Disallowance of Interest on Borrowed Capital Under Sec 153A Invalid Without Incriminating Material Found in Search

The ITAT Chennai held that the AO's disallowance of interest on borrowed capital under section 153A r.w.s. 143(3) was unsustainable due to the absence of any incriminating material found during the search under section 132. Since no such material was cited to justify the addition, the AO acted without jurisdiction, rendering the assessment order invalid. Relying on Supreme Court and HC precedents, the tribunal affirmed that in an unabated assessment, additions under section 153A must be based on incriminating material discovered during the search. Consequently, the appeal was allowed, and the disallowance was set aside.

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ISSUES:

Whether the Assessing Officer (AO) has jurisdiction under section 153A of the Income Tax Act to make additions or disallowances in the absence of incriminating material found during search and seizure operations.Whether an assessment for an assessment year is "pending" or "unabated" as on the date of search, and the legal consequences thereof under section 153A.Whether disallowance of interest on borrowed capital under section 24(b) without supporting incriminating material or evidence is sustainable.Whether the AO is bound to complete assessment based on the return filed in compliance with notice under section 153A and cannot proceed ex parte ignoring such return.Interpretation of the scope and applicability of section 153A(1) and (2) regarding abatement of pending assessments and reassessment powers.

RULINGS / HOLDINGS:

The AO does not have jurisdiction to make additions or disallowances under section 153A in the absence of any incriminating material found during the search; additions must be based on "incriminating material unearthed during the course of search."An assessment is "pending" only if (a) a return has been filed and the time for issuance of notice under section 143(2) has not expired, or (b) a notice under section 142(1) has been issued, or (c) reassessment proceedings under section 147 have been initiated and are ongoing; otherwise, the assessment is "unabated."In an "unabated" assessment, the AO's jurisdiction under section 153A is restricted and no addition can be made unless it is based on incriminating material found during search operations.Disallowance of interest on borrowed capital under section 24(b) without any incriminating material or documentary evidence is "without jurisdiction and vitiates the assessment order."The AO is bound to complete the assessment in accordance with the mandate of section 153A read with section 143(3), based on the return filed pursuant to the notice under section 153A and cannot proceed ex parte ignoring such return.

RATIONALE:

The Court applied the statutory framework of section 153A of the Income Tax Act, which mandates issuance of notice requiring returns for six preceding years and provides for abatement of pending assessments or reassessments on the date of search.Reliance was placed on the Supreme Court decision in PCIT v. Abhisar Buildwell Pvt. Ltd., which clarified the distinction between "abated" and "unabated" assessments and restricted AO's jurisdiction in "unabated" cases to additions based only on incriminating material discovered during search.The Court followed the precedent of the Delhi High Court in CIT v. Kabul Chawla, which defined the conditions under which an assessment is considered pending.The Court noted the absence of any incriminating material found during search to justify additions or disallowances, emphasizing that "suspicion however strong cannot take the place of evidence."The Court identified a doctrinal shift in limiting the scope of reassessment under section 153A to material discovered during search in "unabated" assessments, thereby protecting taxpayers from arbitrary additions unsupported by search findings.

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