2022 (2) TMI 1512 - AT - Income Tax

Appellate authority upholds dismissal of revenue appeal; s.133A mobile image deemed inadmissible, no addition for alleged undisclosed sales

ACIT (Central) -2, Indore Versus Shri Nakoda Construction Company

ITAT, Indore AT upheld the appellate authority's decision dismissing the revenue's appeal and rejecting an income addition based on an image recovered ... Addition on account of undisclosed income - Image recovered from mobile phone recovered u/s 133A relied upon - AO made the addition mainly of undisclosed income from suppressed sale of D-Block in Niranjanpur Project - HELD THAT:- We find that in the instant case, the document seized from the premises of the third party without any corroborative evidence was a dumb document having no evidentiary value and cannot be relied upon for making any addition and the assessee was also not given proper opportunity of cross-examination which was unjustified. Before us, CIT(A) could not controvert the findings of CIT(A) by bringing any contrary material on record. Thus, no infirmity in the order of the CIT(A). We confirm the same. Accordingly, ground raised in the departmental appeal stands dismissed. ISSUES PRESENTED AND CONSIDERED 1. Whether an addition to income can be sustained on the basis of a loose paper/image ('dumb document') recovered from the premises or mobile of a third party without any corroborative evidence linking the document to the assessee? 2. Whether statutory presumptions under sections 132(4A) and 292C (presumptions regarding ownership of seized documents) can be invoked against an assessee where documents were seized from a third party's premises and not from the assessee? 3. Whether the failure to afford the assessee an opportunity to cross-examine persons whose statements or materials formed the basis for the addition amounts to a violation of the principles of natural justice and vitiates the assessment? ISSUE-WISE DETAILED ANALYSIS - Issue 1: Admissibility and evidentiary value of loose/dumb documents recovered from a third party Legal framework: Evidence must be admissible and sufficiently corroborative to form the basis of an assessment; notings/loose papers that do not, by themselves, disclose a complete transaction are 'dumb documents' and lack evidentiary value to make additions in absence of corroboration. Precedent Treatment: Followed and applied consistent decisions of higher and co-ordinate fora holding that mere entries/loose papers found at a third party cannot, by themselves, support additions (including authorities that the onus lies on the Revenue and that seizure at third party premises does not conclude liability of the assessee). Interpretation and reasoning: The Tribunal examined the image recovered from a third party's mobile and found it did not disclose complete transactional particulars (no clear party attribution, dates, consideration particulars, or corroborative accounting/financial trail in assessee's records). The Assessing Officer's reliance on handwriting resemblance and arithmetic inference (totaling jottings) was held to be speculative and insufficient to establish income. The Tribunal emphasized that seized third-party material must be corroborated by independent evidence before serving as a basis for additions. Ratio vs. Obiter: Ratio - additions cannot be made solely on dumb documents recovered from third parties without corroboration. Obiter - observations on what constitutes sufficient corroborative material in different fact patterns (illustrative citations to other decisions) are persuasive but fact-specific. Conclusion: Addition based solely on the loose image found at a third party is not sustainable; the document is a dumb document lacking evidentiary value absent corroboration, and the deletion by the appellate authority was affirmed. ISSUE-WISE DETAILED ANALYSIS - Issue 2: Applicability of statutory presumptions when documents are seized from third parties Legal framework: Statutory presumptions (as in sections analogous to 132(4A) and 292C) apply to persons from whom documents are seized/impounded; such presumptions cannot be mechanically extended to third parties without statutory basis and independent evidence linking the seized material to the assessee. Precedent Treatment: Followed prior pronouncements holding that presumptions operate against the person in whose possession documents were found and that the Revenue bears onus to prove nexus between seized material and the assessee. Interpretation and reasoning: The Tribunal held that the Assessing Officer improperly applied a presumption of ownership/connection to the assessee despite the material being impounded from a third party. There was no evidence establishing that the jottings belonged to the assessee or that the alleged transaction actually consummated in the relevant year. Thus statutory presumption could not be invoked to shift onus to the assessee. Ratio vs. Obiter: Ratio - statutory presumptions cannot be applied against an assessee in respect of material seized from a third party absent proof that the document belongs to or was held by the assessee. Obiter - remarks on the limits of handwriting comparison and the need for documentary/financial corroboration. Conclusion: Presumptions under the relevant provisions could not be applied to sustain the addition since documents were found at a third party and no independent link to the assessee was established. ISSUE-WISE DETAILED ANALYSIS - Issue 3: Violation of principles of natural justice by denial of opportunity to cross-examine Legal framework: Principles of natural justice require that an assessee be given a fair opportunity to meet evidence relied upon, including cross-examination where statements or third-party materials are used to form the basis of an adverse finding; failure to afford such opportunity may vitiate the order. Precedent Treatment: Followed binding authority that non-provision of opportunity to cross-examine witnesses whose statements underpin an adjudication is a serious flaw rendering the order nullity. Interpretation and reasoning: The Tribunal found that the Assessing Officer relied upon material retrieved from a third party (including alleged statements/entries) without conducting adequate inquiry of the assessee, issuing a show-cause, or allowing cross-examination of persons whose material formed the basis of addition. Given that the evidence was already weak (dumb document), denial of procedural opportunity compounded the infirmity and precluded sustainable assessment. Ratio vs. Obiter: Ratio - absence of an opportunity to cross-examine persons whose statements/evidence form the basis of addition vitiates the assessment; when coupled with reliance on third-party dumb documents, the defect is decisive. Obiter - procedural safeguards' application may vary with strength of corroborative material. Conclusion: The assessment was vitiated by procedural unfairness; non-provision of cross-examination and failure to issue show-cause were material defects supporting deletion of the addition. CROSS-REFERENCES AND OVERALL CONCLUSION Cross-reference: Issues 1-3 are interlinked - the weak evidentiary character of the seized third-party document (Issue 1) precluded invocation of statutory presumptions (Issue 2) and amplified the prejudice caused by denial of cross-examination (Issue 3). The Tribunal's reliance on established case law on each point collectively supports the conclusion. Overall conclusion: Additions based on loose, non-speaking papers or images recovered from third parties cannot sustain an assessment unless corroborated by independent evidence or clear documentary/financial linkage; statutory presumptions against seizure-persons do not automatically apply to third parties; and failure to afford opportunity for cross-examination where such third-party material is relied upon is a violation of natural justice - accordingly, the appellate deletion of the addition was upheld and the departmental appeal dismissed.