Validity of aaddition based on third party statement recorded by Investigation Wing without opportunity of cross-examination afforded to assessee

Short Overview  Where AO made addition under section 68 based on third party statement recorded by investigation wing, however, without affording opportunity of cross-examination to assessee, it amounted to violation of principles of natural justice and, therefore, addition was deleted.

Assessee was dealing in wholesale cloth trading business. AO based on third party statement recorded by Investigation Wing treated sales and purchases of assessee as bogus and made addition of unexplained cash credit to net profit under section 68 and charged income-tax under section 115BBE. Assessee challenged this. AO had not provided copy of such statement to assessee and thus, denied opportunity of cross-examination.

It is held that  Right of cross-examination is an important right available to assessee and not providing opportunity to cross-examine would amount to violation of principles of natural justice. In the instant case, statements of third parties were not made available to assessee for cross-examination and on the other hand, assessee had recorded entries of sales and purchases in its books of account and had duly disclosed items of sales and purchases in profit and loss account and duly disclosed profit earned on trading in the profit and loss account and had offered the same as business income. Accordingly, assessee had prima facie discharged initial burden of substantiating purchases through cheques, VAT registration of sellers and their income-tax returns and, therefore, AO was not justified in making addition under section 68.

Decision: In assessee s favour.

Followed: CIT v. Odeon Builders Pvt. Ltd. (2019) 418 ITR 315 (SC) ; (2019) 110 Taxmann.com 64 (SC) : 2019 TaxPub(DT) 6298 (SC), Andman Timber Industries v. CIT, vide Order, dated 2-9-2015 and Morning Glory vide Order, dated 15-3-2019 ITA. No. 72/Lkw/2018.

IN THE ITAT, LUCKNOW BENCH

A.D. JAIN, V.P. & T.S. KAPOOR, A.M.

Sigma Castings Ltd. v. Dy. CIT

I.T.A. Nos. 510 to 518 & 526/Lkw/2019

16 December, 2020

Appellant by: Ashwani Kumar, C.A., Sudhindra Kumar Jain, C.A.

Respondent by: S.K. Madhuk, CIT (DR)

ORDER

Per Bench:

This is a group of ten appeals relating to different assessees belonging to same group and for different assessment years. However, the grounds of appeal, taken by the assessees in these appeals, are identical and these were heard together therefore, for the sake of convenience a common and consolidated order is being passed. For the sake of completeness, the grounds of appeal in I.T.A. No. 510 are reproduced below :–

“1. That the learned Commissioner (Appeals)-4, Kanpur, has erred in law and on facts in sustaining the treatment of profit in wholesale trading in cloth amounting to Rs. 3,78,24,737, as unexplained cash credit by the learned assessing officer, under section 68 read with section 115BBE of the Income Tax Act, 1961.

2. That while sustaining the profit in wholesale trading in cloth as unexplained cash credit, the learned Commissioner (Appeals)-4, Kanpur failed to appreciate the fact that even in the course of search, no incriminating document(s)/evidence, indicating or suggesting that the business of wholesale trading in cloth was not genuine, was found.
3. That the learned Commissioner (Appeals)-4, Kanpur, has erred in law and on facts in treating the business of trading in cloth as bogus, without appreciating the fact that the business of trading in cloth was duly accepted in the original assessment(s) made under section 143(3) of the Income Tax Act, 1961, and thus the assessing officer cannot review his own order passed earlier under section 143(3) of the Income Tax Act, 1961 in the assessment made under section 153A of the Income Tax Act, 1961, without any incriminating documents found during the course of search.
4. That the learned Commissioner (Appeals)-4, Kanpur has erred in law and on facts in sustaining the addition of Rs. 3,78,24,737 in order passed by learned assessing officer under section 153A of the Income Tax Act, 1961, merely on the basis of borrowed satisfaction of Dy. CIT, Central Circle-II, Kanpur, without there being any corroborating material or evidence found in the course of search, to form a valid reason to believe that the business of wholesale trading in cloth was not genuine.
5. That the learned Commissioner (Appeals)-4, Kanpur, has erred in law and on facts in sustaining the adverse inferences drawn by the assessing officer in respect of business of trading in cloth, without bringing any cogent material on record and confronting the same to the appellant, thus, the inferences drawn are arbitrary, unilateral and are also illegal and Unsustainable in law and on facts.
6. That the learned Commissioner (Appeals)-4, Kanpur, has erred in law and on facts in sustaining the arbitrary addition/disallowance made by the learned assessing officer amounting to Rs. 7,56,495, being the alleged commission paid @ 2% on the net profit in wholesale trading of cloth treated as unexplained expenditure from undisclosed income under section 69C of the Income Tax Act, 1961 in the assessment passed under section 153A of the Income Tax Act, 1961.
7. That the learned Commissioner (Appeals)-4, Kanpur, has erred in law and on facts in sustaining the arbitrary addition of Rs. 7,56,495 made by the assessing officer being unexplained expenditure from undisclosed income under section 69C of the Income Tax Act, 1961, merely on surmises and conjectures, without appreciating that no incriminating document(s)/evidence was found in the course of search relating to the above addition in the assessment passed under section 153A of the Income Tax Act, 1961.
8. That the learned Commissioner (Appeals)-4, Kanpur, has erred in law and on facts in sustaining the addition of Rs. 7,56,495 being the alleged commission paid @ 2% on the net profit in trading of cloth, made by the assessing officer, without confronting any material, evidence/information to the appellant, obtained at the back of the appellant and thus is unwarranted, unjustified and deserves to be deleted.
9. That the learned Commissioner (Appeals)-4, Kanpur, has failed to consider and appreciate that no cogent material/evidence was brought on record by the learned assessing officer while making the impugned addition or disallowance, without any proper basis and consequent addition in the income of the appellant deserves to be deleted.
10. That the learned Commissioner (Appeals)-4, Kanpur has erred in law and on facts by not appreciating the fact that even if the seized document(s) was found from the premises of the 3rd party then, the assessment and addition on the basis of the said documents can only be made under section 153C of the Income Tax Act, 1961, hence the impugned assessment/addition(s) made under section 153A of the Income Tax Act, 1961 is illegal, bad in law and liable to be quashed/deleted.
11. That the learned Commissioner (Appeals)-4, Kanpur, has erred in law and on facts and failed to appreciate that the approval granted by Joint Commissioner of Income Tax under section 153D of the Income Tax Act, 1961, before passing the impugned assessment order, was mechanical in nature and thus, the whole assessment is liable to be quashed.
12. That the order passed under section 127 of the Income Tax Act, 1961 is unsustainable in law, therefore the impugned assessment order is illegal, bad in law and liable to be quashed.
13. That the impugned assessment made under section 153A of the Income Tax Act, 1961 is unsustainable in law and on facts and liable to be quashed.
14. That the impugned order under appeal is insupportable in law and on facts and is also contrary to the principles of natural justice and equity therefore, liable to be quashed.”
15. Learned counsel for the assessee submitted that he will be taking up the appeal inI.T.A. No. 510 in the case of Sigma Casting Ltd. and the arguments in I.T.A. No. 510 will hold good for rest of the appeals.

Explaining the facts of the cases, learned counsel for the assessee submitted that a search took place on the assessees on 23-8-2016 wherein no incriminating material was found during the search. But the assessing officer made the additions on the basis of documents found during search on a different assessee and in this respect our attention was invited to the order of the assessing officer specifically from pages 8 to 11 where the assessing officer has referred to search & seizure operation conducted on 28-4-2015 on the companies of Shri Shashwat Agarwal.

Learned counsel for the assessee submitted that the assessing officer in the order itself has mentioned that a diary identified as BK-2, containing ledger account of different parties, was found and seized at the premises of Shri Shashwat Agarwal from where he observed that the searched group was engaged in the accommodation entries of Long Term Capital Gain/unsecured loans to various parties. It was submitted that the assessing officer in the case of Shri Shashwat Agarwal observed that the name of Navin Jain and his family members, belonging to Sigma Group of companies, was also found in that diary and therefore, he held that Navin Jain and his family members had taken accommodation entries of tax exemption of Long Term Capital Gain by way of pre arranged trading in shares. Learned counsel for the assessee submitted that nowhere in that diary the name of the assessees appeared and the names which appeared are individuals and the assessees being companies are different than the individuals. Therefore, it was submitted that addition in the case of the assessees cannot be made as the names of the assessees did not appear in the impounded documents and that too which were impounded in the case of a third party. Moreover, it was argued that addition in the case of the assessees was not made on account of Long Term Capital Gain or unsecured loans but it was made by treating as bogus the sale and purchase of cloth made by the assessees on wholesale basis from Rich Group of companies managed by Shri Shashwat Agarwal. Learned counsel for the assessee therefore, argued that first of all the addition has not been made on the basis of documents recovered during search on the assessees which is apparent from the assessment order itself and secondly, the additions have not been made on account of Long Term Capital Gain or on account of share capital or unsecured loans for which the documents were found at the premises of the third party. Learned counsel for the assessee submitted that for assessment year 2013-14 and 2015-16, the assessments stood completed and therefore, in the absence of any incriminating material, the addition could not have been made.

2.1 Reliance in this respect was placed on the following case laws :–

(i) 395 ITR 526 Pr. CIT v. Meeta Gutgutia

(ii) 380 ITR 573 (Del) CIT v. Kabul Chawla

(iii) 380 ITR 571 (Del) CIT v. Murele Paper Mills

(iv) 352 ITR 493 (Del) CIT v. Anil Kumar Bhatia

(v) (2015) 374 ITR 645 (Bom) : 2015 TaxPub(DT) 2182 (Bom-HC) CIT v. Continental Warehousing Corpn.

(vi) (2016) 386 ITR 483 (Bom) : 2016 TaxPub(DT) 3900 (Bom-HC) CIT v. Gurinder Singh Bawa

(vii) 392 ITR 501 (Del) Pr. CIT v. Smt. Ania Rani

(viii) 397 ITR 344 (SC) CIT v. Singhad Tech. Edu. Society

Learned counsel for the assessee submitted that Hon’ble Supreme Court has dismissed the SLP in the case of Kabul Chawla and Meeta Gutgutia.

2.2 Without prejudice it was submitted that the assessing officer did not make available any material to the assessee for cross-examination and therefore, the additions sustained by learned Commissioner (Appeals) are not in accordance with law as held by Hon’ble Supreme Court in the case of Andaman Timber Industries v. Commissioner of Central Excise (2015) 281 CTR 241 (SC) : 2015 TaxPub(DT) 5186 (SC) which was followed by Lucknow Bench of the Tribunal in the case of Morning Glory Infra Limited v. DCIT in I.T.A. No. 72/Lkw/2018.

2.3 Without prejudice to the above, learned counsel for the assessee submitted that on merits also the assessee has a strong case as assessee was dealing in wholesale cloth trading business since assessment year 2011-12 and in none of the years the addition was made. It was submitted that even in assessment year 2013-14 the assessment was completed under section 143(3) and no addition was made on account of trading in wholesale business of cloth. Moreover, it was submitted that Hon’ble Supreme Court in the case of CIT v. Odeon Builders Pvt. Ltd. (2019) 110 taxmann.com 64 (SC) : 2019 TaxPub(DT) 6298 (SC) has held that no addition can be made on the basis of third party information gathered by the Investigation Wing of the Department which has not been submitted to further verification by the assessing officer and he had not provided copy of such statement to the assessee and thus, denied the opportunity of cross-examination and whereas on the other hand the assessee had prima facie discharged initial burden of substantiating purchases through cheques, VAT registration of sellers and their income tax returns. Learned counsel for the assessee submitted that in the present cases also the assessee had registration under the VAT Registration Act wherein the turnover from the cloth trading was also reported and for financial year 2012-13 the assessment was also completed and in this respect our attention was invited to pages 55-61 of the paper book where the copy of assessment order was placed. It was submitted that all the purchases and sales were made through banking channels and in this respect learned counsel for the assessee heavily relied on the submissions made before learned Commissioner (Appeals) vide Letter, dated 28-7-2019, copy placed at pages 62 to 71 of the paper book. Learned counsel for the assessee further submitted that assessing officer held the sales and purchase of the assessee as bogus and made the addition of the net profit under section 68 of the Act and charged the income tax under section 115BBE of the Act thereby disallowing the assessee the benefit of set off. Learned counsel for the assessee submitted that however the learned Commissioner (Appeals) had allowed relief to the assessee by allowing set off of such income against the other income of the assessee but he did not agree to the contentions of the assessee that the income was from genuine business activity and needed to be included under the head income from profits & business instead of it having been treated as unexplained credit under section 68 of the Act, therefore, it was prayed that keeping in view the above legal issues and the merits of the cases, the income held by the authorities below to be taxed under section 68 be treated as being income from business activity.

3. Learned D.R., on the other hand, vehemently argued that assessee cannot take the argument that no incriminating document was found. It was submitted that the documents relied on by the assessing officer was though found during the search & seizure operation on the Rich Group of companies but in that document the names of its promoters existed and if the document found at the premises of Rich Group is incriminating and the entries recorded in the diary finds place in the books of account of the assessee, the books of account itself are incriminating in the case of the assessees and therefore, on that basis the assessing officer has rightly made the addition and which the Commissioner (Appeals) has rightly upheld. Without prejudice it was submitted that Hon’ble Allahabad High Court in the case ofCIT v. Raj Kumar Arora (2014) 367 ITR 517 (All) : 2014 TaxPub(DT) 3949 (All-HC) has held that there is no requirement of incriminating material for invoking the provisions of section 153A. As regards the reliance placed by Learned counsel for the assessee on the judgment of Hon’ble Delhi High Court in the case of CIT v. Kabul Chawla (2016) 380 ITR 573 (Del) : 2015 TaxPub(DT) 3486 (Del-HC), Learned D.R. submitted that Department has not accepted the decision of Hon’ble Delhi High Court in the case of Kabul Chawla and moreover the SLP was dismissed by Hon’ble Supreme Court due to low tax effect. As regards reliance placed by Learned counsel for the assessee on the judgment of Hon’ble Supreme Court in the case of Meeta Gutgutia, the learned D.R. submitted that Department has not accepted the decision and has filed SLP in the case of Continental Warehousing Corporation which has been admitted and therefore, it was submitted that the judgment of Hon’ble Allahabad High Court in the case of Raj Kumar Arora will apply.

3.1 As regards the other argument of Learned counsel for the assessee that the assessee was not provided opportunity to cross-examination, Learned D.R. submitted that Hon’ble Allahabad High Court has already examined this aspect and has held the Rich Group of companies to be engaged in the business of providing accommodation entries and therefore, the turnover generated from these companies and routed through different companies of assessee will also be bogus and the assessing officer has specifically quoted the order of Hon’ble High Court.

In this respect the learned D.R. invited our attention to the order of the assessing officer wherein he has quoted the order of Hon’ble Allahabad High Court and wherein the entities belonging to Rich Group were held to be engaged in providing accommodation entries.

3.2 As regards the merits of arguments, learned D.R. submitted that assessing officer in respect of reply to queries after specifically citing a number of adversities held that the turnover of the assessee from cloth business was bogus and heavily relied on the findings of assessing officer. Therefore, it was argued that learned Commissioner (Appeals) has rightly confirmed the addition to be under section 68 of the Act.

4. In rejoinder learned counsel for the assessee submitted that in the order of Hon’ble Allahabad High Court there are only observations with regard to the companies being involved in providing accommodation entries in the form of providing Long Term Capital Gain and share capital etc. and there is no whisper as to the cloth business being run by the companies and also there is no Long Term Capital Gain or unsecured loans entries taken by assessees. It was submitted that the assessing officer has made addition on account of trading in cloth. On the conclusion of the arguments by the parties, the Bench directed both the parties to furnish written submissions along with the copy of Panchnama and list of documents etc. seized during the course of search in the case of the assessees and other group companies and later on which have been filed by both the parties. For the sake of completeness, the written submissions filed by both the parties has been made part of this order and which are reproduced below :–

Assessee’s written submissions

“(1) Brief facts are that a search under section 132(1) of the Income Tax Act, 1961 (hereinafter referred to as Act) took place at the business premise of the appellant Co. and the residential premises of the Directors of the Company, on 23-8-2016 which continued up to 25-8-2016 and as a result of search, notices under section 153A were issued in the case of appellant for assessment years 2012-13 to 2016-17.

(2) The appellant is engaged in the business of manufacturing and trading of MS Ingots and also wholesale trading in cloth.

(3) Original return of income for assessment year 2013-14 was filed by the appellant on 23-10-2013 declaring net income at Rs. 25,70,020.

(4) Assessment under section 143(3) was framed by the learned assessing officer at a total income of Rs. 29,82,960 vide assessment Order, dated 22-3-2016. Copy of assessment order has been placed at pages 51 to 54 of the paper book.

(5) Return of income filed along with Audited set of accounts, copy of the income tax return and Tax Audit Report have been placed at pages 1 to 50 of the paper book.

(6) A notice under section 153A was issued by the assessing officer on 3-4-2018, and thereafter assessment under section 153A read with section 143(3) was made by the learned assessing officer computing total income at Rs. 3,85,81,232 and provision in section 115BBE of the Act was invoked to tax the assessed income under section 115BBE.

(7) During the relevant assessment year, as already submitted above, the appellant was engaged in the business of manufacturing and trading of MS ingots and wholesale trading in cloth. Profit in the trading of cloth was declared at Rs. 3,78,24,737.

(8) The learned assessing officer, while framing assessment, had no doubt, by way of cursory remarks observed that the trading results are not accepted. But fact of the matter is that neither any item of purchase/sale or any expenditure found to be unrelated nor any specific defect has been pointed out in the maintenance of the books of accounts. The system of maintenance of books of accounts continues to be the same as was in the past years, which as already submitted above, has been accepted by the learned assessing officer.

Otherwise also, the learned assessing officer, while framing assessment, proceeded to compute the total income by adopting the figures as Profit & Loss Account and the return of income which is solely based on the books of accounts maintained by the appellant company.

(9) In addition to the above treatment of profit in trading of cloth, the assessing officer also estimated and added an amount of Rs. 7,56,491, representing 2% of the total profit in trading in cloth, declared by the appellant, as an unexplained expenditure to obtain the alleged accommodation entry by resort to provisions of section 69C of the Act.

(10) While computing the total income, the learned assessing officer did not allow the set off of the income declared by the appellant in trading of cloth against the business losses in the same year in accordance with the provision in section 71 and 72 of the Act.

(11) The appellant preferred an appeal against the said assessment before the learned Commissioner (Appeals)-4, Kanpur. On adjudication, the learned Commissioner (Appeals)-4, Kanpur upheld the action of the learned assessing officer in treating the amount declared as profit on cloth trading as an unexplained credit and also upheld the action of the learned assessing officer in estimating the addition of Rs. 7,56,491 on account of alleged expenditure representing 2% of the amount of total profit of trading in cloth but allowed the set off of profit of trading in cloth against losses in iron & steel business.

(12) The appellant is in appeal before the Hon’ble Bench against upholding of the action of the learned assessing officer by the learned Commissioner (Appeals) (supra).

(13) While framing the assessment, the learned assessing officer has solely relied on certain communication received by him from the Deputy Commissioner of Income Tax, Central Circle-1, Kanpur, vide Letter No. DCIT/CC-1/KNP/Misc/18-19/699, dated 6-12-2018 being the assessing officer of Rich Group of cases which has been reproduced by the assessing officer from pages 7 to 12 of the assessment Order.

(14) The assessing officer has observed that during the course of search of Rich Group of cases, on 28-4-2015, certain documents were found particularly, a reference has been made to a ledger, seized and inventorised as Annexure BK-2, which allegedly transpires that Rich Group of cases along with appellant company were involved in circular trading of cloth.

(15) As per the learned assessing officer, the transaction(s) relating to purchase and sale of cloth were only in the nature of book entries and there was no actual business transaction and from this he inferred that the profit declared by the appellant company as profit in trading in cloth business was not business profit but was only an unexplained cash credit and the appellant had routed its unaccounted money through M/s. Rich Group of companies.

(16) At the outset, the said Annexure BK-2 does not mention anything about cloth trading and apart from mentioning of the issue(s) undertaken referred to here above seized document BK-2, there is no mention of any seized/impounded document, which could be said to have been found during the course of search either at the premises of the appellant or at the premises of Rich Group of Companies.

(17) The learned assessing officer thus failed to make reference of any incriminating information or document etc. in the body of the assessment order. As directed, copy of Panchnama prepared by the learned Authorized Officers during the course of search under section 132(1) of the Income Tax Act, 1961, at the premises of the Appellant Co. is enclosed.

(18) Before going into the various legal and factual issues, your humble appellant would very vehemently like to state that neither any incriminating document was found from the premises of the appellant during the course of search nor the learned assessing officer has referred to any such document in the body of assessment order.

(19) The appellant is agitating the action of the learned assessing officer and upholding of the same by the learned Commissioner (Appeals) on the ground that the case of the appellant is that the assessment had been framed under section 153A of the Act and is not a regular assessment.

(20) It is worth noting that an addition or any adverse inference in the case of the assessment under section 153A of the Income Tax Act, 1961 can be made only on the basis of incriminating material whereas, in the case of the appellant, no incriminating material was found/noticed or referred to in the Assessment Order.

(21) Entire thrust of the learned assessing officer has been on the documents/ledger found and seized from the premises of Rich Group of Companies, which was seized by the Department way back on 28-4-2015. This fact is amply clear from reading of the assessment order from page 4 onwards.

(22) Perusal of the assessment order will reveal that the only document referred for drawing this adverse inference is a diary inventorised as BK-2 from the premises of Shri Shaswat Aggarwal on 28-4-2015.

(23) Any adverse inference drawn on the basis of the document seized from the possession of any third party, except by resorting to the laid down procedure provided under section 153C of the Act, while framing assessment under section 153A of the Income Tax Act, 1961 is bad in law. Your Honour’s kind attention is drawn to the ratio propounded in the following judgments :–

— 395 ITR 526 Pr. CIT v. Meeta Gutgutia

— 380 ITR 573 (Del) CIT v. Kabul Chawla

— (2016) 380 ITR 571 (Del) : 2016 TaxPub(DT) 1068 (Del-HC) CIT v. Kurele Paper Mills

— 352 ITR 493 (Del) CIT v. Anil Kumar Bhatia

— (2015) 374 ITR 645 (Bom) : 2015 TaxPub(DT) 2182 (Bom-HC) CIT v. Continental Warehousing Corpn.

— (2016) 386 ITR 483 (Bom) : 2016 TaxPub(DT) 3900 (Bom-HC) CIT v. Gurinder Singh Bawa

— 392 ITR 501 (Del) Pr. CIT v. Smt. Ania Rani

— 397 ITR 344 (SC) CIT v. Singhad Tech. Edu. Society

Thus the impugned assessment is illegal and unsustainable in law and on facts.

(24) Alternatively and without prejudice to the legal issue, the inference drawn by the learned assessing officer and upheld by the learned Commissioner (Appeals)-4, Kanpur that the profit declared by the appellant company in trading of cloth is unexplained cash credit and is liable to be taxed under section 68 of the Act is devoid of any merit and deserves to be negated.

(25) Even otherwise, it may respectfully be submitted that the appellant company has been engaged in the business of whole sale trading in cloth in the earlier years also. A detailed chart showing the total purchases and sales in respect of cloth trading in respect of assessment year 2012-13 to 2017-18 has been given by the learned assessing officer in his Notice, dated 12-12-2018, placed at pages 123 to 125 of the paper book.

(26) Assessment for assessment year 2012-13 was framed under section 143(3) by the learned assessing officer vide Order, dated March, 2015.

Original assessment for assessment year 2013-14 was framed by the learned assessing officer under section 143(3) vide Order, dated 22-3-2016. Copy of the same appears at pages 51 to 54 of the paper book.

(27) The appellant is duly registered under U.P. VAT Act and the appellant has been filing VAT returns regularly. Regular assessment for the Financial Year 2012-13 has been framed vide Order, dated 5-3-2016 and copy of assessment order under VAT has been enclosed at pages 55 to 61 of the paper book.

(28) All the transactions of purchase and sale of cloth are duly recorded in the books of accounts and all payments are routed through normal banking channels.

(29) The learned assessing officer had sought various details and explanations vide different show cause notices in response to which the appellant Co. furnished detailed replies to explain and support full facts relating to trading of cloth. Copies of all such show cause notices and relevant replies have been placed at pages 72 to 125 of the paper book.

(30) It is also significant to point out that complete details of month-wise purchases and sales of cloth were also filed before the assessing officer vide reply dated 27-8-2018 and the same are placed at pages 72 to 76 of the paper book.

(31) Your Honour’s kind attention is drawn to the ratio propounded by Hon’ble Supreme Court in the judgment of CIT v. Odeon Builders Pvt. Ltd. (2019) 418 ITR 315 (SC) : (2019) 110 taxmann.com 64 (SC) : 2019 TaxPub(DT) 6298 (SC), wherein, their Lordships have held that where assessee had submitted purchase bills, transportation bills, confirmed copy of account and VAT registration of sellers and payments were made through cheques, impugned purchases could not be disallowed.

(32) In view of detailed submissions made that the action of the learned assessing officer and upholding the same thereof by the learned Commissioner (Appeals) in treating the profit on trading of cloth as an alleged unexplained cash credit liable to be charged to tax under section 68 of the Act is arbitrary, unjustified, against law & facts and the same deserves to be treated as Income from Business from an established source.

(33) Before I close, I will once again like to reiterate that there is not even a whisper of finding of any material relating to trading in cloth, not to speak of incriminating material, found and seized during the course of search at the appellant’s premises which has been discussed by the learned assessing officer in coming to the conclusion that the business of purchase and sale of cloth be treated as alleged unexplained cash credit.

(34) The only reference of a document inventorised as BK-2 seized from the premises of Rich Group of Companies and that too does not relate to trading of cloth therefore, in my humble view cannot be made as a basis for drawing such an adverse inference.

(35) Facts for assessment year 2015-16 are identical to the facts for assessment year 2013-14. Return of income was filed on 27-10-2015 and intimation under section 143(1) was passed on 3-5-2016. Assessment for this year was also an abated assessment.

For assessment year 2016-17, the return of income was filed on 2-10-2017. In this way, this was the case of unabated assessment year and such was a case of regular assessment.

The learned assessing officer has solely relied on the same set of facts as for the earlier years. I have already made detailed submissions both on law and on facts and am relying on the same action of the lower authorities for the assessment year 2016-17 also.

It is, thus, respectfully prayed that the action of the learned Commissioner (Appeals) in upholding the action of the learned assessing officer of treating the additions as a deemed income rather than a normal business income is totally unwarranted, unjustified both in facts and on law and deserves to be negated.

“Further, to submissions made by the appellant, following is also respectfully submitted for your honours kind consideration and necessary adjudication upon by the Hon’ble Bench :–

(1) The learned assessing officer made the addition(s) based on alleged findings given in the order of the Hon’ble Allahabad High Court in the case of M/s. Rich Udyog Network Ltd. and M/s. Cityon Nano Technology Pvt. Ltd., which inter alia revealed that the group was involved in providing accommodation entry by issuing cheques and taking back cash and its commission.

(2) The finding in the order of the Hon’ble Allahabad High Court does not relate to trading in cloth or purchase and sale of cloth by the companies of Shashwat Agarwal Group of cases. The finding is therefore, not relevant in the present appeals before the Hon’ble Bench, because there is no addition or adverse inference in the present appeal relating to any accommodation entry whatsoever.

(3) However, during the course of entire search assessment, the appellant was neither confronted with the statements recorded under section 132(4) of the Income Tax Act, 1961 or otherwise of Shri Shashwat Agarwal Group of cases nor an opportunity of cross-examination was allowed to the appellant to ascertain correct facts relevant for the search assessment.

(3) The denial of cross-examination was wholly arbitrary and contrary to the principles of natural justice and equity. In plethora of cases of High Courts and Supreme Court it was held that before using any information or evidence against the assessee, he must be confronted with such information/material and allowed opportunity for cross-examination.

(4) In the present case, specific requests were made by the appellant from time to time seeking cross-examination but the same was denied completely. Reliance in this regard is placed on the following decisions :–

(a) Judgment of Hon’ble Supreme Court in the case of Andaman Timber Industries v. Commissioner of Central Excise (2015) 281 CTR 241 (SC) : 2015 TaxPub(DT) 5186 (SC) (copy enclosed), wherein it was held as under :–

“……not allowing assessee to cross-examine witnesses by Adjudicating Authority through statements of those witnesses were made as basis of impugned order, amounted in serious flaw which make impugned order nullity as it amounted to violation of principles of natural justice. It was to be borne in mind that order of Commissioner was based upon statements given by two witnesses. Even when assessee disputed correctness of statements and wanted to cross-examine witnesses, Adjudicating Authority did not grant opportunity to assessee. In impugned order passed by Adjudicating Authority it was specifically mentioned that such opportunity was sought by assessee, however, no such opportunity was granted. Assessee contested truthfulness of statements of two witnesses and wanted to discredit their testimony for which purpose opportunity of cross-examination was sought. In case testimony of two witnesses was discredited, there would be no material with Department to justify its action, as statement of two witnesses was only basis of issuing show cause notice. Impugned order as passed by CESTAT was set aside. Appeal allowed….”

(b) Decision of Hon’ble ITAT Lucknow Bench in the case of Morning Glory Infra Limited v. DCIT, Central Circle-II, Kanpur [IT(SS)A No. 72/LKW/2018] (copy enclosed) for the assessment year 2015-16, wherein it was held as under :–

“……. 16. Thus, one cannot but come to the inexorable conclusion that the order under appeal suffers from the vice of not taking into consideration the assessee’s contention, which contention also does not stand rebutted, that it was not provided with any opportunity of cross-examining Shri Anoop Asthana.

17. In view of the above, we hold that :–

(i) the case of the assessee has been prejudiced for want of providing him opportunity of cross-examination of Shri Anoop Asthana, whose unilateral statement recorded ex parte qua the assesses has been made the sole basis of the addition, thereby violating the principles of natural justice; and

(ii) the other material, i.e., three pages of the diary found in the search do not establish any case for addition in the hands of the assesses, in the year under consideration, as none of these documents relate to the year under consideration, one of them does not contain any date/year and the other two pertain to earlier years, in which, no addition based on these documents was made.

18. Therefore, the grievance sought to be raised by the assessee is justified. It is accepted as such. Accordingly, the addition made is deleted. Nothing further survives for adjudication, nor was anything else argued.
19. In the result, the appeal is allowed……”

(c) In the Judgment of CIT v. Odeon Builders Pvt. Ltd. (2019) 110 taxmann.com 64 (SC) : 2019 TaxPub(DT) 6298 (SC) (copy enclosed), the Hon’ble Apex Court while dismissing the appeal of the Revenue upheld the order of the learned Commissioner (Appeals), Tribunal as well as High Court, affirmed the finding of the learned Commissioner (Appeals) (Head note)

“….Certain portion of purchases made by the assessee were disallowed-Commissioner (Appeals) found that the entire disallowance was based on 3rd party information gathered by the Investigation Wing of department, which had not been independently subjected to further verification by assessing officer and he had not provided copy of such statements to appellant, thus, denied the opportunity of cross-examination to appellant, who on the other hand had prima facie discharged initial burden of substantiating purchases through cheques, VAT Registration of Sellers and their Income Tax Return he held that purchases made by the appellant was respectfully and disallowance was to be deleted…..”

In the absence of giving of opportunity to cross-examine, it is to be believed that the addition made by the learned assessing officer is based merely on presumptions, without any independent enquiry or finding contrary to the submissions made by the appellant.

It is, thus, respectfully prayed that the action of the learned Commissioner (Appeals) in upholding the action of the learned assessing officer of treating the additions as a deemed income rather than a normal business income is totally unwarranted, unjustified both in facts and on law and deserves to be negated.”

Department’s written submissions

As required, copies of panchnama drawn in above mentioned group of cases are enclosed herewith. Further as search and seizure operation under section 132 of the Income Tax Act, 1961 was carried out on 23-8-2016 in Sigma group of cases, proceedings under section 153A were initiated in the case of this group of assessee from assessment year 2011-12 to 2016-17. During the course of assessment proceedings under section 153A, seized documents found from the premises of the third party were also used. A detailed note on the scope of proceedings under section 153A vis-a-vis requirement of incriminating material and other issue is attached as Annexure to this letter, which may kindly be placed before the Hon’ble Delhi ITAT for rebuttal of the ground of appeal taken by the appellant. Based on the above note, following conclusions can be drawn in the context of the issues raised by the assessee before ITAT :–

1. There is no requirement of any incriminating material for the purpose of making assessment under section 153A, once a valid search has been initiated in the case of the assessee. The decision taking a contrary view by non-jurisdictional High courts have not become final and further they have not considered the arguments raised in above note. Dismissal of SLP is not a binding precedent.
2. On the other hand, the jurisdictional High Court of Allahabad also favour the view that under section 153A, the assessment of total income needs to be made irrespective of any incriminating seized material.
3. In absence of any specific requirement of ‘incriminating material’ under section 153A, even if there is requirement of some material to make addition under section 153A or upset any concluded assessments, such material should be such that it forms the basis of the additions, irrespective whether such material was seized or obtained otherwise.
4. An entry recorded in books but found false later on, would by itself constitute incriminating material.
5. The scheme of the Act does not envisage multiple assessment proceedings, i.e., under section 143(3)/147/153A/153C for same assessment year at the same point of time in case of an assessee who has been subjected to search. It is for this very reason, the section 153A starts with non-obstante clause overriding the provisions of 143 or 147 etc. Further, the existence of the provisions for abatement of any pending proceedings also reaffirm the above view as also interpreted by High Court inCIT v. K.P. Ummer (Ker)(rendered in February 2019).
6. Section 153C is a mechanism to assess the income of “other person” based on any material found someone else’s search, when no proceedings under section 153A could be initiated in case of such “other person”. Thus, 153C is only an alternative machinery to initiate assessment proceedings based on seized material in case of “other person” where there is no search initiated. But, once search itself is initiated and proceedings under section 153A are pending, then the alternative mechanism of assessment under section 153C does not get invoked even if any material is found in respect of searched person in a search initiated in case of some third-party, because the substantive provision for making assessment under section 153A is already available to assess such income too.
7. Even section 153C provides for assumption of the jurisdiction to issue notice for assessment of total income in case of other person’ but the actual assessment has been specifically provided to be in the same manner as provided under section 153A. This means that 153C is only a machinery provision to assume jurisdiction and the substantive provision for assessment is 153A only. When substantive proceedings are already pending in case of assessee under section 153A, there would be no logic to initiate the alternative notice under section 153C also when ultimately the assessment has to be completed in the manner provided under section 153A only and both provision talk of assessment of total income only.
8. The proceedings under section 153C are to be carried in the manner as provided under section 153A only is also evident that under section 153D, no requirement of any separate approval of Addl. CIT is prescribed for assessment under section 153C meaning thereby that such assessments after being initiated under section 153C are to be treated at par with assessments 153A only.
9. Any material/information pertaining to an assessee coming to knowledge of assessing officer from any source such as search or survey or assessment records of any third party in relation to the same assessment years for which proceedings are already pending before assessing officer under section 153A in case of such assessee, then there would be no requirement of initiating a fresh proceedings under section 153C/148 etc as the case may be. Such material can be validly considered while making assessment under section 153A itself in case of present assessee as per the scheme of the Act as already explained. This view is also supported by decision inCIT, Chennai v. Ajit S. Kumar (2018) 93 taxman.com 294 (SC) :2018 TaxPub(DT) 2096 (SC) and provisions of 153A are 158BB are pari materia.
10. This interpretation of the scheme of the Act, gets further strengthened by the fact the under section 148 also, once the jurisdiction has been validly assumed, it has been specifically provided therein that there is no need to issue another notice under section 148 for any other item of income. On the same logic, when the proceedings under section 153A to assess the total income are validly initiated in case of any assessee after the search, then for assessment of any other item forming part of total income based on material gathered from some other source (third party search/survey) also needs to be considered during the existing proceedings under section 153A itself, without resorting to separate proceedings under section 153C.

Detailed note

1. The language of section 153A makes it very clear that there is no explicit or intended requirement of seizure of incriminating material during the search under section 132(1) before issuing the notices under section 153A. The jurisdiction of section 153A is automatic from the moment a search is initiated. There is no requirement of examination of seized material or recording any satisfaction w.r.t availability of seized material before issue of notice under section 153A. In my opinion, the intention of legislature in allowing so could be that the initiation of search itself is subject to recording of satisfaction under section 132(1) by the PDIT(Inv) on grounds that :–

(i) Upon issue of summons under section 131(1), the assessee has failed to produce or would not produce the books of accounts or other documents so requisitioned; or

(ii) The assessee is in possession of money, bullion jewellery, article or thing which represents wholly or partly in come has not been or would not be disclosed for the purposes of the Act.

2. The conjoint reading of section 153A and 132(1) would clearly imply that a satisfaction to issue notice under section 153A is already deemed to be imported from the satisfaction recorded by PDIT(Inv) at the time of issuing warrants under section 132(1). The existence of satisfaction recorded by PDIT(Inv) is liable to be challenged before courts. Hence, until such satisfaction for issue of warrants under section 132(1) are held invalid by any court, the satisfaction recorded by PDIT(Inv) shall continue to hold the fort for purposes of 153A also and it is for this reason there is no further requirement of recording any belief or satisfaction by assessing officer for issue of notice under section 153A.
3. The conditions of recording the satisfaction of PDIT(Inv), one of the conditions is regarding books or other documents which were not produced or would not have been produced on issue of summons. Thereby implying that post search, while the assessing officer is making assessment, it has to examine the correctness of income disclosed not only based on what material has been gathered during search but also based on these books or documents which in the opinion of PDIT(Inv) would not have been produced upon issue of summons, whether or not such books of accounts or documents have been actually found during search. In fact, there are numerous instances when even the books of accounts as per already filed audit reports are not found at any of the premises during search, more so when the searched entities represent only the shell companies. Similarly, there is a requirement of satisfaction by PDIT(Inv) in respect of income being fully or partly not disclosed for the purposes of the Act.

Hence, even if some income/entry is disclosed in books or audited accounts, the assessing officer is mandated to examine whether such income/entry was disclosed fully or partly and/or represents its real nature and source for the purposes of the Act. This inter alia would mean that even the entries disclosed in accounts which might represent income fully or partly would in itself be an incriminating material for which a search was initiated. When the non-production of books or other documents can give rise to a belief for initiating search under section 132(1), then it may be counterproductive to conclude that the power of assessing officer is restricted to assessment based only on incriminating material found in search, irrespective of any other item of income which might have remained fully or partly undisclosed for the purposes of the Act, based upon the entries already appearing in such books, if any.

4. It is the ‘assessment of total income’ which is required to be made under section 153A. The total income as defined under section 2(45) would be the total income computed as per section 5 of the Act. The word ‘assessment’ cannot have a different meaning for different purposes under the same Act, unless restricted by specific provisions. The process of assessment for the purposes of the Act is wide enough to include every kind of enquiry/examination for discovery, quantification and assessment of any income wholly or partly for the purposes of the Act. Hence, the process of ‘assessment of total income’ under section 153A can neither be restrictive nor have a different connotation for assessment under section 153A vis-a-vis 143(3) or 147. As per the scheme under the Act, the satisfaction recorded under section 132(1) and the results of search are intended to be brought to a logical conclusion by initiating the proceedings under section 153A without any further act of the assessing officer.

Hence it is in the scheme of the Act that after issuance of notice under section 153A, the next action of the assessing officer which must follow is the examination of all aspects, for which a search has been initiated. Hence, it cannot be said that the assessing officer under section 153A cannot proceed to examine the books of accounts or documents, entries which were produced before him subsequently, wherein might also represent income wholly or partly, which has not been disclosed for the purposes of the Act. In the case of ACIT v. M/s. AR Enterprises (2013) 1 SCR 295 (SC) : 2013 TaxPub(DT) 0314 (SC) the Court held that the only way of disclosing income is through filing a return and therefore an undisclosed income signifies income not stated in the return filed. Based on this decision it can be inferred that any incorrect claim of deduction or any entry of income which was not offered as income in return filed, would itself represent undisclosed income thereby constituting something which is incriminating and having a bearing on assessment of total income. Hence, it may be contrary to the scheme of the provisions of 132(1) read with section 153A, if it were to be held that power of assessing officer is restricted only to make assessment the evidence found during search. The provisions of 153A not only require assessment of undisclosed income but total income also. The expression ‘total income’ would include the income emanating from disclosed items, income emanating from partly or wrongly disclosed items as well as income emanating from undisclosed items under section 153A, no distinction is made for assessment of total income in the cases which were earlier completed under section 143(1), the cases which were earlier completed under section 143(3)/147 or the cases where no return was filed prior to search. Thus, in all the three categories, it is as per the scheme of the Act that the total income of the assessee as defined under section 2(45) needs to be assessed for all the 6 assessment years for which the assessing officer is mandated to issue notice under section 153A.

5. Further under section 153A, there is a provision for abatement of pending assessments whether or not any evidences were found for that year. There can also be a situation where neither any regular assessments were made earlier nor any proceedings were pending, which could be abated. The section also envisages the issue of notice under section 153A whether or not any evidences were found for that year. It is also implicit that under section 153A, the items of total income which could be assessed under section 153A in abated proceedings cannot be different for the cases which could not be abated such as (i) where no proceedings were pending; or (ii) where earlier assessments were completed under section 143(3)/147; or (iii) where earlier assessments were not made at all. The only caveat could be that before making any addition to the total income, the assessing officer must bring on the record how such items are falling into the category of total income for the purposes of the Act.
6. If it were to be held that no addition can be made without any incriminating material in respect of the years covered by section 153A, then it would lead to an absurd consequence whereby the powers granted to issue notices under section 153A would be rendered otiose in cases which got abated for any particular assessment year. In the absence of any seized material, assessing officer may not be able to proceed to make any assessment of any other item of total income implying that the process of making assessment of total income as envisaged in section 153A fails in abated cases. However, a statute can never be interpreted in a manner to make it redundant.
7. Further, the Court in case ofCIT v. Neeraj Jindal (2017) 393 ITR 1 (Delhi) :2017 TaxPub(DT) 0816 (Del-HC) held that the penalty under section 271(1)(c) can be levied only on the income assessed over and above the return filed under section 153A even when the assessee offered additional income over and above the earlier return filed under section 139. While holding the Delhi High Court observed in para (ix) as under :–

(ix) Thus, it is clear that when the assessing officer has accepted the revised return filed by the assessee under section 153A, no occasion arises to refer to the previous return filed under section 139 of the Act. For all purposes, including for the purpose of levying penalty under section 271(1)(c) of the Act, the return that has to be looked at is the one filed under section 153A. In fact, the second proviso to section 153A(1) provides that “assessment or reassessment, if any, relating to any assessment year falling within the period of six assessment years referred to in this sub-section pending on the date of initiation of the search under section 132 or making of requisition under section 132A, as the case may be, shall abate”. What is clear from this is that section 153A is in the nature of a second chance given to the assessee, which incidentally gives him an opportunity to make good omission, if any, in the original return. Once the assessing officer accepts the revised return filed under section 153A, the original return under section 139 abates and becomes non-est. Now, it is trite to say that the “concealment” has to be seen with reference to the return that it is filed by the assessee. Thus, for the purpose of levying penalty under section 271(1)(c), what has to be seen is whether there is any concealment in the return filed by the assessee under section 153A, and not vis-a vis the original return under section 139.

The Court in CIT v. Vijay Infrastructure Ltd. (2018) 402 ITR 363 (Alld) : 2018 TaxPub(DT) 1797 (All-HC) also while allowing a fresh claim of deduction under section 80-IA claimed under section 153A return, held that the return under section 153A is not a revised return but an original return. If that be so, the deduction under section 80-IA, if otherwise admissible, always could have been claimed.

The above observations of the Delhi and Allahabad High Courts once again suggest that the assessee gets a second chance to make good his omissions by claiming fresh deductions/disclosing such income in return filed under section 153A which was not claimed/offered earlier in return filed under section 139 and such return becomes final granting immunity from penalty also, whether or not it is emanating from seized material?. If that be so, then why the assessing officer only would be powerless under section 153A to examine/revisit the incomes/claims which may or may not be emanating from the seized material only. If this is not interpreted so, then it will lead to an absurd situation where the assessee has freedom to revise the income/claim of deduction which may not be emanating from seized material but the assessing officer is powerless in probing/examining the veracity of such incomes/claims, even though declared in return filed under section 153A and the assessing officer has to assess the total income of assessee including the one which has no nexus to seized material but claimed for the first time in return under section 153A.

8. Section 153A does not say that additions should be strictly made on the basis of evidence found in the course of search, or on the basis of any other post-search material or information available with the assessing officer though such assessment cannot be arbitrary. The provisions section of 147 and section 153A, though have different conditions to assume jurisdiction but both operate to make the assessment of total income only. The Memorandum explaining the provisions of Finance (No. 2) Bill of 2009 while inserting Explanation 3 to section 147 reads as under :–

“Some courts have held that the assessing officer has to restrict the reassessment proceedings only to issues in respect of which the reasons have been recorded for reopening the assessment. He is not empowered to touch upon any other issue for which no reasons have been recorded. The above interpretation is contrary to the legislative intent.

Therefore to articulate the legislative intent clearly, Explanation 3 has been inserted in section 147 to provide that assessing officer may examine, assess or reassess any issue relevant to income which comes to his notice subsequently in the course of proceedings under this section, notwithstanding that the reasons for such issue has not been included in the reasons recorded under sub-section (2) of section 148.”

9. Even in absence of any explanation under section 153A also similar to the Explanation 3 under section 147, the intention of the legislature and the scheme of the Act for making assessment under section 153A where search under section 132 is initiated, is same, i.e., in order to make assessment of total income, after having assumed the jurisdiction to assess total income, the powers of assessing officer shall not remain restricted to mere those material which were seized during search but shall also include the assessment of income based on any entry already recorded prior to search or any claim/relief allowed prior to search, which has been found to be erroneous during the proceedings under section 153A.
10. Further, due to non-obstante clause under section 153A, no action under section 148 is possible if the evidence is directly or indirectly linked to search. Even otherwise, once the proceedings under section 153A for making assessment of total income are pending before assessing officer for relevant assessment year and it comes to notice of assessing officer of escapement of a part of total income for the same relevant assessment year though not directly emanating from the seized material, it may be difficult for assessing officer to record a belief simultaneously about escapement of income for initiating proceedings under section 147, when another proceedings under section 153A wherein also assessing officer can assess the total income is already pending before him. That being the case, if any information or evidence not directly emanating from the search/seized evidence is found, then there cannot be one assessment under section 153A and at the same time a simultaneous assessment under section 147 also for same assessment year. In fact, the second proviso is intended at keeping in abeyance any pending proceeding for assessment in a particular year; in which there is a proceeding initiated under section 153A, pursuant to a search under section 132. Hence, when a notice is issued pursuant to a search under section 132, for assessment under section 153A, all pending proceedings with respect to a regularly initiated assessment or re-assessment would stand abated. This would clearly reflect the intention of legislature to that to avoid parallel proceedings of regular assessment as well as search assessment, the income from all sources are to be assessed under section 153A itself. Hence to avoid any anomalous situation, the only view could be taken is that under section 153A, the total income including income based on seized documents as well as any other source is required to be assessed.
11. There is divergence of judicial opinion on the question of whether assessment under section 153A can be restricted to only the incriminating material seized during the search or whether the assessing officer can also take a view based on something which might be noticed otherwise during the course of assessment proceedings under section 153A? Some of the conflicting opinions expressed in judicial verdicts are as under :–

(a) Allahabad High Court in Raj Kumar Arora (2014) 367 ITR 517 (All) : 2014 TaxPub(DT) 3949 (All-HC) has held that there is no requirement of incriminating material for invoking provisions of 153A.

(b) The Delhi High Court in Kabul Chawla (2016) 380 ITR 573 (Del) : 2015 TaxPub(DT) 3486 (Del-HC) held that assessment under section 153A on an issue could not have been made unless backed by some incriminating material found during the search. The department has not accepted the decision in case of Kabul Chawla and the SLP was filed was subsequently withdrawn due to low tax effect.

(c) However, the same Delhi High Court in case of Dayawanti Gupta v. CIT (2016) 390 ITR 496 (Del) : 2016 TaxPub(DT) 4888 (Del-HC) in para 16 has observed that :–

“Section 153A, which provides for an assessment in case of search, and was introduced by the Finance Act, 2003 with effect from 1-6-2003, does not provide that a search assessment has to be made strictly on the basis of evidence found as a result of search or other documents and such other materials or information as are available with the assessing officer and relatable to the evidence found. The earlier section 158BB which is not applicable in case of a search conducted after 31-5-2003, provided that the computation of the undisclosed income can only be on the basis of the evidence found as a result of search or other documents and materials or information as are available with the assessing officer, provided they are related to the materials found. Section 153A(1)(b) requires assessment or reassessment of total income of the six assessment years immediately preceding the assessment year relevant to the previous year in which the search took place. This, however, does not mean that the assessment under section 153A can be arbitrary or made without any relevance or nexus with the seized material…..”.

(d) Kerala HC in the case of CIT v. K.P. Ummer (Ker) (rendered in February, 2019), has observed in para 10 and 12, is quoted as below :–

“Hence, when a notice under section 153A is issued, it enables the department to carry out re-assessment or assessment with respect to the six immediate prior years and the year in which the search is carried out.

This does not require any incriminating material recovered on search relating to those prior years; in which there is no time left, on the date of search, for an assessment under section 143. The provision under section 153A is a non obstante clause having overriding effect over sections 139, 147, 158, 149, 151 and 153. The intention of the legislature is to enable assessment, if it has not been regularly done in any of the previous years, or to re-initiate assessment in case there is already proceedings pending or to re-assess in the case of completed assessments; if the search under section 132 reveals material pointing to a practice of suppression of income from taxation. These materials need not necessarily be that relevant to the previous six years since a practice of suppression detected in the subject year permits a like presumption to be drawn in the earlier six years too; on best judgment with reference to the business or profession carried on by the assessee. We have also held in Commissioner of Income Tax v. Orma Marble Palace (P) Ltd. [ITA No. 19 of 2011] : 2019 TaxPub(DT) 0754 (Ker-HC) that a dishonest assessee would not keep evidence of his dishonesty to be discovered after a long time or even a short time. Hence there is no assumption possible that in any of the prior years in which assessments were not regularly completed and the time for the same has expired, there could be additions only on the basis of materials recovered relevant to those years. The returns filed in pursuance to a notice under section 153A is also to be treated as a return filed under section 139. Hence, we cannot agree with the Tribunal that the assessments carried out under section 153A for the prior years in which the due date for notice under section 143(2) has expired, can only be with reference to incriminating materials recovered on search.”

“We do not think that the intention in providing for abatement of pending proceedings and the revival of the same, if the proceedings under section 153A(1) are eventually set aside; was to provide for a separate procedure for the years in which the notice period under section 143(2) has expired. In fact, the second proviso is intended at keeping in abeyance any pending proceeding for assessment in a particular year; in which there is a proceeding initiated under section 153A, pursuant to a search under section 132. Otherwise, there would be parallel proceedings continued for the same assessment year. Hence, when a notice is issued pursuant to a search under section 132, for assessment under section 153A, all pending proceedings with respect to a regularly initiated assessment or re-assessment would stand abated. For the said years, the proceedings under section 153A would be continued and the assessments concluded on that basis. However, when and if the said assessment proceeded with and concluded under section 153A, is set aside by the statutory authorities or by this Court, then necessarily the original proceedings which stood abated would revive, which is the enabling provision under sub-section (2) of section 153A. There can be no corollary inferred from the above provisions to find certain years to be of ‘concluded assessment’ being possible of re-assessment only on incriminating material recovered in search relatable to that year. Hence, we, on the above reasoning and respectfully following the cited decisions of another Division Bench of this Court, answer the question of law against the assessee and in favour of the revenue.”

(e) In Commissioner of Income Tax-VII v. Chetan Das Lachman Das (2013) 254 CTR 392 (Delhi) : 2013 TaxPub(DT) 0009 (Del-HC) the Delhi High Court has held as below :–

Section 153A of the Income Tax Act, 1961–Search or seizure–Assessment in case of–Assessment years 2000-01 to 2006-07–Whether there is no condition in section 153A that additions should strictly be made on basis of evidence found in course of search or other post-search material or information available with assessing officer which can be related to evidence found–Held, yes–Whether seized material can also be relied upon to draw inference that there can be similar transactions throughout period of six years covered by section 153A–Held, yes [In favour of revenue].

(f) Filatex India Ltd. v. CIT-IV 229 Taxman 555 (Delhi)

Whether during assessment under section 153A, additions need not be restricted or limited to incriminating material found during course of search and, hence, argument of assessee that addition under section 115JB was not justified in order under section 153A as no incriminating material was found concerning said addition had to be rejected–Held, yes.

(g) Sunny Jacob Jewelers and Wedding Center v. DCIT (2014) 362 ITR 664 (Ker) : 2014 TaxPub(DT) 1596 (Ker-HC)

Whether there is no requirement under provisions of Act requiring department to collect information and evidence for each and every year for six previous years in order to initiate proceedings under section 153A–Held, yes

(h) CIT v. Anil Kumar Bhatia (2013) 352 ITR 493 (Delhi) : 2013 TaxPub(DT) 0245 (Del-HC)

Whether even if assessment order had already been passed in respect of all or any of those six assessment years, either under section 143(1)(a) or section 143(3) prior to initiation of search/requisition, still assessing officer is empowered to reopen those proceedings under section 153A without any fetters and reassess total income taking note of undisclosed income, if any, unearthed during search–Held, yes. Similar View upheld in E.N. Gopakumar (2016) 75 taxmann.com 215 (Kerala) : 2016 TaxPub(DT) 4661 (Ker-HC).

(i) CIT-II v. Continental Warehousing Corporation (2016) 235 Taxman 568 (SC) : 2016 TaxPub(DT) 0157 (SC)

The High Court by impugned order held that no addition can be made in respect of assessments which have become final if no incriminating material is found during search or during 153A proceeding–Whether Special Leave Petition filed against impugned order was to be granted–Held, yes

(j) Principal Commissioner of Income Tax, Delhi-2 v. Best Infrastructure (India) (P.) Ltd. (2018) 256 Taxman 63 (SC) : 2018 TaxPub(DT) 3351 (SC) High Court by impugned order held that where during search proceeding one of directors of assessee-company surrendered a certain sum as undisclosed income only for assessment year in question and not for each of six assessment years preceding year of search, said submission could not be said to be incriminating material qua each of preceding assessment years and, consequently, assumption of jurisdiction under section 153A and consequent additions made by assessing officer on said basis were not justified–Whether SLP against said impugned order was to be allowed–Held, yes.

(k) The dismissal of SLP by supreme Court in case of PCIT v. Meeta Gutgutia wherein also the same views were expressed as in Kabul Chawla, would also not lead to conclusion that the question decided by Delhi High Court against the revenue in Meeta Gutgutia is settled because the SLP has already been admitted by SC for hearing on the same question in several other cases such as Continental Warehousing, Best Infrastructure (supra).

(l) Further, Supreme Court in Sinhgad Tech Edu. Society (2017) 397 ITR 344 (SC) : 2017 TaxPub(DT) 3941 (SC) held that no notice under section 153C could be invoked unless there was incriminating material is also of no consequence as the provisions of section 153C has been amended with effect from 1-4-2005 and that the decision of Sinhgad Tech Edu. Society was for period prior to 1-4-2005.

12. The sum and substance of all the decisions above could only indicate that the question of whether the assessing officer has powers under section 153A to assess total income as defined under section 2(45)de horsthe incriminating material also, has not at all become final and the same is yet pending final adjudication before the SC in SLPs admitted. Hence the arguments made in preceding paragraphs can be pitched up to support the revenues’ contention before courts.
13. Further, the ‘incriminating material’ can be in any form.

The word incriminating can have multiple manifestations, such as (i) evidence in the nature of a document, content of any document; (ii) an entry in books of account; (iii) an asset; (iv) a statement given on oath in absence of any fact claimed earlier but coming to notice during search; (vi) falsity of nature of entries already recorded in books of accounts, (vii) absence of books being found during search making the claims made in return already filed as suspicious; or (viii) absence of the office/business premises as claimed during returns filed or any other documents, etc. Even a statement given during search under section 132(4) can be incriminating. The apex Court in PCIT v. Best Infrastructure (India) (P) Ltd. 94 taxmann.com 115 (SC) : (2018) 256 Taxman 63 (SC) : 2018 TaxPub(DT) 3351 (SC) has admitted an SLP by revenue against the order of High Court wherein the High Court had held that the statement offering income for one year would be incriminating for the year for which disclosure has been made and not the six years for the purpose of section 153A. In the case of ACIT v. M/s. A.R. Enterprises (2013) 1 SCR 295 (SC) : 2013 TaxPub(DT) 0314 (SC) also the Court held that the only way of disclosing income is through filing a return and therefore an undisclosed income signifies income not stated in the return filed. In short, any fact/evidence which could suggest that the documents/transactions claimed or submitted in any earlier proceedings were not genuine, or recorded unsubstantiated facts/transactions being only a device/make belief based on non-existent facts or suppressed/misrepresented facts, would constitute an incriminating material sufficient to make assessment for the purposes of the Act.

A mere statement under section 132(4) is an evidence for making an assessment as also held by Apex Court in B. Kishore Kumar v. DCIT (2015) 234 Taxman 771 (SC) : 2015 TaxPub(DT) 5204 (SC) as under :–

High Court by impugned order held that since assessee himself had stated in sworn statement during search and seizure about his undisclosed income, tax was to be levied on basis of admission without scrutinizing documents–Whether Special Leave Petition filed against impugned order was to be dismissed–Held, yes

Hence even a statement under section 132(4) shall also constitute incriminating material to dislodge any earlier finding for the purpose of making an assessment under section 153A.

14. The requirement of incriminating material is not specifically mentioned in the Act. However, with effect from 1-4-2005 the provisions of section 153C have been amended so as to allow the invocation of proceedings under section 153C if any document, an entry or an asset is found in relation or pertaining to a person other than the searched person, which has a bearing on the assessment of total income as per the provisions of the Income Tax Act. Hence the word “incriminating”, as used by the courts in context of section 153A/C, needs to be understood in the context of events of misreporting and under reporting as defined under section 270A. The provisions of section 153A/153C are not the normal assessment provisions like 143(3); rather they are curative provisions to plug the mischief of misreporting or under reporting of taxable income based on evidences found in pursuance to search. Hence, if on account of search, the facts and circumstances suggest that any entry already appearing in books or accepted in earlier assessments based on documents submitted at that point of time, are camouflaged or manipulated or reflected to be in the nature or from a source which is different from the real nature or source as appearing from the evidences found during a subsequent search resulting in misreporting as defined under section 270A(10), then such material/facts coming to fore will definitely constitute an incriminating material, even if does not get directly seized from the search of the assessee itself.

Section 270A(10) defines under reporting and misreporting as under :–

270A. (10) The cases of misreporting of income referred to in sub-section (8) shall be the following, namely :–

(a) Misrepresentation or suppression of facts;

(b) Failure to record investments in the books of account;

(c) Claim of expenditure not substantiated by any evidence;

(d) Recording of any false entry in the books of account;

(e) Failure to record any receipt in books of account having a bearing on total income; and

(f) Failure to report any international transaction or any transaction deemed to be an international transaction or any specified domestic transaction, to which the provisions of Chapter X apply.

Thus, if during assessment proceedings, the assessing officer finds existence any of the above facts as mentioned under section 270A(10), the incidence of misreporting will be triggered thereby making the earlier recorded entries/earlier admitted documents and evidence itself to be incriminating in nature on account of such entries being hit by misreporting. Thus, the event of misreporting itself is incriminating. If it were held not to be so, then the purpose of 153A/153C would be defeated as it would fail to prevent the mischief of misreporting in spite of search having being carried, which it sought to prevent just because the entries were already receded in the books or some documents had already been accepted

15. Applying the Hayden’s rule of mischief, the mere fact that such entries are recorded in the books of accounts or some fabricated or colorful documents have already been accepted as correct, will not prevent such material or entry from being incriminating, if the circumstances suggest otherwise. The Hayden’s rule of mischief has been judicially accepted and applied by Calcutta High Court inReckitt Colman of India Ltd. v. ACIT (2001) 252 ITR 550 (Cal) :2001 TaxPub(DT) 1616 (Cal-HC).
16. The incriminating material can be from the search or even from subsequent surveys or any other enquiries. Recently inCIT, Chennai v. Ajit S. Kumar (2018) 93 taxman.com 294 (SC) :2018 TaxPub(DT) 2096 (SC), the Court in the context of section 158BB has upheld the use of information collected in a survey in case of connected person carried along with search in other person for the purpose of making assessment under section 158BB. Provisions of 158BB are pari materia to section 153A.

The Delhi High Court in PCIT v. Kabul Chawla in para 37(iv) observed as under :–

“(iv) Although section 153A does not say that additions should be strictly made on the basis of evidence found in the course of the search, or other post-search material or information available with the assessing officer which can be related to the evidence found, it does not mean that the assessment can be arbitrary or made without any relevance or nexus with the seized material. Obviously, an assessment has to be made under this section only on the basis of seized material.”

Delhi High Court has thus explained the underlying principle that though the assessment may not be based on seized evidence only but the addition cannot be arbitrary. There can be no dispute on this proposition. It has to be based on evidences found during search, or post search or information available with the assessing officer which can be related to the evidence found. Thus, any entry already recorded in the books which is not true in its nature or source and any information even coming to the assessing officer post search shall constitute incriminating material for the purpose of making an assessment under section 153A.

17. Since the proceedings under the Act are civil in nature, even the circumstantial evidences based on preponderance of probability will constitute incriminating material enough to make an assessment of income and fasten the tax liability as held by inSumati Dayal v. CIT (1995) 214 ITR 801 (SC) :1995 TaxPub(DT) 1173 (SC). It will therefore include any circumstantial material also, which directly or indirectly, proves that the earlier evidence submitted was only a make belief and such new material has a bearing on the assessment of total income of any assessee, even if such income was earlier admitted as correct in absence of any such adverse facts available at the time of earlier assessment.”
18. We have heard the rival parties and have gone through the material placed on record. We find that the first argument of learned counsel for the assessee was that in case of completed assessments, the addition cannot be made if there is no incriminating material. In this regard, learned counsel for the assessee had submitted that in the year 2013-14 and 2015-16 the assessments stood completed and there was no incriminating material found during the search. In this respect the Bench had asked both the parties to furnish the material which was impounded during the search and which both the parties had filed with the Bench which we have examined and have compared with the material used by assessing officer in assessment order. We found that none of the material seized during the search was used by the assessing officer for making addition and instead had relied on a document marked as BK-2, which was seized during a search operation on a different group of company and that too on 28-4-2015 that is more than one year before the date of search on assessees. This fact is further strengthened from the assessment order wherein the assessing officer, at page 8, has observed as under :–

“In this context, it is noteworthy that a search & seizure operation under section 132 of the Income Tax Act, 1961 conducted upon the companies of Shmshwat Agarwal on 28-4-2015 by the Investigation Wing, Kanpur. The incriminating documents which were found and seized are the premises also include a diary identified as BK-2, containing ledgers of different parties.

On going through pages of these ledgers, it was found that the companies of Sri Shashwat Agarwal are paper companies and are engaged in providing the accommodation entries of bogus LTCG, unsecured loan etc., to various parties by accepting undisclosed cash from beneficiaries. Name of such beneficiaries, date-wise receipt of cash and issuance of cheques from and to them, is recorded in this diary very vividly. The name of Sri Navin Jain and his family members such as his father Sri Naresh Kiunar Jain, Naresh Kumar Jain HUF, his mother Smt. Shrimati Jain and his wife Neetu Jain also figure in this diary. Shri Navin Jain and his aforementioned family members have taken accommodation entries of tax exempt Long Term Capital Gain by the way of pre-arranged and manipulative trading in the shares Cityon Systems (India) Limited. This sale was stage managed by Shri Shashwat Agarwal and his brothers as all the shares were purchased by the companies controlled by Shri Shashwat Agarwal.”

5.1 The above observations, noted by the assessing officer, clearly demonstrate that a diary identified as BK-2 was impounded during search & seizure operation on 28-4-2015 in the case of search on the companies belonging to Shri Shashwat Agarwal wherein the name of Shri Navin Jain and his family members were mentioned. The assessing officer nowhere noted that the names of the assessees was also mentioned in such diary.

Moreover, from the findings of the assessing officer, we find that the companies of Shri Shashwat Agarwal were engaged in providing accommodation entries of bogus Long Term Capital Gain, unsecured loans etc. to various parties and there is no mention of bogus transactions of cloth. Moreover, the above findings clearly indicate that the accommodation entries of Long Term Capital Gain and unsecured loans were obtained by the individuals mentioned in the assessment order and there is no mention that the assessees had taken any entry of Long Term Capital Gain or unsecured loans from the companies of Shri Shashwat Agarwal. This fact is further corroborated from the fact that the assessing officer in the case of the assessees did not make any addition on account of Long Term Capital Gain or unsecured loans but he made the additions by holding the sale and purchase of cloth which was purchased from Rich Group of Companies to be bogus. All these facts demonstrate that the assessing officer had not made the addition on the basis of any incriminating document but had made the addition on account of bogus sale and purchase of cloth for which no document was found during the course of search. Even otherwise, the documents relied on by the assessing officer were found at the premises of the companies of Shri Shashwat Agarwal wherein the search was carried out on 28-4-2015 and there too the incriminating material, as mentioned in the assessment order, was a diary identified as BK-2 wherein the names of some promoters/directors of the assessees were mentioned. Nowhere therein the names of the assessees have been mentioned. Learned counsel for the assessee had relied on a number of case laws for the proposition that in case no incriminating material is found, the additions cannot be made in the case of completed assessments. Particular reliance was placed on the judgment of Hon’ble Delhi High Court in the case of Kabul Chawla (supra) wherein the SLP filed by the Department was dismissed by Hon’ble Supreme Court. Learned counsel for the assessee had also relied on case law of Pr. CIT v. Meeta Gutgutia (supra), the SLP of which has also been dismissed by Hon’ble Supreme Court. Though the SLP in the case of Kabul Chawla was dismissed due to low tax effect but the SLP in the case of Meeta Gutgutia was not dismissed due to low tax effect but was dismissed on merits. For the sake of completeness, the judgment of Hon’ble Delhi High Court in the case of Meeta Gutgutia is reproduced below :–

“A search and seizure under section 132 urns conducted in the premises of the FNP group which comprised of various companies, partnerships and proprietorship concerns. The statement of an employee PG was recorded on oath under section 133A. The assessee was a director/partner/shareholder in the group of companies/concerns. She was the proprietor of the concern FNP. On the basis of documents recovered during the search operation, a notice under section 153A was issued to the assessee. Thereafter, a notice and questionnaire under sections 143(2) and 142(1) were also issued. The assessing officer passed separate orders in respect of the assessment years 2000-01 to 2003-04. For the assessment year 2004-05, as in the preceding years, the assessee had claimed deduction on account of franchisee commissions paid to various parties.

The assessing officer held that the addresses of the franchisees were not revealed and that there were discrepancies in the details of the accounts of the franchisees filed by the assessee. Consequently, the franchisee commission payments claimed by the assessee were added back to her income. For the assessment year 2004-05, the assessing officer also made an addition on account of stock. The assessing officer estimated the undisclosed income, on account of franchisee fee, at a certain percentage for the assessment years 2001-02 to 2006-07. No addition was made for the assessment year 2006-07, although a disclosure was made. Before the Commissioner (Appeals), the assessee produced additional evidence under rule 46A of the Income Tax Rules, 1962, which included copies of franchisee agreements. A rejoinder was filed by the assessee. On analysis of the additional evidence, the Commissioner (Appeals) held that the accounts of the assessee had been tax audited and that no adverse remarks had been made by the tax auditors. He further held that the assessing officer had not rejected the books of account of the assessee.

Accordingly, he held that the disallowance of the franchisee commissions paid were unsustainable and deleted the additions made. He deleted the additions made on account of payment of rent, non-refundable security, income from self-controlled outlets and reduced the addition made on account of closing stock. He also deleted the additions of undisclosed income, made on account of franchisee fee, accepting the contention of the assessee that there was no disclosure made for earlier years, or any evidence unearthed during the search by the Department that such franchisee fee income was not disclosed by her. Both the Department and the assessee filed appeals before the Appellate Tribunal. Accepting the contention of the assessee that for the assessment years 2000-01 to 2003-04, there was no incriminating material seized during the course of search, and therefore, the assessment orders in respect of those years ought to be quashed, the Appellate Tribunal held that the assumption of jurisdiction under section 153A for those assessment years was illegal. In respect of the assessment year 2004-05, the Appellate Tribunal held that the additions made were based on seized documents and, therefore, the assessment under section 153A was valid.

It dismissed the appeals filed by the Department in respect of the deletions made by the Commissioner (Appeals) and dismissed the assessee’s appeal for non-prosecution. On appeals:

Held, dismissing the appeals, (i) that it was only if during the course of search under section 132 incriminating material justifying the reopening of the assessments for six previous years was found that the invocation of section 153A qua each of the assessment year would be justified.”

5.2 The above judgment of Hon’ble Delhi High Court has been upheld by Hon’ble Supreme Court as the SLP filed by Revenue has been dismissed which is reported at 96 taxmann.com 468. Hon’ble Delhi High Court in above case has distinguished the case law of Dayawanti Gupta v. CIT (2016) 390 ITR 496 (Del) : 2016 TaxPub(DT) 4888 (Del-HC) which learned D.R. had heavily relied. The case law of Hon’ble Allahabad High Court in the case of Raj Kumar Arora (2014) 367 ITR 517 (All) : 2014 TaxPub(DT) 3949 (All-HC), though supports the contentions of the Revenue but since Hon’ble Supreme Court has decided the issue in favour of the assessee in the case of Meeta Gutgutia therefore, the judgment of jurisdictional High Court will not help the Revenue. The contention of the Revenue that since the Department has not accepted the decision of Hon’ble Supreme Court in the case of Kabul Chawla and Meeta Gutgutia as SLP in the case of CIT v. Continental Warehousing Corporation (2016) 235 Taxman 568 (SC) : 2016 TaxPub(DT) 0157 (SC) has been admitted is also of no help to Revenue. Therefore, in view of the above case laws, we hold that in case of completed assessments, the addition can be made only on the basis of incriminating material found during search. We have already held that no incriminating material was found from the premises of the assessee therefore, the additions cannot be made in the case of completed assessments which in this case is appeal for assessment year 2013-14 wherein in I.T.A. No. 510 the assessment order was already passed under section 143(3) on 22-3-2016 which is before the search date of 23-8-2016, copy of assessment order is placed at pages 51 to 54 of the paper book. Similarly in I.T.A. No. 515, the assessment was completed under section 143(3) vide Order, dated 23-3-2016, the copy of which is placed at pages 54 to 57 of the paper book. Similarly in I.T.A. No. 517 relating to assessment year 2013-14, the assessment order under section 143(3) dated 30-3-2016, a copy of which is placed in paper book at pages 52 to 56. Therefore, the assessments in these cases stood completed. Learned counsel for the assessee had though argued that the assessment for assessment year 2015-16 also stood completed but in our opinion the appeals for assessment year 2015-16 cannot be said to be completed as time for issue of notice under section 143(2) was still available to the Department which was upto 30-9-2016 whereas the search took place on 23-8-2016 which means that there was time available to the Department to issue notice under section 143(2) therefore, the appeals filed for assessment year 2015-16 cannot be said to have completed. In view of the above discussion, ground No. 2 & 7 of the appeals in I.T.A. No. 510, 515 & 517 are allowed.

6. The other common legal ground argued by learned counsel for the assessee in all appeals is that the assessing officer has not provided opportunity to the assessees for cross-examination of third parties on whose statements the addition was made and sustained by the authorities.
7. The relevant grounds of appeals covering this grievance of the assessee is contained in ground No. 5 of all appeals. In this respect we find that assessees have been declaring business from cloth trading since assessment year 2011-12 and have also been reporting such turnover with the VAT authorities. All the assessees are registered with VAT Department wherein cloth has been mentioned as one of the commodity for trading.

The VAT Department has passed orders also and has accepted the turnover of cloth declared by the assessees. The relevant documents relating to VAT are placed in paper books as detailed below :–

S.No.	Name of assessee	Copy of VAT documents
1.	Sigma Castings Ltd.	P.B. pages 55 to 61
2.	Kundan Castings (P) Ltd.	P.B. pages 58 to 63
3.	Paras Castings & Alloys (P) Ltd.	P.B. pages 57 to 69
4.	Shri Radhey Radhey Ispat (P) Ltd.	P.B. pages 57 to 63
5.	Quality India (P) Ltd.	P.B. pages 48 to 52

Admittedly, the payments and receipts for all the purchases and sales have been made through banking channels. The assessing officer, vide Show Cause Notice, dated 12-12-2018, confronted the assessee the following questionnaire :–

“Sub.: Show cause notice for assessment proceedings under section 153A/143(3) of the Income Tax Act for the assessment year 2012-13, 2013-14, 2014-15, 2015-16, 2016-17 & 2017-18–Reg.

Please refer to the assessment proceedings pending before the undersigned of the Income Tax Act for assessment year 2012-13 to 2017-18. From the perusal of records and the details furnished by you, it is noticed that you have claimed to have made purchases and sales of cloth as per details given below :–

Assessment Year	Total purchases (Rs.)	Total Sales (Rs.)
2012-13	39,84,04,295	48,75,48,301
2013-14	25,11,10,095	28,87,36,832
2014-15	26,90,31,480	32,17,14,504
2015-16	50,02,71,240	59,97,21,277
2016-17	49,99,04,843	61,30,18,425
2017-18	44,83,60,330	48,07,39,041

During the course of assessment proceedings you have been asked to submit various information, explanations and evidences about the transactions of purchase & sale of cloth business. From the facts provided by you, it is crystal clear that alleged cloth trading is originating from one of the Rich Group of companies and after travelling through Sigma Group of companies, it is again merging into another Rich Group of companies.

Rich Group of companies consisting of 14 companies and individuals namely Shri Ashish Agrawal and Shri Shashwat Agarwal, have been established to accommodation entry provider in the form of profit through bogus sales and purchase transactions, unsecured loans, bogus Long Term Capital Gain and subscription of share capital at premium to the party by accepting undisclosed cash and commission. The facts were established during the course of survey/search & seizure operation as well as assessment proceedings of Rich Group of cases and most importantly it was also held by Hon’ble Allahabad High Court during the course of hearing of Writ Petitions filed by Rich Group of companies. The alleged transactions in cloth trading by Rich Group of companies could not be verified from their books of account and sales tax department as well. Further, you have also failed to prove that genuineness of transactions in cloth trading during the course of assessment proceedings, which is evident from the following facts:

All the purchases have originated from one of Rich Group of companies and again the same was sold to Rich Group companies only. Thus, it is just a circular trading for providing/getting accommodation entries in the form of bogus profit.

Even a layman can understand that there was no logic for making purchase from one of the Rich Group of companies by the assessee and again selling the same to another companies of Rich Group directly or through its sister concern, when the main business of assessee was of manufacturing and trading in iron & steel.

Apparently, if one company of Rich Group would have required cloth, it could have purchased directly from its another group company, which in most of the cases are situated in same campus, instead of purchasing and selling the same from/through Sigma Group of companies.

During the assessment proceedings assessee has stated that whole sale cloth business done by the assessee was conducted at lower ground floor of the property situated at 122/235, Fazalganj Kanpur. However, during the course of search & seizure operation in Sigma Group of cases at the premises 122/235, Fazalganj, Kanpur, Shri Ankur Gupta, employee of M/s. Shri Radhey Radhey Isptal Pvt. Ltd. and also its signatory, stated that cloth trading has been conducted in Sigma Casting Ltd. & Shree Radhey Radhey Ispat Pvt. Ltd. from financial year 2011-12 and in M/s. Kundan Casting Ltd. during financial year 2012-13 and 2013-14 but failed to give any details as to where stock of cloth was being stored as no trace of any cloth whatever was found during the search. Thus the assessee could not substantiate the alleged cloth trading during the search & seizure operation.

During the search & seizure operation at 122/235, Fazalganj, Kanpur no stock of cloth was found and even sample of cloth was also not found.

The assessee was also asked to submit name of the retailers, where the cloth traded by it, is available for end users, it simply replied that it did not deal with retailers. It is highly improbable that the assessee group companies which are having huge turnover of around 1000 crore from financial year 2011-12 to 2016-17, did not bother to know where cloths traded by it are being sold to end users (customers). A business man cannot be so indifferent about the product, he is dealing in, when he is earning net profit of around 15%.

Assessee was also asked to name the description of goods traded including its brand name etc. In its reply assessee stated that it dealt in unbranded goods and the same were identified from resources point or their popular name, but failed to give details of resource point or popular name.

The rate of the cloths mentioned in the different invoices are unreasonably high and seems to be unrealistic.

That no correspondence trail through paper, e-mail, whatsapp or phone etc. has been seen during the course of search as well as assessment proceedings.

Though Kanpur is the oldest and biggest hub (Mandi) of whole sale cloth trading, it is surprising to note that all the suppliers and customers of the assessee are only companies of Rich Group.

From the details provided by you it is found that no manpower has been engaged in the huge trading activities in cloth, which shows that the transaction claimed in cloth trading are only paper/bogus transactions.

In view of the above facts, it is crystal clear that alleged cloth trading shown in your books of account is only book entries and bogus in nature. Hence, you are required to show cause as to why net of bogus sale and purchase credited in your books of account be not treated as cash credit under section 68 of the Income Tax Act and commission paid thereon be not treated as unexplained expenditure from undisclosed income under section 69C of the Income Tax Act and accordingly why these deemed incomes under section 68 be not taxed under section 115BBE of the Income Tax Act.

The date fixed for compliance is 22-12-2018.”

8. The assessee videLetter, dated 21-12-2018 in reply to questions raised in the questionnaire submitted that the assessing officer was using the information on the basis of statement of third party without confronting to the assessee which was not in accordance with law. In this respect the assessee had also replied to other queries of the assessing officer. For the sake of completeness the reply to the show cause notice placed at pages 120 to 122 of the paper book, is reproduced below :–

“Re: Show Cause Notice, dated 12-12-2018 in the case of M/s. Sigma Castings Pvt. Ltd. in connection with Assessment Proceedings under section 153A of the Income Tax Act, 1961, for the assessment year 2013-14 Explanation–Regarding.

With reference to your Notice referred above, we wish to explain and submit as under :–

(1) Pre-conceived inferences:

A search was conducted on 23-8-2016 (concluding on 25-8-2016) and despite almost 27 months passed from the said date, no enquiry except from Shri Ankur Gupta 2-3 questions were asked during the course of search at the office of M/s. Radhey Radhey Ispat Pvt. Ltd. Group, about the cloth trading, no meaningful enquiry was done from any responsible person of the assessee group till now. However, in the Show Cause Notice based on third party information, that too never confronted to the assessee for rebuttal/explanation, pre-conceived inferences have been drawn relating to the cloth trading done by the assessee.

(2) Twisting of Facts:

Certain facts mentioned in the Show Cause Notice are not part of assessment record of the assessee or M/s. Radhey Radhey Ispat Pvt. Ltd. Group of cases. For example cloth trading up to 30-6-2017 was not subjected to any VAT/Sales Tax still inference has been drawn by saying that no information could be obtained from Sales Tax Department. Further, the assessee group as a whole and assessee in particular was dealing in wholesale business of unbranded cloth, which has high margin, compared to branded cloth trading. Whereas, in the Show Cause Notice, firstly adverse inference has already been drawn by presuming that the assessee had no retail outlet, shop or retailers to deal with. Similarly certain questions relating to business activities were asked from Manager (Accounts) Mr. Ankur Gupta, who was not at all concerned with sales, purchases or management of inventory etc. of the cloth trading done by the assessee. All these issues clearly show that facts in the present show cause have been twisted to suit your convenience, whims and fancies. Overall, management of cloth trading on wholesale basis was done by Shri Navin Jain, Director.

(3) Dencndence on search in the case of Rich Group of Companies:

The Show Cause Notice primarily rests on/around a search and High Court Proceedings of Shri Ashish Agarwal and Shri Shashwat Agarwal and Rich Group of Companies. Firstly their reference in the present proceedings is uncalled for and secondly the orders, documents, other information relied upon and mentioned in the Show Cause Notice and likely to be used against the noticee were never confronted to the assessee in accordance with standard operating procedure followed under the Income Tax Law, therefore, all this is non cognizable and cannot be made basis for completion of assessment in the present case. Without prejudice, you are requested to kindly confront all information, documents, orders referred to in your Show Cause Notice relating to any third party to the assessee by providing Original or certified true copy for explanation/rebuttal and till then they should not be used to draw any adverse inference in the case of the assessee.

(4) Pointwise Explanation:

(i) Shri Ashish Agarwal arid Shri Shashwat Agarwal: At the outset, it is explained that the assessee has no dealings either with Shri Ashish Agarwal or Shri Shashwat Agarwal, in their individual capacity.

(ii) It is a common understanding that an individual is different from a juridical person and vise versa. The assessee company had dealings with certain companies but those companies are different from their shareholders and/or directors, hence the inferences drawn in the initial 2-3 paragraphs of the Show Cause Notice are unfounded and unwarranted.

(iii) Sales Tax:

The assessee company is registered under UPVAT for trading in cloth, hence the inference relating to Sales Tax information not received from Sales Tax Department in the case of third party referred to in your Show Cause Notice is neither relevant nor meaningful in the present case. Further, a copy of VAT Registration, Annual Return and copy of order etc. of the assessee company has already been filed with earlier replies.

(iv) Godown:

The assessee group has taken 2 godowns and 5 shops on rent as per details given below :–

Godown/ Shop No.	Premises No.	Owner of Shop/ Godown	Tenant of Shop/Godown
1 to 5 (Five shops) 2 Godowns	122/325 Plot No. 17, Fazal Ganj Kanpur	Sigma Casting Ltd., 122/225, Plot No. 17, Fazalganj, Kanpur	(1) Shree Radhey Radhey Ispat Pvt. Ltd. (2) Kundan Casting (P) Ltd. (3) Paras Casting & Alloys Pvt. Ltd. (4) Sadahari Shakti Pvt. Ltd.

The assessee company was authorized (Licensed) User of Godown and shops for its cloth trading business besides using the same for other business activity(ies), hence the space required for holding of stock from time to time was sufficient and have been unnecessarily ignored to draw adverse inference in the Show Cause Notice.

(v) Stock not existent at the time of survey/search

The cloth trading was discontinued by the assessee and some other assessee group companies with effect from 31-3-2016, but the search/survey was conducted in M/s. Radhey Radhey Ispat Pvt. Ltd. Group on 23-8-2016, i.e., almost after gap of 5 months, hence in the course of search, no stock of cloth was found. As aforesaid the assessee was engaged in wholesale trading of cloth and therefore, question of finding out samples or some stock of cloth, is totally irrelevant as alleged in the Show Cause Notice.

(vi) Margin of Profit

As aforesaid the assessee and other group companies were dealing with unbranded cloth on wholesale basis, which had very good and higher margin than branded cloth trading. It is not understood how the same was found unreliable.

(vii) Staff

It is also not correct that the assessee company did not deploy proper staff for wholesale trading in unbranded cloth during the relevant years. Following staff members were engaged in wholesale trading of unbranded cloth :–

S.No.	Name of the Staff	Work looked after	Designation	Salary
1.	Mr. Ankur Gupta	Accounts Deptt.	Manager	35,500
2.	Mr. R.S. Chauhan	Marketing/Sales	Accountant	8,000
3.	Mr. Atul Shukla	Purchase/Sales	Accounts Clerk	7,000
4.	Mr. Ram Pratap Singh	Godown/Stock	Accountant	8,000

(viii) It is reiterated that —

(a) Whole sale trading in unbranded cloth done by the assessee in F.Y. 2012-13 relevant to assessment year 2013-14 fully mentioned in the above referred show cause notice is genuine, carried on in the ordinary course of business and full and proper bills, vouchers and books of account are maintained by the assessee and are amenable to complete verification.

(b) No commission was paid as alleged in the last paragraph of your notice.

In view of the facts and circumstances narrated above and detailed explanation given on each point raised in the show cause notice proposing to invoke provision in section 68 and 69C of the Income Tax Act, 1961 and to treat cloth trading as Bogus and alleged commission paid thereon as unexplained expenditure is devoid of merits, unfounded and based merely on bald hypothesis therefore, no adverse inference deserves to be drawn on this account.

We hope that the above details/information will meet your requirement and satisfy your good-self in terms of your referenced Show Cause Notice.”

9. From the above questionnaire and reply to the questionnaire, it is clear that the authorities below have not cited any statement of the parties from whom the purchases and sales were made wherein they had denied these transactions and if there are any statements of these parties wherein they had denied these transactions, such statements were not made available to the assessee for cross-examination. The assessee in para 3 of the above reply had specifically requested to confront all information and documents etc. but no such opportunity was granted to assessee. The argument of Learned D.R. that since the Hon’ble Allahabad High Court had held the parties to be bogus therefore, there was nothing to be confronted to assessees is not helpful to the Revenue as opportunity of cross-examination of third parties on whose statements the Revenue is relying is a legal right available to the assessee and which has been held by various Hon’ble courts including Supreme Court in the case ofAndman Timber Industries v. CIT (2015) 281 CTR 241 (SC) : 2015 TaxPub(DT) 5186 (SC). Moreover, we find that the assessing officer had made the additions on the basis of a report from the assessing officer of Rich Group of companies and has not carried out any independent investigations for holding the transactions of cloth trading as bogus. The judgment of Hon’ble Allahabad High Court has been passed on the writ petition filed by two companies belonging to Rich Group.

These companies had prayed to the Hon’ble High Court to quash the search due to warrant of authorization, satisfaction note and incriminating material etc. The Hon’ble Court has dismissed the writ petitions by holding that the companies were taking cash from some parties and were giving cheques to other parties and therefore, Hon’ble Court had held that these companies were doing money laundering in the form of unaccounted cash.

In the findings the Hon’ble Court has nowhere commented on the activities of cloth trading being undertaken by these companies. Moreover, the fact remains that either there was no statement of companies denying cloth trading with the assessees and if there was one then same has not been confronted to the assessees for cross-examination despite specific request of the assessee. The entries of purchases and sales are supported by invoices and are further supported with the fact that these were reported to VAT authorities. The payments and receipts are through banking channels.

10. The assessee has recorded the entries of sales and purchase in its books of account and has duly disclosed the items of sales and purchase in the profit & loss account and has duly disclosed the profit earned on the trading in the profit & loss account and has offered the same as business income. The assessee has furnished as much information as possible to justify its claim about the transactions of cloth being genuine. Under these circumstances, Hon’ble Supreme Court in the case ofCIT v. Odeon Builders Pvt. Ltd. (2019) 418 ITR 315 (SC) ; (2019) 110 taxmann.com 64 (SC) : 2019 TaxPub(DT) 6298 (SC) has decided the issue in favour of assessee by holding as under :–

“1. Delay condoned.

2. We have perused the review petition and find that the tax effect in this case is above Rs. 1 crore, that is, Rs. 6,59,27,298.

Ordinarily, therefore, we would have recalled our Order, dated 17-9-2018, since the order was passed only on the basis that the tax effect in this case is less than Rs. 1 crore.

3. However, on going through the judgments of the CIT, ITAT and the High Court, we find that on merits a disallowance of Rs. 19,39,60,866 was based solely on third party information, which was not subjected to any further scrutiny. Thus, the Commissioner (Appeals) allowed the appeal of the assessee stating :–

“Thus, the entire disallowance in this case is based on third party information gathered by the Investigation Wing of the Department, which have not been independently subjected to further verification by the assessing officer who has not provided the copy of such statements to the appellant, thus denying opportunity of cross-examination to the appellant, who has prima facie discharged the initial burden of substantiating the purchases through various documentation including purchase bills, transportation bills, confirmed copy of accounts and the fact of payment through cheques, & VAT Registration of the sellers & their Income Tax Return. In view of the above discussion in totality, the purchases made by the appellant from M/s. Padmesh Realtors Pvt. Ltd. is found to be acceptable and the consequent disallowance resulting in addition to income made for Rs. 19,39,60,866, is directed to be deleted.”

4. The ITAT by itsJudgment, dated 16-5-2014relied on the self-same reasoning and dismissed the appeal of the revenue. Likewise, the High Court by the impugned Judgment, dated 5-7-2017, affirmed the judgments of the CIT and ITAT as concurrent factual findings, which have not been shown to be perverse and, therefore, dismissed the appeal stating that no substantial question of law arises from the impugned order of the ITAT.
5. In these circumstances, the Review Petitions are dismissed.”
6. Similarly we find that Hon’ble Supreme Court in the case ofAndman Timber Industries v. CIT, vide Order, dated 2-9-2015 allowed relief to the assessee by holding that right of cross-examination is an important right available to the assessee and not providing opportunity to cross-examine will amount to violation of principles of natural justice. The findings of Hon’ble Supreme Court are reproduced below :–

“Insofar as the plea of the appellant that it was not allowed to cross-examine the dealers whose statements were relied upon by the Adjudicating Authority in passing the orders, the Tribunal rejected its plea in the following manner :–

“6. The plea of no cross-examination granted to the various dealers would not help the appellant case since the examination of the dealers would not bring out any material which would not be in the possession of the appellant themselves to explain as to why their ex factory prices remain static. Since we are not upholding and applying the ex factory prices, as we find them contravened and not normal price as envisaged under section 4(1), we find no reason to disturb the Commissioners orders.”

Challenging the aforesaid order, the present appeal is preferred by the appellant-assessee.

We have heard Mr. Kavin Gulati, learned senior counsel appearing for the assessee, and Mr. K. Radhakrishnan, learned senior counsel who appeared for the Revenue.

According to us, not allowing the assessee to cross-examine the witnesses by the Adjudicating Authority though the statements of those witnesses were made the basis of the impugned order is a serious flaw which makes the order nullity inasmuch as it amounted to violation of principles of natural justice because of which the assessee was adversely affected. It is to be borne in mind that the order of the Commissioner was based upon the statements given by the aforesaid two witnesses. Even when the assessee disputed the correctness of the statements and wanted to cross-examine, the Adjudicating Authority did not grant this opportunity to the assessee. It would be pertinent to note that in the impugned order passed by the Adjudicating Authority he has specifically mentioned that such an opportunity was sought by the assessee. However, no such opportunity was granted and the aforesaid plea is not even dealt with by the Adjudicating Authority. As far as the Tribunal is concerned, we find that rejection of this plea is totally untenable. The Tribunal has simply stated that cross-examination of the said dealers could not have brought out any material which would not be in possession of the appellant themselves to explain as to why their ex-factory prices remain static. It was not for the Tribunal to have guess work as to for what purposes the appellant wanted to cross-examine those dealers and what extraction the appellant wanted from them.

As mentioned above, the appellant had contested the truthfulness of the statements of these two witnesses and wanted to discredit their testimony for which purpose it wanted to avail the opportunity of cross-examination. That apart, the Adjudicating Authority simply relied upon the price list as maintained at the depot to determine the price for the purpose of levy of excise duty. Whether the goods were, in fact, sold to the said dealers/witnesses at the price which is mentioned in the price list itself could be the subject matter of cross-examination. Therefore, it was not for the Adjudicating Authority to presuppose as to what could be the subject matter of the cross-examination and make the remarks as mentioned above. We may also point out that on an earlier occasion when the matter came before this Court in Civil Appeal No. 2216 of 2000, Order, dated 17-3-2005 was passed remitting the case back to the Tribunal with the directions to decide the appeal on merits giving its reasons for accepting or rejecting the submissions.

In view the above, we are of the opinion that if the testimony of these two witnesses is discredited, there was no material with the Department on the basis of which it could justify its action, as the statement of the aforesaid two witnesses was the only basis of issuing the Show Cause notice.

We, thus, set aside the impugned order as passed by the Tribunal and allow this appeal.”

12. The Lucknow Bench of the Tribunal in the case ofMorning Glory vide Order, dated 15-3-2019 in I.T.A. No. 72/Lkw/2018, has allowed relief to the assessee wherein again the statements of third parties were not made available to assessee for cross verification. The Hon’ble Tribunal had followed the judgment of Hon’ble Supreme Court in the case of Andman Timber Industries (supra) besides noting down the other decisions.

Therefore, in view of the above, we allow ground No. 5 in all the appeals.

13. Having allowed ground No. 5, the additions sustained by learned Commissioner (Appeals) under section 68 and 69C are not sustainable and hence are deleted.
14. Nothing was argued on other legal grounds taken by the assessee in the grounds of appeals. Therefore, same are dismissed as not pressed.
15. In view of the above, the appeals filed by the assessee are partly allowed.

Order pronounced in the open on 16-12-2020 in accordance with rule 34(4) of Income Tax Act Rules.