ACIT, CENTRAL CIRCLE RAJKOT vs. SIMOLA TILES LLP , MORBI

The grounds of appeal raised by the Revenue are as under:

Succinctly, the factual panorama of the case is that assessee before us is a partnership -firm, which earned income from manufacturing and trading of all kinds of tiles. The return of income for the year has been filed u/s 139 of the Act on 17.10.2019, declaring total income at Rs. Nil. A Search and seizure action named "Operation Star Alliance" was conducted on 26.09.2018. Various builders and financiers were covered under this operation. Inquiries revealed that huge cash transactions in various forms have carried out by the builders and financiers. Some of the prominent builder and financer groups of and around Rajkot city were covered under the operation. Residential premise of Dr. Dilip Kanjibhai Patel was also covered u/s 132 of the Act. During the search operation, incriminating documents pertaining to cash receipt in a land transaction were found and seized. Some of these documents contained information related to / pertaining to the assessee. Thereafter, proceedings u/s 143(3) was initiated by issuing notice u/s 143(2) on 30.09.2020. The notices u/s 142(1) have been issued on 23.02.2021, seeking details and explanations from the assessee. In view of natural justice, copies of the seized documents containing the information related to the assessee, satisfaction note of both assessing officer and relevant part of statements have also been provided to the assessee, whenever he/she has asked for. During the course of search at the premise of Shri Dilip K Patel, incriminating documents in the form of loose papers were found and seized and inventoried as Annexure A-1 (page no. 27, 28, 28A and 29). These pages contain the details of financial transactions during FY 2017-18 and FY 2018-19, i.e, total value of consideration, receipt of cash on various dates as well as interest calculation for land situated at Unchi Mandal Morbi, Revenue Survey No. 77/2/1 others, admeasuring 6.2 Acres (6 Acres and 8 Guthas). The land was sold by Shri Dilip K Patel to Simola Tiles LLP.

In response to the show cause notice of the assessing officer, the assessee submitted its reply before the assessing officer. That is, during the assessment proceedings, the assessee clearly denied the allegation of on-money payment for purchase of an agricultural land at Survey No. 77/2/1, Unchi-Mandal, Morbi from Shri Dilip K. Patel. The assessee also stated that the said loose paper is not a speaking document in any manner, as it neither contained name nor any reference of the assessee, LLP nor did it contain any reference/particulars of the said agricultural land purchased by the assessee, LLP from Shri Dilip K. Patel. Further, the assessee also drew the attention of assessing officer at the following two points:

The assessee, without prejudice to their denial of “on-money” payment, also submitted that in regular and well-accepted method of real estate deals, the on- money is either paid prior to sale deed or at the time of sale deed. Such on- money payment (as alleged) in periodical instalments alongwith interest and that too after a long gap from the date of sale deed is unheard of and it completely defies the logic.

However, the assessing officer rejected the above contention of the assessee and observed that assessee had purchased the land and paid unaccounted cash of Rs.1,06,05,757/- during assessment year (A.Y.) 2019-20. Therefore, same was added to the total income of assessee within the meaning of section 69B r.w.s. 115BBE of the Act, for the year under consideration.

On the other hand, learned Counsel for the assessee defended the order passed by the learned CIT(A) and stated that the said loose papers were not found from the possession the assessee and the same did not contain any signature/handwriting/approval of the assessee. The said loose papers did not contain any reference of the assessee or of the land purchased by the assessee. Thus, the vital link between the assessee and the said loose papers were apparently missing. The dates mentioned on the said loose papers were not in alignment with the date of purchase of land by the assessee. Thus, there was an apparent contradiction. The allegation levelled against the assessee gave rise to an inconceivable situation that the possession of the land and its registered sale deed took place earlier while the sale consideration in cash was paid much later in instalments and along with interest. The statement of Shri Dilip K. Patel was the only evidence with the assessing officer to link the loose papers and land purchased by the assessee. Hence, cross-examination of Shri Dilip K. Patel was necessary, which was not provided to the assessee. There was also a contradiction in the statement of Shri Dilip K. Patel and the loose paper in respect of the amount of sale consideration, hence learned CIT (A) has rightly deleted the addition.

We have heard both the parties and perused the evidence available on record. We note that issue pertains to the additions of Rs. 1,06,05,757/-, u/s.69B r.w.s. 115BBE of the Act, on account of alleged on-money payment and interest for delayed payments made in cash for purchase of an agricultural land from Shri Dilip K Patel. The facts of the case as derived from the assessment order are that there, was a search u/s 132 of the Act in the case of Dr. Dilip K. Patel on 26-09-2018, During the course of the search the following loose papers were found.

In the appellate proceedings, before learned CIT(A), the assessee submitted the following: (i) only the first 3 loose papers were provided to them in the Show Cause Notice and the remaining were directly reproduced for the first time in the assessment order,

The ld.CIT(A) noted that the assessee is right in contending that the loose papers did not contain the name of the assessee or the particulars of the land sold by Shri Dilip K. Patel to the assessee. At first the glance, the contents of the loose papers appear to be of some outstanding amount paid to someone along with interest. Prima facie, the transactions appear to be a loan transactions along with the interest component. Ostensibly, the link between the loose papers and the alleged sale of land is visibly absent in the document relied heavily by the assessing officer. What is strikingly baffling is that the sale deed was executed on 24.10.2016, whereas the date mentioned on the loose papers was 01.12.2017. Thus, there was also a substantial time gap of more than 1 year between the two documents which is significant. In the Show Cause Notice, the assessing officer referred to and provided the assessee, the loose papers No. 28, 28A and 29. However, when the assessee replied in response to the Show Cause Notice stating that the loose papers did not have any visible link with its name or the land purchased, the assessing officer came out with another loose paper directly in the assessment order. Based on the above, the assessing officer contended that the word "Shirvi" mentioned on the above loose paper referred to one of the partners of the assessee namely Shri Rajesh Naranbhai Shirvi. In this manner, the assessing officer tried to establish a link between the loose papers and the land purchased by the assessee.However, the learned CIT(A) noted that the approach of the assessing officer was arbitrary and without application of mind. Under the sacrosanct principles of natural justice which the Courts and Tribunals have repeatedly held to be indispensable in the tax proceedings, it is obligatory on the part of the assessing officer to provide each and every material that he proposes to use against the assessee and allow the assessee a meaningful opportunity to rebut such material. The judiciaries have consistently held that if the material so relied upon for the addition is not provided to the assessee and an opportunity of rebuttal is not allowed to him, the material loses its admissibility as evidence against the assessee. On this count, the above loose paper fails to classify as valid evidence in the present case.

The ld.CIT(A) also noted that even otherwise, the above loose paper, like the other loose papers, did not contain the name of the assessee or the particulars of the land. In fact, all the loose papers primarily depict the payment of certain amounts along with interest and none of them showed that they were in respect of the assessee or the land purchased by the assessee from Shri Dilip K. Patel. The assessee has reasonably submitted that the word "Shirvi" is a common surname in the Patel Community and therefore it cannot be directly co-related with any particular person in the absence of complete narration. The ld.CIT(A) noticed that the word "Shirvi" may resemble the surname of one of the partners but in the absence of any explicit contents on the loose papers or any real connection established by the assessing officer, it is far fetched to link the loose papers with the land transaction between the assessee and Shri Dilip K. Patel merely on the basis of the word "Shirvi". Therefore, learned CIT(A) observed that in the absence of the assessee's name or any details on the loose papers to show that they actually pertained to the land sale transaction between the assessee and Shri Dilip K. Patel, the loose papers cannot be treated as incriminating material in the case of the assessee and therefore, the allegation of on-money has no real legs to stand in the eyes of the law.

The ld.CIT(A) observed from the assessment order, that it is discenible that the only connection on the basis of which the assessing officer linked the loose papers with the land purchased by the assessee is the statement of Shri Dilip K Patel wherein he stated that the loose papers contained the details of on-money he received from the sale of land to the assessee. On holistic consideration of the loose papers and submissions of the assessee, the ld.CIT(A) noticed that the statement of Shri Dilip K Patel is unreliable in the assessee's case on several counts. At first, Shri Dilip K. Patel in his statement stated that he sold the land to the assessee for Rs 1,50,00,000/- and the sale deed was executed at Rs. 8,03,000/- and that the remaining amount was received by him in cash. This means that the total consideration of the land was Rs. 1,50,00,000/- and the on- money component was Rs.1,41,97,000/- The loose papers also showed the calculation for the amount of Rs. 1,50,00,000/-. Now if the loose papers contained the details of payments for the land, the figure of Rs.8,03,000/- should have appeared in it, since this amount was also a part of the total amount of Rs. 1,50,00,000/- as per the statement of Shri Dilip K. Patel. However, the amount of Rs 8,03,000/- is conspicuously absent in the loose papers. On the other hand, if it is believed that the amount of Rs. 1,50,00,000/- only contained cash payments, then total consideration of the said plot of land should amount to Rs. 1,58,03,000/-which also does not match with the statement of Shri Dilip K. Patel as per which the total consideration was Rs. 1,50,00,000/-. Therefore, the ld.CIT(A) noticed that there is a stark contradiction between the apparent contents of the loose papers and the statement of Shri Dilip K. Patel. In the assessment order of the assessee, the assessing officer contended (Page no.19 & 20) that the total consideration was Rs. 1,58,03,000/- which included on- money of Rs. 1,50,00,000/-. However, the same assessing officer has framed the assessment order in the case of Shri Dilip K. Patel wherein the total consideration was taken at Rs. 1,50,00,000/-and on-money receipts by Shri Dilip K. Patel was determined at Rs. 1,41,97,000/-(i.e. Rs. 1,50,00,000 minus Rs.8,03,000). Thus, on the same set of facts, the assessing officer has also taken a contradictory and inconsistent stand in the case of Shri Dilip K. Patel and the assessee which goes to show that the assessing officer was also confused and unclear in his approach while trying to link the loose papers with the case of the assessee.

The ld.CIT(A), further observed that when the assessee requested for a cross-examination of Shri Dilip K. Patel, the assessing officer denied the same stating that the statement of Shri Dilip K. Patel was only secondary evidence and the loose papers were the primary evidence. This contention of the assessing officer is unacceptable on the facts. As stated earlier, the loose papers neither contained the name of the assessee nor the particulars of the land purchased by the assessee. It is only on account of the statement of Shri Dilip K. Patel that the assessing officer formed a belief and proceeded against the assessee. In the absence of this statement, there is nothing to link the loose papers with the assessee. Hence, ld.CIT(A) noted that the statement of Shri Dilip K. Patel can never be treated as secondary evidence and the requirement of cross-examination should have been allowed for fairness and justice. The ld.CIT(A) relied on the judgement of the Hon'ble Supreme Court in the case of Andaman Timber Industries (62 taxmann.com 3) wherein it was held that where the statement of the witness of the basis for the demand, the non-granting of cross-examination is a serious flaw which makes the order a nullity due to the violation of the principles of natural justice. The Hon'ble Gujarat High Court has also taken the same view in the case of Indrajit Singh Suri (33 taxmann.com 281). The judgments cited by the assessing officer for the denial of cross-examination have been explained by the assessee and they are certainly distinguishable from the present case since the seized maternal (loose papers) is conspicuously silent about the name of the assessee or the nature of transaction.

The ld.CIT(A) also noted that the abnormality of the facts also suggested that the statement of Shri Dilip K. Patel could not have been taken at face value in the case of the assessee. In common practice, the on-money (wherever paid) is paid either before the sale deed or at the time of sale deed. Generally, it is never after the sale deed. In the present case, the statement of registration of the property. Shri Dilip K. Patel, however, suggested that the on-money was paid by the assessee after the sale deed and that too in instalments along with interest. This position is appearing from the loose papers was certainly unusual and not as per the prevalent practice in real estate transactions. Thus, besides the fact the loose papers did not contain the name of the assessee or the details of the land sold, the apparent contents of the loose papers were also not in conformity with the prevalent pattern in real estate transactions. Thus, the version of Shri Dilip K. Patel was suspicious as well as contradictory. Hence, there was enough factual justification for the assessing officer to probe further into the statement of Shri Dilip K. Patel to verify its correctness, more particularly, when such statement was proposed to be adversely applied to a third party (ie. the assessee). In the assessment order, the assessing officer simply stated that the statement of Shri Dilip K. Patel was self-harming and therefore, the same should be believed. In this regard, the assessee submitted before the assessing officer that the statement of Shri Dilip K. Patel was self- serving and not self-harming since by diverting the loose papers to land sale transaction, he escaped by paying tax @20% on LTCG which otherwise would have attracted tax @77.25% u/s 115BBE of the Act. This submission of the assessee had reasonable force and the assessing officer ought to have further examined the veracity of the statement of Shri Dilip K. Patel. However, the assessing officer failed in this regard and accepted the statement of Shri Dilip K. Patel at face value which is legally inappropriate. The overall position emerging is that the seized material is silent regarding, the name of the assessee or nature of transaction being land sale and the statement of witness is contradictory to the seized material, untested and beyond the prevailing practice. The addition cannot be confirmed in such a situation.

The ld.CIT(A) also noticed that it is a trite legal position that the material found from the possession of one person cannot be directly applied in an adverse manner in the case of any other person unless such material bears the signature or any other form of approval of such other person. Before applying unsigned material to the case of other person, the law requires corroboration of the content of such material in the absence of which the material would become unreliable in the case of the other person. This is so because, in the situation of material found from the possession of one person, the presumption as prescribed under the law does not and cannot extend to a third party. That is, the reason why the Courts and tribunals have emphasized the requirement of cross-examination in such a case. There are a number of judicial pronouncements (including those relied upon by the assessee) holding and approving this legal principle. In the present case, the loose papers in question were found from the possession of a third party namely Shri Dilip K. Patel during the search in his case. The loose papers were unilaterally created and they neither bear the signature of the assessee nor has the assessee admitted to it. Hence, ld.CIT(A) noted that once the assessee denied the correctness of the loose papers found from the possession of a third party, it was incumbent upon the assessing officer to bring on record some independent corroborative evidence before making the addition in the hands of the assessee. However, the assessing officer simply relied upon the statement of Shri Dilip K. Patel and thrust the loose papers upon the assessee's case as gospel truth without appreciating that such loose papers were neither found from the possession of the assessee nor bore any signature of the assessee and therefore, there cannot be any presumption under the law against the assessee. The contradictory and untested statement of Shri Dilip K. Patel alone cannot fasten the liability of the assessee in the absence of any independent corroborative evidence. In the assessment order, the assessing officer has failed to bring on record any such independent evidence. In this context of the applicability of material found from one person to the case of other person, the ld.CIT(A) relied on the judgement of the Hon'ble Supreme Court in the case of V. C. Shukla (1998 taxmann.com 2155) held that the entries in the books of accounts alone and without independent evidence of their trustworthiness cannot fix liability upon a third party. It was further held in this judgment that even in the case where books of accounts are regularly maintained, there must be some independent evidence to show that the entries represent real and honest transactions and that the money were paid in accordance with those entries. This rationale was again reiterated by the Hon'ble Supreme Court in the case of Common Cause v. Union of India (98 CCH 28). These judgments of the Hon'ble Apex Court and the rationale explained there, have been often followed by the Judiciaries under the income Tax Act. The Hon'ble Ahmedabad ITAT in the case of Prathna Construction Pvt. Ltd. (70 TTJ 122) also held that the addition cannot be sustained based on material found from the possession of a third party and untested statements. This decision was subsequently approved by the Hon'ble Gujarat High Court in Tax Appeal No. 79 of 2000.

Therefore, considering the above facts, the learned CIT( A) was of the view that the addition made by the assessing officer on the basis of unsigned loose papers found from the possession of a third party which did not have any visible link with the case of the assessee as well as a contradictory and untested statement of Shri Dilip K Patel and without any independent corroborative evidence is not sustainable. The ld.CIT(A) finally held that the assessing officer has failed to discharge his onus of proving the on-money payment in conformity with the law. Accordingly, ld.CIT(A) deleted the addition, to the tune of Rs. 1,06,05,757/- made in A.Y. 2019-20. We have gone through the above findings of the learned CIT (A) and noticed that there is no infirmity in the conclusion reached by the learned CIT(A).In the wake of above delineation, we see no error in the conclusion drawn by the CIT(A) in this regard. The CIT(A) in our view, has rightly deleted the addition. We, thus decline to interfere with the conclusion so drawn by the CIT(A) whose order is under challenge by the revenue and dismiss the appeal of the revenue.

In the result, appeal of the revenue is dismissed.