2025 (7) TMI 1231 - AT - Income Tax

Third-party documents from search operations cannot be used against assessee without corroborating evidence under section 132(4)

Homelife Buildcon Private Limited Versus The DCIT Central Circle-1 Ludhiana, Punjab And (Vice-Versa)

Homelife Buildcon Private Limited Versus The DCIT Central Circle-1 Ludhiana, Punjab And (Vice-Versa) - TMI ISSUES: Whether assessment for the year immediately preceding the search year can be validly framed under section 143(3) instead of section 147 read with Explanation 2 thereto, when material seized from third parties is relied upon'Whether reliance on electronic/digital evidence recovered from third parties without compliance with CBDT Digital Evidence Investigation Manual and statutory safeguards is admissible'Whether additions based on documents and statements found from third parties, who are not employees or connected persons of the assessee, can be sustained without corroborative evidence from the assessee's premises'Whether the Assessing Officer was required to record a satisfaction note and obtain prior approval under section 148B before relying on third-party search material for assessment'Whether extrapolation of income based on valuation reports obtained from independent plot holders and third parties without direct link or corroboration with assessee's records is justified'Whether additions can be made without rejecting the books of accounts under section 145(3) and without giving notice of enhancement as required under section 251(2)?Whether addition under section 115BBE is applicable on unexplained expenditure based on documents seized from third parties'Whether mechanical approval accorded under section 153D (prior regime) is valid in the context of assessment framed under section 143(3) post Finance Act 2021 amendments? RULINGS / HOLDINGS: The assessment for the year immediately preceding the search year cannot be validly framed under section 143(3) when material seized from third parties is relied upon; the proper procedure under section 147 read with Explanation 2 and section 148B must be followed. The assessment framed under section 143(3) without compliance is 'without jurisdiction and bad in law.'Electronic/digital evidence seized from third parties is inadmissible unless collected in accordance with the CBDT Digital Evidence Investigation Manual and statutory safeguards, including recording of satisfaction and prior approval, are complied with. Reliance on such evidence without compliance is unjustified.Additions based solely on documents or statements found from third parties, who have no connection with the assessee, cannot be sustained without corroborative evidence from the assessee's own premises; such additions are based on 'surmises and conjectures' and are not sustainable.The Assessing Officer is mandatorily required to record a satisfaction note that the seized material from third parties belongs to or pertains to the assessee and obtain prior approval from the Principal Commissioner or Commissioner under section 148B before initiating reassessment; failure to do so renders the assessment void.Extrapolation based on valuation reports obtained from independent plot holders or third parties, which are not from the Department's official valuers (DVO) and lack connection with the assessee, cannot be used to make additions; such valuation reports have 'no evidentiary value.'Additions cannot be made without rejecting the books of accounts under section 145(3) and without giving the mandatory notice of enhancement under section 251(2); rejection of books without notice is invalid.Addition under section 115BBE on unexplained expenditure based on third-party documents is not justified when the documents belong to third parties and no corroboration is found from the assessee's records.Mechanical approval accorded under section 153D is not valid for assessments framed under section 143(3) post Finance Act 2021 amendments; the mandatory approval under section 148B is required, and absence thereof vitiates the assessment. RATIONALE: The Court applied the amended provisions of section 147 read with Explanation 2 to section 148 (Finance Act 2021), which widened the scope of reassessment to include material seized from third parties during searches conducted on or after 1st April 2021. The statutory scheme mandates recording of satisfaction and prior approval under section 148B before reassessment.The principle of generalia specialibus non derogant was invoked, holding that specific provisions relating to search assessments prevail over general provisions like section 143(3). The assessment year immediately preceding the search year falls within the scope of these specific provisions.The Court relied on the statutory framework requiring prior approval and satisfaction recording to prevent arbitrary use of third-party seized material, emphasizing procedural safeguards in search assessments.The Court noted the absence of any corroborative evidence linking third-party documents or statements to the assessee and the lack of cross-examination opportunities, diminishing the evidentiary value of such materials.Judicial precedents were followed holding that additions cannot be based on third-party evidence alone without corroboration and that registered sale consideration must be given primacy unless credible evidence of underreporting is found.The Court also referred to CBDT's Digital Evidence Investigation Manual and departmental Manual of Office Procedure (February 2003), underscoring mandatory procedures for collection and use of digital evidence in search assessments.The Court recognized the legislative intent behind Finance Act 2021 amendments to bring uniformity and stricter procedural compliance in search-related assessments, thereby protecting taxpayer rights and ensuring fairness.The Court noted that the approval obtained by the Assessing Officer was administrative and not statutory under section 148B, and that the approving authority was not furnished with seized third-party material as required, rendering the approval ineffective.Dissent or doctrinal shift: None noted; the Court adhered to established principles and recent legislative amendments.