Addition made on account of third party evidence without establishing identity of Assessee not valid

Brief of the case:

In case of Prabhat Chandra S Jain Vs. ACIT Pune bench of ITAT have held that where it is not established that name PC Jain of Mumbai written in the said document was in fact the assessee before us and in the absence of any evidence having been found to establish that the assessee before us has received the said amounts from Shri Sohan Raj Mehta on account of M/s. DIL group, we find no merit in the aforesaid addition made in the hands of the assessee. Assessee’s name was mentioned in the documents founds during search. Revenue failed to establish that the person, whose name was mentioned in the documents, is the assessee. Additions could not be made on this basis. The assessee as well as revenue were in appeal against the order of CIT(A) and have raised their respective issues. The first issue of assessee is with regard to the addition made on account of third party evidence and second issue raised without prejudice is the application of GP rate @ 35% on unaccounted sales. The Revenue is in appeal against the application of gross profit rate @ 35% on the unaccounted sales.

Facts of the case:

• The assessee was a director in company Pragatiram Pvt. Ltd.
• A search and seizure action under section 132 of the Act was conducted on Rasiklal M Dhariwal (RMD) group of cases on 20.01.2010.
• The assessee was also searched under section 132(1) and notice under section 153A, in response to which the assessee furnished return of income declaring total income of Rs.3,43,610/- on 01.03.2011.
• AO observed that during the course of search action at the residential premises of Shri Mittulal at Bangalore on 09.10.2009, large number of incriminating documents were found and seized.
• AO further observed that some documents relates to unaccounted sale proceed and among the recipient of such sales proceed name of PC Jain of Mumbai was figured prominently at several places.
• As per the seized pages belonging to Bundle No.A/M/08 seized vide Panchanama dated 09.10.2009 AO observed that that the assessee had received sum of Rs.26,91,03,000/- from M/s. DIL through Shri Sohan Raj Mehta.
• Shri Sohan Raj Mehta (C&F agent of DIL) in his statement recorded on oath under section 132(4) of the Act stated that M/s. DIL had paid the aforesaid amounts to the assessee through him, as per instructions received from Shri Rasiklal M Dhariwal / Shri Prakash R Dhariwal.
• The assessee was asked to explain as to why sum of Rs.26.91 crores should not be added as his undisclosed income.
• The AO also referred to the retraction by Shri Mallikarjuna of Shimoga and also by Shri S. Balan of Pune and applying the test of human probabilities, held that after reading the seized documents as a whole, sum of Rs.1.76 crores received by the assessee during the instant year was to be treated as undisclosed income of the assessee and the addition to the extent of Rs.1.76 crores was made in the hands of the assessee.

Contention of the assessee:

• Assessee was a raw material supplier of M/s. DIL over many years and had transacted with the said concern during the said period of 2003 to 2008 as its raw material supplier.
• The assessee reiterated that he had not received any such sum totaling Rs.26.91 crores from Shri Sohan Raj Mehta as he denied in his statement recorded on the day of search.
• Assessee had not entered into any business transaction with Mr. Sohan Raj Mehta ever in his life and further none of these transactions were reflected in his books of account.
• Without giving assessee an opportunity of cross-examination, Shri Sohan Raj Mehta and obtaining the confirmation from Rasiklal Dhariwal and Shri Prakash Dhariwal, no addition should be made, as there were no unaccounted sales nor any receipt of money from Shri Sohan Raj Mehta.
• No addition could be made on the basis of accounts/entries in the books of third parties as the same were not sufficient to prove that the assessee had indulged in such transactions. Reliance in this regard was placed on series of decisions with lead decision in Addl.CIT. Vs. Miss Lata Mangeshkar reported in 74 ITR 696 (Bom).
• Without admitting the show cause notice, the assessee stated that in case suppressed sales are detected, the entire sales could not be taken as income and only reasonable net profit should be applied on suppressed sales.
• No corroborative evidence was found during the course of search on the premises of the assessee.
• There is no mention of any incriminating evidence found from the assessee in assessment order as well as in show cause notice.
• The documents relied upon by the AO to make the addition in the hands of the assessee were the documents found during the course of search on Shri Sohan Raj Mehta.
• The entries were in the name of P.C. Jain of Mumbai, however, there is no evidence available from the said documents that P.C. Jain referred to in the seized documents was the assessee i.e. Prabhat Chandra S. Jain. This query was raised before AO during assessment proceedings.
• During the course of search assessee had submitted that the documents, seized in the possession of Sohan Raj Mehta, did not belong to him. Further, no opportunity of cross-examination was provided to the assessee to cross-examine Shri Sohan Raj Mehta.
• Similar issue of addition on account of such entries in the seized documents found from the possession of Shri Sohan Raj Mehta, arose before various Benches of Tribunal, wherein consistent view has been taken that no addition is warranted on the basis of such documents.
• Reliance was placed on the decision of the Hon’ble Supreme Court in CBI Vs. V.C. Shukla & Ors. (1998) 3 SCC 410 and Vinod Solanki Vs. UoI & Anr (SC-Civil Appeal No.7407 of 2008) where it was held in any case in the absence of any other independent evidence to establish that there was escapement of income, no addition could be made in the hands of the assessee.
• The application of GP rate @ 35%, which was very excessive and high.
• The assessee in rejoinder pointed out that the assessee has no dealings with M/s. DIL in individual capacity. The company Pragatiram Pvt. Ltd. had transacted with M/s. DIL.
• With regard to the confirmation of Rasiklal and the Assessing Officer being the same, assessee pointed out that till date no statement of Rasiklal has been given to the assessee and in the absence of the same, it cannot be relied upon to make the aforesaid addition in the hands of the assessee.
• In Shri Vinit Ranawat Vs. ACIT (ITA Nos.1105 and 1106/PN/2013), Pune Bench of Tribunal had considered the facts at length and had held that where the assessee’s uncle and group companies were dealers of M/s. DIL, no addition was warranted in the hands of the assessee.

Contention of the revenue:

• Since evidence was seized during the course of search which was a speaking evidence to prove that the entire unaccounted business chain of it regarding unaccounted purchases, unaccounted manufacture, unaccounted packing, unaccounted printing, clandestine removal of goods, unaccounted sales and utilization of sale proceeds.
• In the case of M/s. DIL, entire unaccounted turnover was not brought to tax, instead gross profit of M/s. DIL was estimated and was taxed.
• AO further further observed that since M/s. DIL’s unaccounted expenses had been allowed as expenses by considering gross profit, it becomes imperative that the corresponding unaccounted income of recipient, in the form of raw material supply, etc. was also brought to tax as per law.
• The AO was of the view that in case the arguments of assessee that third party was no evidence, at all is accepted, the provisions of Evidence Act and section 147, 158BD and 153C of the Act would become redundant.
• During the course of search on the assessee on 20.01.2010, nothing was found from the possession of the assessee but However, on 09.10.2009, the said documents were found and seized from Shri Sohan Raj Mehta, in which he admitted that he was carrying on the said business of C&F agent of M/s. DIL.
• There is finding of CIT(A) that the assessee was a regular supplier of raw materials and since the assessee was connected to M/s. DIL, there was preponderance of probabilities.
• Case laws relied upon by the assessee have different facts to the case of assessee.
• Since the documents have been considered by the Assessing Officer as he was also the Assessing Officer of Shri Rasiklal Dhariwal, the addition in the hands of the assessee is justified, especially since Shri Sohan Raj Mehta has accepted the commission on such dealings.

Held by CIT (A):

• The seized documents which form the basis for addition was also provided and appropriate opportunity was given to the assessee, it could not be said that the Assessing Officer had not given proper opportunity of hearing to the assessee.
• Only net rate of profit can be applied in respect of goods sold outside the books of account and the taxing of the entire receipt by the Assessing Officer was not proper and correct.
• Estimation of gross profit rate at a higher level is to be taxed in the hands of the assessee. Consequently, GP rate of 35% on unaccounted sales was directed to be applied to work out the income in the hands of the assessee.

Held by ITAT:

• The facts of the present case are identical to the facts before Pune Bench of Tribunal in Shri Vinit Ranawat Vs. ACIT (supra).
• Where the assessee has denied to have received any payment from M/s. DIL through Shri Sohan Raj Mehta and in the absence of any incriminating documents having been found from the residence of the assessee during the course of search on 20.01.2010 and where the assessee is not dealing with M/s. DIL in his individual capacity, the ratio laid down by the earlier decision of Tribunal as referred to in Shri Vinit Ranawat Vs. ACIT (supra), is squarely applicable to the facts of the present case.
• The company Pragatiram Pvt. Ltd., in which the assessee is a director was supplying raw material to M/s. DIL and the assessee is not supplier of any items of raw material to M/s. DIL.
• Where it is not established that name PC Jain of Mumbai written in the said document was in fact the assessee before us and in the absence of any evidence having been found to establish that the assessee before us has received the said amounts from Shri Sohan Raj Mehta on account of M/s. DIL group, we find no merit in the aforesaid addition made in the hands of the assessee.
• ITAT set-aside the order of CIT(A) and directed AO to delete the addition of Rs.1.76 crores in assessment year 2004- 05. As the addition was deleted in the hands of the assessee, there is no merit in estimating any gross profit on such undisclosed receipts.