Taxpayer Provided Only Informal Assistance to Relatives and Lacked Clear Ownership: ITAT Deletes from profits of Alleged firms [Read Order]

The Jaipur Bench of the Income Tax Appellate Tribunal ( ITAT ) deleted the additions made on account of unsecured loans and estimated profits related to two entities Gopala Garments and Race Kids Wear, observing that the Revenue failed to provide corroborative evidence linking their ownership and income to the assessee.

During a search operation on the Karnani Group, several loose papers were discovered at the residential premises of a partner of Shri Ambica Garments, Shri Ramesh Kumar Mundhra.

These documents included isolated balance sheets and profit & loss accounts for the years 2016 and 2017 for two separate entities including Gopala Garments and Race Kids Wear, both with a Delhi address.

The Assessing Officer (AO) rejected the partner’s statement that these firms belonged to his relatives and that his involvement was limited to providing informal assistance. The AO treated these entities as belonging to the assessee's group, making additions for unexplained unsecured loans and estimated profits/Gross Profit (GP) based on the figures in the loose sheets.

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Aggrieved by the AO’s order, the assessee filed an appeal before the Commissioner of the Income Tax (appeals) [CIT(A)]. The CIT(A) confirmed the AO’s order. Aggrieved by the CIT(A)’s order, the assessee filed an appeal before the ITAT.

The assessee argued that the documents were found at a residential premise, not a business premise, and were mere single-page sheets that lacked independent legal status as "books of account" under the Act.

The assessee argued that no digital data or further corroborative material was seized or produced by the Revenue to substantiate the actual transactions. The assessee argued that the profit & loss accounts contained entries for manufacturing expenses (like factory rent and labor) but no such manufacturing activity was found at the assessee's location.

The two-member bench, comprising Dr. S. Seethalakshmi (Judicial Member) and Rathod Kamlesh Jayantbhai (Accountant Member) held that the loose sheets, being standalone documents without any corroborative evidence, could not be treated as conclusive books of account.

The tribunal observed that the material especially when they were found at a residential premise and the partner had provided an explanation regarding informal family assistance.

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The tribunal held that the burden of establishing ownership and connection between the assessee and the alleged entities was on the Revenue. The tribunal noted that the mere presumption arising from the location of the loose papers was insufficient to link the firms' income to the assessee.

The tribunal observed that tax authorities cannot rely solely on preliminary or unverified documents without substantiated evidence. The tribunal held that the lack of digital records or further inquiry by the AO undermined the validity of the additions.

The Tribunal ultimately directed the deletion of all additions related to the alleged profits and unsecured loans of Gopala Garments and Race Kids Wear. The appeal of the assessee was allowed.

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