2025 (9) TMI 748 - AT - Income Tax

Seized group-premises documents upheld; revenue's claim reduced-apply 50% of 0.075% ITSC rate for commission adjustment

ITAT held that incriminating material seized from a common group premises could be relied upon, dismissing the appellant's Additional Ground No.1A. The ... Assessment u/s 153A - Under reporting of income - unbooked amount of commission on LC discounting - perusal of data extracted from LCBD software and tally data revealed that average commission rate taken is 0.18% of hundi amount whereas a perusal of ASSs revealed that the rate of commission taken in the books is not correct - HELD THAT:- As decided by CIT(A) correctly it is required to be seen whether any incriminating material was found from the appellant during the course of search proceedings or not. As per the assessment order and records, it is seen that the Assessing Officer relied upon incriminating materials seized from Le Meridien and Thapar House. Thapar House is a common premises of all Adam Smith Group of companies. As the seized materials are from common premises and is in incriminating in nature, Additional Ground No. 1A is dismissed. Also Assessing Officer has determined the gross commission @1.28°% with respect to booked commission, which is high looking at the gross commission offered by the appellant during the AY 2012-13 to 2016-17. ITSC order itself proves that the ASAPL Group of companies were earning the additional income which was not offered to taxation. Accordingly, it is necessary to make a little adjustment in the net profit earning of the appellant company with regard to booked commission as well. Considering all the facts, along with the order of ITSC in the case of ASAPL, direct the Assessing Officer to adopt the half the rate which has been adopted by the ITSC in the case of ASAPL i.e. the additional net profit rate would be (50/100}* 0.075% (i.e. (0.5*0.25%)*30%) over and above the income disclosed by the appellant in its return of income. Decided against revenue. 1. ISSUES PRESENTED AND CONSIDERED 1. Whether additions to income under assessment proceedings initiated after search (s.153A) can be made in respect of completed/abated assessments in absence of incriminating material specifically relating to the assessee. 2. Whether gross commission on Letter of Credit (LC) discounting determined by the Assessing Officer by applying an average rate derived from seized group-material (1.28%) to booked transactions of the assessee is sustainable. 3. Whether the appellate authority may admit and rely upon additional evidence (including an ITSC/IBS order in respect of a group flagship entity) not placed before the Assessing Officer, and whether such evidence can justify reduction of the AO's applied rate for commission for the assessee. 4. Whether the Assessing Officer ought to have recognized net commission (after allowing profit margin) rather than making additions on gross commission without substantiation of expenses/net profits. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Validity of additions in s.153A proceedings where completed assessments exist and incriminating material is not specific to the assessee Legal framework: Section 153A confers jurisdiction to assess six years preceding the year of search; it distinguishes between pending/abated assessments and completed assessments and requires a nexus between additions and incriminating material unearthed during search for interference with completed assessments. Precedent treatment: The Tribunal accepts the Supreme Court and High Court jurisprudence that, while s.153A empowers fresh assessment for the six years, additions in respect of completed assessments are permissible only if incriminating material relating to the particular assessee is found in the course of search; otherwise completed assessments cannot be interfered with (principles in Kabul Chawla lineage and recent SC pronouncements summarized in the impugned order). Interpretation and reasoning: The CIT(A) analysed whether incriminating material specific to the assessee was seized. The seized material originated from common/group premises; it was incriminating in nature and related to the Adam Smith Group's LC business generally. The Tribunal agreed with the CIT(A) that since the materials were seized from common premises and were incriminating, the principle barring additions in absence of incriminating material was not attracted. Thus the AO could proceed to make additions in s.153A proceedings. Ratio vs. Obiter: Ratio - In s.153A proceedings, additions to completed assessments require incriminating material specific to the assessee; however where incriminating material is found in common/group premises and can be connected to the assessee's operations, additions are sustainable. (This follows and applies established precedent; no overruling.) Conclusion: The Tribunal upheld the view that the seized group material was incriminating and relevant to the assessee; additions under s.153A were therefore not barred by the completed-assessment rule. Issue 2 - Sustainability of AO's gross commission rate (1.28%) applied to booked transactions Legal framework: Assessment must be grounded on material with nexus to the assessee's transactions; estimation of undisclosed income from seized data requires reliable sample, confrontation with documents, and reasoned linkage to the assessee's books. Precedent treatment: The AO relied upon group-wide seized LCBD data to compute an average gross commission of 1.28% applicable across group entities. The CIT(A) referred to an ITSC/IBS order in respect of the flagship group entity which declined the 1.28% and adopted gross commission 0.259% and net profit at 30% (i.e. net effective 0.075%). Interpretation and reasoning: The CIT(A) found that the assessee had a similar business model as the flagship group company, operated from same premises and that seized material did not carry entity-specific references. Considering (a) lack of independent specific seized material directly attributable to the assessee, (b) the ITSC/IBS settlement in the flagship company, and (c) the assessee's lower revenue scale (15-20% of flagship), the CIT(A) considered the AO's 1.28% to be excessive. On a proportionality/adjustment basis, the CIT(A) reduced the rate by adopting half of the ITSC-adopted net rate (i.e. 50% of 0.075% net), reasoning that some adjustment in net profit recognition for the assessee was necessary but full ITSC rate could not be mechanically applied without confrontation of specific material. Ratio vs. Obiter: Ratio - Where group-wide sequestrable material lacks entity-specific attribution but indicates unbooked earning for the group, an appellate authority may temper AO's group-derived rate for a non-flagship entity by reasoned adjustment rather than sustain full AO's rate; use of group settlements (ITSC/IBS) as persuasive evidence can justify reduction. Obiter - The precise factor of one-half applied by CIT(A) is a case-specific adjustment rather than a binding formula. Conclusion: The Tribunal, following the CIT(A), declined to disturb the reduction and held that AO's uniform application of 1.28% to the assessee's booked commission was not sustainable; CIT(A)'s adoption of a reduced rate (half of ITSC net addition) was upheld. Issue 3 - Admissibility and reliance on additional evidence (ITSC/IBS order in respect of flagship group company) in appellate proceedings Legal framework: Appellate authority has discretion to admit additional evidence if sufficient cause exists and if admission serves substantial justice; such evidence may be used to re-evaluate AO's findings where procedural fairness is preserved. Precedent treatment: The CIT(A) applied a liberal approach to admit the ITSC/IBS order as additional evidence, citing that denying admission for technical non-production at assessment could result in injustice and that appellate proceedings can receive evidence not before the AO if justified. Interpretation and reasoning: The CIT(A) determined that the ITSC/IBS order for the flagship entity was material and relevant given common premises, similar business model and group operations. The appellate admission was used to compare and moderate the AO's findings. The Tribunal found no procedural infirmity in admitting and relying on that order in exercise of appellate discretion and accepted its persuasive value to adjust the AO's estimate for the assessee. Ratio vs. Obiter: Ratio - Appellate authority may admit and rely upon additional contemporaneous evidence, including settlement/ITSC findings for a group flagship entity, when such material bears a legitimate nexus to the assessee's operations and admission furthers substantial justice. Obiter - The weight to be accorded to group settlement findings depends on factual nexus and is not categorical. Conclusion: Admission and reliance on the ITSC/IBS order in appellate proceedings was proper; it furnished a persuasive benchmark that supported downward adjustment of the AO's applied rate for the assessee. Issue 4 - Requirement to consider net commission/profit rather than additions on gross commission Legal framework: Taxability requires recognition of income after allowing legitimate deductions/expenses; in cases of estimated income derived from group material, allowance for net margin may be appropriate if plausible and supported by evidence. Precedent treatment: AO applied gross rate; CIT(A) recognised need to consider net profit and adopted net profit percentage (30% of gross) consistent with ITSC/IBS approach for group flagship, and then applied a downward adjustment for the assessee (resulting in effective net addition of half of 0.075%). Interpretation and reasoning: CIT(A) noted absence of evidence by assessee to substantiate expenses, but also observed that arbitrary imposition of gross commission without allowance for net profit is unsatisfactory. On balance, CIT(A) adopted a uniform net-margin approach (as in ITSC) but moderated it for the assessee. The Tribunal accepted that approach as reasonable given available material and absence of entity-specific expense particulars. Ratio vs. Obiter: Ratio - Where AO estimates unbooked income, adoption of gross figure without considering net profit is susceptible to challenge; appellate adjustment to recognise a realistic net margin is appropriate when supported by record or persuasive group determinations. Obiter - The specific net margin adopted is fact-driven. Conclusion: The Tribunal sustained the CIT(A)'s direction to compute additions on a reduced gross commission/net-profit basis rather than on AO's gross-only approach; accordingly the AO's gross-rate addition was curtailed. Overall Conclusion The Tribunal upheld the CIT(A)'s findings: (i) additions under s.153A were not barred because incriminating group material seized from common premises related to the assessee's business; (ii) the AO's application of a 1.28% gross commission rate to the assessee's booked commission was excessive and was rightly moderated by the CIT(A) by reference to the ITSC/IBS settlement in the flagship company and by a reasoned downward adjustment; (iii) admission and reliance on the ITSC/IBS order as additional evidence in appellate proceedings was permissible; and (iv) computation of addition on an adjusted net-profit basis (as directed by CIT(A)) was appropriate. Appeals by the Revenue were dismissed accordingly.