2025 (1) TMI 1729 - AT - Income Tax

Tax additions for alleged fraud gains while related criminal case was pending-matter remanded until final criminal findings.

Whether additions for alleged fraudulent gains could be sustained when criminal proceedings concerning the same alleged fraud were pending and no final ... Additions made as alleged 'LOC scam' income - addition has been made on account of alleged frauds committed by the assessee along with other officials for which the criminal proceedings are still pending before the competent Court and have not been concluded - HELD THAT:- Since the criminal proceedings relating to the frauds have not been finally concluded as no orders have been passed in the two charge sheets filed and it is by estimate that the assessee has been saddled with 1/16th, 1/13th and 1/5th of 60% of the amount mentioned; unless and until a clear finding of the competent court is delivered relating to who the accused are and it is ascertained what is the benefit which has accrued to each of them, neither any income can be said to have accrued nor the addition will be justified, which has been upheld by the Ld. CIT(A) despite mentioning the facts of the proceedings not being finalised and the hearing still continuing, when last informed. Therefore, in the interest of justice and fair play, we deem it proper to set aside the order of the CIT(A) and restore the appeal to him with a direction that he shall await the orders of the competent court in all the pending criminal proceedings and only thereafter decide the appeal. While deciding the appeal, all the grounds of appeal should be decided by the Ld. CIT(A) whether they pertain to the fraudulent gains or even otherwise. Appeals filed by the assessee are allowed for statistical purposes. 1. ISSUES PRESENTED AND CONSIDERED (i) Whether additions made as alleged 'LOC scam' income, computed purely by estimated shares (fractions of 60% of alleged amounts) and resting on pending criminal proceedings, could be sustained when the competent criminal court had not finally concluded all cases and there was no clear finding of benefit accruing to the assessee. (ii) Whether, in the circumstances of continuing criminal proceedings and absence of final judicial findings on culpability/benefit, the first appellate authority was required to keep the matter open and decide the appeal only after outcomes of the competent court, rather than sustaining the additions on the ground of time limits and inability to wait indefinitely. (iii) Whether the similar controversy for both assessment years warranted the same remand directions, requiring a de novo decision by the first appellate authority after awaiting the competent court's orders and deciding all grounds (relating to alleged fraudulent gains and otherwise). 2. ISSUE-WISE DETAILED ANALYSIS Issue (i) & (ii): Sustainability of estimated 'scam income' additions during pendency of criminal proceedings; necessity to await competent court findings Legal framework (as discussed in the judgment): The Court considered that the additions were made in the backdrop of criminal proceedings on charge-sheets and that the assessment involved attributing alleged gains to the assessee by estimation. The Court treated a 'clear finding of the competent court' on (a) identification of accused and (b) ascertainment of benefit accruing to each person, as central to whether any income could be said to have accrued and whether addition could be justified. Interpretation and reasoning: The Court found that the additions were made on an estimated basis by assigning the assessee a notional share (such as 1/16th, 1/13th, and 1/5th) of an assumed percentage of the alleged amounts. The Court noted that the criminal proceedings were not finally concluded in respect of the charge-sheets, and that, without final outcomes and quantification of benefit attributable to each accused, it could not be said that 'any income can be said to have accrued,' nor could the additions be justified. The Court held that the first appellate authority's approach of sustaining the additions despite acknowledging that proceedings were not finalized was inconsistent with the need for conclusive findings from the competent court on culpability and benefit/pecuniary advantage attributable to the assessee. Therefore, 'in the interest of justice and fair play,' the proper course was to set aside the appellate order and require the first appellate authority to await the competent court's orders in all pending criminal proceedings and only thereafter adjudicate. Conclusions: The Court set aside the first appellate authority's order and remanded the matter with a direction that the first appellate authority shall await the orders of the competent court in all pending criminal proceedings and thereafter decide the appeal. The assessee was granted liberty to file copies of the competent court's orders and make submissions seeking appropriate relief. The Court further directed that, while deciding the appeal after such outcomes, all grounds must be decided, whether they relate to alleged fraudulent gains or otherwise. Issue (iii): Applicability of the same remand directions to both assessment years Legal framework (as discussed in the judgment): The Court treated the issues across both assessment years as common and materially identical, warranting a uniform outcome. Interpretation and reasoning: Having concluded that the additions and the appellate sustainment were premature in view of pending and inconclusive criminal proceedings and the estimation-based attribution of alleged gains, the Court held that the same reasoning applied to the other year since the issues were similar. Conclusions: The Court applied its findings for one year mutatis mutandis to the other year, set aside the first appellate authority's order for both years, and directed a de novo decision in accordance with the remand directions. Both appeals were allowed for statistical purposes.