2022 (2) TMI 327 - AT - Income Tax

Assessment u/s 153C - nexus between the addition made in the assessment order and in the incriminating material found - HELD THAT - A perusal of the assessment order shows that there is no reference to any incriminating material found during the course of search. In fact, the original assessment was framed vide order dated 13.12.2010 wherein short term capital gain was accepted as such. Therefore, in our considered opinion, in the assessment order framed u/s. 153C of the Act, there has to be direct nexus between incriminating material found during the course of search qua the addition, devoid of which, the ratio laid down in the case of Kabul Chawla 2015 (9) TMI 80 - DELHI HIGH COURT and Meeta Gutgutia 2017 (5) TMI 1224 - DELHI HIGH COURT squarely apply. Coming to the facts of Assessment Year 2009-10, we find that the assessee has returned short term capital loss on forfeiture of convertible share warrants which was accepted as such by order dated 10.09.2010 framed u/s. 143(1) of the Act. However, in the order framed u/s. 153C of the Act, the same was disallowed. A perusal of the assessment order clearly shows that there is no nexus between the addition made in the assessment order and in the incriminating material found at the time of search - we do not find any merit in the addition made in Assessment Year 2009-10. - Decided in favour of assessee.

Summary

Issues:
Common grievance in both appeals regarding addition/disallowance under section 153C of the Income-tax Act, 1961 without nexus to incriminating material found during search operation.

Analysis:
The judgment pertains to two appeals against a common order of the CIT(A) for Assessment Years 2008-09 and 2009-10. The issues in both appeals were heard together and disposed of in a common order for convenience. The main grievance in both appeals relates to the addition/disallowance made under section 153C of the Act without a direct nexus to the material found during the search operation. The Tribunal emphasized the necessity of a clear connection between the incriminating material and the addition, citing relevant case law such as Kabul Chawla and Meeta Gutgutia.

In the Assessment Year 2008-09, the Assessing Officer treated short term capital gain as business income under section 153C. However, the Tribunal noted that the original assessment did not mention any incriminating material, and the addition lacked a direct nexus to the material found during the search. The judgment highlighted the importance of establishing a connection between the material unearthed and the addition made under section 153C.

Moving to the Assessment Year 2009-10, the Assessing Officer disallowed short term capital loss on forfeiture of convertible share warrants under section 153C. The Tribunal found that there was no link between the addition and the incriminating material discovered during the search. Moreover, the AO heavily relied on findings from a group company, which had been overturned in a separate case involving Pavitra Commercial Ltd.

The Tribunal referenced the decision in the Pavitra Commercial case, where the disallowance was deleted based on the nature of the forfeiture of convertible warrants. This decision was upheld by the High Court of Delhi, reinforcing the position that the forfeiture did not constitute a transfer within the meaning of the Income-tax Act. Consequently, the Tribunal found no merit in the addition made for Assessment Year 2009-10 and quashed both assessment orders in totality, deleting the additions made in the said year. The appeals of the assessee were allowed accordingly.