2025 (4) TMI 1042 - AT - Income Tax

Unexplained investment in a property transaction which was not reflected in the books of accounts - reliance on loose unsigned hand written paper found at the premises of third party - HELD THAT -The loose sheet has been recovered from the searched person i.e. Gurvinder Singh Duggal who is a third party which bears no signature of either the Assessee or searched person and the same is not in the hand writing of either searched person or the Assessee. Further third party has specifically denied receiving any cash payment. In the absence of any corroborative material brought on record during the assessment proceedings the AO has committed error in making the addition based on the said loose sheet. Therefore CIT(A) has erred in upholding the addition made by the A.O - Thus addition made u/s 69B which has been sustained by the Ld. CIT(A) is hereby deleted. Appeal of the Assessee is allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this appeal are:

(a) Whether the Assessing Officer (A.O.) had valid jurisdiction to make the addition under section 69B of the Income Tax Act, 1961 ('the Act') based on documents seized during search and seizure operations conducted on a third party;

(b) Whether the addition of Rs. 30,00,000/- on account of unexplained investment, premised on a loose, unsigned, and unverified paper found at the premises of a third party, can be sustained without corroborative evidence;

(c) Whether the transfer of jurisdiction from Mumbai to Delhi authorities without providing an opportunity to the Assessee was valid;

(d) Whether the notice issued under section 143(2) of the Act was valid;

(e) Whether the satisfaction note recorded by the Deputy Commissioner of Income Tax (DCIT), Mumbai, was valid and sufficient to initiate proceedings under section 153C of the Act;

(f) Whether the entire proceedings are invalid due to absence of incriminating documents directly linking the Assessee;

(g) Whether conflicting notices issued by different tax authorities (Mumbai and Delhi) create jurisdictional or procedural defects invalidating the proceedings.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a) and (g): Jurisdiction and Conflicting Notices

The Assessee challenged the jurisdiction of the Assessing Officer, contending that the addition was made without valid jurisdiction and that conflicting notices issued by Mumbai and Delhi tax authorities created procedural irregularities. The transfer of jurisdiction without providing an opportunity to the Assessee was also challenged.

The legal framework governing jurisdiction in cases involving search and seizure is primarily section 153C of the Act, which empowers the Assessing Officer to assess income found during search operations conducted on a third party. The satisfaction note recorded by the DCIT Mumbai is a prerequisite for initiating proceedings under section 153C.

The Court examined the facts that the search was conducted on premises of a third party, Gurvinder Singh Duggal, and documents seized therefrom were used to initiate proceedings against the Assessee. The transfer of jurisdiction to Delhi authorities was effected without prior notice to the Assessee.

The Court found that while the transfer of jurisdiction without giving opportunity to the Assessee is procedurally improper, the primary focus was on the validity of the addition itself. The Court did not elaborate extensively on the jurisdictional conflict but implicitly held that the procedural irregularity did not justify sustaining the addition when the evidentiary basis was weak.

Issue (b) and (f): Validity of Addition Based on Loose Paper Found at Third Party Premises

The pivotal issue was whether the addition of Rs. 30,00,000/- under section 69B of the Act, on account of unexplained investment, could be sustained based on a loose, unsigned, and unverified handwritten paper found at the premises of a third party, without any corroborative evidence.

Section 69B of the Act deals with unexplained investments, allowing the Assessing Officer to add such amounts to the income of the Assessee if the investment is not satisfactorily explained.

The Court referred to binding precedents, notably the decision of the Co-ordinate Bench of the Tribunal in the case of ACIT Vs. Lata Mangeshkar, which held that "unsigned, unverified papers cannot form the basis for addition u/s 69B of the Act." Further, the Supreme Court ruling in Common Cause Vs. Union of India (2017) 394 ITR 220 (SC) was cited, which held that "loose papers cannot be considered as admissible evidence for making an addition unless backed by independent corroborative material."

In the present case, the seized document was neither signed nor in the handwriting of the Assessee or the searched person, Gurvinder Singh Duggal. The latter also denied receiving any cash payment. The Assessee contended that all payments related to the property transaction were made through banking channels, negating the possibility of cash transactions.

The Court emphasized that the Assessing Officer erred in relying solely on the loose handwritten paper found at a third party's premises without any corroborative evidence. The absence of signature, handwriting verification, or any other independent material weakened the evidentiary value of the seized document.

Consequently, the Court held that the addition under section 69B based on such loose paper was unsustainable and the order of the Commissioner of Income Tax (Appeal) upholding the addition was erroneous.

Issue (c) and (d): Validity of Notice under Section 143(2) and Satisfaction Note

The Assessee challenged the validity of the notice issued under section 143(2) of the Act and the satisfaction note recorded by the DCIT Mumbai as being "bad on the face of it."

Section 143(2) notice is a mandatory procedural step for initiating scrutiny assessment. The satisfaction note recorded by the DCIT Mumbai is a condition precedent for initiating assessment proceedings under section 153C after search and seizure.

The Court did not provide detailed reasoning on these points but implicitly accepted the validity of the satisfaction note and notice by focusing on the substantive issue of evidence. The absence of incriminating documents directly linking the Assessee was considered more critical than procedural defects.

Issue (e): Absence of Incriminating Documents Linking the Assessee

The Assessee argued that no incriminating documents were found during the search that bear the Assessee's name, which renders the proceedings invalid.

The Court acknowledged that the document seized was not in the Assessee's handwriting, nor signed by the Assessee, and was found at a third party's premises. The searched person denied any cash transaction. This lack of direct incriminating evidence was a significant factor weighing against the Revenue's case.

The Court concluded that in the absence of any corroborative material linking the Assessee to the alleged unexplained investment, the addition could not be sustained.

3. SIGNIFICANT HOLDINGS

The Court held that:

"Unsigned, unverified papers cannot form the basis for addition u/s 69B of the Act."

"Loose papers cannot be considered as admissible evidence for making an addition unless backed by independent corroborative material."

"In the absence of any corroborative material brought on record during the assessment proceedings, the Assessing Officer has committed error in making the addition based on the said loose sheet."

Consequently, the addition of Rs. 30,00,000/- made under section 69B of the Act and sustained by the Commissioner of Income Tax (Appeal) was deleted.

The Court's decision underscores the principle that additions to income under the Act must be based on reliable and corroborated evidence, and that mere possession of loose, unsigned papers found at third party premises is insufficient to establish unexplained investments attributable to the Assessee.