2025 (5) TMI 501 - AT - Income Tax

Assessment u/s 153A - Addition u/s 68 - additions can be made in a search assessment in the absence of any incriminating material found during search? - HELD THAT - In the case of Smt. Shashi Agarwal 2024 (10) TMI 533 - ITAT LUCKNOW co-ordinate bench of ITAT Lucknow has decided the matter in favour of the assessee relying on Abhisar Buildwell (P.) Ltd 2023 (4) TMI 1056 - SUPREME COURT on the issue whether additions can be made in a search assessment in the absence of any incriminating material found during search. Also see M/S U.K. PAINTS (OVERSEAS) LTD. 2023 (5) TMI 373 - SC ORDER held as no incriminating material was found in case of any of the Assessees either from the Assessee or from the third party and the assessments were under Section 153-C of the Act the High Court has rightly set aside the Assessment Order(s).

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in these consolidated appeals arising from assessment years 2014-15 to 2017-18 include:

• Whether the Assessing Officer (AO) could assume jurisdiction under Section 153A of the Income Tax Act, 1961 ("the Act") in the absence of any incriminating material found during the course of search under Section 132 of the Act;
• Whether additions made under Section 68 of the Act, disallowing claimed Long-Term Capital Gains (LTCG) exemptions under Section 10(38), were justified given the documentary evidence furnished by the assessees;
• Whether statements recorded under Section 132(4) of the Act, particularly those of Mr. Naresh Jain and associates, could constitute incriminating material to assume jurisdiction under Section 153A, especially when no corroborative evidence was produced;
• Whether principles of natural justice were violated due to denial of opportunity to cross-examine key witnesses and non-provision of complete investigation reports relied upon by the Revenue;
• Whether estimated additions under Section 69C of the Act, relating to alleged commission payments for arranged LTCG, were valid;
• Whether interest under Sections 234A, 234B, 234C, 234D, and 244A was correctly charged;
• Whether penalty proceedings under Section 271(1)(c) were rightly initiated;
• Whether the Revenue erred in applying inconsistent treatment to the same shares, taxing trading profits as business income while disallowing LTCG exemption on the same shares;
• Whether the assessments and consequent appellate orders were valid despite delays in filing appeals.

2. ISSUE-WISE DETAILED ANALYSIS

Jurisdiction under Section 153A in absence of incriminating material

Legal Framework and Precedents: Section 153A empowers the AO to assess or reassess total income of six assessment years preceding the year of search or requisition. However, the jurisdiction to proceed under Section 153A is contingent upon the presence of incriminating material found during the search under Section 132 or requisition under Section 132A. The Supreme Court in PCIT v. Abhisar Buildwell (P.) Ltd. (2023) clarified that in respect of completed or unabated assessments, no additions can be made under Section 153A without incriminating material found during the search. The Delhi High Court in Meeta Gutgutia and other decisions emphasized that assessments under Section 153A must have nexus with seized material and cannot be arbitrary.

Court's Interpretation and Reasoning: The Tribunal noted that in all five appeals, no incriminating material was found during the search in respect of the assessees. The assessments for the years under consideration had either been completed or no pending assessments existed. The AO assumed jurisdiction under Section 153A merely based on statements recorded under Section 132(4) well after the search and without any corroborative evidence. The Tribunal relied heavily on the Supreme Court's ruling in Abhisar Buildwell, which held that without incriminating material, no additions can be made in completed assessments under Section 153A. The Tribunal further observed that the statements of Mr. Naresh Jain and associates, recorded post-search, could not constitute incriminating material by themselves.

Key Evidence and Findings: The search was conducted due to alleged association with Mr. Naresh Jain, who was implicated in facilitating bogus LTCG in penny stocks. However, no evidence linking the assessees to Mr. Jain was found during the search. The AO relied on Mr. Jain's statements and partial investigation reports, which were not fully disclosed to the assessees. The assessees were denied opportunity to cross-examine Mr. Jain or access the complete investigation report, violating principles of natural justice.

Application of Law to Facts: Given the absence of incriminating material found during search and the fact that the assessments were completed or not pending, the AO lacked jurisdiction to reopen or reassess under Section 153A. The reliance solely on statements recorded post-search without corroborative evidence was insufficient to sustain additions. The denial of cross-examination and incomplete disclosure of investigation reports further invalidated the assessment proceedings.

Treatment of Competing Arguments: The Revenue argued that the statements of Mr. Jain and the investigation reports justified the additions and jurisdiction. However, the Tribunal found no nexus between the statements and the assessees, noting that Mr. Jain did not name the assessees in relation to the alleged bogus transactions. The Revenue's failure to produce corroborative evidence or provide opportunity for cross-examination was held to be a violation of natural justice.

Conclusions: The Tribunal concluded that the AO could not assume jurisdiction under Section 153A in absence of incriminating material found during search. The assessments under Section 153A in these cases were invalid and liable to be quashed.

Additions under Section 68 disallowing LTCG exemption under Section 10(38)

Legal Framework and Precedents: Section 68 mandates that unexplained credits can be added to income if the assessee fails to satisfactorily explain the nature and source. Section 10(38) exempts LTCG arising from transfer of listed securities subject to Securities Transaction Tax (STT). The burden lies on the assessee to prove identity, genuineness, and creditworthiness of the transactions. Courts have held that abnormal or pre-arranged transactions aimed at tax evasion can be disallowed. The Supreme Court in cases like Sumati Dayal and various ITAT decisions have applied the test of human probabilities to detect sham transactions.

Court's Interpretation and Reasoning: The AO disbelieved the claimed LTCG, treating the transactions as sham and pre-arranged to introduce unaccounted income. The AO relied on abnormal price movements, statements of Mr. Jain, and investigation reports alleging price rigging and bogus LTCG in penny stocks. The CIT(A) upheld these additions, emphasizing circumstantial evidence and the improbability of the gains without insider knowledge or manipulation.

Key Evidence and Findings: The assessees furnished extensive documentary evidence including contract notes, DEMAT account details, STT payment proofs, bank statements, and broker details to establish genuineness. The shares were purchased from the open market and held for long periods (often 6-7 years), which contradicts the modus operandi of short-term price rigging alleged by Mr. Jain. No preferential allotments or direct dealings with Mr. Jain were found. The assessees also demonstrated trading activity in the same shares, resulting in both profits and losses, inconsistent with orchestrated bogus gains.

Application of Law to Facts: The Tribunal observed that the assessees had discharged their onus of proving identity, genuineness, and creditworthiness. The absence of any evidence of preferential allotment or direct association with Mr. Jain, combined with the long holding periods and trading losses, undermined the Revenue's allegations. The Tribunal held that the additions under Section 68 were arbitrary and unwarranted.

Treatment of Competing Arguments: The Revenue contended that the abnormal price rise and statements of Mr. Jain justified disallowance. The assessees countered with documentary evidence and argued that even if manipulation existed, they were bona fide investors not party to it. The Tribunal favored the assessees, emphasizing the lack of corroborative evidence and the improbability of the Revenue's theory based on the facts.

Conclusions: The additions under Section 68 disallowing LTCG exemptions were set aside, and the claimed LTCG was held to be genuine and exempt under Section 10(38).

Use of statements under Section 132(4) and natural justice issues

Legal Framework and Precedents: Statements recorded under Section 132(4) are admissible but cannot be the sole basis for additions without corroborative evidence. Principles of natural justice require that the assessee be given a fair opportunity to cross-examine witnesses whose statements are relied upon. Non-provision of complete investigation reports or denial of cross-examination violates natural justice.

Court's Interpretation and Reasoning: The Tribunal noted that the AO and CIT(A) relied heavily on statements of Mr. Naresh Jain and associates recorded post-search, without any corroboration. The assessees repeatedly requested cross-examination of these witnesses and access to the full investigation report, but were denied. This was held to be a flagrant violation of natural justice.

Key Evidence and Findings: The assessees' requests for cross-examination and full reports were documented but ignored. The statements did not name the assessees directly in relation to the alleged bogus transactions. The investigation report was only partially disclosed.

Application of Law to Facts: The Tribunal held that reliance on uncorroborated statements without affording opportunity for cross-examination and without full disclosure of reports was impermissible and vitiated the assessment and appellate orders.

Treatment of Competing Arguments: The Revenue did not produce any alternative evidence nor justify denial of natural justice. The Tribunal criticized the Revenue's conduct as abuse of process.

Conclusions: The assessments and appellate orders were quashed on grounds of violation of natural justice.

Additions under Section 69C relating to alleged commission payments

Legal Framework and Precedents: Section 69C deals with unexplained expenditure. The AO must establish that the expenditure was incurred and the source is unexplained. Additions based on third-party statements without opportunity for cross-examination are invalid.

Court's Interpretation and Reasoning: The AO estimated commission at 2% of sale consideration as unexplained expenditure, relying on third-party statements. The Tribunal found no material evidence of actual commission payments. The assessees denied incurring such expenditure and pointed to lack of evidence in search.

Key Evidence and Findings: No corroborative evidence of commission payments was found during search. The assessees' denial was supported by absence of documentary proof.

Application of Law to Facts: The Tribunal held that the AO erred in making ad hoc additions without evidence, and without affording opportunity to cross-examine the source of such allegations.

Treatment of Competing Arguments: Revenue relied on statements of third parties; assessees challenged the legitimacy and procedural fairness. The Tribunal sided with assessees.

Conclusions: Additions under Section 69C were deleted.

Interest and penalty proceedings

Legal Framework and Precedents: Interest under Sections 234A-D and 244A is chargeable on delayed or defaulted tax payments. Penalty under Section 271(1)(c) requires proof of concealment or furnishing inaccurate particulars.

Court's Interpretation and Reasoning: Since the additions were deleted, interest and penalty based on those additions could not be sustained. The Tribunal found that penalty proceedings were wrongly initiated.

Conclusions: Interest and penalty were set aside.

Delay in filing appeals

Legal Framework: Section 253(3) prescribes time limits for filing appeals, with condonation of delay permissible for reasonable cause.

Court's Interpretation and Reasoning: The assessees explained delay due to change of counsel and technical issues. The Tribunal found the reasons satisfactory and condoned the delay.

Conclusions: Appeals were admitted despite delay.

3. SIGNIFICANT HOLDINGS

"In case no incriminating material is unearthed during the search, the AO cannot assess or reassess taking into consideration the other material in respect of completed assessments/unabated assessments. Meaning thereby, 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, 1961."

"The statements recorded under Section 132(4) of the Act, which were recorded much after the date of search, cannot by themselves constitute incriminating material found during the search, especially in absence of any corroborative evidence."

"Denial of opportunity to cross-examine witnesses whose statements form the basis of additions, and non-provision of complete investigation reports relied upon by the Revenue, constitute violation of principles of natural justice and render the assessment and appellate orders liable to be quashed."

"Additions under Section 68 of the Act disallowing claimed Long-Term Capital Gains exemption under Section 10(38) are unwarranted and arbitrary where the assessee has discharged the onus of proving identity, genuineness, and creditworthiness by furnishing documentary evidence, and where the alleged modus operandi of bogus transactions does not apply to the facts."

"Additions under Section 69C based on estimated commission payments without evidence and without opportunity for cross-examination are invalid."

"Interest and penalty proceedings based on deleted additions are unsustainable."

"Delay in filing appeals can be condoned for reasonable cause such as change of counsel and technical issues."

The Tribunal directed deletion of all additions made under Sections 68 and 69C, set aside interest and penalty, and quashed assessments under Section 153A in absence of incriminating material, following the Supreme Court's authoritative rulings in Abhisar Buildwell (P.) Ltd. and related cases. The appeals were allowed for statistical purposes, and the Assessing Officers were directed to delete the impugned additions.