2023 (5) TMI 955 - AT - Income Tax

Tribunal rules against Rs. 15 crore tax addition, emphasizes need for incriminating material.

ACIT Circle-1, Bhavnagar Versus Shri Ram Vessel Scrap Pvt. Ltd.

ACIT Circle-1, Bhavnagar Versus Shri Ram Vessel Scrap Pvt. Ltd. - TMI ISSUES PRESENTED AND CONSIDERED 1. Whether, in an assessment completed prior to a search under section 132, additions to income in assessment framed under section 153A read with section 143(3) can be made in respect of regular items (share application money and share premium credited in books) absent incriminating material discovered during the search pertaining to the assessment year under consideration. 2. Whether section 153A/153C permits the Assessing Officer to disturb completed assessments on the basis of material gathered in post-search investigations or statements of third parties when no incriminating documents or material were seized from the assessee's premises relating to the completed year. 3. The legal characterization and effect of 'incriminating material' for purposes of making additions in assessments under section 153A - i.e., whether the term is confined to documents seized from the assessee's premises during the search or extends to other investigatory material. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Permissibility of additions to completed assessments under section 153A in absence of incriminating material Legal framework: Section 153A provides for assessment in case of search or requisition by requiring issue of notices for six preceding years; section 143(3) frames assessment. The statutory scheme distinguishes between 'assess' (abatement/pending assessments) and 'reassess' (completed assessments). Precedent treatment: The Tribunal relied upon and followed jurisprudence of higher courts holding that completed assessments can be disturbed under section 153A only upon material of incriminating nature found during the search/requisition. Decisions of the jurisdictional High Court (Saumya Construction and others) and various High Courts were treated as binding guidance and followed. Interpretation and reasoning: The Court reasoned that the heading and mandate of section 153A indicate that assessments under that provision must have a relation to the search/requisition. Where a year is a completed assessment, interference with regular items already accepted in books requires specific incriminating material discovered in the search that bears upon that year's income. Absent such material, altering regular entries (like share application money and premium recorded in the books) goes beyond the scope of section 153A because it is not founded on fresh incriminating evidence from the search. Ratio vs. Obiter: Ratio - Completed assessments cannot be reopened under section 153A to make additions to regular items unless incriminating material pertaining to that year was found in the search/requisition. Obiter - Observations on the precise ambit of investigatory statements or findings in other proceedings where such material was not sourced from the assessee's premises. Conclusions: The addition of Rs.15 crores as unexplained credit under section 68, made in a completed assessment year without incriminating material seized or discovered during the search relating to that year, was beyond the scope of section 153A and was rightly deleted. Issue 2 - Reliance on post-search investigatory material and third-party statements to justify additions in completed assessments Legal framework: Section 153A is triggered by search/requisition; procedural and substantive effects are tied to material obtained in the course of those actions. The distinction between material seized from the assessee and other investigatory materials informs the permissibility of disturbing completed assessments. Precedent treatment: The Court followed decisions which held that mere statements or findings in independent inquiries (including statements of directors of investing companies or results of investigations into other entities) do not permit alteration of a completed assessment unless they qualify as incriminating material discovered in the search connected to the assessee's premises and year under consideration. Interpretation and reasoning: The AO's reliance on statements recorded in separate proceedings, show-cause notices referring to investigations of investing companies, and findings in other years was examined. The Tribunal found no nexus showing that incriminating documents were seized from the assessee in the search or that the seized material linked those third-party statements to the completed year. Consequently, post-search investigative material unconnected to seized incriminating items cannot be used to reopen and make additions in completed assessment years under section 153A. Ratio vs. Obiter: Ratio - Material forming the basis for additions in completed assessments under section 153A must derive from incriminating material gathered in the search/requisition relevant to the assessee and year; independent post-search inquiries or third-party statements not grounded in seized incriminating documents are insufficient. Obiter - Comments on investigative practice and the AO's duty to demonstrate the link between seized material and the addition. Conclusions: The AO's use of independent investigative statements and findings relating to investing companies, when not supported by incriminating material seized from the assessee's premises linking those statements to the completed assessment year, did not justify the addition under section 68. Issue 3 - Meaning and evidentiary role of 'incriminating material' in section 153A proceedings Legal framework: The Act does not define 'incriminating material'; the term is interpreted by courts in the context of the statutory scheme governing searches and assessments under section 153A. Precedent treatment: The Tribunal applied the established understanding from Higher Courts that 'incriminating material' comprises documents, information or material collected during the search/requisition that were not before the revenue in the previous (completed) assessment and that have direct bearing on the total income for the year under consideration. Interpretation and reasoning: The Court emphasized that incriminating material refers to evidence unearthed in the search/requisition which demonstrates undisclosed income or falsehood in the previously completed assessment. Merely observing that seizure is not a precondition for invoking section 153A (as noted by the AO) does not obviate the need for incriminating material when disturbing completed assessments. The Tribunal required that the AO specifically identify seized material or other items of incriminating nature found in the search that substantively justify the addition; absence of such identification defeats the power to reassess completed years. Ratio vs. Obiter: Ratio - 'Incriminating material' for purposes of reopening completed assessments under section 153A means materials discovered in the search/requisition that were not before the assessing authority in the completed assessment and which bear upon the assessee's total income for that year. Obiter - Observations on the undefined scope of 'incriminating' beyond seized documents and the procedural interaction between different investigatory actions. Conclusions: As no incriminating material seized from the assessee's premises pertaining to the year under consideration was placed on record, the AO could not rely on the general investigatory findings to justify additions; therefore, the addition stood unsustainable. Cross-references and Outcome Cross-reference: Issues 1-3 are interlinked - the central principle is that section 153A empowers reassessment in consequence of a search only insofar as the assessment relates to material found in that search; completed assessments require incriminating material discovered during the search to be disturbed (see Issue 3). Consequently, reliance upon third-party investigations or statements unconnected to seized material cannot justify additions (see Issue 2), and thus additions to regular items in completed assessments are impermissible without such incriminating material (see Issue 1). Final conclusion: The Tribunal upheld the appellate authority's deletion of the addition under section 68, holding the Revenue's appeal to be without merit and dismissing it as the AO failed to produce incriminating material from the search linking the alleged bogus share capital to the completed assessment year.