2025 (5) TMI 612 - AT - Income Tax

Assessment u/s 153A - Addition of unsecured loan - addition made on the protective and substantive basis - whether addition can be made in a search assessment in the absence of any incriminating material - 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 the case of Abhisar Buildwell (P.) Ltd 2023 (4) TMI 1056 - SUPREME COURT as held 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 u/s 153-C of the Act Courts has rightly set aside the Assessment Order(s). Decided in favour of assessee.

Summary

The core legal questions considered in this appeal pertain to the validity and legality of additions made under section 68 of the Income Tax Act, 1961, in a search assessment under section 153A, specifically:

1. Whether an addition of an unsecured loan of Rs. 1 crore can be made on a substantive basis without any incriminating material found during the search under section 132 of the Act.

2. Whether the addition under section 68 is justified when the assessee has not violated the provisions of that section.

3. Whether the learned Commissioner of Income Tax (Appeals) applied proper mind while confirming the addition under section 250.

4. Whether the assessment and appellate orders violate the principles of natural justice.

5. Whether the approval under section 153D was granted without proper application of mind, rendering the impugned order liable to be dropped.

The principal issue revolves around the power of the Assessing Officer (AO) to make additions in a search assessment under section 153A of the Act in the absence of any incriminating material found during the search under section 132.

Regarding the first and primary issue, the relevant legal framework includes sections 132, 153A, 153C, 68, 147, and 148 of the Income Tax Act, 1961. The legal position has been crystallized by the Supreme Court in the landmark judgments of Principal Commissioner of Income-tax vs. Abhisar Buildwell (P.) Ltd and Dy. CIT vs. U.K. Paints (Overseas) Ltd. These rulings clarify that:

- In a search under section 132 or requisition under section 132A, the AO assumes jurisdiction for block assessment under section 153A.

- All pending assessments or reassessments stand abated upon such search.

- If incriminating material is found during the search, the AO can assess or reassess the total income considering such material and other available evidence.

- Crucially, if no incriminating material is found during the search, the AO cannot make additions or reassessments in respect of completed or unabated assessments under section 153A or 153C.

- However, the AO retains the power to reopen assessments under sections 147/148 subject to fulfillment of the conditions prescribed therein.

The Tribunal, relying on the above Supreme Court precedents and consistent decisions by the Lucknow Bench of ITAT in cases such as Smt. Shashi Agarwal and Ocean Dream Infrastructures Pvt. Ltd., emphasized that additions made under section 68 in the absence of incriminating material found during the search are impermissible. The Tribunal noted that the addition of Rs. 1 crore was made on a substantive basis without any incriminating documents or evidence unearthed during the search, which is contrary to the settled legal position.

The Tribunal also referred to the CBDT Instruction No. 1 of 2023, which directs field authorities to uniformly implement the Supreme Court rulings in Abhisar Buildwell and U.K. Paints cases, thereby reinforcing the binding nature of these precedents on Revenue authorities.

On the issue of whether the learned CIT(A) applied proper mind under section 250, the Tribunal found no material to suggest that the appellate authority considered the issue afresh in light of the Supreme Court precedents or the absence of incriminating material. The confirmation of the addition without such consideration was thus held to be erroneous.

Regarding the principles of natural justice, the appellant contended that the orders were passed without proper hearing or consideration of relevant facts. While the Tribunal did not elaborate extensively on this point, the implication is that the failure to consider binding precedents and the absence of incriminating material amounted to a denial of fair procedure.

Concerning the approval under section 153D, the appellant argued that it was granted without proper application of mind. The Tribunal, however, did not find any contrary material to challenge the procedural propriety but implied that since the substantive addition itself was not sustainable, the approval and consequent order were also liable to be set aside.

The Tribunal applied the law to the facts by observing that the undisputed facts show no incriminating material was found during the search, and no assessment proceedings were pending at the time of search, categorizing the assessments as completed or unabated. Therefore, the additions under section 68 and consequent confirmation by the CIT(A) were contrary to the Supreme Court's authoritative rulings and thus unsustainable.

Competing arguments from the Revenue side relied on the impugned orders and the assessment order, but the Departmental Representative conceded that no incriminating material was found and did not dispute the binding precedents favoring the assessee. Hence, the Tribunal gave precedence to the settled law and the appellant's submissions.

In conclusion, the Tribunal held that the additions made under section 68 on a substantive basis without any incriminating material found during the search under section 132 are illegal and void. The Tribunal directed the Assessing Officer to delete the addition of Rs. 1 crore and allowed the appeal.

Significant holdings include the verbatim adoption of the Supreme Court's conclusion in Abhisar Buildwell (P.) Ltd:

"(iv) 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 core principles established are:

- The jurisdiction of the AO under section 153A is contingent upon discovery of incriminating material during search under section 132.

- No addition can be made in completed/unabated assessments under section 153A or 153C if no incriminating material is found.

- The powers of reopening under sections 147/148 remain unaffected but must comply with statutory conditions.

- Additions made without incriminating material violate the principles of natural justice and are liable to be quashed.

Final determinations on each issue are:

- The addition of Rs. 1 crore under section 68 is illegal and must be deleted.

- The CIT(A)'s confirmation of the addition is erroneous for failure to apply mind and consider binding precedents.

- The assessment and appellate orders violate natural justice principles by ignoring the absence of incriminating material.

- The approval under section 153D without proper application of mind is not sustainable in light of the above.

- The appeal is allowed with directions to delete the impugned addition.