ITAT allows appeals against Section 68 additions following Supreme Court decisions in Abhisar Buildwell and U.K. Paints cases

ITAT Lucknow allowed appeals against additions made under section 68 during assessment under section 153A. Following SC decisions in Abhisar Buildwell (P.) Ltd and U.K. Paints (Overseas) Ltd, and CBDT Instruction No. 1 of 2023 directing uniform implementation of these orders, the tribunal directed the AO to delete the additions made under section 68. The appeals were allowed on this ground.

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Six appeals filed by different assessees challenge the appellate orders of the Commissioner of Income Tax (Appeals) [CIT(A)] for assessment years 2011-12 to 2017-18. The principal issues raised across these appeals pertain to additions made under section 68 of the Income Tax Act, 1961 (I.T. Act) in search assessments under section 153A, the validity of approval under section 153D, and the legality of assessment orders passed under section 153A in the absence of incriminating material found during search proceedings under section 132.

The core legal questions considered by the Tribunal include:

• Whether additions under section 68 can be sustained in search assessments under section 153A when no incriminating material is found during search under section 132 of the I.T. Act;
• Whether the approval under section 153D for initiating reassessment proceedings was given with proper application of mind or merely in a mechanical manner;
• Whether the assessment orders under section 153A are valid in the absence of incriminating material found during the search;
• Whether other grounds of appeal relating to the merits of additions (such as rental income additions) require adjudication once the primary additions under section 68 are deleted.

The Tribunal consolidated the appeals for convenience due to similarity of issues and facts.

Issue-wise Detailed Analysis:

1. Validity of Additions under Section 68 in Search Assessments under Section 153A without Incriminating Material

Legal Framework and Precedents: Section 68 of the I.T. Act deals with unexplained cash credits. Section 153A provides for assessment or reassessment of income escaping assessment consequent to search or seizure under section 132. Section 153D prescribes the procedure for approval of reassessment orders.

The pivotal precedent is the Hon'ble Supreme Court's decision in Principal Commissioner of Income-tax vs. Abhisar Buildwell (P.) Ltd (2023), which clarified the scope of assessments under section 153A in cases where no incriminating material is found during search. The Supreme Court held:

(i) In cases of search under section 132, the Assessing Officer (AO) assumes jurisdiction for block assessments under section 153A;

(ii) All pending assessments/reassessments stand abated;

(iii) If incriminating material is found during search, the AO can assess or reassess total income considering such material;

(iv) If no incriminating material is found, the AO cannot make additions in completed or unabated assessments under section 153A based on other materials.

The Supreme Court further clarified that completed or unabated assessments can only be reopened under sections 147/148 subject to fulfillment of conditions therein.

Subsequent decisions by the Lucknow Bench of the Income Tax Appellate Tribunal (ITAT), including Smt. Shashi Agarwal vs. DCIT and Ocean Dream Infrastructures Pvt. Ltd. vs. DCIT, have applied the Supreme Court ruling to similar facts, holding that additions under section 68 in search assessments without incriminating material are unsustainable.

Court's Interpretation and Reasoning: The Tribunal noted that in the present appeals, the additions under section 68 were made in assessments framed under section 153A consequent to search operations under section 132. It was undisputed that no incriminating material was found during the search at the premises of the respective assessees. Also, no assessment proceedings were pending at the time of search, rendering the assessments completed or unabated.

Following the binding precedent of the Supreme Court in Abhisar Buildwell and U.K. Paints (Overseas) Ltd., the Tribunal held that additions under section 68 cannot be sustained when no incriminating material was found during search in completed assessments framed under section 153A. The Tribunal emphasized that the Assessing Officer's powers to reopen assessments under sections 147/148 remain unaffected but additions under section 153A without incriminating material are impermissible.

Key Evidence and Findings: The Tribunal examined the assessment orders and appellate orders and found that the additions were based on regular books of account and bank accounts rather than any incriminating documents unearthed during search.

Application of Law to Facts: Applying the Supreme Court's ruling, the Tribunal directed deletion of the additions made under section 68 amounting to Rs. 2,24,81,900/- for assessment year 2015-16 and Rs. 44,25,000/- for assessment year 2016-17. The Tribunal observed that since the additions were deleted on this fundamental legal ground, the merits of the additions did not require adjudication.

Treatment of Competing Arguments: The assessee relied heavily on the Supreme Court's decisions and subsequent ITAT rulings to contend that additions without incriminating material are impermissible. The Departmental Representative urged upholding the CIT(A) orders and remanding the appeals to the Assessing Officer, but failed to distinguish the binding precedents or produce contrary material. The Tribunal found the assessee's submissions persuasive and binding.

2. Legality of Approval under Section 153D

Legal Framework: Section 153D requires prior approval from the prescribed authority before initiating reassessment proceedings under section 153A or 153C.

Analysis: The assessees contended that the approval under section 153D was granted mechanically without application of mind. However, since the Tribunal deleted the additions under section 68 on substantive grounds, the question of validity of approval under section 153D became academic and was not adjudicated.

3. Validity of Assessment Orders under Section 153A in Absence of Incriminating Material

This issue overlaps with the first issue. The Tribunal, relying on the Supreme Court's ruling, held that assessment orders under section 153A cannot sustain additions in completed assessments without incriminating material found during search. Consequently, the assessments under section 153A were held invalid to the extent of additions under section 68.

4. Other Grounds of Appeal

Other grounds, including additions of rental income and other miscellaneous contentions, were raised. However, since the Tribunal deleted the principal additions under section 68, these issues were rendered academic and were not adjudicated.

Significant Holdings:

"In respect of completed/unabated assessments, no addition can be made by the AO in absence of any incriminating material found during the course of search under section 132 or requisition under section 132A of the Act, 1961. However, the completed/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/mentioned under sections 147/148 of the Act and those powers are saved."

"The issue in dispute is squarely covered in favour of the assessee by the orders of Hon'ble Supreme Court in Principal Commissioner of Income-tax vs. Abhisar Buildwell and Dy. CIT vs. U. K. Paints (Overseas) Ltd., and by the aforesaid instruction No. 1 of 2023 of CBDT, which is binding on Revenue authorities."

"Additions made under section 68 in assessment orders passed under section 153A without any incriminating material found during search under section 132 cannot be sustained."

The Tribunal's final determination was to allow the appeals partly by deleting the additions under section 68 and dismissing other grounds as academic. The approval under section 153D and validity of section 153A assessments without incriminating material were held to be legally untenable in the circumstances.

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