Rejection of special auditor report without specifying reasons inexplicable

DCIT Vs Natural Food Products (ITAT Chennai)

ITAT Chennai held that in the present case AO himself referred the matter for special audit u/s 142(2A), however, report of special auditor was later rejected without assigning any reasons for the same is in explicable.

Facts- The Appellant is engaged in the business of trading of eggs, dhal, oil and sugar. The main product supplied by the appellant during the period was Egg (hen) which was supplied as per the terms of the contract entered with ICDS and Noon Meal Scheme of Govt. of Tamil Nadu.

A search and seizure, u/s. 132 of the Income Tax Act was conducted on 5-7-2018 in the premises of the appellant. During the course of search on 5-7-2018, a statement u/s. 132(4) is said to have been recorded from Mr.T.Gnanasekaran Accounts Manager.

A notice u/s. 153C of the Act was issued. In response to the said notice, the assessee has filed return of income for Asst. Years 2015-16 to 2018-19 and for Asst. year 2010-11 on 03-08- 2021 and declared total income which has been declared in the return of income filed u/s. 139(1) of the Act for all assessment years. The case was selected for scrutiny. Special audit was directed, however, AO rejected the audit report and made additions towards undisclosed income on account of profit earned from bogus bought note purchase and sales and also made addition towards income generated from transaction with dummy entries.

CIT(A) deleted additions towards bogus purchases through dummy entries, whereas, enhanced the assessment and directed the AO to make additions towards unexplained expenditure u/s. 69C of the Act, as per supplementary special audit report issued by the auditor and quantified unexplained expenditure in respect of unidentified entries in Erandamthall and apportioned to the appellant and three entities and for all assessment years. Being aggrieved, both revenue and assessee has preferred the present appeal.

Conclusion- In our considered view, the AO did not bring any evidence on record in respect of alleged manipulation of supply quantities by making necessary enquiries with the relevant Govt. departments. Therefore, we are of the considered view that these reasons cited by the AO are unfounded. Further, as could be seen from the discussion in the appellate order, the CIT(A) has given detailed factual reasons in support of his finding that the rejection of first special audit report by the AO is not sustainable. The revenue has not disputed even a single fact finding of the CIT(A) given based on analysis and appreciation of the facts and circumstances of the case and the contents of the first special audit report. In view of this, the contention of the revenue that the CIT(A) erred in holding that the rejection of first special audit report by the AO is not sustainable is false, baseless and total non-application of mind by the AO.

Held that having proposed examination of contents of Erandamthall by the special auditor, the AO completely ignored the special auditor’s report dated 15.04.2021 while completing the assessments. The AO did not even mention the fact that a report was called for from the special auditor on this issue in the assessment orders. The AO remained completely silent with regard to the said report and its contents. This is surprising since the AO himself referred the matter for special audit u/s 142(2A) and obtained the report in pursuance thereof. The AO has not made any discussion in the assessment order regarding the reasons for not accepting the said report. In this factual background, the disregarding of the report of the special auditor obtained subsequently without assigning any reasons for the same is inexplicable and the said action of the AO only adds strength to the appellant’s contention regarding the mechanical manner of adopting the quantification of unaccounted expenditure based on entries in Erandamthall made during the course of search, without addressing various objections and contentions of the appellant. The report of the special auditor obtained by invoking the provisions of the Act could not have been ignored and disregarded by the AO, without specifying the reasons for doing so in the assessment orders.

FULL TEXT OF THE ORDER OF ITAT CHENNAI

1. This bunch of Nine cross appeals filed by the assessee and, as well as the Revenue are directed against common order passed by the ld. Commissioner of income tax (Appeals)-19, Chennai, dated 03-09-2022 and pertains to Asst. Year 2010-11, 2015-16 to 2018­19. Since, facts are identical and issues are common, for the sake of convenience, these cross appeals filed by the assessee and the Revenue are being heard and disposed off together, by this consolidated order.

2. The assessee has more or less raised common grounds of appeal for Asst. Years2015-16 to 2018-19. Therefore, for the sake of brevity, grounds of appeal filed in ITA No. 880/Chny/2022 for the Asst. Year 2015-16 are reproduced as under:

1. The order of the learned CIT(A) in so far as it is against the Appellant is contrary to law, erroneous and unsustainable on the facts and in the circumstances of the case.

2. The learned CIT(A) is erred in not appreciating that without reason to believe and without warrant of authorization required to be issued in the case of the appellant, search & seizure and subsequent proceedings including issuance of notice U/s 153C is bad in law.

3. The learned CIT(A) is erred in not appreciating that the illegalities in conducting search and seizure proceedings as against the appellant is bad in law.

4. The leaned CIT (A) ought to have held that issuance of notice u/s 153C of Income Tax, 1961 and subsequent assessment proceedings are without authority and without jurisdiction on any and each of the following grounds;

a. The transfer of file from jurisdiction Namakkal to Central Circle, Chennai is not in accordance with law as laid down u/s 127 of income Tax, 1961.

b. As per section 132(1) r/w 132(9A) of Income Tax, 1961 the materials handed over to the Assistant Commissioner of Income Tax, Central Circle – 2(1) is without jurisdiction. In such a scenario, the materials become nonexistent in the eyes of law before the assessing officer under Section 153A thereby issuance of notice u/s 153C of Income Tax, 1961 is illegal.

c. without prejudice to the legal position taken by the appellant as stated above the material has been handed over to the Assistant Commissioner Income Tax central circle 2(1) beyond the mandatory period of 60 days contemplated u/s 132(9A), thereby the materials are non-existent as per law.

d. Clause 1.3 of the circular F._ No: 286/161/2006-IT (Inv.II) dated 22/12/2006 on the receipt of the material examination note required to be prepared jointly by the range head and the Assessing Officer for issuing the notice u/s 153A or 153C of Income Tax Act, 1961 as the case may be. However, in our case, without preparation of examination note, the notice was issued u/s 153C of Income Tax Act, 1961, thereby the notice and the subsequent proceedings are illegal.

e. When the entire issues are pending before Authority of Advance Ruling, Mumbai, the assessment order has been passed without any jurisdiction and the same is therefore illegal.

5. The learned CIT(A) ought to have held that the entire assessment order is based on the statements of the employees and third parties were recorded during the search proceedings and the same do not carry any evidentiary value and cannot be held against the appellant as the same were retracted within reasonable time on the ground that they were pre-drafted statements obtained under coercion, threat and physical abuse and particulars and facts are contradictory within the statements, hence all such statements relied by the revenue have lost it evidentiary value, thereby the assessment order is illegal.

6. The learned CIT(A) erred in upholding the legality of the assessment order though the assessing officer proceeded to exercise the jurisdiction and pass the assessment order without complying the mandatory provisions of section 124(4) of Income Tax Act, 1961 in response to the objection to his jurisdiction filed by the appellant within the time specified under section 124(3) of Income Tax Act, 1961.

7. The learned CIT(A) ought to have held that the assessment order is null and void in view of Sec 153D on any and each of the following grounds:

a. The approval u/s. 153D of Income Tax Act, 1961 which is contrary to the deviation note endorsed by learned Addl. Commissioner and the approval was given mechanically and without application of mind particularly when the Assessing Officer declined to provide a copy of the deviation note during remand proceedings.

b. The approval has not been accorded as per the procedure laid down under F.No: 286/161/2006-IT (Inv.II) dated 22/12/2006.

c. The learned Addl. Commissioner neither discussed the illegalities raised by the Appellant nor applied his mind that the Assessing Officer also failed to consider independently the illegalities agitated by the Appellant in the draft assessment order while according the approval, thereby the approval and assessment order fails.

d. While giving the approval, the Addl. Commissioner failed to apply his mind that in the draft assessment order, the Assessing Officer has indicted the Appellant based on certain evidence which have not been raised in the Show Cause Notice. This apparent flaw on the part of Addi. Commissioner makes the approval and assessment order illegal.

e. Instead of giving approval u/s 153D of Income Tax Act, 1961, after examining the draft assessment order submitted by the Assessing Officer, as against law, the Addl. Commissioner directed to incorporate certain alleged findings on suo moto basis without any proposal from Assessing Officer or examination of said findings by the Assessing Officer or giving any opportunity to the Appellant. Even assuming the direction was given u/s 144A of Income Tax Act, 1961 any such direction without providing any opportunity to the Appellant is unlawful. Hence the approval and assessment order fail.

f. While giving the approval u/s 153D of Income Tax Act, 1961 the Addl. Commissioner of Income Tax, failed to apply his mind that issuance of notice u/s 153C of Income Tax Act, 1961 is not in accordance with law. Hence the approval and the assessment order fail.

g. When the matter is pending before Authority of Advance Ruling, Mumbai the approval given by the Addl. Commissioner u/s 153D of Income Tax Act, 1961 is against law thereby the approval and the assessment order fails.

h. The Addl. Commissioner failed to apply his mind that the Assessment orders have been proposed for approval is nothing but verbatim of appraisal report in terms of analysis and estimation of undisclosed income. The Addl. commissioner failed to appreciate or consider any piece of explanation submitted by the Appellant. It establishes total non-application of mind while giving approval. Hence the assessment order fails.

i. While giving the approval, the Addl. Commissioner failed to apply his mind that the Assessing -Officer have not provided the entry wise undisclosed income of Rs.2056 Crs as allegedly computed by the employees and confirmed by the Appellant and imposed against the Appellant, thereby the approval and the assessment order fails.

j. While giving the approval, the Addl. Commissioner failed to apply his mind that the Assessing Officer has determined the undisclosed income of Rs. 2056 Crs neither based on mercantile system nor based on cash system, hence the approval fails.

k. While giving the approval, the Addi. Commissioner failed to apply his mind that as against law, without providing the alleged incriminating materials to the Appellant, the Assessing Officer directed to file the return of income, thereby the approval fails.

l. While giving the approval, the Addi. Commissioner failed to apply his mind that the Assessing Officer has rejected the Special audit report without approval of the sanctioning authority who has ordered the Special audit and failed to appreciate reason for rejection is untenable, thereby the approval and the assessment order fails.

m. While giving the approval, the Addl. Commissioner failed to apply his mind that the Assessing Officer has not examined and given any appropriate finding in the draft assessment order (final assessment order) as to who has maintained or made entries in the “Erandaam Thall”, which is instrumental for imposing undisclosed income, in a situation where there are contradicting statements recorded u/s 132(4) of Income Tax Act, 1961, in this regard, as detailed above, thereby the approval fails.

n. While giving the approval, the learned Addl. Commissioner failed to apply his mind that the electronic devices namely “Erandaam Thaal” which have been the instrumental for arriving undisclosed income have not been vouched by the person namely Karthikeyan from whom the said device has been seized, thereby approval fails.

o. While giving the approval by the Addl. Commissioner, there was no application of mind on the part of the Addl. Commissioner in granting approval under sec 153D for each assessment year separately.

p. Approval have been given without application of mind in a situation where assessment have been made based on the disputed statements of third parties and employees as admission of undisclosed income when such statements have not been admitted or concurred by the Appellant.

8. The CIT(A) failed to appreciate that for application of section 69C the parameters set therein in the provisions have to be satisfied in as much as the appellant incurring the alleged expenditure has not been established for the purpose of making the addition, invoking section 69C was not in accordance with law.

9. The learned CIT(A) has erred in law and in facts in enhancing the addition of Rs.9,15,71,466 u/s 69C of the Income Tax Act 1961.

10. The learned CIT(A) erred in directing the adoption of unexplained expenditure u/s 69C on the basis of the special audit report in respect of the contents of “Erandam Thall” without appreciating that the seized electronic record represented by the “Erandam Thall” is dumb document and it is inadmissible as evidence in view of non­compliance to the mandatory requirement of section 65B of the Evidence Act, 1872 and other mandatory requirements which are also applicable to the proceedings under the Income Tax Act.

11. The learned CIT(A) erred in apportioning the unmatched expenditure as per “Erandam Thall” of Rs. 211.37 crores for AV 2012-13 to 2018-19 arrived at in the special audit report dated 15.04.2021 to the appellant and three other associate concerns, purely on the basis of estimation and without giving a finding based on evidence as to the person who incurred the said expenditure, which is impermissible for making addition u/s 69C of the Income Tax Act 1961 in the assessment made u/s153C of the Income Tax Act 1961.

12. The learned CIT(A) erred in relying on unmatched entries in “Erandam Thall” representing the unmatched expenditure Rs. 211.37 crores for AY 2012-13 to 2018-19 quantified in the special audit report dated 15,04.2021, as the said entries were neither ‘speaking one’ nor supported by corroborative evidences regarding actual incurring of such expenditure and hence were unreliable for making addition u/s 69C of Income Tax Act, 1961.

13. The learned CIT(A) erred in upholding the legal validity of the satisfaction recorded by the assessing officer for assuming the jurisdiction to issue notice u/s 153C ignoring the fact that there is under reporting of income in comparison to the net profit as per seized tally account is not borne out by the facts on record as the returned income is higher than the said net profit as evident from the satisfaction note itself.

14. Each ground is requested to be read independently and without prejudice to each other.

15. The Appellant craves leave to add to, alter, amend or vary the aforesaid grounds of appeal at or before the time of hearing.

16. That the appellant prays leave to adduce such further evidence to substantiate its case as the occasion demands.”

3. The revenue has, more or less raised common grounds of appeal for the Asst. Year 2010-11, 2015-16 to 2018-19. Therefore, for the sake of brevity, grounds of appeal filed in ITA No. 906/Chny/2022 for Asst. Year 2010-11 are reproduced as under:

1. The order of the learned Commissioner of Income Tax (Appeals) is erroneous on facts of the case and in law.

2. The Ld.CIT(A) erred in holding that the retraction of statement made by the assessee, his employees and other associated persons as valid and acceptable, though the retractions were filed after reasonable time of 90 days. The CIT(A) ought to have appreciated that the statements recorded during July 2018 were retracted in January 2019, which proves that the retraction was merely an afterthought.

2.1 The Ld.CIT(A) erred in failing to appreciate that the assessee has not proved that the statements were recorded under duress, coercion and other adverse circumstances.

2.2 The Ld.CIT(A) failed to appreciate that the retractions made by the assessee, employees and other persons are without basis and no other credible explanation backed by evidences have been offered with regard to the incriminating material found and seized during the search.

2.3 The Ld.CIT(A) ought to have appreciated that in the case of earlier search assessment of assessee’s own group case (Block assessment 1986-87 to 1996-97) in T.S.Kumarasamy Vs ACIT (98) 65 ITD 188 (Madras), the Hon’ble High Court held that no ground for coercion or duress or any ground for the involuntary statement was made by the assessee in his retraction, following the decision of the Hon’ble Supreme Court of India in the case of Shri.surjeet Singh Chhabra vs UOI (97) 1 SCC 508.

3. The Ld.CIT(A) erred in holding that the notice u/s.153C issued for this assessment year, in violation to fourth proviso to sec.153A(1) r.w.s 153C, is legally unsustainable and annulling the consequent assessment order u/s.143(3) r.w.s.153C.

3.1 The Ld CIT(A) erred in failing to appreciate that the assessee group indulged in generating unaccounted income over the years and incurring unexplained expenditure also as a going concern. The income generated over the years was kept in the form of cash, which was evidenced by the fact that the assessee group has offered 261.29 Crores under PMGKY and IDS Scheme.

3.2 The Ld CIT(A) failed to appreciate that the assessee has kept unaccounted income generated over the years in the form of Cash, which is an asset and further as per the explanation 2 to fourth proviso to Sec.153A, definition of asset is inclusive one.

3.3 The Ld.CIT(A) failed to appreciate that during the course of search total cash of Rs.16 Crores was found &seized in this group which proved that the assessee has generated asset in the form of cash over the years. As such, satisfaction of the conditions mentioned in the fourth proviso to Sec.153A (1) r.ws 153C were recorded before issue of notice u/s.153C.

4. The ld.CIT(A) erred in deleting the addition of Rs.3,10,93,420/- made toward undisclosed income, being the difference of income reported between ITR and total actual income quantified as per tally data seized plus net of bogus purchases and sale through bought notes

4.1 The Ld.CIT(A) erred in failing to appreciate that Smt. R.Anandhi, in her sworn statement u/s.1324) dated 07/07/2018 admitted that the difference between the income as per tally accounts and income reported in ITRs was the unaccounted income generated. The CIT(A) erred in failing to appreciate that the statements were recorded without any coercion or undue influence. The retractions of statements are merely after thought and without any basis.

4.2 The Ld.CIT(A) failed to appreciate that the use of bought notes for inflation of purchases has been confirmed by Smt. R.Anandhi, CA in her sworn statement and it has been further strengthened by statement of Shri.T.Gnasekaran.

4.3 The Ld.CIT(A) erred in accepting the assessee’s contentions in deleting the addition made towards net of bogus purchases and sales. The assessing officer has clearly brought out in the assessment order that same lorry number was used for continuous bogus bought note purchases and for bogus purchases, only a consolidated entry made day-wise in the tally without any supporting documents.

5. The Ld.CIT(A) erred in holding that the rejection of the first special audit report u/s.142(2A) and complete disregarding of the second special audit report by the assessing officer is not legally sustainable.

5.1 The CIT(A) erred in failing to appreciate that the Special Auditor stated to have conducted independent enquiries which were beyond the mandate of the special audit and he had to rely on the information furnished by the assessee himself, which are false and contradictory, considering the ITR opening &Closing stock balances and the tally data that is seized.

5.2 The CIT(A) failed to appreciate that the Special Auditor who is not privy to the confidential findings of the search, could not provide a true & correct picture, as the assessee’s modus operandi of manipulation was not in the domain of knowledge of the Special Auditor.

5.3 The ld.CIT(A) erred in failing to appreciate that the Special Auditor starts with the proposition that the final product as reported by the assessee is a true and correct picture and then proceeds to work out the expenses by applying an estimate of expenses that would have been reasonably incurred to produce that amount of finished product. But it is proved in the findings of search, that the assessee manipulates both qualitative and quantitative part of production and sales.

6. For these grounds and any other ground including amendment of grounds that may be raised during the course of the appeal proceedings, the order of learned CIT(Appeals) may be set aside and that of the Assessing Officer be restored.

4. The Brief facts of the case are that, the appellant was a partnership firm registered under the Indian Partnership Act. The appellant’s firm was converted into a Private Limited Company with the same partners as shareholders on 13/07/2021 under the Companies Act, 2013. The Appellant is engaged in the business of trading of eggs, dhal, oil and sugar. The main product supplied by the appellant during the period was Egg (hen) which was supplied as per the terms of the contract entered with ICDS and Noon Meal Scheme of Govt. of Tamil Nadu. The appellant also supplies dhal, palmolin oil and sugar, etc., to Tamil Nadu Civil Supplies Corporation through tenders and also to other buyers. The assessee Company has filed return of income u/s 139(1) of the Income Tax Act, 1961 for all assessment years.

5. A search and seizer, u/s.132 of the Income Tax Act, 1961 was conducted on 5-7-2018 in the premises of the appellant at Chinnaveppanatham Vasanthapuram Post, Namakkal in connection with the case of Mr T.S.Kumarasamy/ K.Nalinasundari. During the course of search on 5-7-2018, a statement u/s 132(4) is said to have been recorded from Mr.T.Gnanasekaran Accounts Manager. Further, the registered office premise of the Appellant situated at Kuttakadu, Rasipuram, Namakkal was searched on 05.07.2018 and a statement u/s 132(4) is said to have been recorded from the same Mr. Gnanasekaran. Subsequently, searches at both the premises were finally concluded on 06.07.2018 as per the panchanama dated 06.07.2018. Based on the Satisfaction note dated 5.07.2019, notices under section u/s.153C of the Act, dated 9.07.2019 for AY: 2015-16 to 2018-19 and dated 27.07.2021 for AY 2010-11 was issued and called upon the Appellant to prepare true and correct return of total income. In response to the said notice issued u/s. 153C of the Act, the assessee has filed return of income on 22-07-2019 for Asst. Years 2015-16 to 2018-19 and for Asst. year 2010-11 on 03-08­2021 and declared total income which has been declared in the return of income filed u/s. 139(1) of the Act for all assessment years. The case has been selected for scrutiny and during the course of assessment proceedings, the Assessing Officer considering the voluminous data found during the course of search and complexity involved in accounts of the assessee, directed the assessee to get its accounts audited u/s. 142(2A) of the Act. The special auditor appointed in terms of section 142(2A) of the Act, has submitted their audit report for all assessment years vide their audit report dated 03-12-2020. A further reference was made to special auditor to verify and submit report on voluminous data found during the course of search, including Erandamthall. The special auditor, vide their audit report dated 15-04-2021 has submitted supplementary audit report and commented upon the correctness and authenticity of documents found during the course of search and has also verified entries recorded in Erandamthall and further, identified unmatched/unidentified entries in Erandamthall and suggested those unidentified entries may be treated as unexplained expenditure. The Assessing Officer, has rejected the special audit report submitted by the auditor in terms of section 142(2A) of the Act, and completed the assessment on the basis of various incriminating documents found during the course of search coupled with statements recorded form the assessee and its employees and made additions towards under reporting of income towards difference between net profit as per seized tally accounts and net profit reported by the assessee in ITR Form filed for the assessment years 2010-11, 2015-16 to 2018­19, on the ground that the assessee has under-reported its income when compared to net profit as per seized tally data. The Assessing Officer had also made additions towards undisclosed income on account of profit earned from bogus bought note purchase and sales for assessment years 2010-11, 2015-16 to 2018-19. Similarly, the AO had also made additions towards income generated from transaction with dummy entities for the assessment years 2017-18 & 2018-19.

6. Being aggrieved by the assessment order, the assessee preferred an appeal before the CIT(A). Before the ld. CIT(A), the assessee has challenged the assessment order passed by the AO u/s. 143(3) r.w.s. 153C of the Act, on various grounds, including legality of search conducted and consequent assessment proceedings, jurisdiction of the AO in assessing the income of the assessee, satisfaction recorded by the AO for issue of notice u/s. 153C of the Act for assessment years 2010-11, 2015-16 to 2018-19. The assessee had also challenged approval granted by the Additional/Joint Commissioner in terms of section 153D of the Act, on the ground that before according approval, the authority did not apply his mind to relevant materials and books of accounts found during the course of search which vitiates the entire assessment proceedings. The assessee had also challenged additions made by the AO towards under reporting of income as per seized tally data and ITR filed for assessment years 2010-11, 2015-16 to 2018-19, additions towards difference between bought notes purchases and bought note sales, for assessment years 2015-16 & 2016-17, and also additions of unaccounted income arising from bogus purchases through dummy entities and sales for assessment years 2017-18 & 2018-19. The Assessing Officer while completing the assessment has proceeded to assess the assessee on the basis of “No Accounts Case”. But, the appellant is a company registered under the Companies Act, 1956 is statutorily required to Audit its books and has been maintaining its Books of Accounts in Tally Software and has also filed the tax audit reports as per section 44AB of the act, while filing the income tax return under section 139 of the act. The appellant complied with relevant provisions of Companies Act, Income Tax Act and other laws before the relevant authorities.

7. The ld. CIT(A), after considering relevant submissions of the assessee and also taken note of various reasons given by the AO to make various additions in the assessment order, partly allowed appeal filed by the assessee, where in respect of assessment for assessment year, 2010-11, the CIT(A) held that assessment order passed by the AO for the assessment year 2010-11 is invalid, void, ab-initio and liable to be quashed, because in order to assess the income for a period beyond six years, there should be an undisclosed income of specified amount in terms of forth proviso to section 153A(1) of the Act. Since, the AO fails to make out a case of undisclosed income beyond specified amount in respect of this assessment year, the conditions prescribed under forth proviso to section 153A(1) of the Act are not satisfied and thus, the notice issued u/s. 153C for assessment year 2010-11, in violation of the provisions of forth proviso to section 153A(1) is bad in law and unsustainable. Consequently, the assessment order passed by the AO for assessment year 2010-11 is annulled. Further, the CIT(A), upheld notice u/s 153C and consequent assessment for Asst. year 2015-16, on the ground that satisfaction recorded by the Assessing Officer for issue of notice is valid, because the Assessing Officer had the benefit of seized tally accounts and as per said seized account, there is difference between net profit as per books and net profit reported in ITR filed for relevant assessment year. But, for 2016-17 to 2018-19, the CIT(A) held that notice issued u/s 153C of the Act, is invalid on the ground that conditions prescribed for issue of notice are not satisfied. Further, the CIT(A), had also deleted additions made by the AO towards under reporting of income, being difference between net profit as per seized tally accounts and income reported in ITR filed for the assessment years 2010-11, 2015-16 to 2018-19, by holding that the assessee could able to reconcile difference between total income reported in ITR filed for the relevant assessment year and net profit as per seized tally data. Similarly, the CIT(A) deleted additions made by the AO towards undisclosed income on account of transaction from bought note purchases and bought note sales for Asst. years 2016-17 and 2017-18 on the ground that undisclosed income computed by the assessee is not based on incriminating material found during the course of search, because the seized bought notes does not belong to the assessee. The CIT(A) had also deleted additions towards bogus purchases through dummy entities for assessment year 2017-18 and 2018-19. But, the ld. CIT(A) has enhanced the assessment and directed the AO to make additions towards unexplained expenditure u/s. 69C of the Act, as per supplementary special audit report issued by the auditor and quantified unexplained expenditure in respect of unidentified entries in Erandamthall and apportioned to the appellant and three entities and for all assessment years. Aggrieved by the order of the Ld.CIT(A), the assessee and the revenue are in appeal before the Tribunal for assessment year 2010-11, 2015-16 to 2018­19.

8. The first issue that came up for consideration from assessee appeal for Asst years 2015-16 to 2018-19 is legality of search conducted u/s 132 of the Act and consequent assessment proceedings in light of jurisdiction of the assessing officer and transfer of case from one assessing officer to another officer in violation of relevant provisions. The assessee had also challenged assessment proceedings and consequent additions made in the assessment on various issues in light of sworn statements recorded from various persons.

9. The ld. Counsel for the assessee submits that the assessment order is vitiated on the ground of lack of jurisdiction u/s 127 of the Act. In this regard, the attention is invited to the Notification No.17/2018-19 dated 29.01.2019 regarding transferring of Jurisdiction of appellant’s case from ACIT, Circle-I, Namakkal to DCIT, Central Circle-2(1), Chennai. The ld. Counsel further referring to sequence of events submits that a proposal was received from Director General Income Tax (Investigation), Chennai an officer of the rank of Chief Commissioners of Income Tax addressed to Chief Commissioner of Income Tax, Trichy for centralization of appellant’s case along with connected cases to facilitate co-ordinated investigation. Although, the appellant raised objections for transfer of case, the objections filed by the Appellant was not considered favorably by PDIT (Investigation), Chennai, who subsequently, vide his communication, dated 18.12.2018 addressed to DGIT (Inv), Chennai requested to centralize the appellant’s case. Thereafter a Notification dated 29.01.2019 was issued by PCIT, Salem, u/s 127 of the Act, transferring appellant’s case. A perusal of the above notification, it is noticed that there was no agreement evidenced in the said notification, as arrived between officers of equal rank for transferring the jurisdiction as mandated under section 127(2)(a) of the Act. In this regard, the counsel submits that the transfer of appellant file is within the jurisdiction of Chief Commissioner of Income Tax, Trichy and DGIT, Chennai, when the transfer of the case has been initiated by DGIT, Chennai by invoking his jurisdiction vide his letter dated 08.10.2018 addressed to CCIT, Trichy, however, the transfer order was passed by PCIT Salem under the direction of DGIT and this proves that no agreement existed between officers of equal rank, which is against law and the transfer is non-exist as per law. Even assuming that PCIT, Salem having the jurisdiction there is no agreement among the equals namely PCIT, Salem and PCIT, Central-2., Chennai. In the absence of explicit understanding/agreement, the transfer of the case is lacking jurisdiction. Further, ACIT Circle-1 Namakkal from whom the case is transferred is subordinate to PCIT Salem. The DCIT Central Circle 2(1), Chennai, to whom the case is transferred, is subordinate to PCIT Central 2, Chennai, and not to PDIT (Inv) Chennai. There is no agreement established between PCIT Salem and PCIT Central-2, Chennai. In this regard, reliance is to be placed on the decision of the Hon’ble Supreme Court in the case of Noorul Islam Educational Trust Vs CIT reported in 97 CCH 368 (SC). Since, the condition for invoking transfer of jurisdiction has not been properly exercised in terms of section 127(2) of the Act, the transfer orders passed vide Notification dated 29.01.2019 by PCIT, Salem is non-est in law and not valid and consequently, the assessment orders is required to be quashed since the orders are passed by the Assessing Officer who has not been vested with valid jurisdiction. Further, the Show Cause Notice issued to appellant regarding transfer of file is without any reasoning for making such transfer except mentioning the circle. However, in the transfer order it has been specified as for the “purpose of coordinated Investigation”. From the above, it clear that there is no legal requirement to transfer the file and reason given are not sustainable and hence the transfer is illegal. The counsel further submits that even at the time of issuance of notice u/s 153C the seized material was not in the possession of the assessing officer. The jurisdictional Assessing Officer in the case of the appellant as per Section 127 of the Act is DCIT, Central Circle 2(1) whereas the person who has recorded the satisfaction and issued the notice u/s153C of the Act is ACIT, Central Circle 2(1). Although, the assessee challenged jurisdiction of the Assessing Officer, but the CIT(A) dismissed grounds taken by the assessee without any valid reasons.

10. The ld. Counsel for the assessee further submits that the appellant challenged jurisdiction within the time line stipulated u/s 124(3)(c) of the Act. But, despite the fact that the jurisdiction of the assessing officer was challenged u/s 124(3) of the Act, no orders were passed u/s 124(2) of the Act, determining the jurisdiction of the Assessing Officer.The issue of determination of jurisdiction of the Assessing Officer in terms of section 124 of the Act, where the Appellant has specifically sought for determination of Jurisdiction was subject matter before the jurisdictional high court in the case of Abdul AzeezHaroonVs DCIT reported in 317 CTR 610 (Mad). The Hon’ble High Court found that when the Appellant has specifically sought for determination of Jurisdiction and the assessing officer has not bothered to refer the matter to the superior officer, the error is patent and it vitiates the assumption of jurisdiction. Since, the very edifice of the assessment order viz., notices u/s 153C of the Act itself is invalid and non-est in law, the consequential orders passed by the assessing officer is required to be quashed since the orders are passed by the Assessing Officer without determining the valid jurisdiction as per the provisions of the law.

11. The ld. CIT-DR, Shri. M. Rajan, on the other hand supporting order of the CIT(A) submits that the assessee has made various allegations on procedure followed in conducting search and seizure operations in light of certain circulars issued by CBDT and argued that search proceedings and consequent assessment orders passed by the Assessing Officer are illegal. But, if you go through counter affidavit filed by the revenue before the Hon’ble High Court of Madras in reply to Writ appeal filed by the assessee, it is very clear that the Department has followed due procedure in conducting search, impounding incriminating documents and recording statements. Further, various lapses pointed out by the assessee are in the nature of procedural mistakes which can be cured. Therefore, for those procedural lapses, it cannot be held that whole search proceedings are invalid and consequent assessment proceedings are null and void. The CIT-DR, further referring to provisions of section 153A of the Act, submits that the Assessing Officer acquires jurisdiction to issue notice u/s 153A/153C of the Act, in pursuant to search action conducted u/s. 132(2) or requisition u/s. 132A of the Act, but issuance of notice is not at all dependent on availability of incriminating material, if any found during the course of search. Therefore, the arguments of the counsel for the assessee that the Assessing Officer has issued notice u/s. 153A/153C of the Act without any application of mind and in absence of incriminating material and appraisal report is devoid of merit. The CIT-DR, further submits that in so far as the arguments of the assessee on the issue of jurisdiction of the Assessing Officer and transfer of case from one Assessing Officer to another Assessing Officer, the Department has followed due procedure provided u/s. 124 and 127 of the Act, which is evident from the fact that the appellant case has been transferred from PCIT, Trichy to DGIT, Central, Chennai by passing a valid order in terms of section 127 of the Act. Therefore, he submits that the arguments of the assessee on this issue also without any merits.

12. We have heard both the parties, perused materials available on record and gone through orders of the authorities below. We have also carefully considered affidavits filed by the assessee and his employees and counter affidavits filed by the revenue before Hon’ble High Court of Madras. The appellant had challenged notice issued u/s. 153C of the Act, in light of provisions of section 127 of the Act and argued that the requirements of section 127(2) of the Act, have not been compiled by the Department while transferring jurisdiction of the assessee from CCIT, Trichy-2, to DGIT(Investigation), Chennai. According to the appellant, the invocation of provisions of section 127(2) of the Act, itself is illegal and void and in absence of any positive agreement being arrived at by the authorities of equal rank, transfer of case to jurisdiction of DGIT(Investigation), Chennai is illegal. We have gone through the arguments advanced by the ld. Counsel for the assessee, in light of relevant provisions of the Act and as per section 127 of the Act, the Principal Director General, or the Principal Chief Commissioner, after giving the assessee a reasonable opportunity of being heard in the matter, wherever it is possible to do so and after recording his reasons for doing so, transfer any cases from one or more Assessing Officers subordinate to him to any other Assessing Officer also subordinate to him. On careful examination of provisions of section 127 of the Act, it is very clear that the power to transfer cases from one Assessing Officer to another Assessing Officer is rest with the Principal Director General or Principal Chief Commissioner and thus, in our considered view the assessee cannot call in question the powers vested with the authorities to transfer the cases in a manner convenient to the Department. However, the only requirement is to give an opportunity to the assessee of being heard in the matter, wherever it is possible to do so. In the present case, it is not even the case of the assessee that the procedure laid down u/s. 127 of the Act has not been followed. Therefore, we are of the considered view that there is no merit in objection raised by the assessee on the issue of transfer of cases u/s. 127 of the Act and thus, grounds of appeal filed by the assessee on this issue are dismissed for all assessment years.

13. In so far as, on the issue of validity of notice issued u/s. 153C of the Act, on the ground that the seized materials are not handed over as per section 132(9A) of the Act, we find that, the appellant has challenged the validity of notices issued u/s. 153C of the Act, in light of CBDT instruction no. 286/161/2006-IT(Inv-2), dated 24.07.2007 and argued that the Assessing Officer may issue notices u/s. 153C of the Act, immediately after receiving the appraisal report and seized materials, and ascertaining the cases where notices u/s. 153C of the Act are required to be issued. However, in the present case from the reply of the Assessing Officer, it is evident that the Assessing Officer did not possess any seized material in hand at the time of issue of notice u/s. 153C of the Act and thus, the notice issued u/s. 153C of the Act, can be said to be issued without any application of mind on appraisal report and seized material. We have gone through the contentions of the assessee in light of relevant provisions of section 153C of the Act, and we ourselves do not subscribe to the arguments of the counsel for the assessee for the simple reason that, as per the provision of section 153C of the Act, in the case of the person where a search is initiated u/s. 132 of the Act, the Assessing Officer shall issue notice to such person requiring him to furnish within such period the return of income in respect of each assessment year falling within six assessment years to be filed and also assess or re-assess the total income of six assessment years immediately preceding the assessment year relevant to the previous year in which such search is conducted. From the plain reading of provisions of section 153A/153C of the Act, it is very clear that issuance of notice u/s. 153C and assess and re-assess the total income are not dependent on seized documents or materials. The Assessing Officer acquires jurisdiction to issue notice u/s. 153A/153C of the Act, on the basis of initiation of search and is not dependent on provisions of section 139, 147, 148, 152 & 153 of the Act. In the present case, the appellant is making out a case on the basis of reply furnished by the Assessing Officer to the objection filed by the assessee that, the Assessing Officer does not have the benefit of appraisal report and seized materials when the notice was issued u/s. 153C of the Act. But, fact remains that during the course of search, huge incriminating material was found and seized which clearly established necessity of issue of notice u/s.153A and 153C of the Act and thus, we are of the considered view that the arguments of the assessee on this issue is nothing but hypothetical and thus, we reject the grounds taken by the assessee on this issue for all assessment years.

14. In so far as the issue of jurisdiction of assessing officer, the assessee challenged the issue in light of provisions of section 124 of the Income tax Act, 1961. The assessee submits that although the appellant has raised the jurisdiction issue before the Assessing Officer, the Assessing Officer has decided the question of jurisdiction contrary to provisions of section to 124(2) of the Act, which is in violation of section 124 of the Act. We find that, provisions of section 124 deals with jurisdiction of Assessing Officer in terms of any direction or order issued under sub-section (1) or sub-section (2) of section 120 of the Act. As per sub-section (2) of section 124 of the Act, where a question arises under this section as to whether an Assessing Officer has jurisdiction to assess any person, the question shall be determined by the Principal DGIT, or Principal Chief Commissioner of Income-tax, as the case may be, notified by the Board in the official gazette. In this case, the grievance of the assessee was that objection filed in this regard, in terms of sub­section (3) has been decided by the Assessing Officer himself without referring the matter to the DGIT or PCCIT. We have considered the arguments of the counsel for the assessee, in light of reasons given by the CIT(A) to decide the issue and after considering relevant facts, we do not subscribe to the arguments of the counsel for the assessee for the simple reason that, the jurisdiction was assigned to the DCIT, Central Circle-2(1), Chennai vide order u/s. 127 of the Act dated 29.01.2019 and in view of the said order there is no scope for having any doubt or ambiguity with regard to the jurisdiction of the Assessing Officer. Moreover, since the order assigning with jurisdiction of the Assessing Officer has been passed by the PCIT, the procedure for resolution of the dispute regarding the jurisdiction by reference to the higher authorities as laid down in section 124(2) is considered to be inapplicable and thus, ground raised by the assessee on this issue for all the assessment years are dismissed.

15. The next issue that came up for our consideration from assessee and revenue appeal for Asst years 2010-11, 2015-16 to 2018-19 is validity of statement recorded u/s. 131/132(4) of the Act from various employees of the appellant and subsequent retraction and its evidentiary value. The ld. Counsel for the assessee submits that the assessing officer had relied on various statements cited in the assessment order for making the additions and the appellant had questioned the validity of the said statements. The Assessing Officer relied upon the statements of Mr. Gnanasekaran, Mr. Vannakannan, Shri Valeeshwaran, Shri. Harihara Krishnan and Shri. T.S. Kumarasamy to make various additions as basis, but fact remains that the statements from above persons have been obtained contrary to materials available on record which is evident from the fact that Mr. Gnanasekaran in response to question no 9 & 19 stated that he has gone through the electronic device seized during the course of search, but fact remains that said electronic device ANN/VP/ED/S2 was sealed on 07.07.2018 and opened only on 09.09.2020 as evidenced from Mahazarnama. However, the statement was recorded from Mr. Gnanasekaran, as if he has gone through said documents. From the above, it is very clear that the statement recorded from the employee was only under coercion. In so far as statement of Mr. Vannkannan, recorded on 08.07.2018, he has been asked to confirm the statement of Mr. Gnanasekaran in question no 19 and for which he stated that the statement recorded from Mr. Gnanasekaran is confirmed. The counsel for the assessee submits that the statement relied by the Assessing Officer for quantification of undisclosed income fails and the other statements does not have any value, as such statement are in no way related to the quantification of any amount of undisclosed income. Thereby, passing order by placing reliance on those statements is unsustainable.

16. The Counsel for the assessee further submits that the sole basis for the Assessing Officer to make additions towards under reporting of income being difference between net profit as per seized tally accounts and net profit as per ITR filed for relevant assessment year is statement recorded from Mr. Gnanasekaran. But, fact remains that Mr. Gnanasekaran, in his statement stated that he had gone through the contents of the electronic device seized during the course of search and had quantified the alleged undisclosed income for the assessment year 2015-16 to 2018-19 based on the tally data available in the seized device. But, on verification of said devices it is found statement of Mr. Gnanasekaran is obtained under coercion and computation of unaccounted income based on these devices is also invalid. The ld. Counsel for the assessee further submits that the Assessing Officer had taken support from statement of Shri. Vannakannan and stated that he had confirmed quantification of unaccounted income worked out by Mr. Gnanasekaran. Since, the statement recorded from Mr. Gnanasekaran itself is incorrect; confirmation of said statement by Shri Vannakannan does not have any evidentiary value. Similarly, the Assessing Officer had taken support from statement from Shri Harihara Krishnan and Mr. Valeeswaran and the same has been confirmed by Shri T.S. Kumarasamy. However, the persons who gave statements have been subsequently filed their retraction statement with sworn affidavits before the Hon’ble High Court of Madras and from the contents of affidavit, it is very clear that the statements have been obtained under coercion and duress. Further, the quantification of undisclosed income was also proved to be wrong. Although, the CIT(A) accepted statements recorded u/s. 132(4) of the Act, are correct wherever the admission made in the statements is shown to be contrary to other facts available on record, but the partial acceptance of statements not permissible in the eyes of law and thus, additions made by the Assessing Officer on the basis of said statements should be deleted and those statements cannot be taken as evidence.

17. The ld. CIT-DR, Shri. M. Rajan, submits that the ld. CIT(A) erred in holding that the retraction of statement made by the assessee, his employees and other associated persons as valid and acceptable, though the retractions were filed after reasonable time of 90 days. The DR further submits that the CIT(A) ought to have appreciated that the assessee has failed to prove that the statements were recorded under duress, coercion and other adverse circumstances. The ld. DR further referring to counter affidavit filed by the revenue before the Hon’ble High Court of Madras in response to writ petition filed by the assessee submits that the retractions made by the assessee and other associated persons are without basis and not backed by any credible evidences because admission of undisclosed income in the statements is with regard to incriminating material found during the course of search. The ld. DR referring to the decision of Hon’ble High Court of Madras in the case of T.S. Kumarasamy vs ACIT [98] 65 ITD 188 (mad) submits that, when assessee fails to prove coercion or duress or any ground for the involuntary statement then subsequent retraction without any evidence cannot be considered and in this regard relied upon the decision of Hon’ble Supreme Court in the case of Shri. Surjeet Singh Chhabravs. UOI [1997] 1 SCC 508.

18. We have heard both the parties, perused the material available on record and gone through orders of the authorities below. We have given our thoughtful consideration to the arguments of the ld. Counsel of the assessee in light of relevant provisions of the Act and facts brought on record. The Assessing Officer has rejected retraction statement of appellant and his employees on the ground that retraction has been filed after lapse of more than 90 days from the date of recording of such statement. In this regard, it is noticed that the CIT(A) had given categorical finding that the appellant had filed retraction within 90 days from the date of search, which is evident from the fact that, the appellant and their employees have filed affidavits before the Hon’ble High Court of Madras on 31.10.2018 and contended that statement have been recorded under threat, coercion and duress and also they have been compelled to sign the statement without letting them to go through the contents. In our considered view, said affidavits are in the nature of retraction of statements. The retraction filed on 16.01.2019, referred to by the Assessing Officer are the retraction separately filed before the DDIT(Inv). The Assessing Officer has omitted to take the affidavit filed by the appellant and his employees before the Hon’ble High Court on 31.10.2018, into consideration. Therefore, we are of the considered view that the reasons given the Assessing Officer to reject the retraction of the appellant and its employees on the basis subsequent letter filed before DDIT(Inv) is incorrect and untenable.

19. We further noted that, admission in a statement recorded u/s. 132(4) of the Act, is not conclusive evidence, though it is an extremely important piece of evidence. It is open to the person who made the admission to show that the impugned statement has incorrectly being made. There are cases where the assessee on his own motion gives the disclosure of undisclosed income, however later on such an assessee may realize that such a statement was given under mistaken of facts or at times of nervousness, stress and panic and thereby, the statement so tendered does not reflect the true state of affairs. Therefore, it is very important to consider the statement recorded during the course of search u/s. 132(4) of the Act, in light of their contents with reference to incriminating materials unearthed during the course of search. In a case, where the statement recorded u/s. 132(4) of the Act is supported by corroborative evidences like incriminating material, then those statements needs to be considered on face of it, because the assessee may have given admission after analyzing the material found during the course of search. In a case, where the statement recorded u/s. 132(4) of the Act is not supported by corroborative evidences like incriminating material found during the course of search, then the contents of those statements needs to be considered in light of retraction, if any filed by the assessee and reasons given for filing said retractions. At the same time, it has to be kept in mind that merely because a statement is retracted, it cannot become a statement which is involuntarily or unlawfully obtained. For any retraction to be successful in the eyes of law, the assessee needs to show as to how the statement recorded earlier does not states the true facts or that there was coercion, inducement or threat while recording the statements. Therefore, from the above, it is very clear that retraction of a statement should not be rejected merely because the assessee has given admission during the course of search. In our considered view, although admission is an important piece of evidence, but it is not conclusive and it is open to the assessee to show that it is incorrect.

20. At this stage, it is relevant to refer to the decision of Hon’ble Supreme Court, in the case of Pullangode Rubber Produce Co. Ltd vs State of Kerala [1973] 91 ITR 18, where it has been clearly held that admission is an extremely important piece of evidence, but it cannot be said to be conclusive and that the maker can show that it was incorrect. The above judgment was followed by the Hon’ble High Court of Delhi in case of S. Arjun Singh vs CWT [1989] 175 ITR 91. The sum and substance of ratios laid down by various courts, including the Hon’ble Supreme Court is that, the whole atmosphere during the search is of utmost pressure and therefore, there is very little scope for free and fair thinking for the searched person. Therefore, when a person filed a retraction within reasonable time and such retraction is backed by valid reason, then the Assessing Officer cannot reject the retraction filed by the assessee merely for the reason that the assessee has filed retraction after search, on the ground that said retraction has been filed with an afterthought. In this case, the ld. CIT(A) had given categorical finding in their appellate order while dealing with this issue and observed that although there is no direct evidence to prove the claim of the assessee that statements recorded from various persons was under coercion and duress but not voluntary, but the circumstantial evidences brought on record by the assessee clearly proves that the statements from various persons appears to have been taken without any reference to incriminating materials and further, even if there is some incriminating materials but those materials are not properly analyzed before taking statement from the employees. Therefore, we are of the considered view that the findings recorded by the ld. CIT(A) on this issue is well reasoned and does not call for any interference from our side. Thus, we reiterate the legal position that the retraction of the appellant and his employees and other associates persons has to be regarded as valid and acceptable, wherever the admission made in the statement is shown to be contrary to the facts available on record or seized material. Therefore, this principle has been followed while adjudicating other grounds of appeal dealing with various additions made by the Assessing Officer in the assessment order on the basis of the statement recorded during the course of search. Thus, for above reasons we reject ground taken by the assessee and as well as the revenue on this issue for all assessment years.

21. The next issue that came up for our consideration from ground no 7(a) to 7(p) of assessee appeal for assessment year 2015-16 to 2018-19 is approval granted u/s. 153D of the Act, and consequent assessment proceedings are bad in law and void ab initio and is not valid as per law. The ld. Counsel for the assessee submits that granting approval under section 153D of the Act is not a mere formality, but, it is a supervisory act which requires proper application of administrative and judicial skill by the Addl.CIT on the application of mind and this exercise should be discernible in the orders of the approval under section 153D of the Act. The obligation of the approval of the Approving Authority is of two folds; on one hand, he has to apply his mind to secure the Department against any omission or negligence by the A.O. in taxing right income in the hands of right person and in right assessment year and on the other hand, approving authority is equally responsible and duty bound to do justice with the tax payer by granting protection against arbitrary or baseless tax liability on the Appellant. The approving authority under section 153D is required to apply his mind to such material on record before granting his approval, otherwise, it will be invalid and bad in Law.

22. The counsel for the assessee, Shri. D Anand, Advocate, submits that the Ld. Addl. CIT, Central Range-2, Chennai, erred in giving prior approval to the orders u/s. 153C read with Sec.143(3) of the Income Tax Act, 1961, to bring to tax the undisclosed income and unexplained expenditure in a mechanical manner, without application of mind and own reasoning, in complete defiance to the requirements of law or procedure. He, further submits that it is understood that there was no draft assessment order sent to the Addl.CIT, Central Range-2, Chennai for approval, but without such proposal the Addl. CIT, Central Range-2, Chennai, on her won returned to the Deputy CIT Central Circle-2(1), Chennai, on 24.06.2021, with the ‘directions’ to resubmit the draft orders, after incorporating income admitted during search in sworn statements, undisclosed income towards difference between net profit as per seized tally and income declared as per ITR filed for the relevant assessment year. The Addl. CIT while issuing directions to the Assessing Officer to resubmit draft assessment order, stated that she had verified seized materials and matched them with the Income Tax Returns (ITR) and upon verification, there is a difference between net profit as per seized tally and income reported in ITR filed for the relevant assessment years. It shows that there was no substance in the claim of the appellant that the tally represents the true picture and the same represent accounts relied for filing for ITR. The Addl. CIT further stated that while preparing the Special Audit Report, the special auditor has exceeded the terms of reference by conducting independent enquiries. From the above correspondences, it is clear that the Deputy CIT Central Circle-2(1) was not in agreement with findings given in the Appraisal Report. Whenever the assessing officer is not in agreement with the findings given in the Appraisal Report, the Office Procedure Manual has laid down certain procedure. It is pertinent to note that, the observations made in the Appraisal Report relating to examination/investigation as also issues identified in the course of examination of seized material were carefully considered by Addl. CIT, Central Range-2 before endorsing it to the Addl. DIT, Unit-3, Chennai. The counsel for the assessee further submits that even after endorsing and forwarding the deviation note, the Addl. CIT, Central Range-2, as the sanctioning authority, took an altogether different stand by discarding her own judgment in giving directions to the draft assessment orders. Under Sec. 153D, it is the duty of the Addl. CIT to act in accordance with law, to apply mind while granting approval. The duty cast is to examine the record during searches, and, thereafter accord the statutory approval. Therefore, the manner and the material on the basis of which the approval was granted was mechanical and without application of mind.

23. The counsel for the assessee further submits that the primary duty while granting approval under Sec.153D of the Act, is to see that the draft order does not suffer from legal infirmity and that proper investigation has been conducted to unravel the facts. By doing so, not only the interest of the revenue is to be protected but also with the object of not causing undue tax burden and harassment to the appellant. If there was absence of explanation from Appu Direct Pvt. Ltd in respect of excel sheets, then directions cannot be given to make addition as unexplained expenditure in the hands of the appellant without carrying out verification through issuing summons/commissions. Similarly, when the proposal for conducting a Special Audit was under way, the terms of reference should have been properly taken care to include what is now said to be missing. Even the same could have been done while calling a second report on 15.04.2021. By maintaining silence and not raising objections at the appropriate time and later on saying that the Special Auditor has done a perfunctory job cannot be taken as a shelter while giving approval. This could have been carried out even now as the assessments are to become time barred on 30.9.2021. Therefore, the counsel submits that it amounts to giving approval u/s.153D to the Appraisal Report rather than to the proposed assessment orders. This reflects the non-application of mind while giving approval to the draft assessment order proposed by the Deputy CIT Central Circle-2(1).

24. The ld. Counsel for the assessee further submits that, the assessing officer noted in the deviation note that the purchase inflation on the basis of bought notes has been analyzed but was not verified during the course of search and that the findings in the appraisal report are based on non-availability of certain records and admission in the sworn statements which have been subsequently retracted. The AO further observed that no discrepancies have been found in the quantitative figures of purchases, consumption and sales in the special audit. The assessing officer finally expressed his opinion in the deviation note that the undisclosed income estimated in the appraisal report on the aspect of the bought notes is not correct. The opinion of the AO, as reflected in the deviation report, is the outcome of his application of mind on all the materials available before him including the seized material, statements recorded during the search and the submissions of the assessee during the assessment proceedings. The assessee submits that the said deviation note dated 22.04.2021 submitted by the assessing officer was forwarded by the Additional commissioner to the investigation wing on 22.04.2021 along with his endorsement. It is submitted that the assessing officer subsequently withdrew the deviation note on 11.05.2021 presumably at the instance of investigation wing by stating that certain other issues and facts are to be looked into, without specifying the same. The assessee submit that the view adopted by the assessing officer in the assessment order subsequently passed by him is contradictory to the opinion expressed by him in the deviation note and does not reflect his independent application of mind and the order so passed by him is untenable in law. The appellant contended that the stand taken by the AO in the assessment orders, which were passed subsequent to the framing of deviation note by him, is clear evidence of extraneous undue influence brought upon him to change his stand. The assessments so framed by the AO cannot be construed as reflective of independent application of mind by the AO and the said orders are liable to be regarded as legally unsustainable for this reason.

25. The Counsel for the assessee further submits that the forced withdrawal of the deviation note amounted to investigation wing directing the AO to frame the assessment in a manner that would protect the revenue’s interest. The appellant placed reliance on the decision of Hon’ble Delhi High Court in the case of Agson Global (P.) Ltd [2022] 134 taxmann.com 256 (Delhi), wherein it was held that the assessing officer shifted his position in the assessment order vis-à-vis the deviation note and that the revenue cannot dictate the manner in which the AO frames the assessment order since the assessing officer discharges quasi-judicial function in passing the assessment order. The assessee submits that the act of the Additional Commissioner endorsing the deviation note dated 22.04.2021 submitted by the assessing officer by forwarding the same to the investigation wing on 22.04.2021 and the very same authority granting approval on the contrary view taken by the assessing officer in the assessment order shows that approval under section 153D have been granted in a most mechanical manner without going through the seized material and other material on record and without application of mind. The assessee submits that such approval is contrary to the intent of section 153D and is invalid and void ab-initio and as such entire assessment orders are illegal and bad in Law and liable to be quashed.

26. The ld. Counsel for the assessee further submits that the Assessing Officer, after incorporating the directions given in the letter dated 24.06.2021, final draft assessment orders were sent for approval on 05.08.2021. While seeking approval, the Deputy CIT Central Circle-2(1), categorically stated that “the additions has been made as stated in the appraisal report”. There should be no iota of doubt that the draft assessment orders have been passed at the instance of the Investigation wing. The approval sought for the draft assessment order is in fact seeking approval of the Appraisal Report. Even the ‘directions’ given in letter dated 24.06.2021 appears to be in the form of directions u/s 144A of the Act. The Addl. CIT, Central Range-2 has been forced to grant approval u/s. 153D to the assessment orders despite her clear disagreement as per the deviation note of the Deputy CIT Central Circle-2(1). Hence the approval was given in a mechanical manner, without application of mind and own reasoning, in complete defiance to the requirements of law or procedure. Therefore, he submits that entire handing over file may be called for by your good office, from the file of the AO, to verify, whenever the files had been handed over to the Addl. CIT, Central Range-2, which enlightened the truth. Therefore, he submits that the entire search and assessment proceedings are illegal and invalid in limine when search has not resulted in identification of any unaccounted assets and the seizure of documents is admissible. Thus, the assessment orders not in conformity with section 153D of the Act, is illegal and unsustainable under law.

27. The ld. CIT-DR, Shri. M. Rajan, on the other hand supporting the order of the CIT(A) submits that provisions of section 153D of the Act, deals with prior approval of the Joint Commissioner/Additional Commissioner before passing the assessment order and in this case, there is no dispute with regard to the fact that the assessment order has been passed with prior approval from the Range head in terms of section 153D of the Act. Further, the Counsel for the assessee claims that there is no proper approval as required u/s. 153D of the Act and such argument has been placed on the basis of correspondence between the Assessing Officer and the Addl. CIT, Range Head. From the arguments of the assessee, it appears that there was lot of deliberations on draft assessment order passed by the Assessing Officer, in light of various incriminating material found during the course of search and appraisal report submitted by the DDIT-(Inv.) on various issues including additions to be made towards undisclosed income on account of difference in net profit as per seized tally and net profit as per ITR filed for relevant assessment year and also additions towards unexplained expenditure u/s. 69C of the Act on the basis of seized Erandamthall. In the note submitted to the Assessing Officer, the Addl. CIT categorically observed that on verification of seized material with ITR filed by the assessee there is a difference in income reported for various assessment years. Likewise, the Addl. CIT had also discussed other issues and gave directions to the Assessing Officer. Therefore, it cannot be said that approval granted u/s. 153D of the Act is mechanical and without any application of mind.

28. We have heard both the parties, perused the material available on record and gone through orders of the authorities below. The provisions of section 153D of the Act, deals with prior approval necessary for assessment in cases of search u/s 132 or requisition u/s 132A of the Act. As per said section, no order of assessment or reassessment shall be passed by the Assessing Officer below the rank of Joint Commissioner in respect of each assessment year referred to in section 153A(1)(b) of the Act without prior approval of Addl. CIT/Joint. CIT u/s 153D of the Act. In the present case, there is no dispute with regard to the fact that the assessment order has been passed with prior approval from the Range head in terms of section 153D of the Act. Further, from the arguments of the assessee itself, it appears that there was lot of deliberations on draft assessment order passed by the Assessing Officer, in light of various incriminating material found during the course of search and appraisal report submitted by the DDIT-(Inv.) on various issues including additions to be made towards undisclosed income on account of difference in net profit as per seized tally and net profit as per ITR filed for relevant assessment year and also additions towards undisclosed income arising out of bogus bought note purchases and sales and undisclosed income arising from bogus purchases through dummy entities. In the note submitted to the Assessing Officer, the Addl. CIT categorically observed that on verification of seized material with ITR filed by the assessee there is a difference in income reported for various assessment years. Likewise, the Addl. CIT had also discussed the issue and gave directions to the Assessing Officer to resubmit the draft assessment order. Therefore, it cannot be said that approval granted u/s. 153D of the Act, is mechanical and without application of mind. Further, the assessee rest his arguments solely on the basis of deviation note stated to have been submitted by the Assessing Officer proposing to make modifications to the unaccounted income suggested in the appraisal report and the endorsement by the Addl. Commissioner on said deviation note before forwarding the same to the Investigation Wing for their comments. But, fact remains that the assessee could not produce so called deviation note submitted by the Assessing Officer, to the Range head to prove their claim. Further, during appellate proceedings, the CIT(A) called for remand report on the issue and in response, the Assessing Officer submitted that deviation note being extended part of the appraisal report, is confidential in nature and thus, same cannot be shared with the assessee or any appellate authority. In our considered view, internal correspondence between the Assessing Officer and the investigation officer is confidential and extended part of appraisal report, which cannot be shared with the assessee. The CIT(A), after considering relevant facts and also taken note of provisions of section 153D of the Act, came to the conclusions that in absence of availability of any documentary evidence, in respect of claim of the appellant with regard to deviation note, the arguments of the assessee can be said to be unsubstantiated. In our considered view, the findings of the facts recorded by the Ld. CIT(A) on appraisal of relevant facts is in accordance with law, because from the materials available on record, and also on the basis of arguments of the assessee, it is abundantly clear that there is enough proof to conclude that the Addl. CIT has given approval u/s. 153D of the Act after great deliberations with draft assessment order passed by the Assessing Officer in light of seized material and appraisal report submitted by DDIT(Inv) and thus, in our considered view the arguments of the assessee on this issue for all assessment years is fails. Thus, we reject grounds of appeal of the assessee on this issue for all the assessment years.

29. The next issue that came up for our consideration from Ground no 3 to 3.3 of Revenue appeal for Asst. Year 2010-11 is issuance of notice u/s 153C of Income Tax Act, 1961, for AY 2010­11, in violation of 4^th proviso to section 153A(1) of the Income Tax Act, 1961.

30. The ld. CIT-DR, Shri. M Rajan, submits that the ld. CIT(A) erred in holding that the notice u/s. 153C issued for the assessment year 2010-11, is in violation of forth proviso to section 153A(1) of the Act, without appreciating the fact that the assessee indulged in generating unaccounted income over the years and incurring expenditure also as ongoing concern. The income generated over the years was kept in the form of cash, which was declared as income amounting to Rs. 124.79 crores under PMGKY and IDS Scheme. Further, during the course of search, total cash of Rs. 16 crores was found and seized. All these evidence goes to prove an undoubted fact that there is an undisclosed income in the form of cash which was rotated in the business even for assessment year 2010-11 and this constitutes asset in terms of forth proviso to section 153A(1) of the Act. The CIT(A), without appreciating relevant facts simply annulled assessment order passed by the Assessing Officer for this assessment years, by holding that conditions precedent for invoking forth proviso to section 153A(1) are not satisfied.

31. The Counsel for the assessee, Shri. D Anand, Advocate on the other hand supporting order of the ld. CIT(A) submits that in order to invoke provisions of fourth proviso to section 153A(1) of the Act, the first and foremost condition is undisclosed income in excess of prescribed limit, which is absent in the present case. Further, the CIT(A) negated observations of the Assessing Officer with regard to conditions for imposing fourth proviso to section 153A(1) of the Act, and held that income declared under PMGKY and IDS scheme cannot be construed as asset and further cash seized during search pertains to assessment year in which date of search falls, but same cannot be extrapolated to previous assessment years. The Counsel for the assessee further submits that apart from issuing notices u/s 153C for six AYs immediately preceding the AY relevant to the previous year in which search was conducted, the AO issued notices u/s 153C for AY 2010-11 which is beyond the said 6 AY and completed the assessment for assessment year 2010-11 u/s 153C r.w.s 143(3) and made addition towards underreporting of income without there being any evidence with the Assessing Officer to prove that the income represented in the form asset is escaped assessment for the assessment years. The legality of assumption of jurisdiction and issue of notices u/s 153C for AY2010-11 was challenged by the appellant before the CIT(A) as the satisfaction of the conditions prescribed in the 4th proviso to sec 153A (1) is the sine qua non for such assumption of jurisdiction for “relevant assessment year or years”. The CIT(A) after considering relevant facts and also on appraisal of provisions of fourth proviso to section 153A(1) of the Act, held that issuance of notice in the case of the appellant for AY 2010-11, in violation of the provisions the fourth proviso to section 153A (1) are bad in law and legally unsustainable. Accordingly, the CIT(A) held that the assessment made u/s 153C r.w.s 143(3) for the assessment year 2010-11 is legally invalid and the same is, therefore, annulled. Therefore, he submits that the order of the CIT(A) should be upheld.

32. We have heard both the parties, perused the materials available on record and gone through orders of the authorities below. The jurisdiction to issue notice u/s 153C of the Act, for the relevant assessment year or years, being the assessment years which falls beyond six assessment years, but not later than ten assessment years from the end of the assessment year relevant to the previous year in which search is conducted, is vested with the AO only on fulfillment of conditions laid down in the fourth proviso to section 153A(1) of the Act, which was inserted in the Act with effect from 01.04.2017 by the Finance Act 2017. This becomes very clear when the language employed in the fourth proviso is taken into consideration. The said proviso starts with the phrase that “no notice for assessment or reassessment shall be issued by the Assessing Officer for the relevant assessment years or year unless” followed by the enumeration of the specific conditions which need to be fulfilled. Unless the conditions laid down in clauses (a), (b) and (c) specified in the said proviso are fulfilled, the AO does not get the jurisdiction to issue notice u/s 153C for the relevant assessment year or years”.

33. In light of above legal position, if you examine the facts of the present case, we find that, the assessing officer reiterated the discussion made in the satisfaction note regarding the fulfillment of the conditions spelt out in the fourth proviso in the assessment order. On careful examination of the satisfaction note, it is noticed that the assessing officer has relied on certain factual observations found during search to come to the conclusion that the books of accounts or other documents or evidence found during the search have revealed that income represented in the form of asset exceeding Rs 50 lakhs has escaped assessment for the relevant assessment years. On careful examination of reasons given by the Assessing Officer to assume jurisdiction for Asst. year 2010-11, we find that as per the “ErandamThall” found during the search, the assessee has been making undisclosed/inadmissible expenditure over the years regularly and there has been generation of undisclosed income through bogus bought note and dummy entities. The unaccounted cash has been kept in the business of the assessee, which is a going concern and its group as working capital which is an investment/ asset. Therefore, the Assessing Officer opined that the threshold limit of Rs 50 lakhs is met for the assessment year or in the assessment years.

34. As regards the reference made to the “Erandamthall” which was seized during the search, it is noticed that the same contained details of unexplained expenditure as per the assessing officer’s own remarks and admittedly, there is no information/ details in “Erandamthall” regarding undisclosed investment in any asset. Though, the assessing officer stated that the unaccounted cash has been kept in the business of the assessee as working capital, which is an investment/ asset, it is noticed that the assessing officer failed to specify the entries in the seized “Erandamthall” which go to demonstrate that unaccounted cash has been retained in the business as working capital. The unexplained expenditure cannot be equated with the holding of unaccounted cash as working capital. Such inference drawn by the assessing officer defies logic. As regards reference to generation of undisclosed income through bought notes and dummy entities, which in turn was utilised for making unexplained expenditure as found noted in “ErandamThall”, there is no such issue of generation of undisclosed income through bought notes and dummy entities in the assessment orders passed for assessment year 2010-11 u/s 153C r.w.s 143(3) of the Act. Thus, it is seen that the said factual observation of the assessing officer in the satisfaction note is factually incorrect and not relevant to the issue of income escaping assessment for AY 2010-11. The third observation of the Assessing Officer with regard to cash found during the course of search, we find that the cash found/seized during a search is liable to be treated as income of the assessment year relevant to the previous year in which the search is conducted, in the event of failure of the assessee to satisfactorily explain the sources of such cash. The assessment year in which the taxability or otherwise of the seized cash is required to be considered in the case of the assessee is AY 2019-20 as the search was conducted on 05.07.2018. Thus, it is clear that the fact of cash seizure during the search is no-way related to the detection of undisclosed income, represented by an asset, for the assessment year 2010-11. From the above, it is very clear that the observation of the Assessing Officer with regard to satisfaction of conditions prescribed in fourth proviso to section 153A(1) of the Act, is incorrect and opposed to law.

35. Further, it has been clearly laid down in clause (b) of fourth proviso to section 153C of the Act, that the income should have escaped assessment for the relevant assessment year or years only. It goes without saying that the cash seized during the search conducted in FY 2018-19 cannot be construed by any reasoning or logic to be representing income escaping assessment for AY 2010­11. Similarly, the declaration made under PMGKY is not in relation to any specific assessment year or years and there was no such requirement also under PMGKY. As regards the declaration made under IDS, it is noticed that the same was made for AY 2015-16 alone. Moreover, it has been clearly laid down in section 199-1 of Chapter IX-A of The Taxation Law (Second Amendment) Act, 2016 dealing with the tax and investment regime under PMGKY that the amount of undisclosed income declared under PMGKY shall not be included in the total income of the declarant for any assessment year under the Income Tax Act, 1961. In view of the said specific statutory prohibition, the action of the assessing officer in relying on the declaration made by the appellant under PMGKY to draw inference regarding income escaping assessment for assessment year 2010-11 is in violation of the specific provisions of PMGKY and the same is not legally sustainable.

36. We further noted that in the satisfaction note recorded by the assessing officer prior to issue notice u/s 153C for AY 2010-11, he does not bring out the fulfillment of the conditions laid down in the fourth proviso to section 153A(1) of the Act. The mandatory conditions that the seized material and other documents and evidences in the possession of the assessing officer should reveal that income, represented by an asset, has escaped the assessment for the relevant assessment year or years and such income escaping assessment should be in excess of Rs 50 lakhs have not been satisfied in the appellant’s case. The discussion made in the preceding paragraphs has brought out the fact that no undisclosed asset has been found in the case of the appellant which represents the income escaping assessment for the relevant assessment years. It is interesting to note that no undisclosed asset has been brought to tax by the assessing officer even in the assessment order passed u/s 153C r.w.s 143(3) of the Act, for AY 2010-11. The CIT(A) after considering relevant facts rightly held that the reasons recorded by the AO in the satisfaction note do not bring out satisfaction of the mandatory conditions prescribed in the 4th proviso to sec 153A(1) which necessitate issue of notice for assessment years beyond six assessment years and thus, annulled the assessment orders passed by the Assessing Officer for AY 2010-11. Therefore, we are of the considered view that, there is no error in the reasons given by the ld. CIT(A) to annulled the assessment for Asst. years 2010-11 and thus, we reject grounds of appeal filed by the revenue and uphold the order of the CIT(A) for Asst. year 2010-11.

37. The next issue that came up for our consideration from ground no. 13 of appeal filed by the assessee for assessment year 2015-16 & ground no. 3 to 3.2 of appeal filed by the revenue for assessment year 2016-17 to 2018-19 is validity of notice u/s. 153C of the Act, in light of satisfaction note recorded by the Assessing Officer.

38. The Ld. CIT-DR, Shri. M. Rajan, submits that the ld. CIT(A) erred in holding that the notice u/s. 153C of the Act, issued for assessment year 2015-16 to 2018-19 is invalid and annulling the assessment order passed u/s. 143(3) r.w.s. 153C of the Act for the reason that there is no difference in income reported in ITR and income as per seized tally account without appreciating fact that the electronic device sized vide ANN/VP/ED/S2 contains consolidated entries in respect of bought note purchases and sales. In the assessment also, the additions towards undisclosed income was made on the basis of net of bogus purchases and sales. Therefore, from the above it is very clear that incriminating material seized have bearing on the determination of undisclosed income for assessment year 2015-16 to 2018-19 and thus, notice issued u/s. 153C is on sound footing. Further, the Assessing Officer has recorded satisfaction in light of incriminating material found during the course of search which includes ErandamThall, which clearly established undisclosed income belongs to the assessee. Further, there is enough material in the possession of the Assessing Officer including the ErandamThall which contains unaccounted expenditure of appellant and other group companies, which is having a bearing on undisclosed income of the appellant for these assessment years. From the above, it is very clear that the Assessing Officer has rightly recorded satisfaction note which is supported by incriminating material found during the course of search and thus, the CIT(A) erred in annulled the assessment orders. The CIT-DR, further submits that the statement recorded from employees of the appellant which are based on incriminating material found during the course of search clearly established undisclosed income on account of bogus purchases through dummy entities and said undisclosed income has been quantified during search itself. Although, there is live nexus between satisfaction note recorded by the Assessing Officer and incriminating material found during the course of search for these assessment years, but the CIT(A) without appreciating relevant facts quashed the assessment order.

39. The ld. Counsel for the assessee, Shri. D. Anand, Advocate submits that the satisfaction note recorded by the Assessing Officer on the basis of seized electronic devices ANN/VP/ED/S2, ANN/VP/ED/S16 and ANN/KRR/CFI/CO/B&D/S is incorrect and without any basis and consequent issue of notice u/s. 153C of the Act is without any jurisdiction and bad in law. The ld. Counsel for the assessee further submits that the electronic device seized ANN/VP/ED/S2, contains tally accounts of the appellant for assessment year 2013-14 to 2015-16, apart from the tally accounts of other group entities. It was further submitted that the Assessing Officer does not have the opportunity to examine the contents of seized electronic device, because it was seized on 07.07.2018 and was opened subsequently only on 09.09.2020. He further submits that as regards the seized electronic device ANN/VP/ED/S16, the device does not contain any tally accounts of the appellant for any assessment year. The said device is a hard disk containing the imaged data pertaining to 10 electronic devices seized from the residence of Shri. P. Karthikeyan. The said hard disk contains the ErandumThall among other things, but does not contain tally accounts either of the appellant or any other group entity. Therefore, the findings of the Assessing Officer in the satisfaction note that there is a difference between net profit as per seized tally data and income reported in ITR is totally incorrect. The ld. Counsel for the assessee further submits that the findings of the Assessing Officer in satisfaction note regarding unaccounted income arising on account of bought note purchase and sales, it was noticed that the documents seized vide annexure ANN/KRR/CFI/CO/B&D/S contains the bought note of M/s Christy Friedgram Industry only but not belongs to the assessee. From the above, it is very clear that the Assessing Officer could not have examined and verified the bought notes. Therefore, he submits that the legal sustainability of the satisfaction note is required to be determined on the basis of actual contents of the satisfaction note recorded by the Assessing Officer. In this case, if you go through satisfaction note recorded by the Assessing Officer in light of incriminating material referred to in the said satisfaction note, it is abundantly clear that the Assessing Officer does not verified the incriminating material to arrive at a satisfaction that there is undisclosed income for these assessment years. The ld. CIT(A) after considering relevant facts in their order clearly held that there is no incriminating material in the possession of the Assessing Officer to arrive at a satisfaction that there is undisclosed income for these assessment years to issue notice u/s. 153C of the Act and thus, rightly held that notice u/s. 153C of the Act is invalid and consequent Assessment order passed u/s. 143(3) r.w.s. 153C of the Act are void ab initio and liable to be quashed. Thus, the order of the CIT(A) should be upheld.

40. In so far as assessment year 2015-16, the CIT(A) upheld validity of notice u/s. 153C and consequent assessment order on the ground that the seized electronic device ANN/VP/ED/S2 has been imaged into the hard disk VP/ED/S8 and from the above it is evident that working copies have been prepared from the imaged disk. The handing over of the seized electronic device, ANN/VP/ED/S2 by the Assessing Officer of the searched person to the Assessing Officer of the appellant has to been seen in the said context and such handing over has to be construed as handing over of the working copy of the imaged data of the original seized electronic device and thus, observed that the Assessing Officer has examined and verified the contents of the seized device and hence, there is nexus between incriminating material and satisfaction recorded for issuance of notice. But, fact remains that the observation of the CIT(A) is on presumption basis only but not supported by any evidence in the satisfaction note because the Assessing Officer has not mentioned anything about such a working copy anywhere in his satisfaction note. The ld. Counsel for the assessee further submits that even assuming without admitting that the Assessing Officer had arrived at the satisfaction note based on the working copy, but there is no under reporting of income being the difference between the net profit as per the seized tally in the working copy and income as per the ITR. Therefore, on this very count itself it could be held that notice u/s. 153C for assessment year 2015-16 is without jurisdiction.

41. We have heard both the parties, perused the materials available on record and gone through orders of the authorities below. We have also carefully considered reasons given by the ld. CIT(A) to quash assessment orders for the Asst. years 2016-17 to 2018-19, in light of averments of ld. Counsel for the assessee and ld. DR present for the revenue. After, considering relevant submissions, we find that the seized electronic device vide annexure ANN/VP/ED/S-2 contains tally accounts of the appellant and other group companies for AYs 2013-14 to 2015-16. The said electronic device was seized 07.07.2018 at the office premises of M/s CFI at Tiruchengode during the course of search in the case of Shri.T.S.Kumrasamay., as evidenced by the relevant seizure annexure enclosed to Panchnama dated 09.07.2018 in respect of the said premises. On perusal of the seizure annexure ANN/VP/ED/S, it is noticed that the contents of the electronic device seized at Sl.No.2 of ANN/VP/ED/S have been imaged, along with the contents of electronic device seized at Sl.No.1 and 3 of the said annexure, into a hard disk and the said hard disk have been seized and shown at Sl.No.8 of the same seizure annexure. Once the data available in electronic device is imaged, working copies are prepared for the purpose of accessing the data in the course of recording the statements, it is evident that working copies have been prepared from the imaged disk. The handing over of the seized electronic device ANN/VP/ED/S-2 by the assessing officer of the searched person to the assessing officer of the appellant has to be seen in the said context and such handing over has to be construed as handing over of the working copy of the imaged data of the original seized electronic device. In view of this, we are not inclined to agree with the contention of the appellant that the assessing officer could not have examined and verified the seized electronic device ANN/VP/ED/S-2 as it was seized on 07.07.2018 and was opened subsequently only on 09.09.2020. It has to be construed that the assessing officer has examined and verified the contents of the said seized device by going through the contents of the working copy of the same. We, therefore, reject the contentions of the assessee.

42. Be that as it may, but fact remains that the so called tally data available in electronic device and under reporting of income computed by the Assessing Officer for assessment year 2015-16 is appears to be not based on any evidence in the said electronic device, because the assessee has made out a case that there is no difference between net profit as per seized tally from electronic device and net profit reported in ITR filed for the relevant assessment year which is evident from the fact that the net profit as per seized electronic device was at Rs. 1,67,37,040/- and income as per ITR was at Rs. 1,67,37,040/-. The reason for difference computed by the Assessing Officer is on account of considering incorrect amount from ITR filed for relevant assessment year at Rs. 11,90,330/-, instead of Rs. 1,67,37,040/- which is evident from copy of ITR filed by the assessee which is available in paper book. Therefore, from the above it is clear that the Assessing Officer has adopted incorrect figure to arrive at a conclusion that there is a under reporting of income for assessment year 2015-16 which necessitate issue of notice u/s. 153C of the Act. Since, there is no difference between net profit as per seized tally from electronic device ANN/VP/ED/S2 and income as per ITR, in our considered view the satisfaction recorded by the Assessing Officer for issue of notice u/s. 153C of the Act is not based on any evidences and thus, on the very count itself, it could be seen that notice u/s. 153C of the Act for assessment year 2015-16 is without jurisdiction and thus, we are of the considered view that notice u/s. 153C and consequent assessment order passed by the Assessing Officer is invalid in law and liable to be quashed. Hence, we quash notice u/s. 153C of the Act and consequent assessment order for assessment year 2015-16.

43. As regards to AYs 2016-17 to 2018-19, the learned CIT(A) held that the satisfaction recorded by the assessing officer in respect of AYs 2016-17 to 2018-19 is not a bona-fide satisfaction, since the seized material ANN/VP/ED/S-16 did not contain tally accounts of the appellant for AY 2016-17 to 2018-19 and the seized material vide ANN/KRR/CFI/CO/B&D/S-1-13 did not contain the bought notes of the appellant for the said AYs or any other AYs. The counsel for the assessee took us to paper book and explained that in seized electronic device, tally accounts and bought notes belongs to assessee was not found. From the above, it is clear that it was not possible for the assessing officer to examine the tally accounts for AY 2016-17 to 2018-19 and bought notes for the above period for arriving at the satisfaction for the purpose of underreporting of income between the returns filed for the said assessment years in comparison to the net profit reflected in the corresponding tally accounts. Further, the assessing officer while recording satisfaction has not referred to any evidence contained in the seized material received by him from the assessing officer regarding booking of bogus purchases and sales by the appellant through dummy entities as listed in the satisfaction note. Therefore, we are of the considered view that the satisfaction note recorded by the Assessing Officer does not have any reference to incriminating materials found during search and thus, in our considered view there is no valid satisfaction as required u/s 153C to issue notice. Thus, the findings of the ld. CIT(A) in as much as annulling the assessments for assessment year 2016-17 to 2018-19 is on sound footing and does not call for any interference from our end.

44. As this stage, it is relevant to consider reliance placed on the decision of the Jurisdictional High Court in the case of CIT Vs Late J.Chandrasekaran 338 ITR 61, wherein it was held that the assumption of jurisdiction for issue of notice u/s 153C is not valid in the absence of availability of seized material with the assessing officer at the time of issuing the notice. Further, it is also relevant to refer to the decision of Hon’ble supreme court in the case of CIT vs. Sinhgad Technical Educational Society [2017] 397 ITR 344 (SC), wherein it was held that the seized material should have co-relation with the assessment years for which the notices u/s 153C were issued and that the notices are not legally sustainable for the assessment years for which there is no such co-relation. This legal position is further strengthened by the decision of Hon’ble Supreme Court in the case of PCIT vs. Abhisar Buildwell Pvt. Ltd(2023)149 Taxmann.com 399(SC). In our considered view, the above mentioned decisions are squarely applicable to the facts of the appellant’s case with regard to the satisfaction notes for AYs 2016­17 to 2018-19. Since, the seized material available with the assessing officer did not contain any evidence in support of the satisfaction recorded for the said AYs, the satisfaction so recorded is without any basis and legally unsustainable. Since satisfaction regarding the existence of any seized material on the determination of total income of the appellant is the very basis for deriving the jurisdiction to issue notices u/s 153C, the lack of a valid satisfaction to the said effect results in a jurisdictional defect. The CIT(A) after considering relevant facts has rightly held that notice issued u/s 153C for Asst. Years 2016-17 to 2018-19 is invalid and legally not sustainable and consequently, annulled the assessments for Asst. Years 2016-17 to 2018-19.

45. The Hon’ble Delhi High Court in the case of PCIT vs. N. S. SOFTWARE (FIRM), 403 ITR 0259 (Delhi), it was held that the satisfaction note has been prepared in a standard mechanical format and it does not provide any details about the books of accounts which allegedly belong to the Assessee Firm. The AO’s note nowhere reflects whether any document seized, on application of his mind, disclosed that it belonged to the assessee, and if so, its prima facie nature. Therefore, it was held that, the failure of the AO to record a specific satisfaction as to how the recovered material belonged to the assessee in the note that preceded the notice issued under it, vitiates the assessments.

46. The Hon’ble Delhi High Court in PEPSI FOODS PVT. LTD. vs. ASSISTANT COMMISSIONER OF INCOME TAX (90 CCH 0059) (Del HC), while quashing the notice under section 153C held that Section 132(4A)(i) clearly stipulates that when inter alia any document is found in the possession or control of any person in the course of a search it may be presumed that such document belongs to such person. It is similarly provided in Section 292C(1)(i), whenever a document is found from a person who is being searched the normal presumption is that the said document belongs to that person. It is for the Assessing Officer to rebut said presumption and come to a conclusion or “satisfaction” that the document in fact belongs to somebody else. There must be some cogent material available with the Assessing Officer before he/she arrives at the satisfaction that the seized document does not belong to the searched person but to somebody else. Surmise and conjecture cannot take the place of “satisfaction”.

47. Further, it is evident from the satisfaction note that apart from saying that the documents belonged to the petitioner and that the Assessing Officer is satisfied that it is a fit case for issuance of a notice under Section 153C, there is nothing which would indicate as to how the presumptions which are to be normally raised as indicated above, have been rebutted by the Assessing Officer. Mere use or mention of the word “satisfaction” or the words “I am satisfied” in the order or the note would not meet the requirement of the concept of satisfaction as used in Section 153C of the said Act. In this regard, reference is made to the Departmental Circular No.24/2015 dated 31.12.2015 in which CBDT has given direction that pending litigation with regard to recording of satisfaction note under section 158BD/153C should be withdrawn/not pressed if it does not meet the guidelines laid down by the Apex Court in M/s Calcutta Knitwears.

48. In this view of the matter and considering the facts and circumstances of the case, we are of the considered view that the satisfaction note recorded by the Assessing Officer does not have any reference to incriminating materials found during search and thus, in our considered view there is no valid satisfaction as required u/s 153C to issue notice. Thus, the findings of the ld. CIT(A) in as much as annulling the assessments for AY 2016-17 to 2018-19 is on sound footing and does not call for any interference from us. Thus, we are inclined to uphold the findings of the ld. CIT(A) and dismiss grounds taken by the revenue for Asst. years 2016-17 to2018-19. Similarly, we quash notice u/s. 153C of the Act for assessment year 2015-16 and annulled consequent assessment order passed by the Assessing Officer for assessment year 2015-16. Accordingly, we allow the grounds of the assessee.

49. The next issue that came up for our consideration from ground no. 4 to 4.3 of revenue appeal for assessment year 2010-11 & ground no. 3 to 3.3 of revenue appeal for assessment year 2015-16 to 2018-19 is deletion of additions towards under reporting of income being difference between net profit as per seized tally data and ITR filed for assessment year 2010-11, 2015-16 to 2018-19 and addition on account of net of bogus bought note purchases and bought note sales for assessment year 2015-16 & 2016-17 and also addition on account of net of bogus purchases and sales from dummy entities for assessment year 2017-18 & 2018-19.

50. The brief facts with regard to the impugned dispute are that the AO has made additions towards difference in profit as shown in the return of income filed by the appellant and income as per seized tally account on the ground that the assessee has under stated net profit for assessment years 2010-11, 2015-16 to 2018-19. The details of difference computed by the Assessing Officer are as follows:

AY	Income as per seized tally(In. Rs)	Income as per ITR (In. Rs)	Unaccounted income (In.Rs)
2010-11	11,90,330	1,67,37,040	1,55,46710
2015-16	6,58,68,130	6,60,00,000	1,31,875
2016-17	8,46,79,820	8,49,99,999	3,20,182
2017-18	7,77,42,660	7,77,00,000	2,57,344
2018-19	11,40,73,496	11,40,99,650	4,596

51. The CIT-DR, submits that the ld. CIT(A) erred in deleting additions made by the Assessing Officer towards unaccounted income, being difference between net profit as per tally and income reported in ITR without appreciating fact that the employees of the appellant in their statement recorded u/s. 132(4) of the Act admitted that there is under reporting of income in the ITR filed for the relevant assessment year. The CIT(A) without appreciating relevant facts simply deleted the additions made by the Assessing Officer.

52. The ld. Counsel for the assessee submits that additions made by the Assessing Officer towards under reporting of income is purely on the basis of statement of employees without properly verifying the tally data and ITR filed for the relevant assessment year because the assessee has filed relevant details and proved that there is no difference in net profit as per tally and income reported in ITR. The CIT(A) after considering relevant submissions has rightly deleted additions made by the Assessing Officer and their order should be upheld.

53. We have heard both the parties, perused the materials available on record and gone through orders of the authorities below. The ld. CIT(A), in their order had categorically observed that the Assessing Officer has wrongly extracted the amounts of income as per ITR for assessment year 2010-11 at Rs. 11,90,330/- instead of Rs. 1,67,37,040/- and then compared with net profit as per seized electronic devices which was at Rs. 1,67,37,040/- to arrive at difference of Rs. 1,55,46,710/-. The ld. Counsel for the assessee took us to paper book which contains ITR filed for the assessment year 2010-11 and explained, how the Assessing Officer fundamentally went wrong and from the explanation of the assessee, it is noticed that the Assessing Officer has wrongly considered incorrect amount and assumed that there is a difference in net profit. But, fact remains that there is no difference between net profit as per seized electronic device and net profit in ITR filed for the assessment year 2010-11. The CIT(A) after considering relevant facts has rightly deleted additions made by the Assessing Officer and thus, we are inclined to uphold the findings of the ld. CIT(A) and direct the Assessing Officer to delete additions of Rs. 1,55,46,710/- for assessment year 2010-11 towards under reporting of income.

54. In so far as assessment years 2015-16 to 2018-19, as pointed out by the ld. Counsel for the assessee, from ITR filed for these assessment years that difference between income as per ITR and income as per seized electronic device is due to the depreciation provided as per section 32 of the Act, for assessment year 2015-16 to 2017-18 and for assessment year 2018-19 it was due to disallowance of interest on TDS, EPF and GST. From the above, it is very clear that there is no difference between net profit as per seized electronic device and net profit reported in ITR filed for relevant assessment years. The ld. Counsel for the assessee took us to paper book which contains ITR filed for the assessment year 2015-16 to 2018-19 and explained, how the Assessing Officer fundamentally went wrong and from the explanation of the assessee, we find that the difference noticed by the Assessing Officer is on account of providing depreciation and disallowance of certain inadmissible expenses and thus, we are of the considered view that the assessee has explained difference noticed by the Assessing Officer with necessary evidences. The CIT(A) after considering relevant facts rightly deleted additions made by the Assessing Officer.    Therefore, we are of the considered view that there is no error in the reasons given by the CIT(A) to delete additions towards difference between net profit as per tally and income as per ITR for assessment year 2010-11, 2015-16 to 2018­19. Thus, we are inclined to uphold the findings of the ld. CIT(A) and reject ground taken by the revenue.

55. The next issue that came up for our consideration from ground no. 3 to 3.3 of revenue appeal is addition towards undisclosed income arising from bogus bought note purchases and sales for assessment year 2015-16 &2016-17.

56. The facts with regard to impugned dispute are that, during the course of search huge cash purchases and cash sale by way of bought notes were noticed vide seized material ANN/VP/ED/S1 to S7. It was observed during the course of search that the assessee was resorted to under reporting of income by inflating bought note purchases. Bought notes are purchase bills containing the name of the seller, bought note no, quantity purchased and amount paid towards the purchase. The assessee group has made two types of bought note purchases namely (a) purchase of commodities directly from the farmers through bought notes in cash. (b) Purchase of commodities from dummy entities using bought notes and making payment through banks. During the course of search, the complete set of bought notes of M/s CFI was seized on 27.08.2018. The bought notes were verified with tally accounts in the electronic device as per Annexure –VP/ED/ED/S1 to S7. The seized bought notes and tally extracts were found matching. It was further noted that, in respect of bought note purchases there was no weighment slips, no goods receipt notes (GRN). Further, during the course of post search investigation, it was found that same lorry number was used for number of bought note purchases and instance of such cases has been furnished in the assessment order. During the course of search, on examination of books and accounts maintained in seized tally vide annexure -ANN/VP/ED/S1 to S7 from Smt. R. Anandhi, she was questioned about the nature of purchases, and in response to specific question, she had admitted that bought note purchases were booked for inflation of purchases. During the course of post search investigation, statement of Shri E. Aththiappan was recorded and in response, he had admitted there was no stock register for financial year 2014-15 & 2015-16 and further, he is in possession of stock register for assessment year 2017-18 & 2018-19 only. A statement from M. Vannakannan, DGM (Accounts) was also recorded and he was asked to furnish the quantity details of Maize purchases since financial year 2008-09 onwards. In response, he submitted that quantitative details of maize purchases are available in tally from financial year 2017-18 and for earlier years only purchase value has been entered in the tally without keying in the quantitative details.

57. During the course of assessment proceedings, the Assessing Officer analyzed details of consumption of major raw materials taken from Mr. M. Yuvaraj, Deputy Manager (Production) and on analysis, it was noticed that purchases through bought notes in cash were at higher market price and simultaneously sales for the same is also booked at a much lower price. The Assessing Officer on the basis of various incrimination material found during the course of search, coupled with statement recorded from various persons, observed that bogus purchases were booked though bought notes. In order to verify and understand the veracity of bought note seized, a random set of bought notes were selected and compared with tally accounts seized in the case of M/s. CFI for the financial year 2014-15 and it was found that the assessee has booked bought notes purchases under the head exempted purchase category. The Assessing Officer further observed that bought notes purchases were not supported by necessary evidences including GRN, weighment slip etc. Further, there is a huge variation in purchase quantity and quantity consumed in production process. Therefore, the Assessing Officer opined that the assessee is indulged in booking bogus bought purchases and bogus bought notes sales to reduce profit. Therefore, by taking into bought note purchases and sale for the assessment year 2015-16 & 2016-17, computed unaccounted income arising out of bought note purchases and sales. Thus, The AO made additions of Rs. 62,03,02,732/- & Rs. 47,96,78,788/-, respectively for assessment year 2015-16 & 2016­17 towards such unaccounted income.

58. Being aggrieved by the assessment order, the assessee preferred an appeal before the CIT(A). Before the CIT(A), the assessee challenged the additions made by the Assessing Officer towards undisclosed income arising out of alleged bogus bought note purchases and sales in light of various evidences and argued that addition made by the Assessing Officer is not based on seized documents, because the so called bought notes considered by the Assessing Officer does not pertains to the assessee. Further, the Assessing Officer has made additions only on the basis of statements of various employees of the appellant, even though the persons who gave the statements have filed retractions and explained how statements were obtained during the course of search. The assessee had also contended additions made towards difference in bogus bought note purchase and sales and argued that the Assessing Officer has completely disregarded explanation furnished by the assessee with regard to nature of business, and procedure followed for purchase of major raw materials. The assessee further contended that the observation of the Assessing Officer with regard to unavailability of weighment slips, GRN note and stock details is purely on suspicion, without there being any evidence to suggest that bought note purchases are bogus in nature. The assessee had also explained the deficiencies noticed in documentation and variation in quantities of purchases and consumption in production process. But, the AO disregarded explanation and made additions.

59. The ld. CIT(A), after considering relevant submissions of the assessee and also taken note of reasons given by the Assessing Officer to make additions towards undisclosed income arising out of bogus bought note purchases and sales, held that the finding of the AO that the appellant indulged in bogus bought note purchases and corresponding bogus sales to suppress its income is unsustainable on facts. The CIT(A) directed the Assessing Officer to delete additions made for AYs 2015-16 to 2016-17 towards the unaccounted income arising from bogus bought note purchases and corresponding sales by holding that the observation of the Assessing Officer with regard to weighment slip, GRN and lorry receipt is hypothetical, because if you go through the process employed by the assessee for purchase of raw materials, it was very clear that bought note purchases are directly procured from farmers on ‘as is where is’ condition which are not supported by documents like weighment slips, GRN and lorry receipts like purchases from traders. The CIT(A) further observed that the observation of the Assessing Officer with regard to bought note purchases from APMC is completely contrary to facts on record, because it is impossible to imagine bogus purchases can be made from APMC which are regulated bodies from various state governments. The CIT(A) had also negated observation of the Assessing Officer with regard to variation in quantities of purchases and consumption and countered the findings of the Assessing Officer with facts on losses in production process including storage loss. Therefore, the CIT(A), observed that the Assessing Officer is erred in making additions towards unaccounted income being difference between bought note purchases and sales for assessment year 2015-16 and 2016-17. Being aggrieved by the CIT(A) order, the revenue is in appeal before us.

60. The ld. CIT-DR, Shri. M. Rajan, submits that the CIT(A) erred in deleting addition made towards unaccounted income arising out of difference between purchases through bogus bought notes and sales through bogus bought notes, without appreciating fact that the assessee used bought notes for inflation of purchases and reduce profit and same has been confirmed by Smt. R. Anandhi in her statement recorded u/s. 132(4) of the Act, and it has been strengthened by the statement of Mr. Gnanasekaran & Mr. ThiruvenkataPrabhu, Manager (Purchases), where they had admitted that for bought note purchases there would not be any supporting documents. The ld. CIT-DR, further submits the CIT(A) erred in accepting the explanation of the assessee with regard to bought note purchases without appreciating fact that the assessee could not explain how a single lorry can be used to transport huge quantity of maize from different places in a single day. The Assessing Officer has brought out various facts in the assessment order about modus operandi of purchases through bought notes and sales through bought notes and the same has been supported by admission of employees of the assessee during the course of search. The CIT(A), without appreciating relevant facts simply accepted explanation of the assessee and deleted additions made towards unaccounted income arising out of bogus bought note purchases and sales. It was further submitted that Mr. ThiruvenkataPrabhu. Manager (Purchases) of the assessee group in his sworn statement stated that bogus purchases are shown in the bought note as direct purchases from farmers and these bogus bought note are annexed with sampling details slip printed in pink colour without any entry in the sample register. The Assessing Officer has clearly brought out the fact of using single lorry number for many bought notes and for bogus purchases only a consolidated entry made day wise in the tally without any supporting documents.

61. The ld. Counsel for the assessee Shri. D. Anand, Advocate, supporting the order of the CIT(A) submits that the sole basis for the Assessing Officer to make additions towards unaccounted income arising out of bought note purchases and sales is sworn statement of Mr. Gnanasekaran & Mr. ThiruvenkataPrabhu, obtained during the course of search under coercion which were all subsequently retracted and said statements cannot be considered as valid evidence for making additions. The Counsel for the assessee further submits that the Assessing Officer completely erred in rejecting the purchase made under bought note and AMPC and the sales made through agents in the market without understanding the business model of the assessee. Further, the Assessing Officer has made additions towards unaccounted income from the books of accounts maintained by the assessee for these assessment years without appreciating fact that bought note purchases and sales are accounted in regular books of accounts and purchases and sale has been accepted by the Sales Tax Department. The ld. Counsel for the assessee further submits that the main business of the assessee is to supply nutrition food and other food supplements to various government departments. The Assessing Officer failed to appreciate that but for these purchases, the appellant could not have sold its products to the government and other customers. The Counsel for the assessee further submits that the assessee has explained modus operandi employed for procuring major raw materials and one of the method employed by the assessee is to directly purchase from farmers. The purchases from farmers has been made through bought note purchases, because farmers do not have any formal system like any other traders. Therefore, bought note purchases does not have necessary supporting evidences like weighment slips, GRN because those purchases are directly made from farmers in their places and on where is as is basis. He further submits that the Assessing Officer has treated even purchases made from APMC as bogus in nature without appreciating fact that it is impossible to even think bogus purchase can be made from regulated markets. The assessee has explained the procedure followed in bought note purchases and also explained various deficiencies noticed by the department during the course of search and the CIT(A) after considering relevant facts has rightly deleted the additions made by the Assessing Officer and their order should be upheld.

62. We have head both the parties, perused materials available on record and gone through orders of the authorities below. We have also, carefully considered reasons given by the Assessing Officer to make additions, in light of various averments made by the counsel of the assessee. On careful examination of various facts, we ourselves do not subscribe to the reasons given by the Assessing Officer for simple reason that none of the bought notes considered by the Assessing Officer in the assessment order pertains to the appellant and appellant does not handle the goods mentioned in the said bought notes. The assessing officer observed that the bought note purchases were found to be without weighment slip and good receipt note (GRN). The assessing officer referred to the statement of Shri.Rajaram Mohan, GM (Purchase & commodities), wherein he explained the purchase process followed by the appellant group and the documentation maintained with regard to the same and stated that the bought note purchases for which the weighment slip and GRN have not been found are required to be treated as bogus purchases. In this regard, we find that the purchase process and the related documentation as explained by Shri.Rajaram Mohan pertained to the purchases made from registered dealers/manufacturers only and the same is not applicable to purchases made through bought notes, in view of the fundamental difference in the nature of the said two types of purchases. None of the said steps in the purchase process explained by Shri.Rajaram Mohan are relevant for the purchases made from the farmers at the farm level by making payment in cash, in view of the completely different commercial nature of the said purchases.

63. Further, bought notes are used for making purchases of agricultural commodities from the farmers through their agents at the farm level itself on “as is where is” basis. Since, the weighment of the commodity is made by the farmers/agents themselves at the farm level in the presence of the purchase executives of the appellant, no party weighment slip is necessary for such purchases. It is also explained that as the material is procured on “as is where is” basis and the goods are lifted after making necessary payment in cash, the GRN is not necessary for such purchases and no GRN is prepared by the stores in-charge for such purchases, since the payment has already been made in cash at the time of purchase at the farm level itself. The buyer takes a decision to buy the goods and lift the goods on “as is where is” basis and there is no scope for sorting or grading the goods. No sale invoices are issued by the farmers for the sales made by them unlike registered dealers/other traders. It is therefore an accepted trade practice to prepare self-made bought notes by the buyer organizations as evidence of the purchases made from farmers. The lorry freight slip is not issued to the buyer, since the freight is borne by the agent of the farmers out of their sales commission. In view of these reasons, documentation such as weighment slip, GRN, lorry freight slip, lab test certificate will not be available in respect of bought note purchases made from farmers, having regard to the nature of said purchases as opposed to the purchases made from registered dealers/manufacturers. Similarly, in the case of purchase of eggs also, the same are procured from the poultry farmers/petty traders in cash. In such cases of bought note purchases of eggs, there is no question of having any weighment slips since weighment of eggs is not at all relevant. Since purchases are made in cash, GRN is also not required for such purchases. Therefore, it is completely wrong to draw inference that the bought notes purchases are bogus purchases on the reasoning that no weighment slip, GRN and lorry freight slip are found in respect of such purchases.

64. As regards observations of the Assessing Officer with regard to quality control procedure, it is explained that given the nature and terms of purchases made from farmers, no quality control test is carried out in respect of bought note purchases at the stage of receipt of goods. Further, on the basis of statements of Shri.Rajaram Mohan and Smt. P Vidhaya Lakshmi, (Quality Control-Manager of CFI), the assessing officer observed that the test certificate issued by the testing lab in the case of genuine purchases is in blue colour and the details of the concerned sample and the test result is entered in the sample register, while test certificate issued in the case of bogus bought note purchases is annexed with “sampling details” slip in pink colour and no details of the same are entered in the sample register. In this regard, the counsel explained that no quality control test is carried out at all in respect of bought note purchases at the stage of receipt of goods. The “sample for lab test” slip in blue colour is used for sampling of materials purchased from registered dealers & FCI and the “sampling details” slip in pink colour is used when the raw materials are issued for production. Similarly, the pink slip contains details such as shift/batch number, number of batch mixes, number of bags, quantity of total production, quantity taken for sampling etc., which clearly shows that the same is used for testing the raw material at the time of issuing such material for production. Therefore, the observations of the Assessing Officer to drawn adverse inference against the assessee on the basis of different colour slip used for different purposes are devoid of merits.

65. We further noted that no bought notes pertaining to the assessee have been seized during the course of the search and the assessing officer has wrongly generalized his observations in the case of M/s CFI to the assessee. Therefore, the discussion made by the assessing officer is not at all relevant to the assessee in the absence of seizure of bought notes of the appellant. Further, the net amount of bogus purchases and sales for the purpose of quantifying the unaccounted income has been directly adopted by the assessing officer from the statement of Shri. Gnanasekaran dated 08.07.2018. The details of the break-up of bogus purchases and bogus sales taken into account for arriving at the said net figure are conspicuous by their absence in the statement or in the annexure to the said statement of Shri. Gnanasekaran. Further, the details of commodities which were considered for quantifying the bogus purchases and sales are nowhere mentioned in the said statement or in the assessment order. It is noticed that neither the statement of Shri. Gnanasekaran, nor the assessment order contain any details of how the said net amount of bogus purchases and sales has been arrived at. The assessing officer himself stated in the assessment order that income as per seized tally account has not been correctly incorporated by Shri.Gnanasekaran, while quantifying the unaccounted income in his statement dated 08.07.2018. The assessing officer stated that the correct figures of income as per seized tally account have been incorporated after making verification of the seized tally account during the assessment proceedings. This admission by the assessing officer himself in the assessment order is clear evidence of the fact that the statement obtained from Shri. Gnanasekaran is totally unreliable since the said person was unable to furnish correct figures of even simple data regarding profit as per tally accounts in his statements and therefore, his statement cannot be considered as reliable.

66. The assessing officer was requested by CIT(A) to furnish the relevant details of quantification of the bogus purchases and sales Viz., commodity wise and transaction wise details of bogus purchases and sales vide letter dated 17.05.2022. The assessing officer furnished his remand report vide letter dated 07.07.2022. However, no details regarding quantification of bogus purchases and sales have been furnished by the assessing officer in the remand report. The assessing officer was once again requested by CIT(A) vide letter dated 27.07.2022 to furnish the commodity wise and transaction wise details of bogus purchases and bogus sales, to enable the assessee to defend itself and also to enable the CIT(A) to adjudicate the relevant grounds of appeal. However, no details regarding quantification of bogus purchases and sales have been furnished by the assessing officer in the remand report. From the above, it is very clear that the addition towards unaccounted income arising from bogus bought note purchase and sales for AYs 2015-16 and 2016-17 is merely based on the statement of Shri. Gnanasekaran and without the verification of its correctness by the assessing officer and without affording opportunity to the appellant to explain the adverse material in violation of principles of natural justice and thus, addition cannot be sustained”. We further noted that the assessing officer did not make any enquiries with the suppliers from whom the bought note purchases have been made or the buyers to whom cash sales have been made and did not bring any evidence on record in support of the inference of bogus purchases and sales on the basis of such enquiries. Thus, the addition seems to have been made based only on the suspicion and surmise basis and not on the basis of any concrete enquiry.

67. At this stage, it is relevant to refer to the findings of the special auditor’s report in this regard. In the audit findings furnished in the audit note, the special auditor has given a finding that the net profit as per the final accounts prepared by him is in conformity with the net profit disclosed by the appellant in the returns of income filed for the assessment years under consideration. The special auditor further stated that discrete enquiries were made with various employees, suppliers/agents for the purpose of audit evidence and external confirmation/audit evidences were obtained from the creditors, suppliers, agents, statutory authorities etc., during the course of special audit and that no corroborative evidences were observed/found during the audit, other than the sworn statements recorded during the search, to form an opinion to conclude that the purchases, stock, dispatch, expenditure and income are false. He, further observed that it was noticed during the special audit that the purchases, sales, expenditure have been duly accounted conforming to the volume of turnover, consumption of such raw materials in the finished products and returns filed with other statutory authorities. Further, on analysis of the purchase procedures of the appellant, the special auditor stated that documents such as weighment slip, purchase order, test report etc., that are present for the purchases from a dealer are not of any use in the case of purchases made from farmers/agents through bought notes in view of the different characteristics associated with such purchases. Therefore, from the above, it is very clear that unaccounted income computed by the Assessing Officer on the basis of non existent bought notes is nothing but additions made on the basis of statement of employees alone. As we have already noted in earlier paragraphs of this order, the statements given by various employees are not based on any evidences found during the course of search but purely on mistaken of facts. The CIT(A), after considering relevant facts has rightly deleted additions made by the Assessing Officer towards unaccounted income arising from bogus bought note purchases and sales for assessment year 2015-16 & 2016-17. Thus, we are inclined to uphold the findings of the ld. CIT(A) and reject ground taken by the revenue.

68. The next issue that came up for our consideration from ground no 3 to 3.3 of revenue appeal for assessment year 2017-18 & 2018­19 is addition of undisclosed income arrived by the learned Assessing Officer on account of purchase inflation through dummy entities for assessment years 2017-18 and 2018-19. The brief facts of the impugned dispute are that the assessee is engaged in trading of Eggs, Dhal and Sugar etc. and supplies to the Government under the ICDS and Noon Meal Scheme. Apart from the above, the company is into the trading of agro commodities. The Assessee procures eggs from small and medium farmers at the farm gate on as is where is basis, as well as through traders. The eggs so procured are then subjected to grading in order to match the contract specifications. The eggs which do not comply with specifications are removed from the lot and the remaining lot is sent for dispatch. The average percentage of rejection of eggs due to small size eggs, breakage etc., would be in the range of 30-40%. To procure agro commodities the main sources are farmers, traders, commission agents, local market purchases made through executives/staff and through allotment as per tender. For purchases of eggs from farmers/traders, no Purchase order/weighment slip/quality records/ GRN are required and it is not regular trade practice and is on cash and carry basis only. Logistics expenses like transportation, loading and unloading gunny bags, trays for eggs etc., are also invariably incurred in cash. Procurement of raw material directly from farmers, small traders, commission agent is at affordable prices and is in as is where basis is and it is not like the procurement in organized markets. Weighment is carried out by the farmers/ mandis and goods are kept in pre-weighed bags. The goods can be lifted from the farm level / mandis only after making the necessary payment for the goods. The goods are subjected only to physical inspection and no scientific method of inspection is adopted. The appellant claims that purchases from farmers is to the benefit of the organisation as the profit margin of dealers and wholesalers by default gets eliminated and is effective method to reduce the risk of fluctuating prices, which is one of the prime risks of the business.

69. The Assessing Officer made additions towards undisclosed income arising from bogus purchases through dummy entities on the ground that the assessee and its other group have generated unaccounted income by indulging in bogus purchases from dummy entities and bogus sales. It is the case of the assessing officer that the modus operandi of bogus bought note purchases and corresponding bogus sales is substituted in the impugned years by modus operandi of bogus purchases and sale through dummy entities. The assessing officer further observed that M/s CFI and other group concerns have made bogus purchases from 28 dummy entities whose operations are controlled by finance personnel of M/s CFI, who in turn have shown bogus bought note purchases from a pool of 1317 individual suppliers who are the relatives of the employees of M/s CFI and other group concerns. The basis for additions is the statement of Shri. Gnanasekaran, Accountant of appellant recorded u/s 132(4) on 08.07.2018, where in response to Q.No.15 regarding the modus operandi of manipulation of books of accounts, he stated that bogus purchases and bogus sales have been booked to reduce the profit of the appellant, as per the directions of Shri.Vannakannan and Shri.Maheswaran. In response to Q.No 16, he stated that the cash purchase and cash sales were substituted by the purchases and sales through dummy entities created for the said purpose. In response to Q.No 17, he stated that there won’t be actual movement of goods with regard to such purchases and only entries are made in the books and payments are made through bank. He furnished a list of dummy entities with which bogus purchases and sale entries are made by the appellant in response to Q.No.18. He was requested to quantify the year wise unaccounted income of the appellant based on the responses given by him regarding bogus purchases and sales and in response to Q.No 19, he furnished the following quantification of undisclosed income with regard to AY 2017-18 and 2018-19 involving purchases and sales through dummy entities:

AY	Quantum of addition (in Rs.)	Remarks
2017-18	88,41,79,695/-	Net of bogus purchase & bogus sales using dummy entities
2018-19	95,20,41,762/-	Net of bogus purchase & bogus sales using dummy entities

70. Further, Shri. Vannakannan confirmed the aforesaid computation of unaccounted income in his statement recorded u/s 132(4) on 08.07.2018. The excerpts of the said statement of Shri. Vannakannan on this issue were shown to the Shri.T.S.Kumarasamy, Proprietor of M/s CFI and he confirmed the said excerpts in his statements recorded u/s 132(4) on 08.07.2018 and 09.07.2018. Further, the required cash has been arranged by transferring money from the group concerns to the dummy entities as advance/payment to creditors and in turn, money has been transferred to 1,317 individual suppliers account as advance or payment to creditors. He further stated that cash is drawn from the banks by using free signed cheques in possession of the assessee and its group concerns. It was further noted that the management of the dummy entities has been handled by Shri. N. Vijayanathan. He was examined during the course of search where he explained modus operandi of dummy entities. He further stated that all dummy entities have maintained books of accounts and also filed their returns with various statutory authorities. However, there was no actual movement of goods. The Assessing Officer on the basis of information gathered during the course of search, coupled with post search enquiries opined that the assessee has created various dummy entities to book bogus purchase and sales in order to reduce profits. The Assessing Officer had discussed the issue in light of examination of more than 1,300 dummy suppliers and their deposition given during the course of assessment proceedings, seizure of free signed cheque books of all dummy entities including images of ATM cards and also on analysis of various bank accounts, finally he came to the conclusion that the assessee has generated unaccounted income being difference between bogus purchases and bogus sales through dummy entities and accordingly, made additions towards undisclosed income arising on account of purchases and sales through dummy entities for assessment year 2017-18 & 2018-19 and relevant details are as follows:

AY	Nature of purchase	Quantum of addition (in Rs.)
2017-18	Net of bogus purchases and sales using dummy entities.	88,41,79,695/-
2018-19	Net of bogus purchases and sales using dummy entities.	95,2041,762/-

71. Being aggrieved by the Assessment order, the assessee preferred an appeal before the CIT(A). Before the CIT(A), the assessee challenged additions made by the Assessing Officer towards undisclosed income arising out of purchases and sales through dummy entities in light of retraction filed by various employees, whose statement was the basis for the Assessing Officer to make additions. The assessee had also furnished various evidences to negate the observations of the Assessing Officer with regard to contents of various statement recorded from various employees on the issue of dummy entities. The CIT(A), after considering relevant submissions of the assessee and also taken note of various facts deleted additions made by the Assessing Officer towards unaccounted income arising out of purchases and sales through dummy entities by holding that the reasons given by the Assessing Officer to make additions towards difference between purchases and sales through dummy entities is unsustainable on facts. Being aggrieved by the CIT(A) order, the revenue is in appeal before us.

72. The CIT-DR, Shri. M, Rajan, submits that the CIT(A) is erred in deletion of addition made towards unaccounted income in respect of bogus purchases through dummy entities and corresponding bogus sales to suppress income without appreciating fact that the partners of 28 dummy entities and the 1317 individual suppliers of such entities are the employees/ex-employees of the appellant or his group concerns or their friends and relatives. The CT-DR, further submits that the assessee used the names of his employees and their relatives to float dummy entities for the purpose of booking bogus purchases and sales which is evident from the facts gathered during the course of search, where the department has unearthed the modus operandi of dummy entities in light of huge evidences found and seized during the course of search. He further submits that the department has seized documents from L. Shivakarthi, partner in one of the dummy entities which includes IT returns, cheques books and partnership deed of 28 dummy entities. The electronic devices seized from him included the list of persons of the assessee concern who are put in charge of 28 dummy entities and list of various persons who are relatives of staff members. Further, statement recorded from Shri. N. Vijayananthan clearly established the fact of operating the dummy entities by the assessee to book bogus purchases and to reduce profit. The statement of N. Vijayanathan is confirmed by Shri Vannakkannan, DGM (Accounts) and further strengthened by statement of Mrs. Anandhi, recorded on 07.07.2018. The Assessing Officer has brought out clear facts to the effect that purchases through dummy entities and corresponding sales is bogus in nature and thus, rightly made additions toward unaccounted income being difference between purchases through dummy entities and corresponding sales. The CIT(A) without appreciating relevant facts simply deleted additions made by the Assessing Officer.

73. The ld. Counsel for the assessee, Shri. D. Anand, Advocate, supporting the order of the CIT(A) submits that the assessee has filed various evidences to negate the observations of the Assessing Officer in respect of unaccounted income arising out of bogus purchases and sales through dummy entities and the same has been appraised by the CIT(A) to delete additions made by the Assessing Officer. The Ld. Counsel for the assessee further submits that the Assessing Officer has completely erred in making additions towards unaccounted income for two assessment years solely on the basis of statements of various employees ignoring the fact that the persons who gave statements have withdrawn/retracted from their statement with valid reasons and thus, those statements cannot be considered as valid evidence for making addition. The ld. Counsel for the assessee further submits that the findings of the Assessing Officer with regard to dummy entities is factually incorrect because the sole basis for the Assessing Officer to arrive at adverse inference against the assessee is statements of various employees however, fact remains that those statements have been retracted and thus, same cannot be considered as valid evidences. The CIT(A) after considering relevant facts has rightly deleted additions made by the Assessing Officer and their order should be upheld.

74. We have heard both the parties, perused the material available on record, and gone through orders of the authorities below. The Sole basis for the Assessing Officer to make additions towards unaccounted income arising from bogus purchases through dummy entities is statement recorded from Shri. M Karthikeyan on the date of search on 07.07.2018 and computation of unaccounted income from bogus purchases through dummy entities. We have given careful consideration to the reasons given by the Assessing Officer, in light of arguments of the assessee and we ourselves do not subscribe to the reasons given by the Assessing Officer for simple reason that, except statements from Shri. M Karthikeyan and other employees of the appellant, there is no details with the Assessing Officer with regard to commodity wise breakup of the quantum of bogus purchases and sales through dummy entities. The statements of employees were recorded during the course of search in a hurried manner and no details as to how and where the purchase and sales figure has been culled out. Therefore, we are of the considered view that in absence of any supporting evidences with regard to computation of unaccounted income out of bogus purchases through dummy entities, the additions made by the Assessing Officer solely on the basis of statement of employees cannot be sustained, because the statements relied upon by the Assessing Officer recorded from various employees does not have any evidentiary value as the persons who gave the statement has filed their retraction along with affidavit and thus, we are of the considered view that there is no evidence with the Assessing Officer to justify additions made towards unaccounted income. Further, the Assessing Officer had also taken support from various facts gathered during the course of search including seizure of bank account details of 28 entities and books of accounts maintained in a common place to draw an adverse inference against the assessee and such adverse inference was solely based on the statement of the person who maintains those details. But, fact remains that on perusal of statement of person who is in-charge of these 28 entities, nowhere it was stated that those entities are dummy entities created by the assessee for the purpose of inflating purchases. Further, evidences collected during the course of search itself proves beyond doubt that those 28 entities are separate legal entities and complied with all statutory laws including filing of returns under VAT Act, Income-tax returns etc. Therefore, from the above, it is very clear that the Assessing Officer is completely erred in coming to the conclusion that purchases from those entities is bogus in nature and difference between purchases and sales in unaccounted income of the assessee.

75. We further noted that during the course of assessment proceedings, the assessee had sought for the break up details for the above said quantum of addition, but the same was not provided to the assessee even after repeated requests. Further, during the appellate proceedings, the Ld.CIT(A) had also sought for the break­up of the details on two occasions viz. 17.05.2022 and 27.07.2022 and even then, the assessing officer was unable to furnish the same. It is significant to note that the assessment order is completely silent regarding the entities to whom the alleged bogus sales were made and the reasons and specific evidences found during the search to hold that the said entities are dummy entities. The assessing officer made a sweeping observation that the said sales were made to dummy entities, without even adverting to who the said dummy entities are and what are the features/characteristics which made them liable to be treated as dummy entities. The assessing officer has solely and merely relied on the statements of employees of the appellant concern that bogus sales are booked for the purpose of matching the quantity of bogus purchases through dummy entities and that such sales are booked at lower value than the purchase cost. However, no material has been brought on record by the assessing officer regarding the persons to whom such bogus sales, if any, are made with necessary evidence. The assessment order does not mention regarding any enquiries made with any of the alleged dummy entities to whom the sales were made. It appears that the assessing officer has treated all the sales other than sales made to Government entities as bogus sales in a sweeping manner. The said action of the assessing officer is arbitrary and devoid of any merit. The learned CIT(A) in his order has held that as the assessing officer failed to establish the factum of bogus sales made by the appellant with relevant details and evidences, the very premise on which the inference of generation of unaccounted income by indulging in bogus purchases and sales through dummy entities has completely collapsed.

76. It is also pertinent to observe that the assessing officer did not record any finding in the assessment order regarding any difference in the stock as per books and physical stock as per the inventory prepared at the time of search. This aspect is considered to be very critical in drawing proper conclusion regarding the genuineness of the purchases made from dummy entities. On perusal of the seized tally accounts of the appellant for the relevant assessment years available in ANN/VP/ED/S9&10 and ANN-ERD-SEPL-ED-I-Karthi, it is noticed that the purchases made from alleged dummy entities are being entered in the stock register maintained in the seized tally accounts. In the said circumstances, the physical inventory of stocks taken during the course of the search ought to have resulted in deficit stocks in comparison to the stock as per the books of accounts, if the allegation of the assessing officer regarding the bogus nature of the purchases from the 28 entities. The learned CIT(A) has held no variation was found in the physical stock vis-à-vis the stock as per the books during the course of the search is a strong evidence in support of the appellant’s contention that the purchases from the 28 entities are genuine purchases for the previous year in which search is conducted as well as the previous year relevant to the assessment years under consideration.

77. Further, the assessing officer did not bring out any omissions or deficiencies in the documentation maintained by the appellant in respect of the alleged bogus purchases from dummy entities, which can support his inference regarding the bogus nature of the said transactions. The assessment order is completely silent regarding this aspect, particularly when the assessing officer highlighted the non-availability of party weighment slips, goods receipt note, lorry freight slip, sample for lab test slip and entries in sample register with regard to the bought note purchases which were considered as bogus by him in AY 2015-16 and 2016-17. Similarly, the assessment order is silent regarding the differentiation in the type of lab test report between the actual purchases and bogus purchases, in respect of the purchases made from alleged dummy entities. Therefore, we are of the considered view that no adverse evidence was found during the search in respect of the documentation maintained by the appellant in respect of purchases made from registered dealers, which could reveal that the purchases made from alleged dummy entities are bogus as opposed to the purchases made from other registered dealers.

78. We further noted that it was the claim of the assessing officer that the funds transferred by the appellant to the dummy entities, which are in turn transferred by the dummy entities to the bank accounts of the 1317 individual dummy suppliers are withdrawn by the staff of the finance department from the bank accounts of the individual suppliers by using pre-signed bearer cheques of the said individual suppliers. However, it is noticed that the assessing officer has solely relied on the statements of employees and did not bring any corroborative evidence on record by making necessary enquiries with the bank authorities regarding the identity of the persons who encashed the bearer cheques, even on a sample basis. It is also pertinent to point out that the search did not result in unearthing of any documentary evidence by way of loose sheets, slips etc., containing any notings of handing over of cash and receipt of cash between various persons in the finance department from the time the cash is withdrawn from the bank and it is placed in the locker of the corporate office. This observation needs to be viewed in the context of the statement of Shri.Siddeshwaran that the cash withdrawn from the bank accounts of the individual dummy suppliers by Shri Muthukumar is handed over to Shri Ravichandran and Shri Suresh (finance assistants), they in turn hand over the cash to either Shri Siddeshwaran or Shri Harihara Krishnan and the cash is finally placed in the locker by Shri Siddeshwaran. In the normal course, notings regarding handing over of cash and receipt of cash are expected to be found when cash changes hands to serve as evidence for the same in order to resolve any possible disputes that may crop up given the nature of cash transactions. But, no such evidence was brought on record to prove the findings of the AO.

79. In the assessment order, the assessing officer also alleged that the returns of income of the appellant and the dummy entities have been filed from a common IP address and that a common email id was mentioned in the said returns of income. The assessing officer has relied on the said observation in order to infer that the said entities are being controlled by the appellant and that the transactions of the appellant with the said dummy entities are not genuine. In this regard, the appellant stated that the IP address and email id quoted by the assessing officer in the assessment order does not pertain to the appellant and that the same pertain to the office of the auditor. The appellant also stated that none of the returns of income of the alleged dummy entities were filed using the said IP address and email id. The appellant furnished the copies of the acknowledgement of the returns of income of the dummy entities for AY 2017-18 in support of his explanation. In this regard, on verification of the acknowledgement of the returns of income of the appellant, it was noticed the said returns were not filed from the IP address quoted by the assessing officer in the assessment order. The Ld.CIT(A) has held that on verification of acknowledgement of returns of income of the dummy entities, it is noticed that their returns were also not filed from the said IP address and concluded that the allegation made by the assessing officer in the assessment order in this respect is factually incorrect.

80. With regard to the matter of partners of the 28 entities and the 1317 individual suppliers of such entities are either the employees/ex-employees of the appellant or his group concerns or their friends or relatives, the appellant explained during the course of the assessment proceedings that he has been promoting his employees and others to venture into business for mutual benefit and that the same should not be viewed adversely by the department. During the course of the appellate proceedings, the appellant elaborated the same and stated that he encouraged his employees to start their own business venture which could be beneficial to the employee as well as to the appellant’s business. He stated that it is beneficial to his business to have supplier entities owned by his employees/former employees or their relatives/friends since the appellant is assured of certainty of supplies in the unpredictable agricultural commodity markets in view of the loyalty of the said persons to the appellant concern. Further, it was explained that due to the introduction of demonetization, the appellant was compelled to gradually discontinue the bought note purchases directly from the farmers and explore alternative sources of supply of agricultural commodity through registered dealers. It was considered that it would be mutually beneficial if there are registered dealers owned by persons who are known to the appellant. In this background, some of his employees were encouraged to leave the employment and start their own business ventures for the purpose of carrying on the business of supply of agricultural commodities to the appellant and his group concerns. The said entities in turn found it beneficial to source their supplies from the employees of the appellant having their own agricultural operations, former employees or relatives/friends from their village or nearby areas, since it would give them the benefit of credit facility due to personal acquaintance. The said entities in turn extended credit facility to the appellant and other group concerns. The appellant contended that the association of the former employees/their friends or relatives with 28 entities or suppliers to the said entities was wrongly understood by the department to conclude that they are dummy entities and that purchases made from them are bogus.

81. From the forgoing discussions, it appears that the explanation furnished by the appellant is considered to be reasonable and acceptable, having regard to the business considerations cited by the assessee. Further, after introduction of demonetization, the appellant had to discontinue direct procurement from the farmers in cash and rely more on registered dealers for his procurement which are entities owned by former employees and this was considered to bring business advantage as the appellant is assured of loyalty and preference in supply, in a market which is often affected by fluctuations in supply and price. Further, the appellant also derives the business advantage of better credit period from such entities. The supplier entities have given preference to procurement from friends and relatives of the partners or the employees of the appellant having agricultural operations as it would allow them to avail credit facility from such persons due to their personal acquaintance. Therefore, from the above it is not correct to draw any adverse of the purchases made from the 28 entities based on the fact that former employees of the appellant are the partners of the said entities and those entities are in turn making purchases from individual suppliers who are either employees or former employees of the appellant or their relatives or friends.

82. In the assessment order, the assessing officer placed reliance on seizure of the complete set of pre-signed cheque books of all the 28 entities and 1317 individual suppliers from the corporate office premises of M/s CFI during the course of the search, to state that funds are transferred by the appellant and other group concerns to the 28 dummy entities in the guise of payment for purchases which were in-turn transferred by the said entities to the accounts of 1317 dummy individual suppliers and the cash was withdrawn by the staff of the finance department of M/s CFI using pre-signed cheques of the said individual suppliers, which are in the possession of M/s CFI. The assessing officer also relied on the statements of 1307 individual suppliers which were claimed to have been recorded during the course of the search u/s 131, wherein they have stated that they have no transactions with the appellant and other group concerns, in support of his finding that the purchases made from the 28 dummy entities which in turn were made from said individual suppliers are bogus. In this regard, the appellant explained that pre drafted statements were recorded from 1317 farmers/traders/suppliers of goods to appellant on four days without even allowing them to read and understand the contents of statements which is evident from date and time of summons issued to them. It was further explained that, they were called on the same date of issuing the summons and their statements were stated to have been recorded on oath by the DDIT/ADIT in the office of T. S Kumarasamy at Trichangode which is evident from the text of the answers by different persons on the same set of questions is exactly the same. Further, the handwriting of the staff of Christy Friedgram Industry on the statements is a proof of the dubious and spurious manner in which evidence was created against the appellant. The appellant submits that the statements of the 1307 individual suppliers are manipulated statements as the same were shown to have been recorded within a period of two days by three officers. The appellant further points out that it is not practically possible to record statements of 5 pages each of 1307 persons within the short time available and it is not possible in the normal course that 1307 persons out of 1317 suppliers, who are residing in various villages in different districts, to have attended on the same day of issue of summons to them.

83. In this regard, it is pertinent to mention here that the powers u/s 131(1A) are exercisable by the officers of the Investigation Wing upon having a reason to suspect the existence of undisclosed income. In fact, the condition precedent to arrive at the satisfaction to issue search warrant invariably begins with the phrase that the person who is in possession of undisclosed income would not come forward to produce such documents, etc., when asked to do so in the normal course. Therefore, power has been conferred under the aforesaid section to be exercised before the search and seizure operation with a view to collect the necessary information with regard to the intended search and seizure operation. Clearly, the purpose of issuing summons u/s 131(1A) is for pre-search enquiries. If after completion of the search the DDIT/ADIT issues summons u/s 131(1A), it means that he suspects that the person has concealed the income. If no action is taken after recording the statement u/s 131(1A), it is to be concluded that there is no reason to suspect that income has been concealed as there cannot be an occasion in law to virtually carry out the same act once again by the same authorities by issuing summons u/s 131(1A), after having exercised the powers as mentioned u/s.132. In this case, if you go through the manner in which the so called statements are recorded from 1317 persons/entities, it is abundantly clear that the department created fabricated evidences to implicate the appellant. This is further strengthened from the fact that the suppliers in their statements, while replying to the query whether they supplied goods to the Christy Friedgram Industry, all of them stated that they did not supply goods to Christy Friedgram Industry. This was true as they had supplied goods to so-called-dummies and not to Christy Friedgram Industry. It is to be noted here that there were neither any questions as to whether they had supplied any material to the appellant and M/s Suvarnabhoomi Enterprises Pvt Ltd nor were there any answers recorded as they had supplied any material to the appellant and M/s Suvarnabhoomi Enterprises Pvt Ltd. In such a situation, placing any reliance on those statements in the case of the appellant is untenable and any additions based on the transactions with these entities are invalid.

84. We further noted from the submission of the appellant that, on perusal of the copies of the summons issued to the 1307 individual suppliers and their statements recorded on 10.08.2018, 27.08.2018, 28.08.2018 and 29.08.2018, it is noticed that the statements of the said persons are shown to have been recorded on the same date on which the summons were issued to them u/s 131. Further, it is noticed that the date of issue of summons, the date of service of summons and the date of recording the statements are one and the same. In this connection, it is pertinent to observe that the said 1307 individual suppliers are residing in various villages located in different districts. In such a situation, it is not practically possible to serve the summons on them on the same day of issuing summons particularly considering the large number of such persons and the number days on which such exercise was carried out (1307 persons in 4 days). It is even more practically impossible for the said persons to present themselves at the corporate office of the appellant at Thiruchengode in response to the summons for the purpose of recording of their statements on the same day of service of summons. It is also highly implausible that all 1307 persons on whom the summons were shown to have been served have presented themselves before the officer on the same day of serving the summons, without a single absentee. From the above, it is clear that their presence was ensured through application of some mode and degree of pressure and further, this feature of ensuring the presence of the said persons without formal prior issue of summons lends substantial credence to the averments made by the said 1307 persons in their affidavits filed before the special auditor. Further, as could be seen from the details furnished above, as high as 352 statements are shown to have been recorded on a single day by one officer. The number of statements recorded per day is very high in respect of all the officers, baring the statements recorded on the last day i.e 29.08.2018. Considering the fact that the statements contained 21 questions each, it is not possible to record more than 30 statements by an officer in a day even if it is considered liberally that each statement may consume 20 minutes and the exercise was carried out continuously without a break for 10 hours in a day. The fact that the number of statements recorded by an officer in a day is abnormally high compared to the said reasonable number, the only conclusion that can possibly be drawn is that the statements were recorded in a pre-determined manner without seeking the responses of the deponents to ascertain the true facts. It appears that the answers to various queries were recorded as per the standard templates which were already prepared, except for the personal details of the deponents”.

85. As regards, the pre-signed cheque books of all the 28 entities and 1317 individual suppliers seized during the search from the corporate office premises of Christy Friedgram Industry, the appellant contended before the assessing officer that the persons of the 28 entities and the 1317 individual suppliers were forcibly called to the search premises along with their cheque books, bank pass books and ATM cards and they were forced to handover the cheque books after signing the cheque leaves. The appellant stated that the said cheque books and ATM cards were then seized at CFI premises as if they were found with CFI. It was therefore contended that the same cannot be used as evidence against the appellant. It is submitted further that the said persons have filed affidavits wherein they have confirmed that the cheque books and ATM cards were forcibly collected from them by the search team after getting the cheque leaves signed by them and that the submission in the said affidavits was not addressed by the assessing officer in the assessment order. We find that, the averments made by the assessee appears to be correct, because, as already mentioned earlier, the assessing officer himself stated in the assessment order that the seizures made during the course of search at the residence of Shri.Sivakarthi included cheque books. If the cheque books of the dummy entities were found and seized at the residence of Shri.Sivakarthi, the same cannot be found and seized once again at the corporate office of the searched person. It is to be noted that the said Sivakarthi is accountant of M/s Kandasamy& Co and therefore the possession of cheque book of the respective entity by its accountant cannot vitiate the transactions of the said entity. Further, it was stated by Shri.Valeeshwaran, GM-Finance, of the searched person in his statement u/s 132(4) on 06.07.2018, that the pre-signed cheques of the 28 dummy entities and 1317 individual suppliers are available in the custody of Shri Muthukumar. Subsequently, Shri.Muthukumar stated in his statement recorded u/s 132(4) on 08.07.2018 that the pre-signed cheque books are in his custody. It is therefore apparent from the said statements that the pre-signed cheque books were not available in the corporate office premises of searched person (Christy Friedgram Industry). However, the same were subsequently shown to have been found and seized at the corporate office premises of searched person (Christy Friedgram Industry) on 04.08.2018. From the above, it appears that the seizure of the pre-signed cheque books and ATM cards of the 1307 individual suppliers shown to have been made from the corporate office premises of CFI cannot be considered to be beyond any shadow of doubt. Similarly, the statements of the said 1307 persons to the effect that their bank accounts were being operated by CFI and other group concerns cannot be regarded as voluntary and reliable, particularly for the purpose of drawing any adverse conclusion against the appellant. Having regard to these critical aspects, which have a significant bearing on the integrity and reliability of the relevant seized material and the statements, it is held that the said evidences cannot be taken into cognizance for arriving at any adverse inference against the appellant with regard to the issue of bogus purchases through dummy entities and the modus operandi of withdrawing the amount paid towards such purchases through banking channel from the bank accounts of the individual suppliers (of the dummy entities) using pre-signed cheque books of the said persons. Therefore, we are of the considered view that reliance placed by the assessing officer on the said seized material and statements is not correct.

86. At this stage, it is very important to consider the observations of the Special Auditor with regard to the books of accounts maintained by the assessee and its correctness. The Assessing Officer has appointed Special Auditor to prepare financial statement and audit books of accounts of the assessee for the period covered under search having regard to the nature and complexity of accounts maintained by the assessee and incriminating documents found during the course of search. The Special Auditor, in their audit report submitted in light of scope of audit clearly observed that the financial statements including P&L account and balancesheet prepared for the relevant assessment years gives true and correct position except as stated in notes of accounts. The Special Auditor had also analyzed quantitative details of purchases of raw materials, production of finished goods and sales made by the assessee and does not expressed any adverse opinion on books of accounts maintained by the assessee including stock registers. In fact, the Assessing Officer never disputed the audit report submitted by the Special Auditor on various factual issues, however, rejected Special Audit Report submitted by the special auditor only for the simple reason that the special auditor conducted independent enquiries with various parties including suppliers which is beyond the scope of audit work entrusted to the auditor. We find that, the reasons furnished by the AO for rejection of the report of the special auditor, with particular reference to the findings in the said report regarding the quantum of purchases and use of raw materials in the production process, have been found to be erroneous and factually unfounded. The reason cited by the AO to the effect that the special auditor has acted beyond the mandate of the special audit, which was ordered for the purposes of preparation of final accounts, is held to be not based on proper appreciation of the process of finalisation and auditing of accounts and the relevant standards on auditing.

87. The Revenue has challenged the findings of the Assessing Officer on the ground that the CIT(A) failed to appreciate that Smt.Anandhi, Shri.Vannakannan and Shri.Vijayananthan had admitted in their statements that the assessee has suppressed income by creating bogus purchases and sales through dummy entities. In this regard, it is noted that all the 3 persons had retracted their statements and it was accepted retractions of statements of various persons as valid on the ground that the statements were rendered under mistaken belief of facts, wherever it was found based on the evidences available in the seized material that the contents of the statements are factually erroneous/contrary to the seized material. The revenue has not specifically rebutted the said findings of the CIT(A). The revenue has also contended in the grounds of appeal that the CIT(A) failed to appreciate that partners of 28 dummy entities and 1317 individual suppliers are the employees/ex-employees/ their relatives/friends and erred in accepting the explanation of the assessee that they were encouraged to start their own business ventures which is beneficial to them as well as the assessee though it is only an afterthought to cover up the bogus transactions. In this regard, it is noted that the CIT(A) has given detailed reasons backed by relevant facts from the financial statements for accepting the explanation of the assessee. The revenue has not disputed the correctness of such reasons with relevant facts and evidences and has merely termed the explanation of the assessee an afterthought without any basis.

88. The revenue also contended in the grounds of appeal that the CIT(A) failed to appreciate that the IT returns, partnership deeds and cheques books pertaining to 28 dummy entities, list of persons in-charge of such entities and the list of suppliers of the dummy entities who are relatives of employees of the appellant were found in the possession of Shri.L.Sivakarthi, a partner of one of the dummy entities. In this regard, it is observed that the revenue did not put forth any specific contention as to how the said fact has any conclusive bearing on the inference of dummy nature of the said entities and the bogus nature of the purchases made from such entities. Moreover, after considering the said fact as well as the statement given by Shri.Sivakarthi wherein he stated that the said documents were handed over to him by Shri Vijayanathan CA, and the inference drawn by the AO based on the said statement that the 28 dummy entities are being managed by Shri Vijayananthan, the consultant of the appellant concern, CIT(A) stated that the finding of the AO that the dummy entities are being controlled by the consultant of the appellant is not borne out by other evidences available on record. The CIT(A) observed that Shri Vijayananthan stated in his statement dated 07.07.2018 that the books of accounts of the 28 entities are being maintained by the accountants of the respective entities in their respective office premises and the annual returns of the said entities with various statutory authorities only are being filed by him and that the AO did not dispute the said factual averment of Shri.Vijayananthan in the assessment order. The CIT(A), therefore held that the allegation of the AO that Shri Vijayananthan is managing and controlling the 28 entities on behalf of the appellant concern is not substantiated by supporting evidence. Therefore, we are of the considered view that the revenue fails to bring on record any evidences to counter the findings of facts recorded by the ld. CIT(A).

89. In this view of the matter and considering facts and circumstances of this case, we are of the considered view that the finding of the assessing officer that the appellant indulged in bogus purchases through dummy entities and corresponding bogus sales to suppress its income is unsustainable on facts. The CIT(A) after considering relevant facts has rightly deleted additions made by the Assessing Officer and thus, we are inclined to uphold the findings of the ld. CIT(A) and direct the assessing officer to delete the additions of Rs. 88,41,79,695/- & Rs. 95,20,41,762/- for AY 2017-18 and AY 2018-19 respectively, towards the unaccounted income arising from bogus purchases and sales through dummy entities.

90. The next issue that came up for our consideration from assessee appeal for the assessment year 2015-16 to 2018-19 is enhancement of assessment and consequent addition u/s 69C of the Act, towards unexplained expenditure quantified by the special auditor in their second audit report submitted u/s 142(2A) of the Income Tax Act, 1961.

91. The brief facts of the impugned dispute are that during the course of search, at the corporate office of the appellant, two pen drives were found and seized on 06.07.2018 vide Annexure-ANN/VP/ED/S14 from the cabin of Shri Harihara Krishnan, AGM (Finance). On verification of pen drives, it was observed that the pen drives contained data of various receipts and payments of appellant and other group entities. In the statement recorded u/s. 132(4) of the Act on 06.07.2018, Shri. Harihara Krishnan confirmed the contents of the pen drive are maintained by him and the same represents unaccounted cash expenditure incurred by the appellant and other group concerns. It was further noted that the data contained in the electronic device referred to as ErandamThall seized from Shri. P. Karthikeyan was also contained in the pen drive seized from Shri HariHara Krishnan. During the course of search, it was noticed that the unaccounted cash books contains details of expenditure incurred in cash from financial year 2010-11 to 2018­19 at Christy, Bangalore and Chennai. The entries contained in ErandamThall has been segregated into transactions made at the head office at Thiruchengode, and receipt and payments at Bangalore and Chennai offices. The Assessing Officer has analyzed the contents of ErandamThall in light of statement recorded from various employees including from Shri Valeeswaran, GM (Finance) and observed that the Shri. Valeeswaran, admitted in his statement u/s. 132(4) dated 06.07.2018 that unaccounted cash expenditure has been computed after eliminating double entries, transfer entries to various branch offices and entries regarding keeping the unaccounted cash in Indian bank locker. The statements of Valeeswaran and Hariharan Krishnan were put to Shri. T.S. Kumarasamy, Prop: M/s CFI, in the course of his statement recorded u/s. 132(4) of the Act on 08.07.2018 and in response to question no. 15 to 21, he had confirmed the existence of unaccounted cash book maintained by the finance team. During the course of search, total unexplained expenditure has been worked out at Rs. 2056,76,20,876/-, and the same has been confirmed by, Shri. Valeeswaran, Shri. Harihara Krishnan and Shri. T.S. Kumarasamy in their statements recorded u/s 132(4) of the Act.

92. In the assessment of Shri. T.S. Kumarasamy, the Assessing Officer has assessed unexplained expenditure u/s. 69C of the Act, by taking into account total unexplained expenditure quantified at Rs. 2056.76 crores on the basis of ErandamThall. Further, said sum of Rs. 2056.76 Crores has been treated as total undisclosed income of Shri. T.S. Kumarasamy and three group entities. Since, the AO, has assessed undisclosed income of Rs. 1351, 84, 23, 278/- in the hand of Shri. T.S. Kumarasamy and three other group entities on the basis of admission in the statements recorded u/s 132(4) of the Act, on account of under reported income, being difference between net profit as per seized tally accounts and income as per ITR filed for relevant assessment years, unaccounted income from bought note purchases and bought note sales and also unaccounted income arising out of purchases through dummy entities, and the balance amount of unexplained expenditure of Rs. 687.25 Crores (Rs. 2056.76 Cr Minus Rs. 1351.84 Cr) has been added u/s. 69C of the Act, in the hands of Shri. TS Kumarasamy for Asst. Years 2009-10 to 2018-19. Before the first appellant authority, Shri. T S Kumarasamy challenged addition made by the AO towards unexplained expenditure u/s 69C of the Act. The CIT(A), for the reasons stated in their appellate order in the case of Shri. T.S. Kumarasamy, held that the quantification of unaccounted expenditure as per Erandumthall at Rs.2056.76 crores is not sustainable on facts and consequently, the amount of unexplained expenditure of Rs.687.25 crores assessed in the hands of the Shri. TS Kumarasamy, which is derived from the Erandamthall, is also unsustainable and thus, directed the AO to delete additions u/s 69C of the Act for all assessment years. However, the CIT(A) accepted the findings of the second special audit report dated 15-04-2021 and quantification of aggregate unexplained expenditure of the appellant and 3 other associate concerns at Rs.211.37 cores and apportioned a sum of Rs.34,69,54,527/- out of the same to the appellant. The said sum was further apportioned to assessment year wise for AYs 2014-15 to 2018-19 and the same was directed to be treated as the addition towards unexplained expenditure u/s 69C of the Act in the assessment orders for the said assessment years. Being aggrieved by the CIT(A) order, the assessee is in appeal before the Tribunal.

93. The ld. Counsel for the assessee, Shri. D. Anand, Advocate submits that the Ld. CIT(A) erred in law and in facts in enhancing the assessment and consequent addition u/s. 69C of the Act on the basis of second special audit report in respect of contents of ErandamThall without appreciating fact that the seized electronic record called ErandamThall is a dumb document and it is inadmissible as evidence u/s. 65B of the Indian Evidence Act, 1872. The ld. Counsel for the assessee further submits that the ld. CIT(A) erred in apportioning the unaccounted expenditure of Rs. 211.37 crores and made addition of Rs. 31,11,16,497/- in the hands of the appellant for assessment year 2015-16 to 2018-19, on the basis of second special audit report dated 15.04.2021 without there being any finding, as to how entries recorded in EarandamThall pertains to assessee and how same can be assessed u/s. 69C of the Act. The ld. Counsel for the assessee further submits that the additions made by the CIT(A) u/s. 69C of the Act is purely on estimation basis without any findings as to identification of specific expenditure incurred by the assessee and the same has been not recorded in the books of accounts. He further submits that in order to make additions u/s. 69C of the Act, the identification of nature of expenditure is must and further, no explanation from the assessee for source of said expenditure. In this case, both conditions are not satisfied, which is evident from the fact that the CIT(A) made additions only on the basis of special audit report. But, fact remains that the very same special auditor in his report observed that entries in ErandamThall were neither speaking one nor supported by corroborative evidences regarding actual incurring of such expenditure and hence, additions made on the basis of observation of the special auditor is incorrect and unsustainable in law.

94. The Ld. CIT-DR, Shri.M. Rajan, submits that the Assessing Officer has made quantification of unexplained expenditure at Rs. 2056.76 crores and has also made additions of Rs. 687.25 crores in the hands of Shri. TS Kumarasamy. However, the CIT(A) without any valid reason deleted additions made u/s. 69C of the Act in the hands of TS Kumarasamy and enhanced the assessment on the basis of special audit report, where the auditor has quantified unexplained expenditure of Rs. 211.37 crores without any basis. The CIT(A) without appreciating fact that unexplained expenditure quantified by the special auditor is unscientific and on estimation basis, enhanced the assessment to Rs. 211.37 crores and apportioned to the assessee and other three associates. Therefore, he submits that if at all unexplained expenditure needs to be apportioned to all four entities, then total unexplained expenditure quantified at Rs. 2056.76 crores needs to be apportioned to the appellant and other three entities. Therefore, he submits that the directions given by the CIT(A) in this regard should be set aside and additions made by the AO in the hands of T.S. Kumarsamy should be upheld.

95. We have heard both the parties, perused the materials available on record and gone through orders of the authorities below. The sole basis for the CIT(A) to enhance assessment and direct the AO to make addition in the hands of the assesse is second special audit report of auditor submitted u/s 142(2A) of the Act. The Special auditor examined Erandamthall and entries recorded in pen drive in light of scope of audit and observed in their audit report dated 15-04-2021 that out of more than 30000 entries in Erandamthall, more than 90% entries are identified/matched with regular books of account of assessee and other three group entities. The special auditor further observed in their audit report that unmatched/unidentified entries and net of such unidentified entries amounting to Rs. 211.37 crores may be considered for addition as unexplained expenditure. The CIT(A) on the basis of special audit report enhanced the assessment and directed the AO to make additions towards unexplained expenditure u/s 69C of the Income Tax Act, 1961 for Rs. 211.37 crores in the hands of Shri. T S Kumarasamy and three other group entities. The CIT(A) directed the AO to further apportion said sum to four entities and for all assessment years on the basis of allocation suggested by the special auditor. Therefore, in order to decide the issue of enhancement of assessment and consequent addition made towards unexplained expenditure u/s 69C, it is necessary to analyse, reason given by the CIT(A) in light of provisions of section 69C of the Act, statement recorded during the course of search from various employees and the special audit report submitted by the auditor u/s 142(2A) of the Act

96. The fact that the Assessing Officer has made additions towards unexplained expenditure u/s 69C of the Act, in the hands of Shri. T.S. Kumarasamy itself is enough to hold that said addition cannot be made in the hands of the assesse. Further, when the AO himself was of the opinion that said expenditure is only pertains to M/s CFI, it is incorrect of the part of the CIT(A) to assume something which is not the case of the AO and make additions in the hands of the assessee. Therefore, on this ground itself enhancement of assessment and consequent addition towards unexplained expenditure u/s 69C in the hands of the assessee cannot be sustained. Be that as it may, it is important to see reasons given by the CIT(A) to delete addition u/s 69C in the hands of Shri. T.S. Kumarasamy. The ld. CIT(A) directed the AO to delete addition u/s 69C for the reasons that, when the appellant requested the AO during the course of the assessment proceedings to provide the details of the working of the alleged unaccounted expenditure of Rs.2056.76 crores from the contents of ErandamThall for necessary verification and explanation, the AO failed to provide the details of working of unexplained expenditure. Further, during appellate proceedings, the CIT(A), called upon the Assessing Officer to furnish necessary workings for arriving at unaccounted expenditure, but the Assessing Officer did not furnish any evidence. From the above, it is clear that there is no working with the AO to substantiate his claim that the assessee and their employees have furnished working of unaccounted expenditure of Rs.2056.76 crores which is clear from remand report submitted by AO, where the AO shifting onus to the assessee to prove how working arrived at during search is wrong. In our considered view, the primary onus is on the AO to prove the addition with evidence, because it is the AO who made the additions of Rs.2056.76 crores and claimed that the appellant and their employees had furnished the working. If at all, the AO is correct in his claim, then nothing prevented the AO to furnish the so called working of unaccounted expenditure furnished by the employees of assessee, when the assessee had repeatedly requested the AO to furnish the working. In our considered view, when a huge addition is sought to be made and a large tax liability is sought to be fastened on the appellant, the principles of natural justice demand that the appellant is made aware of the details of the quantification of the unaccounted expenditure worked out based on the seized Erandamthall, to enable him to examine and verify the same in order to defend itself and furnish necessary explanations with regard to the entries in the Erandamthall which have been taken into account for the purpose of such quantification. However, it is evident that the appellant has not been provided with the entry wise working of the relevant amount of Rs.2056.76 crores during the assessment proceedings despite the requests made by the appellant and the said details have not been furnished during the appellate proceedings also despite seeking of the same by CIT(A) through two remand reports. Therefore, we are of the considered view that there is no evidence with the AO to support the addition of unexplained expenditure u/s 69C and this ground itself enhancement of assessment and consequent addition in the hands of the assessee cannot be upheld.

97.It is important at this stage to refer to the observation of the special auditor with regard to correctness of entries recorded in Erandamthall. As per special auditor, the Erandamthall and contents recorded therein is a dumb document and thus, on face of it, it should be discarded. It was further observed that said document even fail to qualify as a books of accounts, because it cannot be identifiable to any person or entity. This special auditor further observed that 90% entries recorded in Erandamthall are identified/matched with regular books of account of four entities. Form the above, it appears that it is a parallel day book maintained for all entities together to have a complete track on various transaction of the assessee. The fact that more than 90% entries are identified with regular books of accounts itself is a strong reason to discard or reject Erandamthall for the purpose of assessment. Further, the special auditor made all effort to reconcile books of the assessee with Erandamthall and where ever possible identified the entries in Erandamthall with books of accounts. For remaining entries in Erandamthall, the special auditor observed that those entries are not identifiable to any individual assessee or entity. The source of debit or receipt of money is not identified, whether it is received in cash or bank. Further, there is no details with regard to nature of debit/receipt whether it is a capital, loan or income. Further, there is no details as to from whom and for what purpose the amount is received. Similarly, in respect of credit or payment entries no details available with regard to nature of payment, whether it is repayment of loan, payment for purchase of any assets or expenditure incurred in the ordinary course of business. Further, there is no details, as to whom and for what purpose the amount is paid. From the above, it is very clear that the unidentified entries in Erandamthall neither can be considered as accounting entries which reflect transaction in the normal course of business nor it can be considered as expenditure incurred in the course of business and thus, based on entries in Erandamthall addition cannot be made towards unexplained expenditure u/s 69C of the Act. In our considered view, in order to bring any amount within the ambit of provision of section 69C of the Act, it is very important to identify the nature of expenditure and the entity to whom said expenditure belongs to, because as per the provision of section of 69C of the Act, in any financial year, if an assessee incurs any expenditure and he offers no explanation about the source of such expenditure, or the explanation if any offered by him is not in the opinion of the AO, satisfactory then said expenditure may be deemed to be income of the assessee for such assessment year. In the present case, there is no findings from the AO as to nature of expenditure incurred by the assessee. Further, the AO has not brought out any reason as to how entries in Erandamthall are considered as expenditure. The entries in Erandamthall are not identified to any person or entity. There is no finding as to which financial year said expenditure relates to. In absence of any finding as to nature of expenditure and person to whom such expenditure belongs to, no addition can be made u/s 69C of the Act, on suspicious and surmise manner. In our considered view, the AO is completely erred in making addition towards unexplained expenditure on the basis of Erandamthall. Therefore, we are of the considered view that quantification of unaccounted expenditure as per Erandamthall at Rs.2056.76 crores cannot be sustained and for this reason, enhancement made by the CIT(A), on the basis of second audit report for Rs. 211.37 crores and further apportioned to the appellant also cannot be sustained.

98. The scope of the work entrusted to the Special Auditor, includes, (a) identification and matching of the sources for the inflow of funds in the said excel sheets with the books of accounts of the assessee, including bank accounts;(b) Identification and matching of the expenses with the books of accounts of the assessee.(c) Whether the identified bank accounts and the sources for the inflow of funds have been disclosed in the books of accounts and consequently offered for taxation in the returns.(d) Assessee wise sources for the inflow of funds in the said excel sheets. The Special auditor submitted his report regarding the examination of Erandamthall and findings in respect thereof. The Special Auditor stated that the examination of ‘ErandamThall’ was carried out in tune with the scope of work specified in the AO’s reference. The Auditor further stated that though the entries in the Erandamthall make it fit enough to be treated as a dumb document when examined in the light of accounting principles and widely accepted accounting concepts, he made certain assumptions in order to carry out the scope of work as entrusted by the AO to compare and match the entries of Erandamthall with the books of accounts of the appellant and 3 other group entities. The special auditor stated that the following methodology has been adopted for identification and matching of entries in Erandamthall with the books of accounts of the appellant and 3 other group entities as per the scope of the work:

i. In order to compare the entries of Erandamthall with the seized books of accounts of the 4 entities, the cash book from the seized tally was extracted in the case of all the 4 entities and the contra entries therein have been removed. The same have been furnished in annexure 1(a) to 1(d) of the report.

ii. Since the entries in 3 different excel sheet are interlinked, the same were compiled into one consolidated file.

iii. Since the entries in Erandamthall lack the “entity concept”, the total inflow and the total outflow of the entries in Erandamthall are cross verified with the total inflow and total outflow of cash in the seized tally books of accounts of the 4 entities put together. The consolidated cash withdrawals from bank accounts of 4 entities as found in the seized tally books of accounts have been furnished in Annexure 5.

iv. Based on the entries in the seized tally books of account, some of the entries in Erandamthall are identified and matched on sample basis. Accordingly, the entries in Erandamthall are marked as contra entries, expenses, advances, purchase or supplier payment, cash sales, bank receipts, bank payments, etc. The non-identifiable entries are culled out separately.

v. The entries with the same amount in the inflow column and outflow column have been treated as contra entries. The names as mentioned in the entries were filtered and such entries with the same amount of inflow and outflow have been treated as contra entries.

vi. The transfer entries such as “transfer to HO”, “Head Office transfer”, “IB Stock”, “Stock IB”, “PNB Stock”, “Cash boss”, “Cash TSK” have been treated as contra entries. The list of entries treated as contra entries have been furnished in Annexure-2 to the report.

vii. After elimination of the contra entries, the inflows majorly found entered with names were identified and matched with the seized tally books of accounts on sample basis. Since the entries in ‘Erandamhall’ are single entry in nature, the figures have been matched to the nearest approximation on the date or nearest date of the entries in the seized tally books of the entity with which it was found matching.

viii. Substantial inflows of Erandamthall were identified and matched with the withdrawal from the bank accounts and such entries have been marked as “cash withdrawal” under the column “nature of entry” in the consolidated file.

ix. On sample basis, it was observed that the inflow entries of Erandamthall such as “Ganesh canvases”, “Mahaveer& Pradeep”, “Logesh”, etc., are found matching to the nearest approximation with the cash withdrawals reflected in the books of account. Such entries have been marked as “cash withdrawal” under the column “nature of entry” in the consolidated file shown in Annexure 4.

x. On sample basis, it was observed that the inflow entries of Erandamthall such as “Salem Foods”, “Elayaperumal”, “Waste Sales”, “Green Trading & Co”, etc., are found matching to the nearest approximation with the cash sales reflected in the books of account. Such entries have been marked as “cash sales” under the column “nature of entry” in the consolidated file shown in Annexure 4.

xi. With respect to the entry in Erandamthall with the narration “cash withdrawn: Syn+KVB+IBNallur+IB+SBI” on 28.03.2017 with the figure Rs.65675, it is observed that the same matches with the sale receipts received through the bank account. Further, the consolidated receipts of such sales of these entities (shown in Annexure 6) and the consolidated entries of the above said nature of narration in Erandamthall were cross verified and were found matching. Such entries have been marked as “cash sales” under the column “nature of entry” in the consolidated file shown in Annexure 4.

xii. After removal of the contra entries, the entries with narration “blend supply exps”, “Jaggery”, “Kavundapadi market” were identified and found matching with the nearest date or on the same date of the books of the account of Christy Friedgram Industry. It is observed that the said nature of entries are matching with APMC/bought note purchases of jaggery, maize, ragi. These entries have been marked as “purchase or supplier payment” under the column “nature of entry” in the consolidated file shown in Annexure 4.

xiii. After removal of the contra entries, the entries with narration “RRM”, “R.T”, “egg”, “dhall”, etc were identified and found matching with the nearest date or on the same date of the books of the account of all the 4 entities. On verifying with the seized tally books of account of all the 4 entities, it is observed that the said nature of entries are matching with APMC/bought note purchase or with supplier payment. These entries have been marked as “purchase or supplier payment” under the column “nature of entry” in the consolidated file shown in Annexure 4.

xiv. After removal of the contra entries, the entries with narration “salary”, “R.V”, “muthusamy”, “Rajaram”, “Balamurugan”, “PKR” were identified and found matching with the nearest date or on the same date of the books of the account of all the 4 entities. On verifying with the seized tally books of account of all the 4 entities, it is observed that the said nature of entries are matching with direct or indirect expenses. These entries have been marked as “cash expenses” under the column “nature of entry” in the consolidated file shown in Annexure 4.

99. After carrying out the examination and analysis of the contents of Erandamthall as per the methodology mentioned above, the special auditor furnished the following findings in respect of the scope of work assigned to him:

i. The outflow entries marked as “unidentified” under the column “nature of entry” in the consolidated file in Annexure 4 were found to be not matching with the seized tally books of account of the 4 entities and the same are extracted and shown separately in Annexure 8. These entries are termed as “disallowable”.

ii. The identified entries marked in the consolidated sheet enclosed as Annexure 4 are found matching with the books of account of the respective entities. The comparison of summary of marked entries in the column “nature of entries” in Annexure 4 with that of summary of cash inflow and cash outflow of the 4 entities extracted from the seized tally data for the respective years is provided in Annexure 7. It is observed that the value of the tally extract is higher than the value arrived in Erandamthall for both the cash inflow and cash outflow, which establishes that the entries in Erandamthall are subsumed in the seized tally data.

iii. It is observed that there is no separate sources of fund for the Erandamthall, other than the sources available in the books of account of the 4 entities.

iv. It is observed that the identified bank accounts and sources of the inflow are disclosed in the seized tally books of account of the respective entities. The identified bank accounts cited in Annexure 5 and other sources of inflow such as cash sales, are reflected in the seized tally books of accounts and the cash sales have been reported in the sales tax returns as well. On verification of income tax returns, it is observed that the sources of inflow as per seized tally accounts and identified bank accounts are reported.

v. With regard to the assessee wise sources for the inflow of funds in Erandamthall, it is observed that the entries do not comply with the fundamental accounting principle of “entity concept”. The entries do not specify the entity to which they pertain to. In view of this, the cash inflows in Erandamthall for each year have been apportioned to the 4 entities in proportion to the share of each entity in the aggregate cash inflows of the 4 entities as per the seized tally books of account of the relevant year. Similarly, the cash outflows in Erandamthall for each year have been apportioned to the 4 entities in proportion to the share of each entity in the aggregate cash outflows of the 4 entities as per the seized tally books of account of the relevant year.

100. Further, the special auditor furnished the following findings as regards the undisclosed income to be considered on the basis of Erandamthall:

i. On examination of Erandamthall, it is opined that the same cannot be construed as a cash book. However, on accepting the same at the face of it, the inflow of funds and other transactions do not disclose any additional undisclosed income other than the income arrived under the original special audit.

ii. The code names contained in the Erandamthall are not giving any prima facie information of evidence for decoding the names with appropriate authentication for considering as disallowable expenditure.

iii. On detailed examination of Erandamthall and accepting the same on face of it and apportioning the income and after considering the inflows / outflows of funds, the disallowable expenditure arrived at for the 4 entities is computed for various financial years and submitted in Annexure 10 to the report. The disallowances for each year have been apportioned to the 4 entities in proportion to the share of each entities in the aggregate cash outflows of the 4 entities as per the seized tally books of accounts. (The entity wise and year wise summary of disallowances as per the special audit report is provided in the table shown below point (c) at para 461 of appellate order).

iv. The entire possible inflow / outflow of funds have been included in the books of accounts of the 4 entities for which a special audit report has already been submitted earlier on 03.12.2020. In the said report, the undisclosed income has been estimated at 1.50% of the total turnover of each entity for the relevant assessment years, keeping in view huge cash transactions involved for various financial years for the said 4 entities in their business. In the case of Christy Friedgram Industry and Suvarnabhoomi Enterprises Pvt Ltd, the undisclosed income has been estimated in the said manner only for the period after the demonetization in November 2016 as the said entities have made disclosures under PMGKY for the earlier period. (The details of the assessment year wise estimation of undisclosed income in respect of each entity made in the first special audit report dt 03.12.2020 are provided in the tables shown below point (d) at para 461 of the appellate order).

v. Due to unreliability of Erandamthall, the undisclosed income arrived at in the first special audit report dt03.12.2020 may be accepted. However, if the revenue accepts the Erandamthall, the undisclosed income arrived at and enhanced in this report can be relied for assessing the income of the 4 entities for various financial years.

101. We have carefully considered observations of the special auditor in their audit report dt. 15.04.2021, and we, find that there is no separate source of funds for Erandamthall, other than the sources available in the books of the account of the 4 entities. It was further noted that except for the entries marked as “unidentified”, all other entries of cash inflow and cash outflow in the Erandamthall were matching with the entries in the seized tally books of accounts of the 4 entities. The special auditor stated that the unidentified entries shown in a separate Annexure-8 to the report represented the entries which were found to be not matching with the seized tally books of account of the 4 entities. Such unidentified entries aggregated to a net sum of Rs.211,37,37,982/-and the special auditor stated that the said amount of unidentified and unmatched entries represents disallowable expenditure. Since, the entries in Erandamthall did not contain references to the entity to which they pertained to, the special auditor apportioned the year wise amount of such disallowable expenditure to the 4 entities in proportion to the share of each entity in the aggregate cash outflow of the 4 entities for the relevant year as per the seized tally books of accounts.

102. In light of findings of special auditor in their report, the issue arising for consideration is whether the second special audit report dated 15.04.2011, which was submitted with particular reference to examination of the contents of Erandamthall, can be considered to constitute a systematic and scientific basis for the addition to be made under u/s 69C based on entries in Erandamthall. As already mentioned, both the AO and Pr.CIT were of the unanimous opinion that the quantification of unaccounted expenditure made during the course of the search based on seized Erandamthall cannot be adopted mechanically on account of the objections of the appellant with regard to the same and that the same needs to be worked out afresh by the special auditor, who is an expert in financial and accounting matters. However, having proposed examination of contents of Erandamthall by the special auditor and having assigned the said work to the special auditor, the AO completely ignored the special auditor’s report dated 15.04.2021 while completing the assessments. The AO did not even mention the fact that a report was called for from the special auditor on the said issue. The AO remained completely silent with regard to the said report and its contents. The AO did not make any discussion in the assessment order regarding the reasons for not accepting the said report. In this factual background, the disregarding of the report of the special auditor obtained subsequently without assigning any reasons for the same is inexplicable and the said action of the AO only adds strength to the appellant’s contention regarding the mechanical manner of adopting the quantification of unaccounted expenditure made during the course of search, without addressing various objections and contentions of the appellant. The report of the special auditor obtained by invoking the provisions of the Act could not have been ignored and disregarded by the AO, without specifying the reasons for doing so in the assessment orders. Although, the AO had given his own reasons for rejecting special audit report, but in our considered view, the AO rejected special audit report on vague reasons just to substantiate addition made u/s 69C of the Act. In our considered view, the report has been prepared after making a very detailed, thorough, in-depth and scientific examination of the entries in Erandamthall and comparison of the same with the books of account of the appellant and the other three group entities as per the scope of work assigned to him by the AO. The contra entries and transfer entries were identified using well defined parameters in conformity with accounting principles for such identification and the same were excluded from further consideration. The analysis made earlier has also strongly indicated that the said exercise was carried out during the search in a hurried and adhoc manner within a short span of three hours, when the entries in Erandamthall were numbering more than 30,000. In the said facts and circumstances, the methodical exercise carried out by the special auditor for identification and exclusion of contra and transfer entries deserves to be accepted.

103. The scope of work assigned to the special auditor included identification and matching of sources of the cash inflows in Erandamthall with the sources available in the books of account of the appellant and 3 other entities and the bank accounts of the said persons. The scope also included identification and matching of expenses with the books of account of the 4 entities. The scope of work further required the special auditor to state whether the identified bank accounts and sources for the inflow of funds have been disclosed in the books of account and consequently offered for taxation in the returns. The said scope of work as laid down by the AO clearly brings out the fact that there were clear indications from the entries in Erandamthall that some of the cash inflows therein are represented by the sources available in the books of account and withdrawals from the bank accounts and some of the cash outflows are represented by the expenses recorded in the books of accounts. The methodology chosen by the special auditor for carrying out the said activities included in the scope of work, as described in detail in the report, is found to be designed in an elaborate and well defined manner having regard to the accounting principles and concepts and the wide experience of the special auditor in probing financial transactions. Every step followed by the special auditor in accordance with the said methodology has been reduced to writing in the special audit report and the output at each step has been provided in separate annexures to the audit report, which is a clear indication of the transparent manner in which the said exercise was carried out. On making such meticulous and painstaking exercise as per the scope of work, the special auditor has identified and matched a large number of cash inflows into Erandamthall with the corresponding withdrawals from the bank accounts of the 4 entities, the cash sales of the said entities and other sources in the books of account of the said entities. The special auditor has also identified and matched a large number of cash outflows from Erandamthall with the corresponding business expenses recorded in the books of account by way of purchases, direct expenses and indirect expenses. The special auditor has furnished the identified and matched nature of each entry of cash inflow and cash outflow in Annexure 4 to the special audit report. The special auditor has also cross checked the sources of inflow into Erandamthall including the withdrawals from the bank accounts with the returns of income of the four entities and has given his finding that the same are reported in the said returns, except the unidentified entries. The entries of cash inflow and cash outflow which could not be identified and matched with the seized tally books of account of the 4 entities have been marked as “unidentified” in Annexure 4 and the said entries have been separately extracted in Annexure 8 to the special audit report.

104. We further, noted that all the entries found in Erandamthall (after excluding the contra entries) were found to be matching with the relevant sources of cash inflow, bank withdrawals and expenses recorded in the books of account of the 4 entities, with the exception of 2455 entries (out of total 30,654 entries) which represented unidentified entries. The entries which were identified to be matching with the books of account and bank accounts disclosed in the books of accounts are not incriminating in nature as the same are duly recorded in the books account. The amounts pertaining to the said entries are not liable to be considered for computing the undisclosed income or unaccounted expenditure. The unidentified entries, numbering 2455, are the entries which could not be matched with the books of account of the four entities. The said unidentified entries consisted of both cash inflows and cash outflows in Erandamthall. The net effect of such entries was presumed as cash expenditure of Rs.211,37,37,982/- for FYs 2011­12 to 2017-18. Since, the said cash expenditure of Rs.211.37 crores is not recorded in the books of account of the four entities, the special auditor suggests that the same has to be construed as unexplained expenditure u/s 69C of the Act. Though, the scope of work assigned to the special auditor included identification of entity wise sources for the inflow of funds in the Erandamthall, it was found by the special auditor that the same is not feasible as the narration of the entries in Erandamthall did not indicate the name of the entity to which the entries pertained to. Having regard to the said constraint, the special auditor apportioned the unaccounted expenditure of Rs.211.37 crores to the 4 entities in proportion to the share of each entity in the aggregate cash outflow of the 4 entities in their books of account for the relevant assessment years.

105. The assessee has strongly opposed addition of unexplained expenditure of Rs. 211.37 crores and apportioned to four entities and for all assessment years. According to the assessee, though scientific examination of the Erandamthall and conclusions drawn by the special auditor in his report is acceptable, but estimation of disallowable expenses made in the report is not acceptable as the same is based on assumptions stated in the report. Further, the appellant objected to the adoption of the unaccounted expenditure of the 4 entities including the appellant at Rs.211.37 crores based on the report of the special auditor on the ground that it was only an estimate made by the special auditor. We have carefully gone through arguments of the assessee in light of observations of the special auditor, and we find that although, various assumptions made by the special auditor are logical, reasonable and in tune with normal characteristics associated with cash transactions, but when it comes to treating unidentified entries in Erandamthall as unexplained expenditure, we do not agree with suggestion made by the special auditor for simple reason that, in search assessment, addition can be made only on the basis of incriminating materials found during the course of search. Further, there is no scope for estimation of undisclosed income on adhac basis and also by extrapolating to various assessment years. In order to make additions, incriminating materials qua each assessment year is must and this principle is supported by the decision of Hon’ble supreme court in the case of CIT vs. Sinhgad Technical Educational Society [2017] 397 ITR 344 (SC), wherein it was held that the seized material should have co-relation with the assessment years for which the notices u/s 153C were issued and that the notices are not legally sustainable for the assessment years for which there is no such co-relation. This legal position is further strengthened by the decision of Hon’ble Supreme Court in the case of Supreme Court in the case of PCIT vs. Abhisar Buildwell Pvt. Ltd(2023)149 Taxmann.com 399(SC). From the ratios laid down by Hon’ble Supreme Court, it is abundantly clear that, in case, the AO, had materials in respect of unaccounted sales or expenditure for part of the period, then he can estimate income or expenditure for the remaining period in the financial year, but such estimation cannot be extrapolated to previous years or subsequent years. In this case, basis for the special auditor to suggest estimation for unexplained expenditure is Erandamthall. However, given the fact that seized Erandamthall cannot be equated with regular books of account and the entries therein are not made strictly in accordance with the accounting concepts and principles, there is no question of making estimation of unexplained expenditure and extrapolation of said estimation to all assessment years.

106.Coming back to arguments of the assessee on the findings of the ld. CIT(A) in sustaining addition of Rs. 211.37 crores towards unexplained expenditure u/s 69C of the Act. The arguments of the counsel for the assessee is that the seized electronic record represented by Erandamthall, based on which the unmatched expenditure of Rs.211.37 crores was computed in the special audit report, is inadmissible as evidence due to non-compliance with the mandatory requirements of section 65B of Indian Evidence Act dealing with admission of electronic record as evidence. The appellant contends that an electronic record is not admissible as evidence if all the conditions laid down in section 65B of Indian Evidence Act are not complied with and if a certificate u/s 65B(4) is not issued regarding the satisfaction of the said conditions as held by the Hon’ble Supreme Court in the cases of Anwar P.V Vs. P K Basheer AIR 2015 SC 180 and Arjun PanditraoKhotkar Vs. KailashKushanrao Gorantyal and Ors 220 SCC Online SC 571. In the case of the appellant, though certificate u/s 65B(4) was prepared during the search, the same does not represent a valid certificate since it is signed by a person other than Sri.P. Karthikeyan though it is prepared in the name of Sri.P. Karthikeyan and it is claimed to be signed by him. The signature found therein is completely different from the signature of Sri.P. Karthikeyan found in the panchnama dated 06.07.2018 and seizure annexures dated 05.07.2018 pertaining to the search at his residence. It is submitted that the said invalid certificate should not be taken into consideration and consequently, the electronic record represented by Erandamthall is inadmissible as evidence due to non-compliance with the mandatory requirements of section 65B of Indian Evidence Act. Therefore, the appellant submits that the unmatched expenditure of Rs.211.37 crores computed in the special audit report on the basis of such inadmissible evidence in the hands of the appellant and three group entities is unlawful and the reliance placed by the CIT(A) on such finding in the special audit report for the purpose of directing that an amount of Rs.34.70 crores apportioned to the appellant out of the said amount of Rs.211.37 crores be treated as unexplained expenditure u/s 69C in the hands of the appellant is also legally invalid.

107. Having heard both the sides, we finds that, there is no merit in argument of the assessee on the issue of correctness of imaging taken from Erandamthall in light of provisions of section 65B of the evidence Act, because the assessee could not prove its allegations on procedural aspects of taking images from Erandamthall. Further, the lapses pointed out by the assessee at best can be considered as procedural lapses in taking signature of witness etc. and for this reason the veracity and acceptability of Erandamthall cannot be questioned. Because, as pointed out the special auditor it is a parallel day book maintained by the assessee for combined transaction of all four entities which is evident from entries in Erandamthall which are also recorded in regular book of the assessee. Therefore, the assessee having been accepted the correctness of Erandamthall to the extent it was favorable to the appellant, it cannot question the authenticity of the said documents in respect of entries which are not favorable to the assessee. Therefore, we reject argument of the assessee on this issue.

108. Another issue raised by the appellant in the grounds of appeal is that the apportionment of Rs.34.70 crores based on estimation for arriving at unexplained expenditure u/s 69C in the hands of the appellant by the CIT(A) is not permissible in a search assessment u/s 153C without bringing proper evidence on record as to the identity of the persons who incurred the expenditure of Rs.34.70 crores and the extent of expenditure incurred by each person. The appellant also contended in the grounds of appeal that no addition is permissible u/s 69C unless the fact of actual incurring of expenditure is established with conclusive evidence. Since, the unmatched entries in Erandamthall are not supported by corroborative evidence regarding actual incurring of such expenditure, it is submitted that no addition can be made u/s 69C based on the said entries.

109. We have given our thoughtful consideration to reasons given by the ld. CIT(A) in light of arguments of the assessee and we ourselves do not subscribe to the reason given by the CIT(A) to direct the AO to sustain additions of Rs. 211.37 crores u/s 69C of the Act, on the basis second audit report of special auditor for the simple reason that even though the special auditor made all effort to reconcile books of the assessee with Erandamthall and where ever possible identified the entries in Erandamthall with books of accounts, but for remaining entries in Erandamthall, the special auditor observed that those entries are not identifiable to any individual assessee or entity. The source of debit or receipt of money is not identified, whether it is received in cash or bank. Further, there are no details with regard to nature of debit/receipt whether it is a capital, loan or income. Further, there are no details as to from whom and for what purpose the amount is received. Similarly in respect of credit or payment entries no details available with regard to nature of payment, whether it is repayment of loan, payment for purchase of any assets or expenditure incurred in the ordinary course of business. Further, there are no details, to whom and for what purpose the amount is paid. From the above it is very clear that, unidentified entries in Erandamthall neither can be considered as accounting entries which reflect transaction in normal course of business nor it can be considered as expenditure incurred in the course of business, and therefore based on entries in Erandamthall addition cannot be made towards unexplained expenditure u/s 69C of the Act. In our considered view, in order to bring any amount within the ambit of provisions of section 69C of the Act, it is very important to identify the nature of expenditure and the entity to whom such expenditure is relates to, because as per the provision of section of 69C of the Act, in any financial year, if an assessee incurs any expenditure and he offers no explanation about the source of such expenditure, or the explanation is any offered by him is not in the opinion of the AO, satisfactory then said expenditure may be deemed to be income of the assessee for such assessment year. In the present case, there are no findings from the AO as to nature of expenditure incurred by the assessee. Further, the AO has not brought out any reason as to how entries in Erandamthall are considered as expenditure. The entries in Erandamthall are not identified to any person or entity. There is no finding as to which financial year said expenditure relates to. In absence of any finding as to nature of expenditure and person to whom such expenditure belongs to, no addition can be made u/s 69C of the Act on suspicious and surmise manner.

110. Further, it is a matter on record that the Assessing Officer has totally ignored second special audit report submitted by the auditor in terms of section 142(2A) of the Act, in respect of Erandam Thall and its contents. If the Assessing Officer had taken into cognizance of second audit report and verified the observations of the auditor with reference to Erandam Thall, in our considered view probably the Assessing Officer would have verified unidentified entries as quantified by the special auditor to quantify unexplained expenditure. Since, the Assessing Officer ignored the special audit report in total and made additions on the basis of statements of employees towards unexplained expenditure u/s. 69C of the Act, in our considered view, the Assessing Officer has miserably failed and missed an opportunity to determine the true and correct undisclosed income of the assessee in respect of unexplained expenditure. In our considered view, when the Assessing Officer or CIT(A) is making additions u/s. 69C of the Act, the burden of proof is on the revenue, because if you go by the provisions of section 68 to 69C of the Act, where addition is made u/s. 68 of the Act, the burden is on the assessee to explain the source of the credit. But, in cases falling u/s. 69, 69A, 69B and 69C of the Act, the words used therein goes to show that before any of these sections can be invoked, the conditions precedent as to the existence of any investment or expenditure must be conclusively established by evidence and/or material on record by the Assessing Officer. If the revenue cannot, or fails to prove, there cannot be any addition. The primary onus is thus, on the revenue. In the present case, if you go through the findings of the special auditor in their audit report issued u/s. 142(2A) of the Act, coupled with reasons given by the CIT(A) to enhance the assessment and direct the Assessing Officer to make additions u/s. 69C of the Act towards unidentified entries in ErandamThall, we find that there is no conclusive evidence with the department/revenue to allege that the assessee has incurred expenditure and the source for the same has not been explained. As we have already noted in earlier paragraph of this order, unidentified entries in ErandamThall are neither linked to any entity or assessee nor the Assessing Officer or CIT(A) claims that the assessee has not explained the source. From the findings of the special auditor itself, it is very clear that the source for ErandamThall is from withdrawal from bank, receipt of sale proceeds which has been already recorded in the regular books of accounts maintained by appellant and other three entities. Therefore, on this count also there cannot be any addition u/s. 69C of the Act. Since, the unidentified entries are not conclusively established by any evidence or material on record to prove that said entries represents unexplained expenditure of the assessee, and further to any particular financial year, in our considered view enhancement of assessment and consequent additions u/s. 69C of the Act made by the ld. CIT(A) cannot be sustained. In our considered view, the CIT(A) is completely erred in making addition towards unexplained expenditure on the basis of Erandamthall. Therefore, we are of the considered view that the additions aggregating to Rs.211.37 Crores made u/s 69C and further apportioned to appellant at Rs. 31,11,16,497/- for the assessment years 2015-16 to 2018-19 cannot be sustained. Thus, we reverse the findings of the CIT(A) and consequent enhancement of assessment. The Assessing Officer is directed to delete additions made towards unexplained expenditure u/s 69C of the Act for assessment years 2015-16 to 2018-19.

111. The next issue that came up for our consideration from ground no. 6 to 6.3 of revenue appeal for assessment year 2015-16 to 2018-19 is validity of Special audit reports u/s 142(2A) of the Act and its rejection by the Assessing Officer. During the course the assessment proceedings, considering the complexity of books of accounts of the assessee and voluminous data found during the course of search, the Assessing Officer, in the interest of the revenue, direct the assessee to get the accounts audited by an Accountant in terms of provisions of section 142(2A) of the Act. The Assessing Officer with prior approval of the Principal Commissioner of Income-tax, appointed M/s. Ramesh & Company, Chartered Accountants for auditing the books of accounts of the assessee and to submit their report with regard to correctness of books of accounts maintained by the assessee for the purpose of computing taxable income. The Special Auditor in light of scope of audit assigned to them, has submitted their audit report for assessment year 2015-16 to 2018-19 and also prepared financial statement for the above period and submitted their report on 03­12-2020. Further, the Assessing Officer has also called for special audit report from the auditor on seized electronic device ErandumThall. The Special Auditor vide their report dated 15.04.2021, submitted their audit report on correctness of ErandamThall and also verified the entries recorded therein. The Assessing Officer rejected Special audit report submitted by the auditor by stating that the special audit report suffers from infirmities in so far as the Special Auditor had to rely on the information furnished by the assessee itself which are false and contradictory and as evident from the ITR opening and closing balances and tally data seized during the course of search. The Assessing Officer, further observed that the special auditor who is not privy to the confidential findings of the search could not provide a true and correct picture, as the assessee’s modus operandi of manipulation was not in the domain of knowledge of the special auditor. Further, the special auditor has done backward working of the entire accounts, making assessment year 2009-10 as the base year and build the accounts for the rest of assessment years. Therefore, the Assessing Officer rejected special audit report submitted by the auditor and financial statement prepared for the relevant assessment years by stating that the Assessing Officer is not binding on the special audit report. Further, the AO has totally ignored and not even discussed the second audit report submitted by the auditor on ErandumThall found and seized during the course of search. On appeal, the CIT(A) accepted the special audit report and financial statement prepared for relevant assessment year on the ground that the financial statements prepared by the special auditor and reports submitted on correctness of financial statement by the special auditor is based on systematic and scientific method followed for preparation of financial statements and further, the assumptions employed by the special auditor is in accordance with Auditing Standards issued by the Institute of Chartered Accountants of India. Being aggrieved by the CIT(A), the revenue is in appeal before us.

112. The ld. CIT-DR, Shri. M. Rajan, submits that the ld. CIT(A) is erred in holding that the rejection of the first special audit report u/s. 142(2A) of the Act and complete disregarding of the second special audit report by the Assessing Officer is not legally sustainable. The ld. CIT(A) erred in failing to appreciate that the Assessing Officer has given various reasons for rejection of special audit report and as per the Assessing Officer, the special auditor has conducted independent enquiries which were beyond the mandate of the special audit and he had to rely on the information furnished by the assessee which are false and contradictory, which is evident from the ITR opening and closing stock balances, and tally data seized during the course of search. The ld. CIT-DR further submits that the special auditor is not privy to the confidential findings of the search and he could not provide a true and correct picture of accounts of the assessee as the modus operandi of manipulation employed by the assessee was not in the domino of knowledge of the special auditor. Further, the special auditor has employed various assumptions in preparing financial statements and also adopted financial year 2008-09 as base year and build accounts for rest of assessment years. Therefore, the audit report submitted by the special auditor cannot give true and correct undisclosed income of the assessee and thus, the Assessing Officer has rightly rejected special audit report while completing assessment, but the CIT(A) without appreciating relevant facts accepted special audit report in total which is incorrect.

113. The ld. Counsel for the assessee Shri. D. Anand, Advocate, supporting the order of the CIT(A) submits that it was the department and the Assessing Officer who had sought the special audit of the books of accounts of the assessee by stating that special audit of books of accounts is required considering the voluminous data and complexity of accounts of the assessee. Further, the special auditor has been appointed by the department from the panel of auditors maintained by the department having considered their expertise knowledge and experience in the field of audit. The scope of audit work has been given by the Assessing Officer. Therefore, it is incorrect on the part of the Assessing Officer to reject the special audit report submitted by the auditor by stating that the special auditor is not having knowledge of modus operandi of manipulation of accounts by the assessee. Further, the observation of the Assessing Officer that he is not bound by the findings of the special audit report is incorrect because when the department has directed the assessee to get its accounts audited in terms of section 142(2A) of the Act, the Assessing Officer is bound to consider the special audit report submitted by the auditor and financial statement prepared for the relevant assessment years. Just because the audit report is not in conformity with the opinion of the Assessing Officer or not in accordance with appraisal report, it cannot be said that special audit report is not prepared in accordance with relevant accounting and auditing standards. The CIT(A), after considering relevant facts has rightly accepted the special audit report submitted by the auditor and thus, the grounds raised by the revenue on this issue should be rejected.

114. We have heard both the parties, perused materials available on record and gone through orders of the authorities below. We have also carefully considered reasons given by the ld. CIT(A) for accepting special audit report submitted u/s 142(2A) of the Act, in light of grounds of appeal filed by the Revenue challenging findings of the CIT(A). In the grounds of appeal, the revenue raised various contentions with regard to the issue of rejection of first special audit report u/s 142(2A) and complete disregarding of the second special audit report by the AO. With regard to the first contentions of the revenue, the AO rejected first special audit report with the remarks that the independent enquiries made by the special auditor for verification of the quantum of purchases and consumption of raw materials for production is beyond the mandate of the special audit. In this regard, we find that the special auditor has sought necessary confirmations from various persons with whom the appellant had transactions of purchases, sales, expenses etc., in accordance with the Standards on Auditing (SA)-505 prescribed by the Institute of Chartered Accountants of India. Such confirmations were sought in the normal course of the auditing process in accordance with auditing standards, as the terms of reference of the special audit included preparation of audit report in form 3CD and notes to accounts apart from preparation of final accounts. From the above, it is clear that the said reason cited by the AO for rejection of the report of the special auditor is not based on proper appreciation of the auditing process. In any case, the confirmations obtained by the special auditor and the conclusions drawn by him based on the same with regard to the transactions recorded in the books of accounts, do not place any restriction on the powers of the AO to make enquiries and gather any adverse evidences in respect of the said transactions for drawing different conclusions. However, the AO has not conducted a single enquiry with the suppliers of the alleged bogus purchases or the buyers of the alleged bogus sales and has merely sought to rely on the statements of the employees recorded during the search. Having not exercised his powers to make such enquiries, it is not correct on the part of the AO to discredit the report of the special auditor on the ground that he has made independent enquiries beyond the mandate of the special audit.

1115. The terms of reference of the special audit included preparation of final accounts for AY 2009-10 to 2018-19 and accordingly the special auditor prepared the final accounts for the assessment years under consideration. While rejecting the special auditor’s report, the AO cited one of the reasons that the books of account were prepared by the special auditor by making AY 2009-10 as the base year and by adopting the closing stock AY 2008-09 as opening stock of AY 2009-10 and proceeding to build the accounts for the remaining years. The AO stated that the accounts so prepared for the base year are not acceptable since the appellant himself has reported “0” in opening and closing stock figures in the return of income filed u/s 153C for AY 2009-10. However, the said reason cited by the AO is factually untenable. It is an undisputed fact that the original return of income for AY 2009-10 filed u/s 139 was filed under the category of “No account case”. As a result, the original return of income does not contain any details of profit and loss account. As per the details relating to P&L account required to be furnished in a return filed under category of No Accounts case, the appellant separately furnished the details of gross receipts, gross profit, expenses and net profit in the relevant columns of the return of income. Further, the appellant furnished the details of sundry creditors, sundry debtors, closing stock and cash balance in the relevant columns of the return, which are required to be furnished in a No Accounts case. While filing the return of income in response to notice u/s 153A, the appellant filed the details in the same manner. The appearance of “0” entries in P&L account, as observed by the AO in the assessment order, were due to this reason. The citing of occurrence of “0” entries in the P&L account by the AO as one of the reasons for rejecting the special auditor’s report is therefore found to be irrelevant and untenable. Therefore, we are of the considered view that the final accounts prepared by the special auditor for the assessment year under consideration are required to be taken into consideration, instead of the seized tally accounts, which are incomplete and inaccurate.

116. As regards the remarks of the AO that the special auditor made backward working of consumption of raw materials based on the quantum of production shown by the appellant and that the same is not acceptable since the search has shown that the appellant manipulated its accounts to inflate purchases. In this regard, it is to be observed that the special auditor has not made any backward working with regard to consumption of raw material. The methodology adopted by him for verification of the consumption of raw materials has been detailed by the special auditor in the notes to accounts given separately for each assessment year in Annexures 1 to 10 of the special audit report. The special auditor stated therein that the consumption of raw material for production of weaning food, blend of critically processed material etc., as shown in the seized tally accounts of the assessee was cross verified with the formulations of respective products as per the terms of the tender document. The special auditor stated that the yield of each raw material used in the production has been computed as per the formulation specified in the tender document and the material wastage has been cross verified with the standards provided under Food Safety and Standard Regulation. Thus, it is seen that the remarks of the AO with regard to the backward working of raw material consumption is not in tune with the methodology adopted in the special audit report. Similarly, as regards the observation that the quantum of production of finished goods and sales have been manipulated by the appellant as per the findings of the search and the said quantum could not have been considered by the special auditor for the purpose of working out the quantum of raw materials consumed in production, we find that the said observation of the AO in the assessment order does not contain any references to evidences in the seized material which reveal manipulation of quantum of production of finished goods. Similarly, the observation of the AO that the quantum of production as per the records of the appellant is not reliable in view of finding of evidences of bribing of public servants during the search which indicates manipulation of the sale quantity of finished goods by the appellant for the Govt. welfare schemes is seen to be mere surmise and speculation. The search did not reveal any evidence regarding supply of less quantity than the invoiced quantity or raising of invoice without actual supply of goods to the Govt. by the appellant. Based on the evidences found regarding bribing of public servants, the AO appears to have made a presumption that such bribing was for the purpose of manipulating the quantum of supplies made to the Govt. without any basis. In our considered view, the AO did not bring any evidence on record in respect of alleged manipulation of supply quantities by making necessary enquiries with the relevant Govt. departments. Therefore, we are of the considered view that these reasons cited by the AO are unfounded. Further, as could be seen from the discussion in the appellate order, the CIT(A) has given detailed factual reasons in support of his finding that the rejection of first special audit report by the AO is not sustainable. The revenue has not disputed even a single fact finding of the CIT(A) given based on analysis and appreciation of the facts and circumstances of the case and the contents of the first special audit report. In view of this, the contention of the revenue that the CIT(A) erred in holding that the rejection of first special audit report by the AO is not sustainable is false, baseless and total non-application of mind by the AO.

117. We further noted that the revenue has not furnished even a single reason in support of its contention that the CIT(A) erred in holding that disregarding the second special audit report by the AO is not legally sustainable. Further, the AO himself proposed for obtaining a report from the special auditor u/s 142(2A) with regard to the contents of Erandamthall vide his letter dated 05.04.2021 addressed to Pr.CIT and the approval for the same was accorded by the Pr.CIT vide letter dated 07.04.2021. This report was sought in continuation of the earlier special audit report submitted by the special auditor vide report dated 03.12.2020 with regard to finalisation of the accounts of the appellant and 3 group entities. As could be seen from the proposal submitted by the AO, it was considered necessary by him to refer the matter of examination of the contents of Erandamthall with reference to the books of accounts of the appellant and 3 entities of the group to the special auditor, in view of the dispute raised by the appellant with regard to placing reliance on Erandamthall. The same is a clear evidence of the fact that the AO was not satisfied with the correctness of the quantification of unaccounted expenditure made from the contents of Erandamthall during the course of the search on account of the objections of the appellant and he considered it necessary and expedient to refer the matter to the special auditor for fresh examination of the contents of Erandamthall with reference to the books of account. The Pr.CIT too expressed the view, while approving the proposal of the AO, that a correct picture regarding the real undisclosed income would be arrived at once the examination of the contents of Erandamthall is made by the special auditor. These facts leave no doubts in our mind that both the AO and the Pr.CIT were of the unanimous opinion that the quantification of unaccounted expenditure made during the course of the search based on seized Erandamthall cannot be adopted mechanically on account of the objections of the appellant with regard to the same and that the same needs to be worked out afresh by the special auditor, who is an expert in financial and accounting matters. However, having proposed examination of contents of Erandamthall by the special auditor, the AO completely ignored the special auditor’s report dated 15.04.2021 while completing the assessments. The AO did not even mention the fact that a report was called for from the special auditor on this issue in the assessment orders. The AO remained completely silent with regard to the said report and its contents. This is surprising since the AO himself referred the matter for special audit u/s 142(2A) and obtained the report in pursuance thereof. The AO has not made any discussion in the assessment order regarding the reasons for not accepting the said report. In this factual background, the disregarding of the report of the special auditor obtained subsequently without assigning any reasons for the same is inexplicable and the said action of the AO only adds strength to the appellant’s contention regarding the mechanical manner of adopting the quantification of unaccounted expenditure based on entries in Erandamthall made during the course of search, without addressing various objections and contentions of the appellant. The report of the special auditor obtained by invoking the provisions of the Act could not have been ignored and disregarded by the AO, without specifying the reasons for doing so in the assessment orders. Although, the AO gave various reasons for rejection of special audit report, but in our considered view, the reasons given by the AO are vogue and found to be incorrect from the discussions in previous paragraphs. Therefore, we are of the considered view that the AO is completely erred in rejecting first and second special audit report.

1118. The power to direct the assessee to get its accounts audited u/s. 142(2A) of the Act is with the Assessing Officer. The Assessing Officer having regard to the complexity involved in accounts of the assessee and in the interest of revenue can direct for special audit and such direction can be issued with prior approval from the Pr. CIT. The procedure laid down for making reference to the special auditor indicates that it is only when complexity in accounts is found, that an expert of accountancy having specialized skill is engaged to examine the books of accounts. The special auditor appointed by the Department is from the panel of special auditors maintained by the Department and such panel has been maintained considering the experience and expertise of the auditors. Further, the special auditor works under the department and carries out the audit work as per the scope of work specified in the appointment letter. Therefore, when the Assessing Officer has sought special audit report on the financial statements of the assessee and books of accounts from their own empanelled auditors, then the Assessing Officer cannot simply reject or discard the special audit report merely for the reason that the findings in the special audit report is adverse/contrary to the appraisal report submitted by the investigation wing. If you see the intention and purpose behind the introduction of special audit in the statue, the purpose is to assist the Assessing Officer to determine correct taxable income of an assessee from the books of accounts and other documents found during the course of search. Therefore, in our considered view, the Assessing Officer having appointed special auditor, cannot ignore the audit report unless he makes out a case with reasons that the special audit report is incomplete or the auditor has not carried out the audit as per the standard auditing procedures. In this case, if we go through the reasons given by the Assessing Officer to reject special audit report for all assessment years, we find that the Assessing Officer has rejected said audit report on flimsy grounds without any finding as to how observation of the special auditor is incorrect. Further, it is nowhere provided that special audit report is binding or the assessment shall be made in conformity with special audit report. However, if there is no adverse material or adverse circumstances or the findings of the Assessing Officer during assessment proceedings is contrary to the special audit report, then such report has to be considered and relied upon. In our considered view, the Assessing Officer is completely erred in rejecting/discarding the special audit report without any valid reason. The CIT(A) after considering relevant facts, has rightly accepted special audit reports submitted u/s 142(2A) of the Act, and thus, we reject grounds taken by the revenue for Asst. year 2015­16 to 2018-19.

119. In the result, appeals filed by the revenue in ITA Nos. 906 to 910/Chny/2022 for assessment years 2010-11, 2015-16 to 2018-19 are dismissed and appeals filed by the assessee in ITA Nos. 880 to 883/Chny/2022 for assessment years 2015-16 to 2018-19 are partly allowed.

Order pronounced in the court on 07^th July, 2023 at Chennai.