2025 (7) TMI 172 - AT - Income Tax

Unaccounted income received from a contractor - whether corroborative evidence found and/or seized from the possession of the appellant during search operation on the same day? - HELD THAT -The facts of the case of the assessee are similar to the case of Rajeshwar Singh Yadav 2023 (9) TMI 201 - ITAT DELHI who was also allegedly receiving money from Ajay Kumar contractor as he was also employed as Executive Engineer of the Irrigation and Water Department of the Government of UP like the present assessee. Thus there being no substantial difference in the facts and not entering into the discussion on appreciation on first principles as there is nothing substantial material to differentiate with the case of the assessee therefore the additions made on that account deserves to be deleted in both the years and corresponding grounds are sustained. Unexplained jewelry - as submitted that daughter of the assessee was engaged on 10.06.2017 and some gold ornaments were offered by her in laws that are also included while search was conducted on 16.06.2017 - her prospective groom was working in Paris since 2014 and belonged to a well to do family. Thus at the time of engagement of his daughter the assessee had received contribution and ceremonial gifts from friends and relatives - HELD THAT - Statement made by Smt. Pushpa Sharma wife of assessee showing ignorance with regard to the jewellery of Shweta Sharma was out of stress as Smt. Pushpa Sharma was at home at the time of search and the assessee was not at home and may be it slipped the attention. The ld.CIT(A) however declined to take into account the statement recorded on 01.08.2017 i.e. 45 days after the date of search. We are of the considered view that there was no justification with the Revenue to make an addition on account of 76.064 gms of Rs. 2, 76, 101/- when out of total 1651.046 gms remaining jewellery is found to be duly explained and justified from the sources of the assessee who is a public servant. It is unreasonable to expect an explanation to the precision with so many family members being given the benefit of their respective holdings as per the CBDT Instruction No.1916 of 1994. A mathematical approach for making an addition of 76.064 is not prudent so as to be sustained. Thus we are inclined to sustain the explanation given by the assessee.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal in this appeal are:

• Whether the additions made on account of alleged unaccounted income received by the assessee from a third party contractor, based on documents seized from the contractor's premises and identified as Annexure D-1, D-6, and LP-4, are sustainable in the absence of corroborative evidence found from the assessee's premises or independent inquiries?
• Whether the presumption under sections 132(4A) and 292C of the Income Tax Act can be invoked in respect of the said documents found from a third party to justify additions in the hands of the assessee?
• Whether the addition made on account of unexplained jewellery found from the premises of the assessee is justified, particularly when a substantial portion of the jewellery is explained and reconciled to the family sources, and whether the residual addition is reasonable?
• Whether the assessing authority and the first appellate authority erred in their appreciation of evidence and application of law, including reliance on surmises, conjectures, and hypothetical reasoning?
• Whether penalty and interest under sections 271AAB(1A) and 234A/B/C are justified in light of the above issues?

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Legitimacy of additions based on documents seized from third party contractor's premises

Relevant legal framework and precedents: The Tribunal examined the applicability of presumptions under section 132(4A) and section 292C of the Income Tax Act, which allow certain presumptions to be drawn regarding seized documents during search and seizure operations. However, these presumptions apply only if the documents are found in the possession of the assessee or closely connected persons and if corroborative evidence is available.

Court's interpretation and reasoning: The Tribunal noted that the documents relied upon (D-1, D-6, and LP-4) were seized from the premises of a third party contractor, and no corroborative or incriminating evidence was independently found from the assessee's possession during the search. The Tribunal relied on a coordinate Bench decision in a similar case involving the same contractor, where identical documents were held to be "dumb documents" lacking evidentiary value because no live nexus was established between the payments noted in the documents and the assessee.

Key evidence and findings: The documents were ledger registers and loose papers indicating payments allegedly made to the assessee. The assessing officer verified some payments through bank records and confirmations from firms. However, the Tribunal emphasized that these documents were not found in the assessee's possession, and no independent enquiry was made to establish a direct connection.

Application of law to facts: Since the presumptions under sections 132(4A) and 292C cannot be invoked for documents found only in third party possession without corroborative evidence, the additions based solely on these documents were not sustainable.

Treatment of competing arguments: The Revenue argued for the validity of the additions based on the documents and bank verifications. The assessee contended that the additions were based on surmises and conjectures without direct evidence. The Tribunal agreed with the assessee, following the precedent that such documents without corroboration cannot be the basis for additions.

Conclusions: The Tribunal deleted the additions of Rs. 36,51,000 for AY 2017-18 and Rs. 40,00,000 for AY 2018-19 made on account of alleged unaccounted income received from the contractor.

Issue 2: Addition on account of unexplained jewellery found during search

Relevant legal framework and precedents: The CBDT Circular No. 1916 of 1994 provides guidance on the treatment of jewellery found during search operations, allowing for reasonable explanation and reconciliation of jewellery held by family members.

Court's interpretation and reasoning: The assessing officer found jewellery weighing 1651.046 grams at the assessee's premises and disallowed 201.046 grams as unexplained. The CIT(A) sustained an addition of Rs. 2,76,101 out of the total Rs. 7,29,940 disallowed. The assessee submitted that jewellery was received as gifts during the engagement of his daughter, with contributions from relatives and the daughter-in-law's jewellery kept with the wife. The Tribunal observed that the CIT(A) did not adequately consider the statement recorded 45 days after the search, which explained the jewellery's origin.

Key evidence and findings: The assessee's family circumstances, including the daughter's engagement and gifts received, were significant. The Tribunal found it unreasonable to expect precise segregation of jewellery among multiple family members during a search, especially when the majority of jewellery was satisfactorily explained.

Application of law to facts: Applying the CBDT Circular and principles of reasonableness, the Tribunal held that making an addition for 76.064 grams of jewellery was imprudent and not justified.

Treatment of competing arguments: The Revenue relied on the initial assessment and CIT(A)'s partial confirmation. The assessee emphasized the family context and the explanation for the jewellery. The Tribunal sided with the assessee, noting the lack of justification for the residual addition.

Conclusions: The Tribunal deleted the addition of Rs. 2,76,101 relating to unexplained jewellery for AY 2018-19.

Issue 3: Penalty and interest under sections 271AAB(1A) and 234A/B/C

The assessee challenged the imposition of penalty and interest on the basis that the additions themselves were not sustainable. Since the Tribunal deleted the additions related to unaccounted income and jewellery, the penalty and interest consequential thereto were also held to be unjustified. The Tribunal did not explicitly elaborate on penalty provisions but implied their invalidity following deletion of additions.

3. SIGNIFICANT HOLDINGS

"The coordinate Bench, vide order dated 11.01.2023, has considered the ledger registers marked as D-1, D-6 and loose paper marked as LP-4 to be documents for which presumption u/s 132(4A) and section 292C of the Act cannot be invoked as no corroborating and incriminating evidence was independently found from the search of the assessee, thus, alleged incriminating documents cannot be relied for making additions in the hands of the assessee and the documents were found to be dumb documents having no evidentiary value."

"It is unreasonable to expect an explanation to the precision with so many family members being given the benefit of their respective holdings as per the CBDT Instruction No.1916 of 1994. A mathematical approach for making an addition of 76.064 grams is not prudent so as to be sustained."

Core principles established include:

• Documents seized from a third party cannot be used to make additions against an assessee unless corroborative evidence is found in the assessee's possession or independent inquiries establish a nexus.
• Presumptions under sections 132(4A) and 292C are not automatic and require the documents to be found in the possession of the assessee or closely linked persons.
• Reasonableness and family context must be considered when additions are made on account of jewellery found during search operations, following CBDT instructions.
• Additions based on surmises, conjectures, and hypothetical reasoning without live nexus or corroboration are not sustainable.

Final determinations were that the additions of Rs. 36,51,000 and Rs. 40,00,000 for AY 2017-18 and 2018-19 respectively, on account of alleged unaccounted income, were deleted; and the addition of Rs. 2,76,101 on account of unexplained jewellery was also deleted. Consequently, the appeals were allowed.