2025 (6) TMI 1550 - AT - Income Tax

Undisclosed sales and undisclosed investment - s ole basis for the addition made by the AO was the information shared by Central Excise Department consequent to search conducted upon on M/s Trikoot Iron and Steel Pvt. Ltd. Muzaffarnagar - as argued AO without making any independent enquiry with either Trikoot or from Excise Department or any other person made additions in the hands of the Assessee HELD THAT - AO issued a show cause notice on the sole basis of the notice issued by the Central Excise Department to the Assessee pursuant to the search conducted by the central Excise Department on the premises of M/s Trikoot Iron and Steel Ltd. AO made the addition pursuant to the said search and based on the material found during the search conducted by the Excise Department on M/s Trikoot Iron and Steel Ltd. The Hon ble CESTAT in Excise Appeal 2024 (10) TMI 672 - CESTAT NEW DELHI quashed the additions made in the hands of M/s Trikoot Iron and Steel Ltd. by allowing the Appeal. Hon ble CESTAT has also allowed Assessee s Appeal wherein deleted the demand of duty and imposition of penalty. AO erred in making the additions in the hands of the Assessee and we find no reason to sustain the addition made by the AO which deserves to be deleted. In the result the appeal of the Assessee is allowed and the impugned assessment order and the order of the CIT(A) are hereby set aside. Assessee appeal allowed.

Summary

The core legal issues considered by the Tribunal in this matter pertain primarily to the validity and correctness of additions made by the Assessing Officer (AO) to the income of the Assessee on account of alleged undisclosed sales and undisclosed investment, based on material seized during a search conducted by the Central Excise Department on a third party, M/s Trikoot Iron and Steel Ltd. The issues also involve the applicability and correctness of the gross profit (GP) rate applied to determine the undisclosed income, the evidentiary value of documents seized from third-party premises, and the procedural propriety of the AO's reliance on such material without independent verification or enquiry. Additionally, the Tribunal examined the correctness of the appellate order by the Commissioner of Income Tax (Appeals) (CIT(A)) in partly deleting certain additions and the Revenue's contention that the CIT(A) erred in restricting or deleting certain additions.

Issue-wise detailed analysis:

1. Validity of additions based on documents seized from third party premises and reliance on Central Excise Department's show cause notice:

The legal framework governing additions to income under the Income Tax Act, 1961 requires that the AO must have credible and admissible evidence to justify such additions. Precedents emphasize the necessity of independent enquiry by the AO before making adverse inferences based on information from third parties or other authorities. The Tribunal referred to the judgment of the Hon'ble Bombay High Court in PCIT vs Sapoorji Pallonji & Co. Ltd., which held that reliance solely on information received from another authority without independent enquiry is impermissible. Similarly, the Tribunal considered the order of the Hon'ble Custom, Excise and Service Tax Appellate Tribunal (CESTAT) in Excise Appeal No. 55779/2023, which quashed the proceedings against M/s Trikoot Iron and Steel Ltd., thereby undermining the foundational basis of the additions made against the Assessee.

The Tribunal noted that the AO had not conducted any independent enquiry either with the Central Excise Department or with M/s Trikoot Iron and Steel Ltd. before making the additions. The documents seized from the third party's premises, including hard disks and pen drives, were not referenced in the panchnama prepared during the search, raising serious doubts about their admissibility and evidentiary value. The Tribunal observed that adverse inferences drawn solely from such material without corroboration or independent verification violate principles of natural justice and procedural fairness.

Consequently, the Tribunal held that the additions made on the basis of such material were not sustainable. The Tribunal also relied on a coordinate Bench's decision in the case of Shree Bhageshwari Papers Pvt. Ltd., where similar additions based on the same set of facts were deleted for analogous reasons.

2. Application of Gross Profit (GP) rate for estimating undisclosed sales:

The AO applied an average GP rate of 6.31% derived from similar concerns over the last three years to estimate undisclosed sales amounting to Rs. 5,91,37,325/-. The CIT(A) applied a current year GP rate of 4.57% of a similar concern (M/s Bhageshwari Paper Pvt. Ltd.) instead. The Revenue challenged this approach, contending that the AO's higher GP rate should have been accepted, and the CIT(A) erred in restricting the addition.

The Tribunal noted the conflicting GP rates and the fact that the AO's estimation was based on assumptions without rejecting the books of accounts or conducting a thorough investigation. Given that the fundamental basis of the addition-the existence of undisclosed sales-was found to be unsustainable due to lack of credible evidence, the question of the exact GP rate became moot. Without the foundational fact of undisclosed sales, the application of any GP rate to estimate income was unwarranted.

3. Additions on account of undisclosed capital and other unverifiable expenses:

The AO made additions on account of undisclosed capital in circulation and certain unverifiable expenses such as freight, repairs, wages, and other expenses. The CIT(A) deleted or restricted these additions, which the Revenue challenged as erroneous.

The Tribunal, however, did not find merit in the Revenue's contentions given that the primary additions based on undisclosed sales were deleted. The deletion of the main additions rendered the related additions on capital and expenses inconsequential. The Tribunal also noted that the AO failed to produce sufficient evidence to justify these additions, and the books of accounts were not conclusively rejected.

4. Procedural propriety and adherence to principles of natural justice:

The Tribunal underscored that the AO's reliance on a show cause notice issued by the Central Excise Department and material seized from third party premises without independent enquiry or opportunity to the Assessee to rebut the allegations violated rudimentary principles of contemporary jurisprudence. The Tribunal emphasized that suspicion or information from another authority cannot substitute for independent investigation and credible evidence.

The Tribunal cited the appellate order of the Central Excise Department itself, which quashed the proceedings against M/s Trikoot Iron and Steel Ltd., thereby invalidating the basis of the AO's adverse inference against the Assessee. The Tribunal held that the AO's failure to conduct independent enquiry and reliance on uncorroborated material was a fundamental error.

Conclusions:

The Tribunal concluded that the additions made by the AO on account of undisclosed sales and undisclosed capital were not sustainable in law or on facts due to lack of credible evidence and procedural irregularities. The Tribunal allowed the Assessee's appeal by setting aside the impugned assessment order and the order of the CIT(A) to the extent that additions were made on this basis. Consequently, the Revenue's appeal became infructuous and was dismissed.

Significant holdings and core principles established include:

"The estimated additions made arising from undisclosed sales outside books of accounts and estimated additions towards undisclosed capital employed on such undisclosed sales is in controversy. 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. However, the 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."

"Merely on suspicion based on information received from another authority, the assessing officer ought not to have made the additions without carrying out independent enquiry and without affording due opportunity to the respondent-assessee to controvert the statements made by the sellers before the other authority."

"The 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 Hon'ble Bombay High Court in PCIT vs Sapoorji Pallonji & Co. Ltd. observed that the AO had merely relied upon the information received from the Sales Tax Department, Government of Maharashtra without carrying out any independent enquiry."

In sum, the Tribunal held that additions based solely on unverified third-party documents and information without independent enquiry are liable to be deleted, affirming the necessity of credible evidence and adherence to principles of natural justice in tax assessments.