2023 (6) TMI 256 - AT - Income Tax

Appeals Upheld: Grape Sales Not Inflated, Revenue's Appeals Dismissed

The CIT(A) deleted the addition made by the A.O, ruling that the grape sales by the assessee to Sula Vineyards Pvt. Ltd. were not inflated. The ITSC found ... Inflation of agricultural receipts - Admissibility and evidentiary value of third party statements - Reliance on seized documents and internal company data - Use of Settlement Commission findings in related entity's adjudication - Addition as unexplained credit under section 68Inflation of agricultural receipts - Addition as unexplained credit under section 68 - Validity of addition made by AO treating inflated agricultural receipts as unexplained income and its deletion by CIT(A). - HELD THAT: - The AO computed purported 'inflated' agricultural receipts for the assessee's three farms by applying area to yield ratios derived from statements of company employees and treated a portion of the assessee's claimed receipts as unexplained income added under section 68. The CIT(A) examined the seized material, the ITSC order in respect of the buyer (Sula Vineyards Pvt. Ltd.) and the totality of records and concluded that the entire sale by the assessee to the company could not be treated as sold at an inflated rate. The ITSC's detailed consideration of seized evidence resulted in an accepted inflation figure substantially lower (approximately 6.6% for FY 2016 17) and found several of the pieces of seized evidence unsuitable to be adopted alone for extrapolation. The Tribunal, applying those findings mutatis mutandis, observed that the assessee's name did not appear in the list of parties from whom the company had inflated purchases; the company's records reconciled physical stock; and no independent incriminating material connected the assessee with accommodation transactions. On this basis the Tribunal found no merit in the revenue's appeal against deletion of the addition. [Paras 6, 9, 13]Addition treating inflated agricultural receipts as unexplained income was not sustained; deletion by CIT(A) upheld and revenue's ground dismissed.Admissibility and evidentiary value of third party statements - Reliance on seized documents and internal company data - Whether statements of company employees (Raman Bhawar and Vinayak Nehe) and the draft plan seized during search were reliable basis to compute inflation in the assessee's receipts. - HELD THAT: - The AO relied on statements of two company employees and a draft plan seized during search to estimate inflated production/receipts. The CIT(A) and the Tribunal noted that those employees were not employees of the assessee, that the ITSC had found the statements and certain seized data unsuitable for use alone to compute inflation, and that the assessee's name was not among the list of parties identified as having been used for accommodation transactions. The Tribunal also accepted the assessee's contention that company records reconciled raw material consumption and physical stock, and that the ITSC's holistic assessment limited inflation to a small percentage. Accordingly, the Tribunal found the third party statements and isolated seized papers insufficiently reliable to uphold the AO's extrapolated inflation in respect of the assessee. [Paras 6, 9]Statements of the company employees and the draft plan were not a reliable or sufficient basis to compute inflated agricultural receipts of the assessee; reliance on them to sustain the addition was rejected.Use of Settlement Commission findings in related entity's adjudication - Reliance on seized documents and internal company data - Extent to which the ITSC's findings in Sula Vineyards Pvt. Ltd.'s case could be relied upon in adjudicating the assessee's claim. - HELD THAT: - The CIT(A) relied on the Income tax Settlement Commission's order in the case of the buyer, which had examined the seized material comprehensively and determined that inflation in purchases was limited (approximately 6.6% for FY 2016 17) and that several pieces of seized evidence could not be used in isolation for extrapolation. The Tribunal applied those findings to the assessee's case, noting that the assessee was not included among the farmers listed as accommodation parties and that company records did not disclose discrepancies attributable to the assessee. Given the Settlement Commission's detailed fact based conclusions about the nature and extent of inflation, the Tribunal held that those findings weighed against sustaining the AO's broader extrapolation in the assessee's assessment. [Paras 6]ITSC findings in the buyer's case were material and, when applied, undermined the AO's extrapolated inflation in the assessee's receipts; reliance on the ITSC record supported deletion of the addition.Final Conclusion: The appeals filed by the revenue were dismissed; the Tribunal upheld the CIT(A)'s deletion of the addition relating to alleged inflation of the assessee's agricultural receipts, finding the AO's reliance on isolated statements and seized documents insufficient and noting the ITSC's contrary findings in the buyer's settlement which did not implicate the assessee. Issues Involved:1. Evidentiary value of statements given by farm managers.2. Appreciation of incriminating material regarding inflation of grape purchases.Issue-wise Detailed Analysis:1. Evidentiary Value of Statements Given by Farm Managers:The primary issue was whether the statements given by Shri Raman Bhawar and Shri Vinayak Nehe, who managed the farms for the assessee, held any evidentiary value. The Assessing Officer (A.O) relied on these statements to claim that the agricultural receipts from the farms were inflated. However, the Income Tax Settlement Commission (ITSC) found these statements unreliable for calculating inflated purchases. The ITSC noted that the statements did not account for factors such as new plantation and disease-infected crops, which could affect grape yield. Furthermore, the statements were not retracted, but the ITSC's order indicated that these were not considered factual pieces of evidence.2. Appreciation of Incriminating Material Regarding Inflation of Grape Purchases:The A.O also used a draft plan unearthed during a search action to argue that there was an inflation in the purchases of grapes. The draft plan indicated a proposal for inflating grape purchases to generate cash. However, the ITSC found that the actual inflation in grape purchases was around 6.6%, not the higher percentages initially suggested. The ITSC's findings were based on various pieces of evidence, including katcha slips, Farmer Vehicle Register, and data from the accounts department. The ITSC concluded that the inflation was used for non-business purposes and accepted a 6.6% inflation rate for the fiscal year 2016-17. The assessee argued that the entire grapes grown were sold to M/s Sula Vineyards Pvt. Ltd., and there was no inflation as alleged. The assessee provided detailed records of grape sales and expenses, which were verified against the company's records. The ITSC also noted that the assessee's name did not appear in the list of parties involved in inflated transactions.Conclusion:The CIT(A) deleted the addition made by the A.O, concluding that the entire sale of grapes by the assessee to Sula Vineyards Pvt. Ltd. could not be considered inflated. The ITSC's findings supported this conclusion, showing that the inflation in grape purchases was significantly lower than initially claimed by the A.O. Consequently, the appeals filed by the revenue were dismissed, and the CIT(A)'s order was upheld.Additional Appeals (ITA Nos. 2543/Mum/2021, 2544/Mum/2021, 2545/Mum/2021):The facts and issues in these appeals were identical to those in ITA No. 2541/Mum/2021. Applying the same findings, these appeals were also dismissed.Final Judgment:All appeals by the revenue were dismissed, and the order was pronounced in the open court on 09.02.2023.