2015 (4) TMI 542 - AT - Income Tax

Addition on account of alleged advances to Shri Niranjan Shah out of undisclosed sources - whether CIT(A) erred in relying upon statement of assessee recorded by FEMA for drawing adverse inference without considering the fact that said statement in such transactions other than FEMA already stood reflected in his statement recorded by Income Tax Authorities - Held that - In this particular case there are irrefutable evidences that not only the two parties were connected but admittedly entered into out of book transaction which even infringed against stringent laws like FERA. The transactions recorded in this account are held to be genuine and the appellant has failed to explain the same. The additions made by the AO on this issue, which are basically those confirmed by the then CIT(A) in the year 2000 on the issue. I agree and confirm the decisions made by him on the issue of the date and the sequence of the transactions and the working of required additions. The additions are therefore, confirmed in all the appeals. The evidence discussed i.e. the entries appearing in the seized documents coupled with the statements of the noticees, as well as other persons whose names are figuring in the documents seized, from Sh. Niranjan Shah as well as the admissions made by the notices, (other than Sh. Niranjan Shah) it is satisfying that the charges levelled against S/ Sh. Niranjan Shah, J.K. Doshi, Parag Kumar Pal, Nikhil R. Parikh and Sh, Nirish Babulat Shah as alleged in the SCN are proved and find them guilty of the said contraventions. S/Sh. j.k. Doshi, Parag Kumar Pal, Bhavnagari, Nikhil R. Parikh and Nirish Babulal Shah have submitted that they had entered into the transactions alleged in the SCN due to the circumstances beyond their control. While imposing penalties on these noticees, considering the fact that they had no deliberate intention to defy the law, but had undertaken the aforesaid transactions without any malafides, due to the exigency of the circumstance, the penalty of ₹ 4,50,000/- (Rs. Four Lacs and fifty thousand only) Imposed on Sh. Niranjan Shah, ₹ 90,000/- (Rs, Ninety thousand only) imposed on Sh. J.K. Doshi, ₹ 8,500/- (Rs. Eight thousand five hundred only) imposed on Sh. Parag Kumar Pal B, ₹ 1,500/- (Rs. One thousand five hundred only) imposed on Sh. Nikhil R. Parikh and ₹ 10.000/-(Rs.Ten Thousand only) imposed on Sh. Nirish Babulal Shah should be deposited in the office of the Enforcement Directorate at Mittal Chambers, 2nd Floor, Nariman Point, Mumbai 21 either by Demand Draft or Pay Order drawn in favour of the Drawing & Disbursing Officer within forty five days from the date of receipt of this order. According to us, FEMA proceeding has a bearing on the issue and latest position of same should be known. So, in view of submission of both parties and in the interest of justice, we restore whole issue to Assessing Officer with direction to decide the issue at hand as per fact and law and in light of subsequent development as discussed above, of course, after providing due opportunity of being heard to the assessee. Since we are restoring the issue on preliminary ground and on for the reasons discussed above, we are refraining to comment on merit at hand. - Decided in favour of assessee for statistical purposes.

Summary

Issues Involved:
1. Addition on account of alleged advances to a third party out of undisclosed sources.
2. Denial of cross-examination of a key witness.
3. Reliance on statements recorded by FEMA authorities.
4. Use of material found and seized from a third party.
5. Charging of interest under various sections of the Income Tax Act.

Detailed Analysis:

1. Addition on account of alleged advances to a third party out of undisclosed sources:
The primary issue revolves around the addition of Rs. 1,83,37,910/- to the assessee's income for A.Y. 1986-87, based on alleged advances to a third party (Shri Niranjan Shah) out of undisclosed sources. The assessee contended that these additions were erroneous as they were based on material found and assessed from a third party and not from the assessee. The CIT(A) confirmed the addition, relying on the statement of the assessee recorded by FEMA authorities where the assessee admitted to the transactions. The tribunal noted that the addition was based on the contents of a computer floppy seized from Shri Niranjan Shah, which contained account no. 36 in the name of 'J.K.', representing the initials of the assessee. The assessee admitted that the credit and debit entries in the account represented amounts paid and received by him or on his behalf. The CIT(A) found the transactions in the account to be genuine and upheld the addition.

2. Denial of cross-examination of a key witness:
The assessee was denied the opportunity to cross-examine Shri Niranjan Shah, whose statements were crucial to the case. The tribunal observed that both the assessee's and Shri Niranjan Shah's Assessing Officers relied on the cash flow statement and statements of Shri Niranjan Shah, which had a vital bearing on the assessee's case. The tribunal noted that the denial of cross-examination constituted a gross violation of the principles of natural justice. Consequently, the tribunal set aside the assessments for all the relevant assessment years and directed the Assessing Officer to allow the assessee a proper opportunity to cross-examine Shri Niranjan Shah.

3. Reliance on statements recorded by FEMA authorities:
The CIT(A) relied heavily on the statements recorded by FEMA authorities, where the assessee admitted to various transactions. The assessee argued that these statements were retracted in subsequent statements recorded by Income Tax authorities. The tribunal noted that the FEMA proceedings had a significant bearing on the issue and directed the Assessing Officer to reconsider the case in light of the subsequent developments in FEMA proceedings. The tribunal refrained from commenting on the merits of the case, pending the outcome of the reassessment.

4. Use of material found and seized from a third party:
The assessee contended that the addition was based on material found and seized from a third party (Shri Niranjan Shah) and not from the assessee. The CIT(A) and the Assessing Officer both relied on the seized material, including the computer floppy containing account no. 36, which was found during a search at Shri Niranjan Shah's premises. The tribunal emphasized the need for the Assessing Officer to provide the assessee with an opportunity to cross-examine Shri Niranjan Shah and to consider the latest developments in FEMA proceedings before making any additions.

5. Charging of interest under various sections of the Income Tax Act:
The assessee challenged the charging of interest under sections 139(8), 215/217, 234A, 234B, and 234C of the Income Tax Act, arguing that the addition was based on material found and seized from a third party, and thus, he could not have anticipated his income at the time of advance tax payment. The tribunal directed the Assessing Officer to reconsider the charging of interest in light of the reassessment and the final outcome of the income tax proceedings.

Conclusion:
The tribunal set aside the assessments for all the relevant assessment years and directed the Assessing Officer to conduct a de novo assessment, allowing the assessee the opportunity to cross-examine Shri Niranjan Shah and to consider the latest developments in FEMA proceedings. The tribunal refrained from commenting on the merits of the case, pending the outcome of the reassessment. The appeals were allowed for statistical purposes.