2025 (6) TMI 208 - AT - Income Tax

Assessment u/s 153A - Difference of incriminating documents extracted from the Hard Disc seized from the premise of the assessee and the income declared by the assessee in return of income - unexplained investment u/s 69 - HELD THAT - Although out of the search conducted on 03.11.2016 the addition has been made. However the alleged incriminating material was not found in the search of the assessee but was found in the search of an independent and altogether distinct taxable entity and the admissions of that taxable entity if were to be relied qua the assessee then the assessments should have been on the basis of the satisfactions recorded for the purpose of section 153C. Thus on this ground alone the impugned additions deserves to be quashed. There was certainly illegality in invoking the provisions of section 292C of the Act qua this disputed document found at the residence of Mr. Praveen Tyagi and to conclude assessment u/s 153A of the Act. Contention of the ld. DR to support the observations of the ld.CIT(A) that opportunity to cross-examine was not sought specifically and otherwise relevant materials was shown to the appellant during the course of assessment proceedings do not advance the cause of justice to hold that separate opportunity of cross-examination is not required to be given. In a case where a liability is being created merely on the basis of statement and conduct of another taxable entity then by citing the relevant material to the present assessee is not sufficient. Indeed cross-examination is not an absolute right but where before the ld.CIT(A) a specific ground has been raised of not providing opportunity of cross-examination of material witness and the ld. CIT(A) proceeds to call for a remand report then certainly the tax authorities below could have come forward and offered their sole witness for cross-examination. Certainly that would have given the assessee an opportunity to put across the case that the flat in regard to which the alleged on money payment was made stands cancelled and even the advance amount stands forfeited. Thus on the basis of the aforesaid discussion not only on the legal aspect of assumption of jurisdiction u/s 153A but otherwise on merits too we are not inclined to sustain the addition. The grounds No.1 and 3 to 9 as raised by the assessee in its appeal are allowed. We find that the CIT(A) has primarily benefitted the assessee on the basis of the remand report wherein the AO himself was satisfied with the evidences of the assessee. Now only because during assessment proceedings the assessee had not provided these evidences in remand report the AO had objected for admission of same that cannot be the basis for sustaining the addition and accordingly the additions deleted by the CIT(A) require no indulgence. The grounds of the Revenue have no substance.

The core legal questions considered in this appeal include: (1) Whether the additions made by the Assessing Officer (AO) on account of alleged unexplained unsecured loans, unexplained cash payments ('on money') for purchase of immovable property, and concealment of income based on documents seized during search proceedings are sustainable; (2) Whether the assessment proceedings initiated under section 153A of the Income Tax Act, 1961 (the Act) are valid given that the incriminating documents relied upon were not found during the search of the assessee but of a third party; (3) Whether the AO and the Commissioner of Income-tax (Appeals) (CIT(A)) correctly applied the provisions of section 68 and section 69 of the Act in making additions; (4) Whether the assessee was afforded adequate opportunity to cross-examine witnesses or verify incriminating material relied upon by the revenue; and (5) Whether the procedural requirements, including approval under section 153D, were complied with in the assessment proceedings.

Regarding the validity of the assessment under section 153A, the Tribunal examined whether the additions could be sustained when the incriminating documents were seized not from the premises of the assessee but from the residence of a third party, namely the CMD of the VVIP group. The legal framework distinguishes between sections 153A and 153C of the Act: section 153A applies to search and seizure cases where incriminating material is found at the premises of the assessee, while section 153C applies when incriminating material is found at the premises of a third party. The Court referred to relevant High Court precedents emphasizing that jurisdiction must be invoked correctly according to the location of incriminating material.

The Tribunal noted that the disputed document related to alleged 'on money' payments for purchase of a flat was found during the search of the CMD of VVIP group, a separate taxable entity, and not at the assessee's premises. The assessee had no stake in the VVIP group, and the transaction was personal in nature, unrelated to any business operations connected with VVIP. The AO had proceeded to make additions under section 153A based on the statement of the CMD of VVIP group and the seized documents. The Tribunal held that this was a misapplication of jurisdiction, and the additions should have been made under section 153C, if at all. Consequently, the assumption of jurisdiction under section 153A was found to be illegal, warranting quashing of the additions on this ground alone.

On the merits of the addition of Rs. 1,30,01,748/- as alleged unexplained cash payment ('on money'), the Tribunal analyzed the facts and evidence presented. The assessee had booked a single flat with an advance payment of Rs. 6,00,000/- towards a sale consideration of Rs. 63,62,368/-. No further payments were made, and the advance was forfeited, with the flat allotted to another party. The assessee denied any cash payment beyond the advance. The AO relied solely on the statement of the CMD of VVIP group, who admitted to accepting 'on money' for taxation. The Tribunal found that the AO and CIT(A) had drawn adverse inferences from the CMD's statement without providing the assessee an opportunity to cross-examine this material witness. The Tribunal emphasized that where liability is sought to be created based on statements of a third party, mere citation of such statements to the assessee is insufficient; cross-examination or opportunity to challenge such evidence is necessary for fair adjudication. The Tribunal rejected the Revenue's contention that no specific request for cross-examination was made and held that the failure to provide such opportunity violated principles of natural justice.

Regarding the addition of Rs. 62,71,749/- as concealed income based on differences between income declared by the assessee and figures extracted from a hard disk seized during search, the Tribunal observed that the profit and loss account and balance sheet extracted were incomplete, unaudited, and unreconciled. The assessee had explained that the entries were tentative and maintained only for convenience, not as final accounts. Moreover, the income components reflected in the seized data were already declared in the return of income under appropriate heads such as salary, house property, and other sources. The AO had failed to consider the computation of income filed by the assessee and had made double additions without rebutting the explanations. The Tribunal found that the AO's order was passed in haste without application of mind and dismissed the addition.

With respect to the addition of Rs. 9,69,47,724/- on account of alleged unexplained unsecured loans under section 68, the Tribunal noted that the balance sheet extracted from the hard disk showed unsecured loans aggregating this amount. However, the data was incomplete and did not reflect repayments or the exact bank credits. The assessee contended that he was not required to maintain books of accounts and that the balance sheet was not final. The unsecured loans included amounts from various parties, many of which were carried forward from earlier years and duly confirmed by the lenders. The assessee submitted account confirmations and evidence of genuineness, but the AO did not accept these on the ground that the assessment record was sent for approval late in the limitation period. The Tribunal found that the AO had not demonstrated the particulars of the credits or rebutted the evidence of genuineness and creditworthiness. The addition was therefore unsustainable.

The Tribunal also addressed the procedural challenges raised by the assessee regarding the approval of the assessment order under section 153D. The assessee argued that the approval was granted mechanically and without application of mind, rendering the assessment void. While the Tribunal did not elaborate extensively on this point, the overall quashing of the assessment on substantive grounds rendered this issue moot.

In dealing with the competing arguments, the Tribunal gave due consideration to the submissions of both parties. It acknowledged the Revenue's reliance on statements and seized documents but underscored the need for corroborative evidence and procedural fairness, especially when incriminating material pertains to a third party. The Tribunal rejected the Revenue's contention that the assessee's failure to specifically challenge the assumption of jurisdiction under section 153A barred the issue, relying on the principle that jurisdictional questions can be raised at any stage and the Tribunal's powers under the ITAT Rules to consider relevant issues for substantive justice. The Tribunal also held that the Revenue's objections to admission of evidence during remand proceedings could not justify sustaining additions when the AO himself accepted the evidence on remand.

The Tribunal concluded that the additions made on account of alleged 'on money' payments, unexplained unsecured loans, and concealment of income were not sustainable either on legal or factual grounds. The assessment proceedings under section 153A were invalid as the incriminating documents were not found at the assessee's premises. The assessee was denied a fair opportunity to cross-examine key witnesses. The AO's additions were based on incomplete and uncorroborated data, and double additions were made without proper application of mind. Accordingly, the Tribunal allowed the assessee's appeal, dismissed the Revenue's appeal, and quashed the impugned assessment order.

Significant legal principles established include:

"Where incriminating material relied upon for making additions is found at the premises of a third party and not at the premises of the assessee, the assessment proceedings must be initiated under section 153C and not section 153A of the Income Tax Act."

"The Tribunal has the jurisdiction to examine the validity of assumption of jurisdiction even if not specifically challenged before the lower authorities, as jurisdictional issues go to the root of the matter and can be raised at any stage."

"When additions are based on statements or admissions of third parties, the assessee must be given a reasonable opportunity to cross-examine such witnesses to uphold principles of natural justice."

"Additions based on incomplete, unaudited, and unreconciled accounts which do not reflect the true income or credit entries cannot be sustained, especially when the assessee has declared income under appropriate heads and furnished explanations."

"Double additions without proper application of mind and ignoring the computation of income filed by the assessee are impermissible."

"The burden to prove unexplained credits under section 68 lies on the revenue, and the assessee is entitled to substantiate the identity, creditworthiness, and genuineness of the transactions."

In conclusion, the Tribunal's final determinations were that all additions made by the AO and sustained by the CIT(A) were to be deleted, the assessment order under section 153A was to be quashed for lack of jurisdiction, and the assessee's appeals were allowed while the Revenue's appeals were dismissed.

← Previous Next →