2024 (8) TMI 283 - AT - Income Tax

Assessment u/s 153A - incriminating material during the search the addition was arbitrary - Fictitious Commodity Losses - assessment order lacked tangible evidence such as undisclosed income or unaccounted assets to substantiate the alleged fictitious losses - HELD THAT - The principle that reassessment should be based on incriminating material is likely to hold even under the new provisions as the rationale behind requiring tangible material for reopening an assessment remains a cornerstone of the reassessment process. The Supreme Court in the case of CIT v. Kelvinator of India Ltd. 2010 (1) TMI 11 - SUPREME COURT emphasized that the AO must have tangible material to justify the reopening of assessments. This principle continues to be relevant under the amended Sections 147 and 148 of the Act. The judicial principles laid down in the Saumya Construction case 2016 (7) TMI 911 - GUJARAT HIGH COURT regarding the necessity of incriminating material for reassessment of completed assessments are still relevant. Therefore the judgment in Saumya Construction Pvt. Ltd. (supra) retains its relevance and can be relied on to support the argument that reassessment post-search should be based on incriminating material ensuring that the reassessment process is grounded in tangible evidence. Given the lack of incriminating material and the reliance on judicial precedents the additions made by the AO are not sustainable and void ab initio. CIT(A) has provided a thorough analysis of the legal principles and factual background leading to the conclusion that the additions cannot be sustained and directed AO to delete the additions made on account of fictitious commodity losses from respective assessment years. Thus these grounds of appeal related to fictitious commodity losses by revenue for AYs 2009-10 to AY 2014-15 are dismissed. Unexplained Credit u/s 68 - AO and CIT(A) have not made any efforts to verify the source of source despite the assessee providing sufficient information we are of the opinion that the addition cannot be sustained. Therefore we direct the AO to delete the additions on account of both unsecured loans and interest thereon. The grounds of revenue are dismissed and that of assessee are allowed in case of all relevant assessment years. Disallowance u/s 14A r.w.r.8D - CIT(A) deleted these additions stating that these assessments are relating to unabated years and there is no incriminating material related to the issue - AO s application of Rule 8D is not justified without recording satisfaction regarding the correctness of the assessee s claim. The assessee being a dealer in shares and securities earns dividend income incidental to its business. However this does not automatically exempt the assessee from the provisions of Section 14A. CIT(A) s deletion of the additions is upheld as the assessments pertain to unabated years. AO made the disallowance without any incriminating material found during the search in line with the principles laid down in Saumya Construction Pvt. Ltd. 2016 (7) TMI 911 - GUJARAT HIGH COURT and Kabul Chawla 2015 (9) TMI 80 - DELHI HIGH COURT We therefore uphold the order of the Ld.CIT(A) and delete the disallowances made by the AO u/s 14A r.w. Rule 8D. These grounds of the Revenue are dismissed and that of assessee s CO are allowed.

Issues Involved:
1. Addition during assessment u/s 153A based on incriminating material.
2. Disallowance of fictitious commodity losses.
3. Addition of unexplained credits u/s 68.
4. Disallowance of interest expenses.
5. Treatment of Long Term Capital Gain (LTCG) as business income.
6. Disallowance u/s 14A.

Detailed Analysis:

1. Addition During Assessment u/s 153A Based on Incriminating Material:
The primary issue revolved around whether additions during the assessment u/s 153A must be confined to incriminating material found during the search. The Tribunal noted that for AYs 2009-10 to 2013-14, the assessments were unabated as the time limit for issuing notice under Section 143(2) had expired. Therefore, any addition made during the proceedings under Section 153A without incriminating material is illegal and void ab initio. This conclusion was supported by the decisions in PCIT vs. Saumya Construction Pvt. Ltd. 387 ITR 529 (Gujarat High Court), CIT vs. Kabul Chawla 380 ITR 573 (Delhi High Court), and CIT vs. Continental Warehousing Corporation (Nhava Sheva) Ltd. 374 ITR 645 (Bombay High Court).

2. Disallowance of Fictitious Commodity Losses:
The Revenue's contention was that the assessee booked fictitious losses to offset profits. The AO made additions based on reports from the Forward Market Commission (FMC) and statements from various brokers. However, the Tribunal found that the AO did not provide the assessee with an opportunity to cross-examine key individuals whose statements were used to make the addition, violating the principles of natural justice. The Tribunal also noted the lack of tangible evidence to substantiate the alleged fictitious losses. Consequently, the Tribunal upheld the CIT(A)'s decision to delete the additions related to fictitious commodity losses.

3. Addition of Unexplained Credits u/s 68:
The AO added amounts of unsecured loans and interest paid on such loans, stating that the director of Bhoomidev Credit Corporation Ltd. (BCCL) admitted to providing accommodation entries. The CIT(A) deleted these additions, concluding that the AO did not provide a clear and satisfactory basis for his dissatisfaction with the nature and source of the loans. The Tribunal upheld this decision, noting that the assessee had satisfactorily established the identity and genuineness of the lenders by providing confirmation letters, PAN details, and copies of ITRs. The Tribunal also emphasized that the AO did not adequately investigate the "source of source" concerning the loan received by the assessee.

4. Disallowance of Interest Expenses:
The AO disallowed interest expenses related to the unsecured loans, but the CIT(A) deleted these disallowances. The Tribunal upheld the CIT(A)'s decision, noting that the AO's additions were based on statements and observations unrelated to any incriminating material found during the search. The Tribunal concluded that since the assessments were unabated and no incriminating material was found during the search, these additions could not be made under Section 153A of the Act.

5. Treatment of Long Term Capital Gain (LTCG) as Business Income:
For AY 2014-15, the AO treated LTCG as business income. The CIT(A) directed the AO to verify the facts and satisfy himself as to whether the shares sold during the year were originally held as stock in trade and converted into investment at market value on 01.04.2012. The Tribunal upheld this direction.

6. Disallowance u/s 14A:
The AO made disallowances u/s 14A r.w. Rule 8D for AYs 2010-11, 2012-13, and 2013-14, which were deleted by the CIT(A). The Tribunal upheld the CIT(A)'s decision, noting that the AO made the disallowance without any incriminating material found during the search. The Tribunal emphasized that the AO's application of Rule 8D was not justified without recording satisfaction regarding the correctness of the assessee's claim.

Conclusion:
The Tribunal dismissed the appeals filed by the Revenue and allowed the two appeals filed by the assessee along with the Cross Objections. The Tribunal upheld the CIT(A)'s decisions, emphasizing the necessity of incriminating material for additions under Section 153A and the importance of providing the assessee with an opportunity to rebut or cross-examine witnesses.

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