2025 (6) TMI 1637 - AT - Income Tax

Unexplained credit u/s 68 - AO relying on the statement of the Accounts Head and non-submission of any document before him proceeded to make the addition with the observation that the credit entries in the case of sundry creditors are made with the narration under the head particulars show cash was written on these pages - HELD THAT - We observed that the document found during the search belongs to various entities of the Rama Group and its associate companies. The last Panchnama was in the name of group companies identified as RU-1 and it was observed that there is no mention of the assessee s name anywhere in the Panchnama. Therefore all these materials found during the search belong to the Rama Group entities. Therefore the addition should have been made in the hands of the relevant entities based on the material found and Panchnama on record. Therefore no addition can be made on the basis of third party without examining and linked to various contents of the documents with the third party in this case assessee. Various courts have held that no addition can be made in the hands of the assessee treating the material found during the search the relevant search was not initiated in the name of the assessee and such material cannot be applied to make addition in the hands of the assessee. After considering the detailed findings of the ld. CIT (A) in this regard we are inclined to dismiss ground nos.1 to 4 raised by the Revenue. Cash transactions in the seized material - CIT (A) has deleted the addition after considering the detailed remand report submitted by the AO - HELD THAT - We observed that in remand report the Assessing Officer has accepted the actual unreconciled amount of Rs. 42.79 lakhs. The same was accepted by both parties. The assessee also surrendered an amount of Rs. 52.50 lakhs to compensate the above. Therefore there is no loss to the Revenue. Accordingly we do not see any reason to disturb the findings of the ld. CIT(A). Accordingly ground raised by the Revenue is dismissed. Book balance in the seized material excluding the opening balance - We observed that there is a credit of Rs. 5, 50, 000/- and Rs. 3, 00, 000/- during the year and also there are debit balances of Rs. 2, 13, 000/-. We observed that there is opening balance of Rs. 4, 01, 000/-. The opening balance is not a transaction relevant for the current assessment year. Since total credit relevant for the current assessment year is Rs. 8, 50, 000/- excluding opening balance and there is a debit balance as well. The net credit transactions are Rs. 6, 35, 000/-. Since the relevant documents were found at the premises of the assessee the maximum addition could be made is Rs. 6, 35, 000/- during the current assessment year. Therefore we direct AO to restrict the addition to Rs. 6, 35, 000/-. Accordingly ground no.6 of Revenue s appeal as well as ground raised by the assessee are partly allowed. Addition based on the material found during search - sales transactions carried on by Rama Central Store - As per the data found during the search it clearly indicates that assessee was indulged in purchase as well as sales during that period and the AO has made addition only the sales without considering the purchases. As per the record submitted before the first appellate authority and the details submitted before us it clearly shows that Rama Central Store was indulged in booking sales as well as purchase during that period. We observed that ld. CIT (A) has sustained only the profit earned by the Rama Central Store in our considered view may be reasonable approach to make addition in the hands of Rama Central Store. No reason to disturb the findings of the ld. CIT (A) in proposing the addition based on the profit earned in the hands of Rama Central Store or Rama Group. However it is apparent on record that purchase and sales were made by Rama Central Store which belongs to Rama Group of companies and they are separate assessees and additions can be made in the respective companies in the relevant assessment proceedings. Assessee being a Director is separate from the company and the addition cannot be made in the hands of the assessee. There is no material brought on record to lift the corporate veil in this case. Unreconciled turnover - We observed that AO has noticed that assessee has declared unreconciled turnover from the data seized from RU-1 Annexure A-39 to the extent of Rs. 11, 65, 77, 710. We observed that AO has not brought on any record to show that assessee has received more than the amount found during the search as per Annexure A-39. That being so in our considered view the actual income alone can be brought on record for taxation and not on the basis of notional income or anything on presumption basis. Therefore assessee has already accepted the actual receipt of cash as actual income and declared the same during search proceedings. Therefore we do not see any reason to disturb finding of the ld. CIT (A). Accordingly ground no.1 raised by the Revenue is dismissed. Addition based on document find from group companies - We observed that AO has noticed that assessee has declared unreconciled turnover from the data seized from RU-1 Annexure A-39 to the extent of Rs. 11, 65, 77, 710. We observed that AO has not brought on any record to show that assessee has received more than the amount found during the search as per Annexure A-39. That being so in our considered view the actual income alone can be brought on record for taxation and not on the basis of notional income or anything on presumption basis. Therefore after considering the relevant document on record the assessee has already accepted the actual receipt of cash as actual income and declared the same during search proceedings. Therefore we do not see any reason to disturb finding of the ld. CIT (A). Accordingly ground no.1 raised by the Revenue is dismissed. 1074.05 grms. of jewellery were found during the search from locker no.171 which was in the name of the assessee as well as Leena Agarwal - Assessee has stated that the abovesaid jewellery belongs to brother-in-law and sister-in-law namely Sachin Goel and Prachi Goel. In support they have also filed affidavits claiming the same that these jewellery belongs to them. Considering the fact that assessee has submitted at the time of recording statement during the course of search as well as subsequently that these jewellery belong to brother-inlaw and sister-in-law of the assessee. In this regard they also filed specific affidavits. After considering the due submissions we observed that assessee has submitted and claimed the jewellery belongs to his in-law family including mother-in-law and other family members. After due consideration of the affidavits filed by Sachin Goel and Prachi Goel we are of the view that no doubt the material found at the time of search presumed to belongs to the assessee as per section 132(4A) of the Act but in case of rebuttal during the search on subsequent proceedings the tax authorities are under obligation to put to test the material as well as the affidavits filed before them. In case if failure is on the part of the authorities below it is presumed that the affidavits filed are true. Assessee ground allowed. Addition of net profit @ 5% in wholesale trading business of cattle feed - CIT (A) has sustained the addition merely relying on the information submitted before him in the form of remand report and rejoinder to the remand report. He observed certain discrepancies on the information supplied by the assessee however he could have asked the assessee to substantiate those observations before dismissing the appeal. In our considered view and for the sake of complete justice we are inclined to remit this matter back to the file of ld. CIT (A) to decide the matter on merits as per law after giving proper opportunity of being heard to the assessee.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in the appeals arising from assessment years 2010-11 to 2014-15 primarily relate to the following issues:

- Whether additions made by the Assessing Officer (AO) under sections 68 and 69 of the Income Tax Act, 1961 (the Act) on account of unexplained credits, unsecured loans, bank overdraft accounts, and out-of-books sales based on documents found during search and seizure operations are justified and sustainable.

- Whether additions can be made in the hands of the assessee on the basis of documents seized from third parties or group companies without direct linkage or examination of the third parties.

- The validity and applicability of the presumption under section 132(4A) of the Act regarding documents found during search belonging to the person searched.

- Whether the additions made on account of unexplained cash, jewellery seized during search, and unexplained investments in movable and immovable properties are justified.

- Whether the additions made on account of alleged out-of-books sales and unaccounted turnover should be restricted to reasonable profits or entire turnover.

- The correctness of the jurisdiction assumed by AO and CIT(A) under section 153A and related procedural aspects.

- Whether the additions made on the basis of digital data without proper certification under section 65B of the Indian Evidence Act are admissible.

- The treatment of interlinked transactions involving related parties and the application of peak credit theory in such cases.

- Whether additions made based on documents not found in the possession of the assessee but in group companies can be sustained by lifting the corporate veil.

- The correctness of the additions made on account of agricultural income and net profit estimated on cattle feed business.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Additions under Section 68 and 69 on Unexplained Credits and Out-of-Books Sales Based on Documents Found During Search

Legal Framework and Precedents: Section 68 of the Act deals with unexplained cash credits, and section 69 deals with unexplained investments. The principle that additions cannot be made solely on the basis of documents found from third parties without linking them to the assessee is well established in jurisprudence. The Tribunal referred to several precedents including ACIT vs. Lata Mangeshkar, Prakash Chand Nahta v. CIT, CIT v. Salek Chand, SMC Share Broker Ltd, CIT vs. JMD Computers & Communications, and others, which emphasize that additions based on third-party documents require examination and linkage to the assessee.

Court's Interpretation and Reasoning: The documents seized during search belonged to various Rama Group companies and were not found in the possession of the assessee. The Panchnama did not mention the name of the assessee, and the documents did not bear the assessee's signature or handwriting. The Tribunal upheld the principle that additions cannot be made in the hands of the assessee on the basis of third-party documents without establishing a nexus. The AO's reliance on digital data without proper certification under section 65B was also questioned.

Key Evidence and Findings: The documents (Annexure A-36 and RU-1) belonged to Rama Group entities, and the assessee was not linked directly to these documents. The assessee had surrendered certain income during search proceedings. The CIT(A) deleted additions except for a specific amount related to an entry in the name of an individual (Sanjeev Kumar), which was directed to be assessed in the relevant period.

Application of Law to Facts: The Tribunal applied the legal principle that no addition can be made solely on third-party documents without linkage and upheld the deletion of additions under sections 68 and 69 except where direct evidence linked the amount to the assessee.

Treatment of Competing Arguments: The Revenue argued for lifting the corporate veil and reliance on digital data found during search. The assessee contended the documents were not found in his possession and lacked proper certification. The Tribunal sided with the assessee on these points.

Conclusion: Additions under sections 68 and 69 based on third-party documents without direct nexus to the assessee were deleted. The AO was directed to initiate proceedings in the relevant assessment years where direct linkage existed.

Issue 2: Additions on Account of Out-of-Books Sales and Unexplained Payments

Legal Framework and Precedents: The principle that only reasonable profits from out-of-books sales can be added, rather than the entire turnover, is recognized. The burden lies on the Revenue to prove concealment and unexplained income.

Court's Interpretation and Reasoning: The Tribunal observed that the sales and purchase registers related to Rama Central Store, a group company, and that the assessee was a separate legal entity. The CIT(A) restricted the addition to the reasonable profit earned by Rama Central Store rather than the entire turnover. The Tribunal agreed with this approach.

Key Evidence and Findings: The assessee submitted purchase and sales registers and profit and loss accounts. The AO had made additions based on the entire turnover found in seized digital data. The CIT(A) and Tribunal restricted additions to profits only.

Application of Law to Facts: The Tribunal applied the principle of separate legal entity and accepted the CIT(A)'s approach to tax only profits, not gross turnover, in the hands of the group company, not the individual assessee.

Treatment of Competing Arguments: Revenue sought to sustain additions on entire turnover, relying on digital data. Assessee argued for deletion or restriction to profit. The Tribunal accepted the assessee's submissions.

Conclusion: Additions on out-of-books sales were restricted to reasonable profits and made in the hands of the relevant group company, not the individual assessee.

Issue 3: Additions on Account of Unexplained Cash, Jewellery, and Investments

Legal Framework and Precedents: Under sections 69A and 69, unexplained cash and unexplained investments can be added to income if the assessee fails to explain the source. The presumption under section 132(4A) applies to documents found during search but can be rebutted by evidence.

Court's Interpretation and Reasoning: The Tribunal examined the facts of cash found at premises of group companies and the assessee, jewellery seized from lockers, and investments in land. It accepted the assessee's explanation and evidence for cash and land purchases, leading to deletion of additions. Regarding jewellery, affidavits were filed claiming ownership by relatives, and the Tribunal held that the tax authorities must test such affidavits; failing which, the affidavits are presumed true.

Key Evidence and Findings: Cash of Rs. 6.4 lakhs found at group company premises was not added to the assessee. Cash of Rs. 42 lakhs found at assessee's premises was covered by surrendered income. Jewellery worth Rs. 29.42 lakhs was claimed to belong to relatives with affidavits supporting the claim. Land purchases were supported by bank statements and explanations.

Application of Law to Facts: The Tribunal applied the principle that unexplained cash and investments can be added unless satisfactorily explained. It accepted the assessee's explanations and evidence, including affidavits, leading to deletion of additions.

Treatment of Competing Arguments: Revenue emphasized lack of documentary evidence and sought to sustain additions. Assessee provided detailed explanations and evidence. The Tribunal favored the assessee where credible evidence was produced.

Conclusion: Additions on unexplained cash, jewellery, and investments were deleted where the assessee satisfactorily explained the sources and ownership.

Issue 4: Jurisdictional and Procedural Issues Regarding Assessment under Section 153A

Legal Framework and Precedents: Section 153A deals with assessment following search and seizure. Jurisdiction and procedural compliance are essential. The principle of natural justice requires adequate opportunity to be given to the assessee.

Court's Interpretation and Reasoning: The Tribunal noted that in some cases, the CIT(A) and AO passed orders without proper opportunity or relied on remand reports without giving the assessee a chance to respond. The Tribunal remitted such matters for fresh adjudication with proper opportunity.

Key Evidence and Findings: In AY 2011-12, the AO passed the assessment order with a backdated date before the search, raising procedural concerns. The CIT(A) sustained additions without allowing the assessee to respond to observations made in remand reports.

Application of Law to Facts: The Tribunal emphasized the need for compliance with natural justice and proper jurisdiction. It remitted the matter for fresh adjudication.

Treatment of Competing Arguments: The assessee argued for quashing the assessment for lack of jurisdiction and violation of natural justice. The Revenue defended the orders. The Tribunal sided with the assessee on procedural grounds.

Conclusion: The Tribunal allowed the appeal for statistical purposes and directed fresh adjudication with proper opportunity.

Issue 5: Additions Based on Digital Data without Certification under Section 65B of the Indian Evidence Act

Legal Framework and Precedents: Section 65B mandates certification for electronic records to be admissible as evidence. Without such certification, digital evidence may be inadmissible.

Court's Interpretation and Reasoning: The Tribunal noted that certain digital documents (Annexure A-36) were relied upon by AO without certificate under section 65B. The assessee challenged the admissibility. The Tribunal upheld the objection and disallowed additions based on uncertified digital evidence.

Key Evidence and Findings: The digital data was not accompanied by the required certificate under section 65B.

Application of Law to Facts: The Tribunal applied statutory evidentiary requirements and excluded the digital data from consideration.

Treatment of Competing Arguments: Revenue sought to rely on digital data; assessee challenged admissibility. Tribunal favored the assessee.

Conclusion: Additions based on uncertified digital data were disallowed.

Issue 6: Treatment of Interlinked Related Party Transactions and Application of Peak Credit Theory

Legal Framework and Precedents: In related party transactions, the peak credit theory is applied to avoid multiple taxation of the same amount. Additions should be based on net outstanding or peak balance rather than aggregate transactions.

Court's Interpretation and Reasoning: The Tribunal observed that transactions involving Mohit Kumar Shahdara and Shahdara Didi (relatives) were interlinked with opening and closing balances. The CIT(A) applied peak credit theory and sustained addition only to the extent of peak credit. The Tribunal further reduced the addition to the outstanding balance after considering repayments.

Key Evidence and Findings: Ledger accounts showed opening balances, credits, and debits during the year. Prior additions for opening balances were sustained in earlier years.

Application of Law to Facts: The Tribunal applied the peak credit principle to avoid double taxation and upheld addition only to the extent of net outstanding balance.

Treatment of Competing Arguments: Revenue sought to sustain full additions; assessee argued for peak credit approach. Tribunal agreed with the assessee.

Conclusion: Additions in related party transactions were restricted to peak outstanding balances.

Issue 7: Additions in the Hands of Individual Assessee Based on Documents Found in Group Companies and Lifting Corporate Veil

Legal Framework and Precedents: Companies are separate legal entities under the Act. Additions should be made in the hands of the entity to whom the documents belong unless there is sufficient material to lift the corporate veil.

Court's Interpretation and Reasoning: The Tribunal held that documents found in group companies cannot be attributed to individual assessee without material to lift the corporate veil. No such material was brought on record. Assessments were made in the respective companies.

Key Evidence and Findings: Documents were found in premises of group companies; no direct evidence linked them to the assessee individually.

Application of Law to Facts: The Tribunal upheld the principle of separate legal entity and rejected Revenue's attempt to attribute group company transactions to the individual assessee.

Treatment of Competing Arguments: Revenue argued for lifting corporate veil; assessee denied nexus. Tribunal sided with assessee.

Conclusion: Additions based on group company documents were not sustained in the hands of individual assessee.

Issue 8: Additions on Agricultural Income and Estimated Net Profit on Cattle Feed Business

Legal Framework and Precedents: Agricultural income is exempt but must be properly substantiated. Estimations of net profit must be based on relevant evidence and not mere assumptions.

Court's Interpretation and Reasoning: The Tribunal found that the CIT(A) sustained additions on agricultural income and net profit without giving proper opportunity to the assessee to substantiate. The Tribunal remitted the matter for fresh adjudication with opportunity to the assessee.

Key Evidence and Findings: The assessee submitted agricultural income and claimed receipts through mandi samiti. The AO and CIT(A) found evidence insufficient or illegible.

Application of Law to Facts: The Tribunal emphasized procedural fairness and proper opportunity to the assessee.

Treatment of Competing Arguments: Revenue supported additions; assessee sought deletion. Tribunal ordered remand.

Conclusion: Matter remitted for fresh adjudication on agricultural income and net profit additions.

3. SIGNIFICANT HOLDINGS

"No addition can be made on the basis of documents found from a third party without examining the third party and linking the contents of the documents with him."

"The presumption under section 132(4A) that documents found during search belong to the person searched can be rebutted by credible evidence, including affidavits, and the tax authorities are under obligation to test such evidence."

"Additions based on digital data without certificate under section 65B of the Indian Evidence Act are inadmissible."

"The corporate veil cannot be lifted merely because the assessee is a director or connected with group companies; additions must be made in the hands of the entity to whom the documents pertain."

"In related party transactions involving continuous credits and debits, the peak credit theory applies to avoid double taxation."

"Additions on account of out-of-books sales should be restricted to reasonable profits and made in the hands of the relevant entity."

"Proper opportunity of hearing and compliance with jurisdictional requirements under section 153A are mandatory; failure warrants remand or quashing of assessment."

"Additions on unexplained cash and investments can be deleted if the assessee satisfactorily explains the sources and ownership."

"Additions relating to agricultural income and estimated profits must be based on proper evidence and after giving opportunity to the assessee."

Final determinations included dismissal of Revenue's appeals for AYs 2011-12 and 2014-15, partial allowance for AYs 2012-13 and 2013-14, and partial allowance of assessee's appeals across assessment years. Some matters were remanded for fresh adjudication to ensure procedural fairness.