Protective addition deleted when expenditure properly recorded in books and no incriminating material found

ITAT Delhi upheld CIT(A)'s deletion of additions made by AO based on loose papers seized during search. AO alleged assessee had 25% share in undisclosed expenditure and made protective addition as unexplained expenditure. CIT(A) found these expenses were duly recorded in books of four entities and AO's verification showed no negative inference. Coordinate Bench had dismissed Revenue's appeals for three companies, ruling separate additions unnecessary when expenditure properly recorded. Revenue failed to controvert findings. Regarding cash deposits, ITAT followed SC precedent in Abhisar Buildwell case, holding no additions permissible without incriminating material for non-abated years. Appeals dismissed, decided for assessee.

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One of the primary issues considered in these appeals is whether the additions made by the Assessing Officer (AO) on account of alleged unexplained expenditure incurred out of undisclosed sources, based on loose papers found during search and seizure operations, are justified. Specifically, whether the unexplained expenditure of Rs. 14,03,60,721/- attributed to the assessee on a protective basis can be sustained when the same expenses appear recorded in the books of account of related group companies.

Another significant issue is the validity of the addition of Rs. 16,00,000/- made under section 69A of the Income Tax Act, 1961, on account of unexplained cash deposits in the assessee's bank account, particularly when such deposits pertain to a regular bank account disclosed in the return of income and whether incriminating material was found during the search to justify such addition.

Additionally, the appeals raise the question of the applicability and interpretation of judicial precedents regarding the scope of additions that can be made in completed assessment years where no incriminating material is found during search operations. The interplay between the Income Tax Settlement Commission (ITSC) proceedings and the assessment proceedings is also an underlying consideration.

Regarding the unexplained expenditure additions, the legal framework involves provisions under the Income Tax Act, 1961 relating to search and seizure operations (Section 132), block assessments (Section 153A), and the treatment of undisclosed income. The AO relied on seized loose papers showing expenditures incurred by four individuals, including the assessee, and made additions on a protective basis attributing 25% share to the assessee. The AO's approach was premised on the assumption that these expenses were incurred from undisclosed sources and were not recorded in the books of account.

The Court examined the remand report submitted by the AO during appellate proceedings, which revealed that the expenses in question were duly recorded in the books of account of four group companies: M/s SRC Buildtech Pvt. Ltd., SRC Realtech Pvt. Ltd., Pyramid Buildtech Pvt. Ltd., and SRC International Pvt. Ltd. The AO had verified these records at the stage of ITSC and had not drawn any adverse inference against the companies. The CIT(A) relied on these findings to conclude that the AO's addition was made without proper verification and was therefore incorrect.

The Court also considered the coordinate bench's decisions in appeals relating to the same group companies for the assessment year 2012-13, where additions based on the same seized documents were deleted. The Tribunal had observed that the seized entries were part of the regular books of account and no case for addition existed. The Revenue failed to distinguish or controvert these findings.

In applying the law to the facts, the Court held that since the expenses were recorded and explained in the books of the group companies, no separate addition could be made in the hands of the individual assessee. The Court emphasized that the AO's addition was not supported by any incriminating material against the assessee individually and was thus unsustainable. The Court dismissed the Revenue's grounds challenging the deletion of the addition of Rs. 14,03,60,721/-.

Regarding the addition of Rs. 16,00,000/- under section 69A for unexplained cash deposits, the Court analyzed the nature of the bank account and the legal principles governing additions in completed assessment years. The CIT(A) had deleted the addition relying on a jurisdictional High Court decision which held that no addition can be made without incriminating material found during search operations in completed assessment years.

The Court referred to the recent Supreme Court ruling in the case of Pr. Commissioner of Income Tax vs. Abhisar Buildwell Pvt. Ltd., which clarified that in search and seizure cases, if no incriminating material is found relating to completed or unabated assessments, the AO cannot make additions based on other material. The Court reiterated that additions in such cases require incriminating material unearthed during the search, failing which the AO's jurisdiction is limited.

Applying this principle, the Court found that the bank account in question was a regular account disclosed in the return of income, and no incriminating material was found in relation to the cash deposit. Therefore, the addition of Rs. 16,00,000/- was rightly deleted by the CIT(A), and the Court upheld this deletion.

The Court also noted that the Revenue's reliance on the Supreme Court's admission of SLP in another case concerning the restriction of additions to incriminating material was not sufficient to overturn the findings in the present case, especially when the coordinate bench decisions and the Supreme Court's recent ruling supported the assessee's position.

In relation to the cross objections filed by the assessee challenging the assessment order on procedural grounds such as the absence of a Document Identification Number (DIN), the Court noted that these objections were not pressed during the hearing and were accordingly dismissed.

For the appeals concerning the subsequent assessment year 2014-15 and those involving another individual similarly situated, the Court observed that the facts and issues were identical to those in the 2013-14 appeals. The Court applied the same reasoning and dismissed the Revenue's appeals in these cases as well.

In conclusion, the Court held that:

• The additions made by the AO on account of alleged unexplained expenditure incurred out of undisclosed sources were not sustainable as the expenses were recorded in the books of group companies and verified by the AO and ITSC without adverse findings.
• The addition under section 69A relating to unexplained cash deposits was rightly deleted in the absence of any incriminating material found during search in respect of a completed assessment year.
• The principles laid down by the Supreme Court in Abhisar Buildwell Pvt. Ltd. govern the scope of additions in search cases, limiting the AO's power to make additions in completed assessments without incriminating material.
• The cross objections on procedural grounds were not pressed and hence dismissed.
• The coordinate bench decisions and the remand reports were relied upon to uphold the deletion of additions.

The appeals filed by the Revenue were dismissed, and the orders of the CIT(A) deleting the additions were upheld.

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