2019 (4) TMI 675 - AT - Income Tax

Tribunal rules in favor of assessee, deems Section 153A additions unsustainable without incriminating material

The Tribunal allowed the appeal of the assessee, holding that the additions made by the AO under Section 153A were not sustainable due to the absence of ... Assessment under section 153A in case of completed assessments - Requirement of incriminating material to interfere with completed assessments under section 153A - Distinction between 'assess' and 'reassess' in section 153A linked to search and requisition - Onus and evidentiary test under section 68 regarding identity, genuineness and creditworthiness of creditors - Evidentiary weight of statements/reports of Investigation Wing versus documentary bank and statutory recordsAssessment under section 153A in case of completed assessments - Requirement of incriminating material to interfere with completed assessments under section 153A - Distinction between 'assess' and 'reassess' in section 153A linked to search and requisition - Sustained additions in proceedings under section 153A cannot be made in respect of assessment years whose assessments were completed on the date of search unless incriminating material relating to those years was unearthed during the search. - HELD THAT: - The Tribunal held that for assessment years which were not pending on the date of search (2010-11 to 2013-14), interference with completed assessments under section 153A is permissible only on the basis of incriminating material discovered in the course of the search or requisition and not on mere post-search information or investigative reports already available to the AO. The decision relies on binding High Court authority (Kabul Chawla and other decisions) that interprets the words 'assess' and 'reassess' in section 153A-'assess' relating to abated/pending proceedings and 'reassess' to completed assessments-and requires a nexus between the seized/incriminating material and the additions sought. In the present case the AO's additions rested principally on a report and third party statements of the Investigation Wing Kolkata (and a statement of Shri Anand Sharma) which were not incriminating material uncovered during the assessee's search; no independent incriminating material was found in the assessee's search. Consequently, the additions made under section 153A for the completed years were held unsustainable and were set aside. [Paras 6, 7]Additions made under section 153A for the completed assessment years 2010-11 to 2013-14 are not sustainable in absence of incriminating material found in the assessee's search and are deleted.Onus and evidentiary test under section 68 regarding identity, genuineness and creditworthiness of creditors - Evidentiary weight of statements/reports of Investigation Wing versus documentary bank and statutory records - Addition under section 68 in respect of amounts received from M/s Jalsagar Commerce Pvt. Ltd. cannot be sustained where the assessee produced bank records, financial statements, confirmations and assessments of the creditor and the only contrary material relied upon by the AO was investigatory statements/reports lacking documentary linkage. - HELD THAT: - On merits the Tribunal applied the established test under section 68: once the assessee produces documentary evidence regarding identity, genuineness and creditworthiness of the creditor (bank statements, financials, ROC data, confirmations, assessed returns of the creditor), the AO must undertake further inquiry and cannot rest the addition solely on investigation wing reports or third party statements that do not establish the flow of funds or insolubly connect the creditor to the alleged entry operator. In the facts, the AO relied mainly on the Investigation Wing report and the statement of an alleged entry operator; there was no documentary chain showing routing of funds from that operator to M/s Jalsagar Commerce Pvt. Ltd. or then to the assessee. The creditor had bank transactions, paid interest (with TDS) and had been assessed; the AO and CIT(A) had no other tangible material to displace the documentary evidence produced by the assessee. Following the Tribunal's earlier decision in the group matter, the section 68 addition in respect of share capital and unsecured loan from M/s Jalsagar Commerce Pvt. Ltd. was deleted. [Paras 8]Addition under section 68 in respect of share capital and unsecured loan from M/s Jalsagar Commerce Pvt. Ltd. is deleted.Final Conclusion: The Tribunal allowed the appeal: deletions were directed of the additions made under section 153A for the completed assessment years (2010-11 to 2013-14) for want of incriminating material found in the assessee's search, and the addition under section 68 in respect of receipts from M/s Jalsagar Commerce Pvt. Ltd. was deleted on merits in view of documentary evidence produced by the assessee and absence of a documentary nexus in the investigative material. Issues Involved:1. Validity of the assessment order under Section 153A read with Section 143(3).2. Alleged violation of natural justice principles.3. Confirmation of additions by the CIT(A).4. Additions under Section 68 of the Income Tax Act, 1961.5. Specific additions concerning share capital and unsecured loans.6. Rejection of the theory of peak credit and telescoping.Issue-Wise Detailed Analysis:1. Validity of the Assessment Order Under Section 153A:The assessee argued that the assessment order passed under Section 153A read with Section 143(3) is bad in law and void ab-initio as the assessment for the year under consideration was not abated on the date of the search. The Tribunal noted that the assessment for the impugned assessment year was not pending on the date of the search and was not abated. It was emphasized that additions could only be made based on incriminating material found during the search. The Tribunal referred to the cases of CIT vs. Kabul Chawla and Jai Steel (India) vs. ACIT, which held that in the absence of any incriminating material, the completed assessment can only be reiterated.2. Alleged Violation of Natural Justice Principles:The assessee contended that the assessment order violated the principle of natural justice by not giving the opportunity for cross-examination of the alleged accommodation entry providers. The Tribunal observed that the AO relied on statements from third parties recorded in other cases without providing an opportunity for cross-examination. This was considered a violation of natural justice principles.3. Confirmation of Additions by the CIT(A):The CIT(A) confirmed the additions made by the AO, which the assessee argued were arbitrary and based on irrelevant material. The Tribunal found that the CIT(A) erred in confirming the additions without proper evidence and solely relied on statements and reports from other authorities.4. Additions Under Section 68 of the Income Tax Act, 1961:The AO made additions under Section 68 for unexplained credits in the form of share capital and unsecured loans. The Tribunal noted that these additions were based on statements from third parties and reports from the Investigation Wing, Kolkata, without any direct incriminating evidence found during the search of the assessee. The Tribunal held that such additions could not be sustained in the absence of incriminating material found during the search.5. Specific Additions Concerning Share Capital and Unsecured Loans:The CIT(A) confirmed the addition of Rs. 18,35,000 received from M/s Jalsagar Commerce Pvt Ltd towards share capital and unsecured loans. The Tribunal examined the transactions with M/s Jalsagar Commerce Pvt Ltd and found that the AO and CIT(A) relied on statements from third parties without direct evidence. The Tribunal referred to the case of M/s Kota Dal Mill, where similar transactions were examined and found genuine based on documentary evidence provided by the assessee. The Tribunal directed the deletion of the addition made under Section 68 towards share application money and unsecured loans from M/s Jalsagar Commerce Pvt Ltd.6. Rejection of the Theory of Peak Credit and Telescoping:The CIT(A) rejected the theory of peak credit and did not allow the benefit of telescoping, recycling, and rotation of funds. The Tribunal did not specifically address this issue in detail, as the primary focus was on the validity of the additions made under Section 68 and the lack of incriminating material found during the search.Conclusion:The Tribunal allowed the appeal of the assessee, holding that the additions made by the AO under Section 153A were not sustainable in the absence of incriminating material found during the search. The Tribunal directed the deletion of the additions made towards share application money and unsecured loans from M/s Jalsagar Commerce Pvt Ltd.