Search assessment for non-abated years: can s.153A add income based only on settlement disclosure; addition deleted.

In assessment under s.153A for non-abated years, the dominant issue was whether an addition could be sustained solely on additional income offered by the assessee in a settlement application (s.245C) when no incriminating material was found in search. The ITAT held that s.153A permits disturbance of completed assessments only to the extent of income evidenced by incriminating material seized during search, and a voluntary, ad hoc disclosure made to render a settlement petition maintainable or for "peace of mind" is not substantive evidence of undisclosed income. As the disclosure was the sole basis and the original return had been accepted without such addition, the addition lacked legal foundation and was deleted; the assessee's grounds were allowed.

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1. ISSUES PRESENTED AND CONSIDERED

(i) Whether, for a non-abated assessment year assessed under section 153A, an addition can be sustained in the absence of any incriminating material found during search.

(ii) Whether an addition made solely on the basis of additional income offered in an application filed before the Settlement Commission (which was rejected/abated), without any corroborative incriminating material found during search, is legally sustainable in section 153A proceedings.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (i) - Scope of additions under section 153A for a non-abated year in absence of incriminating material

Legal framework (as discussed by the Court): The Court considered the scheme of section 153A and noted that assessments pending on the date of search abate, but for non-abated years the assessment can be made only on the basis of incriminating material found in the course of search.

Interpretation and reasoning: The Court found that the relevant year was a non-abated year because the earlier assessment had already been completed before the search date. It further recorded that no incriminating material was found during the search relating to the impugned addition. On these facts, the Court held that the assessment under section 153A could not disturb the completed assessment by making additions unconnected with any incriminating search material.

Conclusions: In a non-abated year, additions under section 153A are not sustainable without incriminating material found during search. Since none was found, the addition could not stand.

Issue (ii) - Addition based solely on settlement-application disclosure after rejection/abatement, without incriminating search material

Legal framework (as discussed by the Court): The Court examined the Revenue's reliance on section 245HA(3) (use of material produced before the Settlement Commission after abatement/rejection) but evaluated its operation within the constraints applicable to section 153A for non-abated years, as discussed above.

Interpretation and reasoning: The Court noted that the additional income was offered before the Settlement Commission on an ad-hoc basis as an estimated disallowance of business expenditure to "buy peace of mind," and that the settlement application was rejected. It held that the Assessing Officer had made the addition by using the settlement disclosure as the only basis, without any independent incriminating material or evidence found during the search to establish that such additional income was actually earned or represented undisclosed income. The Court applied the principle, supported by the authorities it relied upon, that mere voluntary disclosure in settlement proceedings-when not corroborated by incriminating material found in search-cannot by itself justify an addition in a non-abated year under section 153A.

Conclusions: An addition made solely on the basis of an ad-hoc disclosure in a rejected/abated settlement application, without any incriminating material found during search, is invalid in section 153A proceedings for a non-abated year. The impugned additions were therefore directed to be deleted, and the appeals were allowed (with the same reasoning applied mutatis mutandis to the other years, subject to figure differences).

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