2025 (11) TMI 642 - AT - Income Tax

Addition under s.69B deleted where department failed to prove funds belonged to assessee; assumptions unsupported

ITAT (Ahmedabad) allowed the assessee's appeal and deleted the addition made under s. 69B. The Tribunal held that revenue failed to produce cogent or ... Addition u/s. 69B - allegations of suspicious share sale transactions and alleged penny stock activities - HELD THAT:- It is evident from the facts that the Revenue authorities have not brought any cogent evidence to demonstrate that the impugned funds actually belonged to the assessee. The findings of the lower authorities are based merely on assumptions and without any corroborative material on record. In the absence of any contrary evidence produced by the Department, we are of the considered view that the addition made by the AO u/s 69B of the Act deserves to be deleted. Assessee appeal allowed. 1. ISSUES PRESENTED AND CONSIDERED - Whether the addition of Rs. 11,27,450/- as unexplained investment under Section 69B of the Income Tax Act is sustainable in the absence of cogent or corroborative material establishing ownership of funds by the assessee. - Whether findings based on assumptions, surmises or suspicion, without tangible evidence or proper documentary proof, suffice to discharge the statutory burden for making an addition under Section 69B. - Whether acceptance of explanations or conclusions in other assessment years (including those of related persons) operates as res judicata or otherwise precludes reassessment or addition in a subsequent assessment year. - Whether non-disclosure of specific materials relied upon for reopening and consequent reassessment violates principles of natural justice and renders the action void or unsustainable (issue of adequacy of reasons for reopening and disclosure of material). - Whether mechanical affirmation by the appellate authority, without independent examination of evidence and submissions, raises any jurisdictional or legal infirmity warranting interference. 2. ISSUE-WISE DETAILED ANALYSIS Issue: Sustainability of addition under Section 69B in absence of corroborative evidence - Legal framework: Section 69B permits addition where unexplained investments cannot be satisfactorily explained as being made out of known sources; the Revenue bears initial burden to show investments and the assessee must explain source or ownership. - Precedent Treatment: Lower authorities required credible documentary evidence to show that share purchases belonged to third parties (names/confirmations, bank traces, contracts/agency agreements, commission records, statutory registrations). The appellate authority below applied this evidentiary standard to uphold the addition. - Interpretation and reasoning: The Tribunal examined record and found no cogent evidence tying the impugned funds to the assessee. The lower findings were held to rest on assumptions and lack corroborative material. The Tribunal emphasized that, in absence of any contrary material produced by the Department, mere suspicion or non-compliance cannot substitute proof of ownership of funds by the assessee. - Ratio vs. Obiter: Ratio - An addition under Section 69B cannot be sustained where the Revenue fails to produce corroborative or cogent evidence to rebut the assessee's explanation; assumptions and conjectures are insufficient. Obiter - Observations on types of documents useful to prove third-party ownership are illustrative of evidential expectations. - Conclusion: The addition under Section 69B is deleted for lack of evidence; Revenue did not meet requisite standard to establish that funds belonged to the assessee. Issue: Reliance on assumptions, surmises or suspicious transactions (penny stock / circular trading) and the requisite onus on assessee - Legal framework: Where transactions are flagged (e.g., SEBI alerts for penny stocks or circular trading), the onus on the assessee to explain genuine ownership and source of funds increases, but evidentiary burden remains: documentary proof tracing funds or confirming agency relationship is required. - Precedent Treatment: The lower appellate authority applied the principle that flagged transactions create higher onus on the assessee and affirmed addition due to non-production of expected documents; Tribunal acknowledged the increased onus but insisted on positive evidence from Revenue to establish ownership by the assessee. - Interpretation and reasoning: The Tribunal balanced the increased evidentiary onus against the absence of any corroborative material adduced by the Department. It held that suspicion or SEBI alerts, without departmental proof tying the funds to the assessee, cannot justify an addition under Section 69B. - Ratio vs. Obiter: Ratio - SEBI/or other regulatory alerts may raise the onus, but do not obviate the Revenue's duty to produce corroborative material establishing ownership; suspicion alone does not warrant addition. Obiter - Specific descriptive list of evidentiary items expected from an assessee in such circumstances. - Conclusion: The presence of alerted or suspicious scrips does not, by itself, validate an addition absent cogent evidence produced by Revenue; the assessee's explanation could not be displaced on mere suspicion. Issue: Independence of assessment years and res judicata - Legal framework: Each assessment year is an independent proceeding; acceptance in one year does not bind the Revenue or preclude assessment action in another year. - Precedent Treatment: Lower authority properly applied the principle that prior-year conclusions do not operate as res judicata for a separate assessment year; Tribunal acknowledged that principle but treated it only as background, not decisive in the absence of departmental evidence. - Interpretation and reasoning: The Tribunal accepted the legal proposition that assessments are independent; however, it rejected the argument that acceptance in another year justified an addition in the present year. The decisive factor remained the lack of material establishing ownership for the year under consideration. - Ratio vs. Obiter: Ratio - Independence of assessment years is affirmed; prior acceptance does not preclude reassessment. Obiter - The use of prior-year outcomes in assessing reasonableness of departmental action is permissible as contextual, but not determinative. - Conclusion: Independence of years stands, but the absence of departmental evidence for the year before the Tribunal mandated deletion irrespective of outcomes in other years. Issue: Adequacy of reasons for reopening and disclosure of materials relied upon (natural justice) - Legal framework: Reopening under Section 147/148 requires disclosure of material on which the belief is based; principles of natural justice require that the assessee be informed of the reasons/material to enable effective response. - Precedent Treatment: The assessee contended lack of identification and non-supply of material relied upon for reopening; lower authorities did not identify such material in a manner that satisfied the assessee. - Interpretation and reasoning: The Tribunal's order does not primarily reverse on procedural grounds of defective reopening; rather, it focused on substantive deficiency of evidence. The Tribunal noted the assessee's contention of non-disclosure but decided the appeal on merit because the Revenue failed to present corroborative material at any stage. - Ratio vs. Obiter: Obiter - Procedural infirmities in reopening (non-disclosure) were raised and noted, but the decision to delete the addition rests on substantive insufficiency of evidence rather than an express holding that reopening was invalid. - Conclusion: Although non-disclosure of reopening material was contended, the Tribunal's deletion of the addition is grounded on absence of cogent departmental evidence; procedural defects were not the primary basis for interference. Issue: Mechanical affirmation by lower appellate authority - Legal framework: Appellate authorities must independently examine facts and submissions and not mechanically affirm lower orders; judicial norms require reasoned decisions. - Precedent Treatment: The assessee alleged mechanical confirmation by the Commissioner (Appeals); the Tribunal reviewed file materials and submissions. - Interpretation and reasoning: The Tribunal found the lower orders premised on absence of documents and on inferences, but concluded that regardless of the manner of affirmation, the controlling deficiency was lack of evidence produced by Revenue. The Tribunal therefore allowed the appeal on substantive merits. - Ratio vs. Obiter: Obiter - Mechanical affirmation by the appellate authority is undesirable; however, the Tribunal did not base reversal solely on this ground. - Conclusion: Even if the appellate authority's affirmation was summary, the Tribunal required and found the substantive standard of proof unmet by Revenue and deleted the addition accordingly.