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Facts
The Revenue appealed the deletion of an addition of Rs. 78,25,000/- made by the Assessing Officer (AO) for AY 2018-19, which was treated as unaccounted investment. The AO's addition was based on seized material from a third party. The CIT(A) deleted the addition, finding that the assessee's name did not appear in the seized documents and the purchase of shops occurred on 25.05.2021, not in AY 2018-19.
Held
The Tribunal held that the addition made by the AO was based on weak and inconclusive material from a third party, without establishing a clear link to the assessee or corroborative evidence. The purchase date also did not correspond to the assessment year in question, and the assessee was denied an opportunity for cross-examination, which is a violation of natural justice principles.
Key Issues
Whether the addition of Rs. 78,25,000/- on account of alleged unaccounted investment was justified based on seized material from a third party without proper corroboration and without providing opportunity for cross-examination.
Sections Cited
147, 132(4A), 69, 115BBE, 139, 143(3), 148
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Before: SHRI SANJAY GARJ & SHRI BIJAYANANDA PRUSETH
आदेश / O R D E R
PER BIJAYANANDA PRUSETH, AM:
This appeal by the Revenue and Cross Objection (CO) by the assessee emanate from the order passed under section 250 of the Income-tax Act, 1961 CO 3/SRT/2025 A.Y 18-19 Sh. Kailash Agarwal (in short, 'the Act’) dated 27.01.2025 Commissioner of Income tax(Appeals)-4, Surat [in short, ‘the CIT(A)’] for the assessment year (AY) 2018-19, which in turn arises out of assessment order passed by the Assessing Officer (in short, ‘AO’) u/s. 147 of the Act on 19.03.2024.
Grounds of appeal
raised by the Revenue are as under : “1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the addition of Rs.78,25,000/- being unaccounted investment as unearthed on the basis of cogent incriminating details/document recovered during the Search proceedings.
2. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the addition made by the AO ignoring the principles of "Human Probability Test", i.e. preponderance of probabilities which is applicable to Income tax proceedings as laid down in Sumati Dayal Vs. CIT (1995) 214 ITR 801 (SC) and CIT vs. Durga Prasad More (1971) 82 ITR 540.
3. The appellant craves to add, amend, alter, substitute, modify the above ground of appeal, raise any new ground of appeal, if necessary, either before or during the course of the hearing of the appeal on the basis of submissions to be made."
Brief facts of the case are that the assessee is an individual and engaged in the business of wholesale and retail trade under the trade name & style of Bhagwati Prints during the year. The assessee filed return of income u/s.139 of the Act on 02.08.2018 declaring total income at Rs.33,44,140/-. A Search action u/s.132 of the Act was carried out on 03.12.2021 in the case of Sangini group of Surat wherein all the firms, partners, directors, promoters and other connected persons were covered, during which it unearthed that the firms CO 3/SRT/2025 A.Y 18-19 Sh. Kailash Agarwal namely, M/s. Sangini Corporation and M/s. Nandkishore Corporation have developed commercial buildings and entered into various unaccounted transactions by one of the ways of accepting on money against the sale of shops. On perusal of the incriminating material, the assessee was found to be one of the purchasers who has invested / purchased shop(s) from the firms by paying on money, which was treated as unaccounted investment. Subsequently, the case was reopened under the provisions of section 147 and notice u/s.148 of the Act was issued on 11.04.2022. In response to the notice issued, the assessee filed return of income on 28.04.2022 declaring total income at Rs.33,44,140/-. During assessment proceedings, on verification of incriminating material found during the search action and submissions furnished by the assessee, it was found that the assessee had made unaccounted investment in cash amount of Rs.78,25,000/- against purchase of property from M/s. Nandkishore Corporation during the year under consideration. Subsequently, the AO completed the assessment u/s.143(3) r.w.s. 147 of the Act on 19.03.2024and assessed the total income at Rs.1,11,69,140/-. In the assessment, the AO made addition of Rs.78,25,000/- u/s.69 r.w.s. 115BBE of the Act towards unaccounted investment.
Aggrieved by the assessment order, assessee preferred appeal before CIT(A) on 30.03.2024. During the appellate proceedings, it was observed by the CIT(A) that name of the assessee was not appearing in any of the incriminated papers and there was also no evidence of any cash payment. It CO 3/SRT/2025 A.Y 18-19 Sh. Kailash Agarwal was also observed that the assessee bought shops on 25.05.2021 and not in FY 2017-18 (AY 2018-19). Therefore, it was held by CIT(A) that the addition of Rs.78,25,000/- made by the AO towards unaccounted investment u/s.69 of the Act was not warranted. CIT(A) placed reliance on the decision of jurisdictional High Court in the case of CIT Vs. Maulikkumar K Shah 307 ITR 137 (Guj.), wherein it was held that addition should not be made only on the basis of entries found/recorded in seized material without any corroborative evidence. In view of the above facts and the precedent the appeal of the assessee was allowed by the CIT(A).
Aggrieved by the appellate order of the CIT(A), the revenue has preferred appeal before the Tribunal. The Ld. Sr. D.R. for the revenue relied on the orders passed by AO and contended that the addition of Rs.78,25,000/- as unaccounted investment was unearthed on the basis of cogent incriminating material recovered during the search proceedings. It was also submitted that the income-tax proceedings are based on the principles of principle of preponderance of probability and vigors Evidence Act do not apply to income- tax proceedings, unlike in criminal and civil cases.
The Ld. A.R, on the other hand, submitted a paper book containing copy of submission before the CIT(A), reply to show cause notice of AO, copy of Index as proof of purchase of property, copy of ledger of M/s Nand Kishore Corporation, compilation of case laws in favour of assessee. The Ld. AR contended that the whole addition had been made on the basis of material CO 3/SRT/2025 A.Y 18-19 Sh. Kailash Agarwal and HP Pavilion laptop in which books of account were maintained in Tally found and seized from the residence of third party viz., Shri Ankit Vadodaria, who was not connected with Sangini Group. The laptop was kept at his residence by his friend Sh. Jignesh Patel. The main partner of Sangini, Shri Dev Raj Sheta had refused to have given any laptop/bag to Sh. Jignesh Patel and deny the ownership of material found at Sh. Ankit Vadodaria residence. It is further contended that the AO had mentioned shop wise ledger account on page no. 14 and 15 of the assessment order as per the tally data from third party; however, name of the assessee was not mentioned therein and the assessee had repeatedly denied to have paid any cash to purchase the shops. Further, the assessee had purchased shop on 25.05.2021 (AY 2022-23), whereas the transaction mentioned in the reason for reopening pertained to AY 2018-19. Therefore, addition made by AO was not correct. 6.1 The Ld. A.R. also submitted that the ledger account given in assessment order depicted entries in the form of journal entry; however, the said journal entries were not of same shop and mentioned different shop Nos. and name of other person. Therefore, journal entries were passed not for receiving cash as assumed by the AO. It is also submitted that the name of assessee was not at all mentioned in any of the ledger a/c., since the assessee had purchased shops on 25.05.2021 (not in FY 2017-18) and obtained bank loan on such shops from Kotak Bank Ltd. CO 3/SRT/2025 A.Y 18-19 Sh. Kailash Agarwal 6.2 It is alleged by the Ld. A.R. that the AO had not given any ledger copy of shop no. B-544 to 547 either in show cause notice or in assessment order. Also, no cross examination of persons responsible for receiving on-money in cash was provided in spite of making specific request in this regard during the assessment proceedings. It is also alleged that the AO had not given any corroborative evidence to prove that any on-money has been paid by the assessee. The Ld. AR placed reliance on following decisions to contend that the documents found from the premise of third party cannot be a base for addition without corroborative evidence viz., (i) CBI vs. V C Shukla AIR 1998 SC 1406, (ii) Mukesh Agarwal Vs. ITO (ITA No. 361/SRT/2022), (iii) CIT vs. Lavanya Land Pvt. Ltd. [2017] 397 ITR 246 (Bom.), (iv) CIT vs. Prem Prakash Nagpal [40 taxmann.com 353 (Del)], (v) Shri Mahendra Lalka vs. Dy. CIT (ITA No. 172/LKW/2023 date. 18.07.2023) and (vi) ACIT vs. Katrina Rosemary (Kaiff) Turcotte dated 11.10.2017.
We have heard both the parties and perused the entire material available on record. We have also deliberated on the decisions relied upon by the Ld. AR. The addition of Rs.78,25,000/- u/s 69 of the Act by the AO towards unaccounted investment in purchase of shop by appellant from M/s Nandkishor Corporation was deleted by the CIT(A). He observed that shops were purchased in AY 2022-23 but the AO has added in AY 2018-19. He has also relied on decision of Hon’ble jurisdictional High Court in case of Maulikkumar K Shah ((supra) where it was held that addition based on seized CO 3/SRT/2025 A.Y 18-19 Sh. Kailash Agarwal material found from third parties without corroborative evidence cannot be sustained. The facts are already discussed in para 3 and 4 of this order and hence are not repeated. It is well settled that material seized from the premises of a third party has limited direct evidentiary value to fasten tax liability on another person unless there is clear nexus or corroboration linking the seized material to that person. Entries in loose sheets or data recovered from an electric device do not automatically translate into conclusive proof against third parties. The law on the subject recognizes that while such material may form the starting point of an inquiry, corroborative evidence is necessary to establish tax liability in the hands of a person not linked to the searched premises. 7.1 The statutory presumption u/s 132(4A) of the Act relates to the person in whose custody or possession the books of account, documents or computer storage devices are found. The presumption is applicable to such extent. The presumption does not shift the burden to prove the correctness of the entries to unrelated third parties. On perusal of the records, assessment order, the CIT(A)’s order and the paper book placed before us, we note the following undisputed facts: (i) the laptop data on which the AO relied upon was recovered from the residence of a third party, namely, Shri Ankit Vadodaria. The AO has not established a clear and unbroken chain of custody or authenticated the entries as having been made by the Sangini group or by any person authorised to keep the accounts; (ii) the assessee’s name does not CO 3/SRT/2025 A.Y 18-19 Sh. Kailash Agarwal appear in any of the seized entries reproduced by the AO in the assessment order. The AO has not produced a shop-wise ledger entry specifically naming the assessee or showing payment by the assessee in cash; (iii) the assessee’s registered purchase of the impugned shop was on 25.05.2021. There is no material on record to show that any part of the consideration was paid in cash in FY 2017-18 (AY 2018-19); (iv) the entries reproduced in the assessment order and relied on by the AO are journal entries, some bearing references to different shop numbers and different payees. The AO has not produced any documentary proof of contemporaneous cash receipts against those specific shop numbers in the name of the assessee; and (v) the assessee requested cross-examination of relevant persons who could have elucidated the entries but no opportunity for cross-examination was provided during assessment proceedings.
7.2 In the light of the above facts, we find that the addition made by AO is founded on weak and inclusive material which does not establish the existence of unaccounted investment by the appellant in FY 2017-18. The AO has not brought on record any primary fact linking the appellant to any cash payment in FY 2017-18. The ledger entries are neither specific nor authenticated as being in respect of the assessee. The purchase itself postdates the year under consideration. Hence, the human probability test cannot be invoked to bridge these fundamental evidentiary gaps.
CO 3/SRT/2025 A.Y 18-19 Sh. Kailash Agarwal 8. Section 69 of the Act requires that an investment is found to have been made by the appellant and that such investment is not recorded in the books. Once the AO establishes the existence of such unaccounted investment to the satisfaction of the fact finder, the appellant must explain the source to the satisfaction of the AO. The burden of proving the existence of the unaccounted investment in a particular year, however, lies primarily with the revenue.
In the instant case, the revenue has failed to establish that an unrecorded investment of Rs.78,25,000/- was made by the appellant in FY 2017-18 (AY 2018-19). The CIT(A)’s finding that the addition was not warranted is, therefore, sustainable. Further, the assessee had requested cross- examination of persons allegedly connected with receipt of on-money and had indicated that such examination would have tested the veracity of the seized entries. The record does not reflect that any meaningful opportunity of confrontation or cross-examination was afforded. Where adverse inferences are sought to be drawn on the basis of third party seized material, and where the appellant’s liability is sought to be fastened thereon, fairness and principles of natural justice require that the assessee be afforded an opportunity to examine or cross-examine relevant persons or to test the authenticity of the material. The denial of such an opportunity is a material infirmity and weighs against sustaining the addition.
For the reasons given above, we find no merit in the revenue’s appeal. The CIT(A) has recorded a clear and reasoned conclusion after considering the CO 3/SRT/2025 A.Y 18-19 Sh. Kailash Agarwal material on record and relevant legal principles. There is no perversity in the findings of fact warranting interference under the appellate jurisdiction of this Tribunal. Accordingly, the appeal filed by the revenue is dismissed.
In the result, appeal of revenue is dismissed.
CO No.3/SRT/2025 (AY 2018-19)
The assessee raised following grounds:
On the facts & circumstances of the case as well as law on the subject, the Ld. AO is not justified in reopening of assessment u/s.147 of the Act.
13. Since the appeal filed by the revenue against the order of Ld. CIT(A) is dismissed, the CO No.3/SRT/2025 of the appellant does not require adjudication.
In the result, CO of assessee is also dismissed as infructuous.
In combine result, appeal of revenue is dismissed whereas CO of assessee is dismissed as infructuous. Order pronounced in accordance with Rule 34 of ITAT Rules, 1963 on 23/09/2025 in the open court. Sd/- Sd/- (SANJAY GARJ) (BIJAYANANDA PRUSETH) �याियक सद�य/JUDICIAL MEMBER लेखा सद�य/ ACCOUNTANT MEMBER सूरत /Surat �दनांक/ Date: 23/09/2025 Dkp Outsourcing Sr.P.S*