2025 (3) TMI 1490 - AT - Income Tax

Reassessment beyond four years invalid due to improper section 151 approval and inadmissible unsigned police statement

DCIT, Central Circle-1, Aurangabad Versus Sanjay Suganchand Kasliwal

DCIT, Central Circle-1, Aurangabad Versus Sanjay Suganchand Kasliwal - TMI 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered in this appeal and cross-objection are:(a) Whether the reassessment proceedings initiated under section 147 of the Income Tax Act, 1961, read with section 148, are valid and legal, considering the requirements of recording and supplying actual reasons, proper sanction under section 151, and compliance with the proviso to section 147 regarding failure to disclose material factsRs.(b) Whether the assessment order passed without mentioning the Document Identification Number (DIN) is valid in light of CBDT Circular No. 19/2019 dated 14.08.2019 and judicial precedentsRs.(c) On merits, whether the addition of Rs. 8,61,80,284/- under section 69D of the Act, on account of alleged cash loans borrowed on hundi, is justified based on the evidence and facts of the caseRs.(d) Whether the statement recorded by the assessee before police authorities, found during survey proceedings, can be relied upon as admissible evidence to invoke section 69DRs.(e) Whether the alleged documents termed as hundis and post-dated cheques constitute borrowing on hundi within the meaning of section 69DRs.(f) Whether the transaction between the assessee and the complainant (and his father) was a loan transaction or a business transaction involving advance payments for purchase of immovable propertiesRs.2. ISSUE-WISE DETAILED ANALYSIS(a) Validity of Reassessment ProceedingsRelevant Legal Framework and Precedents: The initiation of reassessment under section 147 requires recording of 'reason to believe' that income chargeable to tax has escaped assessment due to failure on the part of the assessee to disclose fully and truly all material facts. The proviso to section 147 mandates that for reopening beyond four years, such failure must be specifically recorded. Section 151 requires proper sanction for issuance of notice under section 148. Judicial precedents emphasize that reasons recorded must be actual, specific, and supplied to the assessee; mechanical or non-application of mind renders proceedings invalid (CIT v. Videsh Sanchar Nigam Ltd., CIT v. Trend Electronics, PCIT v. Shodiman Investments, etc.).Court's Interpretation and Reasoning: The Tribunal noted discrepancies between reasons recorded and reasons supplied during assessment proceedings, including unsigned and undated reasons, and different sanctioning authorities mentioned in the notice and approval documents. The sanction under section 151 was held to be mechanical and without application of mind. The reasons recorded were based on erroneous facts, particularly the mischaracterization of the FIR and complaint as alleging a cash loan, whereas the documents consistently showed the dispute related to advance payments for immovable property purchase. The Tribunal relied on judgments holding that reopening without proper reasons, sanction, and failure to disclose material facts is invalid.Key Evidence and Findings: The reasons recorded did not mention failure on the part of the assessee to disclose material facts fully and truly. The sanction was obtained from a different authority than mentioned in the notice. The reassessment was initiated on the basis of an unsigned police statement and documents found during survey, without corroboration or enquiry into the source of alleged cash with the complainant.Application of Law to Facts: The Tribunal applied the legal principles and found that the conditions for valid reassessment were not met. The reopening beyond four years was not sustainable as no failure to disclose material facts was established. The sanction was invalid, and the reasons were based on incorrect facts.Treatment of Competing Arguments: The Revenue contended that proper sanction was obtained and reasons were sufficient. The Tribunal rejected this, noting lack of proper application of mind and discrepancies in sanctioning authorities. The assessee's contentions on invalidity were accepted.Conclusions: The reassessment proceedings were held to be invalid and bad in law on grounds of improper recording of reasons and invalid sanction under section 151. Other legal grounds were rendered infructuous.(b) Validity of Assessment Order Without DINRelevant Legal Framework and Precedents: CBDT Circular No. 19/2019 mandates quoting DIN on all communications relating to assessments or appeals. Some High Court decisions have held non-mention of DIN as irregularity but not illegality. The Supreme Court has stayed certain High Court orders on this issue.Court's Interpretation and Reasoning: The Tribunal noted that the assessment order did not contain DIN, but the intimation letter issued on the same day did. Since the matter is sub judice before the Supreme Court, the Tribunal refrained from adjudicating this ground, leaving the assessee liberty to raise it later.Conclusions: The issue of DIN was not decided; the assessee may raise it after the Supreme Court's decision.(c) Merits of Addition under Section 69DRelevant Legal Framework and Precedents: Section 69D deems any amount borrowed on hundi or repaid otherwise than through account payee cheque as income of the borrower. The burden lies on the Revenue to prove borrowing on hundi. Statements recorded before police authorities are not admissible evidence under section 25 of the Indian Evidence Act and cannot be sole basis for addition (CIT v. S. Khader Khan Son, PCIT v. Nageshwar Enterprises, Shri Ratan Babulal Lath v. DCIT, etc.).Court's Interpretation and Reasoning: The Tribunal examined the police complaint, FIR, statements of the complainant and the assessee, survey documents, and civil suit records. It found that the complainant consistently alleged advance payments for purchase of immovable properties, not cash loans on hundi. The cheques and documents termed as hundis were held to be collateral securities, not hundis in the legal sense. The draft sale deed and stamp duty payment and refund confirmed the nature of the transaction as a business advance rather than a loan. The Tribunal held that the AO relied solely on the police statement, which was unsigned and denied by the assessee, and failed to bring any cogent evidence of borrowing on hundi.Key Evidence and Findings: The complainant's statement confirmed advances for property purchase, not loans. The draft sale deed and stamp duty refund showed the transaction was not completed. The cheques and promissory notes were given as security. No evidence was produced to prove the source of cash with the complainant or his father. The police statement was found inadmissible. The civil suit was pending with no conclusive finding of loan.Application of Law to Facts: The Tribunal applied the burden of proof principles and evidentiary rules, holding that the Revenue failed to discharge its burden to prove borrowing on hundi. The documents did not constitute hundi, and the transaction was a business advance. The addition under section 69D was thus not sustainable.Treatment of Competing Arguments: The Revenue argued that the cheques and hundis proved borrowing and that the assessee admitted the loan in police statements. The Tribunal rejected these, emphasizing the inadmissibility of police statements, denial of contents by the assessee, and lack of corroborative evidence. The assessee's detailed submissions and judicial precedents were accepted.Conclusions: The addition under section 69D was rightly deleted. The transaction was not borrowing on hundi but a business advance. The AO erred in invoking section 69D.(d) Evidentiary Value of Police StatementRelevant Legal Framework and Precedents: Section 25 of the Indian Evidence Act excludes confession made to police officers from admissible evidence. Courts have held that statements recorded by police or investigating agencies cannot be sole basis for additions under Income Tax Act.Court's Interpretation and Reasoning: The Tribunal noted that the statement recorded before police was unsigned, given under alleged coercion, and denied by the assessee. The police did not rely on this statement in charge sheet or criminal proceedings. The Tribunal held that such statement cannot be relied upon for making additions under the Act.Conclusions: The police statement is not admissible evidence and cannot form sole basis for additions.(e) Nature of Documents as HundiRelevant Legal Framework and Precedents: For section 69D to apply, there must be borrowing on a hundi. Courts have held that promissory notes or collateral securities are not hundis unless they satisfy legal requirements. Cases such as CIT v. Paranjothi Salt Co. and CIT v. K.P. Abdullah have held that mere promissory notes or collateral securities do not attract section 69D.Court's Interpretation and Reasoning: The Tribunal found that the documents alleged as hundis were promissory notes and blank cheques given as collateral security. There was no unconditional order to pay a sum to a third party or bearer. The transaction was identified and verifiable as an advance against property purchase. Therefore, the documents did not constitute hundis within section 69D.Conclusions: The documents are not hundis for the purpose of section 69D; hence, section 69D is not attracted.(f) Nature of Transaction: Loan or Business AdvanceRelevant Legal Framework and Precedents: The nature of receipt is crucial for taxability. Advances in business transactions are not income unless they are loans or unexplained cash credits. The burden is on Revenue to prove the nature of transaction as borrowing.Court's Interpretation and Reasoning: The Tribunal noted consistent allegations by the complainant that the amount was an advance for purchase of immovable properties. The draft sale deed, stamp duty payment and refund, and the absence of any executed sale deed supported this. The assessee denied any borrowing. No credible evidence was produced to prove borrowing. The Tribunal held that the transaction was business advance, not loan.Conclusions: The transaction was a business advance for purchase of properties, not a loan on hundi. Therefore, section 69D does not apply.3. SIGNIFICANT HOLDINGS'The sole basis of making addition by the AO of Rs. 8,61,80,284/- is a statement of the appellant recorded by the Police Authority. It is well settled position of law that the statement recorded by the Police Authorities cannot be the sole basis for making additions. Moreover, the statement recorded by the Police Authority is not admissible evidence as per the provisions of Section 25 of the Indian Evidence Act, 1872. In the present case, the AO did not bring any cogent material on record to prove that the appellant has accepted the cash loan against the hundi violating the provision of section 69D.''The reasons recorded for reopening were based on erroneous facts / non existent facts / erroneous assumption or interpretation of the actual facts/non-consideration of the actual facts... The reasons recorded stated the wrong fact that the FIR filed against the assessee was that cash loan was given, whereas the FIR and other documents show that the amount was advanced towards purchase of immovable properties.''The sanction of PCIT (Central), Pune dated 04.03.2021, as available in the ITBA system, was not a valid approval. This is because, it was not obtained from the authority provided u/s. 151 of the Act... The issuance of the notice u/s. 148 of the Act with the approval of the wrong sanctioning authority vitiates the reassessment proceeding.''The transaction if any which has happened between the assessee and Shri Radheshyam Agrawal/Shri Pankaj Radheshyam Agrawal is certainly not in the nature of borrowing of funds against Hundi but purely a business transaction of purchase of immovable properties... The Revenue authorities have merely acted on the basis of the statement given by the assessee before the police authorities and it is judicially settled that such statement is not admissible evidence.''The reassessment proceedings are invalid and bad in law on the grounds that there was no proper reason to believe with the AO for reopening the proceedings and no proper approval u/s. 151 of the Act.''The addition under section 69D of the Act cannot be sustained as the amount received was not a hundi loan but an advance against the investment in properties.'