2025 (4) TMI 277 - AT - Income Tax

Validity of reopening of assessment u/s. 147 - unsecured loans availed during the year as are non genuine and in the nature of unexplained cash credit in terms of section 68 - whether the reasons recorded by the AO for reopening of the assessment have any live link to the subject matter of assessment and the additions made? HELD THAT - As per the information received from ADIT (Inv.) Unit-2(1) Kolkata it was found that the assessee is one of the beneficiaries of accommodation entries availed of Rs. 50 lacs from certain entities. AO has observed that as per the information received these companies are bogus/shell entities and their bank accounts have been utilized for providing accommodation entries to various parties including the assessee. Thus he has recorded that he has reason to believe that income amounting to Rs. 50 lacs representing the accommodation entries received from the aforesaid entities has escape assessment. A careful and detailed reading of the impugned assessment order reveals that the A.O. has not even whispered a single word either regarding the amount of Rs. 50 lacs the alleged escaped income for A.Y. 2011-12 nor the entities from whom the amount was allegedly received during the assessment year as per the reasons recorded. The facts on record clearly reveal that the subject matter of assessment and the additions made have absolutely no nexus with the escaped income for the assessment of which the assessment was reopened u/s. 147 as per the reasons recorded. Thus in our view without assessing the escaped income for which the assessment was reopened u/s. 147 as per reasons recorded the A.O. could not have proceeded to assess any other income which has no nexus with the reasons recorded. Decided in favor of assessee. Validity of the assessment orders passed u/s. 143(3) r.w.s. 153A - whether additions made are not based on any incriminating material found as a result of search and seizure operation conducted on the assessee? - Addition on account of unexplained cash credit u/s. 68 alleged bogus unsecured loans and payment of interest by the assessee on such loan - HELD THAT - As discussed earlier facts on record reveal that the additions are primarily based on the balance sheet of the assessee and statements recorded in course of some other proceedings from some Kolkata based third party individuals. As far as balance sheet of the assessee is concerned they are based on books of accounts of the assessee already disclosed to the department through return of income and its report filed for the relevant assessment years. It is also a fact on record that the loans availed by the assessee during the relevant assessment years are not only recorded in the books of accounts but are also reflected in the balance sheet which have been disclosed to the department in regular course. Therefore in our view they would not constitute incriminating material found as a result of search and seizure operation carried out on the assessee. The incriminating material has to be of such nature which the assessee must not have disclosed to the department and which the department unearths in course of search and seizure operation conducted in case of the assessee. As far as the statements recorded from some Kolkata based third parties in course of proceedings unconnected to the search and seizure operation carried out in case of the assessee in our view they would not constitute incriminating material found as a result of search and seizure operation conducted u/s. 132 r.w.s. 153A of the Act in case of the assessee. Therefore in our view the disputed additions made in the afore-said assessment years are not based on any incriminating material found as a result of search and seizure operation carried out u/s. 153A of the Act in case of the assessee. That being the factual position emerging on record applying the binding ratio laid down in case of Abhisar Buildwell P Ltd. 2023 (4) TMI 1056 - SUPREME COURT we have no hesitation in holding that the impugned additions made by the A.O. are legally unsustainable. Decided in favour of assessee.

Summary

ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment include:

• The validity of reopening assessments under section 147 of the Income Tax Act for the assessment year 2011-12.
• The legitimacy of additions made under section 68 of the Act concerning alleged unexplained cash credits and unexplained expenditure.
• The validity of assessment orders passed under section 143(3) read with section 153A for assessment years 2012-13 to 2016-17, specifically whether the additions were based on incriminating material found during search and seizure operations.

ISSUE-WISE DETAILED ANALYSIS

Validity of Reopening under Section 147 (A.Y. 2011-12)

• Legal Framework and Precedents: The reopening of assessments under section 147 requires the Assessing Officer (A.O.) to have a reason to believe that income has escaped assessment. The Court referenced the precedents set by the cases of Jet Airways and Ranbaxy Laboratories, which emphasize the need for the A.O. to assess the specific escaped income for which the assessment was reopened.
• Court's Interpretation and Reasoning: The Court found that the A.O. did not assess the specific escaped income of Rs. 50 lakhs mentioned in the reasons for reopening. Instead, the A.O. made additions unrelated to the reasons recorded, which invalidates the reopening.
• Key Evidence and Findings: The A.O. based the reopening on information from the Investigation Wing about accommodation entries from certain Kolkata-based companies. However, the assessment order did not address these entities or the specific amount mentioned.
• Application of Law to Facts: The Court concluded that without assessing the escaped income for which the assessment was reopened, the A.O. could not proceed to assess other unrelated income.
• Treatment of Competing Arguments: The Department argued that the reopening was based on tangible material, but the Court found no live link between the reasons recorded and the additions made.
• Conclusions: The reopening under section 147 was deemed invalid due to the lack of nexus between the reasons recorded and the additions made.

Validity of Additions under Section 68 and Unexplained Expenditure

• Legal Framework and Precedents: Section 68 requires the assessee to explain the nature and source of any cash credits. The Court emphasized the need for genuine transactions and the assessee's burden of proof.
• Court's Interpretation and Reasoning: The Court found that the A.O. mechanically made additions without proper application of mind, as the assessment order contained factual inaccuracies and was based on incorrect assumptions.
• Key Evidence and Findings: The A.O. alleged that unsecured loans were availed from bogus entities, but the Court noted discrepancies in the assessment order, such as incorrect income figures and dates.
• Application of Law to Facts: The Court determined that the assessment order was invalid due to lack of proper reasoning and factual inaccuracies.
• Treatment of Competing Arguments: The assessee argued that the assessment order was based on incorrect facts, which the Court found to be persuasive.
• Conclusions: The additions under section 68 and for unexplained expenditure were unsustainable due to the invalidity of the assessment order.

Validity of Assessments under Section 153A (A.Y. 2012-13 to 2016-17)

• Legal Framework and Precedents: Section 153A assessments must be based on incriminating material found during search and seizure operations. The Court referenced the Supreme Court's decision in Abhisar Buildwell, which requires that additions in unabated assessments must be based on such material.
• Court's Interpretation and Reasoning: The Court found that the additions were based on the balance sheet and third-party statements, which do not constitute incriminating material found during the search.
• Key Evidence and Findings: The A.O. relied on the balance sheet and statements from third parties, but these were not connected to the search conducted on the assessee.
• Application of Law to Facts: The Court concluded that the additions were not based on incriminating material found during the search, making them unsustainable.
• Treatment of Competing Arguments: The Department argued that the balance sheet and statements were incriminating, but the Court disagreed, emphasizing the need for material directly linked to the search.
• Conclusions: The assessments under section 153A were invalid due to the lack of incriminating material, leading to the deletion of the additions.

SIGNIFICANT HOLDINGS

• Verbatim Quotes of Crucial Legal Reasoning: "Without assessing the escaped income for which the assessment was reopened u/s. 147 of the Act as per reasons recorded, the A.O. could not have proceeded to assess any other income, which has no nexus with the reasons recorded."
• Core Principles Established: The reopening of assessments must be directly linked to the reasons recorded, and additions in section 153A assessments must be based on incriminating material found during searches.
• Final Determinations on Each Issue: The Court quashed the reopening under section 147 and the additions made under section 68 and for unexplained expenditure. It also invalidated the assessments under section 153A for lack of incriminating material.