SHREE BHAGESHWARI PAPERS P.LTD,MUZAFFARNAGAR V. ACIT, CIRCLE-2, MUZAFFARNAGAR

ITA 7760/DEL/2018

AI Insights

The case involves Shree Bhageshwari Papers Pvt. Ltd., which appealed against the order of the CIT(A) that sustained certain additions made by the AO regarding undisclosed sales and investments. The AO had made these additions based on documents seized during a search at another company, Trikoot, which allegedly showed undisclosed sales by the assessee to Trikoot. The Tribunal found that the additions were not supported by any incriminating material from the assessee's premises and were primarily based on a show cause notice and electronic records from Trikoot, which were not independently verified. The Tribunal also noted that the proceedings against Trikoot by the Central Excise Department had been quashed, further undermining the basis of the additions.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 314328 (ITAT-DELHI)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 07-05-2025
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: G
• Assessment Year: 2014-2015
• Other Referred Cases: M/s. Trikoot Iron & Steel Casting Ltd. vs Additional Director General (Adjn.) Excise Appeal No.55779 of 2023, PCIT vs Sapoorji Pallonji & Co.Ltd. 2020 (3) TMI 552, State of Kerala vs C. Velukutty [1966] 60 ITR 239 (SC)
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SAHIL KUMAR BANSAL
• Assessee Lawyers: VED JAIN; AMAN GARG; CENTRAL EXCISE
• Keywords: Document seized; Loose papers; Bogus
• Section: 143(3)

Judgement Text

" IN THE INCOME TAX APPELLATE TRIBUNAL DELHI “G” BENCH: NEW DELHI BEFORE SHRI VIKAS AWASTHY, JUDICIAL MEMBER & SHRI PRADIP KUMAR KEDIA, ACCOUNTANT MEMBER ITA No.7760/Del/2018 [Assessment Year : 2014-15] Shree Bhageshwari Papers Pvt.Ltd., 9th KM, Bhopa Road, Muzaffarnagar Uttar Pradesh-251001 PAN-AAACB9178R vs ACIT, Circle-2 Muzaffarnagar Uttar Pradesh-251002 APPELLANT RESPONDENT Appellant by Shri Ved Jain, Adv. & Shri Aman Garg, CA Respondent by Shri Sahil Kumar Bansal, Sr DR Date of Hearing 24.03.2025 Date of Pronouncement 07.05.2025 ORDER PER PRADIP KUMAR KEDIA, AM : The captioned appeal has been filed at the instance of the assessee seeking to assail the First Appellate order dated 14.09.2018 passed by Commissioner of Income Tax (A), Muzaffarnagar [“CIT(A)”] under s. 250(6) of the Income Tax Act, 1961 [“the Act”] arising from the assessment order dated 20.12.2016 passed under s. 143(3) of the Act pertaining to assessment year 2014-15. 2. Briefly stated, the assessee company is engaged in the business of manufacturing of paper and iron ignots for AY 2014-15 in question. The assessee filed return of income declaring total income of INR 2,60,32,880/- on 29.11.2014. In the course of regular assessment, the AO found that a search was conducted by the Central Excise Department (‘CED’) on 04.07.2013 in the case of M/s. Trikoot Iron and Steel Castings Ltd. (Trikoot). Pursuant to search on Trikoot by the Central Excise Department, certain seizure of documents from the premises of Trikoot purportedly led to alleged unearthing of undisclosed sales by the assessee to Trikoot. Consequently, a search was also conducted at the premises of the assessee company on 11.07.2013 by the ITA No.7760/Del/2018 Page | 2 Central Excise Department. Based on the documents unearthed by the Central Excise Department from Trikoot, the AO alleged undisclosed sales amounting to INR 4,15,64,433/- made by the assessee to Trikoot. The AO applied average rate of 6.31% gross profit ratio on such alleged undisclosed sales as undisclosed income of the assessee. Consequently, the additions of INR 26,22,715/- was made on the alleged undisclosed sales by applying G.P. ratio of 6.31%. 3. Based on the allegations towards undisclosed sales of INR 4,15,64,433/- to the said party outside the books, the AO further assumed that for making sales outside books, there would have been investment by way of undisclosed capital in carrying out such sales outside the books. The AO thus made a further addition of INR 83,12,887/- being 20% of the sales as undisclosed capital. 4. The AO further made an addition of INR 3,04,739/- being adhoc disallowance of 20% of the expenditure incurred on telephone expenses and vehicle running and maintenance etc. 5. Aggrieved, the assessee preferred appeal before the CIT(A). The CIT(A) modified the G.P. rate from 6.31% being G.P. average of last three years to 4.57% being G.P. rate of assessment year in question. The CIT(A) thus scaled down the additions in respect of gross profit from INR 26,22,715/- to INR 18,99494/-. The CIT(A) also revised undisclosed capital investment in respect of undisclosed sales from 20% of the sales assumed by the AO to 12.5% of the sales. Thus, the additions of INR 83,12,887/- made by the AO towards undisclosed capital purportedly utilized for undisclosed sales was brought down to INR 51,12,425/-. 6. The CIT(A) further revised the estimated disallowances towards telephone and vehicle running expenses to INR 1,52,270/- as against the additions of INR 3,04,739/- made by the AO by revising the assumptions from 20% to 10%. 7. Aggrieved by the additions and disallowances partially sustained by the CIT(A), the assessee preferred appeal before the Tribunal. ITA No.7760/Del/2018 Page | 3 8. At the time of hearing, the Ld. Counsel for the assessee submitted that a search was conducted at Trikoot as well as on the assessee by Central Excise Department. No incriminating material was found from the premises of the assessee. The additions have been solely made on the basis of show cause notice issued by the Director General of Central Excise Intelligence on Trikoot and an addition of INR 26,22,715/- was carried out. The AO has not made any independent enquiry whatsoever and omitted to take note that all the products manufactured by the assessee i.e. paper and iron ignots etc. are subjected to purview of Central Excise Department and the removal of goods is always made under the supervision of Excise Authorities. 8.1. As further asserted, the absence of any extra consumption of electricity also vouches for the stand claim of the assessee that no sales have been made outside of the books. The Ld. Counsel for the assessee next submits that the sole basis for additions is the show cause notice from CED in the case of Trikoot Iron which show cause notice is no longer reliable having regard to the judgement of the CESTAT, Delhi in the case of M/s. Trikoot Iron & Steel Casting Ltd. vs Additional Director General (Adjn.) Excise Appeal No.55779 of 2023 dated 09.09.2024. Besides, the Ld. Counsel contended that third party information cannot be relied without any independent enquiry. A reference was made to the judgement of the Hon’ble Bombay High Court in the case of PCIT vs Sapoorji Pallonji & Co.Ltd. 2020 (3) TMI 552 dated 04.03.202. 8.2. The Ld. Counsel also contended that loose papers/documents without corroboration cannot form the basis for making such additions. 8.3. The Ld. Counsel for the assessee submitted that the only basis on which the AO has made addition is the information which the AO has got consequent to search carried out by the Central Excise Department on Trikoot. The quantification of sales has been made on the basis of some computer printout taken from the hard disk and pen drive recovered from the premises of Trikoot in the search carried out by Central Excise Department. Undoubtedly, the panchnama prepared at the premises of Trikoot by the Central Excise Department does not mention the details of recovery of the hard disk and pen drive. Accordingly, the conditions stipulated in s. 36B of the Central Excise Act ITA No.7760/Del/2018 Page | 4 have not been complied with in respect of recovery of electronic records/documents. The print out therefore statedly taken from such electronic record could not have been taken into cognizance. The entire allegation of Central Excise Department and consequently that of the AO to blemish the sales declared by the assessee is premised on the electronic records which cannot be taken into account in the absence of any reference in the panchnama. This contention has been accepted by the Custom, Excise and Service Tax Appellate Tribunal (“CESTAT”) in the appeal filed by Trikoot itself and consequently, the relief was granted to Trikoot by CESTAT in the judgement rendered above. The Ld. Counsel for the assessee thus submitted that very basis of making allegations resulting in additions on account of sales outside books of account and investment of undisclosed capital stands wiped out and rendered unsustainable in law. More so, such additions were made by the AO without any independent enquiry on third party information (Trikoot) and therefore, the judgement rendered in the case of PCIT vs Shapoorji Pallonji & Co.Ltd. [2020] 423 ITR 220 (Bom.) dated 04.03.2020 shall apply. 8.4. As regards adhoc disallowance of 10% of telephone expenses and vehicle maintenance expenses etc. sustained by the CIT(A), the Ld. Counsel for the assessee referred to and relied upon the judgement rendered in the case of State of Kerala vs C. Velukutty [1966] 60 ITR 239 (SC) and submitted that the assessee being company, no personal user can be implied and ‘business purpose test’ would be sole consideration. Thus, estimated disallowance initiated by the AO and sustained by the CIT(A) is not justifiable. The Ld. Counsel thus urged for reversal of the additions/disallowances sustained by the CIT(A) as per the grounds of appeal. 9. The Ld. Sr. DR for the Revenue relied upon the first appellate order. 10. We have carefully considered the rival submissions and perused the material available on record. The estimated additions made arising from undisclosed sales outside books of accounts and estimated additions towards undisclosed capital employed on such undisclosed sales is in controversy. It is the case of the assessee that the entire basis of additions towards undisclosed sales and consequent additions towards undisclosed investment is certain ITA No.7760/Del/2018 Page | 5 print out taken by the Central Excise Department from the hard disk and pen drive recovered from the premises of Trikoot in a search carried out by the Central Excise Department. However, the panchnama prepared at the premises of Trikoot does not bear any reference to recovery of hard disk and pen drive. Consequently, adverse opinion towards undisclosed sales made by the assessee to Trikoot flowing from such pen drive etc. is neither admissible as evidence nor it can be examined for this purpose as held in appellate order passed by Excise Tribunal. It is further a case of the assessee that consequent upon search in the case of Trikoot, a search was carried out at the premises of the assessee as well. However, Central Excise Department could not recover any adverse material from the premises of the assessee either. 11. The AO in the instant case has also not brought any material on record adverse to the assessee. The sole basis of estimated addition is a show cause notice issued by the Central Excise Department, the aforesaid proceedings against the third party (Trikoot) by Central Excise Department has been quashed and therefore, no firm basis exists any longer against the assessee. Thus we find substantial force in the plea of the assessee for reversal of the additions on this score. 12. As emerges from the assessment order, the AO has entertained adverse inference based on ‘show cause notice’ issued by the Director of DG of Central Excise Intelligence on Trikoot and reference to some loose papers therein. As pointed out on behalf of the assessee, the appellate authority of Central Excise Department has quashed the proceedings against Trikoot. The relevant paras of the judgement are reproduced hereunder:- 18. “Thus, we find that according to the Tribunal the assessing officer had merely relied upon information received from the Sales Tax Department, Government of Maharashtra without carrying out any independent enquiry. Tribunal had recorded as finding that assessing officer had failed to show that the purchased materials were bogus and held that there was no justification to doubt genuineness of the purchases made by the respondent-assessee. 19. We are in agreement with the views expressed by the Tribunal. Merely on suspicion based on information received from another authority, the assessing officer ought not to have made the additions without carrying out independent enquiry and without affording due opportunity to the respondent-assessee to controvert the statements made by the sellers ITA No.7760/Del/2018 Page | 6 before the other authority. Accordingly, we do not find any good ground to entertain this question for consideration as well. 20. Consequently, we find no merit in the appeal preferred by the Revenue. Appeal is dismissed.” 13. Significantly, the AO has also not made any independent enquiry in the course of search to assert the additions. No independent material to corroborate the allegation of unrecorded sales is available on record. The ratio of judgement referred in the case of PCIT vs Sapoorji Pallonji & Co. Ltd. (supra) would thus squarely apply. The Hon’ble Bombay High Court in that case observed that the AO had merely relied upon the information received from the Sales Tax Department, Government of Maharasthra without carrying out any independent enquiry. The additions were thus quashed. 14. Ground Nos.3 & 4 of the assessee are allowed. 15. As regards adhoc disallowance out of telephone and vehicle expenses etc., it is the case of the assessee that such estimated disallowance by the Revenue is not justified in the case of a company run by the professional management. The assessee being a company, no personal user of telephone and vehicle expenses etc. can be envisaged per se. We find substantial force in such plea of the assessee. The adhoc additions without pin-pointing any specific instance of expenditure incurred which is not wholly and exclusively for the purpose of business, is not permissible. The additions/disallowances cannot be made based on figment of imagination and must necessarily be supported by direct or circumstantial evidences. There being none, the estimated disallowance cannot be sustained in law. 16. Ground No.5 raised by the assessee is thus allowed. 17. In the result, the appeal of the assessee is allowed. Order pronounced in the open Court on 07th May, 2025. Sd/- Sd/- (VIKAS AWASTHY) JUDICIAL MEMBER (PRADIP KUMAR KEDIA) ACCOUNTANT MEMBER ITA No.7760/Del/2018 Page | 7 *Amit Kumar, Sr.P.S* Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(Appeals) 5. DR: ITAT ASSISTANT REGISTRAR ITAT, NEW DELHI "