2025 (7) TMI 1287 - AT - Income Tax

ITAT rules no additions under Section 153A without incriminating material found during search operations

The ITAT JAIPUR ruled in favor of the assessee regarding additions made under Section 153A for bogus Long Term Capital Gain and commission expenses. ... Assessment u/s 153A - Addition on account of bogus Long Term Capital Gain claimed by the assessee AND Addition on account of commission expenses for obtaining accommodation entry @ 5% of Sale consideration - assessee contended that the addition made while making the assessment has no reference to any incriminating material unearthed while search and seizure action on the appellant and therefore, the addition has been made without the basis / source of incriminating material unearthed from the search action - HELD THAT:- As relying on Abhisar Buildwell (P.) Ltd [2023 (5) TMI 587 - SUPREME COURT] in the proceeding u/s. 153A of the Act in case no incriminating material is unearthed, the AO cannot assessee or reassess taking into consideration the other material in respect of completed / unabated assessments, no addition can be made by the AO in absence of any incriminating material found during the search and thus, considering that set of facts and following the judicial precedence we do not find any infirmity in the finding of the ld. CIT(A) in directing the ld. AO to delete the addition made by the Assessing Officer disallowing the exemption of Long-Term Capital Gains on account of unexplained credits u/s 68 of the Act based on these observations ground no. 1 raised by the revenue is dismissed. CIT(A) further directed the ld. AO to initiate appropriate proceedings under Section 147/148 of the Act, relying on the same judgment of Abhisar Buildwell (supra), CBDT Instruction No. 1/2023 (CLC 35-40), and the provisions of Section 150 of the Act - What is not permitted directly cannot be permitted indirectly and therefore, the ld. CIT(A) cannot broaden the scope of the appeal decision to “advise” or “compel” another round of litigation again and again and as held by the apex court that we have to bear in mind that the policy of law is that there must be a point of finality in all legal proceedings, that stale issues should not be reactivated beyond a particular stage. Thus, looking to the provision of the law, decided case and facts of the present case we are of the considered view that ld. CIT(A) was tasked with deciding whether the addition under Section 153A was sustainable given the specific facts and circumstance of the case. Ld. CIT(A) rightfully found it was not (for want of incriminating material) and deleted it. At that point, ld. CIT(A)’s authority ended. Ld. CIT(A) should have simply allowed the appeal on that issue. By proceeding to direct the AO to consider re-opening under Section 147, the ld. CIT(A) acted ultra vires and thereby we allow the cross objection of the assessee. 1. ISSUES PRESENTED and CONSIDERED 1. Whether the Assessing Officer (AO) was justified in making additions disallowing exemption of Long Term Capital Gains (LTCG) claimed by the assessee, treating the gains as unexplained credits under section 68 of the Income Tax Act, 1961, in absence of incriminating material unearthed during search and seizure under section 132. 2. Whether the AO was justified in adding commission expenses claimed by the assessee as unexplained expenditure under section 69C, related to alleged accommodation entries for LTCG. 3. Whether the Commissioner of Income Tax (Appeals) [CIT(A)] exceeded appellate jurisdiction by directing the AO to initiate reassessment proceedings under sections 147/148 read with section 150, following deletion of additions under section 153A, based on judicial precedents and CBDT Instruction No. 1/2023. 4. The scope and applicability of the judgments of the Hon'ble Supreme Court in PCIT v. Abhisar Buildwell Pvt. Ltd. and DCIT v. U.K. Paints (Overseas) Ltd. regarding the jurisdiction of AO in completed/unabated assessments post-search when no incriminating material is found. 5. The legal validity and binding nature of CBDT Instruction No. 1/2023 on appellate authorities like CIT(A) regarding directions for reassessment. 6. Interpretation and application of sections 150 and 251 of the Income Tax Act concerning the powers of appellate authorities to direct reassessment proceedings. 7. Whether the deletion of additions made under section 153A for lack of incriminating material precludes reassessment except by independent jurisdiction of AO under sections 147/148 within statutory limits. 2. ISSUE-WISE DETAILED ANALYSIS 1. Jurisdiction of AO to make additions under section 153A in absence of incriminating material found during search (Issues 1 & 4) Relevant Legal Framework and Precedents: - Section 153A provides for block assessment following search under section 132, with jurisdiction linked to incriminating material found during search. - Hon'ble Supreme Court in PCIT v. Abhisar Buildwell Pvt. Ltd. (2023) clarified that in case of completed/unabated assessments, additions under section 153A can only be made if incriminating material is found during search; otherwise, no addition can be made under section 153A on other material. - The Court also held that in absence of incriminating material, the AO's remedy is to initiate reassessment under sections 147/148, subject to statutory conditions. - Similar view upheld in DCIT v. U.K. Paints (Overseas) Ltd. (2023), dismissing Revenue's special leave petition and confirming reassessment is permissible only if statutory conditions are met. - High Court decisions (e.g., Kabul Chawla, Saumya Construction) and ITAT precedents affirm that no addition can be made under section 153A without incriminating material found in search. Court's Interpretation and Reasoning: - The AO made additions disallowing LTCG exemption and adding commission expenses under sections 68 and 69C, alleging accommodation entries based on documents seized from third parties and other material. - CIT(A) observed that no incriminating material was found during search on the assessee; documents relied upon were not seized from the assessee's premises and were not incriminating per se but related to disclosed transactions. - The AO's additions under section 153A were thus not sustainable as they lacked basis in incriminating material found during search pertaining to the assessee. - The Court emphasized that section 153A jurisdiction is derivative and linked to incriminating material found during search; absent such material, additions cannot be sustained under section 153A. Key Evidence and Findings: - Assessee filed original return declaring LTCG exemption under section 10(38) supported by allotment certificates, bank statements, demat account, sale bills through SEBI registered broker, and MCA master data confirming company's legitimacy. - AO did not establish that these documents were forged or false or that incriminating material was found during search on the assessee. - The incriminating material cited by AO was from other group members or third parties and not linked directly to the assessee's search premises. Application of Law to Facts: - Since no incriminating material was found during search on the assessee, additions under section 153A could not be sustained as per Supreme Court precedent. - The original assessment was completed and not pending or abated at the time of search; thus, no jurisdiction to reassess under section 153A without incriminating material. Treatment of Competing Arguments: - Revenue contended additions were based on evidence collected in search and thus valid. - Assessee argued no incriminating material was found during search, and additions were based on non-incriminating or third-party documents. - Court accepted assessee's argument relying on authoritative Supreme Court rulings. Conclusions: - Additions disallowing LTCG exemption and commission expenses under section 153A were deleted for lack of incriminating material found during search. - The AO's jurisdiction under section 153A does not extend to completed assessments without incriminating material. 2. Legality and scope of CIT(A)'s direction to initiate reassessment proceedings under sections 147/148 read with section 150 (Issues 3, 5 & 6) Relevant Legal Framework and Precedents: - Section 150 allows issue of notice under section 148 notwithstanding limitation under section 149, where reassessment is consequential to findings or directions in appellate or court orders. - Section 251 limits CIT(A)'s powers on appeal to confirming, reducing, enhancing, or annulling assessment; no power to direct reassessment or initiate fresh proceedings. - Hon'ble Supreme Court in PCIT v. Abhisar Buildwell and DCIT v. U.K. Paints clarified that reassessment under sections 147/148 is subject to strict statutory conditions and cannot be directed by appellate authorities. - CBDT Instruction No. 1/2023 is an internal administrative guideline for AO's operational use and is not binding on quasi-judicial authorities like CIT(A). - Judicial precedents (e.g., ITO v. Murlidhar Bhagwan Das, ITAT Kolkata in Biswajit Chatterjee) hold that appellate authorities have no jurisdiction to direct AO to initiate reassessment. Court's Interpretation and Reasoning: - CIT(A), after deleting additions under section 153A for lack of incriminating material, directed AO to initiate reassessment under sections 147/148 relying on Supreme Court judgments and CBDT Instruction. - The Court held that such direction exceeds appellate jurisdiction under section 251, which does not empower CIT(A) to direct reassessment or reopening of assessment. - The direction amounts to substitution or review of AO's independent jurisdiction, which is impermissible. - CBDT Instruction No. 1/2023, being administrative, cannot override statutory provisions or empower CIT(A) to direct reassessment. - The Supreme Court's observations permitting reassessment subject to statutory conditions do not constitute a direction mandating reassessment by appellate authorities. - The Court emphasized the principle of finality and statutory limitation in tax proceedings, which would be undermined if appellate authorities could direct reassessment outside statutory framework. Key Evidence and Findings: - The direction by CIT(A) was challenged by the assessee as illegal, arbitrary, and beyond jurisdiction. - The Revenue's miscellaneous application for clarification before Supreme Court was dismissed, confirming no automatic or blanket power to direct reassessment. Application of Law to Facts: - CIT(A) rightly deleted additions but erred in directing AO to initiate reassessment, which is exclusively AO's domain. - Reopening can only be initiated by AO on independent satisfaction and within limitation prescribed under sections 147 to 149. Treatment of Competing Arguments: - Revenue argued direction was justified to preserve Revenue's remedy and implement Supreme Court rulings. - Assessee contended direction was ultra vires, not a finding or direction under section 150, and violated appellate jurisdiction. - Court sided with assessee, holding CIT(A) exceeded jurisdiction and CBDT Instruction is not binding on appellate authority. Conclusions: - CIT(A)'s direction to AO to initiate reassessment under sections 147/148 read with section 150 is quashed as beyond appellate jurisdiction. - Reassessment proceedings must be initiated by AO independently, subject to statutory safeguards and limitation. 3. Validity and binding nature of CBDT Instruction No. 1/2023 and interpretation of Supreme Court observations (Issue 5) Relevant Legal Framework and Precedents: - CBDT Instruction No. 1/2023 provides administrative guidance to AO on reassessment post-Abhisar Buildwell judgment. - Supreme Court rulings clarify reassessment possible subject to statutory conditions but do not direct appellate authorities to compel reassessment. - UCO Bank v. CIT (1999) establishes that CBDT circulars/instructions are administrative and cannot override statutory provisions or bind quasi-judicial authorities. Court's Interpretation and Reasoning: - The Instruction cannot be construed as empowering CIT(A) to direct reassessment proceedings. - Supreme Court observations permitting reassessment are conditional and subject to AO's independent satisfaction and compliance with statutory provisions. - Observations in judgments are not 'findings' or 'directions' under section 150 warranting reassessment. Key Evidence and Findings: - Miscellaneous application filed by Revenue seeking clarification on the Instruction was dismissed by Supreme Court, indicating no change in legal position. Application of Law to Facts: - CIT(A) misapplied the Instruction and Supreme Court observations to issue directions beyond appellate powers. Treatment of Competing Arguments: - Revenue relied on Instruction and Supreme Court observations to justify direction. - Assessee argued Instruction is administrative, non-binding, and observations are not directions. - Court upheld assessee's contentions. Conclusions: - CBDT Instruction No. 1/2023 is administrative, not binding on CIT(A), and cannot be used to justify directions for reassessment. - Supreme Court observations do not constitute binding directions under section 150. 4. Application of sections 150 and 251 concerning appellate powers and reassessment (Issues 3 & 6) Relevant Legal Framework and Precedents: - Section 150 allows reassessment notwithstanding limitation if consequential to findings/directions in appellate or court orders. - Section 251 limits CIT(A)'s powers to confirming, reducing, enhancing, or annulling assessment; no power to direct reassessment or fresh proceedings. - ITO v. Murlidhar Bhagwan Das (1964) and subsequent judgments hold appellate authorities cannot direct AO to reopen assessments. - Supreme Court in K.M. Sharma v. ITO clarified that reopening assessments barred by limitation cannot be revived retrospectively by section 150. Court's Interpretation and Reasoning: - CIT(A)'s direction to initiate reassessment under section 150 exceeded statutory appellate powers under section 251. - Such directions undermine statutory limitation and finality of assessments. - Appellate authorities have no jurisdiction to advise or compel AO to initiate reassessment; AO's independent satisfaction is essential. Key Evidence and Findings: - CIT(A) issued direction after deleting addition; direction not part of adjudication but administrative instruction. Application of Law to Facts: - CIT(A) should have confined to appellate decision on additions; direction to AO to initiate reassessment is ultra vires. Treatment of Competing Arguments: - Revenue argued direction preserves Revenue's remedy. - Assessee argued direction violates statutory limits and appellate jurisdiction. - Court accepted assessee's submissions. Conclusions: - Direction by CIT(A) to initiate reassessment under section 150 is beyond appellate powers and legally unsustainable. 5. Effect of deletion of additions under section 153A on possibility of reassessment (Issue 7) Relevant Legal Framework and Precedents: - Supreme Court in Abhisar Buildwell and U.K. Paints held that if no incriminating material is found during search, additions under section 153A cannot be sustained but reassessment under sections 147/148 may be initiated if statutory conditions are met. Court's Interpretation and Reasoning: - Deletion of additions under section 153A does not preclude AO from independently initiating reassessment if satisfied of escapement of income and within limitation. Key Evidence and Findings: - CIT(A) directed AO to initiate reassessment; however, such direction is beyond appellate jurisdiction. Application of Law to Facts: - AO may initiate reassessment subject to independent satisfaction and statutory compliance; appellate authority cannot direct or compel. Treatment of Competing Arguments: - Revenue emphasized necessity of reassessment to protect Revenue's interest. - Assessee stressed statutory safeguards and finality.