Court Upholds ITAT Decision: No Additions Without Incriminating Evidence in Search Cases

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Case Name:

Principal Commissioner of Income Tax Vs Ram Avtar Verma

ITA 61/2017, C.M. APPL.2768/2017

Key Takeaways:

1. Additions in search cases must be based on incriminating evidence found during the search.

2. The non-obstante clause in Section 153A doesn't allow unrestricted inquiry beyond undisclosed income.

3. The court affirmed the principle established in Kabul Chawla v. CIT case.

Issue:

Can the Assessing Officer make additions in a search assessment under Section 153A of the Income Tax Act without any incriminating material found during the search?

Facts:

1. Ram Avtar Verma, an individual assessee, was subjected to a search on 20.01.2006.

2. Notice was issued under Section 153A of the Income Tax Act.

3. For AY 2001-02, the AO disallowed ₹43,94,953/- under Section 80HHC, ₹24,000/- standard deduction, and added ₹23,73,378/- as unexplained investment.

4. For AY 2000-01, the AO made additions on standard deductions and recalculated the net profit rate under Section 80HHC.

5. CIT(A) granted relief, stating no incriminating material was recovered during the search.

6. ITAT upheld the CIT(A)'s order, citing the Kabul Chawla v. CIT case.

Arguments:

Revenue's Argument:

- The non-obstante clause in Section 153A and Section 158BD removes restrictions on search assessments being confined to "undisclosed income".

- The AO's inquiry is not limited to evaluating incriminating materials.

Assessee's Argument:

- No incriminating material was found during the search to justify the additions.

- The Kabul Chawla v. CIT case supports the assessee's position.

Key Legal Precedents:

1. Kabul Chawla v. CIT 380 ITR 173: This case established that no addition can be made in the absence of any incriminating material unearthed during the course of search or requisition of documents.

Judgement:

1. The High Court dismissed the Revenue's appeals.

2. The court agreed with the ITAT's decision, stating it doesn't call for interference.

3. The court emphasized that the non-obstante clause in Section 153A was necessary due to the departure from pre-existing provisions, but it doesn't allow unrestricted inquiry beyond undisclosed income.

FAQs:

Q1: What is the significance of "incriminating material" in search cases?

A1: Incriminating material found during a search is crucial for making additions in search assessments under Section 153A. Without such material, additions cannot be justified.

Q2: What is the importance of the Kabul Chawla v. CIT case in this judgment

A2: The Kabul Chawla case established the principle that no additions can be made in search assessments without incriminating material found during the search. This principle was applied in the current case.

Q3: What is the purpose of the non-obstante clause in Section 153A?

A3: The non-obstante clause was necessary to address potential hurdles in unadopted/current assessment years and pending reassessment proceedings at the time of search. However, it doesn't allow unrestricted inquiry beyond undisclosed income.

Q4: Can the Assessing Officer make additions based on pre-existing information in a search assessment?

A4: No, the judgment reinforces that additions in search assessments must be based on incriminating material found during the search, not on pre-existing information.

Q5: How does this judgment impact future search assessments?

A5: This judgment reinforces the principle that Assessing Officers must rely on incriminating evidence found during searches to make additions, limiting their scope of inquiry in search assessments.

1. The Revenue is aggrieved by the common order of the Income Tax Appellate Tribunal (ITAT) for AYs 2000-01 and 2001-02 inasmuch as the order of the CIT(A) was not interfered with to the extent it favoured the assessee.

2. The brief facts are that the assessee, an individual, who reported salary income, besides income from house property etc. was subjected to search of his premises on 20.01.2006. Claiming that incriminating documents were found, notice was issued under Section 153A of the Income Tax Act [hereafter “the Act”] which led to the assessee filing returns for the relevant years. For AY 2001-02, the Assessing Officer (AO) disallowed `43,94,953/- (as deduction under Section 80HHC of the Act) on a recalculation of net profit rate; besides, he also disallowed standard deduction of `24,000/- originally claimed by the assessee, and added over `23,73,378/- as unexplained investment. For AY 2000-01, he made additions on standard deductions and also recalculated the net profit rate under Section 80HHC resulting in additions.

3. CIT(A), after considering the record, was of the opinion that the additions could not be justified, and accordingly granted relief, holding that no incriminating material was recovered during the search. The Revenue’s appeal was rejected. The ITAT held as follows:

“10. As per the paper book ·filed by the ld AR showing the Panchnama from where LD DR could not point out any material found during the course of search which could give even remote possibilities of altering the income of the assessee based on any incriminating documents. Admittedly both the assessment years in these appeals are completed assessments in case of the assessee. The reliance placed upon by the ld AR on the decision of the Hon'ble Delhi High Court in the case of Kabul Chawla Vs.CIT (·Supra) where original assessment have been made u/s 143{1) of the Act is apt and squarely covers issue in favour of the assessee. The Hon'ble High Court in para No. 37 of that decision has held that no addition can be made in the hands of the assessee in absence of any incriminating material unearth during the course of search or requisition of documents. On reading of the order of the AO we could not found that there is any incriminating material referred by the AO which is found during the course of search for making these additions. Therefore respectfully following the decision of the Hon'ble.Delhi High Court in the case of Kabul Chawla Vs. CIT (supra) we confirm the order of the learned Commissioner of Income-tax (Appeals) and dismiss the appeal of the revenue.”

4. The Revenue urges that the non-obstante clause in Section 153A together with Section 158BD removes the barrier vis-a-vis restriction upon search assessments being confined to “undisclosed income”. In other words, it is stated that none of the provisions confine the enquiry of the AO to evaluating incriminating materials. This aspect, in the opinion of the Court, was extensively dealt with in Kabul Chawla v. CIT 380 ITR 173 which has, by now, been followed consistently in several appeals. The non-obstante clause, in the opinion of the Court, was necessary, given that there is a departure from the pre-existing provisions, which applied for the previous years and had a different structure where two sets of assessment orders were made by the AO during block periods. With the unification of assessment years for the block period, i.e. only one assessment order for each year in the block period, it was necessary for an overriding provision of the kind actually adopted in Section 153A. But for such a non-obstante clause, the Revenue could possibly have faced hurdles in regard to unadopted/current assessment years as well as reassessment proceedings pending at the time of the search in respect of which proceedings were to be completed under Sections 153A/153C. Having regard to the above directions, we are of the opinion that the ITAT decision does not call for interference. Both the appeals are accordingly dismissed.

S. RAVINDRA BHAT, J

NAJMI WAZIRI, J

FEBRUARY 07, 2017/ajk