DY CIT CC-7(1), MUMBAI V. M/S. PAN INDIA NETWORK LTD., MUMBAI

ITA 1717/MUM/2020

AI Insights

The case involves appeals by the revenue against the orders of the Ld.CIT(A) which had deleted certain additions made by the Assessing Officer (AO) in the reassessment proceedings under sections 143(3) r.w.s. 147 of the Income-tax Act, 1961. The additions pertained to alleged over-reporting of cancellations of online lottery tickets and discrepancies in purchases reported in the profit and loss account and related party disclosures. The Tribunal considered the findings of the Ld.CIT(A) and the submissions of both parties, including the reliance on previous orders in similar cases involving the same assessee, Pan India Network Ltd.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 123273 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 7 month(s) 8 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-03-2023
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: C
• Next Hearing Date: 14-12-2022
• Assessment Year: 2006-2007
• Appeal Filed On: 03-08-2020
• Other Referred Cases: GKN Driveshafts (India) Ltd. v. ITO, DRP Pan India Network Ltd. for the AY 2010-11, Pan India Network Ltd. for AY 2011-12, Pan India Network Limited for AY 2009-10, Kamani Oil Industries Pvt Ltd. Vs. DCIT, CIT Vs. Gupta Abhushan (P.) Ltd., CIT Vs. Network Programs India Ltd., CIT Vs. Ashish International, CIT Vs. Odeon Builders (P.) Ltd, Dayawanti Vs. CIT, CIT Vs. H.M. Esufali H.M. Abdulali
• Laws Referred To: Income-tax Act, 1961
• Result in Favour of: Matter Remanded
• Court: TRIBUNAL
• Keywords: Business income; Search and seizure; Opportunity of cross examination; Additional evidence; Cost of acquisition; Reassessment proceedings
• Section: 145; 148; 143(3); 133A; 153A; 201; 144C; 73; 72

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH “C”, MUMBAI BEFORE SHRI ABY T. VARKEY, HON'BLE JUDICIAL MEMBER AND SHRI S. RIFAUR RAHMAN, HON'BLE ACCOUNTANT MEMBER ITA NOs. 1716 & 1717/MUM/2020 (A.Ys: 2007-08 & 2006-07) DCIT – Central Circle – 7(1) Room No. 653, 6 th Floor Aayakar Bhavan, M.K. Road Mumbai - 400020 v. M/s. PAN India Network Infravest Pvt. Ltd., 135, Continental Building Dr. Annie Besant Road Worli, Mumbai – 400018 PAN: AACCP2459H (Appellant) (Respondent) C.O. Nos. 136 & 134/MUM/2021 [ARISING OUT OF ITA NOs. 1716 & 1717/MUM/2020 (A.Ys: 2007-08 & 2006-07)] M/s. PAN India Network Infravest Pvt. Ltd., 135, continental Building Dr. Annie Besant Road Worli, Mumbai – 400018 PAN: AACCP2459H v. DCIT – Central Circle – 7(1) Room No. 653, 6 th Floor Aayakar Bhavan, M.K. Road Mumbai - 400020 (Appellant) (Respondent) Assessee Represented by : Shri Niraj Seth Department Represented by : Shri Asif Karmal Date of Hearing : 15.12.2022 Date of Pronouncement : 13.03.2023 2 ITA NOs. 1716 & 1717/MUM/2020 C.O. Nos. 136 & 134/MUM/2021 M/s. PAN India Network Infravest Pvt. Ltd., O R D E R PER S. RIFAUR RAHMAN (AM) 1. These appeals and cross objections are filed by revenue and assessee respectively, against different orders of the Learned Commissioner of Income Tax (Appeals)-49, Mumbai [hereinafter in short “Ld.CIT(A)”] dated 10.02.2020 for the A.Y.2006-07 and 2007-08. ITA NOs. 1717 & 1716/MUM/2020 (A.Ys: 2006-07 & 2007-08) 2. Since the issues raised in both the appeals are identical, therefore, for the sake of convenience, these appeals are clubbed, heard and disposed off by this consolidated order. We are taking Appeal in ITA.No. 1717/MUM/2020 for Assessment Year 2006-07 as a lead appeal. 3. Brief facts of the case are, assessee owns computer network infrastructure and was engaged in the business of selling and marketing State Online Computer Lotteries on the network for companies holding license to sell these lotteries. Assessee filed its original return of income on 30.11.2006. Subsequently, the return was revised on 25.03.2008. Assessment u/s. 143(3) of the Income-tax Act, 1961 (hereinafter 3 ITA NOs. 1716 & 1717/MUM/2020 C.O. Nos. 136 & 134/MUM/2021 M/s. PAN India Network Infravest Pvt. Ltd., referred to as "the Act") was completed vide order dated 30.12.2008 after making certain additions/ disallowances. Subsequently, there was a survey conducted u/s. 133A of the Act on 18.11.2011. The Assessing Officer issued notice u/s. 148 of the Act dated 28.03.2013 after expiry of 4 years. In response to the notice, the assessee filed its return of income u/s. 148 of the Act under protest. 4. Assessee vide letter dated 20.05.2013 requested for the reasons recorded prior to reopening the case of the Assessee which is in accordance with the procedure laid down by the Hon'ble Supreme Court in case of GKN Driveshafts (India) Ltd. v. ITO (259 ITR 19). The Assessing Officer provided a copy of reasons recorded vide letter dated 30.07.2013. The assessee filed its objections in response to the reasons recorded vide letter dated 28.08.2013. The same were rejected by the Assessing Officer vide order dated 11.09.2013. 5. After calling for further details and submission, the Assessing Officer completed the assessment vide order under section 143(3) r.w.s.. 147 of the Act on 19.03.2014 making the following additions:  Addition on account of alleged over-reporting of cancellation of online tickets - Rs. 7,06,00,000/- 4 ITA NOs. 1716 & 1717/MUM/2020 C.O. Nos. 136 & 134/MUM/2021 M/s. PAN India Network Infravest Pvt. Ltd.,  Addition on account of alleged profit on the difference between the purchases shown in the profit and loss account and purchases shown in the related party disclosure, forming part of the notes to account owing mainly due to prize money of unsold paper lottery tickets- Rs. 1,60,00,000/- 6. Aggrieved, the assessee preferred an appeal before the Ld.CIT(A) challenging the reopening of the case of the assessee as well as on merits. The Ld.CIT(A) vide order dated 10.02.2020 upheld the reopening, however, on merits decided as under: a. With regard to cancellation of online lottery tickets addition, Ld.CIT(A) has adjudicated as under:- “7.3. I have considered the facts of the case and the submissions of the assessee. It is found that the findings of the Ld. AO on this issue is based on suppositions not backed by any evidence. The Ld.AO could not bring any definite findings in survey to support the addition. The contention of the assessee is that the very documents on the basis of which additions were made were not provided to the assessee to rebut various allegations which is against the principles of natural justice and provisions of law and hence additions made by Ld. AO solely on the basis of assumptions, presumptions and surmises without finding any defects or discrepancies in the books of account and hence, following the DRP Order, the addition made by Ld. AO is required to be deleted. 7.4 I further find that the issue was considered by the Hon'ble in the case of DRP Pan India Network Ltd., which is the successor in business of the assessee company, for the AY 2010-11. The DRP vide it's order dated 24.11.2014 has deleted the addition with following findings: 1. In this case a survey u/s 133A of the Act was under taken on 18.11.2011. During the and after the survey action the department has collected certain information including recording of statements of certain persons. 5 ITA NOs. 1716 & 1717/MUM/2020 C.O. Nos. 136 & 134/MUM/2021 M/s. PAN India Network Infravest Pvt. Ltd., 2. It is seen from the extract of survey reports forwarded by the AO that some discrepancies have been noted therein. However, neither in the assessment order nor in the extract of the survey report there is any mention of the any discrepancy which was specific to the assessment year under consideration. The observations of the AO are generally borrowed ones from the past assessment year's order or from the survey report but still there is nothing which could be considered to be specific and relating to the year under consideration. 3. The AO has taken a average figure of cancellation of lottery ticket at 1.2% as against such cancellation percentage as per books of the assessee at 3.28%. It is seen that such average figure of cancellation at 1.2% has been arrived based on the figures collected during the survey action as under Agency Code Name of Retailer Period Total Sales Cancellation (in Rs.) Cancellation (%) 4430460 Shri Sidhi vinayak 19.02.2012 to 25.02.2012 76,171 931 1.2 4401240 Dhamal Online 07.05.2012 to 11.05.2012 32,312 338 1.00 4461440 New Ganesh Lottery 07.05.2012 to 11.05.2012 6,945 96 1.38 4013050 Laxmi Lottery 07.05.2012 to 11.05.2012 1,351 56 4.10 4014380 Sai Agency 07.05.2012 to 11.05.2012 99,461 1,199 1.20 4048800 - 30.04.2012 to 06.05.2012 8,966 29 0.30 4048910 Sai Ratan 30.04.2012 to 06.05.2012 18,432 201 1.09 4650130 Weekly Star 13.02.2012 to 19.02.2012 5,132 19 0.37 vi. It is also seen from the one of the letters of the AO that the addition has been for the reasons of consistency of the addition made in A.Y. 2009-10, which is pending before the CIT(A). In this regard it is stated that there cannot be application of principles of consistency if the relevant facts for the year under 6 ITA NOs. 1716 & 1717/MUM/2020 C.O. Nos. 136 & 134/MUM/2021 M/s. PAN India Network Infravest Pvt. Ltd., consideration are not found or indicated to be similar based on some enquiry/investigation or verification. vii. It is also the fact seen from the letters/remand report of the AO that the statements referred to and relied upon in the assessment order have not been able to supplied/confronted to the assessee. In the assessment order there is only a general reference regarding the statements, without mentioning the names of the persons whose statement have been relied upon and based on which inference has been drawn against the assessee. It is also not know nor mentioned by the AO in his assessment order/remand report that in any of the statements there was any specific fact stated for the year under consideration and which could have supported the inference drawn by the AO regarding higher level of cancellations recorded in the assessee's books. The AO further has not brought on record any comparable circumstances of higher level of cancellation of ticket in similar business as that of the assessee. viii. In view of the facts and circumstances of the case and discussion herein above, the addition made by the AO of Rs. 26.11 crores is not found to be sustainable and there is directed to deleted. 7.5 Following the rationale of the above directions for the AY 2010-11, the Hon'ble DRP has also deleted the addition on this very issue in the case of Pan India Network Ltd. for AY 2011-12 vide its directions dated 14.12.2015. further to the above, following the directions of DRP as above, ld. CIT(A) has also deleted addition on account of excess cancellation of lottery tickets in A.Y. 2009-10 in case of Pan India Network Limited. 7.6 Material facts remain the same during the year under reference. The order of the ld. AO is having similar observations as in the years decided by DRP and CIT(A) as above. The AO has not referred to any evidence pertaining to the year under reference. It has also not been demonstrated how the findings of the survey supports the case of the AO and how the same provide any evidence to arrive at conclusion that the cancelation of lottery tickets claimed was excessive. Similar to the aforesaid AYS, the ld. AO has restricted the same to 1.2% without providing any basis for the same. The AO has referred to statements but there are no specifics about such statements and there is no reference that in 7 ITA NOs. 1716 & 1717/MUM/2020 C.O. Nos. 136 & 134/MUM/2021 M/s. PAN India Network Infravest Pvt. Ltd., any of the statements there was any specific fact stated for the year under consideration which could have supported the inference drawn by the AO regarding higher level of cancellations recorded in the assessee's books. The order of the Hon'ble DRP for AY 2010-11 is a detailed order where the AO was given another opportunity to explain the evidences by way of remand report. As noted, by the ld. DRP in the said order, the AO could not support his findings even in the remand report. Hence, respectfully following the findings and directions of the Hon'ble DRP and ld. CIT(A) in subsequent AYS as above, and for the reasons as discussed above, the AO is directed to delete the addition. The assessee accordingly gets a relief of Rs.7.06 crore added on this account. The Ground is accordingly ALLOWED. b. With regard to alleged profit on prize money of unsold paper lottery tickets, Ld.CIT(A) has adjudicated as under:-: “8.3. I have considered the facts of the case and the submissions of the assessee. I find that this issue has also been considered by the Hon'ble DRP in the case of Pan India Network Ltd. for the AY 2011-12, the DRP has given it's findings vide directions dated 14.12.2015 which is as follows: "The DRP has considered the submissions of the appellant. The appellant has submitted the Reconciliation of the Purchases with the Total Purchased as per notes on accounts along with the ledger extracts of the purchase and others accounts as referred in the reconciliation statement. Prima facie the contention of the appellant appears to be correct. The AO is directed to verify the above statement from the books of accounts/ financial statements of the appellant by providing the appellant an opportunity of being heard and allow the claim of the appellant if the claim of the appellant is found to be correct after verification." (emphasis supplied) 8.4. Pursuant to the above directions, the Hon'ble DRP has set aside the matter for verification before the Ld. AO. I find that that the Ld. AO in his order u/s 143(3) r.w.s 144C dated 22.01.2016 has deleted the said addition vide his findings appearing in Para 6.6 of the aforesaid order. He categorically observed in the said para that, "consequently, the assessee's AR was heard on 20.012016 who 8 ITA NOs. 1716 & 1717/MUM/2020 C.O. Nos. 136 & 134/MUM/2021 M/s. PAN India Network Infravest Pvt. Ltd., submitted his explanation on the facts of the case alongwith the ledger extracts of the purchases and other accounts as referred in the reconciliation statement. The same were verified and the assessee's contention was found to be correct." 8.5 Material facts remain the same during the year under reference. In principle, the contention of the assessee as to the reconciliation of the discrepancies perceived by the Ld. AO was found to be correct. The contention of the assessee for the year under reference is, therefore, acceptable in principle. However, the assessee has not filed any additional evidences for the year under reference. The Ld. AO is accordingly directed to allow the claim of the assessee subject to reconciliation in the manner as verified in AY 2010-11. The ground is Allowed, subject to verification of reconciliation as above.” 7. Aggrieved by the findings of the Ld.CIT(A) as regards the additions made in the reassessment order, revenue has preferred the present appeal. The assessee has filed cross objection contesting the validity of reopening. 8. Aggrieved revenue is in appeal before us raising following grounds in its appeal: - “1. "Whether on the facts and circumstances, the Ld.CIT(A) is justified in deleting the addition of Rs. 7.06 crore on account of cancellation on online lottery tickets even when the additions were made after proper findings done by AO and bases on statements recorded from the retailers and on the information received during the survey u/s. 133A of the I.T. Act, 1961" ? 2. "Whether on the facts and circumstances, the Ld.CIT(A) is justified in deleting the addition of Rs. 1.6 crore on account of alleged profit on prize money of unsold paper lottery tickets, even when the additions were made after proper findings done by AO that the assessee has manipulated with the records of lottery sales as per their requirement."? 9 ITA NOs. 1716 & 1717/MUM/2020 C.O. Nos. 136 & 134/MUM/2021 M/s. PAN India Network Infravest Pvt. Ltd., 9. At the time of hearing, Ld DR brought to our notice the facts of this case and submitted that subsequent to the regular assessment, there was survey conducted on the premises of the assessee on 18.11.2011. In the above survey various documents were unearthed by the department which consist of over statement and inflated cancellation of the tickets and also it revealed that the tickets issued are not serially numbered. Further, the department found that the assessee has suppressed the sales. Because of this reason, the case was reopened and during the reassessment proceedings also the assessee has not submitted relevant documents to substantiate its claim. With regard to reopening, he submitted that the reopening was done with proper approval and the material in the hands of the assessing officer is enough material to form belief for the escapement of the income. Therefore, he supported the reopening of the assessment. He submitted that the Ld.CIT(A) has not properly appreciated the facts on record to give relief to the assessee. He has merely accepted the documents submitted by the assessee. He prayed that the findings and additions made in the assessment order may be restored and sustained. 10 ITA NOs. 1716 & 1717/MUM/2020 C.O. Nos. 136 & 134/MUM/2021 M/s. PAN India Network Infravest Pvt. Ltd., 10. On the other hand, Ld. AR brought to our notice facts of the case and filed written submissions, for the sake of clarity it is reproduced below: - “2.1. The AO based upon certain purported findings of the survey reopened the case of the assessee on the following reasons (Page No 46 to 47 of PB): • Alleged Over reporting of cancelled tickets: The AO alleged that the Appellant has over reported its cancellation of online tickets at 3% instead of benchmark of 1%. The AO alleged that the assessee has manipulated the serial number of the tickets. • Non-reconciliation between purchases in profit and loss and purchases reflected in relatedparty disclosure: The AO alleged that the assessee reported purchases of Rs. 1469.27 crores while purchases reported in the Related Party Disclosure forming part of the notes to the financials of Rs. 1608.50 crores and accordingly the difference represents income chargeable to tax which has escaped assessment 2.2 At the outset, we submit that the reassessment proceedings are bad in law, without jurisdiction and void ab initio. The Ld. AO in the reasons for reopening proceeds on factually erroneous basis, merely based upon survey finding without independent verification. The reasons recorded as such are in realm of suspicion, surmises and conjectures which cannot be the basis of reopening. In this regard, we submit as under: As regards the alleged over reporting of cancelled tickets: 2.3. The reasons for reopening allege that the assessee had a cancellation rate of 3% viz the benchmark of 1%. However, the Ld. AO completed the assessment adopting the benchmark cancellation rate at 1.20% and observed that actual cancellation rate is at 1.72% and accordingly, the excess of 0.52% is required to be disallowed. This itself shows that the rates of 3% and 1% 11 ITA NOs. 1716 & 1717/MUM/2020 C.O. Nos. 136 & 134/MUM/2021 M/s. PAN India Network Infravest Pvt. Ltd., mentioned in the alleged reasons had no basis and that the AO proceeded on a factually erroneous basis. 2.4 We submit that the so called benchmark of 1% was worked out arbitrarily by the survey teams, whose conclusions were blindly adopted by the AO, taking a small sample that too for a different period. The sample is tabulated as under (extract taken from DRP's order in the case of Pan India Network Ltd for AY 2010-11 on Page 30 and applied to the assessee) Agency Code Name of Retailer Period Total Sales Cancellation (in Rs.) Cancellation (%) 4430460 Shri Sidhi vinayak 10.09.2012 to 15.02.2012 76,171 931 1.20 4401240 Dhamal Online 07.05.2012 to 11.05.2012 32,312 338 1.00 4461440 New Ganesh Lottery 07.05.2012 to 11.05.2012 6,945 96 1.38 4013050 Laxmi Lottery 07.05.2012 to 11.05.2012 1,351 56 4.10 4014380 Sai Agency 07.05.2012 to 11.05.2012 99,461 1,199 1.20 4048800 - 30.04.2012 to 06.05.2012 8,966 29 0.30 4048910 Sai Ratan 30.042012 to 06.05.2012 18,432 201 1.09 4650130 Weekly Star 13.02.2012 to 19.02.2012 5,132 19 0.37 4461550 Shree Ganesh 07.05.2012 to 11.05.2012 25,864 485 1.87 4460820 Parasmani 20.02.2012 to 25.02.2012 73,487 758 1.03 Total 3,48,121 4,112 Average 1.18 2.5 The reliance on the aforesaid data to proceed to make the impugned addition is erroneous on the following count: (a) the figures collected are just for a week (b) the data pertains to FY 2011-12 (AY 2012-13) and FY 2012-13 (AY 2013-14) and not to the assessment years AY 2006-07 and AY 2007-08 under consideration and there is a huge gap of time of more than 5 years between the two (c) There is no data/ details brought out either in the assessment order or submitted along with remand report which 12 ITA NOs. 1716 & 1717/MUM/2020 C.O. Nos. 136 & 134/MUM/2021 M/s. PAN India Network Infravest Pvt. Ltd., could relate to the assessment years under consideration (d) The assessee has turnover of Rs. 1,255.45 crores from online lottery ticket sales and the data collected is from 10 retailers out of total 28,000 retailers and their transactions for the week (as seen in the above table) being only for Rs. 3,48,121/- and therefore, the so called sample cannot be regarded as representative of the assessee's business by any stretch of imagination. 2.6 The reasons record that the cancellation was 3% and the benchmark was 1% while infact, the AO, himself, while completing the assessment has observed that the actual cancellation is 1.72% and not 3%. Further, the benchmark cancellation is 1.2% and not 1%. This, itself show: that the reasons, proceed on a factually erroneous basis. The reasons are vague, unclear and proceed on a borrowed satisfaction without independent verification. The relevant material forming the basis of such benchmark has not been enunciated in the reasons and absent the basis of such belief, the reopening cannot be sustained. If the correct cancellations and benchmarkings were taken into account, the AO himself would not have initiated reopening for the marginal difference. 2.7. Further, the AO has failed to appreciate that the 10 digit number generated by the computer system is the Internal Reference No. and the 16 digit alpha numeric number is the ticket serialnumber. These numbers are generated automatically by the system. Vide letter dated 03.03.2014 (Pg 70 of the PB), the assessee submitted the following: i. The Company monitors and restricts cancellation of tickets on the basis of experience and performance of individual retailers. Sometimes, few retailers sell tickets and cancel them in order to become active agency. Cancellations of tickets are permissible within 5 minutes post transaction or before Draw close time, whichever is earlier. In Lotto game, cancellation is permissible before the draw time. The whole system of ticket sale, cancellations etc is fully automated without any manual intervention. ii. On successful cancellation within the permissible time limit, a cancel voucher is printed with details (TSN, Agency Id, Game, Date/Time of cancel, cost being refunded) pertaining to the ticket. Copy of sample cancel ticket is at Pg 73 of the PB. The amount is 13 ITA NOs. 1716 & 1717/MUM/2020 C.O. Nos. 136 & 134/MUM/2021 M/s. PAN India Network Infravest Pvt. Ltd., immediately credited back to the retailer account, which is reflected in the accounts report available in the terminal (with the retailer). Beyond the above criteria, an Error message is flashed "Too late to cancel" (Pg 74 of the PB). iii. As already explained, all terminals are connected to the Central server in the State to which lottery belongs and monitored by the State Government and whatever transactions takes place at the terminal (POS) are recorded in that server and accounts/ any other statement/reports can be generated from that system." 2.8 It maybe pertinent to note that similar additions have been made in subsequent years takingthe difference between the actual cancellation rate and benchmark as 1.20%. Where the actualcancellation rate is higher than 1.2%, an addition has been made. However, where thecancellation is below the benchmark rate, no addition is made. This, itself, shows that themethodology used to make an addition is flawed as the AO assumed that there would bestandard cancellation over various years without appreciating that cancellation rate would fluctuate year on year based on various factors. 2.9 In view of the above, the reopening based on such reasons recorded which proceed on factually erroneous and legally unsustainable basis and merely on surmises and conjectures cannot be upheld. 2.10. In the case of CIT Vs. Gupta Abhushan (P.) Ltd. 1312 ITR 166], during a survey conducted at business premises of assessee on 7-3-2002, it was found that business premises was underrenovation; and that there was discrepancy in stock. On basis of survey report, the 2.11. Assessing Officer reopened assessments of assessee for relevant 3 assessment years earlier to the year of survey on grounds that discrepancy in stock was likely to occur in relevant years also and income to that extent had escaped assessment and that assessee had not booked any expenses on account of renovation of business premises and, thus, investments made in renovation work had escaped assessment. The Hon'ble Delhi High Court held that when survey was conducted on 7-3-2002, which fell in year subsequent to three years in question and reasons, as recorded, did not show or indicate existence of any evidence 14 ITA NOs. 1716 & 1717/MUM/2020 C.O. Nos. 136 & 134/MUM/2021 M/s. PAN India Network Infravest Pvt. Ltd., regarding escapement of income in three years in question, Assessing Officer was not justified inreopening assessment on basis of mere suspicion. The relevant extract of the judgment read as 5. ... 6. .... 2.12. Further, the AO erred in proceeding in estimating the cancellation at 1.20% and arbitrarily rejecting the actual cancellation rate of 1.72% for the year under consideration as excessive. Merely, because the cancellation rate is higher than that of subsequent period without any further enquiry or pin pointing any defect in the process of cancellation, can be no reason to presume that cancellation rate is excessive and false. It is further submitted that the books of accounts are audited and that infact, the AO has not rejected the book of accounts and therefore to cast a doubt on the cancellation and hold it excessive without pointing out any defect in the books cannot be sustained. In the case of PCIT Vs. Marg Ltd. (84 taxmann.com 52) (Mds.) held that profits of an assessee cannot be estimated without rejecting its books of account. Similarly, the cancellation rate cannot be rejected without finding any defect in the books of account and rejecting the same. The Hon'ble Mumbai Tribunal in the case of Kamani Oil Industries Pvt Ltd. Vs. DCIT (ITA 5465/Mum/2017) held that the AO cannot reject books of account and proceed in estimating gross profit merely because there is a fall in gross profit for the year under consideration. The relevant extract of the judgment reads as under: “6.1 .... 6.3 .... 2.13. Similarly, the Hon'ble Delhi High Court in the case of PCIT Vs. Network Programs India Ltd. [87 taxmann.com 285] held that there is no reason for the AO to make an addition on an estimation basis when the books of accounts of the appellant were not rejected. 2:14. The AO alleged that there has been over-reporting of cancellation of tickets based on an extract of the data of the assessee's books itself for a different period. It is pertinent to note that admittedly retailers/ distributors do not maintain independent books of accounts of their own and rely on the data provided by the assessee's server. This fact is also recorded in the assessment order passed by the AO (Pg No of the Assessment Order). 15 ITA NOs. 1716 & 1717/MUM/2020 C.O. Nos. 136 & 134/MUM/2021 M/s. PAN India Network Infravest Pvt. Ltd., Therefore, the so called Benchmark rate of 1% referred in the reasons is nothing but the result from the assessee" books itself. Therefore, it is not understood how the same can be compared with assessee's books for years under consideration and the difference is treated as undisclosed income. Atthe same time, the AO has not rejected the books of accounts of the assessee. Accordingly, the AO's action of dislodging the cancellations stated by the assessee is erroneous. 2.15. In view of the above decisions, the AO erred in proceeding to adopt the benchmark / estimated rate merely on allegation that the actual cancellation rate is high without first demonstrating any defect in the actual cancellation rate. Merely because the rate is higher than that reported in any other year would not be sufficient to dislodge the cancellation rate for the year under consideration. 2.16. The Ld. AO has re-opened the assessment and made addition of Rs. 7.06 crores on account of excess cancellation of online lottery tickets, referring to the alleged findings of survey team. third party information and statements without providing the assessee an opportunity to rebut the same. The assessee has vide letter dated 15.10.2013 (Page No 55 of PB) and 16.04.2014 (Page No 88 of PB) requested the Ld. AO to provide the copy of recorded statements, the documents/ records, information referred in the order for making addition. However till date, assessee has neither been provided with any of the statement recorded during survey proceedings nor given document/information and response to our letters. Even the CIT(A) at Pg 27 of the order his noted that the assessee has not been confronted with the documents/ statements. In view of the same, additions based upon such third party information / statements cannot be sustained. 2.17. Reliance is placed on the judgement of the Hon'ble Kolkata Tribunal in case of Smt. Anita Singhania Vs. DCIT (ITA No. 45/Kol/2019) wherein, the Hon'ble Tribunal held that the Assessing Officer has to confront the assessee with the material collected behind the back of the assessee and the AO should provide the assessee an opportunity for cross-examination. The relevant extract of the judgment is as under: “6.10. ... 6.11. .... 2.18 The Hon'ble High Court in the case of CIT Vs. M/s Ashish International (ITA No. 4299 of 2009) dismissed the appeal of the department since the assessee was not given any opportunity to 16 ITA NOs. 1716 & 1717/MUM/2020 C.O. Nos. 136 & 134/MUM/2021 M/s. PAN India Network Infravest Pvt. Ltd., cross examine the person whose statement was relied upon by the revenue. 2.19. Lastly, it is submitted that the additions cannot be solely on third party information without further scrutiny. Reliance is placed on the judgement of Hon'ble Apex Court in the case of CIT Vs. Odeon Builders (P.) Ltd (110 taxmann.com 64) wherein it is held that disallowance based on third party information gathered by the Investigation Wing of the Department which have not been independently subjected to further verification by the AO who has not provided the copy of such statements to the appellant thereby denying opportunity of cross examination to the appellant is bad in law. The relevant extract of the judgement is as under: "3. ..... 4. ... 2.20. In view of the aforesaid, it is respectfully submitted that addition on account of alleged over reporting of cancellations, be deleted for being merely on surmises and conjectures. 2.21. At the time of hearing, attention of the assessee's counsel was invited by the Hon'ble Bnech to the decision of the Hon'ble Delhi High Court in the case of Dayawanti Vs. CIT [84 taxmann.com 296] [Del.], wherein reliance was placed on CST Vs. HM. Esufali H.M. Abdulali 190 ITR 271]. We submit that the same is distinguishable on facts as explained hereinafter: Dayawati's case 2.22. The facts in Dayawanti's case (supra) were as under:  Search and seizure operation was carried out on 22.03.2006 in the premises of M/s. Balajee Perfumes Group, which manufactures Gutka. The assessee along with other family members ie her three sons and their wives namely Deepa Gupta, Sunita Gupta and Preeti Gupta, along with Varun Gupta, surrendered a sum of Rs. 3.5 crores at the time of the search, as additional income in respect of business carried on outside books of account in connection with production and sale of Gutka. Statement of the assessee Smt. Dayawanti proprietor of M/s. Assam Supari Traders was also recorded in the course of search. Therefore, it was an admitted position that the books of accounts were unreliable and liable to be rejected. 17 ITA NOs. 1716 & 1717/MUM/2020 C.O. Nos. 136 & 134/MUM/2021 M/s. PAN India Network Infravest Pvt. Ltd.,  Notice under Section 153A was issued on 21.08.2006 requiring the assessee to furnish returns. In response the assessee filed no proper return.  The AO asked the assessee to produce vouchers of sale, purchases, and expenses. The assessee however, produced computerized books of accounts without producing sale bills. purchases bill etc. to substantiate the declared results. The AO also noted that confirmation from all creditors was not furnished. Further discrepancy in respect of cash balance under the books and financial results was also not explained.  In these circumstances, the AO rejected the books of accounts under section 145 of the Act and estimated the sales and G.P. ratio for various years forming part of the block prior to the date of search. 2:23. The Hon'ble Delhi High Court confirmed the additions holding as under:  .The search was conducted on 22.03.2006. Various materials: documents, agreements,invoices and statements in the form of accounts and calculations were seized.  The assessee's sons (including one of the appellants, Abhay Gupta) recorded statements under oath; the assessee too made her statement under oath, admitting that though returns were filed ostensibly on her behalf, she was not in control of the business. The statements indicated that there were unaccounted sales. Their probative value was undeniable, the occasion for making them arose because of the search and seizure that occurred and the seizure of various documents, etc, that pointed to undeclared income.  The assessee could not produce before the ld. CIT (A) the sale bills, purchase bills and vouchers for the expenses incurred by her. In such a scenario, it was held that the AO had no other alternate but to reject the books of accounts as there is no material to substantiate the correctness and completeness of such books of accounts. Accordingly, additions made based on estimates were made in various years forming part of the block with reference to the year of search. The same was upheld following the decision of Hon'ble Supreme Court in the case of CST Vs. H.M. Esufali II.M. Abdulali [90 ITR 271] 18 ITA NOs. 1716 & 1717/MUM/2020 C.O. Nos. 136 & 134/MUM/2021 M/s. PAN India Network Infravest Pvt. Ltd.,  The inferences drawn in respect of undeclared income were premised on the materials found as well as the statements recorded by the assessees. The Hon'ble Court found that,these additions therefore were not baseless. 2.24. The facts of the case of the assessee are different. In the year of search, the Department claimed to have found discrepancies relating to the cancellation of lottery tickets based uponcertain extract of assessee's books itself. No such discrepancies were found for the year under consideration i.e. AY 2006-07 or AY 2007-08. The books of account were accepted and no defect were found in the books of the account for the assessment years in question. These facts are different from Dayawanti's case (supra) wherein the statements showed that there was undisclosed sales in the year of search. Further, in Dayawanti's case (supra) considering the assessee's failure to produce bills and vouchers for the years in question, the AO had rejected the books of accounts. No such failure is even alleged in the present case and, in fact, assessee's own books are used to determine the so called benchmarking and that is compared with books of another period. The Hon'ble Court in Dayawanti's case (supra) found that inference could be drawn that there were unaccounted sales in other years too, especially considering the habitual concealment of income by the assesee in concealing income. The decision of Dayawanti (supra) has been distinguished by the Hon'ble Delhi High Court in the case of PCIT Vs. MeenaGutgutia (82 taxmann.com 287) (copy enclosed as Annexure A) wherein the Hon'ble Court held that invocation of section 153A by revenue for assessment year 2000-01 to 2003-04 based on material pertaining to subsequent years was without any legal basis since there was no incriminating material qua each of those assessment years. While holding so, the Hon'ble Court distinguished the decision in the case of Dayawanti (supra) as under: The decision in Dayawanti Gupta "64. ..... 65. ... 66. ... 67. ... 68. ... 19 ITA NOs. 1716 & 1717/MUM/2020 C.O. Nos. 136 & 134/MUM/2021 M/s. PAN India Network Infravest Pvt. Ltd., 69. ... 2.25. The SLP against the case of MeenaGutgutia (supra) has been dismissed by the Hon'ble Supreme Court (96 taxmann.com 468) (copy enclosed as Annexure B). Similarly, the Hon'ble Kolkata Tribunal in the case of DCIT Vs. Bhavya Merchandise (P.) Ltd. (121 taxmann.com 112) has distinguished the judgment of Dayawanti's (supra). Therefore, it is clear that Dayawanti's case (supra) can only be applied where books are found to beunreliable and are rejected and not in a case like that of the assessee, whose books itself arethe basis of determining the benchmark. 2.26. Coming to other decision i.e. H.M.Esufali's case, in the said case, the assessee was a dealer in Iron and Steel in Madhya Pradesh. The Sales Tax Officer in making the original assessment for the period November 1, 1959 to October 20, 1960 accepted the, gross turnover disclosed by the assessee's accounts. Later, the Flying Squad inspected the business premises of the assessee and found a bill book for the period September 1, 1960 to September 19, 1960. The bill book showed that the assessee had effected sales of iron and steel during that period of the value of Rs. 31.171. Those sales had not been entered in the books of account maintained by the assessee. The Sales Tax Officer, based upon the said information, made reassessments on best judgment basis and in estimating the assessee's turnover took into consideration the fact that the assessee had dealings outside his accounts of the value of Rs. 31,171. during a period of 19 days. In these circumstances, the Hon'ble Supreme Court held that: In the present case it was proved as well as admitted that the assessee's dealings outside his accounts during a period of 19 days were of the nature of Rs. 31.171.28. From this circumstance it was open to the Sales-tax Officer to infer that the assessee had large scale dealings outside his accounts. It was obvious that he was maintaining false accounts to evade payment of sales-tax. In such a situation it was not possible for the Sales-tax Officer to find out precisely the turnover suppressed. He could only make an estimate of the suppressed Turnover on the basis of the material before him. So long as the estimate made by him was not arbitrary and has nexus with facts discovered, the same could not be questioned 20 ITA NOs. 1716 & 1717/MUM/2020 C.O. Nos. 136 & 134/MUM/2021 M/s. PAN India Network Infravest Pvt. Ltd., 2.27. The case too is distinguishable. It maybe observed that the Sales Tax Officer acted upon information in the form of bill book which showed undisclosed sales during the period, September 1, 1960 to September 19, 1960 related to the period of assessment i.e. November 1. 1959 to October 20, 1960. The assessment was completed on a best judgment basis. However, in the instant case before Your Honors, the alleged material relates to the books of the assessee itself. pertaining to a different period than the year in question i.c. AY 2006-07 and no other material/ evidence is found. In the assessee's case regular assessment was made accepting the books of account. Hence, the decision of the Hon'ble Supreme Court in the case of H.M. Esufali (supra) is distinguishable. 2.28. To summarize, the reopening is based upon factually erroneous basis. The reasons which are vague, unclear and proceed on a borrowed satisfaction without independent verification. The so called benchmark rate of 1% referred in the reasons is nothing but the result from the assessee's books itself for a different period and compared with assessee's book's result for AY 2006-07 and AY 2007-08. Further, the AO, himself, while completing the assessment has observed that the actual cancellation is 1.72% and not 3% as alleged in the reasons, Infact, if the correct cancellations and benchmarking were taken into account, the AO himself would. not have initiated reopening for the marginal difference. It is not even the case of the AO that the books of account suffer from any defect and that the book of account of the assessee havebeen accepted. In view of the above, the reopening is unsustainable and the addition deservesto be deleted. As regards difference in purchases as per P&L, and related party disclosure: 2.29. The total purchases reported as per the Profit and Loss Account for year ended 31.03.2006, relevant to the assessment year under consideration is Rs. 1472.73 crores (Pg 11 of the PB) of which Rs. 1469.26 crores were from related parties. The total purchases as per the related party disclosure in the notes to account (Pg 24 of the PB) was Rs. 1608.49 crores: 21 ITA NOs. 1716 & 1717/MUM/2020 C.O. Nos. 136 & 134/MUM/2021 M/s. PAN India Network Infravest Pvt. Ltd., Particulars Amount (in Rs in crores) Purchases Tashi Delek Gaming Solutions Pvt. Ltd. 371.22 Kenlott Gaming Solutions Pvt. Ltd. 819.16 Ecool Gaming Solutions Pvt. Ltd. 418.11 Total 1,608.49 2.30. The Ld. AO failed to understand the facts of the case and made addition of Rs. 1.60 crores calculated @ 1.15% (being alleged percentage of profit on purchases) on Rs. 139.23 crores (1,608.50 Crores - 1,469.27 Crores) by terming it as undisclosed profit on suppressed sales. Therefore, the question to be considered is whether Rs. 139.23 crores can be regarded as suppressed sales. 231. The AO failed to appreciate that the difference in purchases reported in the Profit & Loss A/c (Pg 11 of the PB) refer to the purchases net of prize money on unsold tickets and include third party purchases while purchases in the related party disclosure (Pg 24 of the PB) refer to gross purchases without excluding prize money earned 2.32 In this regard, we submit as under: 2.33. Reopening on this ground is not sustainable as it is based on the figures available on record. There is no fresh material or any failure to disclose fully and truly material facts. There is no discrepancy as alleged, as explained below. Even assuming that there was a discrepancy. reopening would still be invalid based upon the material already on record. 2.34. The purchase cost of the appellant company includes purchase cost of online as well as paper lottery tickets. In case of paper lottery, purchase cost is reflected net of prize money of unsold tickets. In paper lottery, tickets have to be purchased on all sold basis as per the agreement and hence prize money on unsold tickets is deducted from the gross purchase cost. Accordingly, the appellant has deducted the prize money on unsold tickets of paper lottery and net purchase cost is reflected in the profit and loss account. The purchase cost shown in the profit and loss account of 22 ITA NOs. 1716 & 1717/MUM/2020 C.O. Nos. 136 & 134/MUM/2021 M/s. PAN India Network Infravest Pvt. Ltd., the appellant is thus gross purchase from the distributors minus prize money on unsold paper lottery tickets. However, the related party disclosure inthe notes to accounts reports the gross purchases before excluding prize money on unsold tickets. The same has been explained vide letter dated 03.02.2014 at Pg 61 of the PB and vide letter dated 03.03.2014 at Pg 72 of the PB. The reconciliation was submitted to the AO vide letter dated 03.02.2014 (Refer Pg 63 of the PB). The reconciliation is as under: Particulars Amount (in Rs in crores) Purchases from Related Party Tashi Delek Gaming Solutions Pvt. Ltd. 371.22 Kenlott Gaming Solutions Pvt. Ltd. 819.16 Ecool Gaming Solutions Pvt. Ltd. 418.11 Total 1,608.49 Less: Prize pool fund on unsold tickets -139.23 Total 1,469.26 Purchases from Unrelated Party Intrex India Pvt. Ltd 3.46 Total 1,472.73 2.35. Similar additions were deleted by the Hon'ble DRP in the case of Pan India Network Ltd., for the AY 2011-12 vide its directions dated 14.12.2015 (Refer Pg 144 to 159 of the PB). 2.36. In any case, it is pertinent to not that the Hon'ble CIT(A) vide his order dated 10.02.2020 has directed the AO to verify the claim of the assessee and delete the addition. However, the Ld. AO has yet not passed the order giving effect to the Hon’ble CIT(A)'s order. Therefore, the CIT(A)'s order does not warrant any interference. AY 2007-08 The issues raised in this appeal are similar to the issues in the appeal for AY 2006-07 and, therefore. the aforesaid submissions may be considered for deciding this appeal as well.” 23 ITA NOs. 1716 & 1717/MUM/2020 C.O. Nos. 136 & 134/MUM/2021 M/s. PAN India Network Infravest Pvt. Ltd., 11. Considered the rival submissions and material placed on record, we observe that the assessment was reopened heavily relying on the findings in the course of survey. We observe from the reassessment order that the assessing officer observed that the major area of manipulation for reducing the profit is the over booking of cancellation of lottery tickets. He observed that the cancellation of lottery tickets vary differently under different scheme and region. Accordingly, he analysed the past records and observed that the cancellation recorded by the assessee during the current assessment year is higher than the weighted average of the past result, accordingly, he has taken the cancellation percentage of 1.2% as reasonable. Thereby, he disallowed the difference of actual booking in the books of account and reasonable percentage determined by him. We observe that Ld.CIT(A) has analysed the cancellation of tickets retailer-wise and further he observed that the assessee was not confronted with the informations before finalising the assessment. Further he has relied on the directions of DRP in the case of Pan India Network Ltd for AY 2011-12 and Ld.CIT(A) order in the case of Pan India Network Ltd in AY 2009-10. He further observed that assessing officer has not referred to any evidence found during the survey pertaining to the current assessment year under 24 ITA NOs. 1716 & 1717/MUM/2020 C.O. Nos. 136 & 134/MUM/2021 M/s. PAN India Network Infravest Pvt. Ltd., consideration. He found that the percentage adopted by the Assessing Officer as reasonable without providing any basis for the same. Therefore, he gave relief to the assessee. We have also considered the survey report and did not find any reference to present assessment year and found that there is no basis for adopting the percentage adopted by the Assessing Officer as reasonable. Hence, we do not see any reason to interfere with the findings of Ld CIT(A). Therefore, we are inclined to dismiss the ground raised by the revenue. 12. With regard to unsold paper lottery tickets, we observe that Ld.CIT(A) again relied on the order of DRP in AY 2011-12 in the case of Pan India Network Ltd, wherein the DRP has considered the submissions of the assessee and the assessee has produced before them the reconciliation of the purchases with the total purchases as per notes to accounts alongwith the ledger extracts of purchase and other accounts as referred in the reconciliation statement. Prima facie they have accepted the information submitted by them. It was remitted back to Assessing Officer to verify the information submitted by the assessee. In the effect giving order, the Assessing Officer found that the contention of the assessee was correct. Since the facts in the present case is 25 ITA NOs. 1716 & 1717/MUM/2020 C.O. Nos. 136 & 134/MUM/2021 M/s. PAN India Network Infravest Pvt. Ltd., similar to the facts in the assessee’s case, Ld.CIT(A) gave relief to the assessee. After careful consideration, we noticed that the assessee has not submitted any additional information before appellate authority to substantiate its claim. In our considerate view, the assessing officer should verify the same before giving relief to the assessee. Accordingly, this issue is remitted to the file of Assessing Officer to verify the contention of the assessee and give relief as per law. Accordingly, this ground of appeal is allowed for statistical purpose. 13. In the result, appeal filed by the revenue is partly allowed. ITA.No. 1716/MUM/2020 (A.Y. 2007-08) 14. Coming to the appeal relating to A.Y. 2007-08, since facts in this case are mutatis mutandis, therefore the decision taken in A.Y. 2006-07 is applicable to this assessment year also. Accordingly, this appeal is partly allowed. 15. In the result, appeal filed by the Revenue is partly allowed. 26 ITA NOs. 1716 & 1717/MUM/2020 C.O. Nos. 136 & 134/MUM/2021 M/s. PAN India Network Infravest Pvt. Ltd., C.O. Nos. 134 & 136/MUM/2021 16. Since we have decided the appeals filed by the revenue in favour of the assessee, the cross objections filed by the assessee are accordingly dismissed. 17. In the result, cross objections filed by the assessee are dismissed. 18. To sum-up, appeals filed by the revenue are partly allowed and cross objections filed by the assessee are dismissed. Order pronounced in the open court on 13 th March, 2023 Sd/- Sd/- (ABY T. VARKEY) (S. RIFAUR RAHMAN) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai / Dated 13/03/2023 Giridhar, Sr.PS Copy of the Order forwarded to: 1. The Assessee 2. The Respondent. 3. The CIT(A), Mumbai. 4. CIT 5. DR, ITAT, Mumbai 6. Guard file. //True Copy// BY ORDER (Asstt. Registrar) ITAT, Mum