2025 (7) TMI 531 - HC - Income Tax

AO cannot invoke Section 153A powers without incriminating material found during search operations

The Calcutta HC upheld ITAT's decision deleting additions made u/s 68 during assessment u/s 153A. The AO had treated share capital as assessee's own ... Assessment u/s 153A - Addition u/s 68 - incriminating documents found during the search or not? - AO opined that no explanation has been given by the assessee with regard to the identity and creditworthiness of the subscriber companies and genuineness of the transaction has not been established and therefore, the credit in the books of the assessee is the own money of the assessee company shown to be share capital - ITAT deleted addition - HELD THAT:- Tribunal after noting the factual finding recorded by the CIT(A), on its part re-examined the facts and concurred with the CIT(A) to the effect that the AO was not able to bring on record any material from which it can be inferred that the information regarding Form 26AS or the receipts of the assessee as not part of the regular books of assessee based on which the original return has been filed. After referring to the decisions of CIT vs. Kabul Chawla [2015 (9) TMI 80 - DELHI HIGH COURT] held that in terms of Section 153A would come into play only when there is existence of incriminating material and in the absence of any such incriminating material the AO could not have resorted to the power conferred u/s 143A of the Act. No substantial question of law 1. ISSUES PRESENTED and CONSIDEREDThe Court considered the following core legal questions:i) Whether the Income Tax Appellate Tribunal (ITAT) was justified in law to hold that the addition to income was not made based on incriminating documents found during the search and seizure operation, despite evidence in seized material (CG/2) indicating cash payments to brokers equivalent to the value of shares issuedRs.ii) Whether the ITAT was justified in holding that additions could not be sustained on the basis of incriminating documents found during the search which allegedly established that the group routed unaccounted funds as share capital within group companiesRs.iii) Whether the seized material relied upon for making additions regarding share capital could be construed as incriminating material for the purpose of such additionsRs.2. ISSUE-WISE DETAILED ANALYSISIssue i) and ii): Legitimacy of additions based on incriminating documents found during search and seizure operationRelevant legal framework and precedents: Section 153A of the Income Tax Act, 1961, empowers the Assessing Officer to make assessments or reassessments where search and seizure operations have been conducted and incriminating material is found. The principle established in CIT vs. Kabul Chawla (2016) 380 ITR 573 (Del.) is that the provisions of Section 153A can only be invoked if incriminating material is found during the search. Without such material, the Assessing Officer cannot proceed to make additions under this section.Court's interpretation and reasoning: The Court examined whether the additions made by the Assessing Officer were based on incriminating material found during the search. The Assessing Officer contended that cash payments to brokers, as evidenced in seized document CG/2, and the routing of unaccounted funds as share capital within group companies, were incriminating and justified additions.Key evidence and findings: The Court noted that the assessee company was part of the search and seizure operation, but no incriminating material relating to the assessee was found or seized. The Assessing Officer issued notice under Section 153A and made additions on the ground that the share capital credited in the books was unexplained and represented own money of the assessee. However, the CIT(A) and subsequently the ITAT found no reference in the assessment order to any incriminating material seized from the assessee. The information regarding share capital and receipts was already part of the assessee's regular books of account and returns filed prior to the search.Application of law to facts: Since no incriminating material was found or seized from the assessee, the Court held that the Assessing Officer could not invoke Section 153A to make additions. The additions were not based on any material discovered during the search but on information already available in the regular books of the assessee. Therefore, the additions could not be sustained under the provisions applicable to search and seizure cases.Treatment of competing arguments: The revenue argued that the seized documents (CG/2) showed incriminating evidence of cash payments and bogus share capital, justifying additions. The Court rejected this, noting that the seized material did not relate to the assessee company and that no addition was made on the basis of the alleged bogus long-term capital gains. The CIT(A) and ITAT emphasized the absence of any incriminating material found in the assessee's possession or relating to it, thereby negating the revenue's contention.Conclusions: The Court agreed with the ITAT and CIT(A) that the additions were not based on any incriminating material found during the search and seizure operation. Hence, the invocation of Section 153A was not justified, and the additions under Section 68 could not be sustained.Issue iii): Whether seized material can be construed as incriminating material for additions regarding share capitalRelevant legal framework and precedents: The legal principle is that additions under Section 153A require that incriminating material be found during the search and seizure operation. The existence of incriminating material is a precondition to invoke the special assessment provisions.Court's interpretation and reasoning: The Court scrutinized the seized material relied upon by the Assessing Officer and found that it did not constitute incriminating material with respect to the assessee's share capital. The Assessing Officer's order did not reference any seized material as the basis of the addition. The share capital raised by the assessee was already disclosed in the books and returns filed prior to the search.Key evidence and findings: The CIT(A) and ITAT noted the absence of any seized documents directly implicating the assessee company in bogus share capital transactions. The seized documents referred to other entities or individuals and did not form the basis of the addition in the assessment order.Application of law to facts: Since the seized material was not incriminating in relation to the assessee, it could not justify additions under Section 153A or Section 68. The additions must be based on material discovered during search operations, which was not the case here.Treatment of competing arguments: The revenue's contention that the seized documents were incriminating was rejected as the Assessing Officer failed to demonstrate any direct link between the seized material and the assessee's share capital. The Court emphasized that information already available in the regular books cannot be treated as incriminating material found during search.Conclusions: The Court held that the seized material could not be construed as incriminating material for additions regarding share capital, and therefore, the additions were unsustainable.3. SIGNIFICANT HOLDINGSThe Court preserved the following crucial legal reasoning verbatim:'In terms of Section 153A would come into play only when there is existence of incriminating material and in the absence of any such incriminating material the Assessing Officer could not have resorted to the power conferred under Section 143A of the Act.'Core principles established include:The special assessment provisions under Section 153A of the Income Tax Act can only be invoked if incriminating material is found during the course of search and seizure operations.Additions cannot be made based on information already available in the regular books of account or returns filed prior to the search.Seized material must directly relate to the assessee and be incriminating to justify additions under Section 68 or other provisions linked to search assessments.Final determinations on each issue were:The ITAT was justified in law in holding that no addition was made based on incriminating material found during search.The additions made by the Assessing Officer were unsustainable as they were not based on any incriminating material seized or discovered during search operations.The seized material could not be construed as incriminating for the purpose of additions regarding share capital.No substantial question of law arose for the High Court's consideration, and the appeal filed by the revenue was dismissed.