No Incriminating Evidence, No Tax!! : Delhi High Court’s Landmark Ruling Shakes Up Tax Assessments

-Dipakbhai Dama, Chartered Accountant, Jamnagar

Background of Case : –

• Delhi High Court dealt with the case involving M/s Pavitra Realcon Pvt. Ltd., M/s Delicate Realtors Pvt. Ltd., and M/s Design Infracon (P) Ltd., which are part of the BPTP Ltd. group.
• Search & Seizure operation u/s. 132 of IT Act, 1961, was conducted on 07.12.2010, revealing that these companies had received advances against property amounting to INR 325.23 crores from companies associated with the Jain group.

Voluntary Disclosure : –

• During the search, directors of respondent companies voluntarily disclosed an amount as unaccounted income for AY 2011-12
• Respondent companies declared nil income for M/s Pavitra Realcon Pvt. Ltd. and M/s Delicate Realtors Pvt. Ltd., and a total loss of INR 3254 for M/s Design Infracon (P) Ltd.

Assessment Proceedings :-

• Notices u/s. 143(2) were issued to respondent companies, leading to AO passing assessment orders on 28 March 2013.
• AO has made additions u/s. 68 of the Act, relying on the directors’ statements and documents seized during the search.

ITAT’s Ruling:

• The ITAT has deleted an additions made u/s. 68, holding that no incriminating material was found during the search to justify these additions.
• The ITAT emphasized that assessments could not be made based on mere presumption of existence of incriminating material.

Revenue’s Appeal :

• Revenue contended that ITAT erred in its finding regarding lack of incriminating material and argued that the assessment should have been made under Section 153C instead of 143(3)
• The Revenue further argued that the explicit admission of the directors about accommodation entries justified the additions.

High Court’s Key Findings :-

1. Necessity of Corroborative Evidence :

High Court emphasized that statement recorded u/s. 132(4) of the IT Act has significant evidentiary value but cannot be the sole basis for making additions. There must be corroborative evidence to support the statements. This is consistent with the legal precedent set in Kailashben Manharlal Chokshi v. CIT, where it was held that additions cannot be made solely on admissions without supporting material.

      2. Incriminating Material Requirement:

Court underscored that no incriminating material was found during search that could justify additions made u/s. 68. Assessment order was based on the presumption of incriminating material without actual evidence. The ITAT correctly deleted the additions on this basis.

       3. Improper Invocation of Section 153C: –

Court found that invocation of Section 153C was improper due to absence of incriminating material. ITAT had noted that proceedings drawn u/s. 143(3) instead of 153C were invalid due to the lack of incriminating material found for the impugned assessment year. 

        4. Mechanical Preparation of Satisfaction Note :–

High Court has highlighted that satisfaction note prepared by AO was mechanical and lacked details about the incriminating material. This procedural lapse was critical in vitiating the entire assessment proceedings.

        5. Violation of Principles of Natural Justice : –

Significant aspect of the court’s decision was violation of natural justice principles. Respondent companies were not given opportunity to cross-examine statements of the Jain group, which were used as the basis for the additions. Denial of cross-examination constituted  serious procedural flaw, rendering the assessment order invalid. The court cited the Andaman Timber Industries v. CCE case, where it was held that such a violation nullifies the proceedings.

1. Section 292B Limitations:

Revenue’s argument that the procedural error could be cured u/s. 292B of the Act was rejected by the court. The court clarified that Section 292B condones errors arising from mistakes, defects, or omissions but does not cover jurisdictional defects. This was aligned with the decision in CIT v. Micron Steels P. Ltd., where it was held that jurisdictional errors render the proceedings null and void.

1. Supreme Court Precedents: –

Court referenced the Supreme Court’s decision in CIT v. Abhisar Buildwell (P) Ltd., reiterating that in an absence of incriminating material found during search the AO has no jurisdiction to make additions. Said principle was further supported by the decision in CIT v. Kabul Chawla, which stated that additions must relate to material found during the search.

     2. Consistency with Established Law:

High Court’s decision was consistent with established legal principles that emphasize the necessity of corroborative evidence and adherence to procedural fairness. This was evident from the reliance on precedents like Kailashben Manharlal Chokshi v. CIT and CIT v. Harjeev Aggarwal, which both highlight the insufficiency of statements alone for making additions.

      3. ITAT’s Correct Approach :-

Court affirmed that ITAT correctly approached the case by deleting the additions made u/s. 68 due to lack of incriminating material & procedural violations. ITAT’s reliance on Supreme Court decisions further validated its findings.

1. Broader Implications:

Judgment reinforces importance of procedural fairness & substantial evidence in tax assessments. It highlights that tax authorities must ensure assessments are backed by solid evidence & procedural lapses, especially those violating natural justice principles, cannot be overlooked.

Decision serves as a critical reminder for tax practitioners and authorities to adhere to the rule of law in tax proceedings.

This comprehensive analysis provides a clear understanding of the Delhi High Court’s findings and their implications, underscoring the necessity of following legal and procedural standards in tax assessments.

Legal Precedents used by Delhi HC in this case and their analysis

1. Kailashben Manharlal Chokshi v. CIT 2008 SCC OnLine (Guj) 436: (2010) 328 ITR 411 (Guj-HC)

The court held that additions made solely on the basis of a statement recorded under Section 132(4) of the Income Tax Act, without any corroborative material, are not justified.

In this case, the assessee retracted the statement, and the court emphasized that without supporting evidence, the admission alone could not be the basis for additions.

The relevant paragraph states: “Despite the fact that the said statement was later on retracted, no evidence has been led by the Revenue authority. We are, therefore, of the view that merely on the basis of admission the assessee could not have been subjected to such additions unless and until, some corroborative evidence is found in support of such admission.”

2. CIT v. Harjeev Aggarwal 2016 SCC OnLine (Del) 1512: 2016 TaxPub(DT) 1836 (Del-HC)

The court clarified that statements recorded during a search and seizure operation under Section 132(4) cannot be the sole basis for computing undisclosed income unless corroborated by evidence found during the search.

The court held that an assessment or reassessment under the block assessment should be based on evidence found during the search.

The relevant paragraph states: “The statements recorded would certainly constitute information and if such information is relatable to the evidence or material found during search, the same could certainly be used in evidence in any proceedings under the Act as expressly mandated by virtue of the Explanation to section 132 (4) of the Act.”

3. CIT v. Sinhgad Technical Education Society (2018) 11 SCC 490 (SC): 2017 TaxPub(DT) 3941 (SC)

The Supreme Court held that Section 153C can only be invoked when incriminating materials assessment year-wise are recorded in the satisfaction note.

In the absence of such incriminating material, proceedings under Section 153C are invalid.

The court stated: “Section 153C can be invoked only when incriminating materials assessment year-wise are recorded in satisfaction note which is missing here. Therefore, the proceedings drawn under section 143 (3) as against 153C are invalid for want of any incriminating material found for the impugned assessment year.”

4. CIT v. Abhisar Buildwell (P) Ltd. 2023 SCC OnLine 481 (SC): 2023 TaxPub(DT) 2442 (SC)

The Supreme Court clarified that in the absence of incriminating material found during a search under Section 132, the assessing officer has no jurisdiction to make an assessment.

The court reiterated that additions in respect of completed/unabated assessments cannot be made without incriminating material.

The relevant paragraph states: “In case no incriminating material is unearthed during the search, the assessing officer cannot assess or reassess taking into consideration the other material in respect of completed assessments/unabated assessments.”

5. Andaman Timber Industries v. CCE 2015 SCC OnLine SC 1051: (2015) 281 CTR 241 (SC)

Supreme Court held that denying the assessee the opportunity to cross-examine witnesses whose statements formed the basis of an assessment is a serious violation of the principles of natural justice.

Such a denial renders the proceedings invalid and null.

The court stated: “Not allowing the assessee to cross-examine the witnesses by the adjudicating authority though the statements of those witnesses were made the basis of the impugned order is a serious flaw which makes the order nullity inasmuch as it amounted to violation of principles of natural justice because of which the assessee was adversely affected.”

6. CIT v. Kabul Chawla 2015 SCC OnLine (Del) 11555: 2015 TaxPub(DT) 3486 (Del-HC)

The court noted that assessments under Section 153A should be based on evidence found during the search or other post-search material that can be related to the evidence found.

Arbitrary assessments without any relevance or nexus to the seized material are not permitted.

The relevant portion states: “Section 153A does not say that additions should be strictly made on the basis of evidence found in the course of the search, or other post-search material or information available with the assessing officer which can be related to the evidence found. It does not mean that the assessment can be arbitrary or made without any relevance or nexus with the seized material.”

7. CIT v. Micron Steels P. Ltd. 2015 SCC OnLine Del 7321: 2015 TaxPub(DT) 1584 (Del-HC)

The court held that jurisdictional defects in the issuance of notices or orders cannot be cured under Section 292B of the Income Tax Act.

Such defects render the entire proceedings null and void.

The court stated: “The jurisdictional defects cannot be cured under Section 292B of the Act and they render the entire proceedings null and void.”

Implications and Lessons:- 

This judgment reinforces necessity for tax authorities to adhere strictly to procedural fairness and evidentiary standards.

Ruling underscores that assessments must be based on solid, incriminating evidence rather than mere statements, maintaining the integrity of the tax assessment process.

Court’s decision highlights the importance of the correct application of relevant sections and the limitations of Section 292B in curing jurisdictional defects, ensuring taxpayer rights are protected against arbitrary assessments.

This article is not served as professional advice. You may not rely on the opinion expressed in this article to make a business or regulatory compliance-related decision. If you are looking for professional advice, please consult a professional. Any comments and/or suggestions concerning this article may be sent to dipak_fca@yahoo.in for any query feel free to whatsapp at +91 8000777854

(The author is a well known Chartered Accountant practicing at Jamnagar)