2025 (4) TMI 989 - AT - Income Tax

Additions of order passed u/s 153A - Whether no incriminating material found and seized from the possession of the assessee and solely on the basis of the material found and statements recorded of third parties which are not related to the assessee as neither they were the directors nor employees of the assessee company? - HELD THAT - Any information or entry found in any document seized pertaining / relating to a person other than the person searched from the searched premises as was referred u/s 153A of the Act was to be handed over by the investigation wing to the AO of such other person (searched) and then that AO of the searched person shall handover the same to the AO of the person not searched who thereafter was to proceed against such other non-person by issuing a notice u/s 153C of the Act and then to assess / re- assess income of such other not searched person. The assessment order passed u/s 153A of the Act on the basis of an income-tax search conducted on the assessee the impugned amount of undisclosed/unexplained income allegedly based on some incriminating material in the shape of statement of third persons recorded elsewhere could not be assessed in the said assessment order passed u/s 153A of the Act but it could be considered for the purpose only and only in a separate assessment order by taking recourse to the mandatory and special non obstante provisions of the section 153C of the Act and then to pass a separate assessment order u/s 153A r.w.s. 153C of the Act. Had recourse to section 153C of the Act been adopted by the revenue then it would be in accordance with the decision of Calcutta Knitwears 2014 (4) TMI 33 - SUPREME COURT Admittedly no money bullion valuable article or thing or property which was not disclosed or would not be disclosed was found during the search carried out by the department in the case of the assessee. Under these circumstances by respectfully following the decisions of Anand Jain HUF 2021 (3) TMI 8 - DELHI HIGH COURT we hold that 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 and the incriminating material if any found during the course of search of the assessee could only be utilized for making addition. Thus the additions made are hereby deleted. Appeals of the assessee are allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal are:

(a) Whether additions under section 153A of the Income Tax Act, 1961 (the Act) can be made in respect of undisclosed income based solely on incriminating material found from the possession of a third party, when no incriminating material was found or seized from the assessee's own premises during a search and seizure operation;

(b) Whether the assessment proceedings initiated under section 153A of the Act violate the moratorium imposed under section 14 of the Insolvency and Bankruptcy Code (IBC) when the assessee is under corporate insolvency resolution process;

(c) Whether the Assessing Officer (AO) had jurisdiction to reassess completed assessments in the absence of incriminating material found from the assessee's possession;

(d) Whether the procedure prescribed under section 153C of the Act should have been invoked for assessing income based on material found from third parties;

(e) Whether the additions made by the AO and upheld by the Commissioner of Income Tax (Appeals) [CIT(A)] were arbitrary, based on conjectures and surmises without proper material or evidence;

(f) Whether the assessment order passed under section 153A violated principles of natural justice by not allowing adequate opportunity to the assessee;

(g) Whether penalty proceedings under section 271(1)(c) are justified in respect of the additions made.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a), (c), and (d): Legality of additions under section 153A based on third-party material and jurisdictional scope

Relevant legal framework and precedents: Section 153A of the Act empowers the AO to assess or reassess income of a person in cases where a search or requisition has been conducted. Section 153C applies where incriminating material found during the search of one person relates to another person, requiring the AO of the searched person to hand over such material to the AO of the other person, who may then initiate assessment or reassessment proceedings.

The Supreme Court in the case of M/s Abhisar Buildwell (2023) 454 ITR 212 (SC) held that the object of section 153A is to bring to tax undisclosed income found during the course of search or requisition, and jurisdiction to reassess completed assessments arises only if incriminating material is found during search of the assessee. The Court emphasized that undisclosed income must be unearthed during search of the particular person to assume jurisdiction under section 153A.

In Calcutta Knitwears, the Supreme Court clarified the procedural necessity of invoking section 153C when incriminating material found during search of one person relates to another person, mandating handover of such material and separate proceedings.

Jurisdictional High Court and ITAT precedents (PCIT vs. Anand Kumar Jain (HUF); Trilok Chand Chaudhary vs. ACIT; PCIT vs. Shivalik Mahajan; Om Prakash Tantia vs. DCIT) have consistently held that incriminating material found during search of third parties cannot be used to make additions under section 153A against the assessee. Instead, section 153C must be invoked.

Court's interpretation and reasoning: The Tribunal noted that in the instant case, no incriminating material was found or seized from the assessee's premises during the search conducted on 14.10.2020. The additions made by the AO under section 153A were solely based on material found from the possession of third parties, namely Shri Manoj Kumar Singh (a legal consultant) and his employees, who are independent and unrelated entities.

The Tribunal observed that the AO relied on pen drives, laptops, server disks, diaries, and printouts seized from these third parties, and statements recorded from them, to allege undisclosed cash transactions with the assessee. However, none of these materials were found in or seized from the assessee's premises as per the Panchnama. The AO did not allege or establish any incriminating material found from the assessee itself.

Following the Supreme Court's ruling in Abhisar Buildwell, the Tribunal held that jurisdiction under section 153A to reassess completed assessments arises only if undisclosed income is found from incriminating material belonging to the assessee. Material found from third parties cannot be used to reassess the assessee under section 153A without following the procedure under section 153C.

The Tribunal further emphasized that the assessee and the third parties were independent entities engaged in different businesses, with no interrelation beyond consultancy services, thus negating the notion of a common entity for simultaneous use of search material.

Application of law to facts and treatment of competing arguments: The Department argued that since searches were simultaneous and integrated, material found from third parties could be used against the assessee under section 153A. The CIT(A) upheld this view relying on Abhisar Buildwell, interpreting that undisclosed income found during search need not emanate only from the searched person's premises.

The Tribunal rejected this interpretation as impractical and inconsistent with statutory provisions and Supreme Court rulings. It held that the proper course was to complete the assessment under section 153A for the assessee based on material found from the assessee's premises (if any), and then invoke section 153C for material found from third parties.

The Tribunal noted that the AO failed to follow the mandatory procedure under section 153C, which requires recording of satisfaction and issuance of notice to the other person before making additions. The Tribunal further referred to the legislative intent and Notes on Clauses of the Finance Bill 2015, which clarified the procedural requirements of section 153C.

Conclusion: Additions made under section 153A based on third-party material without following section 153C procedure are invalid. The AO lacked jurisdiction to reassess the completed assessment of the assessee on such basis.

Issue (b): Violation of moratorium under section 14 of the Insolvency and Bankruptcy Code (IBC)

Relevant legal framework: Section 14 of the IBC imposes a moratorium on institution or continuation of suits or proceedings against the corporate debtor during the insolvency resolution process.

Court's reasoning: The assessee contended that assessment proceedings under section 153A violated this moratorium. The Tribunal noted the contention but did not find it necessary to adjudicate on this ground since the primary legal grounds on jurisdiction and procedure were decided in favour of the assessee, rendering this issue moot.

Issue (e) and (f): Validity of additions on merits and principles of natural justice

The assessee challenged the additions as arbitrary, based on surmises and conjectures without proper material, and contended that the assessment order violated principles of natural justice by not allowing adequate opportunity for explanation.

The Tribunal refrained from adjudicating these grounds on merits, as the legal grounds on jurisdiction and procedure were allowed in favour of the assessee, leading to deletion of additions.

Issue (g): Penalty proceedings under section 271(1)(c)

The assessee challenged penalty proceedings initiated on account of the additions as unwarranted. Since the additions were deleted on legal grounds, the Tribunal did not adjudicate this issue.

3. SIGNIFICANT HOLDINGS

"The object of section 153A is to bring under tax the undisclosed income which is found during the course of search or pursuant to search and requisition. Therefore, only in a case where the undisclosed income is found on the basis of incriminating material, the AO would assume the jurisdiction to assess or reassess the total income for the entire six years block assessment period even in case of completed/unabated assessment."

"It would be wrong to interpret that the undisclosed income should emanate only from the incriminating material found from a particular premise or the owner of the premise, as such interpretation would lead to impractical proposition and simultaneous proceedings under sections 153A and 153C in the same case."

"When no incriminating material was found and seized during the course of search from the possession of the assessee, no addition could be made in the assessment completed under section 153A by making additions on the basis of the statements and other material found from the possession of third party even though a search was simultaneously carried out."

"The best course of action would be under section 153C after following the procedure of recording of satisfaction to this effect as provided by the Hon'ble Supreme Court. The assessing officer should have completed the proceedings initiated in terms of the notice issued under section 153A for the year under appeal since it is an unabated assessment year, and thereafter, must follow the procedure as laid down."

"No addition could be made in the assessment completed under section 153A of the Act on the basis of statements of third party recorded during the search in their own case and the incriminating material, if any, found during the course of search of the assessee could only be utilized for making addition."

Core principles established:

- Jurisdiction under section 153A to reassess completed assessments exists only if incriminating material is found during search of the assessee itself.

- Incriminating material found during search of third parties cannot be used to make additions under section 153A against the assessee; instead, section 153C must be invoked following prescribed procedure.

- Simultaneous or integrated searches on different persons do not merge them into a common entity for purposes of assessment under section 153A.

- The procedure under section 153C is mandatory for assessing income of a person based on material found in search of another person.

Final determinations:

The Tribunal allowed the appeals and deleted the additions made under section 153A of the Act for both assessment years 2011-12 and 2012-13, holding that the AO lacked jurisdiction to make such additions based solely on third-party material without following section 153C procedure. The legal grounds challenging the validity of assessment proceedings under section 153A were upheld, and the merits of additions and penalty proceedings were not adjudicated.