2024 (11) TMI 1560 - AT - Income Tax

Alleged unaccounted cash paid to buy multiple shops: u/s 69 additions deleted; third-party material/statements rejected, stock-shortage remanded

Additions u/s 69 for alleged unaccounted cash paid for purchase of multiple shops were unsustainable because income must be assessed in the hands of the ... Unexplained investment u/s 69 - cash payments made outside the books for purchase of shops - HELD THAT:- Under the Income tax Act, income of a particular person has to be assessed in the hands of that person only, unless the Act provides otherwise. In case of unaccounted investment, the same is required to be assessed in the hands of the person who has made that investment. We notice that the Ld CIT(A) has followed the above said principles of taxation and accordingly expressed the view that the income tax has to be levied on right person, i.e, in the hands of the person who had actually made investment. In the instant case, there is no dispute with regard to the fact that the assessee has purchased only one shop and the remaining shops were purchased by different persons, who are assessed separately. It was not shown or proved that the assessee has actually funded those cash payments. Had it been shown so, then there is a possibility to assess the value of impugned investments in the hands of the assessee, which is not the case here. Hence, with regard to the unaccounted cash payments, if any, recorded against the shops purchased by those persons, the enquiry should be done with or action, if any, can be taken on those respective persons only. Accordingly, we agree with the view taken by CIT(A) that the AO was not right in assessing those cash payments in the hands of the assessee. Accordingly, we are of the view that the Ld CIT(A) was justified in deleting the additions made in these two years. Validity of assessments completed by the AO u/s 153A - mandation to find incriminating material from assessee - Admittedly, the details relating to alleged cash payments were not found during the course of search conducted in the hands of the assessee. There is also no dispute that the assessment years 2018-19 and 2019-20 fall under the category of unabated assessment years. In the instant case, the assessments have been completed by the AO u/s 153A of the Act on the basis of search conducted in the hands of the assessee. Hence the AO could have made these additions in these two years on the basis of incriminating material found from the assessee only and not on the basis of materials found with third parties. For materials found from third parties, the Act has prescribed separate procedures u/s 153C of the Act, which has not been done. Hence the decision rendered in the case of Abhisar Buildwel (P) Ltd [2023 (4) TMI 1056 - SUPREME COURT] will apply to the facts of the present case. Cash payment in respect of purchase of shop confirmed by CIT(A) - We notice that the AO has made the addition on the basis of evidence found in the premises of third party and also on the basis of deposition made by the employee of the third party. No corroborative material was brought on record to support the statement so given, which is mandatory when the assessee denies any such payment. AO also did not provide opportunity of cross examination to the assessee, even after the said request was made by the assessee. Under these set of facts, we are of the view that the impugned addition cannot be sustained. Non providing opportunity to cross examine - AO did not provide opportunity to cross examine the persons from Rubberwala group, on whose statements the AO had placed reliance upon. The Hon’ble Supreme Court has held in the case of Andaman Timber Industries [2015 (10) TMI 442 - SUPREME COURT] that not providing opportunity to cross examine is a serious flaw and it will make the order nullity, as it amounts to violation of principle of natural justice. Addition of shortage of stock - We notice that the tax authorities have presumed that the shortage stock represented the stock sold outside the books. We notice that the view so taken by the tax authorities is also based on presumptions, i.e., they have also not brought on record to show that stocks have been sold outside the books. Since the view taken by the tax authorities is based on presumptions only, it cannot be sustained. The only deficiency noted down by the tax authorities is that the assessee has not supported the reconciliation statement with any evidence. We notice that the assessment order did not contain details as to how the value of book stock was arrived. From the observations made in the assessment order, we notice that the assessee has not given effect to the loss of stock by fire in accounts. This observation would show that the books of accounts available as on the date of search might be incomplete. It is not clear as to how the value of book stock was arrived at on the basis of incomplete accounts. We are of the view that this issue requires fresh examination. Accordingly, in the interest of natural justice, we opine that the assessee may be provided with one more opportunity to present its case on this issue properly before the AO. 1. ISSUES PRESENTED AND CONSIDERED 1. Whether additions for alleged unaccounted cash payments towards purchase of multiple commercial shops could be assessed as unexplained investment in the assessee's hands when most shops were purchased by other separately assessed persons and the assessee was not shown to have funded those investments. 2. Whether, for 'unabated' assessment years framed under section 153A, additions could be sustained when the alleged incriminating material was not found in the assessee's search but was found during search on a third party, and no proceedings under section 153C were initiated. 3. Whether, in an 'abated' assessment year under section 153A, an addition for alleged cash component of a shop purchased by the assessee could be sustained when it was based on third-party documents and statements, without corroboration and without granting cross-examination despite request. 4. Whether the addition on account of stock shortage (treated as unaccounted sales/profit) could be sustained on presumptions, and whether the matter required remand for fresh examination due to uncertainties about book-stock valuation and incomplete accounts. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Assessment of unaccounted cash payments for shops purchased by others in the assessee's hands Legal framework (as discussed by the Court): The Tribunal applied the principle that income/unexplained investment must be assessed in the hands of the 'right person', i.e., the person who actually made the investment, unless the statute provides otherwise. For section 69-type additions, the relevant person is the one who made the investment. Interpretation and reasoning: The Tribunal accepted the factual finding that, except for one shop, the shops were purchased by different persons (including family members/related persons) who were independently assessed to tax. The Tribunal noted that it was not shown or proved that the assessee actually funded the cash payments for those other purchasers. While the appellate authority had observed the assessee might have acted as a conduit/facilitator, the Tribunal held this did not justify taxing the alleged investments in the assessee's hands without proof of funding by him. Conclusions: Additions for alleged cash payments pertaining to shops purchased by other persons were not assessable in the assessee's hands. The Tribunal upheld deletion of such additions for the relevant years to that extent. Issue 2: Additions in unabated years under section 153A based on third-party search material without section 153C action Legal framework (as discussed by the Court): The Tribunal applied the rule that, for completed/unabated assessment years covered by section 153A, additions can be made only on the basis of incriminating material found during the search in the assessee's case. Material found in a third-party search must be acted upon through the statutory route applicable to such material (section 153C), if pursued. Interpretation and reasoning: The Tribunal recorded that the details of alleged cash payments were admittedly not found during the search conducted in the assessee's case, and that the years in question were 'unabated'. Since assessments were framed under section 153A in the assessee's case, the Tribunal held the assessing authority could not make additions for those completed years relying upon third-party material. The Tribunal further noted that the separate procedure for third-party material (section 153C) was not invoked. Conclusions: For the unabated years, the impugned additions were unsustainable because they were not based on incriminating material found in the assessee's search and were founded only on third-party search material without section 153C action. The deletions were upheld on this legal ground as well. Issue 3: Sustainability of addition for alleged cash component for the assessee's own shop in an abated year-third-party evidence, corroboration, and cross-examination Legal framework (as discussed by the Court): The Tribunal examined principles governing reliance on third-party statements/documents when the assessee denies the transaction, including the need for corroboration and adherence to natural justice through cross-examination where statements are relied upon. The Tribunal treated denial of cross-examination, after request, as a serious flaw amounting to violation of natural justice in the facts. Interpretation and reasoning: For the year where the assessee's own shop purchase was involved, the addition was made solely on documents found at the third party's premises and the third-party employee's statement. The Tribunal found that no corroborative material was brought on record to support the statement once the assessee denied payment of cash. Further, despite the assessee's request, cross-examination of the persons whose statements were relied upon was not provided. On these facts, the Tribunal held the addition could not stand. Conclusions: The addition for the alleged cash component relating to the assessee's shop was deleted due to lack of corroboration and breach of natural justice arising from denial of cross-examination. Issue 3A (legal contention): Whether section 153C proceedings were mandatory in abated years for using third-party search material Legal framework (as discussed by the Court): The Tribunal held that where a search was also conducted on the assessee and the year is an 'abated assessment', the assessing authority in section 153A proceedings can consider not only search material found with the assessee but also other material that comes to notice during assessment proceedings. Interpretation and reasoning: The Tribunal reasoned that since the relevant years were abated and section 153A jurisdiction existed due to search in the assessee's case, the assessing authority was entitled to consider information/material arising from the third-party search as well. Therefore, initiation of section 153C was not necessary merely because the material emanated from a third party. Conclusions: The assessee's legal challenge on non-initiation of section 153C for abated years was rejected. Issue 4: Addition for stock shortage-whether sustainable on presumptions; remand for fresh examination Legal framework (as discussed by the Court): The Tribunal evaluated whether the stock-shortage addition could rest on presumptions and whether the record permitted a conclusive finding, emphasizing natural justice and proper fact-finding where the basis of book-stock valuation was unclear. Interpretation and reasoning: Physical inventory showed a shortfall versus 'book stock'. The assessee attributed it to fire-related destruction and provided a reconciliation in quantities, but without supporting evidence. The tax authorities rejected the explanation and presumed the shortage represented sales outside the books; the appellate authority then restricted taxation to estimated profit. The Tribunal found that both sides were operating on presumptions: the assessee's reconciliation was unsupported, but the authorities also had no material proving out-of-books sales. The Tribunal additionally noted a key uncertainty: the assessment order did not explain how book-stock value was arrived at, and it appeared the loss was not incorporated in accounts as on the search date, suggesting the accounts might have been incomplete-making the derivation of 'book stock' unclear. Conclusions: The stock-shortage issue required fresh examination. The Tribunal set aside the appellate decision on this point and remanded the matter to the assessing authority for de novo consideration after granting adequate opportunity to the assessee and requiring supporting information/explanations.