ITAT Rules Out Additions to Completed Assessment Years in the Absence of Incriminating Evidence

Introduction

Income Tax Appellate Tribunal Bangalore Bench (‘ITAT’), in the case of Income-tax* *Officer v. Ramachandra Shetty & Sons[i], discussed the provisions of s. 132 of the Income-tax Act, 1961 (‘IT Act’) and the validity of the addition made by the assessing officer (‘AO’) in the absence of incriminating evidence or on the basis of a statement recorded under s. 132(4) of the IT Act.

Facts

• Three appeals[ii] were filed against the orders of the commissioner of income tax (‘CIT’) Panaji, and two cross-appeals[iii] were filed against the different orders of CIT, Panaji. The grounds for three appeals were common, except for the figures.

• The grounds raised in the first two appeals were identical. The CIT deleted the additions made by the AO. The revenue contended that the CIT ignored the estimate slips found during the search, the basis on which the addition was made.

• The revenue filed a revision on the grounds of ITA Appeal No. 1165/Bang/2023 that the addition has been made based on a statement recorded under s.132(4) of the IT Act.

• The revenue filed ITA Appeal No. 1166/Bang/2023 against the order of the CIT, and it was contended that the CIT ignored the materials found during the search. The AO made the addition based on the assessee's statement recorded under s. 132(4) of the IT Act.

• The assessee filed ITA No. 1156/Bang/2023 against the CIT's order. It was contended that the CIT erred in holding that the stock of jewellery found at the assessee's residence has to be considered undisclosed income under s. 69B of the IT Act and must be taxed at 60% under s. 115BBE of the IT Act, while ignoring that the stock was like excess stock and was to be considered business income in the assessee's hands.

Held

• The first two appeals were decided in favour of the assessee. The ITAT held that if the assessee has filed the return of income and the time limit for the issuance of notice under Section 143(2) of the IT Act has passed, the AO cannot make additions in the absence of incriminating evidence. Relying on the decision of the jurisdictional High Court in the case of Principal CIT v. Delhi International Airport Pvt. Ltd[iv] and the Hon’ble Supreme Court's decision in the case of Pr. CIT v. Abhisar Buildwell,[v] the ITAT held that a concluded assessment cannot be disturbed without a valid basis.

• ITA No. 1165/Bang/2023 was also decided in favour of the assessee. The ITAT found that statements recorded after the completion of the search do not hold any evidentiary value unless corroborated with tangible evidence. Consequently, the AO cannot base their findings solely on uncorroborated scribblings and loose sheets.

• ITA Nos. 1156 and 1166 were decided in favour of the assessee, determining that the jewellery, treated like excess stock found at the business premises, should be considered as the assessee's business income. Thus, in the absence of evidence indicating that such income is unrelated to the business, it should not be treated as undisclosed income under Sections 69, 69A, 69B, or 69C of the IT Act.

Our Analysis

This ITAT decision is clarificatory in nature. While discussing the position of law on ss. 143, 132, and 69B, the ITAT has clarified that the concluded assessment cannot be interfered with in the absence of incriminating evidence. Further, the AO cannot base additions on the assessee's uncorroborated statements or insubstantial evidence found during the search.

ITAT has also clarified that if excess stock is found during the search, it should not be treated as undisclosed income under s. 69B of the IT Act and subject to taxation under s. 115BBE of the IT Act. Instead, such excess stock should be treated as business income, thereby attracting a lower tax rate.

End Notes

[i] [2024] 163 taxmann.com 666 (Bangalore - Trib.) dated 10.06.2024.

[ii] ITA Nos. 1163 to 1165/Bang/2023.

[iii] ITA No. 1156/Bang/2023 and ITA No. 1166/Bang/2023.

[iv] ITA No.322/2018.

[v] [2023] 149 taxmann.com 399 (SC).

Authored by Rosy Gupta, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinion.