2024 (1) TMI 1447 - AT - Income Tax

ITAT rules additions under section 69A cannot be sustained based on unverified excel sheets from third-party premises

Deputy Commissioner of Income Tax, Central Circle 2 (1), Chennai Versus M/s. Appu Direct Pvt Ltd.

The ITAT Chennai held that additions under section 69A based on excel sheets found during search of third-party premises cannot be sustained without ... Undisclosed cash transaction from undisclosed sources - addition u/s 69A - Addition made on the basis of entries pertaining to the assessee firm based on the excel sheets found in the electronic devices seized during the course of search in the case of Christy group of companies - HELD THAT:- AO has failed to link any cash transactions recorded in excel sheet with any other corroborative evidence which means the cash transactions alleged to be recorded in excel sheet cannot be considered as transactions of the assessee. In this connection, it is necessary to refer to the decision of State of Kerala vs KT Shadulli and Nalla Kandy Yusuf [1977 (3) TMI 160 - SUPREME COURT] where it has been observed that, it is quite possible that the author of the seized documents may have mentioned certain transactions in their books of accounts either to embarrass the assessee or due to animus or business rivalry or such other reasons which could only be established when the department examines such author of the document. In our considered view unless the AO makes out a case that alleged cash receipts and payment pertains to transactions of assessee which constitute income or expenditure, no addition can be made on the basis of said documents. The proposition that addition cannot be made merely on the basis of entries in loose sheets found in the premises of a third party without bringing on record independent evidence to corroborate such entries has been reiterated in several decision, like MM Financiers (P) Ltd [2006 (12) TMI 189 - ITAT MADRAS-B], Regency Mahavir Properties [2018 (1) TMI 245 - ITAT MUMBAI] and Monga Metals (P) Ltd. [1999 (6) TMI 47 - ALLAHABAD HIGH COURT] Also as documents are found in the premises of third party, the presumption as contended in section 132(4A)/292C of the Act is not applicable. The Hon’ble High Court of Bombay in the case of PCIT vs Umesh Israni [2019 (4) TMI 1947 - BOMBAY HIGH COURT] held that, the entries of the loose papers which were seized were not corroborated with any other evidence on record and no enquiry or verification was made and thus, no additions can be made u/s. 69A of the Act. Revenue has taken a ground in light of alleged two set of accounts maintained “Tally 1 and Tally 2 by the assessee group and argued that, the appellant is in the practice of replacing the invoices not checked by any Government authorities in the accounted Tally - Ground taken by the revenue is devoid of merits, because the AO neither considered so called Tally 1 and Tally 2, nor made any additions based on said evidences in the assessment order in respect of additions made u/s. 69A of the Act. Therefore, in our considered view the ground of appeal taken by the revenue fails. Appending two zeros to value recorded in alleged excel sheets, the AO has added two zeros to values recorded to excel sheets for assessment year 2018-19 only - When the bank entries is matching with the books of accounts of the assessee without appending two zeros, the question of appending two zeros to cash entries alone is totally incorrect. Since, the payment through bank noted in seized excel sheets are matching with the corresponding entries found in the bank statement without need to append two zeros, it is considered that the payments through cash found noted in the same excel sheet cannot be construed by adding two zeros to the said amounts. If the payments through cash alone are considered by adding two zeros and the payment through bank are considered in the manner in which they appear in the excel sheets, the totals of the payments column and the receipts column will be grossly different from the total mentioned in the excel sheet. It is therefore clearly evident that, all the amounts mentioned in the excel sheets, regardless of whether they are cash transactions or bank transactions are the actual amounts without suppression of two zeros at the end. Therefore, we are of the considered view that the AO is erred in appending two zeros to the cash transactions appearing in the seized excel sheets and same is untenable. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered in this judgment include:Whether the additions made by the Assessing Officer (AO) towards undisclosed cash transactions based on excel sheets found in the possession of a third party are sustainable under Section 69A of the Income-tax Act, 1961.Whether the excel sheets found in the possession of a third party have evidentiary value to substantiate the alleged cash transactions.Whether the presumption under Sections 132(4A) and 292C of the Act applies to documents found in the possession of a third party.Whether the AO's action of appending two zeros to the cash transaction values recorded in the excel sheets is justified.Whether the method adopted by the CIT(A) in computing undisclosed income by netting off cash receipts against cash payments is appropriate.ISSUE-WISE DETAILED ANALYSIS1. Evidentiary Value of Excel SheetsThe excel sheets found in the possession of a third party were the primary basis for the AO's additions under Section 69A. The relevant legal framework includes Section 132(4A) and 292C, which provide presumptions regarding documents found during searches. However, these presumptions apply only when documents are found in the possession of the assessee, not a third party. The Court noted that the excel sheets lacked corroborative evidence, such as cash receipts or unaccounted purchase bills, to substantiate the alleged cash transactions. Furthermore, the documents were not in the handwriting of the assessee or its partners, and no other evidence was found during the search to support the entries in the excel sheets.2. Presumption under Sections 132(4A) and 292CThe Court emphasized that the presumption under Sections 132(4A) and 292C does not apply to documents found in the possession of a third party. The Court referenced several precedents, including the Hon'ble Gujarat High Court's decision in PCIT vs. Gaurangbhai Promodchandra Upadhyay, which held that no presumption could be drawn against the assessee for documents not found in their possession. The Court concluded that without corroborative evidence, the excel sheets could not be used to draw adverse inferences against the assessee.3. Appending Two Zeros to Cash TransactionsThe AO appended two zeros to the cash transaction values based on a statement from an employee of the Christy group. However, the Court found that this action lacked a valid basis, as the statement related to a separate unaccounted cash book and not the excel sheets in question. The Court noted that the bank transactions in the excel sheets matched the books of accounts without appending zeros, indicating that cash transactions should be treated similarly.4. Method of Computing Undisclosed IncomeThe CIT(A) computed undisclosed income by netting off cash receipts against cash payments, arguing that aggregating both would exaggerate the income. The Court found this method reasonable, as it accounted for the possibility that cash payments were made from cash receipts. The Court upheld this approach, noting that it was consistent with the absence of corroborative evidence for the alleged cash transactions.SIGNIFICANT HOLDINGSThe Court held that the additions made by the AO under Section 69A based on excel sheets found in the possession of a third party were unsustainable due to a lack of corroborative evidence. The Court emphasized that:'The evidences relied upon by the AO in the form of excel sheets does not constitute adequate evidence to draw adverse inference against the assessee, in the absence of any other corroborative evidence.'The presumption under Sections 132(4A) and 292C does not apply to documents found with a third party.The AO's action of appending two zeros to cash transaction values was unjustified.The method adopted by the CIT(A) in computing undisclosed income by netting off cash receipts against cash payments was reasonable and acceptable.The Court dismissed the appeals filed by the revenue for the assessment years 2017-18 and 2018-19, upholding the CIT(A)'s decision to delete the additions made by the AO. The cross objections filed by the assessee were dismissed as infructuous.