2019 (4) TMI 97 - AT - Income Tax

Tribunal rules against Assessing Officer's additions under Section 68, upholds Commissioner's deletions.

The Tribunal held that the additions made by the Assessing Officer under Section 68 were unsustainable due to the absence of incriminating material and ... Reassessment under Section 153A - Incriminating material requirement for reassessment of completed assessments - Natural justice - right to cross examine witnesses - Cash credits - burden under Section 68 (identity, creditworthiness and genuineness) - Investigation wing reports / statements recorded behind the back of the assessee - Disallowance under Section 14A - requirement of recorded satisfaction and applicability of Rule 8DReassessment under Section 153A - Incriminating material requirement for reassessment of completed assessments - Investigation wing reports / statements recorded behind the back of the assessee - Whether additions in assessments completed prior to search can be sustained under Section 153A in absence of incriminating material found during the search (and where additions were based on investigation wing reports/statements). - HELD THAT: - The Tribunal held that where assessments for the years under challenge were complete on the date of search, the assessing officer could reopen or reassess those years under Section 153A only on the basis of incriminating material unearthed during the search or requisition which was not already available to the AO. The AO's reliance solely on reports/statements of the Investigation Directorate (collected in separate investigations) and material not seized in the assessee's own search did not satisfy this requirement. The coordinate bench group decisions dealing with identical facts (Kota Dall Mill and Baran Roller Flour Mills) were followed; those authorities found no incriminating material from the assessee's search and hence deletions were justified. Consequently, additions made by the AO under Section 153A in the absence of incriminating material were deleted.Additions made under Section 153A for AYs 2010-11 and 2011-12 on the basis of investigation reports/statements (and not on incriminating material found in the assessee's search) are not sustainable and are deleted.Natural justice - right to cross examine witnesses - Investigation wing reports / statements recorded behind the back of the assessee - Whether assessment additions founded on statements obtained by investigation authorities can be sustained where the assessee was denied copies of such material and opportunity to cross examine the deponents. - HELD THAT: - The Tribunal found that the assessee repeatedly requested copies of incriminating material and an opportunity to cross examine witnesses whose statements the AO relied upon, and that these requests were not honoured. Citing settled precedent, the Tribunal held that where the AO proposes to act upon material obtained by private inquiries or investigation wing statements, that material must be disclosed and the assessee afforded an opportunity to meet it, including cross examination where necessary. The denial of such opportunity amounted to a breach of natural justice rendering additions based on those undisclosed statements unsustainable.Additions based on investigation wing statements not disclosed to the assessee and relied upon without permitting cross examination are void for violation of principles of natural justice and are accordingly deleted.Cash credits - burden under Section 68 (identity, creditworthiness and genuineness) - Reassessment under Section 153A - Whether additions under Section 68 in respect of share application money, share premium and unsecured loans from specified companies (M/s Sangam Distributors Pvt. Ltd., M/s Teac Consultants Pvt. Ltd., M/s ISIS Mercantiles Pvt. Ltd., and M/s Jalsagar Commerce Pvt. Ltd.) were sustainable on the facts. - HELD THAT: - Applying the tests under Section 68 and following the Tribunal's group bench findings, the Tribunal observed that the assessee produced confirmations, bank statements, ROC master data, affidavits, and that several of the creditor companies had been regularly assessed (including scrutiny assessments) without adverse findings. For the specified investors/lenders the AO had no independent documentary material seized during the assessee's search to impugn those transactions; instead the AO relied on investigation reports/statements. On this factual matrix, and in absence of incriminating material arising from the assessee's search, the Tribunal affirmed the CIT(A)'s deletions of additions in respect of the share application money and most of the unsecured loans. As to the particular loan initially sustained by lower authorities, the Tribunal applied the same group reasoning and deleted the addition where documentary evidence and assessments of the creditor supported the genuineness and creditworthiness.Additions under Section 68 in respect of the identified share applicants and lenders are deleted; the AO's reliance on external investigation reports/statements (without incriminating material from the assessee's search) was insufficient to sustain the additions.Disallowance under Section 14A - requirement of recorded satisfaction and applicability of Rule 8D - Whether disallowances under Section 14A were correctly made by the AO for AY 2010-11 and AY 2011-12. - HELD THAT: - The CIT(A) found that the AO had not recorded the mandatory satisfaction required by Section 14A(1) before making the disallowance and had mechanically applied Rule 8D as amended with retrospective effect (w.e.f. 02.06.2016) to assessment years to which it did not apply. The AO also failed to establish any nexus between borrowed funds and exempt income or to identify exempt income earned in the relevant years. On these grounds, and on the materials before it, the Tribunal sustained the CIT(A)'s conclusion that the Section 14A disallowances were unwarranted and deleted them.Disallowances made under Section 14A for AY 2010-11 and AY 2011-12 are deleted for want of recorded satisfaction and incorrect/retroactive application of Rule 8D, and for failure to establish requisite nexus.Final Conclusion: Following the Tribunal's application of settled precedent and the coordinate bench group decisions, the additions made under Section 153A/68 (share application money, share premium and unsecured loans) were deleted where no incriminating material was found in the assessee's own search and where the AO relied on investigation reports/statements not disclosed to the assessee; the Tribunal further held that denial of opportunity to cross examine such deponents violated natural justice. Disallowances under Section 14A were also deleted for lack of requisite satisfaction and incorrect mechanical application of Rule 8D. Result: assessee's appeals allowed; revenue's appeals dismissed; cross objection dismissed as infructuous. Issues Involved:1. Legality of the order passed under Section 153A read with Section 143(3) of the Income Tax Act, 1961.2. Validity of additions made under Section 68 of the Income Tax Act.3. Denial of opportunity for cross-examination.4. Justification of additions based on statements and third-party information.5. Deletion of additions by the CIT(A) and the Revenue's appeal against it.6. Disallowance under Section 14A of the Income Tax Act.Detailed Analysis:1. Legality of the Order Passed Under Section 153A Read with Section 143(3):The assessee challenged the legality of the order passed under Section 153A read with Section 143(3) on the grounds that the assessment was not abated as on the date of search. The Tribunal noted that the assessments for the years 2010-11 and 2011-12 were completed before the search, and no incriminating material was found during the search. It was held that in the absence of any incriminating material, the completed assessments could only be reiterated and not disturbed. The Tribunal relied on several judicial precedents, including the Delhi High Court's decision in PCIT vs. Kurele Paper Mills Pvt Ltd and the Supreme Court's dismissal of the SLP against it, to support its conclusion. Therefore, the additions made by the AO were not sustainable.2. Validity of Additions Made Under Section 68:The AO made additions under Section 68 based on the statements of accommodation entry providers and third-party information. The assessee contended that these additions were arbitrary and based on no evidence. The Tribunal observed that the AO relied on the statements of third parties without providing the assessee an opportunity to cross-examine them. The Tribunal emphasized that the assessee had provided necessary documents to substantiate the identity, creditworthiness, and genuineness of the transactions. The Tribunal concluded that the additions made by the AO were not justified as they were based on suspicion and conjecture without any tangible evidence.3. Denial of Opportunity for Cross-Examination:The assessee argued that the AO violated the principles of natural justice by not providing an opportunity to cross-examine the alleged accommodation entry providers. The Tribunal noted that the AO and CIT(A) failed to provide the opportunity for cross-examination despite repeated requests from the assessee. The Tribunal relied on the Supreme Court's decision in Andaman Timber Industries vs. CCE, which held that denial of cross-examination amounts to a violation of natural justice. Consequently, the Tribunal held that the assessment order was void ab initio due to the denial of the opportunity for cross-examination.4. Justification of Additions Based on Statements and Third-Party Information:The AO made additions solely based on the statements of third parties and information from the Investigation Wing. The Tribunal observed that these statements were recorded at the back of the assessee and were not corroborated by any documentary evidence. The Tribunal emphasized that the AO should have provided the assessee with the material used against it and allowed cross-examination of the witnesses. The Tribunal concluded that the additions were not sustainable as they were based on statements without any supporting evidence.5. Deletion of Additions by the CIT(A) and the Revenue's Appeal Against It:The CIT(A) deleted the additions made by the AO on account of share application money and unsecured loans. The Revenue appealed against the deletion. The Tribunal upheld the CIT(A)'s decision, noting that the assessee had provided sufficient evidence to substantiate the transactions. The Tribunal observed that the AO did not bring any specific defect in the evidence provided by the assessee. The Tribunal also noted that the AO's reliance on the statements of third parties without providing an opportunity for cross-examination was unjustified. Therefore, the Tribunal dismissed the Revenue's appeal.6. Disallowance Under Section 14A:The AO made disallowance under Section 14A for both assessment years. The CIT(A) deleted the disallowance, observing that the AO did not record any satisfaction as required under Section 14A(1) before making the disallowance. The Tribunal upheld the CIT(A)'s decision, noting that the AO mechanically applied Rule 8D without establishing any nexus between the investment and borrowed funds. The Tribunal concluded that the disallowance under Section 14A was unwarranted and dismissed the Revenue's appeal on this ground.Conclusion:The Tribunal concluded that the additions made by the AO under Section 68 were not sustainable due to the lack of incriminating material and denial of the opportunity for cross-examination. The Tribunal upheld the CIT(A)'s deletion of the additions and disallowance under Section 14A. The appeals by the assessee were allowed, and the appeals by the Revenue were dismissed.