Section 153A additions barred for completed assessments absent incriminating material; Section 69C and 40A(3) disallowance deleted

ITAT held that for A.Y. 2017-18, which was a completed/unabated assessment on the date of search, no additions could be made under s.153A in the absence of incriminating material found during search u/s 132 or requisition u/s 132A. The excel sheet retrieved from the accountant's email, being merely an internal document whose entries were already recorded in the regular books and scrutinized u/s 143(3), was not treated as incriminating material or evidence of undisclosed income. Consequently, additions made u/s 69C and the CIT(A)'s direction to consider disallowance u/s 40A(3) were held to be beyond jurisdiction and unsustainable. The assessee's appeal was allowed and the additions deleted.

---

---

1. ISSUES PRESENTED AND CONSIDERED

1.1 Whether, for an unabated/completed assessment year, additions under section 153A (including under sections 69C and 40A(3)) can be sustained in the absence of incriminating material found during search.

1.2 Whether the excel sheets and loose sheets seized (including those found in the email account of the assessee's accountant and at the premises of a third party) constituted "incriminating material" disclosing undisclosed income for the year under consideration.

1.3 Whether the directions of the appellate authority to treat cash payments already recorded in the books as disallowable under section 40A(3) in a section 153A proceeding were within jurisdiction when the year was not pending on the date of search.

1.4 Whether the additions sustained as unexplained expenditure under section 69C, including in respect of payments relatable to a fuel station, were legally sustainable when the corresponding expenses stood recorded in the regular books of account already scrutinized under section 143(3).

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1 & 2: Scope of section 153A for completed assessments and character of seized excel/loose sheets as incriminating material

Legal framework (as discussed by the Tribunal)

2.1 The Tribunal considered section 153A read with sections 132 and 132A, and relied upon the law declared by the Supreme Court in Abhisar Buildwell (P) Ltd. and the Delhi High Court in Kabul Chawla and Rakesh Babbar, as extracted in the order.

2.2 The principles culled out and applied were:

(a) In case of search under section 132 or requisition under section 132A, the Assessing Officer assumes jurisdiction for block assessment under section 153A and all pending assessments abate.

(b) In respect of completed/unabated assessments, additions can be made under section 153A only on the basis of incriminating material unearthed during search having a bearing on the determination of total income for the relevant year.

(c) In the absence of incriminating material for a completed/unabated year, no addition can be made under section 153A; recourse, if any, lies only under sections 147/148 subject to their conditions.

Interpretation and reasoning

2.3 The assessment for the year under consideration had already been completed under section 143(3) prior to the date of search. The year was therefore an unabated/completed assessment year on the date of search.

2.4 During search, certain excel sheets (working.xlsx, jmmr25.11.2016.xlsx, cash book working.xlsx) were seized from the email account of the assessee's senior accountant, and a loose sheet relating to payments to a fuel station was found at the premises of a third party. The Assessing Officer treated the totals of these as unexplained expenditure under section 69C and also made related additions.

2.5 The assessee produced books of account, ledgers, cash book, bank statements and reconciliation statements in remand and before the Tribunal, showing that the cash expenditures reflected in the excel/loose sheets had already been recorded in its regular books and were part of the expenditure considered in the original section 143(3) assessment, where a specific disallowance under section 40A(3) had already been made.

2.6 The appellate authority, after detailed reconciliation, accepted that substantial parts of the seized excel entries were either:

(i) duplicate/common entries across different excel sheets; or

(ii) entries already recorded in the regular books of account and forming part of the expenditure earlier scrutinized under section 143(3).

2.7 The Tribunal held that the seized excel sheets, being internal workings prepared by the accountant and fully reconcilable with the regular books, did not by themselves disclose any undisclosed income or unrecorded transactions and therefore could not be regarded as "incriminating material" for the purposes of section 153A.

2.8 The Tribunal further held that where the same cash expenditure has already been recorded in the books and examined in a completed scrutiny assessment, and no new discrepancy or unrecorded item is shown by the seized documents, such documents cannot be the basis for reopening issues already concluded in an unabated year under section 153A.

Conclusions

2.9 For an unabated/completed assessment year, the Assessing Officer has no jurisdiction under section 153A to disturb a concluded assessment in the absence of incriminating material found during search having nexus with undisclosed income for that year.

2.10 The seized excel sheets and the loose sheet relating to cash payments, having been fully reconcilable with and subsumed in the regularly maintained and already scrutinized books of account, did not constitute incriminating material and could not lawfully support additions under section 153A for the year under consideration.

Issue 3: Jurisdiction to direct disallowance under section 40A(3) in a 153A proceeding for a completed year

Legal framework (as discussed by the Tribunal)

2.11 The Tribunal noted that the appellate authority, while deleting additions under section 69C by acknowledging that the relevant cash expenditures were duly recorded in the books, nevertheless directed the Assessing Officer to treat the same sums as liable for disallowance under section 40A(3) in the section 153A assessment.

2.12 The Tribunal applied the ratio of Abhisar Buildwell (P) Ltd. and Kabul Chawla that in the absence of incriminating material, completed assessments cannot be reassessed or varied in section 153A proceedings.

Interpretation and reasoning

2.13 Once it was accepted that the impugned cash payments were already on record in the books and had been available and partly disallowed under section 40A(3) in the original section 143(3) order, there was no new incriminating material justifying reopening or enhancement of disallowance on the same set of transactions in the section 153A proceedings.

2.14 The Tribunal held that directing a fresh or additional disallowance under section 40A(3) in section 153A proceedings, in respect of a completed assessment year and without any new incriminating material, amounts to an impermissible review of a concluded assessment, contrary to the limits of jurisdiction under section 153A as settled by the Supreme Court.

Conclusions

2.15 The directions issued by the appellate authority to the Assessing Officer to treat the cash expenditures reflected in the excel sheets as disallowable under section 40A(3) in the section 153A assessment, in the absence of fresh incriminating material and for an unabated year, were held to be beyond jurisdiction and unsustainable.

Issue 4: Sustainability of additions under section 69C, including in respect of payments to fuel station

Interpretation and reasoning

2.16 The Assessing Officer had made aggregate additions under section 69C on the basis of the three excel sheets and the loose sheet relating to payments to a fuel station, including:

(i) additions aggregating to several crores as unexplained cash expenditure based solely on excel sheet totals; and

(ii) an addition of Rs. 1.10 crore treated as cash payment to a fuel station not explained from books.

2.17 The appellate authority, after calling for a remand report, found that:

(a) parts of the excel entries were duplicate/common across sheets and were to that extent to be excluded;

(b) substantial portions of the remaining entries, including salary, site and contractor payments, were duly recorded in the regular books of account; and

(c) only a residual portion of Rs. 1,98,93,435/- (on a working of Rs. 5,11,01,235/-) was sustained as unexplained expenditure under section 69C.

2.18 Regarding the alleged unexplained payment of Rs. 1.10 crore to a fuel station, the Tribunal, on a closer verification of the ledgers and books produced, found that:

(a) Rs. 20,00,000/- was directly recorded in the books in the name of "Krishna Filling Station" on 27/07/2016;

(b) further amounts aggregating to Rs. 90,00,000/- were recorded in the books as fuel payments in the name of "Sri Venkata Narasimha Filling Station" on 03/11/2016 and 10/11/2016; and

(c) the entire sum of Rs. 1.10 crore represented accounted fuel expenditure in the assessee's books, with the apparent confusion stemming only from nomenclature in the seized loose sheet vis-à-vis the ledger names.

2.19 The Tribunal held that, since all such expenditures (including the fuel payments) were duly recorded in the books, formed part of the profit and loss account, and had been subject to scrutiny in the original assessment, they could not be characterised as "unexplained expenditure" under section 69C in the section 153A proceedings, especially in the absence of any contrary material showing them to be unrecorded or bogus.

2.20 In particular, the Tribunal held that the appellate authority's conclusion that only Rs. 20,00,000/- could be treated as explained in relation to fuel payments, and that the balance Rs. 90,00,000/- was unexplained, was factually inconsistent with the ledger evidence on record and therefore unsustainable.

Conclusions

2.21 All additions sustained under section 69C, including the addition of Rs. 1,98,93,435/- and the balance of Rs. 90,00,000/- relating to fuel payments, were held to be untenable because:

(i) the corresponding expenditures were found recorded in the regular books of account and had been subjected to scrutiny in the completed section 143(3) assessment; and

(ii) the seized excel/loose sheets did not reveal any fresh, unrecorded, or undisclosed expenditure so as to qualify as incriminating material.

2.22 Consequently, in the absence of incriminating material for this unabated year, the entire additions sustained by the appellate authority were deleted and the appeal of the assessee was allowed.

---