ITAT deletes undisclosed interest income from foreign bank deposits after removing quantum addition

The ITAT Delhi held that undisclosed interest income from foreign bank deposits should be deleted from the assessment. Since the Tribunal had already deleted the quantum addition related to the undisclosed deposits, the corresponding interest income added for the assessment year was also liable to be deleted. The Tribunal directed the Assessing Officer to delete the interest income that had been added to the taxpayer's assessment for the relevant year.

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The core legal questions considered by the Tribunal are:

1. Whether the appeal of the Revenue can be recalled and heard on merits despite being earlier dismissed on account of tax effect in light of CBDT Circular No. 3/2018, specifically considering the exception for undisclosed foreign income/assets under clause (d) of the Circular.

2. Whether the addition of undisclosed interest income earned on deposits in foreign bank accounts (HSBC) made in the assessment year under consideration is sustainable, given the Tribunal's earlier deletion of the quantum addition in the assessment year 2006-07.

3. The applicability and interpretation of Section 153A of the Income Tax Act concerning additions based on incriminating material found during search and seizure proceedings, especially when the assessment for the relevant year had attained finality prior to the search.

4. The evidentiary value of information received from foreign authorities and whether such information, absent corroborative incriminating material found during search, can sustain additions under Section 153A.

5. The scope and limitations on the Assessing Officer's power to make additions under Section 153A in cases where no incriminating material was found during the search, and the assessment had attained finality before the search.

Issue-wise Detailed Analysis:

1. Recall of Revenue's Appeal in Light of CBDT Circular No. 3/2018:

The Revenue contended that the appeal was dismissed due to tax effect following CBDT Circular No. 3/2018 dated 11.07.2018. However, the Revenue argued that the case falls under the exception in clause (d) of the Circular, which excludes cases involving undisclosed foreign income or assets, including foreign bank accounts, from the Circular's tax effect dispensation. The Tribunal noted that the addition of Rs. 93,00,953/- pertained to undisclosed interest income from foreign bank accounts (HSBC), thus falling squarely within the exception. Consequently, the Tribunal allowed the miscellaneous application and recalled the earlier order dismissing the Revenue's appeal, permitting the appeal to be heard on merits.

2. Sustainability of Addition of Undisclosed Interest Income in the Assessment Year Under Consideration:

The Tribunal observed that the quantum addition in the assessment year 2006-07, which formed the basis for the interest income addition in the current year, had already been deleted by the Tribunal. The deletion was grounded on the absence of incriminating material found during search and seizure proceedings in relation to the foreign bank accounts. The Tribunal held that the consequential addition of interest income in the present assessment year had no independent basis and was liable to be deleted. The Assessing Officer was directed to delete the addition of Rs. 93,00,953/- relating to interest income.

3. Interpretation of Section 153A and the Requirement of Incriminating Material Found During Search:

The Tribunal extensively analyzed the scope of Section 153A of the Income Tax Act, which empowers the Assessing Officer to reassess income for six assessment years preceding the year in which search is conducted. The key legal framework was derived from the binding precedents of the jurisdictional High Court, notably the judgment in Kabul Chawla, which laid down the following principles:

• Section 153A assessments are triggered by search under Section 132 and require notice to file returns for six preceding years.
• Assessments pending on the date of search abate and require fresh computation of total income.
• Assessments must be based on incriminating material found during search or post-search material linked to the search.
• Completed assessments that had attained finality prior to search cannot be reopened under Section 153A unless incriminating material is found during search.
• Information or material in possession of the department prior to search, without corroboration from search, cannot be used to make additions under Section 153A.

The Tribunal emphasized that the legal position mandates a nexus between the incriminating material found during search and the additions made under Section 153A. Absent such material, additions in finalized assessments are impermissible.

4. Evidentiary Value of Information Received from Foreign Authorities:

The department had received information from French authorities regarding foreign bank accounts held in HSBC Switzerland, implicating the assessee. However, during the search and seizure conducted on 20.01.2012, no incriminating documents or evidence linking the assessee to these accounts were found or seized. The assessee consistently denied any connection in statements recorded under Section 132(4) and during assessment proceedings. The Tribunal held that information received prior to search, even if incriminating, does not equate to incriminating material found during search. Reliance on the Supreme Court judgment in Pooranmal was distinguished on the basis that it permits use of material found during search even if search is invalid, but does not extend to pre-search information.

5. Treatment of Competing Arguments and Reliance on Precedents:

The Revenue's reliance on the judgment in Anil Kumar Bhatia was rejected because the High Court explicitly left open the question of whether Section 153A can be invoked when no incriminating material is found during search. The Tribunal also referred to subsequent judgments, including Meeta Gutgutia and Best Infrastructure (India) Pvt. Ltd., which reaffirmed that statements recorded under Section 132(4) alone do not constitute incriminating material. The Tribunal noted that the Revenue's contention for a larger bench reference was declined by the High Court in related cases, reinforcing the binding nature of the existing precedents.

The Tribunal concluded that the absence of incriminating material found during search, combined with the finality of the original assessment, precluded additions under Section 153A. The Tribunal underscored that the Revenue has other remedies outside Section 153A if it possesses information prior to search but lacks corroborative material from the search itself.

Significant Holdings:

"Once any document which though is in the nature of incriminating material but if it has not been found in the course of search, then in view of the principle laid down by the Hon'ble Jurisdictional High Court in several cases, such an addition cannot be roped in the assessment u/s. 153A especially in the assessments which are not abated."

"Although Section 153 A does not say that additions should be strictly made on the basis of evidence found in the course of the search, or other post- search material or information available with the AO which can be related to the evidence found, it does not mean that the assessment 'can be arbitrary or made without any relevance or nexus with the seized material. Obviously an assessment has to be made under this Section only on the basis of seized material."

"In the case of the unabated assessment which had attained finality on the date of search, which are reckoned as unabated assessments, no addition over and above the originally assessed income can be made sans any incriminating material found or unearthed during the course of search."

"Despite there being incriminating material in the possession of the Revenue which may implicate assessee, but same cannot be used within the scope of Section 153A when nothing has been found from the search, especially when assessee too has denied any such involvement and there is no material gathered during the search to rebut such a denial by the assessee."

The Tribunal's final determinations were:

• The miscellaneous application of the Revenue was allowed to recall the earlier dismissal of the Revenue's appeal.
• The addition of undisclosed interest income of Rs. 93,00,953/- made in the assessment year under consideration was deleted as it was consequential to the quantum addition in AY 2006-07, which had been deleted for lack of incriminating material.
• The appeal of the Revenue was dismissed on merits.

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