchiah (219 ITR 239) (SC).

The Tribunal observed that there was no evidence that the assessee had paid cash for shops in the names of others. Therefore, any enquiry or addition in respect of unaccounted cash investments should be directed towards the actual purchasers, not the assessee.

The Tribunal thus agreed that the AO was not justified in taxing cash payments for shops purchased by other persons in the assessee’s hands and upheld deletion of these additions on merits.

Legal Challenge for Unabated Years: Application of PCIT Vs. Abhisar Buildwell P. Ltd.

Assessee’s Legal Ground Under Rule 27