2009 (5) TMI 23 - HC - Income Tax

Undisclosed income additions made u/s 69A - Revenue had taken into consideration a Statement made by a third party independent of the Search and since nothing was discovered in the course of the Search the action of revenue was contrary to law held that income not disclosed or unearthed as a result of the Search or Requisition cannot be brought to tax under Chapter-XIVB - undisclosed income not determined on the basis of material gathered in a Search cannot justify the ordering of a Block Assessment

Summary

Issues:
1. Addition of income under Section 69A of the Income Tax Act.
2. Validity of evidence collected during a search or survey.
3. Interpretation of relevant case laws regarding undisclosed income determination.
4. Consideration of third-party statements in tax assessments.

Issue 1: Addition of income under Section 69A of the Income Tax Act:
The Commissioner of Income Tax challenged an order of the ITAT regarding the addition of Rs. 68,00,000 under Section 69A of the Act. The CIT(A) had deleted this addition, concluding that no incriminating material was found during a search on the Assessee and connected concerns. The Revenue relied on a third party's statement to allege the Assessee's involvement in providing accommodation entries for cash. However, the Tribunal dismissed the Revenue's appeal, emphasizing that evidence relied upon should have been gathered during the search or requisition under the Act.

Issue 2: Validity of evidence collected during a search or survey:
The Tribunal, citing relevant case laws, held that material collected during a survey under Section 133A cannot be considered as evidence for tax assessments. The ITAT applied judgments stating that loose slips or statements not directly linked to the search operation are insufficient to invoke Section 69A. It was deemed improper to rely on evidence not obtained during the search process to add undisclosed cash to an Assessee's profits.

Issue 3: Interpretation of relevant case laws regarding undisclosed income determination:
The Division Bench of the High Court referred to various judgments to analyze the determination of undisclosed income. Case laws like CIT vs. Ravi Kant Jain highlighted that undisclosed income must be based on material gathered during a search to warrant a Block Assessment. Conversely, in cases like CIT vs. Mukundray K. Shah, the contents of a diary found during a search were considered valid evidence leading to the discovery of undisclosed income.

Issue 4: Consideration of third-party statements in tax assessments:
In another appeal, the Revenue contested an addition based on a statement made by a third party after the search. However, the statement was contradicted during cross-examination. It was noted that the Assessee and the supplier operated independently, being assessed for Income Tax and Sales Tax separately. The Court dismissed the appeal, stating no substantial question of law arose for consideration.

In conclusion, the Court dismissed both appeals, emphasizing the importance of evidence gathered during a search or survey for tax assessments and highlighting the significance of directly linked material in determining undisclosed income. The judgments referred to underscored the necessity of establishing a clear connection between the evidence and the search operation to justify additions to an Assessee's income.