2025 (1) TMI 93 - AT - Income Tax

Assessment u/s 153A - Addition u/s 68 - as argued addition is not based on any incriminating material and rather it is based on 3rd party investigation report - CIT(A) deleted addition - HELD THAT - We find that CIT(A) has passed a correct order wherein, it is abundantly clear that assessment u/s. 153A of the Act and in case of 153A of the Act assessment addition has to be made on the basis of incriminating material found during search. But in this case, CIT(A) has clearly brought out that addition was not done on the basis of any incriminating material found during search. In this view of the matter, we find that CIT(A) has passed a well reasoned order, as supported by the decision of Abhisar Buildwell Pvt. Ltd 2023 (4) TMI 1056 - SUPREME COURT wherein as expounded that no addition can be made when the assessment framed u/s. 153A dehors incriminating material found during the search. Decided in favour of assessee.

1. ISSUES PRESENTED and CONSIDERED

The legal judgment revolves around the following core issues:

Whether the CIT(A) erred in deleting the addition of Rs. 6,74,19,148/- made under Section 68 of the Income Tax Act, 1961, concerning the alleged bogus Long Term Capital Gains (LTCG) from penny stocks.
Whether the CIT(A) erred in deleting the addition of Rs. 20,22,574/- under Section 69C of the Act regarding commission paid for procuring the alleged accommodation entry.
Whether the CIT(A) correctly interpreted the scope of Section 153A of the Act as being limited to assessing only search-related income.
Whether the CIT(A) was right in limiting the scope of Section 153A to undisclosed income when the section mandates assessing the total income for the six assessment years.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Deletion of Addition under Section 68

Relevant legal framework and precedents: Section 68 of the Income Tax Act allows for the addition of unexplained cash credits. The legal precedent set by the Delhi High Court in the case of CIT vs. Kabul Chawla and other cases establishes that additions under Section 153A can only be made based on incriminating material found during a search.
Court's interpretation and reasoning: The CIT(A) noted that the addition was not based on any incriminating material found during the search. The assessment relied on information from a survey conducted five years prior, not on documents seized during the search.
Key evidence and findings: The statements of entry operators and the financial analysis of Nikki Global Finance Ltd. were used to justify the addition. However, these were not part of the search operation.
Application of law to facts: The CIT(A) applied the legal principle that additions in a 153A assessment must be based on incriminating material found during the search, which was absent in this case.
Treatment of competing arguments: The Revenue argued for the addition based on third-party reports and prior investigations, but the CIT(A) and Tribunal found these insufficient without incriminating search material.
Conclusions: The Tribunal upheld the CIT(A)'s decision to delete the addition, emphasizing the lack of incriminating material from the search.

Issue 2: Deletion of Addition under Section 69C

Relevant legal framework and precedents: Section 69C pertains to unexplained expenditure. The same legal framework regarding the necessity of incriminating material applies.
Court's interpretation and reasoning: The CIT(A) found no evidence from the search to support the claim of commission payment for accommodation entries.
Key evidence and findings: The AO's reliance on prior statements and investigations was deemed insufficient without corroborating search evidence.
Application of law to facts: The CIT(A) applied the principle that without search-related evidence, the addition could not stand.
Treatment of competing arguments: The Tribunal agreed with the CIT(A) that the addition lacked a basis in search findings.
Conclusions: The deletion of the addition was upheld due to the absence of incriminating evidence from the search.

Issue 3 and 4: Scope of Section 153A

Relevant legal framework and precedents: Section 153A deals with assessments following a search. Precedents like Kabul Chawla clarify its scope as limited to undisclosed income discovered during the search.
Court's interpretation and reasoning: The CIT(A) and Tribunal interpreted the section as allowing additions only when supported by search-related evidence.
Key evidence and findings: No new evidence from the search supported additional assessments for the years in question.
Application of law to facts: The Tribunal found the CIT(A)'s application of the law consistent with established precedents.
Treatment of competing arguments: The Revenue's broader interpretation was rejected in favor of a narrower, evidence-based approach.
Conclusions: The Tribunal affirmed the CIT(A)'s interpretation, limiting Section 153A's scope to search-related findings.

3. SIGNIFICANT HOLDINGS

Preserve verbatim quotes of crucial legal reasoning: "Completed assessments can be interfered with by the AO while making the assessment under Section 153A only on the basis of some incriminating material unearthed during the course of search or requisition of documents or undisclosed income or property discovered in the course of search."
Core principles established: Additions under Section 153A require incriminating material from the search. Prior investigations or third-party reports are insufficient.
Final determinations on each issue: The Tribunal confirmed the CIT(A)'s decision to delete the additions under Sections 68 and 69C due to the lack of incriminating search material. The interpretation of Section 153A was upheld, limiting its scope to search-related evidence.

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