M/S. SHAH FOILS LTD.,,AHMEDABAD vs. THE ITO, WARD-4(1)(3), AHMEDABAD

ORDER \nPER MAKARAND V. MAHADEOKAR, AM:\nThese cross-appeals by the Assessee and the Revenue are directed against the order of the Commissioner of Income Tax (Appeals)-8, Ahmedabad [hereinafter referred to as “CIT(A)"], dated 23.10.2019, arising out of the assessment order dated 29.12.2017 passed under Section 143(3) read with Section 147 of the Income Tax Act, 1961 [hereinafter referred to as \"the Act\"], for Assessment Year (AY) 2011-12 by the Income Tax Officer, Ward 4(1)(3), Ahmedabad [hereinafter referred to as “AO”]. Since common issues are involved, both the appeals are being disposed of by this consolidated order for the sake of convenience.\nFacts of the Case:\n2. The assessee filed its return of income on 31.08.2011, declaring a total income of Rs.6,48,57,662/-, which was processed under Section 143(1) of the Act. Subsequently, based on information received from the Director General of Central Excise Intelligence (DGCEI) regarding unaccounted cash transactions, the case was reopened under Section 147 of the Act, and an assessment order was passed making an addition of Rs.7,51,35,438/- under Section 69A of the Act, treating the alleged unaccounted cash receipts as undisclosed income.\n3. The assessee filed an appeal before CIT(A) against the order of AO, who partly allowed the assessee's appeal by deleting a substantial portion of the addition but confirmed an addition of Rs.45,08,126/-.\n4. Aggrieved by the order of CIT(A), both the Assessee and the Revenue have filed cross-appeals with following respective grounds:\nITA Nos.1852/Ahd/2019 (By Assessee) &\nITA No.1922/Ahd/2019 (By Revenue)\nM/s.Shah Foils Ltd. vs. ITO\nAsst. Year: 2011-12\n2\nGrounds of Assessee's appeal in ITA No.1852/AHD/2019\n1. The learned CIT-(A) has erred in law and on facts in not quashing the proceedings u/s.147 of the Act as invalid and in not annulling the reassessment made in pursuance of invalid proceedings u/s.147 of the Act.\n2. The learned CIT-(A) has also erred in law and on facts in not deleting the entire addition made u/s.69A of the Act of Rs.7,51,35,438/- and in partly confirming the addition of Rs.45,08,126/-.\n3. On the facts and in the circumstances of the case and in law the learned CIT (A) ought to have quashed the proceedings u/s.147 of the act, and annulled the reassessment made and ought to have deleted the entire addition u/s.69A of the Act of Rs.7,51,35,438/-.\n4. It is therefore prayed that the proceedings u/s.147 may be quashed, the reassessment may be annulled, and the entire addition u/s.69A of the Act of Rs.7,51,35,438/- may be deleted.\n5. Your appellant craves leave to add, amend, alter or withdraw any ground of appeal at the time of hearing.\nGrounds of Revenue's appeal in ITA No.1922/AHD/2019\n1. Whether the La. CIT(A) was correct in partly deleting the addition of Rs.7,51,35,438/- U/s.69A of the Income-Tax Act, 1961 when the assessee has failed to demonstrate that corresponding purchases were accounted for against the unaccounted sales made.\nGround relating to challenging the reassessment proceedings u/s 147 of the Act:\n5. Based on incriminating evidence obtained during the search, the DGCEI concluded that M/s. Shah Foils Ltd. had made unaccounted sales of Rs.7,51,35,458/- and received sale consideration in cash during the period April 2010 to 20.10.2011. A summary of observations made by the AO on the basis of a search conducted by the Director General of Central Excise\nITA Nos.1852/Ahd/2019 (By Assessee) &\nITA No.1922/Ahd/2019 (By Revenue)\nM/s.Shah Foils Ltd. vs. ITO\nAsst. Year: 2011-12\n3\nIntelligence (DGCEI) on 20.01.2011 at the factory cum office premises of M/s. Paras Bhavani Steel Pvt. Ltd. is given below :\n5.

1. The seized diary marked as A/8 contained entries of cash payments made by M/s. Paras Bhavani Steel Pvt. Ltd. to the assessee, Shah Foils Ltd., against clandestine procurement of SS Strips. During the investigation, responsible persons of M/s. Paras Bhavani Steel Pvt. Ltd. admitted that they had made cash payments totalling Rs.7.51 crores to M/s. Shah Foils Pvt. Ltd. These payments were recorded in a seized diary (marked as A/8). Statement of Shri Kartikbhai Rameshbhai Shah, Director of the assessee company was recorded on 03.01.2012 by the Superintendent, DGCEI, Ahmedabad Zonal Unit, under Section 14 of the Central Excise Act, 1944. He confirmed details about Shah Foils Ltd.'s business activities, including manufacturing SS Cold Rolled Coils/Strips. Kartikbhai Shah confirmed that Shah Foils Ltd. had regular business dealings with M/s. Paras Bhavani Steel Pvt. Ltd. since 2008. Although the seized diary (A/8) showed cash payments, Kartikbhai Shah denied receiving any cash amounts from Bhavani Steel Pvt. Ltd. However, the DGCEI investigation revealed that the cash payments were linked to unaccounted sales of SS Strips. The DGCEI cross-examined records such as Panchanama dated 20.01.2011 at M/s. Paras Bhavani Steel Pvt. Ltd. premises and statements of various officials from M/s. Paras Bhavani Steel Pvt. Ltd., confirming cash payments.\n5.

2. A statement of Shri Jayeshbhai Anilbhai Khandhar (who was a commission agent/sales agent of M/s. Paras Bhavani Steel Pvt. Ltd., and was allegedly involved in making unaccounted cash payments to M/s. Shah Foils\n (By Assessee) &\nITA No.1922/Ahd/2019 (By Revenue)\nM/s.Shah Foils Ltd. vs. ITO\nAsst. Year: 2011-12\n4\nLtd. for the clandestine purchase of SS Strips) was also recorded during the DGCEI investigation on 09.03.2011. Jayeshbhai Khandhar admitted that cash payments were made by M/s. Paras Bhavani Steel Pvt. Ltd. for purchasing SS Strips without bills from M/s. Shah Foils Ltd. He confirmed the details of cash transactions recorded in the seized diary (A/8). He stated that wherever the term \"Jayeshbhai, Mumbai\" appeared in the seized diary, it referred to cash amounts given by him to the Mumbai office of Shah Foils Ltd. He also confirmed that these cash payments were made through the Mumbai office, and in some cases, they were routed through M/s. Purnima Angadia Service. His statement corroborated the depositions of other individuals, including Shri Kalubhai Jivaji Desai (Accountant of M/s. Paras Bhavani Steel Pvt. Ltd.) and Shri Parasmal Shremal Bohra (Managing Director of M/s. Paras Bhavani Steel Pvt. Ltd.). These individuals had also confirmed that cash payments were made for the clandestine procurement of SS Strips from Shah Foils Ltd. The statement was compared with entries in the seized diary (A/8), which recorded 176 transactions totalling Rs.7,51,35,438/- as cash payments to Shah Foils Ltd. Jayeshbhai Khandhar was shown these entries and acknowledged their accuracy. While Kartikbhai Rameshbhai Shah (Director of Shah Foils Ltd.) denied receiving cash, he could not provide evidence to disprove the seized diary entries or the statements of Jayeshbhai Khandhar and others.\n5.

3. Based on the seized documents and statements recorded by the DGCEI, the AO had reasons to believe that income to the extent of Rs.7,51,35,458/- had escaped assessment, thereby justifying reopening under Section 147 of the Act. The AO issued a notice under Section 148 of the Act on 30.03.2017, reopening the assessment based on information from DGCEI\n (By Assessee) &\nITA No.1922/Ahd/2019 (By Revenue)\nM/s.Shah Foils Ltd. vs. ITO\nAsst. Year: 2011-12\n5\nregarding alleged unaccounted sales. The assessee, vide letter dated 07.04.2017, responded by stating that the return filed on 31.08.2011 may be treated as its return in response to the notice under Section 148. The assessee also requested the reasons for reopening, which were provided on 05.05.2017. The assessee, vide submission dated 28.08.2017, submitted details along with the sales register, purchase register, and other ledger accounts. The assessee also stated that the income equivalent to cash payments recorded in the seized diary (A/8) was wrongly treated as unaccounted sales and there was no direct evidence of unaccounted cash receipts. The assessee also stated that the company was a registered excise unit, maintaining proper stock records, sales records, and statutory books, which were duly audited by tax and excise authorities. The assessee further stated that the reassessment was based on mere third-party statements, which could not be relied upon without corroboration.\n6. The AO carefully considered but did not accept the assessee statements and relied on the search proceedings conducted by DGCEI, where seized diaries (A/8) from M/s. Paras Bhavani Steel Pvt. Ltd. contained details of cash payments to Shah Foils Ltd. The AO issued a letter to the assessee on 15-12-2017 seeking evidence that sales of Rs.7,51,35,438/- has been accounted for or show cause why the same should not be added to the income of the assessee.\n6.

2. The AO rejected the assessee's statements and relied on corroborative evidence such as seized materials, third-party statements, and judicial precedents to justify the addition under Section 69A of the Act.\n7. The CIT(A) held that the AO was justified in reopening the assessment based on information received from DGCEI and the information revealed cash transactions linked to unaccounted sales, which provided the AO with prima facie \"reason to believe\" that income had escaped assessment. The CIT(A) examined the assessee's submissions and correspondence with the AO (letter dated 28.08.2017). It was concluded that the assessee had NOT formally objected to the reassessment proceedings but instead filed submissions on merits of the case. The CIT(A) observed that the AO had relied on multiple pieces of evidence, including seized diaries (A/8), third- party statements, and search findings of DGCEI which constituted fresh tangible material, which justified the initiation of reassessment proceedings u/s 147 of the Act. The CIT(A) also rejected the assessee's claim of violation of natural justice, noting that the reasons for reopening were provided to the assessee on 05.05.2017 and the assessee had the opportunity to respond and filed detailed submissions on merits. Based on the above findings, CIT(A)\n (By Assessee) &\nITA No.1922/Ahd/2019 (By Revenue)\nM/s.Shah Foils Ltd. vs. ITO\nAsst. Year: 2011-12\n7\ndismissed Grounds relating to validity of reassessment proceedings u/s 147\nof the Act.\n8. During the course of hearing before us, the Authorized Representative (AR) of the assessee reiterated the facts and circumstances and submitted that the validity of the proceedings be adjudicated based on independent scrutiny of the reasons as the assessee do not press the contentions taken before lower authorities.\n9. The DR relied on the order of lower authorities.\n10. Having considered the rival submissions and perused the material on record, we are of the view that the lower authorities have rightly concluded that the information from DGCEI-evidencing cash payments through seized diary (A/8), corroborated by multiple statements—constituted fresh tangible material. This suffices to form the requisite “reason to believe\" that income had escaped assessment, thereby justifying the issuance of notice under Section 148 of the Act. The assessee has not demonstrated any procedural infirmity or shown that the AO's belief was based on mere suspicion or conjecture. On the contrary, the facts clearly indicate that the AO acted on specific, credible information of unaccounted transactions. Further, we note that the assessee did not press earlier objections before us, focusing instead on the merits of the addition. Under these circumstances, we find no reason to interfere with the well-reasoned findings of the CIT(A) in upholding the validity of the reassessment proceedings.\nITA Nos.1852/Ahd/2019 (By Assessee) &\nITA No.1922/Ahd/2019 (By Revenue)\nM/s.Shah Foils Ltd. vs. ITO\nAsst. Year: 2011-12\n8\n11. In light of the foregoing, the ground challenging the reassessment\nproceedings under Section 147 stands dismissed.\nOn the Grounds relating to addition of Rs.7,51,35,438/- u/s 69A of the Act:\n12. Both the assessee and the revenue have contested the addition made\nunder Section 69A. The assessee argues that the entire addition of\nRs.7,51,35,438/- is unjustified, as it is based solely on third-party statements\nand seized documents from M/s. Paras Bhavani Steel Pvt. Ltd., without any\ndirect evidence of unaccounted cash receipts. It contends that all transactions\nwere duly recorded in audited books, as it is a registered excise unit\nmaintaining proper stock and sales records. On the other hand, the revenue\nchallenges the partial relief granted by CIT(A), asserting that the seized diary\n(A/8) and corroborative statements clearly establish unaccounted cash\ntransactions, which the assessee failed to rebut with credible evidence. The\nrevenue seeks restoration of the entire addition, while the assessee prays for\ncomplete deletion of the addition.\n13. The AO after considering the submissions of the assessee, rejected the\nassessee's contentions and upheld the addition of Rs.7,51,35,438/- under\nSection 69A of the Act. The AO relied on the Corroborative Evidence in the\nform of Seized diary (marked as A/8) recovered from M/s. Paras Bhavani\nSteel Pvt. Ltd. contained 176 entries of cash payments made to Shah Foils Ltd.\nand statements of Shri Jayeshbhai Anilbhai Khandhar (commission agent),\nShri Kalubhai Jivaji Desai (authorized signatory of M/s. Paras Bhavani Steel\nPvt. Ltd.), and Shri Parasmal Shremal Bohra (Managing Director of M/s.\nITA Nos.1852/Ahd/2019 (By Assessee) &\nITA No.1922/Ahd/2019 (By Revenue)\nM/s.Shah Foils Ltd. vs. ITO\nAsst. Year: 2011-12\n9\nParas Bhavani Steel Pvt. Ltd.) confirming the cash payments for clandestine\npurchases of SS Strips. The AO applied the principles laid down in the case(s)\nof CIT vs. Durga Prasad More (82 ITR 540) (SC) and Sumati Dayal vs. CIT\n(214 ITR 801) (SC), emphasizing that mere denial by the assessee cannot\noverride strong circumstantial evidence. The transaction, being in cash, had\nno formal documentation, which aligned with the nature of unaccounted\ntransactions. Invoking Section 106 of the Evidence Act, and Collector of\nCustoms vs. D. Bhoormull (1974 AIR 859), the AO held that once\ncircumstantial evidence establishes unaccounted sales, the burden shifts to\nthe assessee to disprove it. The AO noted that no substantive evidence was\nproduced by the assessee to counter the findings. The AO rejected the\nassessee's argument that it maintained proper excise records, citing that\nclandestine transactions do not pass through official records. Finally, the AO\nconcluded that the assessee had concealed its income by engaging in\nunaccounted sales.\n14. The CIT(A) agreed with the Assessing Officer (AO) that the assessee,\nprima facie, engaged in unaccounted sales. This conclusion was based on\nDiary A/8 seized from M/s. Paras Bhavani Steel Pvt. Ltd., recording a series\nof cash payments to the assessee, statements of key personnel at M/s. Paras\nBhavani Steel Pvt. Ltd., who admitted to making those cash payments and\nassessee's regular business relationship with M/s. Paras Bhavani Steel Pvt.\nLtd., indicating that there was opportunity for such transactions. However,\nrelying on judicial precedents, such as, President Industries (258 ITR 654)\nand Panna Corporation (2012) 82 CCH 0266 (Guj.), the CIT(A) held that the\nentire amount of unaccounted sales could not be taxed as income. Instead,\nITA Nos.1852/Ahd/2019 (By Assessee) &\nITA No.1922/Ahd/2019 (By Revenue)\nM/s.Shah Foils Ltd. vs. ITO\nAsst. Year: 2011-12\n10\nonly the profit component embedded in those unaccounted sales should be\nbrought to tax. The assessee's declared profit rate was approximately 3%.\nObserving that unaccounted transactions typically involve reduced expenses,\nthe CIT(A) deemed it reasonable to apply a higher rate of 6% to the\nunaccounted sales figure. Consequently, the CIT(A) restricted the addition to\n6% of Rs.7,51,35,438/-, i.e., Rs.45,08,126/-.\n15. The AR reiterated the submission made before lower authorities and\nstated that the AO has not carried out any independent inquiry. The AR also\nstated that the accounts of the assessee are not doubted by the AO. The AR\nplaced reliance on decision of Hon'ble High Court of Delhi in case of CIT Vs.\nVimal Moulders (india) Ltd. IT Appeal No. 1418 of 2009 and decision of\nHon'ble High Court of Madras in case of CIT Vs. Vignesh Kumar Jewellers\nTax Case (Appeal) No. 374 of 2008, where it was held that the AO must\nconduct an independent inquiry and bring corroborative evidence on record\nand mere reliance on third-party findings, without further verification, is\ninsufficient to justify an addition under the Act.\n16.\nIn case of Revenue's appeal on the solitary ground, the DR stated that\nthe details of cash payments recorded in the diary and the statements\nrecorded in the search by DGCEI have been discussed by the AO in detail.\nThe DR further stated that the CIT(A) has erred in confirming only profit\nmargin of 6% by giving deduction for corresponding purchases and expenses\nwhich are also unaccounted.\nITA Nos.1852/Ahd/2019 (By Assessee) &\nITA No.1922/Ahd/2019 (By Revenue)\nM/s.Shah Foils Ltd. vs. ITO\nAsst. Year: 2011-12\n11\n17. We have carefully considered the submissions of both parties, the\nassessment order, the order of the CIT(A), and the material placed on record.\nThe core issue before us pertains to the addition made under Section 69A on\naccount of alleged unaccounted sales. The Revenue has challenged the\nrestriction of the addition to 6% of unaccounted sales, arguing that no\ndeduction for corresponding purchases and expenses should have been\nallowed since the entire transaction was outside the books of account.\n17.

1. The assessment in this case is primarily based on evidence gathered by\nthe DGCEI, including seized diary entries (marked A/8), third-party\nstatements, and cash trail analysis. The AO relied on these materials, holding\nthat the assessee engaged in clandestine transactions involving cash\npayments for unaccounted sales of SS Strips. The CIT(A), after a detailed\nexamination, upheld the existence of unaccounted sales but restricted the\naddition to 6% of the total turnover, treating it as the embedded profit in such\ntransactions.\n17.