ITAT deletes all additions under section 153A as no incriminating material found during search operations

ITAT Mumbai ruled in favor of the assessee, deleting all additions made by AO under section 153A for AYs 2012-13 to 2016-17. The tribunal held that no incriminating material was found at the assessee's premises during search operations, making the additions beyond AO's jurisdiction. The revenue's case was based solely on materials found at third parties' premises and presumptions. Additions under sections 69 and 56 regarding alleged cash loans and notional interest were deleted as unsupported by evidence. Addition for unexplained jewellery under section 69A was also deleted as adequately explained and within permissible limits for a seven-member family.

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1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal in this group of appeals arising from assessments for AYs 2012-13 to 2018-19 are:

• Whether additions made under section 69 of the Income Tax Act, 1961 (the Act) on account of alleged cash loans advanced by the assessee to a third party (Mr. Nilesh Bharani/Evergreen Enterprises) can be sustained in absence of any incriminating material found from the premises of the assessee during search and seizure operations;
• Whether additions under section 56 of the Act on account of notional interest earned on such alleged cash loans are justified without corroborative evidence from the assessee's premises;
• Whether the Assessing Officer (AO) had jurisdiction to make additions under section 153A of the Act based on incriminating material found at the premises of a third party, without following the procedure under section 153C of the Act;
• Whether the assessment orders passed under section 153A without a computer-generated Document Identification Number (DIN) are valid;
• Whether the approval granted under section 153D of the Act was valid, given allegations of mechanical approval without application of mind;
• Whether additions based solely on statements of third parties and uncorroborated personal ledgers can be sustained, especially when such statements were retracted or denied during cross-examination;
• Whether the additions made in the abated assessment years (2017-18 and 2018-19) on estimated basis without direct evidence are sustainable;
• Whether the addition under section 69A of the Act for unexplained jewellery is justified considering the family's permissible holding limits under CBDT circulars and explanations provided by the assessee.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1 & 2: Validity of additions under sections 69 and 56 on alleged cash loans and interest without incriminating material found from the assessee's premises

The legal framework involves provisions under section 69 (unexplained investments) and section 56 (income from other sources) of the Act, which empower the AO to make additions where investments or income are unexplained or not satisfactorily accounted for. However, the procedural safeguards under section 153A (search assessments) require incriminating material to be found from the premises of the assessee to justify reassessment.

The Tribunal relied heavily on the recent Supreme Court judgment in PCIT vs Abhisar Buildwell Pvt Ltd (2023) 149 taxmann.com 399, which held that in cases of completed assessments prior to search, no addition can be made in the hands of an assessee searched if no incriminating material was found during the search at the assessee's premises. The Court emphasized that the mere existence of incriminating material from premises of a third party does not justify additions in the hands of the assessee under section 153A.

In the present case, the AO made additions on the basis of alleged cash loans advanced by the assessee to Mr. Nilesh Bharani/Evergreen Enterprises, relying on incriminating material found only at the third party's premises. No incriminating documents or evidence were found during the search of the assessee's premises. The assessee had also filed returns declaring income and denied any cash transactions with Mr. Bharani. Cross-examination of Mr. Bharani himself negated the existence of such cash loans or interest payments.

Further, the Tribunal noted that the additions in the abated assessment years (2017-18 and 2018-19) were based on assumptions and presumptions without any direct evidence or corroboration from the assessee's premises. The Tribunal referred to coordinate bench decisions where similar additions based on unverified material seized from third parties were deleted due to lack of concrete evidence.

The Tribunal applied the law to facts and held that additions under sections 69 and 56 without incriminating material found from the assessee's premises violate settled legal principles and Supreme Court rulings. The additions for the unabated years (2012-13 to 2016-17) were thus held to be beyond jurisdiction and liable to be deleted. Similarly, additions for abated years were also deleted for lack of evidence.

Issue 3: Jurisdictional validity of assessment under section 153A without following section 153C procedure

The legal framework here involves the interplay between sections 153A and 153C of the Act. Section 153A empowers the AO to reassess income of a searched person, while section 153C allows assessment of another person if incriminating material belonging to that person is found during the search of the first person.

The Tribunal referred to the Hon'ble High Court of Karnataka's decision in PCIT vs VSL Mining Company Pvt Ltd (2024) 167 taxmann.com 373, which held that if incriminating material is found during search on a third party, the AO must follow the procedure under section 153C to assess the other person, and cannot proceed under section 153A directly.

In the instant case, since the incriminating material was found only at the premises of Mr. Nilesh Bharani/Evergreen Enterprises and not the assessee, the AO ought to have invoked section 153C for assessment of the assessee. The failure to do so rendered the assessment order under section 153A void ab initio in respect of such additions.

Issue 4: Validity of assessment orders without computer-generated Document Identification Number (DIN)

Circulars issued by CBDT (Circular No. 19/2019 dated 14/08/2019 and Circular No. 27/2019 dated 26/09/2019) mandate generation and quoting of DIN in assessment orders passed under section 153A to ensure authenticity and traceability.

The assessee contended that absence of DIN renders the assessment order invalid. However, the Tribunal did not find it necessary to adjudicate this ground separately as the substantive grounds on merits were decided in favour of the assessee. Hence, this issue was left open.

Issue 5: Validity of approval under section 153D

The assessee challenged the approval granted under section 153D on the ground that it was mechanical and without application of mind. The Tribunal did not specifically adjudicate this issue as the substantive additions were deleted on other grounds, rendering this issue academic.

Issue 6: Reliance on statements of third parties and uncorroborated personal ledgers

The Tribunal considered the evidentiary value of statements recorded under section 132(4) of the Act and the seized material. It noted that statements of Mr. Nilesh Bharani and others were retracted or denied during cross-examination. The assessee also filed affidavits denying the alleged transactions. Moreover, no original seized material was allowed for inspection despite specific requests, violating principles of natural justice.

The Tribunal emphasized the settled legal proposition that statements or material seized during search can be used only against the person searched and not against others without corroboration. The absence of corroborative evidence and the denial by the alleged borrower weakened the revenue's case.

Issue 7: Additions in abated assessment years based on estimates without factual basis

The Tribunal noted that for AYs 2017-18 and 2018-19, which were abated years, the additions were estimated based on unverified material. The Tribunal held that no addition can be made on mere assumptions without any evidence of receipt of interest or loans by the assessee. The absence of incriminating material from the assessee's premises during search negated the basis for such additions.

Issue 8: Addition under section 69A for unexplained jewellery

The assessee explained the jewellery holding by reference to family size and permissible limits under CBDT circular 1916 dated 11/05/1994, which allows 500 grams for female members and 100 grams for male members as "Stridhan." The assessee also explained jewellery belonging to an aunt. The Tribunal found the explanation satisfactory and held that the addition was unjustified.

3. SIGNIFICANT HOLDINGS

The Tribunal held:

"As there is no incriminating material found in the possession of the assessee during the search, the additions made for AYs. 2012-13 to 2016-17 are beyond the jurisdiction of the Ld. AO under section 153A of the Act."

"In the absence of any incriminating material found during search in the premises of the assessee, no addition can be made on the basis of material found in the premises of a third party."

"The additions based on uncorroborated statements of third parties and personal ledgers, which were retracted or denied, cannot sustain."

"Where incriminating material is found only at third party's premises, assessment of the other person can only be made following the procedure under section 153C and not under section 153A."

"Additions based on mere assumptions or estimates without any corroborative evidence are not sustainable."

"Explanation of jewellery holding in terms of CBDT circular limits is acceptable and additions under section 69A are liable to be deleted."

The Tribunal accordingly allowed all the appeals of the assessee for the relevant assessment years, deleting the additions made under sections 69, 56, and 69A of the Act, and quashing the assessments made under section 153A where jurisdiction was lacking.

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