2024 (11) TMI 1519 - AT - Income Tax

Additions under section 153C based on third-party books showing alleged on-money payments held unsustainable; assessee need not explain source

ITAT AHMEDABAD held that additions under section 153C based on third-party books showing alleged on-money payments are unsustainable. Relying on HC ... Assessment u/s 153C - payment of on-money - consequence of search conducted at the premises of HN Safal Group/third party - HELD THAT:- Hon’ble Gujarat High Court in the case of Krishna Textiles [2008 (7) TMI 291 - GUJARAT HIGH COURT] has held that assessee cannot be called upon to explain the source of income, even if credited by the third party as assessee claimed that no such amount was invested or paid by it to third party. In this case addition was sought to be made on the basis of entries in the books of third party showing payment made by assessee to said party. We hold that the additions made by the Lower Authorities on account of payment of onmoney is not sustainable in law. Therefore the additions are liable to be deleted. 1. ISSUES PRESENTED AND CONSIDERED 1. Whether assessment proceedings under section 153C can validly result in additions in the absence of independent material connecting the seized third-party records to the assessee, where seized documents originate from a third party and the assessee denies the transaction. 2. Whether entries in books or seized records of a third party (including admissions made by that third party before the Settlement Commission) can, without more, constitute admissible and sufficient evidence to make additions against a taxpayer who was not party to the search, particularly when the assessee was not afforded opportunity to cross-examine makers of the third-party statements or produce confirmations refuting the seized entries. 3. Whether initiation of 153C assessment and consequent additions against one co-owner is sustainable when seized material shows transaction involving co-ownership and the assessing authority did not verify or proceed against the other co-owner(s). 4. Whether the extent of addition may be limited where the seized record supports a lesser amount than that assessed. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Validity of additions under section 153C based on third-party seized material Legal framework: Section 153C permits assessment of a person in respect of books, documents or assets found during search of another person where those materials pertain to the person assessed. The requirement is that seized material must pertain to the assessee and be such as to permit assessment. Precedent treatment: Authorities recognize that entries in records seized from a third party do not automatically establish the assessee's liability; the Department must establish a nexus between the seized material and the assessee. Case law cited by the Tribunal holds that possession or entries in another's records cannot be presumed to be possession or income of the assessee without proof. Interpretation and reasoning: The Tribunal analysed the seized excel sheet and sale deed, noting co-ownership of the property and payment of consideration by both co-owners. The Tribunal found no independent corroborative incriminating material linking the seized third-party record to the assessee alone. The Court emphasised that third-party admissions before the Settlement Commission and entries in third-party records, without direct evidence tying the amounts as the assessee's undisclosed income, do not satisfy the burden on the Department to prove that the records 'pertain' to the assessee for purposes of section 153C assessments. Ratio vs. Obiter: Ratio - where seized material originates from a third party, the Department must demonstrate a live nexus between that material and the assessee; mere entries or third-party admissions are insufficient absent corroboration. Obiter - observations on the nature of excel sheets as incriminating documents in general. Conclusion: Additions based solely on third-party seized records, without independent evidence establishing that those records pertain to the assessee, are not sustainable; deletions warranted. Issue 2 - Reliance on third-party statements/admissions (including Settlement Commission filings) without opportunity to cross-examine Legal framework: Principles of natural justice and settled law require that statements or evidence relied upon against an assessee must be placed before the assessee and the assessee given opportunity to controvert, including by seeking cross-examination of makers of adverse statements, where those statements are critical to the assessment. Precedent treatment: Jurisprudence holds that statements recorded behind the assessee's back and not furnished to the assessee, or where cross-examination is not afforded, cannot be relied upon to make additions. Decisions uphold deletion of additions where departmental reliance is on third-party statements without giving the assessee an opportunity to meet such evidence. Interpretation and reasoning: The Tribunal noted the assessee's grievance about lack of opportunity to cross-examine the third-party witnesses whose admissions were relied upon before the Settlement Commission and observed that principles of natural justice were not satisfied by the Department's reliance on such material without providing the assessee a chance to challenge it. The Tribunal treated the absence of cross-examination and nondisclosure of full Settlement Commission petition details as material procedural infirmities undermining the validity of the additions. Ratio vs. Obiter: Ratio - where departmental reliance rests on third-party statements or admissions, the assessee must be afforded an opportunity to confront and cross-examine such sources; failure to do so vitiates additions. Obiter - specific procedural steps the Department ought to have taken in the instant fact pattern. Conclusion: Additions based on third-party admissions and Settlement Commission filings, without furnishing the material to the assessee and allowing cross-examination, are invalid and liable to be set aside. Issue 3 - Failure to proceed against all co-owners when seized material indicates co-ownership Legal framework: Assessments must be factually and legally coherent; when records show co-ownership or transactions involving multiple persons, authorities should verify and, where appropriate, proceed against all relevant persons or at least establish why only one person is being assessed. Precedent treatment: Courts have required departmental verification and consistency when third-party records implicate multiple persons; selective assessment without explanation can be unsustainable. Interpretation and reasoning: The seized material and registered sale deed showed joint purchasers/co-owners. The Tribunal held that initiating 153C proceedings only against one co-owner without verifying or proceeding against the other co-owner was unsustainable. That factual lacuna meant the Department failed to establish that the seized entries related exclusively to the assessee. Ratio vs. Obiter: Ratio - selective initiation of 153C assessment against one co-owner, when records indicate joint ownership and no verification of others, undermines the assessment; such procedure is legally unsustainable. Obiter - comments on best administrative practice to verify co-ownership before assessing. Conclusion: The assessment cannot stand where the Department initiated proceedings against only one co-owner despite seized material showing joint involvement and without requisite verification. Issue 4 - Quantum of addition where seized records support a lesser amount Legal framework: Additions must be supported by evidence as to quantum; if the seized document or third-party record substantiates a specific lesser sum, the Department's interpretation to higher figures must be demonstrably justified. Precedent treatment: Courts require that the amount added to income correspond to the evidence; misinterpretation of third-party records leading to inflated additions is vulnerable to challenge. Interpretation and reasoning: The Tribunal noted the assessee's plea that the seized record mentioned a smaller figure (Rs.20,000) that was misread as Rs.20,00,000 by authorities. While the Tribunal primarily set aside the additions on other grounds, it recognised that, at minimum, quantum must be traceable to the seized record and that overassessment cannot be sustained without clear documentary support. Ratio vs. Obiter: Ratio - quantum of addition must be directly traceable to and supported by admissible evidence; where seized records only support a lesser amount, higher additions cannot be sustained. Obiter - factual finding on the specific figures in this record (left open by the primary conclusion deleting the addition). Conclusion: Even if some liability were to be established, assessment quantum must be confined to figures actually supported by the admissible seized material; speculative or erroneous inflation must be disallowed. Overall Conclusion The Tribunal concluded that the lower authorities' additions were unsustainable: (a) third-party seized material and Settlement Commission admissions, without independent corroboration and without affording opportunity to the assessee to cross-examine, do not justify additions under section 153C; (b) initiation of assessment against a single co-owner when records disclose joint ownership is procedurally and legally infirm; and (c) quantum must be strictly supported by admissible records. Accordingly, the Tribunal deleted the additions.