2025 (10) TMI 341 - AT - Income Tax

Assessments under s.153C and s.69 set aside where loose seized notes lacked corroboration and could not prove cash loans

ITAT, Chennai (AT) upheld the CIT(A) and set aside additions made under s.153C/s.69 that were based solely on loose seized sheets found at a third party's ... Assumption of jurisdiction u/s 153C - Undisclosed investment u/s.69 - Reliance on loose sheets - HELD THAT:- AO was not entitled to make a pure guess and make an assessment without reference to any evidence / material. It is trite law that the addition could not be made on mere suspicion, conjectures or surmises. In the present case, the loose sheets were found from the premises of third-party. These sheets did not bear the requisite enough details for formation of opinion about grant of loan by the assessee in cash. Therefore, such loose sheets were to be categorized as dumb document only. Merely by relying on this material, no conclusion could be made that the assessee actually advanced loan and received interest on such loan. There was no corroborative evidence to prove that the noting in the seized material had actually materialized and transfer of money had actually taken place between the concerned parties. No document evidencing grant of loan by the assessee has been found from the possession of the assessee. Adjudication of Ld. CIT(A) and reliance of case laws, on merits, could not be faulted with. We order so. The adjudication of Ld. CIT(A) find our concurrence. ISSUES PRESENTED AND CONSIDERED 1. Whether additions under sections relating to unexplained investments and income could be sustained where purported incriminating documents (loose sheets) were seized from third-party premises and were relied upon by the Assessing Officer without independent corroboration. 2. Whether the Assessing Officer validly invoked section 153C (proceedings consequent to search/seizure) when the satisfaction note was recorded on incorrect facts and without specifying the relevant assessment year(s). 3. Whether statements recorded during search (including admissions) can be the sole basis for additions where those statements were retracted and the assessee was denied cross-examination of third-party witnesses. ISSUE-WISE DETAILED ANALYSIS Issue 1: Reliance on loose sheets seized from third-party premises to make additions Legal framework: Additions under provisions dealing with unexplained investments and income require satisfaction of taxable receipt or unexplained investment. Evidence relied upon must establish actual receipt/transfer of money; documents seized from third parties are 'dumb documents' and need corroboration to support charge. Precedent treatment: The Tribunal and High Courts have consistently held that entries in third-party loose sheets cannot, without corroboration, be the basis for additions (decisions applying requirement of corroborative evidence; reliance on K.P. Varghese principle that burden lies on revenue to prove taxability). Decisions cited require correlation and further investigation where seized documents lack necessary particulars. Interpretation and reasoning: The Court examined the seized loose sheets and found them undated, unsigned and lacking requisite particulars as to ownership, year and mode of transaction. No promissory notes, cheques or other documentary evidence of payment were seized from the assessee. No independent enquiries were undertaken by the AO to establish actual exchange of money. Third-party witness statements either did not corroborate the notings or were not subjected to cross-examination. A retraction of admissions further weakened reliance on statements. Ratio vs. Obiter: Ratio - where incriminating entries are found in third-party material and those entries are not self-sufficient, revenue must produce corroborative evidence of actual payment/transfer before making additions; mere notings in loose sheets are insufficient. Obiter - observations on the comparative weight of various cited tribunal decisions are supportive but not novel. Conclusions: Additions based solely on loose sheets seized from a third party cannot be sustained in absence of corroborative evidence showing actual receipt/advancement of funds. The impugned additions failed for lack of corroboration and were rightly deleted on merits. Issue 2: Validity of invocation of section 153C where satisfaction note was recorded on incorrect facts and without year-wise specificity Legal framework: Section 153C requires a recorded satisfaction that documents seized during search made in one person's case have bearing on determination of total income of another for a specific assessment year; recording of a valid satisfaction note with correct facts and year-wise linkage is mandatory for jurisdiction. Precedent treatment: Supreme Court and Tribunal decisions establish that absence of proper/ year-wise satisfaction vitiates proceedings under section 153C and renders them void-ab initio; satisfaction must be based on correct facts and indicate relevance to particular AY(s). Interpretation and reasoning: The satisfaction note under challenge incorrectly stated that the seized material was from the assessee's residence and that the assessee was a director of the searched group; in truth the material was seized from a third party and the assessee was not a director. The AO also recorded a blanket satisfaction for multiple years without tying entries to specific financial years. These factual errors and lack of year-wise satisfaction showed that the jurisdictional precondition for issuing notices under section 153C was not met. Ratio vs. Obiter: Ratio - jurisdiction under section 153C is contingent on a properly recorded satisfaction grounded on correct facts and specifying the relevant assessment year(s); failure to do so invalidates subsequent proceedings. Obiter - reference to CBDT circulars and analogous decisions reinforces the principle. Conclusions: The AO assumed jurisdiction under section 153C without valid satisfaction; proceedings were therefore without jurisdiction and the resulting additions could not be sustained on this legal ground. Issue 3: Reliance on statements recorded during search, subsequent retraction, and denial of cross-examination Legal framework: Statements recorded under search provisions can be admissible evidence but should not ordinarily be the sole basis for adverse findings unless corroborated; procedural fairness (including opportunity to cross-examine witnesses whose statements underpin an order) is part of principles of natural justice. Precedent treatment: Authorities hold that a voluntary statement is important but not conclusive and may be rejected where retraction or coercion is established. Further, denial of cross-examination of witnesses relied upon by revenue has been held to be a violation of natural justice rendering the order unsustainable. Interpretation and reasoning: Admissions recorded during search were retracted within a relatively short period. The assessee requested cross-examination of a key third-party witness whose statement formed part of the record, but this was not permitted. Given the retraction and the denial of opportunity to test witnesses, reliance on the statements as sole or primary evidence was legally impermissible. Ratio vs. Obiter: Ratio - statements recorded during search cannot form the sole basis for additions where they are retracted and where the assessee is denied the opportunity to cross-examine third-party witnesses whose statements underpin the additions. Obiter - discussion of specific timelines for retraction and coercion evidence is illustrative. Conclusions: The AO's reliance on retracted statements and failure to allow cross-examination were material procedural defects; accordingly, the statements could not sustain the impugned additions. Interplay of legal and factual infirmities Legal framework: Jurisdictional invalidity under section 153C and evidentiary insufficiency independently vitiate assessments; both defects may be cumulative. Interpretation and reasoning: The Court found both jurisdictional infirmity (invalid satisfaction) and substantive evidentiary deficiency (uncorroborated third-party loose sheets and retracted statements coupled with denial of cross-examination). Either ground independently sufficed to invalidate the additions; taken together they compellingly lead to deletion. Ratio vs. Obiter: Ratio - where jurisdictional preconditions are not satisfied and evidence is insufficient/corroboration absent, additions must be deleted. Obiter - none beyond reinforcing established principles. Conclusions: The impugned additions are unsustainable both for lack of jurisdiction under section 153C and for absence of corroborative evidence; the appellate deletion is affirmed.