Reopening under section 153A requires incriminating material; absence prevents reopening and 40A(3) disallowance deleted consequently.

A completed assessment cannot be reopened on the basis of a search unless incriminating material relating to that assessee is found; applying that principle the Tribunal quashed reassessment under the search provisions for the earlier year because no incriminating material was discovered. Separately, cash advances to project managers that were recorded in regular books and documented as payments disbursed by agents at locations lacking banking facilities fall within the Rule 6DD exception, so the Tribunal deleted the disallowance under the rule prohibiting certain cash payments. Both outcomes were decided in favour of the assessee.

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Issues: (i) Whether an assessment completed prior to a search can be reopened under section 153A of the Income-tax Act, 1961 in the absence of any incriminating material found during the search; (ii) Whether addition/disallowance of Rs. 2,73,603/- under section 40A(3) of the Income-tax Act, 1961 is sustainable where cash advances were given to project managers (agents) and recorded in books and payments fell within the exception under Rule 6DD of the Income-tax Rules.

Issue (i): Whether an assessment completed prior to the search dated 10.02.2021 could be reopened under section 153A of the Income-tax Act, 1961 when no incriminating material relating to the assessee was found during the search.

Analysis: The assessment for AY 2016-17 was completed before the search and no proceedings were pending on the date of search. The decision relied upon requires presence of incriminating material found during search to justify reopening a completed assessment under section 153A. The Tribunal applied that principle to the facts and noted absence of any incriminating material relating to the assessee.

Conclusion: Assessment under section 153A of the Income-tax Act, 1961 is not legally sustainable and is quashed in the absence of any incriminating material found during the search. This conclusion is in favour of the assessee.

Issue (ii): Whether the addition of Rs. 2,73,603/- under section 40A(3) of the Income-tax Act, 1961 is justified where cash payments were advanced to project managers (agents), recorded in regular books and fell within the exception under Rule 6DD of the Income-tax Rules.

Analysis: The assessee produced cash books, ledger accounts and evidence that payments were made as advances to project managers who disbursed funds for exhibitions and expenses at locations lacking banking facilities. The payments to individual persons were below the threshold limit and were accounted for in regular books. The Tribunal examined these factual and documentary records against the statutory prohibition and the exception under Rule 6DD and found the facts consistent with the claimed exception.

Conclusion: The disallowance of Rs. 2,73,603/- under section 40A(3) of the Income-tax Act, 1961 is not sustainable and is deleted. This conclusion is in favour of the assessee.

Final Conclusion: The appeal is allowed: the assessment passed under section 153A read with section 143(3) of the Income-tax Act, 1961 is quashed for want of incriminating material found during the search, and the addition under section 40A(3) is deleted as payments were advanced to agents, duly recorded and within the recognized exception.

Ratio Decidendi: A completed assessment cannot be reopened under section 153A of the Income-tax Act, 1961 in respect of an assessee unless incriminating material pertaining to that assessee is found during the search; where cash payments are properly accounted as advances to agents and conform to the exception in Rule 6DD of the Income-tax Rules, disallowance under section 40A(3) is not warranted.

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