Mani Square Ltd Vs ACIT (ITAT Kolkata)
ITAT Kolkata allowing appeal of addition of 214 crores (approx) on host of issues on search assessment mainly on 1) Incriminating material 2) addition u/s 68 for unsecured loans 3) Alleged Undisclosed on money consideration and Theory of extrapolation 5) Cash Purchases 6) Unexplained expenditure also deciding basis of Evidentiary value of Third party statement and Cross examination angle . (all imp judgements referred) .
Ist aspect
16. Considering the judicial precedents (supra) on the subject, particularly the decision of the Hon’ble jurisdictional Calcutta High Court in the case of PCIT vs Salasar Stock Broking Ltd. (supra) which is binding upon this Tribunal as well as the Hon’ble Apex Court decision, we hold that in the case of unabated assessments of an assessee, no addition is permissible in the order u/s 153A of the Act unless it is based on any tangible, cogent and relevant incriminating material found during the course of search qua the assessee and qua the AY
IInd aspect
The nature of the evidence or information gathered during the search should be of such nature that it should not merely raise doubt or suspicion but should be of such nature which would prima facie show that the real and true nature of transaction between the parties is something different from the one recorded in the books or documents maintained in ordinary course of business. In some instances, the information, document or evidence gathered in the course of search, may raise serious doubts or suspicion in relation to transaction reflected in regular books or documents maintained in the ordinary course of business, then in such event the AO is not permitted to straightaway treat such material as ‘incriminating’ in nature unless the AO thereafter brings on record further corroborative material or evidence to transform his suspicion to belief and conclude that the transaction reflected in regular books or documents did not represent the true state of affairs and rather that can be the starting point of inquiry to un-earth further material or evidence to transform his suspicion to belief and conclude that the transaction reflected in regular books or documents did not represent the true state of affairs. Until these conditions are satisfied, it cannot be held that every seized material or document found in the course of search as incriminating in nature qua the assessee justifying the additions in unabated assessments. In other words, any and every seized material which comes in AO’s possession cannot be construed as ‘incriminating material’ straightaway. For instance, scribbling or rough notings found on loose papers cannot be straightaway classified as ‘incriminating material’ unless the AO establishes nexus or connect of such notings with unearthing of undisclosed income of the assessee. This nexus or connect has to be brought out in explicit terms with corroborative material or evidence which any prudent man properly instructed in law must be able to understand or correlate so as to justify the AO’s inference of undisclosed income from such seized incriminating material.
IIIrd aspect
Upon going through the above response to the RTI query, we find substance in the Ld. AR’s submission that when Shri Satyam Bubna had stated that these documents i.e. RB/12 were rough calculations, the AO of M/s Satyam Bubna HUF accepted his submission and neither drew any adverse inference nor made any addition on account of alleged cash payments in its hands as unexplained expenditure; then as a corollary the very same document cannot be said to constitute incriminating material or evidence qua the assessee. We further note that the assessee has also placed the copy of the sale deed dated 30.06.2014 along with its ledger at Pages 340 to 380 of the convenience compilation from which it is evident that all the transactions involving receipt of payments in lieu of sale of flat & car park to M/s Satyam Bubna HUF was conducted through proper banking channel without there being any involvement of cash. For the reasons discussed in the foregoing, we therefore hold that documents ID marked RB/12 cannot be construed to be ‘incriminating’ in nature qua the assessee for drawing adverse inference and so it cannot be considered as a basis for making any addition against the assesse.
IVth aspect
We also find merit in the Ld. AR’s alternate contention that the documents ID marked RB/12 was a third party document found in the course of search conducted on a different person i.e. Ambica Dhatu Group and not the assessee; and therefore this document did not constitute incriminating material found in the course of search at the premises of the assessee, based on which any addition could be validly made in assessment u/s 153A of the Act. In this regard, we may gainfully refer to the Hon’ble Delhi High Court in the case of Pr. CIT vs Subhash Khattar in ITA No. 60 of 2017 dated 25.07.2017 wherein the Hon’ble Court, on similar facts, held that, no addition is permissible in an unabated assessment u/s 153A of the Act on the basis of evidence gathered in the course of search conducted against other third parties. The relevant facts involved in this judgment and the findings of the Hon’ble High Court are as follows:
The facts leading to the filing of the present appeal are that a search took place on 17th August, 2011 in the corporate office of AEZ Group at 301-303, Bakshi House, Nehru Place, New Delhi during which a hard disc was found and seized from which, a print out of a file named “D.P. Correction Sheet.xls” was taken. This sheet contained details of Sales Status of lndirapuram Habitant Centre and at serial No. 32 of the said sheet, the name of the Assessee appeared. According to the Revenue, the Assessee had invested a sum of Rs. 20 crores. Therefore, on 10th February, 2012, a search operation was undertaken under Section 132 of the Act in the case of the Assessee. There is no dispute that this search did not result in the discovery of any incriminating material qua the Assessee. ……. 6. The Assessee went in appeal before the Commissioner of Income Tax (Appeals) who dismissed it by an order dated 27th November, 2014. A further appeal was filed by the Assessee before the ITAT. The ITAT, inter alia, found substance in the contention of the Assessee that the assessment under Section 153(A) of the Act, in the absence of any incriminating material found during the search on the premises of the Assessee was not sustainable in law. Reliance was placed on the decision of this Court in Commissioner of Income Tax v. Kabul Chawla, [2016] 380 ITR 573. 8. Consequently, the impugned order of the ITAT calls for no interference of this Court. The question framed by this Court on 7th February, 2017 is answered in negative, that is, in favour of the Assessee and against the Revenue.” 7. A question was posed to the learned counsel for the Revenue whether in the present case anything incriminating has been found when the premises of the Assessee was searched. The answer was in the negative. The entire case against the Assessee was based on what was found during the search of the premises of the AEZ Group. It is thus apparent on the face of it, that the notice to the Assessee under Section 153A of the Act was misconceived since the so-called incriminating material was not found during the search of the Assessee’s premises. The Revenue could have proceeded against the Assessee on the basis of the documents discovered under any other provision of law, but certainly, not under Section 153A. This goes to the root of the matter. 8. Consequently, the impugned order of the ITAT calls for no interference of this Court. The question framed by this Court answered in negative, that is, in favour of the Assessee and against the Revenue.” (emphasis supplied by us )
Vth aspect
And moreover, if the AO wanted to still rely on the statements of third party to draw any adverse inference against the assessee/IQCIPL/Appellant, then he was duty bound to furnish a copy of the third party statement to assessee/IQCIPL/Appellant and then summon the third parties and examine them himself and thereafter allowed the assessee/IQCIPL/Appellant an opportunity to cross examine and thereafter if he is satisfied about the veracity of their statements then he can rely on such statement, which unfortunately the AO has not done, so the third party statement cannot be relied upon by the AO to draw adverse inference against the assessee/ IQCIPL/Appellant. It has to be kept in mind that wide though his power, the AO must act in consonance with the rules of Natural Justice. One such rule is that he shall not use any material against the assessee without giving him an opportunity to meet it. In short, the AO cannot assess keeping the assessee in dark as to the materials against him. And even after the material/statement is furnished to the assessee, and the assessee contest the veracity of the statement against him, then the AO is bound to give an opportunity to the assessee to test the veracity of the statement on the touch stone of cross examination and thereafter only the AO can rely on the statement or else he cannot be allowed to rely on the statement of the third party against the assessee. (Refer Hon’ble Supreme Court decision in Andaman Timber Industries in Civil Appeal No. 4228 of 2006). In the circumstances we find merit in the Ld. AR’s claim that the third party statements relied upon by the AO without even recording their statement and allowing the assessee to cross examine, cannot justify the additions u/s 68 & 69C and the statements cannot be said to be incriminating material or documents found and/or collected in the course of search conducted against the assessee and so, cannot be used against the assesse
VIth aspect
Additionally, we also find merit in the Ld. CIT(A)’s reliance on the following decisions holding that the theory of extrapolation cannot be applied on mere theoretical or hypothetical basis in absence of any incriminating & corroborative evidence or material brought on record by the AO to warrant the same.
(A) C.J. Shah & Co., [2000] 246 ITR 671 (Bombay H.C.)
“3. It is well-settled that in cases where material is detected after search and seizure operations are carried out, the Assessing Officer is required to determine the undisclosed income. In such cases additions are generally based on estimates. In matters of estimation some amount of latitude is required to be shown to the Assessing Officer, particularly when relevant documents are not forthcoming. However, it does not mean that the Assessing Officer can arrive at any figure without any basis by adopting an arbitrary method of calculation. In the present matter, A3, A4 and A6 nowhere records the turnover of the assessee as found by the Tribunal and yet on the wrong basis of the incoming and outgoing cash transactions, the Assessing Officer has arrived at the turnover. Moreover, the peak investment was Rs. 40,14,806 for three months. However, there is no material seized to justify any figure to be included for a period earlier to the said period of three months. In the circumstances, the Tribunal has recorded a finding of fact and has held that the addition of Rs. 3.40 crores was totally unjustified. The entire finding of the Tribunal is based on the facts. No substantial question of law arises. Hence, the appeal is dismissed.”
7th aspect
It is to be appreciated that this is a case of two unrelated parties i.e. lender and borrower, brought together by a finance broker, and the loans were given and thereafter repaid along with interest through banking channel after deducting tax on it.Accordingly when there was no continuing relationship with the loan creditors, then post the conclusion of such loan transactions and applying the tests of human probabilities, the non-attendance/ non-service of summons by the loan creditors could not be viewed adversely by the AO in the light of the evidences furnished by the assessee on this issue we discussed supra. In the present case on hand, considering the facts and circumstances discussed, such non-compliance alone cannot be the decisive fact to justify the impugned addition in the hands of the appellant, particularly when the appellant had furnished all the relevant documents which it was required to maintain in ordinary course to substantiate its loan transactions with independent third party loan providers.
According to Ld. AR’s plea section 68 of the Act nowhere prescribes that the identity, creditworthiness and genuineness of the transaction should be proved by an assessee only by producing concerned creditors for personal examination by the AO. It is true that section 68 of the Act does not require so. However, it is insisted when there is reasonable doubt as to the identity, creditworthiness and genuineness of the transactions. Presence of creditor before the AO in such case is a Rule of Prudence to repel the doubts if any in the mind of the AO. However, in this case on hand we note that the appellant/assessee had furnished the requisite documentary evidences; to substantiate the loan creditors’ identity, creditworthiness and genuineness of the transactions. Having received these documents, the AO was not able to point out as to which other documentary proof was required or expected by him, which had not been submitted by the appellant/assessee, or found any infirmities on these documents. On these facts and in our considered view therefore the adverse inference drawn by the AO u/s 68 and 69C of the Act solely on the premise that the summons went non-complied or remained unserved was not justified.
8th aspect
Ld. AR has pointed out to us that the so-called entry operators were not even shareholders or directors of the loan creditor companies. We also note that although the AO had heavily relied upon the statements of the sundry creditors/entry operators, the AO had neither personally or independently examined even a single entry operator in the capacity as the Assessing Officer to verify the correctness of the facts or to dig or probe and unearth the link if any with the Appellant/assessee. However, the unfortunate part is that the AO blindly relied on the bald statements of these operators and in the process has not brought out any link to connect them with the Appellant/assessee. And if the AO wanted to use the statements of the so-called entry operators, then the AO during the assessment proceedings ought to have summoned these entry operators and examined them thoroughly and should have unearthed the links, materials or relevant evidences if any against the appellant/assessee and thereafter called the assessee and confronted him with any materials or statement which he discovers and which material he wishes to rely against the assessee and after giving an opportunity to assessee to cross examine the maker of the statement etc, and in the event, the maker of the statement could pass the cross examination, then the statement of the entry provider could have been acted upon by the AO against the assessee or he cannot use it against the assessee. The lack of enquiry of AO by not even summoning these operators and reliance of their statements, how it affects the action of AO can be seen from the following facts.
9th aspect
74. In view of the above judicial precedents (supra), we note that in the facts of the present case, save and except extracting the statements of so-called entry operators, the AO did not bring on record any credible evidence/material which could show that the appellant had routed its unaccounted monies in the form of bogus loans. In fact the AO himself never examined any one of the persons whose statements were relied upon by him in the assessment order nor did he grant the appellant/assessee an opportunity to cross-examine the witnesses whose statements were extracted in the assessment order. Except the bald references to the recorded statements, the AO did not bring on record any material which could link the appellant with any wrong doing as held by him that the assessee’s unaccounted monies were introduced in the garb of unsecured loans. For the reasons set out in foregoing, we are of the considered view that the AO’s failure to personally examine the witnesses and his denial to allow the appellant opportunity to cross examine the third parties/Departmental witnesses on whose statements he was relying upon was a serious and fundamental error which resulted in the additions as well as the action of AO to point out any material and irrelevant to justify the addition made u/s 68 & 69C of the Act in the assessment order untenable and so it cannot be sustained.
10th aspect
75. Moreover, as noted by us supra, the AO in the most perfunctory manner and based on conjecture rejected the financial capacity of the loan creditors to advance loans. Before drawing adverse inference regarding creditworthiness, the AO did not objectively apply his mind to the financial statements submitted before him from which it was prima facie apparent that the loan creditors possessed sufficient funds out of which the loans could be advanced. The financial statements also demonstrated that the loan creditors were otherwise engaged in the business of granting loans to other parties and in the course of their financing business, the appellant was granted loans carrying commercial interest rates. Before rejecting the appellant’s explanation regarding the creditworthiness of the parties, the AO was required to demonstrate with cogent fact that financial position of the loan creditor in fact was weak consequent which they would not be in a position to advance the loan amounts. Even in such case, where the financial position was doubtful and yet the loan creditor had accepted the fact of granting loan, then in such case it is not proper for the AO to brand the creditor as unworthy of credence. In such a scenario, the AO should enquire from the AO of the loan creditor as to the genuineness of the transaction as to whether the loan creditor’s AO has accepted the loan transactions as genuine or not. Without doing this exercise the AO of the loan taker (debtor) cannot brand the loan creditor as unworthy of credence. Here, in this case on hand, the AO has not done this exercise and these loan creditors all are income tax assessees and all their detail were furnished before the AO and they have all shown the interest income as their income and while paying interest, the assessee had deducted tax at source also.
11th aspect
This action of the lower authorities has been challenged by the appellant/assessee as untenable both factually as well as legally. It is true that Section 132(4A) read with Section 292C of the Act, raises a presumption that that the contents of books of account and other documents seized during the course of search is true. But it should be kept in mind that this presumption is only qua the person who is searched and/or from whose possession the books of account and documents are found and none else. Moreover this presumption is rebuttable. In the given facts of the case, since the documents in question was not found or impounded from the appellant’s premises but in the course of survey (not search) conducted against a third party, the presumption set out in Section 292C of the Act does not apply to the appellant. The appellant/assessee, therefore, is legally entitled to an opportunity of examining these documents, which were admittedly not impounded from its premises, and can seek cross examination of the third party from whose possession such document was found and furnish its rebuttals and defence with cogent evidence.
12th aspect
8. From the facts on record, it is abundantly clear that M/s Abasan Realty LLP did not perform its obligation agreed in the sub-lease agreement for which dispute was referred for arbitration/reconciliation to fellow builders. It is noted that even after the award of the fellow builders, M/s Abasan Realty LLP did not act on the same. Neither did it pay the interest which it was/is required to pay within 31-10-2015 nor did it ensure that the bottlenecks in construction are removed and the work resumed. Instead, the construction got suspended and no payment was ever made to the appellant by either M/s Abasan Realty LLP or Shri Hari Sharma. In the circumstances it is erroneous to hold that the appellant/assessee could have been able to realize interest from M/s Abasan Realty LLP or Shri Hari Sharma in real terms. Further such compensatory interest determined in terms of an award, by its very nature is such that unless the payment is actually received from the defaulter, one cannot estimate its chances of realization. In fact, the AO did not bring on record any cogent documentary evidence/material to support his findings that in terms of any legally enforceable award or decree of the court or arbitral tribunal, the assessee had acquired any vested right to receive such interest. In the present case the CFO of the appellant had unilaterally made calculations of expected interest without there being demand from the appellant. Accordingly, since no ‘real’ income had accrued or was received in the relevant year, the interest computed and added by the AO on mercantile basis could not be brought to tax in the hands of the appellant. Before imposing tax on any sum it is necessary for the Revenue to establish that the income assessable is “real income” which legally accrued during the relevant year. Unless, in fact, an assessee earns income in the real sense; there cannot be charge of tax. This legal proposition is laid down by the Hon’ble Supreme Court in the following cases. 1) UCO Bank Vs. CIT (237 ITR 889) 2) CIT Vs. Shoorji Vallabhdas (46 ITR 144) 3) Godra Electricity Co. Ltd Vs. CIT (225 ITR 746)
FULL TEXT OF THE ITAT JUDGEMENT
All these cross appeals preferred by the revenue and assessee are against the common order of Learned Commissioner Income Tax (Appeals)-21 [herein after referred to as Ld. CIT(A)], Kolkata dated 13.08.2019 for AYs 2013-14 to 2017-18. Since issues involved are common, all the appeals for all the assessment year/years (hereinafter referred to as “AY”) were heard together. Both the parties also argued them together raising similar arguments on these issues. Accordingly, for the sake of convenience and brevity, we dispose all the appeals by this consolidated order.
2. Before we advert to the grounds taken in the cross appeals, it would first be relevant to cull out the basic facts of the case and effect of law in brief in respect of certain AY’s. Search u/s 132 of the Income Tax Act, 1961 (hereinafter referred to as “the “Act”) was conducted against the Mani Group, on 22-06-2016 thereby triggering section 153A of the Act. Prior to the date of search, the income-tax assessment under section (hereinafter referred to as “u/s.”) u/s 143(3) of the Act (scrutiny assessment) for AY 2013-14 stood already completed on 29-03-2016 i.e. (two months before the search). Accordingly, the assessment for AY 2013-14 did not abate consequent to the search on 22.06.2016. The original return of income for AY 2014-15 was filed on 30-03-2016 and the time limit for issuance of notice u/s 143(2) of the Act had not expired as on the date of search. Accordingly AY 2014-15 was an abated assessment year. With regards AY’s 2015-16, 2016-17 & 2017-18, it was pointed out that the returns of income for all these years were filed only after the date of search. Therefore, except AY 2013-14, all the other AYs 2014-15, 2015-16, 2016-17 & 2017-18 were abated assessments. The summary of the additions/disallowances in Rupees made by the Assessing Officer (in short the AO) which are in dispute in the cross appeals for AYs 2013-14 to 2017-18 are as follows:
