2025 (2) TMI 1368 - AT - Income Tax

Search assessments and loose documents: additions require cogent search materials; lack of cross-examination and valuation rules led to deletion of additions.

Additions in search assessments must rest on cogent, positive materials found during search; mere loose sheets or diary entries cannot sustain additions, ... Addition u/s 69A - Addition only on the basis of loose sheets, diary entries - legal presumption u/s 292C is that the cash found in a premises is presumed to belong to the owner of the premises - mandation of allowing allowing cross examination of those witnesses - HELD THAT:- Addition in assessments carried out pursuant to search action u/s 132 of the Act has to be related to cogent and positive materials found during search which prove conclusively that the assessee has either earned an income or made an investment which has not been recorded in his regular books of account or that his case is covered under any of the deeming provisions contained in sections 68, 69, 69A to 69D of the Act. However, additions cannot be sustained merely on the basis of rough noting made on few loose sheets. The fact of the case in hand or similar - AO cannot make addition only on the basis of loose sheets, diary entries, we are deleting the addition on this counts. In the present case we notice that the Revenue has heavily relied upon the statements given by Rajendran and Anjaneya to support many of the additions and the cross examination of these persons were not afforded as they had retracted and the revenue felt that it would not serve any purpose. The Revenue has however relied on these statements to frame the assessment. As decided in Andaman Timber Industries [2015 (10) TMI 442 - SUPREME COURT] not allowing cross examination of those witnesses, whose statements are relied upon to frame the assessment, is a serious flaw & makes the assessment a nullity in as much as it amounted to violation of principles of natural justice because of which the assessee is adversely affected. The Apex Court went onto hold that in view of the fact that cross examination of the witnesses being not afforded, the testimony of these witnesses stand discredited. Thus all those additions, the AO has made on the basis of the statements of these two persons, have to be necessarily be deleted on this count also. Transaction of exchange - income arising/accrued to the assessee - substantial or protective addition - Capital gain on transaction with M/s. Davanam Constructions Private Limited (Substantive addition) - Income from other sources on account of transaction with M/s. Davanam Constructions (Protective addition) - HELD THAT:- We find that the AO is correct in holding that the assessee did not have possession of the entire property at CTS I and II ever since 10/10/2004. The Sale Agreements dated 10/10/2004 as well as 09/09/2005, in respect of properties at CTS I and II, respectively clearly state that possession will be given only upon execution of Sale Deed. Assessee had possession of only 1,57,841 sft of land at CTS II and did not have possession of the balance portion of 1,92,917 sft of land. We also find from the Agreement of Sale, dated 09/09/2005, entered into between the assessee and DCPL, that the assessee had acquired right to purchase 69% of the property at CTS I, coming to about 30,958 sft. There is no doubt that the agreements dated 10/10/2004 and 09/09/2005 are not registered, but the same are not denied either by the assessee or by DCPL. We are also of the view that the agreements may be registered or unregistered. In any case the agreements are binding on both the parties. The assessee can be said to be in possession of only 1,57,841 sft of land since 21/02/2005, as he has a registered sale deed registered to the said effect. The assessee cannot be said to be in possession of any extent of land in excess of 1,57,841 sft at CTS II as on the date of MOU. The assessee also cannot be said to be in possession of any extent of land in CTS I as he has not registered any portion thereof as on the date of the MOU. Similarly, D.K. Suresh who had succeeded to the rights of the Kempegowda HUF as on the date of the MOU, cannot be said to be in possession of any extent of land either in CTS I or II. Having decided that the transaction is not clearly in the nature of an Exchange, we need to now look at the fact, whether any income arises out of the same or not and if it does, what would be the nature of income and under what head should it be taxed. We find that the claim of the assessee that he has along been in possession of the entire property at CTS I & II, cannot be accepted in the absence of any proof to substantiate the same. The Agreements of Sale do not specify that the assessee has been put in possession of the property. During the course of hearing the ld. counsel submitted that the occupancy certificate was issued by the BBMP on 17.06.2019 and 15.10.2019 and assessee has offered capital gain in the year of sale in ay 2020-21 and 2021-22. The actual transfer took place after occupancy certificate issued by the BBP. We are also in agreement on this point of the ld. AR. We have also in the earlier part of this order come to a conclusion that there is no exchange u/s 2(47)(i) of the Act in the impunged AY.2018-19. In view of the above findings we have to determine if any income arises applying the provisions of section 50C and 56 (2)(x)(b) of the Act as these are the two sections relevant for this case. As no income accrues to the assessee as per the provisions of Sections 50C, 50D or 56(2)(x)(b) from this transaction and hence no income can be said to have escaped assessment under any of these sections as the law stands today and hence no addition can be made in the hands of the assessee or his family either u/s 50D, which is relied upon to make a substantive addition or u/s 56(2)(x)(b) of the Act, which is relied upon to make a protective addition. Having held that there is no income arising to the assessee, applying the provisions of section 50C and section 56(2)(x)(b), we delete the substantive addition made u/s 45(1) of the Act and also delete the Protective addition made u/s 56(2)(x)(b) of the Act. Accordingly Grounds allowed in favour of the assessee. Issues: (i) Whether additions made by the AO under sections 69A/69/69B and related heads based on cash seized and seized documents/loose sheets/diaries are sustainable; (ii) Whether the addition of Rs.103,36,94,904/- as long-term capital gain and protective addition of Rs.104,97,55,888/- under section 56(2)(x)(b) arising from land transactions with M/s Davanam Constructions Pvt. Ltd. are sustainable; (iii) Whether procedural/natural justice defects (denial of cross-examination) and other legal grounds raised require interference; (iv) Whether any specific additions should be remitted to assessing officer for fresh consideration.Issue (i): Sustainability of additions based on cash found/seized and on seized documents, loose sheets, diaries and entries (additions numbered 114 in assessment).Analysis: The Tribunal examined cash seizures at several premises and materials seized (loose sheets/diaries/notes). It applied the authorities establishing that loose sheets/diary entries are non-speaking/dumb documents absent independent corroboration and that entries in books/loose papers alone are insufficient to fasten liability. The Tribunal considered statements recorded under section 132(4), the fact of retractions and the denial of cross-examination, the statutory presumption under section 292C and relevant High Court/Supreme Court precedents. For cash seized at certain third-party premises the Tribunal noted admissions by those owners (and satisfactions/153C steps) and lack of compelling corroboration by Revenue. For seized loose sheets/diaries the Tribunal found absence of corroborative material, lack of author attribution for many sheets, and absence of unearthed corresponding assets; it also relied on binding jurisdictional authority that loose sheets without corroboration have no evidentiary value. Where statements of third parties were relied upon but cross-examination was denied, the Tribunal treated that as vitiating reliance on those statements.Conclusion: Additions relying on loose sheets/diaries and uncorroborated seized materials (items 714) are deleted in favour of the assessee. Additions based on cash seized at Flat No.17 B-4 (Rs.1,37,36,500), Flat No.201 B-5 (Rs.6,61,26,000) and Mr. Anjaneyas residence (Rs.15,00,000) were examined individually: additions relating to flats where third parties admitted ownership or where corroboration was lacking are deleted. One cash seizure (Rs.41,03,600 at Flat No.107 B-2) is remitted to the assessing officer for fresh consideration with directions to allow reasonable opportunity and to verify agricultural-income claim of the HUF.Issue (ii): Legality and quantification of capital gains addition (Rs.103,36,94,904) and protective addition under section 56(2)(x)(b) (Rs.104,97,55,888) arising from alleged exchange/relinquishment in land transactions with M/s Davanam Constructions Pvt. Ltd.Analysis: The Tribunal analysed agreements, registered sale deeds, advances reflected in DCPL books, the memorandum of settlement, timings of possession/registration and relevant principles on transfer/part-performance (including Registration Act / Section 53A jurisprudence). It examined whether the transaction amounted to an exchange under section 2(47)(i) and whether valuation provisions section 50C/50D applied. The Tribunal found no reliable material that the assessee had ceded rights in CTS-1297 in a manner attracting exchange taxation for AY 2018-19; advances held with DCPL covered the value of land ultimately registered in favour of the assessee; no corroborative material established an escapement of income under section 50C/50D or section 56(2)(x)(b).Conclusion: Both the substantive capital gain addition under section 45(1) (Rs.103,36,94,904) and the protective addition under section 56(2)(x)(b) (Rs.104,97,55,888) are deleted in favour of the assessee.Issue (iii): Effect of procedural defects and applicability of other general/legal grounds (including jurisdictional and statutory-formal objections).Analysis: The Tribunal reviewed claims regarding limitation, statutory format of notices, centralization/ jurisdiction, involvement of assessing officer in search team, PAN errors on orders, and interest computations. It treated many general grounds as not adjudicated or as legal questions already addressed by the CIT(A). It applied principle from higher authority that denial of opportunity to cross-examine witnesses whose statements are relied upon is a serious procedural defect and discredits such statements.Conclusion: Procedural defects discrediting reliance on third-party statements (where cross-examination denied) supported deletion of additions dependent on those statements. Several general grounds were left unadjudicated; specific legal grounds addressed by CIT(A) were dismissed where no infirmity found. Interest issue held to be consequential. Overall results favour the assessee on grounds specified above.Issue (iv): Remittance of any issue to AO for fresh consideration.Analysis: For the cash seizure of Rs.41,03,600 at Flat No.107 B-2 the assessee claimed HUF agricultural income as source; Revenue raised no objection to remittance for verification. Tribunal balanced interests of justice and directed reconsideration by JAO with opportunity to assessee to substantiate and warning against undue adjournments.Conclusion: The issue relating to cash seizure of Rs.41,03,600 is remitted to the file of the JAO for fresh consideration; all other contested additions as decided above disposed in favour of the assessee (deletions) except remitted item.Final Conclusion: The appeal is partly allowed: numerous additions based on uncorroborated seized loose sheets/diaries and several cash-seizure additions and the large capital-gain/protective additions are deleted in favour of the assessee, while one cash-seizure issue is remitted to the assessing officer for verification; the operative effect is that the Tribunal grants substantial relief to the assessee and allows the appeal partly for statistical purposes.Ratio Decidendi: Loose sheets, diary entries or other non-speaking seized materials lack evidentiary value absent independent corroboration; additions based solely on such dumb documents or on third-party statements relied upon without affording the assessee a right to cross-examine cannot sustain assessment additions under sections 69/69A/69B or related deeming provisions.