2025 (6) TMI 1549 - AT - Income Tax

Ex-parte order passed by the CIT(Appeals)/NFAC - cash and the gold-like metal seized during the search operation can be treated as the unexplained income - Assessee submitted that the assessee is a hawala trader and is earning commission from such transactions and therefore the money which was stated to be of the assessee was actually to be handed over to some other person and that he would have just got some commission in lieu of such services. HELD THAT - After hearing the submissions it was queried by the Bench whether any Enforcement Directorate (ED) proceedings or action of PMLA Act has been conducted in the case of the assessee to which the Ld. Counsel submitted in negative. Therefore these facts are not regular facts which are coming in every day to day in any business or profession. Rather these are facts relating to interception and confiscation by the authorities where money jewellery are being confiscated detected and the person is held accordingly if there is any violation of relevant statutes. Therefore it is now the onus on the part of the department to conduct necessary enquiry and verification to see whether any tax evasion is committed by the assessee or any colorable device adopted by the assessee to defraud the revenue in such case the entire addition have to be sustained in the hands of the assessee since fraud vitiates everything including natural justice. Appeal of the assessee is allowed for statistical purposes.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this appeal include:

• Whether the cash amounting to Rs. 74,98,000/- and the gold-like metal seized during the search operation can be treated as the unexplained income of the assessee under the relevant provisions of the Income Tax Act, 1961.
• Whether the statement recorded under oath during the search and survey operations admitting ownership of the seized cash by the assessee can be retracted and disregarded for assessment purposes.
• The applicability and interpretation of sections 68 and 69A of the Income Tax Act concerning unexplained credits and unexplained money found during search and seizure operations.
• Whether the ex-parte order passed by the first appellate authority due to non-compliance by the assessee is sustainable or requires reconsideration in the interest of natural justice.
• The evidentiary value and legal consequences of statements recorded under section 131(1A) and survey operations under section 133A of the Act.
• The burden of proof on the department to establish tax evasion or fraudulent conduct by the assessee in cases involving intercepted cash and gold-like metal.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Treatment of seized cash and gold-like metal as unexplained income under sections 68 and 69A of the Income Tax Act

Relevant legal framework and precedents: Section 68 of the Income Tax Act deals with unexplained cash credits, requiring the assessee to satisfactorily explain the nature and source of such credits. Section 69A pertains to unexplained money found during search operations and permits addition to income if the assessee fails to account for it satisfactorily. Precedents emphasize that unexplained cash found during search operations, if linked to the assessee, can be added to income unless satisfactorily explained.

Court's interpretation and reasoning: The Tribunal noted that Rs. 74,98,000/- cash and gold-like metal were intercepted by the Railway Protection Force (RPF) and subsequently requisitioned under section 132A. The assessee, during the recorded statement under oath on 21.05.2018, admitted ownership of the entire cash amount. Furthermore, he conceded that this amount was not recorded in the books of account of his firm or individual books. These admissions formed the basis for the Assessing Officer (AO) to treat the amount as unexplained income and add it under section 69A. The Tribunal acknowledged these facts and the statutory provisions empowering the AO to make such additions.

Key evidence and findings: The critical evidence included the statement recorded under oath during search proceedings, the seizure reports, and the loose papers (LPS-04) seized from the assessee's premises. The assessee himself offered Rs. 66,000/- depicted in loose papers as unexplained income. The AO relied on these to complete assessment with additions of Rs. 74,98,000/- and Rs. 66,000/-.

Application of law to facts: Given the admission of ownership and the failure to record the amount in books, the AO correctly invoked sections 69A and 68 to treat the amount as unexplained income. The Tribunal did not disturb this finding on merits but rather focused on procedural aspects relating to the appeal.

Treatment of competing arguments: The assessee's counsel contended that the assessee was a hawala trader earning commission and that the money was to be handed over to others, implying the cash did not belong to the assessee. However, no corroborative evidence or proceedings under the Prevention of Money Laundering Act (PMLA) or Enforcement Directorate (ED) were initiated to substantiate this claim. The Tribunal noted this absence and the fact that the onus lies on the department to establish tax evasion or fraudulent conduct.

Conclusions: The cash and gold-like metal found during search proceedings, coupled with the assessee's admission, justified the addition under sections 68 and 69A. However, the Tribunal did not finalize this issue on merits due to procedural grounds discussed below.

Issue 2: Validity of ex-parte order passed by the first appellate authority due to non-compliance by the assessee

Relevant legal framework and precedents: Principles of natural justice require that an assessee be given a fair opportunity to be heard before adverse orders are passed. Ex-parte orders can be passed if the assessee wilfully absents or fails to comply with notices. However, appellate authorities are also guided by Board's instructions to dispose of appeals promptly, balancing procedural fairness and administrative efficiency. Precedents hold that ex-parte orders can be set aside if the assessee demonstrates sufficient cause or if the order is found to be unjust.

Court's interpretation and reasoning: The Tribunal noted that the first appellate authority (Ld. CIT(Appeals)/NFAC) had granted multiple opportunities to the assessee to appear and file submissions, including adjournments. The assessee failed to comply with hearing notices and did not appear on the final opportunity, resulting in an ex-parte order. However, the Tribunal referred to a Division Bench decision of the ITAT Raipur dealing with similar circumstances, which remanded the matter back for fresh adjudication to protect the interest of natural justice.

Key evidence and findings: The record showed repeated adjournment requests by the assessee, followed by non-appearance despite final opportunity. The first appellate authority's order detailed this chronology and the rationale for proceeding ex-parte. The Tribunal found that despite procedural lapses, it was appropriate to provide one final opportunity to the assessee before the first appellate authority.

Application of law to facts: The Tribunal balanced the need for prompt disposal of appeals against the right of the assessee to be heard on merits. It exercised discretion to set aside the ex-parte order and remand the matter for fresh hearing.

Treatment of competing arguments: The Revenue's Senior DR conceded that the matter could be adjudicated de novo before the first appellate authority. The assessee's counsel sought opportunity to present the case on merits. The Tribunal found this approach just and in consonance with natural justice.

Conclusions: The ex-parte order was set aside, and the matter was remanded to the first appellate authority for fresh adjudication with one final opportunity to the assessee to present his case.

Issue 3: Evidentiary value of statements recorded under section 131(1A) and survey operations under section 133A

Relevant legal framework and precedents: Statements recorded under section 131(1A) during survey or search operations are admissible and can be used as evidence. However, the assessee has a right to retract statements if done voluntarily and without coercion, subject to corroboration. Courts have held that such statements carry significant evidentiary weight but are not conclusive if contradicted by other evidence.

Court's interpretation and reasoning: The AO relied on the statement recorded under oath on 21.05.2018 where the assessee admitted ownership of the cash. The assessee later denied and retracted this statement before the AO, which was rejected. The Tribunal noted that the initial statement was recorded under oath and was a strong piece of evidence. The assessee's retraction was unsubstantiated and thus not accepted.

Key evidence and findings: The statement under section 131(1A) was recorded contemporaneously during search proceedings. The assessee's denial post facto was found to be an afterthought. The Tribunal relied on the statutory provisions and the factual matrix to uphold the evidentiary value of the original statement.

Application of law to facts: The statement formed the basis for treating the cash as unexplained income. The Tribunal did not find any procedural irregularity or coercion in recording the statement, thus giving it full evidentiary weight.

Treatment of competing arguments: The assessee's contention that the statement was retracted was considered but rejected due to lack of credible evidence or corroboration.

Conclusions: The statement recorded under section 131(1A) was valid and admissible evidence to link the cash to the assessee, justifying additions under the Act.

Issue 4: Burden of proof and departmental obligation in cases involving intercepted cash and alleged hawala transactions

Relevant legal framework and precedents: The burden to prove tax evasion or fraudulent activity lies on the Revenue. Mere possession or interception of cash does not conclusively establish tax evasion unless linked to the assessee's undisclosed income or colorable device. The Prevention of Money Laundering Act (PMLA) and Enforcement Directorate (ED) proceedings are relevant in hawala or money laundering cases.

Court's interpretation and reasoning: The Tribunal observed the assessee's claim of being a hawala trader earning commission and that the intercepted cash was to be handed over to others. However, no ED or PMLA proceedings were initiated. The Tribunal emphasized that these facts are not routine business transactions but involve interception and confiscation by authorities. Therefore, the onus is on the department to conduct necessary enquiry and verification to establish tax evasion or fraudulent conduct. In absence of such enquiry, the additions must be sustained.

Key evidence and findings: No evidence of ED or PMLA action was found. The department relied on the statement and physical seizure to make additions. The assessee's explanation lacked corroboration.

Application of law to facts: The Tribunal highlighted the necessity of departmental enquiry beyond mere interception to establish tax evasion. However, it did not disturb the addition on this ground but allowed the appeal for statistical purposes to enable fresh adjudication.

Treatment of competing arguments: The assessee's argument of hawala trading and commission was noted but not accepted due to absence of supporting proceedings or evidence.

Conclusions: The department must conduct thorough enquiry to establish tax evasion in such cases; mere interception and statement are insufficient. The matter requires fresh consideration.

3. SIGNIFICANT HOLDINGS

"Since, the statement of the assessee was recorded on oath on 21.05.2018 wherein he had admitted that the entire cash found from possession of Shri Devanand Behera of Rs. 74,98,000/- belongs to him. Again, in reply of question 9 of his statement dt.21.05.2018, the assessee clearly stated that the entire amount of Rs. 74,98,000/- was not recorded in books of account of his firm or in individual books and he duly accepted that the same as his undisclosed income."

"Despite several opportunities being granted from time to time, there has been absolutely no compliance on part of the appellant to give detailed explanation regarding ground of appeal taken for the year under consideration. This clearly shows that the appellant is not keen to pursue the above-mentioned appeal."

"In the interest of natural justice, we deem it fit and proper to provide one final opportunity to the assessee to represent his case on merits before the Ld. CIT(Appeals)/NFAC."

"These facts are not regular facts which are coming in every day to day in any business or profession. Rather these are facts relating to interception and confiscation by the authorities where money, jewellery are being confiscated, detected and the person is held accordingly if there is any violation of relevant statutes. Therefore, it is now the onus on the part of the department to conduct necessary enquiry and verification to see whether any tax evasion is committed by the assessee or any colorable device adopted by the assessee to defraud the revenue."

Core principles established include:

• Admissions made by the assessee under oath during search proceedings are significant and can be relied upon for additions under the Income Tax Act.
• Ex-parte orders due to non-compliance can be set aside in the interest of natural justice to allow fresh hearing.
• The burden lies on the department to conduct thorough enquiry and establish tax evasion beyond mere interception of cash and goods.
• Statements under sections 131(1A) and survey operations under section 133A carry evidentiary weight but must be corroborated.
• Procedural fairness requires giving the assessee adequate opportunity to present their case on merits before adverse orders are passed.

Final determinations:

• The addition of Rs. 74,98,000/- and Rs. 66,000/- as unexplained income under sections 69A and 68 respectively stands on record but was not finally adjudicated due to procedural grounds.
• The ex-parte order of the first appellate authority was set aside and the matter remanded for fresh adjudication with one final opportunity to the assessee.
• The assessee's contention of hawala trading and commission was noted but not accepted due to lack of evidence or related proceedings.
• The department is directed to conduct necessary enquiries to establish any tax evasion or fraudulent device beyond the intercepted cash and metal.