2024 (12) TMI 423 - AT - Income Tax

Assessment u/s 153A - incriminating material found during search or not? -Introduction of own funds by way of bogus share capital receipt through shell companies - pendrive that was received from the directorate of enforcement subsequent to search action and which will help establishing certain incriminating facts - whether in spite of their being nothing emanating in the form of an admission of fact disclosing incorrect reporting of income or undisclosed income, merely the circumstances surrounding the existence of certain documents found during search, alone can be considered as incriminating material ? HELD THAT - As observed from the impugned assessment order that assessing officer has laid more emphasis on the examination of the reasons for investment, financials of the investor companies, their assets, taxable income etc., for drawing a conclusion that investor companies were shell companies and based upon this conclusion a backward flip is taken to draw an inference that existence of the disputed documents and the possession with the assessee makes these disputed documents incriminating material for purpose of section 68 of the Act. We are of considered view that it is only after establishing that seized material is incriminating the same can be relied for the purpose of seeking an explanation from an assessee for the purpose of section 68 of the Act. However, here in the case in hand the assessing officer has first examined the veracity of the investment and then concluded that the seized material is incriminating material. Thus, whatever submissions the learned spl. counsel for the Department has made bringing forth as to how the disputed documents have in themselves certain contents which make them incriminating material has not at all been examined and brought on record in the assessment order. On the contrary the assessing officer has preferred to complete the search assessment on the basis of principles of preponderance of probabilities and circumstantial evidence. We find that the five shareholders had sold all their shares in the company to Mr. Shushant Gupta in AY 2014-15 and Mr Shushant Gupta had further sold the shares to DMGFI in AY 2016-17. However, the Ld. AO proceeded on the premises that the five shareholders had directly sold the shares to the DMGFI, so it was the money of assessee which was infused as capital receipt through shell companies. In fact, Ld. Spl. counsel appearing for the Department was not able to rebut the fact asserted by Ld. counsel of assessee that the Department has accepted the sale of shares at ₹ 10 each share in the hands of Mr. Shushant Gupta, and no addition is made under section 56 of the Act, to allege that there was bogus share premium at any stage earlier. Admittedly the search is of 02.1.2020, while the investor companies had sold the shares in AY 2014-15. Thus if any blank documents were found, in search in the year 2020, then the Ld. Assessing officer was supposed to establish as to how keeping any of these blank documents would have been part of the transaction initiated in AY 2011-12, of introducing undisclosed income of assessee, by way of capital receipts through alleged shell companies, while these alleged shell companies had sold the shares further to Mr. Sushant Gupta. As a matter of fact, the scrutiny assessment of M/s Spiral E-Systems Pvt. Ltd., for AY 2013-14 has been completed u/s 143(3) of the Act on 18.03.2016 wherein income has been accepted as the returned income after examination of share capital issued including justification of higher share premium. Scrutiny assessment of M/s Spiral E-Systems Pvt. Ltd., for AY 2013-14 has been completed u/s 143(3) of the Act on 18.03.2016 wherein income has been accepted as the returned income after examination of share capital issued including justification of higher share premium. The assessee received the application money in the impugned assessment year 2011- 12, but, share capital was allotted n AY 2013-14. Therefore, the issue of share capital was examined by the AO in AY 2013-14 u/s 143(3) proceedings. Hence, the argument of ld. Spl. Counsel for Revenue that the original investors were never subjected to any examination, the AO, falls flat. AO could have verified from the records of Spiral E Systems, which AO was having which was not done. This only indicates that AO had only approached the issue with pre-conceived notion in order to reach a predetermined finding and destination, so for that reason the assessment order is not a speaking order but parrot like version of how bogus transactions are generally effected. We are of the firm view that the impugned order before us requires no interference by way of either reversal of findings or setting aside the issue to the files of either of the two of the learned tax authorities below. The grounds raised cannot be sustained. Consequently the appeal of revenue fails and same is dismissed.

Summary

Issues Involved:

1. Whether the documents seized during the search operation qualify as "incriminating material" under Section 153A of the Income Tax Act.
2. Whether the addition made under Section 68 of the Act by the Assessing Officer (AO) was justified based on the seized documents.
3. Whether the Commissioner of Income Tax (Appeals) [CIT(A)] erred in deleting the addition made by the AO.
4. Whether the Tribunal should remand the matter back to the lower authorities for further examination of the seized documents.

Issue-wise Detailed Analysis:

1. Incriminating Material:

The core issue was whether the documents seized during the search operation constituted "incriminating material" under Section 153A of the Income Tax Act. The AO considered the seized documents, which included share transfer forms, power of attorney, and other related documents, as incriminating. However, the Tribunal observed that the AO failed to demonstrate any direct evidence from the documents themselves indicating undisclosed income or incorrect reporting by the assessee. The Tribunal emphasized that for a document to be considered "incriminating," it must contain direct evidence of undisclosed income without relying on circumstantial evidence or inferences. The Tribunal concluded that the seized documents did not qualify as "incriminating material" since they did not directly establish any undisclosed income of the assessee.

2. Addition under Section 68:

The AO made an addition under Section 68 of the Act, treating the share capital received by the assessee as unexplained cash credits. The AO's conclusion was based on the belief that the investor companies were shell companies providing accommodation entries. However, the Tribunal noted that the AO's assessment was primarily based on inferences and presumptions without concrete evidence from the seized documents. The Tribunal highlighted that the AO did not establish the genuineness of the transactions or the creditworthiness of the investor companies through direct evidence. The Tribunal found that the AO's reliance on circumstantial evidence and preponderance of probabilities was insufficient to justify the addition under Section 68.

3. Deletion of Addition by CIT(A):

The CIT(A) deleted the addition made by the AO, concluding that the seized documents were not incriminating. The Tribunal upheld this decision, agreeing with the CIT(A) that the documents were statutory records and not indicative of any undisclosed income. The Tribunal found no error in the CIT(A)'s approach and emphasized that the AO failed to provide a factual basis for considering the documents as incriminating. The Tribunal also noted that the CIT(A) was justified in concluding that the documents did not constitute incriminating material, as they were merely statutory records required to be maintained under the Companies Act.

4. Remand for Further Examination:

The Revenue argued for remanding the matter to the lower authorities for further examination of the seized documents. However, the Tribunal rejected this request, stating that the AO had already failed to establish the incriminating nature of the documents in the assessment order. The Tribunal emphasized that the AO's assessment was based on assumptions and lacked a thorough examination of the documents' contents. The Tribunal concluded that there was no basis for remanding the case, as the AO had not demonstrated any incriminating evidence from the seized documents.

In conclusion, the Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decision to delete the addition made by the AO under Section 68. The Tribunal found that the seized documents did not qualify as incriminating material and that the AO's assessment lacked a factual basis for the addition.