ITAT Chandigarh Caps Additions on Unrecorded Liquor Sales and Quashes Multiple Section 69 / Section 69A Additions

Background of the Dispute

A group search under Section 132 was conducted on 04.11.2022 in the Himgiri Beverages group, in which the assessee, Shri Kapil Gupta, was a key person. This search triggered reassessment and scrutiny for Assessment Years (AYs) 2020-21 to 2023-24.

Three personal diaries, marked as Annexures A-1, A-2 and A-3, were seized from the assessee’s residence. These diaries contained:

  • Entries of both accounted (excise-paid) and unaccounted liquor transactions
  • Cash receipts and cash payments (with figures written after suppressing three zeros)
  • References to certain parties, including M/s Jia Diamonds and an individual referred to as “whisky / whisky Mohali”

The Assessing Officer (AO) treated the entire cash receipts of ₹121.46 crore (as per seized diaries) as unaccounted sales and then:

  • Applied a Gross Profit (GP) rate of 5.38% on these receipts to compute additional business income under Section 28, and
  • Independently made various additions under Section 69 and Section 69A for alleged unexplained investments/expenditure in jewellery, gold bars, land, cash dealings with third parties, and cash found during search.

This approach led to clear overlapping—effectively taxing the same stream of cash again and again as:

  1. Business income on gross receipts, and
  2. Separate unexplained investments/expenditure out of those very receipts, and
  3. Assets acquired from such payments (e.g., jewellery and gold bars).

The assessee carried the matter in appeal to the CIT(A) without success and then to the ITAT, Chandigarh Bench ‘B’, in four connected appeals relating to AYs 2020‑21, 2021‑22, 2022‑23, and 2023‑24.

Core Facts Considered by the Tribunal

Nature of Business and Records

  • The assessee is an individual engaged solely in the business of manufacturing and sale of alcoholic liquor through his proprietorship concern, M/s Himgiri Beverages, operating from Kala Amb, District Sirmour, Himachal Pradesh.
  • No regular books of account were maintained: neither at the residence nor at the factory. This was confirmed by employees’ statements and absence of audited accounts.
  • The entire assessment was built on the seized diaries (Annexures A‑1 to A‑3) for calendar years 2020, 2021 and 2022, and on statements recorded under Section 132(4) from the assessee and related parties.

What the Seized Diaries Showed

The AO found that:

  • Entries ending with “800” corresponded to accounted, excise-paid sales, matching excise and bank records.
  • Entries ending with “802”, “702”, “202” etc. were treated as unaccounted sales.
  • Cash receipts and cash payments recorded in the diaries were shown by suppressing three zeros (e.g., “100” representing ₹1,00,000).
  • The AO concluded that the assessee was indulging in unrecorded production and sale of liquor, using surplus ENA and unaccounted raw material, and was routing unrecorded dispatches with the help of manipulation in excise transport documents.

Based on the diaries, the AO summarized total cash receipts and payments as under:

Calendar year-wise:

  • Total cash receipts: ₹51,07,34,800 (2020), ₹41,61,47,000 (2021), ₹28,77,62,000 (2022)
  • Total cash paid: ₹39,03,83,700 (2020), ₹20,29,19,000 (2021), ₹23,10,14,000 (2022)

Financial year-wise:

  1. FY 2019‑20 – cash receipts ₹9,40,14,000; cash paid ₹6,82,58,200
  2. FY 2020‑21 – cash receipts ₹54,26,56,800; cash paid ₹37,45,51,500
  3. FY 2021‑22 – cash receipts ₹40,26,31,000; cash paid ₹31,31,59,000
  4. FY 2022‑23 – cash receipts ₹17,53,42,000; cash paid ₹6,83,48,000

Total cash receipts: ₹121,46,43,800
Total cash paid: ₹82,43,16,700

Assessee’s Stand and Retraction

  • The assessee initially made statements under Section 132(4) linking the diaries to business transactions.
  • About 16‑17 months later, he filed a retraction claiming that statements were obtained under coercion and that the diaries were “dumb documents.”
  • The AO and later the ITAT rejected the retraction, holding that:
    • The diaries were corroborated by employee and third-party statements, excise records, and bank statements.
    • Presumptions under Section 292C and Section 132(4A) applied.
    • The retraction was belated and a mere afterthought to derail assessment.

Accordingly, the ITAT held that the diaries were valid incriminating material and not “dumb documents.”

Additions Made by the AO

Across the four AYs, the AO made the following key additions:

1. Business Income on Unaccounted Cash Receipts (Section 28)

  • Treated the entire cash receipts of ₹121.46 crore as unaccounted sales.
  • Applied an average GP rate of 5.38% (based on earlier years) and made additions as business income for each year.
  • For instance, in AY 2021‑22 (lead year), on cash receipts of ₹54.26 crore, GP @ 5.38% resulted in an addition of ₹2,91,94,936.

2. Jewellery and Gold Bars (Section 69A)