Addition under section 143(3) quashed; alleged undisclosed payment required section 153C proceedings, lacked corroboration and valid 132(4) statement

ITAT Delhi-AT allowed the assessee's appeal, holding that the Rs. 5 crore addition made in regular assessment u/s 143(3) for AY 2012-13 was invalid. The alleged undisclosed payment, based solely on an email seized from a third party and a statement recorded u/s 132(4), could only be examined in separate proceedings u/s 153C, not in a regular assessment for the year of search. The Tribunal further held that, on merits, there was no corroborative evidence of the alleged payment to the counterparty; the statement stood effectively retracted, and the AO failed to obtain independent confirmation. The addition was quashed and deleted.

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1. ISSUES PRESENTED AND CONSIDERED

1.1 Whether the assessment for the relevant year, based on material seized from premises of a third party, could validly be framed under section 143(3) read with section 153B, or whether recourse to section 153C was mandatory, rendering the impugned assessment without jurisdiction.

1.2 Whether the addition of Rs. 5 crores, founded on an email seized from a third party's premises and a statement under section 132(4), was sustainable on merits in the absence of corroborative evidence.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1 - Validity and jurisdiction of assessment when incriminating material is found in search of a third party (sections 143(3), 153A, 153B, 153C)

Legal framework (as discussed by the Tribunal)

2.1 The Tribunal examined sections 153A and 153C, including the scheme that: (i) where material seized in the course of a search under section 132 at the premises of one person "belongs/pertains/relates" to another person, such material must be handed over to the Assessing Officer having jurisdiction over that other person; and (ii) proceedings against such other person are then to be initiated under section 153C, treating the date of receipt of such material by that Assessing Officer as the deemed "date of search" for the purpose of determining the relevant six assessment years.

2.2 Reference was made to the Notes on Clauses to the Finance Bill, 2015 explaining the amendment to section 153C, and to the principle that section 153C is a mandatory, special provision with a non obstante clause, to be invoked whenever seized documents pertaining to a person other than the searched person are sought to be used against such other person. The Tribunal also relied on the reasoning in a coordinate bench decision treating the date of receipt of incriminating material by the Assessing Officer of "other person" as the deemed date of search and concluding that such material must be assessed only through section 153C and not in a regular/other assessment for that year.

Interpretation and reasoning

2.3 The only incriminating material relied upon for the addition of Rs. 5 crores was an email dated 19.05.2011 exchanged between the assessee and a third party, found and seized from the computer in the office premises of a company (Frost Falcon Distilleries Pvt. Ltd.) during a search on 09.11.2011. The assessee's name did not appear in the warrant or in the panchnama relating to that search.

2.4 The Tribunal recorded that the seized email was received by the Assessing Officer of the assessee on 29.08.2013. Therefore, qua this email, the "date of search" for the assessee, in terms of section 153C, would be 29.08.2013, falling in assessment year 2014-15. For such third-party material, the only permissible route was through satisfaction under section 153C and initiation of proceedings accordingly.

2.5 It was noted that no satisfaction as required under section 153C had been recorded by the Assessing Officer of the searched person or the Assessing Officer of the assessee, and no proceedings under section 153C had been initiated for the year in question. Nonetheless, the Assessing Officer used the seized email to frame an assessment for the assessee for assessment year 2012-13 under section 143(3) read with section 153B, treating it as arising from the search in the group cases on 09.11.2011.

2.6 The Tribunal held that any material found and seized at premises where the assessee's name neither figures in the search warrant nor in the panchnama cannot be used in a regular or 153A assessment of the assessee without following the prescribed procedure of section 153C. The proper recourse is mandatory satisfaction that the seized documents do not belong/pertain/relate to the searched person but to a third person, followed by transfer and initiation of proceedings under section 153C.

2.7 The Tribunal clarified that, independently, there had been a separate search action on the assessee's bank locker on 18.11.2011 on the strength of a warrant in the assessee's name, which warranted proceedings under section 153A for that search and framing of assessment under section 143(3) in respect of undisclosed income, if any, discovered from that locker search. However, the Rs. 5 crore addition was not based on locker search material but solely on the third-party email; therefore, its consideration could only be in a separate and independent proceeding under section 153C.

2.8 The Tribunal noted that there is no legal bar to having parallel assessments for the same assessment year under sections 153A, 153C, and 143(3), as each provision has distinct procedural preconditions. However, where the foundation of an addition is material seized from another person's premises, that addition must be routed through section 153C and cannot be validly made in a regular/153A assessment that ignores section 153C.

Conclusions

2.9 The assessment framed for the relevant year under section 153B read with section 143(3) on the basis of search material found in the group search on 09.11.2011, without invoking section 153C in relation to the seized email, was held to be without valid jurisdiction and liable to be quashed.

2.10 Consequently, the addition of Rs. 5 crores made in such assessment was held unsustainable on jurisdictional grounds and was required to be deleted.

Issue 2 - Sustainability of the Rs. 5 crore addition on merits (email and section 132(4) statement; absence of corroboration)

Interpretation and reasoning

2.11 On merits, the Tribunal considered the content of the seized email dated 19.05.2011. It observed that the email reflected mutual allegations between the assessee and the third party, and specifically recorded that the third party had categorically denied having received any sum of Rs. 5 crores from the assessee and had asked the assessee to "clarify the exact transaction including details of payment consequent to which the aforesaid amount is owed by him to be made."

2.12 The Tribunal held that the email, read in entirety, did not, by itself, indicate that any payment of Rs. 5 crores had actually been made by the assessee. Rather, it showed denial by the alleged recipient and a call for evidence of such payment. Thus, the document relied upon did not constitute proof of an actual payment.

2.13 The Assessing Officer had also relied on a statement by the assessee recorded under section 132(4) during the search, wherein the assessee allegedly surrendered Rs. 5 crores. The Tribunal noted that this surrender was not honoured in the return of income and that the assessee's subsequent conduct amounted to a retraction, asserting that no such payment had been made.

2.14 The assessee, by letter dated 18.12.2013, had specifically requested the Assessing Officer to obtain a direct confirmation from the third party (whose updated address was provided) in order to verify whether any amount of Rs. 5 crores had in fact been paid. The Assessing Officer did not act on this request and did not carry out cross-verification, nor did he bring any independent or corroborative material on record.

2.15 The Tribunal reasoned that in a situation where there were clear mutual disputes and allegations between the assessee and the third party, as evident from the email, the assessee could not reasonably be expected to procure a favourable confirmation from the opposite party. Hence, the Assessing Officer's failure to independently verify the alleged payment from the third party, despite a specific request and availability of details, was a serious lacuna.

2.16 In the absence of any corroborative evidence, either documentary or by independent confirmation, to prove that the assessee had actually paid Rs. 5 crores to the third party, the Tribunal held that the mere contents of the email, coupled with a bare statement under section 132(4) that had effectively been retracted by not being reflected in the return, could not form a valid and sufficient basis for such an addition.

Conclusions

2.17 On merits, the Tribunal concluded that there was no material on record, apart from the ambiguous email and the uncorroborated, effectively retracted section 132(4) statement, to establish that any payment of Rs. 5 crores had actually been made by the assessee. The evidentiary burden to substantiate the alleged payment had not been discharged by the Revenue.

2.18 Accordingly, even assuming jurisdiction, the addition of Rs. 5 crores was held unsustainable on merits and was directed to be deleted.

2.19 In view of the findings on both jurisdictional and substantive issues, all grounds (original and additional) raised by the assessee were allowed and the appeal was allowed in full.

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