Additions under Section 68 disallowed where no incriminating material found or seized during search under Sections 132/132A

ITAT MUMBAI - AT dismissed revenue's appeals, holding that additions under s.68 cannot be made for completed or unabated assessment years where no incriminating material was found or seized during search proceedings u/s 132/132A. Assessments for relevant years were already complete or unabated, so the SC principle that absent seized incriminating material the AO cannot reassess or make additions in such years applies. Statements recorded during another person's search were held not to qualify as incriminating material per the HC authority, so no merit in revenue's appeals.

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The core legal questions considered in this judgment revolve around the scope and application of Section 153A of the Income-tax Act, 1961, particularly in the context of search and seizure proceedings under Section 132. The primary issues are:

1. Whether additions to income under Section 68 and other provisions can be sustained in the absence of incriminating material found or seized during the search conducted on the assessee.

2. The nature and scope of "incriminating material" and whether statements recorded during search operations on related or third parties can be treated as incriminating material against the assessee.

3. The jurisdiction of the Assessing Officer (AO) to make assessments or reassessments under Section 153A in cases where assessments for the relevant years are unabated or completed, but no incriminating material is found during search.

4. The procedural requirements and limitations imposed by Sections 153A and 153C regarding assessments based on material found in searches conducted on third parties.

Issue-wise Detailed Analysis

1. Additions in Absence of Incriminating Material Found During Search

The legal framework primarily involves Sections 132, 153A, and 153C of the Income-tax Act. Section 132 authorizes search and seizure operations, Section 153A provides the procedure for assessment or reassessment following such searches, and Section 153C deals with assessments where incriminating material pertains to a person other than the one searched.

The AO made additions under Section 68 based on statements recorded during search operations on a related group (Janil Shah Group), contending these statements constituted incriminating material. The AO relied on the Supreme Court decision in P.R. Metrani v. CIT, which clarifies that statements and documents seized during search can be used as evidence in proceedings under the Act.

However, the CIT(A) observed that the AO did not identify any incriminating material actually found or seized from the assessee's premises. The CIT(A) emphasized that the statements recorded during search were not adverse or incriminating against the assessee and that the assessment orders were not passed under Section 153C or 148, which would have been appropriate if the incriminating material related to a third party. Consequently, the CIT(A) deleted the additions made under Section 56(2)(vii) and other provisions, holding that additions under Section 153A require incriminating material found during the search in the assessee's own case.

The Court noted that the assessments for the relevant years were unabated or completed before the search. The Supreme Court's ruling in Abhisar Buildwell Pvt. Ltd. was pivotal, holding that in the absence of incriminating material found during the search, the AO cannot reassess or make additions under Section 153A for completed or unabated assessments. The only remedy for the Department in such cases is to initiate reassessment under Sections 147 or 148, subject to their conditions.

The Court applied this principle, concluding that additions made without incriminating material found during the search on the assessee were not sustainable.

2. Reliance on Statements Recorded During Search of Third Parties as Incriminating Material

The AO's contention that statements recorded during search of related entities (Janil Shah Group) constituted incriminating material against the assessee was examined in light of judicial precedents.

The Delhi High Court's decision in PCIT vs. Pavitra Realcon (P) Ltd. was extensively relied upon, which held that statements recorded under Section 132(4) have evidentiary value but cannot alone sustain additions unless corroborated by other material. The Court emphasized that admissions made during search can be retracted and without corroborative evidence, such statements cannot form the sole basis for additions.

The Court also referenced the decision in CIT vs. Harjeev Aggarwal, which clarified that statements recorded during search are information and can be used as evidence only if linked to incriminating material found during the search. Standalone statements without such linkage do not empower the AO to make block assessments.

Further, the Court noted the decision in PCIT vs. Anand Kumar Jain (HUF), which held that if incriminating material pertains to a person other than the searched assessee, the Department must follow the procedure under Section 153C, not Section 153A. The failure to do so violates the mandatory statutory scheme and deprives the assessee of the opportunity to cross-examine witnesses.

Accordingly, the Court rejected the revenue's stand that statements recorded during search of third parties could be treated as incriminating material against the assessee for assessment under Section 153A.

3. Jurisdiction of AO under Section 153A in Case of Completed or Unabated Assessments

The Court analyzed the scope of Section 153A, especially the second proviso which states that pending assessments abate upon initiation of search proceedings, but unabated or completed assessments continue unless incriminating material is found.

The Supreme Court in Abhisar Buildwell Pvt. Ltd. clarified that Section 153A empowers the AO to assess or reassess total income for six years preceding the search year only if incriminating material is found during the search. Otherwise, the AO cannot reopen completed or unabated assessments under Section 153A, and the Department's remedy lies in Sections 147/148.

The Court held that allowing assessment under Section 153A without incriminating material would create two conflicting assessment orders for the same year, which is impermissible and would render statutory provisions redundant.

This principle was applied to the facts, where assessments for AYs 2012-13 to 2015-16 were completed or unabated, and no incriminating material was found during search at the assessee's premises. Therefore, the AO lacked jurisdiction to make additions under Section 153A.

4. Procedural Requirements under Sections 153A and 153C

The Court emphasized the procedural distinction between Sections 153A and 153C. Section 153A applies when incriminating material is found in the searched person's premises. Section 153C applies when incriminating material relates to a person other than the one searched, requiring the AO of the concerned person to proceed.

The failure to follow Section 153C procedure, when incriminating material relates to a third party, was held to vitiate the assessment under Section 153A. The Court noted that the assessee was denied the opportunity to cross-examine witnesses whose statements were relied upon, violating principles of natural justice.

Conclusions

The Court dismissed the revenue's appeals, affirming the CIT(A)'s order deleting additions made under Section 68 and other provisions in the absence of incriminating material found during search on the assessee. The Court held that:

• Additions under Section 153A require incriminating material found or seized during search in the assessee's own case.
• Statements recorded during search of third parties cannot be treated as incriminating material against the assessee unless corroborated and the procedure under Section 153C is followed.
• The AO has no jurisdiction to reassess completed or unabated assessments under Section 153A without incriminating material; reassessment can only be done under Sections 147/148 subject to their conditions.
• Natural justice and statutory procedural safeguards must be observed, including the right of the assessee to cross-examine witnesses whose statements are relied upon.

Significant Holdings

"On a plain reading of section 153A of the Income-tax Act, 1961, it is evident that once a search or requisition is made, a mandate is cast upon the Assessing Officer to issue notice under section 153 of the Act... The intention does not seem to be to reopen completed or unabated assessments, unless any incriminating material is found with respect to the concerned assessment year falling within the six years preceding the search."

"In case no incriminating material is found during the search conducted under section 132 of the Act, the AO will have no jurisdiction to make an assessment... completed or unabated assessments can be reopened by the AO in exercise of powers under sections 147/148 of the Act, subject to fulfilment of the conditions as envisaged under those sections."

"Statements recorded during search under section 132(4) of the Act have evidentiary value but additions cannot be sustained merely on the basis of such statements without corroborative material."

"If incriminating material pertains to a person other than the searched person, the Department must proceed under section 153C and not under section 153A; failure to do so violates statutory procedure and principles of natural justice."

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