2022 (5) TMI 1711 - AT - Income Tax

Third-party search material and defective notice service cannot sustain unexplained investment addition or reassessment reopening.

An addition for alleged on-money payment and unexplained investment in flats could not be sustained where it rested only on third-party search material ... Unexplained investment - Third-party search material - Cross-examination and natural justice - Service of notice for reassessment - Section 147 vis-a-vis section 153CUnexplained investment - Third-party statement - Cross-examination and natural justice - The deletion of the addition for alleged on-money payment on purchase of flats was upheld. - HELD THAT: - The Tribunal found that the addition under section 69 had been made only on the basis of the builder's statement recorded in search proceedings and the allegation of receipt of on-money outside the books. The assessee had, however, produced supporting material showing that only earnest money was paid by cheque as per the allotment letters, that the allotments were transferred during the year, and that the transactions stood reflected in its books. The builder's statement was not supplied to the assessee and no opportunity of cross-examination was granted. The payment schedule in the allotment letters, the stoppage of construction, the non-registration of the agreement, and the valuation material showing the stated price to be higher than stamp value were also noticed. On these facts, the Tribunal held that no infirmity was shown in the appellate deletion of the addition. [Paras 5]The Revenue's challenge to the deletion of the addition failed.Section 147 vis-a-vis section 153C - Handing over of seized material - Reassessment under section 147 was not barred merely because the information had emanated from a search on a third party. - HELD THAT: - The Tribunal held that no seized material found in the search of the builder had been handed over by the searched person's Assessing Officer to the assessee's Assessing Officer. In the absence of such handing over, the statutory requirement for proceeding under section 153C was not satisfied. Since the reopening was based on information received and reasons were recorded that income had escaped assessment, the assessee's objection that only section 153C could have been invoked was rejected. [Paras 8]The cross-objection challenging the reassessment on the ground that section 153C alone was applicable was dismissed.Service of notice for reassessment - Notice issued at old address - The reassessment was invalid for want of proper service of notice under section 148. - HELD THAT: - The Tribunal recorded that the assessee's address had already been changed in the PAN records and the jurisdictional assessment records before issuance of the notice under section 148, and subsequent assessments had also been completed by the Mumbai Assessing Officer on the basis of the changed address. Even so, the notice was issued at the old address, and the Assessing Officer could not substantiate with supporting evidence that it had been served on the assessee. The Tribunal therefore held that mere issuance of notice was insufficient and, in the absence of valid service, the reopening itself was bad. [Paras 10]The assessee's cross-objection on invalid service of notice was allowed, and the reopening was held invalid.Final Conclusion: The Revenue's appeal against deletion of the addition for alleged on-money was dismissed. The assessee's cross-objection succeeded in part, the objection based on section 153C having been rejected but the reassessment itself having been held invalid for want of proper service of notice under section 148. Issues: (i) Whether the addition towards alleged on-money payment for purchase of flats as unexplained investment could be sustained on the basis of seized loose papers and a third-party statement without direct clinching evidence and cross-examination; (ii) Whether the reopening of assessment was valid where notice under section 148 was issued to an old address despite updated records and service was not established.Issue (i): Whether the addition towards alleged on-money payment for purchase of flats as unexplained investment could be sustained on the basis of seized loose papers and a third-party statement without direct clinching evidence and cross-examination.Analysis: The addition was founded on material found in search of a third party and on a statement recorded from that third party. The assessee produced allotment letters, bank entries showing cheque payments, and evidence that the allotments were transferred during the year. The projected cash payment was found inconsistent with the documented payment schedule and the state of construction. The statement relied upon by the Assessing Officer was not furnished to the assessee and no opportunity for cross-examination was granted. In the absence of corroborative evidence connecting the assessee with any cash payment, the addition could not rest on presumption or surmise.Conclusion: The addition for alleged on-money and unexplained investment was not sustainable and was rightly deleted.Issue (ii): Whether the reopening of assessment was valid where notice under section 148 was issued to an old address despite updated records and service was not established.Analysis: The record showed that the assessee had changed its registered address, the PAN database had been updated, and earlier assessment orders had been passed on the basis of the new address. The Revenue failed to establish effective service of the notice under section 148 at the correct address. In such circumstances, mere issuance of notice was insufficient and the reopening could not be sustained.Conclusion: The reopening was invalid for want of proper service of notice.Final Conclusion: The addition was deleted and the reassessment was held invalid on the service issue, resulting in relief to the assessee on the principal monetary dispute and partial relief on the jurisdictional challenge.Ratio Decidendi: An addition based on third-party search material cannot survive without direct, corroborated evidence linking the assessee to the alleged transaction and without affording cross-examination where the statement is relied upon; reopening is invalid if notice under section 148 is not duly served at the correct address.