ITAT deletes additions under sections 68 and 69C for bogus capital gains lacking search-based incriminating material under section 153A

The ITAT Mumbai held that additions made under sections 68 and 69C treating long-term capital gains from share sales as bogus could not be sustained under section 153A assessment. The tribunal found no incriminating material was discovered during the search conducted on the assessee. Evidence relied upon by the AO, including Investigation Wing reports and third-party statements, predated the search and could not constitute search-based material. Since the assessment year was concluded and no incriminating evidence was found during search, the additions were deleted and the assessee's appeal was allowed.

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The core legal questions considered by the Tribunal in the present appeals are:

1. Whether additions under section 153A of the Income Tax Act, 1961 ("the Act") can be sustained in respect of long-term capital gains (LTCG) declared in the return of income when no incriminating material was found during the course of the search in the hands of the assessee or its associated persons.

2. Whether the addition under section 69C of the Act on account of alleged cash commission paid in relation to the LTCG can be upheld in the absence of any incriminating material found during the search.

Issue-wise Detailed Analysis

Issue 1: Validity of additions under section 153A in absence of incriminating material found during search

Relevant legal framework and precedents: Section 153A of the Act empowers the Assessing Officer (AO) to assess or reassess income in cases where search or seizure operations under section 132 or requisition under section 132A have been conducted. However, the Supreme Court in PCIT v. Abhisar Buildwell Pvt Ltd (2023) 149 taxmann.com 399 (SC) clarified that if no incriminating material is found during the search, the AO cannot make additions in respect of completed or unabated assessments under section 153A. The Court observed that completed assessments can only be reopened under sections 147/148 subject to their specific conditions.

Court's interpretation and reasoning: The Tribunal noted that the assessee had filed its original return which was processed under section 143(1) and was not subject to scrutiny within the prescribed time. The search was conducted on 06/10/2017, well after the expiry of the scrutiny period. Therefore, the assessment was unabated and completed prior to the search.

The AO made additions treating the LTCG from sale of shares as bogus and invoked sections 68 and 69C. However, the AO's reliance was primarily on investigation reports from the Kolkata Investigation Wing and statements recorded prior to the search date, including that of an entry operator and recommendations of the SIT on Black Money. The Tribunal emphasized that none of this material was found during the search in the assessee's premises or those of associated persons.

The Tribunal held that the statement of the assessee recorded during the search, which was relied upon by the Revenue to allege non-genuineness, cannot be treated as incriminating material merely because the assessee failed to establish genuineness. The pre-search investigation reports and statements recorded prior to the search date cannot be equated with incriminating material found during the search.

Applying the Supreme Court's ruling in Abhisar Buildwell, the Tribunal concluded that in the absence of incriminating material found during the search, additions under section 153A cannot be sustained for completed/unabated assessments.

Key evidence and findings: The key evidence against the assessee was the investigation report, statements recorded prior to search, and price fluctuations of the scrip. None of these were discovered during the search in the assessee's premises. The assessee's original return was processed without scrutiny and no incriminating material was found during the search.

Application of law to facts: Since the assessment was completed and not pending on the date of search, and no incriminating material was found during the search, the Tribunal applied the Supreme Court precedent to hold that the additions under section 153A were not maintainable.

Treatment of competing arguments: The Revenue argued that failure of the assessee to discharge its onus and reliance on investigation reports and statements recorded prior to search constituted incriminating material. The Tribunal rejected this, clarifying that material must be found during the search itself to invoke section 153A additions in completed assessments.

Conclusion: The Tribunal allowed the ground raised by the assessee, setting aside the additions under section 153A for the completed assessment years in absence of incriminating material found during the search.

Issue 2: Addition under section 69C on account of alleged cash commission

This issue pertained to the addition of Rs. 3,04,061 under section 69C alleging commission paid in cash for the LTCG on equity shares, despite no incriminating material found during search.

Given the Tribunal's finding on the absence of incriminating material during search, the issue of addition under section 69C did not require separate adjudication. The Tribunal implicitly held that the addition under section 69C also could not be sustained for the same reasons as the additions under section 153A.

Significant Holdings

The Tribunal succinctly stated the core holding from the Supreme Court in Abhisar Buildwell:

"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. Meaning thereby, in respect of completed/unabated assessments, no addition can be made by the AO in absence of any incriminating material found during the course of search under Section 132 or requisition under Section 132A of the Act, 1961."

The Tribunal applied this principle to the facts and concluded:

"...additions made by the AO under section 153A of the Act cannot be sustained in the absence of incriminating evidence found during the course of the search."

Core principles established include:

• For completed or unabated assessments, additions under section 153A require incriminating material found during the search in the hands of the assessee or associated persons.
• Pre-search investigation reports or statements recorded prior to search cannot be treated as incriminating material discovered during the search.
• Failure of the assessee to establish genuineness of transactions does not convert statements recorded during search into incriminating material.
• Completed assessments can only be reopened under sections 147/148 subject to their conditions, and not under section 153A in absence of incriminating material.

Accordingly, the Tribunal allowed the appeals, setting aside the additions on account of LTCG and commission under sections 68, 69C, and 153A of the Act for the assessment years 2012-13 and 2013-14.

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