2025 (4) TMI 1443 - AT - Income Tax

Assessment u/s 153A - absence of any incriminating material belonging to the assessee being found during the course of the search - HELD THAT - From the perusal of the impugned order of AO we find that the AO referred one pen drive seized from the premises of the proprietorship firm of the assessee containing Trial balance of the assessee. In the said trial balance an entry of unsecured loan of Rs. 30.00 lacs taken from M/s Destiny Gems Jewellers Pvt. Ltd. is appearing. The trail balance is prepared from the regular books of accounts and in the Balance Sheet this loan of Rs. 30, 00 lacs taken from M/s Destiny Gems Jewellers Pvt. Ltd. is duly appearing. Therefore this document could not be hold as incriminating material. As seen that besides pen drive the AO has relied upon the statements of various directors of the loaner company wherein they accepted that the said company is paper/ shell company and concluded that the loan taken from the said company is bogus. It is admitted position that search was simultaneously carried out in the case of assessee as well as in the case of SRS group of cases however both the entities are independent and separate entities. AO cannot allowed to assume jurisdiction to assess the assessee u/s 153A on the statements of third parties in whose cases search was also carried out and such persons were not related to the assessee. AO should have proceeded to assess the income of the assessee for such statements u/s 153C after following the procedure of recording of satisfaction to this effect in the case of CIT vs. Culcutta Knitwears 2014 (4) TMI 33 - SUPREME COURT Any material/ statements pertaining / relating to a person other than the person searched was first to be handed over by the AO of the searched person after recording his satisfaction to the AO of other person to whom such material/ statements belonged who after recording his satisfaction has to proceed against such other person by issuing a notice u/s 153C and then to assess / re- assess income of such other person for such material/ statements. As by respectfully following the decisions of Anand Jain HUF 2021 (3) TMI 8 - DELHI HIGH COURT and coordinate benches of the Tribunal in various cases we hold that no addition could be made in the assessment completed u/s 153A on the basis of statements of third party recorded during the search in their own case. Therefore the addition made in the hands of the assessee on account of unsecured loan taken from M/s Destiny Gems Jewellers Pvt. Ltd. solely on the basis of statements of third party is hereby deleted. Assessee appeal allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this appeal are:

(a) Whether additions can be made under section 153A of the Income Tax Act, 1961 ("the Act") in the absence of any incriminating material found or seized from the possession of the assessee during the course of search conducted under section 132 of the Act?

(b) Whether the addition of Rs. 30,00,000/- on account of unsecured loan taken from M/s Destiny Gems and Jewellers Pvt. Ltd., a company alleged to be a shell company, can be sustained solely on the basis of statements of third parties recorded during search and seizure proceedings against other entities (SRS group), without independent enquiry or verification?

(c) Whether the assessment framed under section 153A of the Act is legally valid when based on incriminating material or statements pertaining to third parties, without following the procedure prescribed under section 153C of the Act?

(d) Whether the procedure adopted by the Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] in confirming the addition violated principles of natural justice by relying on statements recorded behind the back of the assessee, without giving opportunity to cross-examine or rebut such material?

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a): Legality of additions under section 153A without incriminating material found from the assessee

The legal framework mandates that assessments under section 153A can be initiated following a search under section 132, and additions should be based on incriminating material found during such search relating to the assessee. The AO's reliance on incriminating material found from third parties unrelated to the assessee is challenged.

The Court examined the facts that only one pen drive containing the trial balance was seized from the assessee's premises, which showed an unsecured loan of Rs. 30,00,000/- from M/s Destiny Gems and Jewellers Pvt. Ltd. This was a regular transaction recorded in books of account and not incriminating material. The AO's addition was based on statements of employees and directors of SRS group companies (third parties) who claimed that Destiny Gems was a shell company. However, these third parties had no direct relationship with the assessee.

The Court referred to authoritative precedents including the Hon'ble Jurisdictional High Court ruling in PCIT (Central)-3 vs. Anand Kumar Jain (HUF), which held that incriminating material found during search of third parties cannot be used for assessment under section 153A against the assessee. Instead, section 153C mandates a separate procedure for such material.

The Court also relied on coordinate bench decisions which reinforced that material found from third parties must be dealt with under section 153C and cannot be used under section 153A in the absence of incriminating material from the assessee's own premises.

Applying these principles, the Court held that the addition under section 153A based solely on third-party statements was without jurisdiction and void ab initio.

Issue (b): Validity of addition of Rs. 30,00,000/- on account of unsecured loan from a shell company

Section 68 of the Act deals with unexplained cash credits and requires the assessee to prove the identity, creditworthiness, and genuineness of the transaction. Section 115BBE provides for taxation of undisclosed income at a higher rate.

The assessee had maintained regular books of account reflecting the loan and had filed returns accordingly. The AO did not doubt the books or issue any notice under section 142(1) questioning the loan's authenticity. The addition was made on the basis of statements of third parties who claimed the lender company was a shell entity.

The Court noted that the AO did not conduct any independent enquiry under sections 131 or 133(6) to verify the genuineness of the loan. Nor was the assessee given opportunity to cross-examine the third-party statements or rebut the allegations.

Given the absence of incriminating material from the assessee's premises and the failure to follow proper enquiry procedures, the Court found the addition unsustainable.

Issue (c): Applicability of section 153C procedure when incriminating material pertains to third parties

Section 153C mandates that if incriminating material seized during search of one person's premises pertains to another person, the AO must record satisfaction, hand over the material to the AO having jurisdiction over the other person, who then proceeds under section 153A against that person.

The Court referred to the Finance Bill 2015 Notes on Clauses, which clarify the legislative intent to ensure proper procedural safeguards when incriminating material relates to persons other than the one searched. This amendment was in response to the Supreme Court judgment in CIT vs. Calcutta Knitwears.

The Court emphasized that the AO's failure to invoke section 153C and proceed accordingly rendered the assessment order passed under section 153A invalid to the extent it relied on third-party material.

Issue (d): Violation of principles of natural justice in relying on third-party statements without opportunity to cross-examine or rebut

The assessee contended that the AO and CIT(A) confirmed additions based on statements recorded behind the back of the assessee, without giving an opportunity for cross-examination or rebuttal, violating principles of natural justice.

The Court observed that such reliance on statements without giving the assessee a chance to test their veracity is impermissible. The procedure under the Act requires that the assessee be afforded opportunity to confront adverse material.

Though this issue was raised, the Court did not extensively adjudicate on it since the primary ground of jurisdictional defect in invoking section 153A without incriminating material was sufficient to decide the appeal.

3. SIGNIFICANT HOLDINGS

The Court held:

"No addition could be made in the assessment completed u/s 153A of the Act on the basis of statements of third party recorded during the search in their own case."

"The AO cannot assume jurisdiction to assess the assessee u/s 153A on the statements of third parties in whose cases, search was also carried out and such persons were not related to the assessee."

"Any material/statements pertaining/relating to a person other than the person searched, was first to be handed over by the AO of the searched person after recording his satisfaction, to the AO of other person to whom such material/statements belonged, who after recording his satisfaction, has to proceed against such other person by issuing a notice u/s 153C of the Act."

"The assessment framed under section 153A without following the procedure prescribed under section 153C in respect of incriminating material relating to third parties is without jurisdiction and void ab initio."

Consequently, the addition of Rs. 30,00,000/- made on account of unsecured loan from M/s Destiny Gems and Jewellers Pvt. Ltd. was deleted.

Grounds of appeal challenging the additions on merits were held to be academic and not adjudicated.