2025 (5) TMI 971 - AT - Income Tax

Assessment u/s 153A - absence of any incriminating material found during the course of search u/s 132 - HELD THAT - Since the addition in the instant case has been made in absence of any incriminating material found during the course of search and since the assessment is an unabated assessment and the addition is based mainly on the basis of third party statement without any supporting evidence and that too on estimate basis therefore as relying on Abhisar Buildwell (P.) Ltd 2023 (4) TMI 1056 - SUPREME COURT we hold that the addition made by the Assessing Officer by estimating the commission income in 153A assessment is not in accordance with law. We therefore set aside the order of the CIT(A) and direct the AO to delete the addition. Appeal filed by the assessee is allowed.

Summary

The core legal questions considered by the Tribunal in this appeal are as follows:

1. Whether an addition to income can be made in an unabated assessment year under section 153A of the Income Tax Act, 1961, in the absence of any incriminating material found during the course of search under section 132 of the Act?

2. Whether the addition of commission income estimated at 1% of sales from alleged accommodation entries, based primarily on third-party statements without corroborative evidence, is justified and sustainable in law?

3. Whether the failure of the Assessing Officer to provide the assessee with a copy of the statement of a key witness relied upon, and consequently denying the opportunity of cross-examination, violates principles of natural justice and affects the validity of the addition?

Issue 1: Validity of Addition in Absence of Incriminating Material in Unabated Assessment

The legal framework revolves around the provisions of the Income Tax Act, particularly sections 132 (search and seizure), 132(4) (recording of statements during search), and 153A (assessment following search). The principle issue is whether additions can be made in an unabated assessment year when no incriminating material is discovered during search.

The Tribunal examined the Supreme Court decision in PCIT vs. Abhisar Buildwell (P.) Ltd. (2023) 454 ITR 212, which held that no addition can be made in a completed or unabated assessment in the absence of incriminating material found during search or requisition under section 132 or 132A. The Tribunal further relied on the Delhi High Court ruling in PCIT vs. Harjeev Agarwal (290 CTR 263), which clarified that statements recorded under section 132(4) cannot be treated as incriminating material unless corroborated by other evidence found during search.

The Tribunal also referred to the Mumbai Bench's decision in Chandrika Mansukhlal Dodhia vs. DCIT (IT(SS)A No.199/MUM/2025), which upheld the above principles and set aside additions made solely on third-party statements without incriminating material.

In the instant case, the assessee had filed the original return for assessment year 2018-19 before the search conducted on 06.11.2019, and the time limit for issuing notice under section 143(2) had expired. No incriminating material was found during the search at the assessee's premises. The addition of commission income was made solely on the basis of statements of Shri Madhuchnadra Kalaskar, AGM Finance of M/s BVG India Ltd., without any corroborative documentary evidence.

Applying the above legal precedents, the Tribunal held that the addition in the unabated assessment could not be sustained in the absence of incriminating material found during the search. The addition was therefore held to be not in accordance with law and was set aside.

Issue 2: Merits of Addition of Commission Income Based on Third-Party Statements and Estimation

The Assessing Officer estimated commission income at 1% of sales amounting to Rs. 11,36,79,121/- on the basis that the assessee provided accommodation entries to M/s BVG India Ltd. The AO relied on statements of third parties and the general practice of charging commission on bogus entries.

The assessee submitted various documents during assessment proceedings, including ledger accounts, sales and purchase invoices, GST returns, and bank statements, to demonstrate genuine trading activities. However, the AO and CIT(A) found that none of the submitted documents pertained to the alleged sales to M/s BVG India Ltd. and that the purchases claimed to have been made by BVG India Ltd. from the assessee were held to be bogus in BVG India Ltd.'s own assessment proceedings.

The CIT(A) upheld the AO's findings, noting that the assessee failed to provide details of entities from whom purchases were made and that the bank account of the assessee was used as a conduit for cash transactions. The CIT(A) also noted that the assessee did not request cross-examination of the key witness, which was a settled procedural requirement.

However, since the Tribunal allowed the appeal on the legal ground that no incriminating material was found during search, it did not adjudicate the merits of the addition, rendering the issue academic.

Issue 3: Violation of Natural Justice Due to Denial of Cross-Examination Opportunity

The assessee contended that the Assessing Officer failed to provide a copy of the statement of Shri Madhuchnadra Kalaskar and denied the opportunity to cross-examine him, thereby violating principles of natural justice.

The CIT(A) rejected this plea, observing that the assessee did not make any formal request for cross-examination during assessment proceedings. The Tribunal referred to settled legal principles, including the decision of the Calcutta High Court in Hindustan Tobacco Company vs. CIT (211 Taxman 11), which held that failure to seek cross-examination at the appropriate stage precludes raising such a plea at the appellate stage. The plea was thus held to be belated and an afterthought.

Given the Tribunal's decision on the primary legal issue, it did not further adjudicate on this ground.

Significant Holdings and Core Principles

The Tribunal crystallized the following principles:

"In respect of completed assessment / unabated assessment, no addition can be made by the Assessing Officer in absence of any incriminating material found during the course of search u/s 132 of the Act or requisition u/s 132A of the Act."

"Statements recorded under section 132(4) of the Act cannot be considered as incriminating material unless corroborated by any incriminating evidence found during the search."

"Failure to request cross-examination of witnesses at the assessment stage precludes raising such plea at the appellate stage."

Applying these principles, the Tribunal held that the addition of Rs. 11,36,791/- as commission income estimated at 1% of sales, made solely on the basis of third-party statements without incriminating material discovered during search, was not sustainable in law.

The Tribunal accordingly set aside the addition upheld by the CIT(A) and directed the Assessing Officer to delete the addition. Since the appeal succeeded on this legal ground, the Tribunal refrained from adjudicating the merits of the addition or the natural justice plea.