2025 (6) TMI 788 - AT - Income Tax

Tax Authority's Assessment Invalidated Due to Procedural Errors and Jurisdictional Overreach Under Section 153A

The Tribunal ruled against the tax authority's assessment, finding critical procedural and substantive flaws. The AO lacked jurisdiction under section ... Additions made by the AO on account of estimated Gross Profit (“G.P”) - HELD THAT:- The controversy raised as narrated in the preceding paragraphs is no longer res integra. The Co-ordinate Bench of Tribunal, in identical facts, have consistently adjudicated the issue in favour of the respective assessee of the group concerns as pointed out on behalf of the assessee by taking holistic view of the matter. See Shri Kamal Sharma [2024 (12) TMI 1519 - ITAT DELHI], Sunil Garg [2025 (1) TMI 905 - ITAT DELHI], Star International [2025 (1) TMI 761 - ITAT DELHI] and Kamal Sharma [2024 (12) TMI 1519 - ITAT DELHI] In identical facts, we thus see no reason to depart therefrom. In consonance with the view expressed by the Co-ordinate Benches as noted in preceding paragraphs, we are inclined to set aside the order of the CIT(A) and reverse the additions made by the AO in the respective assessment years. Assessee appeal allowed. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered in the appeals arising from assessment years 2008-09 to 2014-15 are:Whether the Assessing Officer (AO) had jurisdiction under section 153A of the Income Tax Act, 1961, to make additions based on incriminating material found at the premises of a third party (M/s. Sunstar Overseas Ltd.) rather than at the assessee's own premises;Whether the AO was justified in rejecting the books of accounts and declared purchases and sales of the assessee, yet adopting the gross profit margin declared by the assessee on the declared turnover to make additions to income;Whether the additions made on estimated gross profit margins resulted in double taxation, given that the assessee had already declared taxable income based on book results;Whether the findings and additions made in the present appeals are consistent with the precedent decisions of Co-ordinate Benches of the Tribunal in identical facts involving group concerns of M/s. Sunstar Overseas Ltd.;Whether the payments shown in the seized documents (salary, bonus, audit fees) through the assessee's bank account constitute incriminating material justifying additions or denial of deductions.2. ISSUE-WISE DETAILED ANALYSISIssue 1: Jurisdiction under Section 153A based on incriminating material found at third party's premisesRelevant legal framework and precedents: Section 153A of the Income Tax Act empowers the AO to assess income escaping assessment where incriminating material is found during search or seizure operations. However, the jurisdiction is triggered only if such material is found at the premises of the assessee or any other person. The question arises whether material found at a third party's premises can be used to initiate proceedings against the assessee under section 153A.Court's interpretation and reasoning: The AO's assessment orders repeatedly relied on documents seized at the premises of M/s. Sunstar Overseas Ltd. (SSOL), a third party, to allege that the assessee was a paper concern used to manipulate purchases and sales. The AO noted that the incriminating material included salary and audit fee payments made through the assessee's bank account. However, the Tribunal observed that these payments were made in the ordinary course of business and did not, by themselves, constitute incriminating evidence against the assessee.Application of law to facts: The Tribunal held that the incriminating material found at SSOL's premises could at best give rise to proceedings under sections 153C or 147, but not 153A against the assessee. Therefore, the AO's jurisdiction under section 153A was not properly invoked based on such material.Treatment of competing arguments: The Revenue contended the documents showed the assessee was a paper concern lacking genuine business transactions, justifying the additions. The Tribunal rejected this, emphasizing the payments were routed through normal banking channels and did not amount to incriminating evidence.Conclusion: The Tribunal concluded that the AO lacked jurisdiction under section 153A to make additions based on incriminating material found at a third party's premises.Issue 2: Rejection of books of accounts but adoption of gross profit margin declared by the assesseeRelevant legal framework and precedents: When the AO rejects the books of accounts, he must estimate income based on reliable data. However, adopting the gross profit margin declared by the assessee on declared turnover, after rejecting the books themselves as unreliable, raises legal and logical inconsistencies.Court's interpretation and reasoning: The Tribunal noted that the AO's approach was internally inconsistent. The AO rejected the books of accounts as unreliable but then accepted the gross profit margin declared therein to compute estimated profits. This approach was described as 'apparently inchoate and inconsistent.'Application of law to facts: The Tribunal held that the AO's method resulted in mutually contradictory positions: rejection of books but acceptance of gross profit margins derived from those very books. This flawed approach undermined the basis for the additions.Treatment of competing arguments: The Revenue maintained that the gross profit margin was a reasonable basis for estimation. The Tribunal, however, found that such acceptance after rejection of books was legally untenable.Conclusion: The Tribunal set aside the additions based on estimated gross profit margins, holding that the AO's approach was flawed and inconsistent.Issue 3: Alleged double taxation due to additions on gross profit margin already reflected in book resultsRelevant legal framework and precedents: Additions to income must not result in double taxation by taxing the same income twice. If the gross profit margin additions are already reflected in declared book profits, further additions would be unjustified.Court's interpretation and reasoning: The Tribunal observed that the AO's additions on estimated gross profits were in addition to taxable income already declared based on book results. This amounted to double taxation.Application of law to facts: Since the AO accepted book results up to the determination of gross profits but then made additions based on estimated gross profits, the assessee was effectively taxed twice on the same income component.Treatment of competing arguments: The Revenue did not specifically address the issue of double taxation. The Tribunal emphasized the need to avoid such duplication.Conclusion: The Tribunal held that the additions resulted in double taxation and were therefore unsustainable.Issue 4: Consistency with precedent decisions of Co-ordinate Benches on identical factsRelevant legal framework and precedents: Decisions of Co-ordinate Benches on identical facts and issues are binding and must be followed to ensure consistency and avoid conflicting rulings.Court's interpretation and reasoning: The Tribunal noted that several Co-ordinate Benches had, in identical facts involving the Sunstar Group concerns, ruled in favour of the assessee on the issues of jurisdiction, rejection of books, and additions based on gross profits. The Tribunal cited four such decisions delivered between December 2024 and January 2025.Application of law to facts: Given the identical factual matrix and legal issues, the Tribunal found no reason to depart from the consistent view taken by the Co-ordinate Benches.Treatment of competing arguments: The Revenue urged upholding the additions, but the Tribunal gave precedence to the established judicial consensus.Conclusion: The Tribunal set aside the CIT(A) order and reversed the additions in line with the Co-ordinate Benches' rulings.Issue 5: Validity of additions based on payments shown in seized documents (salary, bonus, audit fees)Relevant legal framework and precedents: Payments made in the ordinary course of business through bank accounts are generally not incriminating. The mere presence of such documents at a third party's premises does not establish wrongdoing.Court's interpretation and reasoning: The Tribunal found that the payments of salary, bonus, and audit fees made through the assessee's bank accounts were normal business transactions and did not constitute incriminating evidence.Application of law to facts: Since these payments were genuine and properly routed, the AO's reliance on them to deny deductions or make additions was unfounded.Treatment of competing arguments: The Revenue argued these payments were part of a paper concern scheme. The Tribunal rejected this view as unsupported by evidence.Conclusion: The Tribunal held that these payments did not justify additions or denial of deductions.3. SIGNIFICANT HOLDINGSThe Tribunal's crucial legal reasoning and core principles established include:'The incriminating material found at the premises of the other person can at best give rise to proceedings under section 153C or 147 of the Act. The assessment carried out under section 153A based on incriminating material found in the premises of other concerns does not give rise to jurisdiction under section 153A of the Act.''The action of the AO is thus, apparently inchoate and inconsistent to the rejection of the books itself. The AO has computed estimated profits based in trading account which was rejected as unreliable showing mutually contradictory positions taken.''Such action has resulted in double taxation inasmuch as, based on the book results the assessee has already declared the taxable income which was further enhanced on account of gross profit additions made which was already forming part of the book results.''In identical facts, we thus see no reason to depart therefrom. In consonance with the view expressed by the Co-ordinate Benches as noted in preceding paragraphs, we are inclined to set aside the order of the CIT(A) and reverse the additions made by the AO in the respective assessment years.'Final determinations on each issue:The AO lacked jurisdiction under section 153A to make additions based on incriminating material found at a third party's premises;The AO's rejection of books but acceptance of gross profit margin declared by the assessee was inconsistent and legally untenable;The additions based on estimated gross profits resulted in impermissible double taxation;The payments of salary, bonus, and audit fees were genuine business transactions and did not constitute incriminating evidence;The Tribunal followed the consistent rulings of Co-ordinate Benches and allowed the appeals, setting aside the additions made by the AO and confirmed by the CIT(A).