Court rejects tax addition based on third-party documents without proper evidence linking taxpayer

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Case Name

Principal Commissioner of Income Tax vs. Ganesh Plantation Ltd. (High Court of Gujarat)

R/Tax Appeal No. 251 of 2021

Date: 22nd November 2021

Key Takeaways

• Third-party documents alone can’t justify tax additions: Documents seized from one party cannot be used to make additions against another party without establishing a clear nexus
• Burden of proof on tax authorities: When alleging accommodation entries or sham transactions, the Revenue must provide credible evidence, not just suspicions
• Importance of cross-examination: Key witnesses must be properly examined, and taxpayers should have the right to cross-examine adverse witnesses
• Section 68 requires proper evidence: Unexplained cash credit additions under Section 68 need substantial proof, not mere conjectures

Issue

Whether the Income Tax Appellate Tribunal was correct in deleting the addition of Rs.4,00,00,000/- made on account of unexplained credit under Section 68 of the Income Tax Act, despite the Assessing Officer’s reliance on documents seized from a third party.

Facts

Ganesh Plantation Ltd. filed their tax return for 2011-12, declaring income of Rs.6,54,22,430/-. Initially, their case went through normal scrutiny assessment.

However, things got complicated when the tax department conducted a search operation on the “Venus Group” of companies. During this search, they seized various documents and cash books from Venus Group’s premises.

Based on these seized documents, the tax department reopened Ganesh Plantation’s case under Section 147. They issued a fresh notice on 27.03.2017, claiming that Ganesh Plantation had received Rs. 4 crores from Sunderdeep Builders (part of Venus Group) on 24.01.2011, and this was actually a sham transaction involving unaccounted cash.

The key transaction in question: Ganesh Plantation had an existing business relationship with Sunderdeep Builders. They had given advances totaling Rs. 11 crores (Rs. 1 crore in 2008 and Rs. 10 crores in May 2008). Sunderdeep had repaid Rs. 7 crores in 2008-09, leaving a balance of Rs. 4 crores outstanding. This Rs.4 crores was repaid by Sunderdeep to Ganesh Plantation through a proper account-payee cheque on 24.01.2011.

Arguments

Revenue’s Arguments:

The tax department argued that the Rs.4 crores received by Ganesh Plantation was not a genuine repayment but an accommodation entry. They relied on:

• Seized documents from Venus Group showing unaccounted cash transactions
• Statement of Mr. Deepak Gajjar (Venus Group’s accountant) who said he maintained unaccounted cash books as per directions of the Vaswani brothers
• Coding and systematic maintenance of these cash books suggesting organized hawala transactions
• Allegation that Ganesh Plantation paid unaccounted cash to get back Rs.4 crores through banking channels

Ganesh Plantation’s Arguments:

The company argued that:

• The Rs.4 crores was a legitimate repayment of an existing loan/advance
• All transactions were properly recorded in their books and done through banking channels
• Documents were seized from Venus Group’s premises, not from their premises
• No direct evidence linked them to any cash transactions
• The accountant’s statement was hearsay and he had no personal knowledge of the source of cash

Key Legal Precedents

The court relied on several important precedents:

1. CBI vs. V.C. Shukla and Others [(1998) 3 SCC 410] - This case established that loose paper vouchers or pages found and seized from third parties cannot be considered as evidence against another party
2. Prarthna Construction Pvt. Ltd. case - The court mentioned that ITAT had decided a similar matter following this precedent, which was upheld by the High Court
3. Section 68 of the Income Tax Act - The court extensively analyzed this provision which deals with unexplained cash credits
4. Sections 131, 132(4), 143(3), 147, 148, and 151 of the Income Tax Act - Various procedural provisions related to assessment, reassessment, and examination of witnesses

Judgement

The High Court dismissed the Revenue’s appeal and upheld the deletion of Rs. 4 crores addition. Here’s the court’s reasoning:

Key findings:

1. No credible nexus established: The court found that there was no live link or proximate nexus between the alleged dubious transactions of Venus Group and Ganesh Plantation
2. Inadequate investigation: The tax department failed to examine key persons like the Vaswani brothers who could have provided credible information. The only statement was from an accountant who admitted he had no personal knowledge of cash sources
3. Third-party documents insufficient: The court held that “unilateral entries made by Venus Group (an outside party) in their records and admittedly belonging to them cannot, in our view, has any rational basis to crucify a third party and fix tax liability on it”
4. Burden of proof not discharged: The Revenue failed to provide direct or circumstantial evidence to support their allegations of underhand cash transactions
5. Legitimate business transaction: The court accepted that the Rs. 4 crores was a genuine repayment of an existing outstanding liability through proper banking channels

The court concluded that the additions were “made without any legally supported documents” and were “devoid of any rational”.

FAQs

Q1: Can tax authorities make additions based on documents seized from other parties?

A: Not without establishing a clear and credible connection. The court made it clear that documents seized from third parties cannot automatically be used to make tax additions against another taxpayer without proper evidence linking them.

Q2: What is Section 68 and when can it be applied?

A: Section 68 deals with unexplained cash credits. It allows tax authorities to treat unexplained credits as income if the taxpayer cannot satisfactorily explain the nature and source. However, the authorities must have substantial evidence, not mere suspicions.

Q3: What happens if key witnesses are not examined properly?

A: The court emphasized that when making serious allegations like accommodation entries, tax authorities must examine key persons who have direct knowledge. Relying only on statements from people with no personal knowledge weakens the case significantly.

Q4: Can legitimate business transactions be treated as sham transactions?

A: No, not without concrete evidence. In this case, the court found that the transaction was supported by proper books of accounts, banking records, and had a genuine business purpose (repayment of an existing loan).

Q5: What’s the significance of this judgment for taxpayers?

A: This judgment strengthens taxpayers’ rights by establishing that tax authorities cannot make arbitrary additions based on weak evidence or third-party documents. It emphasizes the need for proper investigation and credible evidence before making tax additions.

Q6: Does this mean all reassessment proceedings are invalid?

A: No, the court upheld the validity of reopening the case under Section 147. However, it held that having valid reasons to reopen doesn’t automatically justify the additions made - those still need to be supported by proper evidence.

1. Aggrieved by the order dated 13.04.2021 passed by the Income Tax Appellate Tribunal, Ahmedabad (‘ITAT’ hereinafter) in ITA No. 2295/Ahd/2018 for the assessment year 2011-12, the present Tax Appeal is preferred raising the following questions of law for the determination of this Court:-

“Whether in the facts and circumstances of the case and in law, the Appellate Tribunal is right in deleting the addition of Rs.4,00,00,000/- made on account of unexplained Credit under section 68 of the Act by

ignoring the overwhelming and strong evidences discussed by the Assessing Officer in the assessment order relating to the unexplained transactions?”

2. The assessee had filed the return of income on 12.07.2012 declaring its total income of Rs.6,54,22,430/-. Its case was selected for scrutiny and income of Rs.6,67,58,012/- was assessed on scrutiny assessment under Section 143(3) of the Income Tax Act (the ‘IT Act’ hereinafter).

2.1. The case was transferred to the DCIT, CC-1 under Section 127 of the IT Act and it was reopened under Section 147 of the IT Act after dully recording the reasons on getting the sanction of the CIT (Central), Ahmedabad under Section 151 of the Act.

2.2. A notice under Section 148 was issued on 27.03.2017.

The information had been received from the office of the CIT

in connection with the search and seizure action conducted in

the Venus Group of Company which had led to seizure of

various incriminating materials. According to the Revenue,

unaccounted cash transactions of the Venus Group were

recorded on cash vouchers and thereafter on the strength of

the recording made on cash voucher, entries were recorded

on the Day Cash Book. This had led to not only the reopening

of the assessment but also addition of Rs. 4 Crores on account

of unexplained cash credit under Section 68 of the Act.

2.3. It was alleged that an amount of Rs.4 Crores has been received by the assessee from the Sunderdeep Builders of Venus Group through banking channel on 24.01.2011 against the corresponding payment of unaccounted cash by the

assessee to Sunderdeep Builders which was a concerned of Venus Group.

2.4. The Assessing Officer considered this as a sham

transaction as also an accommodation entry against payment

of unaccounted income. He relied on the statement of the

accountant of the Venus Group where he deposed that the

unaccounted cash books had been written by him as per the

direction of Ashok Sunderdas Vaswani and the documents

were linked by the Assessing Officer to the assessee.

According to the assessing officer, the unaccounted daily cash

books were found which had transactions since 01.01.2017.

They were also maintained in a systematic manner on a daily

basis and they were also supported by the vouchers. He also

noted the coding of dates, amounts and other descriptions in

the unaccounted day cash books. According to him, the

vouchers kept in different colours indicated the receipt as well

as expenses and they too were arranged in a systematic

manner as per the nature of expense like land/person, etc. He

was of the opinion that these transactions were related to the

cash transactions and the bank transactions were exchange of

cash with the RTGS/EC.

2.5. By a detailed order, under the head of co-relation

against EC entries with bank account of the assessee, he had

added the amount of Rs. 4 Crores as an addition on account of

unexplained cash credit.

2.6. The assessee, being aggrieved by this huge addition, had

preferred the appeal before the CIT Appeals which confirmed

the reopening of the reassessment proceedings under Section

147 of the IT Act however, it deleted the additions made by

the Assessing Officer predominantly on the ground that the

documents were seized from the premise of the Venus Group

and not from the premise of the assessee.

2.7. After considering the detailed factual submissions made

by both the sides as also in extenso considering the legal

submissions of the parties, it has chosen not to endorse the

additions made by the Assessing Officer. In the detailed

reasoning given by the CIT Appeals, it has held that if the

jotting on the seized loose papers are assumed to be a

material, the burden would be always on the Assessing Officer

as an assessing authority to bring it on record independent

clinching evidence. It is also of the opinion that under the law,

the Assessing Officer will need to consider his duty to bring on

record such material information which is available outside

the assessee’s control which the assessee asserts is existing

and it is within the power of the Assessing Officer to call for.

2.8. He has extensively also considered the allegations of the

Assessing Officer of accommodation entry transaction to hold

that the Assessing Officer in assessment order has not

identified any of the statements of main persons of the Venus

Group namely Shri Ashok Vaswani, Shri Deepak Vaswani and

Shri Rajesh Vaswani, proprietors of the Sunderdeep Builders

about their admission that the Venus Group has indulged into

any accommodation entry transaction. Nothing has been

brought on record against the company even from the

submissions made by the Venus Group search case. No

statement is recorded of Shri Ashok Vaswani, Shri Rajesh

Vaswani and Shri Deepak Vaswani under Section 132(4) and

131 in respect of the scanned copies of the seized loose pages

reproduced by the Assessing Officer in the assessment order.

2.9. The appellate authority also verified the ledger account

of M/s. Sunderdeep Builders from the books of accounts of the

appellant company to note that there was an opening debit

balance of M/s. Sunderdeep Builders on 01.04.2008 for an

amount of Rs. 1 Crore and thereafter on 26.05.2008 the

company advanced Rs. 10 Crores to M/s. Sunderdeep Builders

in financial year 2008-09 and in the same financial year

M/s.Sunderdeep Builders repaid back to the appellant

company an amount of Rs. 7 Crores between the period

29.09.2008 to 20.10.2008.

2.10. It was the case of the appellant company that the

outstanding payable of Rs. 4 Crores on 31.03.2009 by M/s.

Sunderdeep Builders was repaid to the appellant company on

24.01.2011 by an account-payee-cheque duly reflected in the

bank account of the appellant company and therefore, the CIT

Appeals held that the allegation of any accommodation entry

transaction and alleged cash payment by the appellant

company to M/s. Sunderdeep Builders for recovering back the

advance of Rs. 4 Crores from M/s. Sunderdeep Builders did

not arise at all.

2.11. The Assessing Officer’s stand in the assessment order of

making an observation about the alleged cash of Rs. 4 Crores

by the appellant company in lieu of the cheque payment and

also of making an allegation of cash received against EC from

Jayesh Kotak for Ganesh Plantations Ltd. was in detail

considered by the CIT Appeals to hold that nothing had been

noted except the word cash and there was no signature or

name of the Director of the appellant company or any

employee of the company and the name written is of Jayesh

Kotak and the Assessing Officer has not brought on record

any evidence that this person is either a director of the

appellant company or even the shareholder of the appellant

company.

2.12. The Commissioner (Appeals) held that the case of the

appellant company is squarely covered by the decision of the

CBI vs. V.C.Shukla and Others [(1998) 3 SCC 410], where

loose paper vouchers or pages found and seized from the third

party were not considered as the evidence in the case of the

appellant company. It further held that following the decision

in case of Prarthna Construction Pvt. Ltd., the ITAT had

decided the matter which had been upheld by this Court.

Accordingly, addition by way of unexplained cash credit under

Section 68 of the IT Act was not held justifiable.

3. This had been challenged by the Revenue before the

ITAT which has upheld the findings and observations made by

the CIT Appeals. It recognized that the challenge to the

additions towards the unexplained cash credit under Section

68, on merit, has been dealt with by the CIT elaborately. It

has also concurred with the CIT Appeals that the unaccounted

cash transactions of the Venus Groups which were detected

from the premises of the searched person were stated to be

first recorded by the searched person on a loose papers in

encrypted form and then on the basis of the recording made

on these cash vouchers, the entries were recorded on a Day

Cash Book not forming part of the regular books of accounts

maintained in ordinary course. They were the transactions in

a continuous manner without any gap from January, 2007 to

07.03.2015.

3.1. It also considered the contention of the Revenue that the

coding was done to alibi and camouflage the real value of

unaccounted cash transactions and held that the allegation of

alleged accommodation entry of receipt/payment of existing

loans receivable by assessee from M/s. Sunderdeep Builders

largely centered around the statement recorded under

Section 131 of the Accountant Mr. Deepak Gajjar of the Venus

Group. It is a testimony where he deposed of the unaccounted

cash books written by him as per the direction of Mr. Ashok

Sunderdas Vaswani and the same had been handed over to

one Vasibhai at Crystal Archade as per the direction of Mr.

Vaswani. The signature also was stated to be of Mr. Deepak

Vaswani and of Mr. Ashok Vaswani of the Venus Group. They

were linked by the Assessing Officer to the assessee with aid

of statement of Mr. Gajjar and the additions were made.

3.2. The Tribunal noted significantly that the statement of

Mr. Gajjar did not appear to say that he was privy to the

source of cash recorded by him in cash book. He simply

recorded the entries in the unaccounted cash books under the

instructions of the Vaswani brothers. The person had no

knowledge of the relevant facts towards receipt of cash from

the assessee and hence, he would not be entitled to any

weight and it cannot be also considered pertinent so far as the

assessee is concerned.

3.3. There was no inquiry made by the Assessing Officer from

either Vaswani brothers to elicit the credible information and

in absence of any examination of the key persons, the contest

according to the tribunal by way of cross examination was

also stonewalled. It therefore held

“The unilateral entries made by Venus Group (an

outside party) in their records and admittedly

belonging to them cannot, in our view, has any

rational basis to crucify a third party and fix tax

liability on it. No live link/proximate nexus of alleged

dubious transactions between searched person and

the assessee has been brought on record. The

inquiries made were directionless without quizzing

the key persons who needed to be. Nothing of this

sort has been done. No acquiescence of receipt of

cash by searched person from assessee has been

successfully established. Naturally, propriety

demanded the cross examination thereon in the event

any culpable statement roping the assessee

somewhere. The Assessing Officer has conveniently

implicated the assessee without any cogent premise

on the basis of some aimless examinations.

No doubt, the documents found possessed from the

custody of a searched person may possibly operate as

an estoppel against that searched person, if the

circumstances so warrant, but it is unconceivable to

bind a third party for such entries/diary without

demonstrating cogent nexus. The whole action is in

the realm of conjectures and surmises mainly on the

basis of some scanty and sketchy statement yeilded

from the accountant of the searched person. The

revenue has alleged underhand cash transactions.

Hence, the primary onus in the instant case, squarely

lied upon the Revenue and that to justify it with

direct or circumstantial evidences. The onus rested

upon the revenue has not been discharged at all and

thus did not shift on to assessee. Consequently, in the

absence of any credible proof of receipt of cash from

assessee, the apparent has to be taken as real i.e.

Sunderdeep Builders have repaid Rs. 4 Crore through

banking channel in discharge of its existing

outstanding liability as a matter of course.”

4. Learned Senior Advocate Mr. Bhatt has extensively

argued this matter and has also taken us through the

statement recorded of Mr. Deepak Gajjar and the cross-

examination conducted of his by the respondent company. The

same had been called for by this Court after examining the

entire material on record. As could be also noticed from the

statement given by this person that he has no personal

knowledge of any source of the cash. All that he has done is at

the instance of Mr. Ashok Vaswami. His nature of job was to

note down and jot down as per the directions of Mr. Vaswami.

The initials were done either by Mr. Ashok Vaswani or Mr.

Deepak Vaswani of Venus Group. He also had taken the cash

on some occasions and has stated that without any coercion or

inducement, he has given his version. However, in the cross-

examination he admitted that he has no idea as to what was

the source. He had been categorically inquired with regard to

the amount of Rs. 4 Crores that whether the said amount of

cash had been received from the Ganesh Plantations or any of

the directors to which he had denied. He also had been

categorically questioned as to whether as a representative of

Venus Group, he received this amount of Rs. 4 Crores in cash

from the company or its directors, he had no knowledge of as

to who was Mr. Jayesh Kotak. He did not receive this amount

also from Mr. Jayesh Kotak. This man did not know any

director of the Ganesh Plantations. He also had no clue where

the respondent company existed.

5. Noticing the statement given by this person as well as

his detailed cross examination, in no manner the Court needs

to interfere and intervene in the detailed concurrent findings

of both the CIT Appeals and the ITAT. The CIT Appeals and

the Tribunal both have reached to the rightful conclusion by

holding that the additions were made without any legally

supported documents. Also it had noted from the material

which had been placed before it that there was an opening

receivable by the respondent from M/s. Sunderdeep Builders

at Rs. 1 Crore given as a loan in advance by the respondent

company to regular books of accounts. Another advance

aggregating Rs. 10 Crores was given in the month of May,

2008 against which in the very year M/s. Sunderdeep Builders

had repaid back the temporary loan in part to the respondent

company to the tune of Rs. 7 Crores. The balance of Rs. 4

Crores which remained as outstanding was receivable by the

respondent as on 31.03.2009. The Tribunal also has noted that

the loan of Rs. 7 Crores was squared of by way of repayment

in the financial year 2008-09.

6. Section 68 of the Income Tax Act was brought into

picture for making addition of Rs. 4 Crores which deserves to

be reproduced at this stage:-

“68. Cash credits:-

Where any sum is found credited in the books of an

assessee maintained for any previous year, and

assessee offers no explanation about the nature and

source thereof or the explanation offered by him is

not, in the opinion of the [1][Assessing] Officer,

satisfactory, the sum so credited may be charged to

income-tax as the income of the assessee of that

previous year.

Provided that where the assessee is a company, (not

being a company in which the public are substantially

interested) and the sum so credited consists of share

application money, share capital, share premium or

any such amount by whatever name called, any

explanation offered by such assessee-company shall

be deemed to be not satisfactory, unless —

(a) the person, being a resident in whose name such

credit is recorded in the books of such company also

offers an explanation about the nature and source of

such sum so credited; and

(b) such explanation in the opinion of the Assessing

Officer aforesaid has been found to be satisfactory :

Provided further that nothing contained in the first

proviso shall apply if the person, in whose name the

sum referred to therein is recorded, is a venture

capital fund or a venture capital company as referred

to in clause (23FB) of section 10.”

6.1. Any sum which is found credited in the books of the

assessee maintained for any previous years and he can for

more explanation about the nature and source thereof or the

explanation offered by him is not satisfactory in the opinion of

the Assessing Officer, such sum can be charged to income tax

as the income of the assessee of that previous year.

7. On the strength of the suspicion, the Assessing Officer

had added the sum and charged the amount to income tax as

the income of the assessee. Both the authorities have rightly

held that to be an addition which is devoid of any rational.

8. Resultantly, we find no merit in the appeal and since the

question raised is already with extensive facts and reasonings

answered above, the appeal deserves no entertainment.

(SONIA GOKANI, J)

(NISHA M. THAKORE,J)