2023 (10) TMI 373 - AT - Income Tax

Appeal allowed due to lack of incriminating material & connection with seized items

The appeal was filed against the confirmation of an addition of Rs 50,00,000 to the appellant's income in relation to an unsecured loan. The Tribunal ... Assessment u/s 153A - Addition of unsecured loan receipts u/s 68 - as per assessee genuine loan is received where Identity, Genuineness and Creditworthiness had been proved - HELD THAT:- As per Meeta Gutgutia case [2017 (5) TMI 1224 - DELHI HIGH COURT] no assessment was pending on the date of search and the addition has been made merely on the basis of the book entries already disclosed to the department. Further, reliance is also placed on the decision of the Hon’ble Jurisdictional High Court in the case of PCIT Vs. Subhash Khattar [2017 (7) TMI 1091 - DELHI HIGH COURT] The entire issue stands settled by the judgment of Hon’ble Apex Court in the case of M/s. Abhisar Buildwell P. Ltd. [2023 (4) TMI 1056 - SUPREME COURT] wherein the held that 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. Hence, we hold that no addition can be made in the case of the assessee sans seized material. Appeal of the assessee is allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether an addition under section 68 of the Income Tax Act treating an unsecured loan of Rs. 50,00,000 as unexplained can be sustained where the taxpayer furnished confirmations, ITRs, bank statements and financial statements of lender entities and notices under section 133(6) were responded to. 2. Whether invocation of assessment proceedings under the search and seizure provision (section 153A context) permits the Assessing Officer to make additions in respect of a completed and unabated assessment year on the basis of material not seized or not incriminating vis-à-vis that assessment year. 3. Whether penalty under section 271(1)(c) and interest under sections 234A/B/C/D can be sustained when the primary addition is held unsustainable for lack of incriminating seized material. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Sustenance of addition under section 68 in respect of unsecured loan Legal framework: Section 68 permits taxing of unexplained cash credits/loans where the identity, creditworthiness and genuineness of the transaction are not established by the assessee. The assessing authority may call for evidence and issue notices to the alleged creditors under section 133(6). Precedent treatment: The Tribunal considered and applied binding and persuasive decisions of higher courts which require that, in the absence of incriminating material unearthed during search, additions in completed assessments cannot be made merely on the basis of book entries already disclosed to the department. Those precedents have been followed by the Tribunal. Interpretation and reasoning: The Tribunal examined the documentary evidence produced by the assessee - confirmations, income-tax returns, bank statements and financial statements of the lenders - and noted that statutory notices under section 133(6) were issued to the lender entities and they complied. The Tribunal treated the assessment year as a completed, unabated assessment (return filed under section 139(1), due date for notice under section 143(2) expired prior to search). It held that the additions in the assessment order were not based on any material seized or found during search; instead, they related only to disclosed book entries. Relying on the settled principle that completed assessments may be revisited after search only when incriminating material relevant to that assessment is unearthed, the Tribunal concluded that the AO lacked legal basis to invoke section 68 to make the addition for that completed assessment year absent such seized incriminating material. Ratio vs. Obiter: The holding that section 68 addition cannot be sustained in a completed (unabated) assessment year unless incriminating material specific to that year is discovered during search is treated as ratio for the facts before the Tribunal. Observations about sufficiency of the particular documentary evidence (confirmations, ITRs, bank statements and responses to section 133(6)) support the ratio but are specific to the factual matrix and therefore operative as applied ratio. Conclusion: The Tribunal set aside the addition under section 68 of Rs. 50,00,000, holding that identity/creditworthiness/genuineness were not properly challenged by any incriminating seized material and that the AO could not lawfully make such addition in a completed assessment on the basis of disclosed book entries alone. Issue 2 - Permissibility of invoking assessment proceedings under search for completed/unabated assessment year Legal framework: The assessment scheme and search provisions permit reassessment/assessment in relation to items discovered during search; however, whether completed assessments can be reopened/reassessed in respect of matters not revealed by the search depends on presence of incriminating material pertinent to that assessment year. Precedent treatment: The Tribunal relied on jurisdictional High Court authority and an apex authority establishing that the Assessing Officer may interfere with completed assessments under search only on the basis of incriminating material unearthed during the search which relates to that particular assessment year. Those authorities were followed without distinguishing. Interpretation and reasoning: Applying the cited principles, the Tribunal found that the search yielded no incriminating material relating to the assessment year in question; the additions made bore no nexus to any seized documents or undisclosed property unearthed during search. Consequently the invocation of post-search assessment activity to make additions in that completed assessment was improper. The Tribunal also noted that the assessee had filed return under section 139(1) and the statutory time for issuing notice under section 143(2) had expired before search, reinforcing the characterization of the assessment year as completed/unabated. Ratio vs. Obiter: The proposition that post-search additions in a completed assessment require seized or incriminating material specific to that year is applied as the ratio. The factual determination that no seized material related to the additions is case-specific but supports the operative ratio. Conclusion: The Tribunal held that the AO could not lawfully make additions in a completed/unabated assessment year where no incriminating material was unearthed during search; therefore the additions based solely on disclosed book entries were unsustainable. Issue 3 - Validity of penalty under section 271(1)(c) and interest under sections 234A/B/C/D Legal framework: Penalty and interest provisions attach to tax shortfalls or concealment determined by assessment. Their sustainment depends upon correctness of the underlying assessment additions and the existence of culpable conduct or tax liability for the period. Precedent treatment: Where primary additions are quashed for want of legal basis (for example, being made in a completed assessment absent incriminating material), consequential penalties and interest arising from those additions cannot stand unless independently justified. Interpretation and reasoning: Because the Tribunal concluded that the addition under section 68 was unsustainable, it followed that related penal and interest consequences premised upon that addition lacked foundation. No separate finding of deliberate concealment or tax shortfall independent of the quashed addition was recorded that could sustain penalty or interest. Ratio vs. Obiter: The determination that penalties and interest cannot survive when the underlying addition is invalid is an applied legal consequence (ratio) in the present factual matrix; any broader obiter concerning assessment of culpability was not required. Conclusion: The Tribunal held that penalty under section 271(1)(c) and interest under sections 234A/B/C/D could not be sustained in the absence of a valid addition; such consequential demands were therefore not maintainable. Cross-references and Interplay The Tribunal's conclusions on Issues 1 and 2 are interdependent: the prohibition on making additions in completed/unabated assessments without incriminating seized material directly negates the AO's jurisdiction to invoke section 68 against disclosed book entries, and that negation in turn nullifies penalties and interest premised on such additions. The Tribunal followed higher court rulings on each point and applied those precedents to the facts, treating them as binding and dispositive.