2026 (3) TMI 1665 - AT - Income Tax

Search limitation and third-party material: panchanama timing, corroboration requirements, and infrastructure deduction for subcontract work

In search assessments, limitation under section 153B is linked to the conclusion of search in the assessee's own panchanama, even where a joint warrant ... Validity of assessment order as being barred by limitation prescribed u/s 153B r.w.s. 153A - Limitation for search assessments under joint warrant - Person-specific execution of authorisation and panchanama - Addition on third-party electronic material - Corroborative evidence and nexus with assessee - Deduction under Section 80IA(4) to sub-contractor executing infrastructure projects Limitation under Section 153B - Joint warrant of authorisation - Separate assessment of each person - computing limitation for assessment under section 153A where search was conducted under a joint warrant - HELD THAT: - The Tribunal held that section 153B has to be read with section 292CC. Though a joint warrant may validly name more than one person, assessment or reassessment has to be made separately in the name of each such person. Consequently, for limitation purposes, execution of authorisation and the last panchanama must be examined person-wise. Since a separate panchanama in the assessee's case recorded that search was finally concluded on 12.02.2020, limitation had to be reckoned from that date and could not be extended by the later revocation of restraint order and panchanama drawn at the residence of another person named in the joint warrant. The Tribunal further held that the extension granted by the Supreme Court in In Re: Cognizance for Extension of Limitation [2022 (1) TMI 385 - SC ORDER] applied to institution of judicial or quasi-judicial proceedings and not to completion of assessments governed by the specific statutory scheme read with TOLA. On that basis, the assessments completed on 31.03.2022 were beyond time. [Paras 18, 19, 20, 21] The assessments for A.Ys. 2014-15 to 2020-21 were held barred by limitation and were quashed. Addition made towards cash sheets found in the email account of third party - reliability on Third-party email material - Absence of nexus with assessee - Uncorroborated notings - HELD THAT: - The Tribunal found that the impugned notings were recovered from the personal email account of Shri P. Anil Kumar, who was independently engaged in contract business and had joined the assessee only from 01.12.2016. The assessee consistently denied ownership of those notings and asserted that they pertained to his individual affairs. The AO, despite being aware of these facts, conducted no independent enquiry and brought no corroborative material to show that the entries belonged to or represented income of the assessee. The Tribunal held that addition cannot rest merely on third-party notings without proof of ownership and nexus. [Paras 28] The additions made on this basis for A.Ys. 2014-15, 2015-16 and 2016-17 were deleted. Addition towards alleged cash transactions - Loose sheet as third-party document - loose sheet found as an attachment in the email account​ -​​​​​​ Corroborative evidence - Nexus with assessee - HELD THAT: - The Tribunal noted that the loose sheet headed 'C. Krishna Reddy' was retrieved from Shri P. Anil Kumar's personal email account and not from the assessee's premises or records. It also found that the transactions recorded therein related to a period prior to his joining the assessee. The assessee had specifically denied any dealing with Sri Krishna Reddy and pointed out that no such account existed in its books. The Assessing Officer made the addition without any independent enquiry, verification, or evidence of fund flow, and the CIT(A)'s reliance on the email address used for transmission was held insufficient to attribute the document to the assessee. The Tribunal reiterated that additions cannot be made merely on loose sheets or third-party documents without corroborative evidence. [Paras 35, 36] The additions for A.Ys. 2014-15, 2015-16, 2016-17 and 2017-18 were directed to be deleted. Cash transactions based on so-called “cash scrolls” found as attachments in the email account - Arbitrary computation - Identification of assessee-related entries - HELD THAT: - The Tribunal held that once the appellate authority itself recorded that several entries in the cash scrolls were personal in nature or pertained to Shri P. Anil Kumar's independent business activities, the additions could not continue in the assessee's hands unless specific entries relatable to the assessee were identified. AO had conducted no independent enquiry and adopted an arbitrary method by taking the higher of debit or credit entries. The Tribunal found the documents to be non-speaking and unverified, with no material showing nexus to the assessee. It therefore rejected the approach of sustaining the addition while directing later identification of entries. [Paras 43] The additions made on this account for A.Ys. 2015-16 to 2020-21 were deleted. Addition made towards alleged out of book cash transactions relating to “BC Soil Land” on the basis of an Excel sheet found as an attachment in the email account of third party - Preliminary working document - Absence of proof of actual payment - Need for corroboration - HELD THAT: - The Tribunal accepted the assessee's explanation that the Excel sheet was only a preliminary projection or working document. It noted inconsistencies between the entries in the sheet and the actual transactions recorded in the books, including lands not purchased, lands taken on lease, and variations in extent and consideration. In the absence of corroborative evidence that the amounts shown under the 'Cash' column were actually paid, the Tribunal held that such a proposal document could not constitute the basis of addition. [Paras 50] The addition for A.Y. 2017-18 was deleted. Addition based on Milestone-based Excel sheet - Third-party mailbox material - Proof of actual expenditure - HELD THAT: - The Tribunal found that the Excel sheet was recovered from Shri P. Anil Kumar's personal email account and not from the assessee. It also noted that Shri P. Anil Kumar was independently engaged in civil contract business through Avaya Construction Company. In these circumstances, milestone-based workings or commission-related calculations found in his mailbox could not, without cogent evidence, be attributed to the assessee. As no corroborative material, nexus, or proof of actual payment was brought on record, and part of the addition was overlapping, the addition was held unsustainable. [Paras 57] The additions for A.Ys. 2018-19 and 2019-20 were deleted. Addition based on WhatsApp messages as evidence - Authentication of electronic records - Uncorroborated digital communication - HELD THAT: - The Tribunal found that the WhatsApp messages did not refer to the assessee and that no enquiry had been made to examine Shri P. Anil Kumar or to verify the nature and authenticity of the messages. No evidence of actual flow of funds was brought on record. It held that uncorroborated WhatsApp chats, without proper authentication and supporting material, cannot by themselves constitute admissible evidence for making an addition, and relied on ACIT Vs. Manchukonda Shyam and Gavireddygari Aparna Kalyani [2020 (12) TMI 653 - ITAT VISAKHAPATNAM] in that regard. In the absence of nexus and supporting evidence, the addition was held unsustainable. [Paras 64] The addition for A.Y. 2020-21 was deleted. Estimated commission on alleged bogus sub-contracts - Uncorroborated statements - Presumption without fund-flow evidence - Estimated 1% commission income on the footing that various sub-contracts were accommodative - HELD THAT: - The Tribunal held that the AO proceeded on assumptions drawn from search statements of some sub-contractors without independent corroborative evidence. Against that, the assessee had produced work orders, bills, bank statements and confirmations showing execution of work, and most sub-contractors later confirmed the work in response to statutory notices and summons. The Tribunal held that factors such as engagement of known persons or employees, perceived deficiencies in documentation, audit remarks, or common IP addresses were insufficient by themselves to brand all contracts as non-genuine. Since payments were through banking channels with tax deduction at source, no material showed that funds returned to the assessee, and the assessee had already offered income from such contracts in its books, the ad hoc estimation of commission was held to be based on presumption alone. [Paras 73, 74, 75] The additions towards alleged 1% commission income were deleted for the years in which they were made. Cash returned to the management of the assessee in the context of works awarded - Addition based on third-party statement - Right of cross-examination - Proof of cash circulation - HELD THAT: - The Tribunal noted that the assessee had produced documentary evidence showing execution of Government work, release of contract payments after due verification, and payment to the subcontractor through banking channels with deduction of tax at source. The books of both parties were audited and no defect was pointed out. No evidence of cash circulation or fund flow back to the assessee was found despite search. The statement relied on by the Assessing Officer had not been subjected to cross-examination and remained uncorroborated. The Tribunal therefore held that, once the assessee discharged its initial burden through documentary evidence, the Department had to establish falsity of the transactions with cogent material, which it failed to do. [Paras 83, 84] The additions for A.Ys. 2018-19 and 2019-20 were deleted. Unreliable search statement - Burden after documentary proof - Absence of corroborative evidence - Alleged cash returned to the assessee from payments made to Avexa Corporation Private Limited - HELD THAT: - The Tribunal found that the addition was founded primarily on the statement of Sri K.J. Rao, who himself admitted that he was not involved in execution of the contract during the relevant period. His statement was held inconsistent and lacking credibility, as he could not correctly identify the project, amounts, or persons involved. In contrast, the assessee produced documentary evidence of execution of work, Government verification, and payments through banking channels with deduction of tax at source, all reflected in audited books. Since no evidence of cash circulation or return of funds to the assessee was found and cross-examination was not afforded, the Tribunal held that the Department had failed to dislodge the genuineness shown by the assessee. [Paras 92, 93] The additions for A.Ys. 2019-20 and 2020-21 were deleted. Unexplained cash found at the registered office of the assessee at “Prathima” - Cash found in common premises - assessee submitted that, the premises “Prathima” houses multiple companies and the cash found during the course of search cannot be attributed entirely to the assessee - HELD THAT: - The Tribunal found that the premises where cash was found housed multiple entities and not the assessee alone. The assessee furnished details of cash balances of various entities supported by records, and the appellate authority had already accepted the explanation in respect of other entities. It was further noted that verification directed from the seized books could not be carried out because the Assessing Officer stated that the seized data could not be accessed. In these circumstances, the cash balance reflected in the audited books, which had not been rejected, could not be disregarded. The Tribunal held that the Department had failed to discharge the burden of proving that the balance sustained represented unexplained income of the assessee. [Paras 101] The addition for A.Y. 2020-21 was deleted. Revenue appeal on unexplained income additions - Earlier findings applied - Revenue's challenge to deletion of additions based on loose sheets and email data of Shri P. Anil Kumar failed because the same issue had already been decided against the Revenue in the assessee's appeals - HELD THAT: - The Tribunal held that the Revenue's grounds on unexplained income for the relevant years were identical to the issues already adjudicated in the assessee's appeals. Having held that additions based on loose sheets and email data of Shri P. Anil Kumar, without corroborative evidence and nexus with the assessee, were unsustainable, the Tribunal found no error in the CIT(A)'s deletion of similar additions in the Revenue's appeals. [Paras 105] The Revenue's grounds on deletion of unexplained income additions were dismissed. Deduction under Section 80IA(4) - Sub-contractor executing infrastructure projects - Binding precedent - Deduction under section 80IA(4) was allowable to the assessee, though a sub-contractor, because the issue stood covered by binding jurisdictional Tribunal precedent in the assessee's own case and the facts of Celebi Delhi Cargo Terminal Management India Pvt. Ltd. Vs. Union of India were distinguishable. - HELD THAT: - The Tribunal held that the issue was squarely covered by the jurisdictional Tribunal's earlier decision in the assessee's own case, which recognised eligibility under section 80IA(4) even to a sub-contractor engaged in execution of infrastructure development projects. It further held that mere pendency of the Department's appeal before the High Court did not permit departure from binding precedent. The Revenue's reliance on Celebi Delhi Cargo Terminal Management India Pvt. Ltd. Vs. Union of India [2019 (2) TMI 1429 - ITAT DELHI] was rejected because that decision turned on absence of an agreement with the Government or specified authority on materially different facts, whereas the present case concerned execution of infrastructure work by a constituent partner/sub-contractor under the arrangement accepted in the earlier binding decision. [Paras 112, 113, 114] The order allowing deduction under section 80IA(4) for A.Ys. 2016-17, 2018-19, 2019-20 and 2020-21 was upheld and the Revenue's grounds were dismissed. Final Conclusion: The assessee's appeals were allowed and the assessments for A.Ys. 2014-15 to 2020-21 were held time-barred; the Tribunal also deleted the impugned additions on merits for want of nexus and corroborative material. The Revenue's appeals were dismissed, including its challenge to the deletion of additions and to the allowance of deduction under section 80IA(4). Issues: (i) Whether the assessments framed under section 143(3) read with section 153A were barred by limitation under section 153B in a joint warrant search, (ii) whether additions based on electronic material, loose sheets, cash scrolls, WhatsApp messages and other third-party documents retrieved from the email or mobile account of a person associated with the assessee could be sustained without corroboration and nexus, and (iii) whether deduction under section 80IA(4) was allowable to the assessee in respect of infrastructure contracts executed as a subcontractor.Issue (i): Whether the assessments framed under section 143(3) read with section 153A were barred by limitation under section 153B in a joint warrant search.Analysis: The limitation under section 153B is computed from the end of the financial year in which the last of the authorisations was executed, and execution in a search case is linked to the conclusion of search as recorded in the last panchanama drawn in relation to the person concerned. Section 292CC permits a joint warrant, but assessment has to be made separately in the name of each person mentioned in the authorisation. The search in the assessee's case stood concluded on the date recorded in the assessee's own panchanama, and not on the later date of conclusion in the case of other persons covered by the same joint warrant. The extended limitation under the COVID relaxation provisions did not rescue the assessments, which were completed beyond the permissible period.Conclusion: The assessments were time-barred and were rightly quashed.Issue (ii): Whether additions based on electronic material, loose sheets, cash scrolls, WhatsApp messages and other third-party documents retrieved from the email or mobile account of a person associated with the assessee could be sustained without corroboration and nexus.Analysis: The disputed additions were founded on material recovered from the personal email account or mobile device of a third party associated with the assessee, or on loose sheets and electronic records that did not themselves establish ownership, actual payment, or a direct link with the assessee. In several instances, the person from whose device the material was recovered was independently engaged in other business activity, and the documents either pre-dated his association with the assessee or contained personal and mixed entries. The Revenue did not conduct independent enquiries to establish the flow of funds, did not produce corroborative evidence, and relied substantially on unverified notings or initial statements recorded during search. Where the documents were only preliminary workings, dumb documents, or uncorroborated chats, they could not by themselves justify additions or estimation of income.Conclusion: The additions on this account were unsustainable and were deleted.Issue (iii): Whether deduction under section 80IA(4) was allowable to the assessee in respect of infrastructure contracts executed as a subcontractor.Analysis: The assessee was engaged in execution of infrastructure development projects and the controversy turned on whether subcontract execution disentitled it from the statutory benefit. The issue had already been decided in the assessee's favour in its own case on similar facts, and the same binding reasoning was followed. The nature of the work, rather than the form of the contractual chain, governed eligibility, and the Revenue's attempt to distinguish the claim on the ground that the contracts were not directly awarded to the assessee was not accepted.Conclusion: The deduction under section 80IA(4) was allowable and the Revenue's challenge failed.Final Conclusion: The search assessments did not survive on limitation, the impugned additions based on uncorroborated third-party material were deleted, and the assessee's claim for infrastructure deduction was sustained, resulting in complete success for the assessee and failure of the Revenue's appeals.Ratio Decidendi: In a search assessment, limitation under section 153B must be reckoned with reference to the conclusion of search in the assessee's own panchanama, and additions cannot be made solely on uncorroborated third-party electronic or loose-sheet material without establishing ownership, nexus and actual flow of funds.