2022 (9) TMI 1330 - HC - Income Tax

Section 153A additions unsustainable where assessments final before search and no incriminating material seized; witness statement excluded

Held that where assessments had attained finality before the search and no incriminating materials were seized, additions under s.153A could not be ... Validity of additions under Section 153A in absence of incriminating material - Incriminating nature of seized documents (share certificates) in search proceedings - Admissibility of statements recorded under Section 132(4) without opportunity of cross-examination - Reliance on post-search enquiries and third-party statements for making additions - Effect of pending SLP on applicability of a coordinate bench precedent - Validity of notices under Section 133(6) and assessment of investor companies' networthValidity of additions under Section 153A in absence of incriminating material - Whether additions under Section 153A could be sustained where assessments had attained finality and no incriminating material was found during search. - HELD THAT: - The Court held that where the assessment has attained finality prior to the date of search and no incriminating documents/materials were found and seized at the time of search, additions under Section 153A cannot be sustained; such cases are to be treated as non-abated assessments. The Court relied upon its prior decisions and concluded that the ITAT and CIT(A) concurrently found absence of incriminating material and that those findings precluded the assumption of jurisdiction under Section 153A to make the impugned additions. The Court noted that the pending SLP in a separate matter did not operate as a stay on the precedent relied upon. The conclusion follows the determinative reasoning that absence of incriminating material defeats the basis for reopening under Section 153A. [Paras 8, 9, 10, 14]Additions under Section 153A were unsustainable and the appeals did not raise any substantial question of law.Incriminating nature of seized documents (share certificates) in search proceedings - Whether share certificates found during search constituted incriminating material justifying additions. - HELD THAT: - The Court accepted the ITAT's finding that share certificates (or their photocopies) merely record transactions already disclosed in the assessee's books and, in the present cases, were not used by the AO as the basis for additions under Section 68. The Tribunal observed that the AO relied on post-search investigation reports and third-party statements rather than the seized share certificates; the Revenue failed to place material on record to show the seized documents were original or incriminating. Accordingly, the mere seizure of share certificates did not constitute incriminating material to sustain reopening. [Paras 5, 10, 11]Seized share certificates (or photocopies) were not incriminating in the facts of these cases and did not justify additions.Admissibility of statements recorded under Section 132(4) without opportunity of cross-examination - Whether statements of third parties recorded under Section 132(4) could be relied upon when the assessee was denied opportunity to cross-examine the witness. - HELD THAT: - The Court agreed with the ITAT that statements recorded under Section 132(4) do not by themselves constitute incriminating material and, where the assessee was denied an opportunity to cross-examine the declarant (here, Mr. Rajesh Agarwal), such statements cannot be relied upon. The Court noted authority supporting exclusion of untested statements and emphasised that failure to allow cross-examination is a serious procedural flaw, rendering reliance on such statements impermissible. [Paras 6, 12, 13]The statement of the third party was excluded and could not be the basis for additions in the absence of cross-examination.Validity of notices under Section 133(6) and assessment of investor companies' networth - Whether the investor companies were bogus/accommodation entries because notices under Section 133(6) were returned unserved and whether they had sufficient networth to make investments. - HELD THAT: - The Court recorded the concurrent findings of the Tribunal and CIT(A) that investor companies had filed detailed replies to Section 133(6) notices and furnished requisite details, and that the networth figures shown in the record supported their capacity to make the stated investments. The Court agreed with the ITAT's appraisal of the networth table, concluding that the investor companies were not shown to be sham entities for the purpose of these assessments. [Paras 4, 7, 11]Investor companies were not bogus and had sufficient networth; non-receipt of notices did not render them non-genuine on the record before the Court.Effect of pending SLP on applicability of a coordinate bench precedent - Whether the pendency of Revenue's SLP in another matter prevents this Court from following its own precedents relied upon by the assessee. - HELD THAT: - The Court observed that although a SLP in M/s Apar Industries Ltd. was pending before the Supreme Court, there was no stay in favour of the Revenue. Applying settled principles, the Court held that in absence of any stay the High Court's precedents remain binding and the issues in these appeals are covered by the judgments of this Court and relevant Supreme Court authorities cited. [Paras 2, 9]Pending SLP did not preclude the Court from applying its precedents; no stay existed to alter applicability.Final Conclusion: The High Court concluded that the additions could not be sustained: seized documents were not shown to be incriminating, the third-party statement was inadmissible without cross-examination, investor companies' replies and networth supported genuineness, and therefore no substantial question of law arose; the appeals were dismissed. Issues Involved:1. Reliance on the judgment in CIT vs Kabul Chawla.2. Incriminating material found during the search.3. Statement of Mr. Rajesh Agarwal and its evidentiary value.4. Notices under Section 133(6) of the Income Tax Act, 1961.5. Net worth of investor companies.6. Validity of additions under Section 153A in absence of incriminating material.7. Opportunity to cross-examine Mr. Rajesh Agarwal.Detailed Analysis:1. Reliance on the judgment in CIT vs Kabul Chawla:The appellant argued that the ITAT erred by relying on CIT vs Kabul Chawla, as a similar issue is pending before the Supreme Court in the case of M/s Apar Industries Ltd. However, the court noted that there is no stay order in favor of the revenue in the Apar Industries case. Consequently, the issue of law is covered by existing judgments, including CIT vs Kabul Chawla.2. Incriminating material found during the search:The appellant contended that original share certificates were found at the premises of the assessee company, suggesting that the investor companies were bogus. However, the ITAT found that only photocopies of share certificates were seized, which merely recorded the number of shares issued and were disclosed in the books of accounts. The ITAT concluded that these documents were not incriminating.3. Statement of Mr. Rajesh Agarwal and its evidentiary value:The appellant relied on the statement of Mr. Rajesh Agarwal to support the additions. However, the respondent argued that they were not given an opportunity to cross-examine Mr. Rajesh Agarwal. The court agreed with the ITAT that without cross-examination, the statement could not be relied upon as evidence.4. Notices under Section 133(6) of the Income Tax Act, 1961:The appellant argued that the investor companies were not genuine as notices issued under Section 133(6) were returned unserved. However, the ITAT found that the investor companies had filed detailed replies and furnished requisite details, which the Assessing Officer had failed to consider.5. Net worth of investor companies:The respondent provided a table showing the net worth of the investor companies, which indicated that they had sufficient net worth to make the investments. The court agreed with the ITAT that the investor companies had sufficient net worth to make the investments.6. Validity of additions under Section 153A in absence of incriminating material:The court reiterated that no additions could be made under Section 153A if no incriminating material was found during the search, especially when the assessment had attained finality prior to the date of search. This principle was supported by multiple judgments, including CIT vs Kabul Chawla and PCIT vs. Meeta Gutgutia.7. Opportunity to cross-examine Mr. Rajesh Agarwal:The court emphasized that the respondents were denied the opportunity to cross-examine Mr. Rajesh Agarwal, despite a specific request. This denial violated the principles of natural justice, making the statement inadmissible as evidence. The court referred to the Supreme Court judgment in M/s Andaman Timber Industries vs. CCE, which held that not allowing cross-examination of witnesses whose statements were the basis of the order is a serious flaw.Conclusion:The court concluded that no substantial question of law arose for consideration. Both CIT (A) and ITAT had given concurrent findings that no incriminating material was brought on record to sustain the additions. The appeals were dismissed along with pending applications.