DEPUTY COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE -1, GUWAHATI vs. BMG INFORMATICS PVT. LTD., GUWAHATI

O R D E R PER GIRISH AGRAWAL, ACCOUNTANT MEMBER: Appeal filed by the revenue and the Cross Objection filed by the assessee are against the order of Ld. CIT(A), Central, North-East Region, Guwahati dated 31.10.2022 against the assessment order of ACIT,

CO No. 03/GTY/2023 BMG Informatics Pvt. Ltd., AY: 2016-17 Central Circle-1, Guwahati u/s. 143(3) r.w.s. 147 of the Income-tax Act, 1961 (hereinafter referred to as the “Act”), dated 16.03.2022 for AY 2016- 17.

2.1. Facts of the case as culled out from records are that assessee is engaged in the business of information technology, operating in entire North-East India, supplying/selling items like computers, laptops, UPS, batteries, power bank, laptop bags etc. Return of income was filed on 06.09.2016, reporting total income at Rs.3,32,23,900/-. A survey u/s. 133A of the Act was conducted in the case of D S System Pvt. Ltd. (DSSPL) on 02.11.2017. In this survey, a bunch of loose sheets were impounded inventorised as “DSS-05”. Subsequent to this survey, another survey action was undertaken on the assessee on 28.11.2017. In the course of survey at the premise of the assessee, no incriminating material was found.

2.2. From the perusal of survey report in the case of assessee, received from the office of ITO (Inv.) Unit-1, Gauhati and the CO No. 03/GTY/2023 BMG Informatics Pvt. Ltd., AY: 2016-17 impounded material marked as DSS-05 found in the case of DSSPL, it was noted by the Ld. AO that assessee had made payment of Rs.7,34,95,000/- through cheque to DSSPL against purchase of laptop bags and power banks. Against these payments, assessee has received back an amount of Rs.3,25,93,500/- in cash from DSSPL. In the post survey investigation, it was found that while cheque transactions between the assessee and DSSPL were recorded in the regular books of account of the assessee but the cash transactions were not recorded in the regular books of account of the assessee. Director of the assessee Shri Joydeep Gupta in his statement recorded u/s. 131 on 17.09.2019 had denied receipt of cash from DSSPL, as noted by the Ld. AO. Ld. AO applied his mind on this information and after verifying the records, formed a belief that assessee had inflated its purchase cost in its books of account against which it has received unaccounted cash of Rs.3,25,93,500/-. He thus, recorded the reasons to believe that income amounting to Rs.3,25,93,500/- has escaped assessment in the case of the assessee owing to failure on the part of the assessee to disclose true and complete material facts necessary in the assessment and thus, issued a notice u/s. 148, thereby undertook the proceedings for reassessment u/s. 147 of the Act.

2.3. Ld. AO has implicated the assessee for unaccounted cash transactions with DSSPL and made the addition for the same in the hands of the assessee to complete the assessment u/s. 147 read with sec. 143(3) of the Act. In the course of assessment, assessee had provided sample purchase invoices, sample sales invoices, confirmation of accounts of transactions with DSSPL,

CO No. 03/GTY/2023 BMG Informatics Pvt. Ltd., AY: 2016-17 its own financial statement. In the impugned assessment order, ld AO has noted that assessee had recorded payments made to DSSPL through cheques and these cheques payments were found to be exactly matching with the entries of cheque payments recorded in pages 1 to 15 of the impugned impounded material marked as DSS-05. In order to prove the sanctity of the impounded material found at the premise of the DSSPL during its survey, Ld. AO observed that since the cheque transactions recorded in the impounded material are real, the contents of the same are proven to be inviolable and true. He thus, casted the onus on the assessee to prove that no cash was received by the assessee which otherwise is recorded in this impounded document. Assessee had strongly contended that documents/diaries etc. impounded through survey action on a third person cannot be taken as evidence without corroborative material in the case of the assessee. It also placed reliance on several judicial precedents to fortify its claim. Ld. AO did not find favour with the submissions furnished by the assessee and completed the assessment by making the addition. Aggrieved, assessee went in appeal before the Ld. CIT(A).

3.1. The principal contours of arguments raised by the Ld. Counsel on the legal issue are in respect of borrowed satisfaction for the purpose of reason to believe recorded by the ld. AO. Admittedly, it is a fact on record that the material impounded is during the course of survey of DSSPL which forms the basis for initiating proceedings u/s. 148 read with 147. In this impounded material, payments made by the assessee to DSSPL through the banking channel are recorded in the regular books of account of both the assessee and DSSPL. However, there are certain cash payments made by the DSSPL to the assessee, noted in the same impounded material which are neither recorded in the regular books of account of the assessee nor that of DSSPL. Ld. AO co-related the details of these payments made by the assessee to DSSPL. He thus, inferred that by receiving back cash from its supplier i.e. DSSPL, out of earlier payments made through the banking channel by the assessee, it has inflated the cost of purchase. Thus, at the time of recording the reasons to believe, Ld. AO had prima facie material available with him which was pointed to the purposed escapement of income from assessment. Since bank transactions appearing in the impounded material were found to be matching with the regular books of account of the assessee, formation of reason to believe that cash would have been received back by the assessee against the aforesaid bank payments made by the assessee to DSSPL, cannot be termed as reason to suspect.

CO No. 03/GTY/2023 BMG Informatics Pvt. Ltd., AY: 2016-17 4. It is well settled that at the initial stage, final ascertainment about the escapement of income is not necessary. What is required is the formation of opinion based on prima facie but precise facts. At the stage when the AO seeks to reopen the assessment, the final outcome of the proceeding is not relevant. Powers to reopen are liable to be exercised on the basis of cogent probable facts and not on the basis of established facts. At the stage of issuance of notice u/s. 148, the only question is to be addressed is whether relevant material is available with the AO on the basis of which reasonable likelihood would be gathered that there was an escapement of income. Reason to believe is a cause which may be validly weighed when the AO prima facie noticed that the income had escaped assessment. The word “reasons” would imply justifying the facts available with the AO. Thus, if the facts so suggest, the AO would be entitled to form such belief to proceed further. Sufficiency of material could not be said to be germane at this stage.

4.1. In order to appreciate the controversy in the light of above principles and facts, it is clearly noticed that at the time of recording the reasons to believe, Ld. AO had prima facie material available with him pointing out to the purported escapement of income from assessment, since the bank transactions appearing on the impounded material were found to be matching with the regular books of account of the assessee. Based on this, AO had reason to believe that the cash would have been received back by the assessee against the aforesaid bank payments made by it to DSSPL. Thus, we are in agreement with the finding arrived at by the Ld. CIT(A),

CO No. 03/GTY/2023 BMG Informatics Pvt. Ltd., AY: 2016-17 dismissing the legal contention of the assessee. Accordingly, grounds of cross objection taken by the assessee are dismissed.

6.1. The document on the basis of which the addition has been made are loose sheets. It is a settled law that loose papers and documents cannot possibly be considered as books of account regularly kept in the course of business. It is worth appreciating the fact that no incriminating material was found during the survey in the case of assessee itself. The additions

CO No. 03/GTY/2023 BMG Informatics Pvt. Ltd., AY: 2016-17 made on the basis of loose papers, diary and documents found from third party are not justified if such documents contain narration of transactions with the assessee as held by the Hon’ble Supreme Court in the case of Central Bureau of Investigation Vs. V. C. Shukla & Ors. [1998] 8 SSC 410. In this case, Hon’ble Court rejected the prosecution’s claim, justifying counsel for the appellant’s contention that the entries in the diary maintained by the Jain Brothers were admissible and bundle of sheets/papers which are detachable and replaceable at a moment, notice can hardly be characterized as ground of evidence of some books of account.

6.2. Coordinate Bench of ITAT, Ahmedabad had dealt with similar issue in the case of ACIT Vs. Prabhat Oil Mills [1995] 52 TTJ 553 (Ahd.) wherein a bunch of loose papers were seized from the premises of the third party which indicated the alleged unrecorded sales made to that party by the assessee. Variation in month-wise and other allied enterprises did not indicate that the assessee made any sales to 'H'. Average yield of the assessee was higher than that in comparable cases. The AO relied only on the entries of the said diary and did not bring on record any corroborative material to prove that such sales were made outside the books. It was held that mere entries in the accounts of a third party were not sufficient to prove that the assessee indulged in such transactions.

7.1. In the present case before us, there is no corroborative or direct evidence to presume that the noting/jotting had materialised into transaction giving rise to income not disclosed in the regular books of account. It is also noted that statement of Director of DSSPL Shri Debojyoti Nath was also recorded u/s. 131 of the Act wherein he had not owned up the purported transaction, pertaining to alleged cash payments made by DSSPL to the assessee. The impugned assessment order is bereft of any observation or any statement recorded of any Director or any other person in charge of the affairs of DSSPL which would even remotely suggest that there was some admission by the said Director or any other person in charge of the affairs of DSSPL that any cash as alleged was in fact paid to the assessee by DSSPL.

CO No. 03/GTY/2023 BMG Informatics Pvt. Ltd., AY: 2016-17 7.2. We also take note of the factual analysis done by the Ld. CIT(A) in respect of noting found on the impounded material marked as DSS-05 which is reproduced as under:

“That, unlike Page No. 02 of the impounded Annexure DSS-05, there is no column bearing the heading "Cash refunded to BMG" in the aforesaid Page.

That, on this Page, the aggregate amounts stated under the Column bearing the heading "BMG" is Rs.2,97,77,000/-. However, in the absence of any expression "cash", it would be neither possible nor justifiable to presume that these amounts were returned back to the Appellant by M/s. DS Systems P. Ltd.

That, even though some incomplete dates appear against the amounts stated under the column heading "BMG". However, there is no specific Year against the amounts stated in the aforesaid column heading. Thus, in the absence of any specific Date(s), it is neither possible nor justifiable to presume or assume any fact in favour of or against the Appellant. In the case of M/s. DS Systems P. Ltd., a Survey under Section 133A of the Act was conducted on 02/11/2017. Thus, in the absence of any specific year in the incomplete dates in the above referred column bearing the heading "BMG", the corresponding years could be 2014, 2015, 2016 or even 2017 since the incomplete Dates against the name "Bhaskar Da" start from "28.02" and end on “23.07".

That, apart from the above two Pages, there is no other Page in the aforesaid impounded Annexure DSS-05 from which it could be reasonably presumed that any purported cash was received by the Appellant from M/s. DS Systems P. Ltd. However, for the sake of record, the entire Annexure DSS-05 (Pages 01 to 15) shall form a part and parcel of the instant appellate Order.”

7.3. On the above analysis by the Ld. CIT(A) of the impounded material, the findings given by him are noted as under:

“In the instant case on hand, it is evident that the impugned impounded papers (i.e. Pages 01 to 15 of Annexure DSS-05) are undated, have no acceptable narration and do not bear the signature of the Appellant or any other party,

Further, the aforesaid loose sheets of papers were recovered by the Survey Team from the premises of a third party, who had explained the contents of these Pages and the explanation adduced by the said third party is a reasonable explanation. In my opinion, the CO No. 03/GTY/2023 BMG Informatics Pvt. Ltd., AY: 2016-17 Assessing Officer was wrong in accepting the explanation qua the transactions coded as "Cash Receipts" and "Cash Payments" between the said third party [i.e. M/s D.S Systems Private Limited) and its other parties (i.e. customers and suppliers of M/s D.S Systems Private Limited) on one hand AND in not accepting the transactions having only partial usage of the expression "Cash Paid" in the case of the Appellant and the said third party (i.e. M/s D.S Systems Private Limited). This is akin to blowing hot and cold together.

Clearly, in case the Assessing Officer intended to rely upon these loose sheets, the onus lay on him to collect cogent evidence to corroborate the notings therein. The Assessing Officer failed to corroborate the notings by bringing some cogent material on record to prove conclusively that the notings in the seized papers reveal unaccounted receipts of the Appellant. Further, no circumstantial evidence in the form of any unaccounted cash, jewellery or investments outside the Books of Account was found even during the course of the consequential Survey conducted by the Investigation Wing in the case of the Appellant. Thus, the impugned addition was made by the Assessing Officer on the aforesaid inadequate material or rather no material at all.

Cleary, in the instant case, there is conspicuous absence of the following relevant facts:

Complete Dates on which the purported cash was received by the Appellant.

The complete breakup of the amounts allegedly received by the Appellant in cash.

Any enquiry qua the actual rate/price of the goods supplied to the Appellant by the third party from whose premises the impounded material (i.e. Annexure DSS-05) was recovered.

Any purported loose slip, paper, evidence etc. during the course of Survey conducted in the case of the Appellant which would even remotely corroborate the impounded Annexure DSS-05.

Discovery of any undisclosed investment, assets, money, bullions etc. during the course of Survey conducted in the case of the Appellant which would remotely indicate any investment out of the impugned secret profits (i.e. on account of alleged cash received back by the Appellant).

Thus, in the absence of any specific enquiry, absence of specific corroboration and considering the facts of the case discussed earlier as well as respectfully relying upon the rationes of the above Judgments, it is held that the loose slips (i.e. impounded Annexure

CO No. 03/GTY/2023 BMG Informatics Pvt. Ltd., AY: 2016-17 DSS-05 - Pages 01 to 15), based on which the impugned sole addition has been made, are in the nature of dumb documents having no evidentiary value and these loose slips, perse, on their own, cannot be taken as the sole basis for foisting a tax liability on the Appellant. The Law is trite that no addition can be made simply on the basis of uncorroborated notings in loose papers. Accordingly, the impugned sole addition of Rs. 3,25,93,500/- made by the Assessing Officer is, hereby, deleted and the instant Grounds of Appeal are, hereby, allowed.”

8. On the grounds taken by the Revenue in respect of relief granted by the Ld. CIT(A) for non-supply of impounded material to the assessee and giving opportunity to cross examine the same, it is noted that assessee had made request in the course of assessment proceedings for the supply of the material which is being relied upon by the Ld. AO. We refer to the provisions of section 142(3) which cast an onus on the AO to give an opportunity of being heard in respect of any material gathered and proposed to be utilised for the purpose of the assessment. It is a statutorily mandatory procedural requirement for the conduct of assessment proceedings, failure of which vitiates the assessment itself. Thus, where copies of reports or documents or statement of third party are relied upon for making an addition, it is the duty of the revenue, not only to provide such reports or documents or statement but also allow the assessee to examine the same. In the present case, impounded document marked as DSS-05 were found in the possession of the third party i.e. DSSPL in the course of its survey. No such opportunity had been given to the assessee to cross examine the person who has written such documents and in whose possession the documents were found. Thus, there is a violation of principles of natural justice which is fatal to the impugned proceedings.

CO No. 03/GTY/2023 BMG Informatics Pvt. Ltd., AY: 2016-17 8.1. On this aspect, Hon’ble Supreme Court in the case of Andaman Timber Industries Vs. Commissioner of Central Excise [2015] 281 CTR 241 (SC) has held –

“5. 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."

8.2. Also, Hon’ble Delhi High Court in the case of CIT Vs. Ashwini Gupta 322 ITR 396 (Del.) held that once there is a violation of principles of natural justice inasmuch as seized material is not provided to the assessee nor his cross examination of the person whose statement the AO relied on, granted, then, such deficiencies would amount to denial of opportunity and consequently would be fatal to the proceedings.

CO No. 03/GTY/2023 BMG Informatics Pvt. Ltd., AY: 2016-17 arrived at by the Ld. CIT(A). Accordingly, grounds taken by the revenue are dismissed.

Order pronounced in the open Court on 07th August, 2023.