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2025 (5) TMI 614 - AT - Income TaxEstimated additions made arising from undisclosed sales outside books of accounts and estimated additions towards undisclosed capital employed on such undisclosed sales - It is the case of the assessee that the entire basis of additions towards undisclosed sales and consequent additions towards undisclosed investment is certain print out taken by the Central Excise Department from the hard disk and pen drive recovered from the premises of Trikoot in a search carried out by the Central Excise Department. HELD THAT - Panchnama prepared at the premises of Trikoot does not bear any reference to recovery of hard disk and pen drive. Consequently adverse opinion towards undisclosed sales made by the assessee to Trikoot flowing from such pen drive etc. is neither admissible as evidence nor it can be examined for this purpose as held in appellate order passed by Excise Tribunal. It is further a case of the assessee that consequent upon search in the case of Trikoot a search was carried out at the premises of the assessee as well. However Central Excise Department could not recover any adverse material from the premises of the assessee either. AO in the instant case has also not brought any material on record adverse to the assessee. The sole basis of estimated addition is a show cause notice issued by the Central Excise Department the aforesaid proceedings against the third party (Trikoot) by Central Excise Department has been quashed and therefore no firm basis exists any longer against the assessee. Thus we find substantial force in the plea of the assessee for reversal of the additions on this score. AO has entertained adverse inference based on show cause notice issued by the Director of DG of Central Excise Intelligence on Trikoot and reference to some loose papers therein. As pointed out on behalf of the assessee the appellate authority of Central Excise Department has quashed the proceedings against Trikoot. AO has also not made any independent enquiry in the course of search to assert the additions. No independent material to corroborate the allegation of unrecorded sales is available on record. The ratio of judgement referred in the case of PCIT vs Sapoorji Pallonji Co. Ltd. 2020 (3) TMI 552 - BOMBAY HIGH COURT would thus squarely apply. The Hon ble Bombay High Court in that case observed that the AO had merely relied upon the information received from the Sales Tax Department Government of Maharasthra without carrying out any independent enquiry. The additions were thus quashed. Adhoc disallowance out of telephone and vehicle expenses etc - It is the case of the assessee that such estimated disallowance by the Revenue is not justified in the case of a company run by the professional management. The assessee being a company no personal user of telephone and vehicle expenses etc. can be envisaged per se. We find substantial force in such plea of the assessee. The adhoc additions without pin-pointing any specific instance of expenditure incurred which is not wholly and exclusively for the purpose of business is not permissible. The additions/disallowances cannot be made based on figment of imagination and must necessarily be supported by direct or circumstantial evidences. There being none the estimated disallowance cannot be sustained in law.
1. ISSUES PRESENTED and CONSIDERED
The core legal questions considered by the Tribunal in this appeal are:
2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Reliance on Third Party Information and Absence of Independent Enquiry Relevant legal framework and precedents: The Tribunal considered principles established in various judgments, including the Hon'ble Bombay High Court decision in PCIT vs Sapoorji Pallonji & Co. Ltd., which held that additions cannot be made solely on third party information without independent enquiry. The principle that the AO must conduct independent verification and afford the assessee an opportunity to rebut allegations is well settled. Court's interpretation and reasoning: The Tribunal observed that the AO's entire case for additions was premised on information derived from a show cause notice issued by the Director General of Central Excise Intelligence against the third party (Trikoot). The AO did not conduct any independent enquiry or gather any incriminating evidence from the assessee's own premises. The Tribunal noted that the Central Excise Department's search at the assessee's premises did not yield any adverse material. Key evidence and findings: The Tribunal highlighted that the panchnama at the third party's premises did not mention recovery of electronic devices (hard disk and pen drive), which were the source of the incriminating data. The CESTAT had quashed the proceedings against the third party on this ground, rendering the basis for the AO's additions legally unsustainable. Application of law to facts: Given the absence of independent enquiry and corroborative evidence, and the quashing of the third party proceedings, the Tribunal held that the AO's reliance on third party information without independent verification was impermissible. Treatment of competing arguments: The Revenue relied on the first appellate order, but the Tribunal found the assessee's arguments, supported by judicial precedents and the CESTAT's decision, more persuasive. Conclusion: The additions based on alleged undisclosed sales to the third party were set aside due to lack of independent enquiry and inadmissibility of the electronic evidence. Issue 2: Quantification of Undisclosed Sales and Gross Profit Ratio Relevant legal framework and precedents: The AO initially applied an average gross profit rate of 6.31% based on the last three years to quantify undisclosed income. The CIT(A) revised this to 4.57%, corresponding to the G.P. rate of the relevant assessment year. Court's interpretation and reasoning: While the CIT(A) attempted to moderate the additions by applying a lower G.P. rate, the Tribunal found the entire basis for the undisclosed sales to be flawed due to the inadmissibility of the underlying evidence. Therefore, the issue of G.P. ratio application became moot. Key evidence and findings: The Tribunal noted that the quantification was based on computer printouts from electronic devices not properly seized or documented, undermining their evidentiary value. Application of law to facts: Since the foundational evidence was inadmissible, the quantification of undisclosed sales using G.P. ratio was not sustainable. Treatment of competing arguments: The assessee's contention that no extra consumption of electricity or other operational anomalies existed supported the claim that no undisclosed sales occurred. Conclusion: The additions on account of undisclosed sales quantified by applying G.P. ratio were disallowed. Issue 3: Addition of Undisclosed Capital Investment Relevant legal framework and precedents: The AO assumed that undisclosed sales would have been supported by undisclosed capital investment and added 20% of the alleged sales as undisclosed capital. CIT(A) reduced this to 12.5%. Court's interpretation and reasoning: Since the foundational premise of undisclosed sales was rejected, the assumption of undisclosed capital investment based on those sales was also unsustainable. Key evidence and findings: No independent evidence was brought on record by the AO to support the existence of undisclosed capital investment. Application of law to facts: The addition being derivative of the primary addition on undisclosed sales was also disallowed. Conclusion: The addition towards undisclosed capital investment was reversed. Issue 4: Adhoc Disallowance of Telephone and Vehicle Expenses Relevant legal framework and precedents: The AO and CIT(A) made adhoc disallowances of 20% and 10% respectively on telephone and vehicle running expenses. The assessee relied on the Supreme Court decision in State of Kerala vs C. Velukutty, which mandates that disallowances must be based on evidence and not mere estimates, especially for companies where personal use is not presumed. Court's interpretation and reasoning: The Tribunal held that adhoc disallowances without specific evidence or pinpointing non-business expenditure are impermissible. The business purpose test must be applied, and in a professionally managed company, personal use of such expenses cannot be presumed. Key evidence and findings: No direct or circumstantial evidence was presented to justify the adhoc disallowance. Application of law to facts: The adhoc disallowance was found to be based on figments of imagination rather than evidence. Conclusion: The adhoc disallowances on telephone and vehicle expenses were disallowed. Issue 5: Admissibility of Electronic Evidence Not Recorded in Panchnama Relevant legal framework and precedents: Section 36B of the Central Excise Act requires proper documentation of electronic evidence in the panchnama for it to be admissible. The CESTAT had held that electronic records not mentioned in the panchnama cannot be relied upon. Court's interpretation and reasoning: The Tribunal noted that the hard disk and pen drive, source of the incriminating data, were not mentioned in the panchnama prepared during the search at the third party's premises. Consequently, the electronic evidence was inadmissible. Key evidence and findings: The CESTAT's quashing of proceedings against the third party on this ground was a critical factor. Application of law to facts: Since the electronic evidence was inadmissible, the AO could not rely on it for making additions against the assessee. Conclusion: The electronic evidence was excluded from consideration, undermining the AO's case. 3. SIGNIFICANT HOLDINGS The Tribunal held:
This principle underpinned the Tribunal's decision to set aside the additions based on third party information. The Tribunal also emphasized the necessity of independent enquiry and corroborative evidence before making additions based on third party data, reaffirming the principle that "additions cannot be made based on figment of imagination and must necessarily be supported by direct or circumstantial evidences." On the issue of electronic evidence, the Tribunal reaffirmed that non-compliance with procedural safeguards under the Central Excise Act, such as failure to mention electronic devices in the panchnama, renders such evidence inadmissible. Regarding adhoc disallowances, the Tribunal held that in a company run by professional management, personal use cannot be presumed, and adhoc disallowances without evidence are impermissible. In final determinations, the Tribunal allowed the appeal, setting aside the additions and disallowances sustained by the CIT(A), thereby reversing the additions on undisclosed sales, undisclosed capital investment, and adhoc disallowances on expenses.
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