2004 (9) TMI 719 - AT - Income Tax

Additions for alleged 'oil gain' and faxed papers deleted in block assessment; employee statements insufficient to sustain charge

Assistant Commissioner of Income Tax Versus Santogen Textile Mills Ltd.

ITAT, Mumbai set aside additions made in a block assessment: the tribunal deleted an addition for alleged undisclosed 'oil gain' from ... Addition of oil gain and consequent undisclosed income - whether addition made on mere surmises and conjectures? - basis or relevance to make addition - presence of 'oil gain' in texturising/processing of yarn - whether any incriminating material found/seized or not? - Scope for additions based on presumption or estimation in the course of a block assessment - HELD THAT:- We find that from the material brought on record, that regular assessments under Section 143(3) have been passed off, without noticing any defects in the books of account, and without even a whisper about the so-called universal phenomena of 'oil gain' derived in the course of texturising of yarn, which according to the AO, assessee failed to take proper note of account in its accounts. The allegation of the AO is not that any purchase or sale outside the books or any incriminating material, having a nexus/bearing on the so-called oil gain derived by the assessee, was found at the time of search, but that there is incriminating material, viz. statements of employees, etc. which indicate that the so-called oil gain was not properly accounted by the assessee in its books. That being so, even if there is any 'oil gain' derived by the assessee in its manufacturing process, it cannot be brought to tax in the course of impugned block assessment, in the absence of any nexus between the material found at the time of search and the impugned addition. Further, we find merit in the contentions of the assessee, that the statements of the employees or third parties, who have no knowledge of the men, machinery and procedure employed by the assessee in its manufacture, besides the purpose of manufacturing, as these features would be varying from company to company, and with such variance, the so-called element of 'oil gain' would also be vastly differing from company to company. Procedures adopted by the assessee cannot be relied upon to draw any adverse inference against the assessee. The assessee has brought on record, lot of material, in the form of chart indicating procedure in production, conversion and sales of yarn adopted by it, report of chartered engineers in relation to the assessee, and albeit in the form of additional evidence file before the CIT (A) which was not admitted, test reports issued by the SASMIRA itself dt. 7th Feb., 2001 and 27th Feb., 2001, based on the samples submitted by Suresh Synthetics, to dispute the 'oil gain' claimed to have been derived by it, but not accounted for in its books. In the absence of any incriminating material to suggest either 'oil gain' derived by the assessee, or production or any transaction of purchase or sale made by the assessee outside its books of account, found at the time of search, there is no justification to make any addition on that count. In this view of the matter, the case law relied upon by the Revenue has no application to the facts of this case. Thus, we set aside the Order of the CIT (A) on this issue, and delete the entire addition made by the AO on account of oil gain. Consequently, assessee's contentions on this aspect are accepted, and the Revenue's grounds are rejected. This disposes of, the appeal of the Revenue. Addition on papers received at the time of search by fax - plea of the assessee all along has been that the papers received at the time of search by fax do not relate to it at all - correctness of the assessee's version - HELD THAT:- There is nothing more that an assessee can do to establish its plea, and has as such discharged the onus that lay on it. Notwithstanding the details furnished by the assessee, if at all any doubt about the correctness of the assessee's version persists in the minds of the authorities, the onus is rather on the Department to prove the falsity of the assessee's version. For that purpose, it is open for the Department, to examine the concerned party and verify the matter, with reference to the assessment records or other connected documents of the concerned party, after calling for the same. But, it is not fair to expect the assessee to explain the transactions contained in the papers, that were claimed to be not belonging to it. A reading of the impugned Order of the CIT (A) reveals that the assessee's plea is rejected on mere suspicion, and for the inability of the assessee to explain the transactions, which according to it, do not belong to it. We are of the view that such an addition cannot be sustained. We accordingly delete the same. In the result, appeal of the assessee is allowed and the Revenue's appeal is dismissed. ISSUES PRESENTED AND CONSIDERED 1. Whether an addition in block assessment based on alleged 'oil gain' (increase in finished yarn weight due to oil pick-up during texturising) can be sustained in absence of nexus between material seized at search and the estimated undisclosed income claimed to arise from that phenomenon. 2. Whether additional evidence (post-search laboratory/test reports submitted by the assessee) regarding absence or quantum of oil gain should have been admitted in appellate proceedings. 3. Whether an addition founded on paper documents (faxed papers) found at search can be sustained against the assessee where the assessee produces contemporaneous confirmation from the third party owner of those papers asserting the documents belong to that third party and identifying its tax particulars. ISSUE-WISE DETAILED ANALYSIS - Oil Gain Addition Legal framework: In block assessment proceedings under provisions dealing with search and seizure, additions can be made where incriminating material discovered in search establishes undisclosed income; estimation may be resorted to where direct proof is unavailable, subject to nexus with seized material and reasonableness of estimation. Precedent treatment: The Tribunal and Courts have recognized that circumstantial evidence, third-party statements and industry information may support estimation, and that once a phenomenon is shown during a limited period, inference of continuity may be drawn for proximate periods; however, estimations must rest on material found during search and be reasonable in quantum. Interpretation and reasoning: The AO relied on third-party statements (employees and a director common to group companies), seized handwritten notes showing oil gain, and a general industry report to conclude existence of oil gain and quantified it at 2% to compute excess production and value. The assessee produced engineer certificates and later sought to place specific SASMIRA test reports (based on samples submitted by an associate) to rebut oil gain. The Tribunal analysed whether (a) there was a sufficient nexus between material seized in search and the addition claimed, and (b) the estimative exercise was permissible in a block assessment absent direct incriminating material demonstrating unaccounted transactions. The Tribunal emphasized that the seized material did not disclose any purchase/sale outside books or any transaction of the assessee evidencing suppression; the AO's case rested on a generalized phenomenon (oil pick-up) inferred from group/third-party materials and a qualified industry norm (which itself warned that actual values vary significantly with material, machinery and procedure). Regular assessments during the block years had not earlier noted any discrepancy. The Tribunal held that when the basis for addition is a universal/industry phenomenon rather than material specifically linking the assessee to unaccounted income discovered at search, the addition cannot be sustained in a block assessment; the Department should have pursued such matters (if at all) in regular assessments where books and records were examinable. The Tribunal accepted that estimation of oil gain and consequent value was speculative here and that the admission of additional SASMIRA reports in appeal was not conclusive to alter this conclusion, but that even without admitting those reports the absence of nexus was decisive. Ratio vs. Obiter: Ratio - In block assessment, an estimated addition based on an industry phenomenon cannot be sustained unless there is nexus between material seized during the search and the specific undisclosed income alleged; generalized third-party statements and industry norms that are expressly qualified cannot substitute for incriminating material tying the phenomenon to the assessee's undisclosed transactions. Obiter - Observations on limited scope for estimated additions in block assessments and procedural suggestions about pursuing such issues in regular assessments are supportive but ancillary to the core ratio. Conclusion: The Tribunal set aside and deleted the entire addition attributable to oil gain for lack of nexus between seized material and the impugned addition and because the estimation was speculative and not justified in block assessment circumstances. ISSUE-WISE DETAILED ANALYSIS - Admission of Additional Evidence (connected to oil gain) Legal framework: Appellate authorities may admit additional evidence subject to rules of procedure and relevance; weight accorded to post-assessment tests depends on whether the evidence could reasonably have been produced earlier and on overall probative value. Precedent treatment: Authorities have discretion to refuse later evidence where ample opportunity was afforded earlier; nonetheless, relevant lab tests that directly address disputed factual issues may be material if not unduly withheld. Interpretation and reasoning: The AO asserted the assessee had many hearings and questionnaires and that a departmental SASMIRA report had been shared earlier; the AO resisted admission of the new SASMIRA reports as belated and of limited relevance. The Tribunal noted these procedural facts but did not base the final decision solely on admissibility: even if the additional SASMIRA test reports were admitted, the Tribunal concluded that absence of nexus between seized material and the addition would still defeat the addition. Hence the non-admission did not alter the outcome. Ratio vs. Obiter: Obiter - The Tribunal's comments on procedural opportunities and the AO's resistance to admission are persuasive but peripheral; the dispositive finding does not rest on the admission issue. Conclusion: The appellate refusal to admit the additional SASMIRA reports was noted but ultimately immaterial to the outcome; the oil gain addition was deleted on substantive grounds. ISSUE-WISE DETAILED ANALYSIS - Fax Papers Addition (Rs. 5,25,000) Legal framework: Onus lies on the assessee to explain incriminating documents found in its possession during search; if the assessee shows documents belong to a third party, the Department must prove otherwise to sustain an addition. Precedent treatment: Where an assessee credibly demonstrates lack of nexus to seized documents and procures contemporaneous admissions/identifications from third parties, Courts/Tribunals have required the Department to verify or rebut that explanation rather than sustain additions on suspicion. Interpretation and reasoning: The assessee produced an affidavit and a letter from the third party owner of the faxed papers stating the papers and transactions belonged to that third party, furnishing its PAN and assessment jurisdiction. The Tribunal found that the assessee had done all reasonably possible to discharge its onus by identifying the true owner and supplying corroborative particulars; consequently, any remaining doubt lay on the Department which had the means to verify the third party's claim with assessment records. The CIT(A) sustained the addition on the basis that the third party had not explicitly stated the transactions did not relate to the assessee; the Tribunal rejected this approach as impermissibly relying on suspicion and for shifting to the assessee a burden to disprove a matter it had already credibly explained. The Tribunal held that in such circumstances the addition cannot be sustained. Ratio vs. Obiter: Ratio - Where an assessee produces contemporaneous confirmation from the third party owner of documents found in its possession identifying those documents and supplying tax particulars, the assessee has discharged the onus of showing the documents do not belong to it; the Department must then verify and disprove that version before making an addition. Obiter - Procedural guidance that the Department may call for assessment records or examine the third party to rebut the assessee's explanation. Conclusion: The addition of Rs. 5,25,000 based on the fax papers was deleted because the assessee discharged its onus by obtaining identification and particulars from the third party owner, and the authorities sustained the addition only on suspicion without displacing that evidence. OVERALL CONCLUSION & CROSS-REFERENCE Both impugned additions were reversed: the oil gain addition was deleted for lack of nexus between seized material and the estimated undisclosed income and because the estimation was speculative in a block assessment context; the fax-papers addition was deleted because the assessee credibly established the documents belonged to a third party, shifting the burden to the Department to verify and rebut which it did not do. These conclusions are interrelated in that both turn on the necessity of demonstrable nexus and probative material linking seized items to undisclosed income rather than reliance on general industry norms, third-party statements without specific linkage, or mere suspicion.