2023 (12) TMI 537 - AT - Income Tax

Payment of interest in cash - Addition relying on the order passed by the Income Tax Settlement Commission in the case of unrelated third party - HELD THAT - We find the AO considering the proceedings before the Income Tax Settlement Commission made addition in the hands of the assessee on account of interest payment in cash. In view of the same we directed the ld. DR to furnish a copy of order of the Income Tax Settlement Commission regarding M/s. Wellbuild Merchants Pvt. Ltd. of the Damale Group unrelated third party . DR furnished the same which is on record by way of covering letter and we note that the said Damale Group representing 04 applicants filed applications u/sec. 245C before the ITSC. In turn the ITSC sought reports from PCIT as required u/sec. 245D (2B) of the Act and also under Rule 9 of the Income Tax Settlement Commission Procedure Rule 1997. On perusal of the statement of CIT-DR representing Pr. CIT before the Income Tax Settlement Commission of the said order argued taking reference to Question that the cash expenses out of which already claimed and allowed at the time of search action were claimed on estimation basis without any supporting evidence or documents. He submitted the claim of cash expenses is a pure imaginary figure without any basis and argued to reject the claim in the case of M/s. Wellbuild Merchants Pvt. Ltd.. Further taking reference to seized document concerning the assessee before us as referred by the AO in his order we note that the CIT DR argued that the applicant furnished a common reply regarding evidences of cash receipts in seized documents stating that entry pertain to cash loan/ repayment. Further he vehemently argued that the claim of interest payment of Rs. 7, 80, 00, 000/- out of Rs. 8, 00, 62, 029/- is not verifiable in the absence of mention of its payment and also in absence of conformity of nature of funds which is evident from para 5A(ii) of Page No. 25 of Income Tax Settlement Commission order. However the assessee therein got relief towards business expenditure. Therefore in our opinion that the information by way of a seized loose papers in the case of third party cannot be said to be tangible material without a further enquiry falling which the addition made in the hands of the assessee fails and is not justified . Thus the order of CIT(A) in confirming the order of AO is not maintainable and set aside. Thus the grounds raised by the assessee are allowed.

1. ISSUES PRESENTED and CONSIDERED

The core legal question in this case was whether the Commissioner of Income Tax (Appeals) [CIT(A)] was justified in confirming the addition made by the Assessing Officer (AO) by relying on an order passed by the Income Tax Settlement Commission in the case of an unrelated third party.

2. ISSUE-WISE DETAILED ANALYSIS

Relevant Legal Framework and Precedents:

The legal framework revolves around the interpretation of evidence obtained during search and seizure operations under Section 132 of the Income Tax Act, and the reliance on third-party proceedings, particularly those involving the Income Tax Settlement Commission.

Court's Interpretation and Reasoning:

The court analyzed whether the AO's reliance on third-party proceedings was justified. It was noted that the AO based the addition on statements and documents related to a third party, Shri Yuvraj Dhamale, and not directly on evidence against the assessee. The court emphasized the lack of independent inquiry by the AO and the absence of direct evidence linking the alleged cash payments to the assessee.

Key Evidence and Findings:

The AO relied on seized loose papers and statements made by Shri Yuvraj Dhamale, which allegedly indicated cash payments to investors. However, the court found these documents and statements insufficient as they lacked clarity and direct linkage to the assessee. The court highlighted contradictions in the statements made by Shri Yuvraj Dhamale and the lack of independent corroboration.

Application of Law to Facts:

The court applied the principle that mere entries in documents seized from a third party do not constitute conclusive proof against the assessee. The AO's reliance on these documents without further inquiry or corroboration was deemed inadequate to justify the additions.

Treatment of Competing Arguments:

The court considered the arguments from both parties. The appellant argued that the third-party statements and documents could not be used to fix liabilities on them without direct evidence. The respondent relied on the AO's findings and the Settlement Commission's order. The court sided with the appellant, emphasizing the need for direct evidence and independent inquiry.

Conclusions:

The court concluded that the CIT(A)'s confirmation of the AO's additions was not justified. The reliance on third-party proceedings and documents without direct evidence or independent inquiry was insufficient to uphold the additions.

3. SIGNIFICANT HOLDINGS

Preserve Verbatim Quotes of Crucial Legal Reasoning:

"A mere entry in the seized documents which were found from the third party does not constitute a conclusive proof to make addition in the hands of the assessee."

Core Principles Established:

The judgment established that reliance on third-party proceedings and documents, without direct evidence or independent inquiry, is insufficient to justify additions in the hands of the assessee.

Final Determinations on Each Issue:

The court set aside the CIT(A)'s order confirming the AO's additions, allowing the appeals of the assessees. The court held that the additions based on third-party proceedings were not justified without direct evidence or independent inquiry.

Order Summary:

The appeals of the assessees were allowed, and the additions confirmed by the CIT(A) were set aside. The court emphasized the need for direct evidence and independent inquiry in tax assessments.

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