Navigating the Complexities of Search and Seizure Assessments: Unraveling the Intricacies of Section 68 Additions

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Deciphering Legal Judgments: A Comprehensive Analysis of Case Law

Reported as:

2024 (5) TMI 1408 - DELHI HIGH COURT

Introduction

This article provides a comprehensive analysis of a significant judgement delivered by the High Court concerning the addition of accommodation entries u/s 68 of the Income Tax Act, 1961 (the "Act"). The case revolves around the assessment proceedings initiated by the Income Tax Department against three respondent-assessee companies, wherein substantial additions were made to their income for the Financial Year (FY) 2010-11 u/s 68 of the Act.

Arguments Presented

Revenue's Contentions

The Revenue contended the following arguments:

The additional grounds raised before the Income Tax Appellate Tribunal (ITAT) for the first time, urging that the assessment made u/s 143(3) ought to have been made u/s 153C of the Act.
The ITAT's finding that no incriminating material was found during the search is invalid, particularly in light of the explicit admission of the Directors of the respondent-assessee companies that accommodation entries were taken.
The Assessing Officer (AO) acted on a bona fide belief that the date of the search should be taken as the date for initiating assessment proceedings u/s 153C of the Act.
The statement of Mr. Jain, the owner of the Jain group of companies, was not provided to the respondent-assessee companies, and no opportunity for cross-examination was given.
Although no notice u/s 153C of the Act was ever sent to the respondent-assessee companies, the assessment order u/s 143(3) read with Section 153C of the Act was a rectifiable mistake u/s 292B of the Act.

Respondent-Assessee Companies' Contentions

The respondent-assessee companies contended the following arguments:

The assessment order u/s 143(3)/153C of the Act was wrongly framed as no incriminating material against the respondent-assessee companies was found during the course of the search.
Since there was a gross violation of the principles of natural justice on the ground of lack of opportunity for cross-examination, the assessment order itself is void.

Discussions and Findings of the Court

Evidentiary Value of Statements Recorded u/s 132(4)

The Court acknowledged that while statements recorded u/s 132(4) of the Act have better evidentiary value, it is a settled position of law that additions cannot be sustained merely on the basis of such statements. There must be some corroborating material to support the content of the statements, as held in the cases of KAILASHBEN MANHARLAL CHOKSHI Versus COMMISSIONER OF INCOME-TAX - 2008 (9) TMI 525 - GUJARAT HIGH COURT and Commissioner of Income Tax Versus Harjeev Aggarwal - 2016 (3) TMI 329 - DELHI HIGH COURT

Requirement of Incriminating Material

The Court emphasized that the Act does not contemplate computing undisclosed income solely based on statements made during a search. While these statements constitute information, they can be used in proceedings under the Act only if they relate to the evidence or material found during the search. However, such statements alone, without any other corroborating material discovered during the search, do not grant the AO the authority to make an assessment, as held in the cases of Principal Commissioner of Income Tax, Central-3 Versus Abhisar Buildwell P. Ltd. - 2023 (4) TMI 1056 - Supreme Court and Commissioner of Income Tax (Central) -III Versus Kabul Chawla - 2015 (9) TMI 80 - DELHI HIGH COURT.

Violation of Principles of Natural Justice

The Court found that in the case of Pavitra Realcon Pvt. Ltd., Design Infracon Pvt. Ltd. And Delicate Realtors Pvt. Ltd. Versus ACIT Central Circle-32, New Delhi - 2017 (12) TMI 44 - ITAT DELHI, there was a violation of the principles of natural justice as neither the statement of the owner of the Jain group of companies was provided to the company, nor was the opportunity for cross-examination given. Relying on the decisions in Andaman Timber Industries Versus Commissioner of Central Excise, Kolkata-II - 2015 (10) TMI 442 - Supreme Court and STATE OF KERALA Versus K.T. Shaduli Yusuff - 1977 (3) TMI 160 - Supreme Court, the Court held that not providing the opportunity for cross-examination amounts to a gross violation of the principles of natural justice, rendering the order null and void.

Applicability of Section 292B

The Court rejected the Revenue's argument that the mistake of not issuing a notice u/s 153C of the Act was curable u/s 292B of the Act. The Court held that Section 292B condones invalidity arising merely from a mistake, defect, or omission in a notice, but it does not cure jurisdictional defects, as held in the case of COMMISSIONER OF INCOME TAX –II Versus M/s MICRON STEELS PVT. LTD AND M/s STEELS PVT. LTD - 2015 (2) TMI 589 - DELHI HIGH COURT.

Analysis and Decision by the Court

The Court found no reason to interfere with the order of the ITAT, which had rightly set aside the assessment order and deleted the additions made therein. The Court observed that the Revenue failed to establish how the material gathered from the search of the Jain group of companies belonged to the respondent-assessee group and was incriminating. The satisfaction note prepared by the AO was also found to be mechanical and devoid of any details about the incriminating material.

Consequently, the Court dismissed the appeals filed by the Revenue, holding that they did not raise any substantial question of law.

Comprehensive Summary of the Judgement

The High Court, in this judgement, upheld the order of the ITAT, which had set aside the assessment order and deleted the additions made u/s 68 of the Act against the respondent-assessee companies. The Court emphasized that additions cannot be sustained solely based on statements recorded u/s 132(4) of the Act without any corroborating material found during the search. The Court also highlighted the requirement of incriminating material relating to the assessee for initiating assessment proceedings u/ss 153A and 153C of the Act.

Furthermore, the Court stressed the importance of adhering to the principles of natural justice, particularly the opportunity for cross-examination, and held that a violation of these principles renders the assessment order null and void. The Court rejected the Revenue's argument that the mistake of not issuing a notice u/s 153C was curable u/s 292B, as jurisdictional defects cannot be cured under this provision.

Ultimately, the Court dismissed the appeals filed by the Revenue, finding no substantial question of law to be addressed, as the Revenue failed to establish the link between the seized material and the respondent-assessee group, and the satisfaction note lacked details about the incriminating material.

Full Text:

2024 (5) TMI 1408 - DELHI HIGH COURT