2018 (4) TMI 337 - AT - Income Tax

Assessment u/s 153C - Held that - As per the provisions of section 153C A.O. required to issue the notice only on the basis of money, bullion, jewellery, other article or thing seized or requisitioned belonged to or any books of accounts or documents seized or requisitioned pertains to or pertain to the assessee. Invoking provisions of section 153C of the Act without having incriminating material is bad in law and accordingly we set aside the orders of the lower authorities and allow the appeal of the assessee.

Issues Involved:
1. Validity of invoking Section 153C of the Income Tax Act.
2. Addition of unsecured loans as unexplained cash credits under Section 68.
3. Disallowance of interest claimed on unsecured loans.
4. Jurisdiction of the Assessing Officer (A.O.) to make additions in completed assessments without incriminating material.

Detailed Analysis:

1. Validity of Invoking Section 153C of the Income Tax Act:
The assessee's return of income was filed on 23.11.2007, admitting a total income of ?1,47,830/-. A search under Section 132 was conducted on 03.02.2009, leading to the reopening of the assessment under Section 153C. The A.O. found unsecured loans totaling ?1,61,900/- from various persons. The assessee failed to explain the source and nature of these credits, prompting the A.O. to make additions and disallow the interest related to these unsecured loans. The CIT(A) upheld the A.O.'s actions, noting that the appellant did not dispute the search action or the seized documents detailing the appellant's income. The CIT(A) confirmed the A.O.'s jurisdiction under Section 153C, emphasizing that the appellant had complied with the proceedings without objection and failed to provide adequate material to contest the legal issues raised.

2. Addition of Unsecured Loans as Unexplained Cash Credits under Section 68:
The CIT(A) noted that the appellant borrowed ?1,61,000/- from ten individuals, with repayments made to five creditors before the search and to the remaining five in 2010. The loans were accepted in cash, and the appellant failed to substantiate the payments with entries in the books or bank accounts of the creditors. The CIT(A) highlighted that mere confirmation letters from creditors were insufficient without corroborative evidence. The appellant failed to prove the genuineness and creditworthiness of the creditors, leading to the addition being upheld under Section 68.

3. Disallowance of Interest Claimed on Unsecured Loans:
Given the loans were deemed unexplained, the interest claimed on these loans was also considered unexplained expenditure. The CIT(A) upheld the A.O.'s disallowance of the interest claimed by the appellant.

4. Jurisdiction of the Assessing Officer (A.O.) to Make Additions in Completed Assessments Without Incriminating Material:
The ITAT emphasized that in search assessments, completed assessments should not be disturbed unless incriminating material is available. Additions under Section 153C should be based on incriminating material rather than assessment records. This view was supported by various tribunal orders, including the cases of Bhavanasi Anjaneyulu and P. Rama Raju. The ITAT cited several precedents, including the Special Bench decision in All Cargo Logistics Ltd., which held that in non-abated assessments, additions should be based on incriminating material found during the search. The ITAT concluded that invoking Section 153C without incriminating material is invalid, setting aside the lower authorities' orders and allowing the assessee's appeal.

Conclusion:
The ITAT ruled in favor of the assessee, holding that the A.O.'s invocation of Section 153C was invalid without incriminating material. Consequently, the additions made under Section 68 and the disallowance of interest were set aside. The appeal in ITA No.111/Vizag/2017 was allowed, while ITA No.112/Vizag/2017 was dismissed as not pressed. The judgment underscores the necessity of incriminating material for making additions in completed assessments under search proceedings.

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