2025 (6) TMI 293 - AT - Income Tax

Assessment u/s 153A - on-money received by various entities - whether the impugned addition is based upon any incriminating material found at the time of search? - HELD THAT - Completed assessments i.e. unabated assessments can be interfered with only on the basis of some incriminating material unearthed during the course of search or requisition of documents or undisclosed income or property discovered in the course of search which were not produced or not already disclosed or made known in the course of original assessment. No hesitation to hold that the impugned addition is devoid of any incriminating material and therefore the assessment must fail. We accordingly direct the AO to delete the impugned addition.

Summary

The core legal questions considered in this appeal pertain primarily to the validity and legality of the assessment order passed under section 153A of the Income Tax Act, 1961 ("the Act"), the necessity and propriety of approval under section 153D, the evidentiary basis for additions made under section 68 read with section 115BBE, and the applicability of principles related to search assessments and the requirement of incriminating material to justify reopening or reassessment of completed assessments. Specifically, the issues include:

1. Whether the assessment order passed under section 153A is valid and lawful, particularly in the absence of approval under section 153D and when the approval lacks a Document Identification Number (DIN) as required by CBDT Circular No.19/2019.

2. Whether the assessment order was passed without application of mind, rendering it void.

3. Whether the addition of Rs. 50,97,643/- on account of alleged accommodation loans is justified in the absence of incriminating material found during the search.

4. Whether the principles of natural justice were violated by not providing sufficient opportunity to the assessee to make submissions.

5. Whether the documents filed as additional evidence were rightly rejected by the CIT(A) and whether the burden of proof under section 68 was discharged.

6. Whether the notice issued under section 153A beyond six years is valid in the absence of undisclosed income represented in the form of an asset, as per the fourth proviso to sub-section (1) of section 153A read with Explanation 2.

Issue-wise Detailed Analysis

Validity of Assessment under Section 153A and Requirement of Approval under Section 153D

The assessment order was challenged on the ground that it was passed without requisite approval under section 153D of the Act, and that such approval was defective as it did not mention the DIN as mandated by CBDT Circular No.19/2019. The assessee contended that this rendered the assessment order bad in law, illegal, and void.

The relevant legal framework mandates that any assessment or reassessment under section 153A requires prior approval under section 153D. The CBDT Circular No.19/2019 prescribes procedural safeguards including mentioning the DIN on approval orders to ensure transparency and accountability.

The Court, however, did not delve deeply into the procedural infirmities regarding approval and DIN, as the primary focus shifted to the substantive issue of whether incriminating material existed to justify the assessment under section 153A. The Court implicitly held that even if procedural lapses existed, the substantive absence of incriminating material was fatal to the assessment.

Requirement of Incriminating Material for Making Additions under Section 153A

The pivotal question was whether the addition of Rs. 50,97,643/- on account of alleged accommodation loans was justified in the absence of any incriminating material found during the search. The loans in question were unsecured and recorded in the assessee's books of account from two entities, Mishka Finance and Trading Limited and Radford Global Limited.

The Assessing Officer (AO) treated these loans as accommodation entries based on pre-search investigations and made additions under section 68 read with section 115BBE, alleging that these were rooted in unaccounted on-money received by the group entities. The CIT(A) confirmed these additions.

The Court examined the legal principles laid down by the Supreme Court and High Courts concerning assessments under section 153A. The apex Court's ruling in Abhisar Buildwell Pvt. Ltd. was extensively relied upon, which clarified that:

• Section 153A assessments are triggered only by a valid search under section 132.
• The purpose is to assess undisclosed income detected through incriminating material found during the search.
• In the absence of incriminating material, no addition or reassessment can be made under section 153A.
• Completed or unabated assessments cannot be reopened or interfered with unless incriminating material is unearthed during the search.

The Court also relied on the Delhi High Court decision in Kabul Chawla and Gujarat High Court decision in Saumya Construction, which emphasized that assessments under section 153A must have a nexus with incriminating material found during the search or requisition. The assessment cannot be arbitrary or based on surmises.

Applying these principles, the Court found that the alleged accommodation loans were duly recorded in the regular books of account and that no incriminating material was found during the search to connect these loans with undisclosed income or on-money. The seized bundles from the premises of Mr. Anil Morarka, a key associate, indicated on-money received by various group entities but no direct incriminating evidence linked the assessee's loans to such undisclosed income.

Therefore, the addition was based on conjecture and surmises rather than concrete evidence. The Court held that entries recorded in the regular books of account without rejection by the AO cannot be treated as incriminating material to justify addition under section 153A.

Natural Justice and Opportunity to Make Submissions

The assessee contended that the AO did not provide sufficient opportunity to make submissions, thereby violating the principles of natural justice. The Court, however, did not find any merit in this contention. The record indicated that the assessee had ample opportunity to present its case before the AO and the CIT(A). The Court did not find any procedural irregularity or denial of opportunity that would vitiate the assessment order.

Rejection of Additional Evidence and Burden of Proof under Section 68

The CIT(A) had rejected certain documents filed by the assessee as additional evidence, treating them as "make-believe" and insufficient to discharge the onus under section 68, which requires the assessee to prove the genuineness and creditworthiness of the loan transactions.

The Court did not disturb the CIT(A)'s findings on this issue, implicitly accepting that the burden of proof was not satisfactorily discharged by the assessee. However, since the addition itself was found unsustainable due to lack of incriminating material, the rejection of documents became inconsequential for the final outcome.

Validity of Notice under Section 153A Beyond Six Years

The assessee raised an additional ground that the notice issued under section 153A was beyond the six-year limitation period and was invalid as there was no undisclosed income represented in the form of an asset, as required by the fourth proviso to sub-section (1) of section 153A read with Explanation 2.

The Court, relying on the legal principles discussed above, held that since no incriminating material was found, the notice and consequential assessment order under section 153A were bad in law and void ab initio. This ground reinforced the conclusion that the assessment could not be sustained.

Conclusions

The Court concluded that:

• The impugned addition of Rs. 50,97,643/- was devoid of any incriminating material found during the search and was based on surmises and conjectures.
• The assessment under section 153A could not be sustained in the absence of incriminating material linking the alleged accommodation loans to undisclosed income.
• The principles laid down by the Supreme Court in Abhisar Buildwell and the High Courts in Kabul Chawla and Saumya Construction decisively apply, mandating that completed assessments cannot be reopened without incriminating material.
• The notice issued under section 153A beyond six years was invalid in the absence of undisclosed income represented as an asset.
• Other grounds raised but not pressed were dismissed.

The Court accordingly directed the Assessing Officer to delete the impugned addition and partly allowed the appeal.

Significant Holdings

"The foundation for making search assessments under sections 153A/153C can be said to be the existence of incriminating material showing undisclosed income detected as a result of search."

"Although Section 153A does not say that additions should be strictly made on the basis of evidence found in the course of the search, or other post search material or information available with the AO which can be related to the evidence found, it does not mean that the assessment can be arbitrary or made without any relevance or nexus with the seized material. Obviously an assessment has to be made under this Section only on the basis of seized material."

"In absence of any incriminating material, the completed assessment can be reiterated and the abated assessment or reassessment can be made."

"The assessment under section 153A of the Act is linked with search and requisition under sections 132 and 132A of the Act, it is evident that the object of the section is to bring to tax the undisclosed income which is found during the course of or pursuant to the search or requisition."

"In case no incriminating material is found, as held by the Rajasthan High Court in the case of Jai Steel (India) v. Asst. CIT, the earlier assessment would have to be reiterated."

These principles establish that assessments under section 153A must be founded on concrete incriminating material discovered during the search or requisition, and cannot be based on mere suspicion or entries in books of account. The Court's final determination was to delete the addition and partly allow the appeal on this substantive ground.