2025 (7) TMI 665 - AT - Income Tax

Legality of the assessment order passed u/s 153A - incriminating material found or seized from the assessee s premises during the search action - As argued no pending assessment proceedings as on the date of search action and there is no nexus between the addition made to the returned income to that of incriminating material found/seized - HELD THAT - We find that on identical set of facts in assessee s own case the Co-ordinate Bench in 2025 (5) TMI 14 - ITAT MUMBAI has considered a similar grievance and held Act does not contemplate computing of undisclosed income solely on the basis of statements made during a search. However these statements do constitute information and if they relate to the evidence or material found during the search they can be used in proceedings under the Act as specified u/s 132(4) of the Act. Nonetheless such statements alone without any other material discovered during the search which would corroborate said statements do not grant the AO the authority to make an assessment. Also the Supreme Court in the case of Abhisar Buildwell (P) Ltd 2023 (4) TMI 1056 - Supreme Court has clarified that in case no incriminating material is found during the search conducted u/s 132 of the Act the AO will have no jurisdiction to make an assessment. Decided in favour of assessee.

Summary

The core legal issues considered in this judgment are as follows:

1. Whether the ld. CIT(A) was justified in admitting additional grounds and evidence raised by the assessee during appellate proceedings, despite the restrictions under Rule 46A(1) of the Income-tax Rules.

2. Whether the ld. CIT(A) erred in deleting the addition made under section 56(2)(viia) of the Income-tax Act, 1961, amounting to Rs. 7,85,55,233/-, given the absence of share transfer forms and proof of stamp duty payment.

3. Whether the assessment proceedings initiated under section 153A of the Act were valid in the absence of incriminating material found or seized from the assessee's premises during the search action.

4. The legal effect and applicability of incriminating material found during search proceedings, especially when such material relates to third parties and not the assessee directly.

5. The scope and limitations on the Assessing Officer's jurisdiction to reassess or assess income under section 153A when assessments for relevant years are completed or unabated, and no incriminating material is found during the search.

Issue 1: Admission of Additional Grounds and Evidence During Appellate Proceedings

The legal framework governing the admissibility of additional evidence during appellate proceedings is encapsulated in Rule 46A(1) of the Income-tax Rules, which restricts the production of evidence before the CIT(A) to that which was produced before the Assessing Officer (AO), except under circumstances constituting reasonable cause.

The ld. CIT(A) admitted additional grounds and evidence filed by the assessee, holding that the assessee was prevented by reasonable cause from producing such evidence before the AO. The Tribunal upheld this finding, observing that the CIT(A)'s discretion to admit additional evidence is well recognized when justified by reasonable cause, and that the assessee's inability to produce the evidence earlier was adequately demonstrated.

The revenue's contention that the CIT(A) disregarded Rule 46A(1) was rejected on the basis that the rule allows for exceptions, and the CIT(A) had correctly applied the exception for reasonable cause. The Tribunal found no error in the CIT(A)'s exercise of discretion.

Issue 2: Deletion of Addition Under Section 56(2)(viia)

Section 56(2)(viia) of the Income-tax Act deals with taxation of income from the transfer of shares where the consideration is less than the fair market value. The AO made an addition of Rs. 7,85,55,233/- on the ground that the assessee failed to provide share transfer forms and proof of stamp duty payment, relying only on a confirmation letter.

The CIT(A) deleted this addition after analyzing the evidence, including the AO's own report confirming that the shares were purchased prior to 1 June 2010, which predates the applicability of section 56(2)(viia). The CIT(A) found that the assessee's submissions were credible and that the addition was not sustainable.

The Tribunal concurred with the CIT(A), emphasizing that the absence of share transfer forms and stamp duty proof was not fatal where other credible evidence established the timing of share acquisition. The Tribunal noted that the AO's own confirmation supported the assessee's claim, and thus the deletion was justified.

Issue 3: Validity of Assessment Proceedings Under Section 153A Without Incriminating Material

Section 153A permits assessment or reassessment following a search or requisition under section 132 or 132A, but only if incriminating material is found during the search. The revenue challenged the CIT(A)'s deletion of additions on the ground that no incriminating material was found or seized from the assessee's premises to justify invoking section 153A.

The Tribunal relied heavily on a co-ordinate Bench decision involving the same assessee for subsequent assessment years, which held that in the absence of incriminating material found during the search, the AO has no jurisdiction to assess or reassess under section 153A in respect of completed or unabated assessments. The Tribunal cited the Supreme Court's ruling in Abhisar Buildwell Pvt. Ltd., which clarified that:

"...where during the search no incriminating material is found, in the case of a completed or unabated assessment, the only remedy available to the Department would be to initiate reassessment proceedings under section 147 or section 148 of the Act, subject to fulfilment of the conditions mentioned in those sections..."

The Tribunal found that the assessment years in question were unabated or completed, and no incriminating material was found during the search on the assessee's premises. Therefore, the AO's proceedings under section 153A were invalid, and the additions could not be sustained.

Issue 4: Reliance on Statements and Material Found from Third Parties

The revenue argued that statements recorded during searches of related parties or third parties should be treated as incriminating material to justify assessments under section 153A. The Tribunal rejected this contention, relying on decisions of the Delhi High Court in PCIT vs. Pavitra Realcon (P) Ltd. and PCIT vs. Anand Kumar Jain (HUF).

The Tribunal highlighted that statements recorded under section 132(4) have evidentiary value but cannot alone sustain additions without corroborative material. The Tribunal quoted the Pavitra Realcon decision stating:

"...addition cannot be sustained merely on the basis of the statement. There has to be some material corroborating the content of the statements."

Furthermore, the Tribunal noted that when incriminating material relates to a third party, the correct legal procedure under section 153C must be followed, which involves transferring the material to the AO having jurisdiction over that third party. The failure to follow this mandatory procedure invalidates the assessment under section 153A based on such material.

Issue 5: Jurisdiction of AO Under Section 153A in Completed or Unabated Assessments

The Tribunal emphasized that section 153A's jurisdiction to assess or reassess income is contingent upon the presence of incriminating material found during the search. The Supreme Court's decision in Abhisar Buildwell Pvt. Ltd. was pivotal, clarifying that:

"...in respect of completed/unabated assessments, no addition can be made by the AO in absence of any incriminating material found during the course of search under section 132 or requisition under section 132A of the Act."

The Tribunal further explained that if no incriminating material is found, the AO's only remedy is to initiate reassessment under sections 147 or 148, subject to their conditions. This interpretation preserves the legislative intent and prevents duplication or arbitrariness in assessments.

Conclusions on Issues

The Tribunal concluded that:

- The CIT(A) was justified in admitting additional grounds and evidence on the basis of reasonable cause.

- The deletion of the addition under section 56(2)(viia) was proper, given the credible evidence that the shares were acquired before the provision's applicability.

- The AO lacked jurisdiction to make additions under section 153A in the absence of incriminating material found during the search, especially for completed or unabated assessments.

- Statements recorded during searches of third parties cannot be treated as incriminating material against the assessee without corroborative evidence, and the mandatory procedure under section 153C must be followed.

- The revenue's appeals were dismissed, and the cross-objections by the assessee were also dismissed as not pressed.

Significant Holdings and Core Principles

The judgment reiterates and affirms the following key principles:

"...where during the search no incriminating material is found, in the case of a completed or unabated assessment, the only remedy available to the Department would be to initiate reassessment proceedings under section 147 or section 148 of the Act..."

"...additions cannot be sustained merely on the basis of statements recorded under section 132(4) of the Act without corroborative material."

"...assessment under section 153A can only be validly made if incriminating material is found during the search relating to the assessee; material found from third parties must be dealt with under section 153C."

"...the Assessing Officer's jurisdiction under section 153A is limited by the presence of incriminating material and the status of the assessment years (completed or unabated), preserving the legislative scheme and preventing arbitrary assessments."

These principles underscore the necessity of strict adherence to procedural safeguards and evidentiary requirements in search-based assessments, ensuring that the revenue's powers are exercised within the statutory framework and respecting the assessee's rights.