2024 (12) TMI 1636 - AT - Income Tax

Assessments under Section 153A, 153C and 153D invalidated where no incriminating material found and procedures not followed

M/s. Maheshwari Coal Benefication & Infrastructure Private Limited Versus Dy. Commissioner of Income Tax [Central] Circle–1 (1), Nagpur

ITAT NAGPUR - AT held that additions in assessments framed u/s 153A for A.Y. 2014-15, 2015-16 and 2016-17 based on a third-party pre-search statement were ... Assessment u/s 153A - mandation to find incriminating material in search against assessee - Addition on account of unexplained cash credit u/s 68 and on account of interest paid on such bogus unsecured loans - HELD THAT:- Assessing Officer has used this statement (i.e., pre-search statement recorded on 22/01/2019 at third party premises at Kolkata) of Suresh Agrawal, Kolkata, director of M/s. Rashi Steel & Power P Ltd, Kolkata on oath recorded on 14/03/2019 in the course of a separate search conducted in the case of a third party (i.e., search of Suresh Agrawal, Kolkata, director on 22/01/2019 which is a pre-search statement of third party at third party premises at Kolkata) for making the additions in the hands of the assessee in the assessment made under section 153A for unabated assessments on the date of search on the assessee (i.e., on 11/07/2019) i.e., A.Y. 2014-15, 2015-16 and 2016-17, which is unabated assessments for the assessee, since on the date of search on 11/07/2019, no assessments were pending for the A.Y. 2014-15, 2015-16 and 2016-17. We also find that as per the mandate of section 153C, if this statement was to be construed as an incriminating material belonging to or pertaining to a person other than person searched (as referred to in section 153A), then the only legal recourse available to the Deptt was to proceed in terms of section 153C by handing over the same to the Assessing Officer who has jurisdiction over such person. Here, the assessment has been framed under section 153A on the basis of alleged incriminating material i.e., being the statement recorded under section 132(4). The assessee had no opportunity to cross-examine the said witness, but that apart, the mandatory procedure u/s 153C has not been followed; On this count alone, we conclude that the alleged additions made in assessments made under section 153A for unabated years i.e., A.Y. 2014-15, 2015-16 & 2016-17 on the date of search (i.e., 11/07/2019) on the assessee, in the absence of any incriminating material found during the course of search from the premises of the assessee on 11/07/2019, which relates to the alleged additions made for A.Y. 2014-15, 2015-16 & 2016-17, is invalid, unjustified and hereby it is deleted. On the issue of the alleged unsecured loan which has been re–paid by the assessee in subsequent year and the Revnue has not disputed the same. It is legally well settled now that when the loan amount has been squared–up in subsequent years, addition cannot be made on account of unexplained cash credit under section 68 of the Act and further if no fresh credits are appearing in the books of account or it is brought forward from earlier years, then it cannot be added as addition under section 68 of the Act in the relevant assessment year. We find on merits also and addition of Rs. 12 lakh for the assessment year 2014–15 on account of unsecured loan treating it as unexplained under section 68, when it is opening balance as on 01/04/2023 brought forward from earlier year and no fresh cash credit received during the assessment year 201415, it had already accepted in scrutiny assessment completed under section 143(3) dt. 18/08/2016/ Moreso, it had already been repaid on 04/10/2018 which is prior to the search conducted on 11/07/2019, addition is not justified hence deleted and consequently, the interest on such unsecured loans is also deleted. For coming to such conclusion, we rely on the judgment of Usha Stud Agricultural Farms Ltd, [2008 (3) TMI 91 - DELHI HIGH COURT] and Ayachi Chandrashekhar Narsangji [2013 (12) TMI 372 - GUJARAT HIGH COURT] Validity of the approval granted u/s 153D - The power to grant approval under section 153D is not to be exercised casually or in a routine manner, rather the concerned authorities are expected to grant approval upon examination of the entire materials before approving the draft assessment order and the authority is legally required to ensure due application of mind. The Revenue does not have any evidence to show that the approval was granted with due diligence upon exercising adequate time and upon examining the materials needs to be considered in terms of the statutory provisions. Clearly, therefore, we hold that the approval so granted is violative of the mandate of section 153D and, therefore, not sustainable at all. Consequently, the assessment made for the A.Y. 2014–15 to 2020–21, is held to be invalid and hence the same is hereby quashed for want of valid assumption of jurisdiction in the absence of valid and proper statutory approval under section 153D by the Addl. CIT. Understated the coal service charges (i.e., coal benefication and loading & unloading of coal) - Addition is based on dumb documents found at the third party premises as claimed by the learned A.R. of the assessee that it is on dumb material (i.e., screen shot of mobile of one Sandeep Agrawal, Nagpur, director of M/s. Swami Fuels; from 15-4-19 to 15/06/2019, which is not even pertain to the assessee. We find that the addition made by the Assessing Officer is merely based on presumption, surmises, mathematical calculation & extrapolation which has no legal basis/ sanctity for doing this, is not justified in search assessment made under section 153A rws. 143(3) for A.Y. 2018-19, without having any corroborative material evidence brought on record by the Assessing Officer / CIT(A) is completely unjustified and not sustainable. Addition on account of unaccounted sale of coal dust for A.Y. 2018-19, i.e., 80%, which was extrapolated sale of coal dust for A.Y. 2019-20, and thereafter, he estimated 40% gross profit on such extrapolated/ estimated sale of coal dust of ₹ 21,39,69,630, that would come to ₹ 8,55,87,852. The Assessing Officer has made addition on the basis of addition made in the A.Y. 2019-20 of ₹ 10,69,84,815 by making gross profit estimation on extrapolated/ estimated sale of coal dust and nothing else has been brought on record for the impugned presumptive addition of ₹ 8,55,87,852 in A.Y. 2018-19, which had no valid/ admissible basis in search assessment made under section 153 A r.w.s. 143(3) for A.Y. 2018-19 and such addition is unsustainable in law. Assessments made under section 143(3) for the A.Y. 2018-19 to 2020–21 by making gross profit estimation on extrapolation of unaccounted sale of coal dust, books of account have not been rejected and section 145(3) has not been applied, no assessment has been made under section 144, no defect has been found in the books of accounts maintained by the assessee for A.Y. 2018-19 to 2020–21 and, therefore, any estimation of income is not permissible in the eyes of law in search assessment made under section 143(3) and thus, the addition of ₹ 8,55,87,852, for the A.Y. 2018–19 is hereby deleted. ISSUES PRESENTED AND CONSIDERED 1. Whether additions in a search assessment under section 153A can be made in respect of assessment years for which regular assessments were completed (unabated/completed years) when no incriminating material is found at the searched person's premises relating to those years. 2. Whether statements recorded under section 132(4) in the course of a search of a third party (or pre-search statements) can be treated as incriminating material to sustain additions in the searched person's assessment under section 153A, without following section 153C procedure or providing opportunity for cross-examination. 3. Whether unexplained credits or interest additions under section 68 can be sustained where the challenged credits are opening balances brought forward from earlier years and/or the loans were repaid prior to the date of search. 4. Whether approval under section 153D (prior approval to pass assessment/reassessment consequent to search) is valid where the approving officer grants approval mechanically or without recorded application of mind to the draft assessment order and seized/appraisal material. 5. Whether an assessing officer may make large extrapolated/adhoc additions (gross-profit estimation/backward extrapolation of alleged suppressed sales) in search assessments without rejecting books of account under section 145(3) and framing best-judgment assessment under section 144. 6. Whether 'dumb' documents (loose papers/screenshots/excel extracts recovered from third parties) and extrapolations based on them, in absence of corroborative material, suffice to make additions. ISSUE-WISE DETAILED ANALYSIS Issue 1: Power to make additions in completed (unabated) assessments under section 153A absent incriminating material Legal framework: Section 153A confers power to assess or reassess total income of a searched person for six years preceding the search-year, with the second proviso preserving that proceedings pending on the date of search shall abate. The legislative scheme links the block/search assessment regime to incriminating material discovered by search under section 132. Precedent treatment: High Court and Supreme Court authorities have held that completed assessments cannot be reopened under section 153A in the absence of incriminating material found during search; completed assessments can only be reopened by invoking reassessment provisions (sections 147/148) subject to their conditions. Earlier judicial pronouncements are followed and applied. Interpretation and reasoning: The Court reasons that the very purpose of search-triggered block assessment is detection of undisclosed income evidenced by incriminating material found during search; absent such nexus, allowing assessment of completed years would render the second proviso and scheme meaningless and permit impermissible double-assessment. The Tribunal applies the principle that incriminating material found in the searched person's premises is a sine qua non for additions in unabated years under section 153A. Ratio vs. Obiter: Ratio - additions for completed/unabated years under section 153A are impermissible unless incriminating material linking the addition to the searched person's premises and the relevant year is found during the search. Obiter - remarks on policy purpose of sec 153A/trace of earlier block-assessment regime. Conclusion: Additions for completed assessment years in the absence of incriminating material found at the searched person's premises are invalid and are to be deleted; reassessment under sections 147/148 remains the remedy if statutory conditions are met. Issue 2: Reliance on third-party/pre-search statements and need to follow section 153C and natural-justice safeguards Legal framework: Statements recorded under section 132(4) and the explanation thereto have evidentiary value, but section 153C governs transfer/use of seized material pertaining to persons other than the person searched; natural-justice principles require opportunity to confront and cross-examine adverse witnesses whose statements form the basis of assessment. Precedent treatment: Courts and Tribunals have repeatedly held that (i) section 132(4) statements do not per se constitute incriminating material for other persons; (ii) statements of third parties found in their search cannot be imported into the searched person's proceedings without complying with section 153C; and (iii) denial of opportunity to cross-examine witnesses relied upon vitiates reliance on such statements. Interpretation and reasoning: The Court finds the Assessing Officer relied solely or predominantly on a pre-search/third-party statement not seized from the searched person's premises, without providing its copy or offering cross-examination; the mandatory procedure under section 153C for handing over material to the officer having jurisdiction over the person to whom the material pertains was not followed. Reliance on untested third-party statements amounts to using uncorroborated material and violates natural justice. Ratio vs. Obiter: Ratio - statements of third parties cannot be used as incriminating material against another person in section 153A assessment unless section 153C procedure is complied with and the assessee is afforded opportunity to confront/cross-examine; such untested statements alone cannot sustain additions. Obiter - discussion of evidentiary caution and need for corroboration. Conclusion: Additions based solely or primarily on statements recorded in third-party searches (without complying with section 153C or providing cross-examination opportunity) are invalid and must be deleted. Issue 3: Application of section 68 to opening balances and loans repaid prior to search Legal framework: Section 68 addresses unexplained cash credits in the hands of the assessee; to attract s.68 the credit must be a fresh credit in the year and the assessee must fail to satisfactorily explain identity/creditworthiness/genuineness or source. Repayment in subsequent year and being an opening balance brought forward are relevant factual circumstances. Precedent treatment: Authorities have held that opening balances carried forward from earlier years and credits not introduced in the year under consideration cannot be subjected to section 68 in the relevant year; repayment of the loan in a subsequent year can negate addition where documentary bank evidence/confirmations are available and AO did not adequately investigate. Interpretation and reasoning: The Tribunal accepts that the sum treated as unexplained credit was an opening balance carried from prior year(s) and not a fresh credit in the year under challenge, and that the loans were repaid before the search date with confirmations and bank statements on record. Given these facts and established precedent, section 68 addition in the impugned years is unjustified. Ratio vs. Obiter: Ratio - opening balances/old credits not fresh in the year under consideration, and loans repaid in subsequent years with evidence, cannot be taxed as unexplained cash credits under s.68 for the earlier year. Obiter - emphasis on AO's duty to make inquiries and verify confirmations before making additions. Conclusion: Section 68 additions on account of opening-balance loans and interest where repayments and confirmations exist (and no fresh credit in the year) are deleted. Issue 4: Validity of approval under section 153D - requirement of application of mind Legal framework: Section 153D requires prior approval of the prescribed higher authority before passing an assessment/reassessment under sections 153A/153C; the approval is a quasi-judicial/supervisory function intended as a check against arbitrary or ill-considered draft assessments. Precedent treatment: Multiple High Court and Tribunal decisions establish that prior approval under the corresponding provision must reflect application of mind; mere rubber-stamping, blanket single-day approvals for numerous draft orders, or approvals that do not show perusal of assessment/ seized material render the approval vitiated and the consequent assessment void. Interpretation and reasoning: The Tribunal examines the approval memo/letter and finds that the approving officer granted multiple approvals on the same day, often on the basis of draft assessment orders only, without record of perusal of seized/appraisal material or reasons showing satisfaction. The statutory scheme contemplates that the approver should examine the draft order and supporting seized materials and independently apply his mind. Mechanical approvals convert the safeguard into an empty formality and vitiate assessments reliant on them. Ratio vs. Obiter: Ratio - prior approval under s.153D must manifest application of mind; mechanical or rubber-stamp approvals lacking any recorded satisfaction/verification vitiate the approvals and the resulting assessments. Obiter - procedural guidance on how approval ought to be documented and the approver's functions vis-à-vis appraisal reports and seized materials. Conclusion: Approvals granted under section 153D in a mechanical manner without application of mind are invalid; assessments made pursuant to such invalid approvals are quashed. Issue 5: Estimation/extrapolation of income without rejecting books (section 145(3)/section 144) and use of 'dumb' documents Legal framework: Section 145(3) prescribes that best-judgment assessment (section 144) can be made where AO is not satisfied about correctness/completeness of accounts; rejection of books is a precondition to estimation. Search assessments under section 153A must still comply with statutory safeguards; evidence supporting estimation must be cogent and connected to the relevant year. Precedent treatment: Judicial authorities require that (i) books of account be rejected under section 145(3) before resorting to best-judgment assessment; (ii) estimation must be based on credible corroborative material, not mere suspicion or unauthenticated loose papers; and (iii) extrapolation from third-party/dumb documents without nexus to the searched person or relevant year is unsustainable. Interpretation and reasoning: The Tribunal finds that major extrapolated additions (40% GP on alleged unaccounted sales) were computed without rejecting books, without invoking section 145(3)/144, and were based on screenshots/excel extracts recovered from a third party, with no working or corroboration, and without confronting or examining the third party. The additions rest on presumption, surmise and arithmetic extrapolation rather than admissible incriminating material directly linked to the searched person and year; hence they are arbitrary and unsustainable. Ratio vs. Obiter: Ratio - estimation of income in search assessments must satisfy the conditions of section 145(3) where applicable; absent rejection of books and acceptable corroborative material, extrapolated/adhoc additions based on 'dumb' documents are invalid. Obiter - cautionary note on use of circumstantial inferences and requirement for AO to record defects before rejecting books. Conclusion: Extrapolated gross-profit additions made without rejecting books or adducing corroborative, year-specific incriminating material are deleted; additions based on uncorroborated third-party screenshots/excel sheets are unsustainable. Issue 6: Evidentiary sufficiency of seized loose papers/screenshots and role of cross-examination Legal framework: Statements and seized documents have evidentiary value but must be corroborated and linked to the assessee and relevant year; procedural fairness requires opportunity to confront adverse material and witnesses whose statements are used to make additions. Precedent treatment: Courts have consistently held that uncorroborated loose papers and statements found in third-party searches cannot be the sole basis for additions; denial of cross-examination where such statements are relied upon is fatal to reliance on them. Interpretation and reasoning: The Tribunal applies settled principles: (i) a 'dumb' document without corroboration or nexus is insufficient; (ii) a section 132(4) statement must be relatable to incriminating material found during the search in the searched person's premises; and (iii) failure to allow cross-examination of witnesses whose statements are relied upon undermines the fairness and validity of the assessment. Ratio vs. Obiter: Ratio - uncorroborated seized loose papers/screenshots/third-party statements do not, by themselves, constitute incriminating material enabling additions; lack of opportunity for cross-examination vitiates reliance on such statements. Obiter - judicial emphasis on the need for AO to undertake independent inquiry and verification. Conclusion: Additions founded on uncorroborated/dumb documents or on third-party statements not tested by cross-examination are invalid and are to be deleted.