2025 (6) TMI 1999 - AT - Income Tax

Unexplained sales found from EmmEss- Gold software maintained found during the course of survey action carried out by the investigation wing - as per revenue during the course of search digital data were found seized having record of whole accounted as well unaccounted transaction. i.e. Gold purchase/ sale in/out of Gold bar in the digital form on which the assessing officer has relied upon - HELD THAT - As entries written as 1 / 2 against the name of the assessee in the said EmmEss-Gold software represented inward entries (and not quantity) of goods received from the assessee and that the said transactions were recorded in their books of accounts. Accordingly the assessee inquired about the matter with the V. K. Group and it is given to understand that the successor A.O. while framing the assessment in case of entities of V. K. Group examined the EmmEss-Gold software in depth and thereafter accepted the submission of the V. K. Group that the entries written as 1 / 2 in the EmmEss-Gold software represented inward entries only and the same did not represent any quantity. Thus when no addition was made on account of unaccounted purchases in case of V. K. Group who is the author of alleged incriminating material in digital form there remains no basis whatsoever to sustain any addition on account of alleged unaccounted sales in the hands of the assessee more particularly when no incriminating material was found during the search in case of the assessee. Decided against revenue.

Summary

The core legal questions considered by the Appellate Tribunal (AT) in these appeals pertain to the validity and correctness of additions made by the Assessing Officer (AO) under section 69 of the Income Tax Act, 1961, on account of alleged unaccounted sales of gold bullion as revealed by digital data found during survey and search operations. Specifically, the issues include:

1. Whether the addition of Rs. 10,01,45,000/- (for AY 2018-19) and Rs. 2,62,10,100/- (for AY 2019-20) on account of unexplained sales found from the EmmEss-Gold software maintained by V.K. Group is justified.

2. Whether the digital data seized during the search, which purportedly records both accounted and unaccounted transactions, can be relied upon to make additions in the hands of the assessee.

3. Whether the assessing officer properly investigated and applied his mind to the report of the Deputy Director of Income Tax (DDIT), Investigation Wing, and whether the assessment order is based on cogent material and relevant evidence.

4. Whether the assessee's admission of unaccounted sales and request to estimate profits on such transactions using GP/NP ratios is a valid basis for additions.

5. Whether the facts regarding transactions with V.K. Jewellers, where relevant data was accounted but not recorded in the assessee's books, were correctly interpreted.

Issue-wise Detailed Analysis

1. Legitimacy of Addition Based on EmmEss-Gold Software Data

The legal framework involves provisions under the Income Tax Act, particularly sections 132 (search and seizure), 133A (survey), 153A (assessment after search), and 69 (unexplained investments). The AO relied on digital data seized from the premises of V.K. Group, which maintained the EmmEss-Gold software, to identify unaccounted sales by the assessee. The AO interpreted entries marked '1' in the software as indicating purchase of 1 kg gold, thus inferring unaccounted sales by the assessee to V.K. Group amounting to Rs. 10,01,45,000/- for AY 2018-19.

The assessee contested this interpretation, submitting that the entries did not reflect quantity and that these were accounted transactions. The assessee also pointed out that the V.K. Group denied any unaccounted transactions with the assessee. The AO's initial addition was premised on a literal and erroneous interpretation of the software entries.

The CIT(A) directed verification from the AO handling V.K. Group's assessment and obtained a factual report. The AO in the V.K. Group case clarified that the entries '1' or '2' in the software represented inward voucher types and not quantities, and that actual purchase quantities were recorded in a different module, which matched the books of accounts. This corrected interpretation led to the conclusion that the transactions were accounted and there was no unaccounted sale.

The Tribunal noted that the AO who made the addition in the assessee's case was the same officer who later, while assessing V.K. Group, corrected the interpretation after a detailed examination of the software. This factual report, supported by the statement of the key person of V.K. Group, negated the basis for the addition.

The Tribunal also considered the assessee's request for cross-examination and the principle laid down by the Supreme Court that evidence collected without confronting the assessee is inadmissible. The assessee's contention that no incriminating material was found during the search at its premises was significant in undermining the AO's reliance on third-party data.

2. Reliance on Digital Data and Seized Materials

The AO relied heavily on digital data and loose papers seized during the survey and search operations. The assessee challenged the reliability of such data, highlighting the absence of direct incriminating evidence from its own premises and emphasizing the need for expert examination of the software data.

The Tribunal observed that the AO did not seek expert assistance in interpreting the EmmEss-Gold software, which was a technical tool, and that the initial interpretation was flawed. The corrected interpretation by the AO himself in the V.K. Group case, after a more thorough examination, was accepted as credible. Thus, the Tribunal found that the digital data, when properly interpreted, did not support the addition.

3. Application of Law and Investigation by the Assessing Officer

The AO's initial addition was based on a misinterpretation of the software data. The Tribunal emphasized that an assessing officer must apply his mind and investigate thoroughly before making additions. The AO's subsequent factual report in the V.K. Group case demonstrated proper application of mind and investigation.

The Tribunal held that since the AO himself corrected the error in interpretation, the addition in the assessee's case, which was based on the erroneous interpretation, could not be sustained. The principle that additions must be based on cogent and relevant material was reiterated.

4. Assessee's Admission and Estimation of Profit on Unaccounted Transactions

The assessee had, at one point, admitted unaccounted sales and requested that profit be estimated on such transactions using GP/NP ratios. However, the Tribunal found that since the foundational data for such unaccounted transactions was discredited, the admission and estimation became irrelevant.

The Tribunal also noted the assessee's alternative submissions that only the net profit element should be taxed if additions were made, which aligns with settled legal principles that sales amounts alone do not constitute income unless profits are shown.

5. Transactions with V.K. Jewellers and Accounting Treatment

The Tribunal examined the contention that relevant data was accounted for by V.K. Jewellers but not recorded in the assessee's books. The factual report and cross-verification of accounts between the assessee and V.K. Group showed matching and tallying entries, negating the claim of unaccounted transactions.

The Tribunal also relied on the statement of the key person of V.K. Group, who clarified the nature of entries in the software and confirmed that the transactions were recorded in their books.

Treatment of Competing Arguments

The Revenue argued that the remand report was not applicable to the assessee's case and that the AO was not technically competent to interpret the software data, thus the report should be disregarded. The Tribunal rejected this contention, observing that the AO who made the addition and the subsequent factual report was the same officer, and that the corrected interpretation was based on detailed examination. The Tribunal also noted the absence of any expert opinion to the contrary from the Revenue.

The assessee's arguments regarding the need for cross-examination and the inadmissibility of evidence collected without confrontation were accepted, reinforcing the principle of natural justice.

Conclusions

The Tribunal concluded that the addition of Rs. 10,01,45,000/- for AY 2018-19 and similarly for AY 2019-20, based on the EmmEss-Gold software data, was unsustainable. The addition was founded on a misinterpretation of the software entries, which was corrected by the AO himself in the related V.K. Group assessments. The absence of incriminating material from the assessee's premises and the matching of accounts between the assessee and V.K. Group further negated the claim of unaccounted sales.

Accordingly, the Tribunal dismissed the Revenue's appeals for both assessment years.

Significant Holdings

"The entire addition was the result of incorrect interpretation of the EmmEss software and such incorrect interpretation was corrected by the assessing officer himself while framing assessments of V. K. Group. Thus, in view of specific factual report of the A.O. himself as reproduced hereinbefore, the entire addition of Rs. 10,01,45,000/- deserves to be deleted."

"When no addition was made on account of unaccounted purchases in case of V. K. Group who is the author of alleged incriminating material in digital form, there remains no basis whatsoever to sustain any addition on account of alleged unaccounted sales in the hands of the assessee, more particularly, when no incriminating material was found during the search in case of the assessee."

"Evidence collected at the back of the assessee has to be confronted to the assessee to give him opportunity to rebut the evidence, otherwise, same is not admissible." (Reliance on Supreme Court ruling)

Core principles established include the necessity for correct interpretation of technical data before making additions, the importance of confronting the assessee with evidence, and the requirement that additions must be based on cogent and relevant material. The Tribunal emphasized that an addition based on erroneous interpretation, subsequently corrected, cannot be sustained.

Final determinations: The additions made by the AO on the basis of EmmEss-Gold software data were deleted by the CIT(A), and the Tribunal upheld this deletion, dismissing the Revenue's appeals for both AY 2018-19 and AY 2019-20.