2026 (3) TMI 1572 - AT - Income Tax

Search assessment additions fail without incriminating material or unexplained sources; explained business entries and withdrawals sustained relief.

In search assessment, additions for cash shortage, cash found at residence, opening sundry creditors, wages, stock and capital introduction were deleted ... Validity of assessment u/s 153A - Statement u/s 132(4) - Opening balance creditors and section 68 - Explained source of capital introduction - Section 69C and source recorded in books - Disallowance under section 40A(3) Assessment u/s 153A - incriminating document found during search or not? HELD THAT:- As there was no incriminate document found during the course of search and hence, no addition can be made in view of the decision of the Hon’ble Supreme Court in the case of Principal CIT vs. Abhisar Bhuildwell P. Ltd. [2023 (4) TMI 1056 - SUPREME COURT] Addition on account of unexplained expenditure u/s 69C for shortage of cash at business premises and unexplained and unaccounted cash found at his residential premises during the search u/s 69A and invoked the provision of Section 115BBE - CIT(A) deleted addition - AO has made two contradictory observations that on the one hand he has accepted the statement recorded during the course of search at residence but on the other hand he has not accepted statement recorded during the search at the business premises. CIT(A) observation that the assessee did not mention in statement recorded at residence, what he stated in the statement at business, at the case of repetition would not justify the action of the AO in treating the cash as unaccounted when during the search itself it was admitted that the cash belonging to the business. Meaning thereby the expenditure was made out of cash book at the business premises of the assessee found during the course of search where search team found shortage of the cash at the business premises as rightly explained towards the expenditure incurred by the assessee which were yet to be accounted for in the books of accounts and the expenses were not subject to TDS provision and that balance cash found and seized from residence. Further, no adverse observation has been made by the AO. In our view, the Ld. CIT appeal’s decision is justified in deleting the addition made by the AO on account of shortage of cash at business and unexplained cash from the residence respectively. Addition on account of sundry creditors shown in the balance sheet as opening balance u/s 68 - AO has stated that assessee himself made disclosure during the search - HELD THAT:- Appellant has established the Identity, Creditworthiness & the genuineness of the loan/creditors and therefore, the onus casted upon assessee has been discharged by the appellant. It is noted that the AO has not specifically mentioned in the assessment order that what details were not furnished by the assessee which were required to be furnished. Unexplained expenditure in the form of wages - Addition u/s 69C - HELD THAT:- CIT (A) has appreciated the fact by observing that the AO has not established the facts regarding the source of expenditure was outside the books or the disputed expenditure was not recorded in the books of accounts by the assessee. Therefore, in our considered view, the section 69C would not be applicable for making the said alleged addition. Addition on account of unexplained expenditure in the form of introduction of capital u/s Section 69 - AO has discussed that assessee has made huge investment in UNS every year which is not commensurate to his income - HELD THAT:- Details submitted by the appellant provide sufficient evidence to establish the contention of the appellant to explain the source of the investment in UNS. The observation of the AO that assessee has made huge investment in UNS which is not commensurate to his income is factually incorrect with respect to the assessment year under consideration. Hence, investment made in UNS stands explained by the appellant with reference to the books of account of the appellant. Since, the appellant has explained the source of capital introduced, the addition made by the AO is not found to be sustainable. Addition u/s 69A - unexplained and unaccounted cash found from the safe of the Shri Dharmveer Singh Kanda during the search - CIT(A) deleted addition - HELD THAT:- CIT(A) in accepting the contentions of the appellant are found to be justified because the AO has not brought any evidence on record to prove his contention that cash found at the residence was not related to the business firm of the assessee. Accordingly, this ground of appeal of the department stands rejected. Unexplained investment in stock under section 69 - books of account were not held as maintained properly by the AO, as some of the purchase vouchers were yet to be accounted for - HELD THAT:- Only recording of statement at the time of search that some of the bills were not recorded do not prove that the books of accounts are not authentic or genuine. The lack of proper maintenance of books of accounts can be there if the books are not updated on daily basis. Thus, only reason that books are not found to be updated on the date of search cannot be a ground for treating the same as non genuine. Since the AO has not mentioned any other defect to establish that the books of accounts are not genuine, the addition made by the AO is not found to be sustainable and rightly deleted by the Ld. CIT (A). Further the taxation u/s section 115BBE, prescribed in the Act for addition made u/s 69 of the Income Tax Act and since the addition made u/s 69 is deleted hence applicability the charging of tax at higher rate u/s 115BBE is also rejected. Unaccounted expenditure on account of creditors paid off, made on account of creditors paid off out of unaccounted income and made on account of bogus cash creditors as unexplained credits - CIT(A) has deleted the said addition - HELD THAT:- AO has not brought any evidence to establish that any of the creditor were bogus or amount incurred from unaccounted sources being used to pay off these creditors. It is noted that the AO has not brought any material on record that these are not business creditors. From the record, it is admitted facts that these were opening balances of the current Assessment Year and not a new creditors of the assessment year under consideration. Thus, the Section 68 would not be applicable on such opening balances. This view is fortified by the decision of Usha Stud Agrl. Farms Ltd. [2008 (3) TMI 91 - DELHI HIGH COURT] as rightly relied by the Ld. CIT (A). Again, the three unsecured loans amounting to Rs. 39,05,000/-, were opening balances as these unsecured loans were received by the assessee during the financial year 2012-13 through banking channel. Necessary documents were submitted by the assessee proving the genuineness of the transaction, identity of the lender and their creditworthiness at the time of assessment. Thus, the creditors stand explained. Addition u/s 69 as unexplained investment and on account of cash deposited in the bank account of Gurpreet Kaur rejecting the explanation that the said account was received from late Shri Kanwal Nain Singh on account of sale agreement of property - HELD THAT:- It is seen from the record that the same income has been subject to double taxation. After completing the assessment of the assessee and the group, the department has taxed the same income in the hands of Late Sh. Kawal Nain Singh by passing the assessment order in his hands of the same income. It is settled legal position that no income can be taxed twice i.e. once in the hands of the appellant and again in the hands of Late Sh. Kanwal Nain Singh. It is pertinent to mention that on parity of facts, the Ld. CIT(A) has deleted the similar addition in the hands of Smt. Gurpreet Kaur. According to the principle of consistency, he cannot confirm the addition in the hands of the assessee, which is deleted on parity of facts in another case as illegal in the eyes of laws. Further, the aforesaid addition tantamount to double taxation of the same income in two hands which is not permissible in the eyes of laws. We, therefore, hold that the decision of the ld. CIT (A) in confirming the addition in the hands of the assessee is perverse to the facts on record and as such, the addition would be liable to be deleted in the hands of assessee. Addition on account of foreign currency - HELD THAT:- We find that the alleged foreign currency was purchased out of withdrawals made during the year which is evidently proved from the financial statement of the assessee submitted before Ld. AO. The assessee has withdrawn Rs. 11,16,362/- during the year under consideration. It is relevant to mention here that a fire accident was occurred on dated 19.07.2014 at the business premises of Shri Dharamveer Singh Kanda and all the relevant records relating to purchase of above foreign currency were got burn as a consequence the appellant could not produce the relevant document before the authorities below. It is seen that the assessee has made sufficient withdrawals to purchase the foreign currency, therefore, addition on account of foreign currency. House construction and renovation - Unexplained investment - Withdrawals from proprietorship concerns - HELD THAT: - The Tribunal found from the capital accounts and material on record that both the assessee and his son had made withdrawals from their proprietorship concerns over the relevant financial years and that these withdrawals explained the expenditure on construction and renovation. Since the source of funds stood established from the record, the addition could not be maintained. Section 40A(3) - Accepted genuineness of expenditure - Rule 6DD - Disallowance of wages expenditure under section 40A(3) could not be sustained. - HELD THAT: - The Tribunal held that once the expenditure itself had been accepted, disallowance under section 40A(3) could not be made without identifying specific cash payments exceeding the prescribed limit and without showing why the case did not fall within the permissible exceptions. It also noted that the authorities had not rejected the books and had not pointed out any precise offending payment or established any contravention of rule 6DD. Final Conclusion: The departmental appeals were rejected, including two appeals dismissed on low tax effect and the remaining appeals on merits. The assessees' cross appeals were allowed to the extent of the additions sustained by the Commissioner (Appeals), the Tribunal holding that the impugned additions were either unsupported by incriminating material, based on opening balances or explained entries, or otherwise contrary to the statutory requirements of the provisions invoked Issues: (i) Whether additions made on account of shortage of cash, cash found at residence, opening sundry creditors, wages, stock and capital introduction, and the consequent application of the higher-rate provision, could be sustained in search assessment where the disputed sums were explained as business-related entries, opening balances or reconciled items and, in the concerned unabated years, no incriminating material was found. (ii) Whether the additions relating to cash deposit, house construction or renovation, foreign currency and capital introduction, along with the related higher-rate provision, could be sustained where the assessees furnished sources from withdrawals, accumulated savings, regular business income and other explained receipts. Issue (i): Whether additions made on account of shortage of cash, cash found at residence, opening sundry creditors, wages, stock and capital introduction, and the consequent application of the higher-rate provision, could be sustained in search assessment where the disputed sums were explained as business-related entries, opening balances or reconciled items and, in the concerned unabated years, no incriminating material was found.Analysis: The additions under sections 69, 69A and 69C were examined on their own factual footing. The cash shortage and cash found at residence were treated as explainable against business cash book entries and seized vouchers, and the finding of contradictory treatment in the assessment was accepted. The opening creditors were held not chargeable under section 68 for the year under consideration because they were old balances and not fresh credits of that year. The wages addition was found unsustainable as section 69C was not attracted in the absence of proof that the expenditure came from outside the books, though the factual dispute over cash payment did not survive as an unexplained expenditure issue. The stock addition was deleted because the books were not shown to be wholly bogus merely for want of updation on the search date, and no specific defect was established. For the concerned unabated years, the absence of incriminating material was treated as fatal to additions under section 153A. The related application of section 115BBE was found dependent on the survival of the substantive addition.Conclusion: The challenged additions on these issues were not sustainable, and the departmental appeals on these points were rejected.Issue (ii): Whether the additions relating to cash deposit, house construction or renovation, foreign currency and capital introduction, along with the related higher-rate provision, could be sustained where the assessees furnished sources from withdrawals, accumulated savings, regular business income and other explained receipts.Analysis: The cash deposit addition was deleted where the source was traced to sale consideration received by a family member and the record showed that the same income had been assessed in another hand, making the impugned addition vulnerable on the ground of double taxation. The house construction or renovation addition was deleted because withdrawals from proprietorship concerns and other available funds were found sufficient to explain the expenditure. The foreign currency addition was also deleted since the withdrawals during the relevant period were adequate to cover the purchase and the explanation was not dislodged by contrary evidence. The capital-introduction additions were deleted where the source was supported by regular books, accumulated savings, debtor realisations and bank records. The corresponding higher-rate provision did not survive once the substantive additions were deleted.Conclusion: The assessees succeeded on these issues, and the additions as sustained by the first appellate authority were deleted.Final Conclusion: The departmental appeals failed on the contested additions, while the assessees obtained relief on the surviving additions; the consolidated result is in favour of the assessees overall, with the matters finally concluded.Ratio Decidendi: In a search assessment, additions in an unabated year cannot be made in the absence of incriminating material, and opening balances or explained business entries cannot be brought to tax as unexplained credits or expenditure merely on suspicion or non-updation of records on the search date.