2022 (9) TMI 922 - AT - Income Tax

Rejection of books of accounts - NP estimation - addition made by applying net profit (Declared by the assessee) @ 4.42% on suppressed sales - additional net profit earned by applying the net profit rate of 3.64% in place of 4.19% - HELD THAT - As undisputed that no corroborative evidence has been found from the business premises of the assessee and the Income Tax Authorities have simply relied on the contents of the e-mail and the statement of Shri Manish Jain without leading further evidence which could strengthen the case of the Department and, therefore, we are unable to agree with such action of the Department in placing its entire reliance on such third party evidence without there being any corroborative evidence to make the impugned additions. Once again, we would like to refer to the statement of Shri Shiv Charan Lal, an Ex-employee, who has categorically stated that the assessee company used to destroy the alleged parallel invoices once the consignment was delivered. This statement of Shri Shiv Charan Lal goes contrary to the fact of invoices being recovered during the search at the residential premises of Shri Sanjay Dhawan. As also worth noting that as per the e-mail print out for June 2015, the bill numbers are running into series of 200 whereas as per the regular books of account the serial numbers of the invoices for the month of June 2015 is in the series of 700 onwards. Thus, this apparent contradiction castes a doubt on the veracity and the evidentiary value of the invoices recovered from the premises of Shri Sanjay Dhawan. Accordingly, on an overall view of the factual matrix of the case and for the various reasons as aforementioned in the preceding paragraphs, we are of the considered opinion that the Department could not have validly made the impugned additions by placing sole reliance on the invoices recovered from the residence of Shri Sanjay Dhawan as well as on the statement of the various third parties viz. S/Shri Gulshan Gaba, Naveen Salley and Sudhir Sethi which were recorded at the back of the assessee without giving the opportunity to the assessee to cross examine them. For the reasons mentioned in the preceding paragraphs, the impugned additions could not have been made on the basis of the statement of Shri Manish Jain and the electronic record discovered from the premises of the M/s. B.M Paper Mart, Delhi because the origin of the e-mail was not established. We have no option but to direct the deletion of the impugned additions in all the five years under consideration. As far as the issue of rejection of books of account is concerned, since we have already allowed the relief to the assessee on merits of the case by holding that the impugned additions are not sustainable, the question of rejection of books of account assumes only academic interest, and therefore, it is not being adjudicated at the present juncture.

Issues Involved:
1. Rejection of books of accounts.
2. Addition based on suppressed sales.
3. Reliance on findings of excise authorities.
4. Non-allowance of interest income reduction.
5. Denial of cross-examination opportunity.

Detailed Analysis:

1. Rejection of Books of Accounts:
The Tribunal noted that the Assessing Officer (AO) rejected the books of accounts under section 145(3) of the Income Tax Act, 1961, for all the assessment years under consideration. The AO's rejection was based on alleged discrepancies and unaccounted sales discovered during a search operation by the Directorate General of GST Intelligence. The CIT(A) upheld the AO's rejection but provided partial relief by adjusting the net profit rate. The Tribunal concluded that since the primary issue of additions based on suppressed sales was resolved in favor of the assessee, the rejection of books of accounts became a matter of academic interest and did not require further adjudication.

2. Addition Based on Suppressed Sales:
The AO made additions to the assessee's income based on alleged suppressed sales, which were computed using parallel invoices and statements from third parties. These additions were challenged by the assessee on the grounds that the evidence was insufficient and the statements were recorded without cross-examination. The Tribunal found that the AO relied heavily on the statements and invoices recovered from Shri Sanjay Dhawan, an ex-employee, without corroborative evidence. The Tribunal held that the additions lacked a sound basis as the Department did not provide the assessee an opportunity to cross-examine the witnesses, violating principles of natural justice. Consequently, the Tribunal directed the deletion of the impugned additions for all assessment years under consideration.

3. Reliance on Findings of Excise Authorities:
The AO's additions were also based on findings from the Central Excise Department, which alleged that the assessee was involved in under-invoicing and unaccounted sales. The Tribunal noted that the AO did not conduct any independent inquiry and solely relied on the excise authorities' findings. The Tribunal emphasized that excise laws and income tax laws are independent, and findings under one cannot be directly applied to the other without proper verification and corroboration. The Tribunal found that the reliance on excise findings without independent verification was unjustified and unsustainable.

4. Non-Allowance of Interest Income Reduction:
The assessee argued that the AO and CIT(A) erred in not allowing the interest income to be reduced from the net profit while calculating the addition based on suppressed sales. The Tribunal did not specifically address this issue in detail, as the primary issue of additions based on suppressed sales was resolved in favor of the assessee, rendering this point moot.

5. Denial of Cross-Examination Opportunity:
The Tribunal highlighted that the AO denied the assessee the opportunity to cross-examine the witnesses whose statements were used to justify the additions. The Tribunal cited the judgment of the Hon'ble Supreme Court in the case of Andaman Timber Industries vs. Commissioner of Central Excise, which held that not allowing cross-examination of witnesses whose statements form the basis of an order is a serious flaw and violates principles of natural justice. The Tribunal concluded that the denial of cross-examination significantly weakened the Department's case and contributed to the decision to delete the impugned additions.

Conclusion:
The Tribunal found that the additions made by the AO based on alleged suppressed sales were not sustainable due to the lack of corroborative evidence and the denial of cross-examination. Consequently, the Tribunal directed the deletion of the impugned additions for all assessment years under consideration. The issue of rejection of books of accounts was deemed academic and not adjudicated further. The appeals were partly allowed in favor of the assessee.

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