No Additions Under Section 153A Without Incriminating Material or Proper Procedure Under Section 153C

The ITAT Delhi held that no additions could be made under section 153A as no incriminating material was found in possession of the assessee or its directors during the search. Additions based solely on statements of unrelated third parties, which were later retracted, were not sustainable. The tribunal clarified that the proper procedure under section 153C should have been followed after completing the unabated assessment year proceedings under section 153A, as per the Supreme Court's ruling in Calcutta Knitwears. Since the AO failed to adhere to this procedure, no action under section 153C could be taken for the year under appeal. Consequently, the additions were deleted.

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ISSUES:

Whether additions under section 153A of the Income Tax Act, 1961 can be made in respect of unabated assessment years without reference to incriminating material found during the search in the possession of the assessee.Whether statements recorded under section 132(4) from third parties, unrelated to the assessee and retracted thereafter, can constitute incriminating material to justify additions under section 153A in the assessee's case.Whether the proper procedure under section 153C of the Act must be followed for making additions based on incriminating material found during search of third parties.What constitutes "incriminating material" under sections 132(1)(c) and 132(4) of the Income Tax Act, 1961.Whether additions can be sustained solely on the basis of statements of third parties without any corroborative material found during search in the assessee's premises.

RULINGS / HOLDINGS:

Additions under section 153A in respect of unabated assessment years must be made "solely on the basis of incriminating material unearthed during the course of the Assessee's search" and not on material found from third parties.Statements recorded under section 132(4) from third parties, especially if retracted and without corroborative incriminating material found in the assessee's possession, do not constitute incriminating material for the purposes of section 153A assessments.The procedure prescribed under section 153C, including recording of satisfaction by the AO of the searched person and transfer of seized material to the AO of the other person, must be followed before initiating assessment proceedings based on incriminating material found in searches of third parties."Incriminating material" under section 132(1)(c) is limited to money, bullion, jewellery, valuable articles or things, or books of account and documents seized which represent undisclosed income or property, and must have a direct nexus with undisclosed income or property of the assessee.Additions cannot be sustained merely on statements of third parties without tangible evidence or direct link to undisclosed assets or income found during the search of the assessee.

RATIONALE:

The Court applied the statutory framework of sections 132, 132(1)(c), 132(4), 153A, and 153C of the Income Tax Act, 1961, as well as judicial precedents including the Supreme Court decision in Abhisar Buildwell Pvt. Ltd. and the decision in CIT vs. Calcutta Knitwears.The Court emphasized the restricted scope of "incriminating material" under section 132(1)(c), requiring actual discovery of undisclosed money, bullion, jewellery, valuable articles, or relevant books of account/documents from the searched premises of the assessee for additions under section 153A.The Court noted that statements recorded under section 132(4) must be linked to such incriminating material to have evidentiary value; mere statements without corroboration are insufficient.The Court highlighted that additions based on third-party statements without following the mandatory procedure under section 153C are legally unsustainable, as section 153C is the exclusive remedy for utilizing incriminating material found in the search of a person other than the assessee.The Court followed the principle that in unabated assessment years, completed assessments cannot be disturbed under section 153A without incriminating material found in the assessee's search, preserving the sanctity of completed assessments unless reopened under sections 147/148.The Court distinguished prior rulings where searches on servants or agents of the assessee were considered searches on the assessee, noting that unrelated third parties' statements do not fall within this scope.The Court relied on various High Court and Tribunal decisions reinforcing the necessity of direct nexus between incriminating material and the assessee's undisclosed income for additions under section 153A.The Court underscored the legislative intent and procedural safeguards mandated by the CBDT Circular No. 24/2015 and the Finance Bill 2015 amendments to section 153C, requiring strict compliance with procedural steps before invoking section 153C assessments.

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