2025 (7) TMI 1231 - AT - Income Tax

Reopening of assessment u/s 147 - materials sourced from the third-party - HELD THAT - As per section 132(4) a person from whom possession such documents are found the contents of such documents have to be considered to be belonging to him only. Further neither Sh. Ravi Kapoor nor Ajay Prabhakar or Devinder Ghai have alleged that documents from them belong to Homelife Buildcon Pvt.Ltd. and thus under such circumstances the said documents as recovered from Sh. Ravi Kapoor others can not be used against the assessee company. Further no enquiries have been made from Praveen Banda and Surbhi Banda. Therefore sustaining of addition as confirmed by the CIT (A) in para xx is deleted and the assessee succeeds on this issue. Also as per finding given by us on legal ground of appeal no satisfaction having been drawn by AO the whole basis of making addition is not justified. Addition on the basis of valuation report submitted by purchaser of SCO to the bankers - The rate of sale of SCO have been adopted for the year under consideration at enhanced value. These facts are identical to our findings with regard to deletion of addition while dealing with the Ground No. 1 to 3 of the department appeal and ground No. 1 of the assessee s appeal. We have held that no such basis can be adopted on such valuation reports and neither any extrapolation can be made. Thus this ground of appeal in the department appeal is dismissed as per our finding given above while deciding ground No. 1 to 3 of the department appeal. On money receipts - Addition has solely been based on the basis of digital data found from the search carried out on Sh. Ajay Prabhakar a deed writer. No corroborated or linking evidence has been found from the assessee company or from the premises of directors Sh. Jagjeet Singh Grewal or Sh. Manu Gupta. As no opportunity of cross examination have been afforded to the assessee on the basis of such digital data recovered from Sh. Ajay Prabhakar. Merely on the basis of some entries of payment through banking channels being made to Sh. Gurmit Singh by the assessee company on certain dates the addition u/s 69 have been made in the hands of assessee company and it has been sustained by the CIT(A) to the extent of on money allegedly being paid to one Sh. Gurmit Singh from whom the land had been purchased. No corroborating or any other evidence has been found from the premises of assessee. Even Sh. Gurmit Singh had appeared before the AO and copy of his statement has been filed before us. He has completely denied any dealings with Sh. Ajay Prabhakar. He has not agreed to the cash payment or other evidences which have been reproduced at various pages in the assessment order as having been found from the premises of Sh. Ajay Prabhakar in digital mode. CIT(A) has rightly held that the author of the document could have prepared these papers for his own benefit or to lure certain parties to enter into certain transactions in such seized papers from the third party on which there is no name of the company or its representative no presumption that the contents of the documents reflect any unaccounted transactions entered by the assessee company can be drawn. Further in the digital data found from the third party the name is mentioned as Gurmeet Singh and not Gurmit Singh from whom the land has been purchased. Even Sh. Gurmit Singh has stated before the AO that he does not know the directors of assessee company. Even Sh. Jagjit Singh Grewal and Sh. Manu Gupta have denied any cash amount being paid to Sh. Gurmit Singh as per noting seized from Sh. Ajay Prabhakar. Though the CIT(A) has deleted the extrapolation in respect of land purchased during the year on the basis of above evidence but he has sustained the addition of Rs. 2.05 crore on the basis of digital data in the hands of assessee. As submitted above that no addition could be made on the basis of third party document specially when no satisfaction has been drawn by the Assessing Officer while framing the assessment of the assessee company as per case laws as cited above no addition could be made on the basis of third party evidence without any corroborated evidence found from the assessee company. There being no satisfaction being framed by the AO on this issue no cognizance could be taken of such document recovered from third party. Further any conclusion drawn on the basis of discovery of evidence and the statement recorded u/s 132(4) is confined to the person from whose possession such document is found and such document cannot bind the third person as in the present case. It is a fact that no cross examination was allowed of Sh. Ajay Prabhakar from whose premises such documents were recovered. The assessee is not expected to know why that person has made such entries of third person. The reliance by the assessee on the judgment of Sh. V.C. Shukla case 1998 (3) TMI 675 - SUPREME COURT of the Hon ble Apex Court is quite apt to the above issue. Besides that no cross examination has been allowed of Sh. Ajay Prabhakar and further Sh. Gurmit Singh have also not agreed to any on money having been received by him thus on the basis of finding given by the AO and the CIT(A) and the evidence possessed by revenue has hardly any worth of credence and on that basis no addition can be made in the hands of assessee both on legal and on facts of the case thus the ground of appeal as taken by the department by way of Ground No. 5 6 are dismissed and while ground as raised by the assessee bearing 3 (a), (b) (c) are allowed as per above. Recovery of certain documents found from Sh. Ravi Kapoor and Sh. Devinder Ghai - As Sh. Ravi Kapoor in his statement categorically owned such document belonging to him while dealing with legal ground it has been held that no satisfaction had been drawn by the AO with regard to documents recovered from third party. No satisfaction had also been drawn by AO before confronting such documents as held above the addition as sustained by the CIT(A) at Rs. 1, 41, 50, 000/- is hereby deleted both on legal and on merits. The provisions of section 115BBE are not applicable as such either. Addition presumption has been drawn by the AO and CIT(A) that M/s JKB India where name has been mentioned on one piece of paper seized from Sh. Devinder Ghai where the name of Sh. Devinder Ghai is there. The finding by AO/CIT(A) that JKB is group company of Homelife Buildcon Pvt. Ltd. is misplaced and this finding is based only on presumption/assumption. Document has to be read as a whole. It is also settled law that the assessee has no idea as to what kind of record the third party is maintaining and in what manner. Moreover no direct/indirect link has been established by the AO/CIT(A) that such document belong to assessee company. The same addition was made in the hands of Sh. Devinder Ghai u/s 68. Thus wrong conclusion has been drawn in the case of assessee on the basis of such document. The finding of CIT(A) about the confirmation of addition is again on presumption and assumption and we have no hesitation in deleting said addition as sustained by CIT(A).

Summary

ISSUES:

Whether assessment for the year immediately preceding the search year can be validly framed under section 143(3) instead of section 147 read with Explanation 2 thereto, when material seized from third parties is relied upon'Whether reliance on electronic/digital evidence recovered from third parties without compliance with CBDT Digital Evidence Investigation Manual and statutory safeguards is admissible'Whether additions based on documents and statements found from third parties, who are not employees or connected persons of the assessee, can be sustained without corroborative evidence from the assessee's premises'Whether the Assessing Officer was required to record a satisfaction note and obtain prior approval under section 148B before relying on third-party search material for assessment'Whether extrapolation of income based on valuation reports obtained from independent plot holders and third parties without direct link or corroboration with assessee's records is justified'Whether additions can be made without rejecting the books of accounts under section 145(3) and without giving notice of enhancement as required under section 251(2)?Whether addition under section 115BBE is applicable on unexplained expenditure based on documents seized from third parties'Whether mechanical approval accorded under section 153D (prior regime) is valid in the context of assessment framed under section 143(3) post Finance Act 2021 amendments?

RULINGS / HOLDINGS:

The assessment for the year immediately preceding the search year cannot be validly framed under section 143(3) when material seized from third parties is relied upon; the proper procedure under section 147 read with Explanation 2 and section 148B must be followed. The assessment framed under section 143(3) without compliance is "without jurisdiction and bad in law."Electronic/digital evidence seized from third parties is inadmissible unless collected in accordance with the CBDT Digital Evidence Investigation Manual and statutory safeguards, including recording of satisfaction and prior approval, are complied with. Reliance on such evidence without compliance is unjustified.Additions based solely on documents or statements found from third parties, who have no connection with the assessee, cannot be sustained without corroborative evidence from the assessee's own premises; such additions are based on "surmises and conjectures" and are not sustainable.The Assessing Officer is mandatorily required to record a satisfaction note that the seized material from third parties belongs to or pertains to the assessee and obtain prior approval from the Principal Commissioner or Commissioner under section 148B before initiating reassessment; failure to do so renders the assessment void.Extrapolation based on valuation reports obtained from independent plot holders or third parties, which are not from the Department's official valuers (DVO) and lack connection with the assessee, cannot be used to make additions; such valuation reports have "no evidentiary value."Additions cannot be made without rejecting the books of accounts under section 145(3) and without giving the mandatory notice of enhancement under section 251(2); rejection of books without notice is invalid.Addition under section 115BBE on unexplained expenditure based on third-party documents is not justified when the documents belong to third parties and no corroboration is found from the assessee's records.Mechanical approval accorded under section 153D is not valid for assessments framed under section 143(3) post Finance Act 2021 amendments; the mandatory approval under section 148B is required, and absence thereof vitiates the assessment.

RATIONALE:

The Court applied the amended provisions of section 147 read with Explanation 2 to section 148 (Finance Act 2021), which widened the scope of reassessment to include material seized from third parties during searches conducted on or after 1st April 2021. The statutory scheme mandates recording of satisfaction and prior approval under section 148B before reassessment.The principle of generalia specialibus non derogant was invoked, holding that specific provisions relating to search assessments prevail over general provisions like section 143(3). The assessment year immediately preceding the search year falls within the scope of these specific provisions.The Court relied on the statutory framework requiring prior approval and satisfaction recording to prevent arbitrary use of third-party seized material, emphasizing procedural safeguards in search assessments.The Court noted the absence of any corroborative evidence linking third-party documents or statements to the assessee and the lack of cross-examination opportunities, diminishing the evidentiary value of such materials.Judicial precedents were followed holding that additions cannot be based on third-party evidence alone without corroboration and that registered sale consideration must be given primacy unless credible evidence of underreporting is found.The Court also referred to CBDT's Digital Evidence Investigation Manual and departmental Manual of Office Procedure (February 2003), underscoring mandatory procedures for collection and use of digital evidence in search assessments.The Court recognized the legislative intent behind Finance Act 2021 amendments to bring uniformity and stricter procedural compliance in search-related assessments, thereby protecting taxpayer rights and ensuring fairness.The Court noted that the approval obtained by the Assessing Officer was administrative and not statutory under section 148B, and that the approving authority was not furnished with seized third-party material as required, rendering the approval ineffective.Dissent or doctrinal shift: None noted; the Court adhered to established principles and recent legislative amendments.