ITAT Bangalore Deletes Farm Expense Disallowances for Unabated Years Without Incriminating Material

Lotus Chick Foods Private Limited Vs ACIT (ITAT Bangalore)

A Search Paper Repeating What the Books Already Reveal Is Not “Incriminating”-Farm Expenses Cannot Be Disallowed u/s 153C in Unabated Years: Bangalore ITAT

The Bangalore ITAT has held that a document found during search cannot be treated as incriminating material merely because it pertains to the assessee. Where the seized document merely records expenditure already disclosed in the regular books & audited financial statements, it does not reveal any undisclosed income or justify an addition u/s 153C for completed or unabated assessment years.

Following the Supreme Court decisions in PCIT v. Abhisar Buildwell Pvt. Ltd. & DCIT v. U.K. Paints (Overseas) Ltd., the Tribunal deleted the disallowance of farm maintenance expenses for five assessment years.

Facts of the Case

Sri Lotus Chick Foods Pvt. Ltd. had filed its original returns u/s 139 for AYs 2014-15 to 2018-19. All the returns were processed through intimations u/s 143(1).

A search u/s 132 was conducted on 14.02.2020 in the case of M/s Lotus Farms & at the residence of Mr. Damodar Reddy. Certain documents stated to pertain to the assessee were found during the search.

The AO recorded satisfaction on 22.02.2021 that the seized documents pertained to Sri Lotus Chick Foods Pvt. Ltd. & had a bearing on determination of its total income. Notices u/s 153C were issued for the relevant assessment years.

During the assessment proceedings, the AO examined the farm maintenance expenses claimed by the assessee. Since complete supporting bills & invoices were allegedly not furnished, the AO treated the expenses as bogus & made disallowances.

The AO also referred to certain blank cash vouchers found during the search. Employees had stated that the blank vouchers were printed to accommodate cash expenditure incurred by the assessee & such expenditure was booked as farm maintenance expenses.

CIT(A) Treats Documents as Incriminating

Before the CIT(A), the assessee specifically challenged the jurisdiction assumed u/s 153C on the ground that no incriminating material had been found during the search.

The CIT(A) rejected the jurisdictional objection. He observed that documents identified as A/LF/132/LH5/02, Page 193 & A/LH2/132/1, Page 2 had been seized from the searched premises & pertained to the assessee.

According to him, those documents constituted incriminating material. He therefore upheld the disallowance of farm maintenance expenses.

The assessee carried the matter to the Tribunal.

Assessment Years Were Unabated

The Tribunal first examined whether the relevant assessments were pending or completed on the date relevant for proceedings u/s 153C.

Under the first proviso to s.153C(1) r/w the second proviso to s.153A(1), the relevant date in the case of a person other than the searched person is the date on which the seized books, documents or assets are received by the AO having jurisdiction over such other person.

In the present case, the satisfaction u/s 153C was recorded & notices were issued on 22.02.2021.

The original returns for all five years had been filed between September 2014 & October 2018. No notices u/s 143(2) had been issued within the prescribed time. Therefore, the time for initiating regular scrutiny had already expired much before 22.02.2021.

The Tribunal consequently held that AYs 2014-15 to 2018-19 were completed or unabated assessment years.

Meaning of Incriminating Material

The Tribunal observed that the expression “incriminating material” is not defined in the Act.

Judicially understood, it refers to information, evidence or documents that incriminate or militate against the assessee. The material must possess a prima facie potential to disclose income that had not been offered to tax.

It should reveal that the real nature of a transaction was materially different from what had been recorded in the books maintained in the ordinary course of business. Material which merely raises doubt or suspicion does not automatically become incriminating.

Equally, a document does not acquire an incriminating character merely because it bears the assessee’s name or “pertains” to the assessee. Pertinence & incrimination are two different requirements.

Expenses Already Recorded in Audited Books

The seized material contained particulars of farm maintenance expenditure for FYs 2012-13 to 2019-20.

The assessee demonstrated, by producing year-wise details & financial statements, that the corresponding farm maintenance expenses had already been recorded under “other expenses” in its audited accounts for the relevant years.

Thus, the seized documents did not expose any expenditure maintained outside the books, suppressed transaction or undisclosed income. They merely reflected expenses already forming part of the regular accounts.

The assessee had also produced sample bills & confirmations from suppliers during the assessment as well as remand proceedings. The AO rejected the claim primarily because only sample evidence, rather than complete supporting documentation, had been furnished.

The Tribunal observed that such alleged insufficiency of supporting evidence might prompt examination in an ordinary assessment. It could not, however, supply the jurisdictional requirement of incriminating material discovered during search for disturbing completed assessments u/s 153C.

Supreme Court Principle Applied

Relying upon Abhisar Buildwell, the Tribunal reiterated that in respect of completed or unabated assessments, the AO cannot make an addition u/s 153A without incriminating material found during search.

The same principle applies to an assessment u/s 153C involving a person other than the searched person. In U.K. Paints (Overseas) Ltd., the Supreme Court upheld the setting aside of a s.153C assessment where no incriminating material was found either from the assessee or the searched third party.

The Tribunal also followed its decision in the assessee’s sister concern, Crystal Hatcheries Pvt. Ltd., arising from the same search & involving identical farm maintenance expenditure.

ITAT’s Decision

Since the five assessment years were unabated & the seized papers merely reflected expenses already disclosed in the books, the Tribunal held that no incriminating material existed to sustain the additions.

The disallowances of farm maintenance expenses were deleted & all five appeals were allowed.

Author’s Comments

The order correctly distinguishes between a document that “pertains to” an assessee & material that actually incriminates it. The former may trigger examination; the latter alone permits disturbance of an unabated assessment u/s 153C.

Once expenditure already stands disclosed in audited accounts, discovery of another paper recording the same expenditure does not magically convert it into undisclosed income. Nor can absence of every supporting voucher retrospectively provide the missing incriminating character.

In short, search proceedings may uncover a document—but if the books have already told the same story, s.153C cannot rewrite the ending merely because the AO dislikes the supporting vouchers.

Cases Discussed

• PCIT Vs Abhisar Buildwell P. LTD. (Supreme Court of India) — Civil Appeal No. 6580 of 2021.
• DCIT vs. U.K. Paints (Overseas) Limited — Civil Appeal No. 6634 of 2021.
• Crystal Hatcheries Pvt. Ltd. Vs ACIT (ITAT Bangalore) — ITA No. 251 – 257/Bang/2025; AYs 2014-15 to 2020-21.

FULL TEXT OF THE JUDGMENT/ORDER OF ITAT, BANGALORE BENCH

1. This appeal by the assessee is against the common impugned order dated 12.11.2025, passed under section 250 of the Income Tax Act, 1961 (“the Act”) by the learned Principal Commissioner of Income Tax (Appeals) – 11, Bengaluru [“learned PCIT(A)”], which in turn arose from the assessment orders passed under section 153C of the Act, for the assessment years 2014-15 to 2018-19.

2. Since all these appeals pertain to the same assessee involving similar issues arising out of the same factual matrix, these appeals were heard together as a matter of convenience and are being decided by way of this consolidated order. The assessee has raised similar grounds in all the appeals. Therefore, the grounds raised in the appeal for the assessment year 2014-15 are reproduced as follows for ready reference: –

1. The learned Commissioner of Income Tax (Appeals) [“CIT(A)”] erred in rejecting the grounds of appeal and upholding the impugned assessment order. The order is bad in law and liable to be quashed on the following grounds:

a) Lack of Jurisdiction

b) Erroneous assumption of jurisdiction.

c) Failure to comply with the principles of natural justice

2. The Ld. CIT(A) erred in confirming the impugned order without appreciating that the assessment order is erroneous on facts and in law, and that no disallowance was warranted under the provisions of the Act.

3. The Ld. CIT(A) has erred in law and on facts in confirming the impugned assessment order u/s 153C of the Act making additions therein without reference to or reliance upon any incriminating material found and seized during the course of search.

4. The Ld. CIT(A) has erred in law and on facts in confirming the impugned assessment order u/s 153C of the Act passed without reference to or reliance upon any incriminating material found and seized during the course of search which is in violation of the decision laid by Hon’ble Supreme Court in the case of Abhisar Buildwell (P) Ltd.

5. The Ld. CIT(A) has erred in law and on facts in confirming the impugned assessment order u/s 153C of the Act which is bad in law and void ab initio, as the satisfaction note recorded by the learned Assessing Officer suffers from fundamental and incurable defects.

6. The Ld. CIT(A) has erred in passing the impugned order by not considering the fact that the learned assessing officer is not justified in making the disallowance of the farm maintenance expenditure of Rs.21,58,057/-in spite of furnishing of the relevant ledger extract from the audited books of account and in spite of the fact that no evidence was found during the course search proving that the expenditure in question is bogus in nature.

7. The Ld. CIT(A) has erred in passing the impugned order by not considering the fact that the learned assessing officer is not justified in making the disallowance of the farm maintenance expenditure of Rs. 21,58,057/- without considering the detailed explanation / submission furnished by the appellant and without considering the facts and circumstances of the case.

8. The Ld. CIT(A) erred in upholding the disallowance made on the basis of presumption, assumption and surmise, by misinterpreting the provisions of the Act and without any cogent evidence on record.

9. The Ld. CIT(A) erred in law and on facts in ignoring the remand report of the Assessing Officer, wherein after verification of the bills and confirmations the assessee’s claim was stated to be fit for consideration on merits, without recording any adverse finding or assigning reasons for disregarding the same.

10. The Ld. CIT(A) and the learned Assessing Officer failed to appreciate that the farm maintenance expenses were routine, day-to-day in nature, such as labour and cleaning charges involving small and petty amounts, for which maintaining bills is impractical.

11. The Ld. CIT(A) has erred in passing the impugned order as the same is against the principles of Natural Justice as the submissions made by the Appellant on merit have not been considered and there is no rebuttal to the same. The Assessment proceedings as well as the CIT(A) were mechanical and no benefit of the doubt was lent to the Appellant as should have been the case. The evidence relied upon was circumstantial at its best.

3. During the hearing, the learned Authorised Representative (“learned AR”), at the outset, submitted that the addition was made pursuant to proceedings initiated under section 153C of the Act without there being any incriminating material found during the course of search under section 132 of the Act. In support of its contention, the learned AR placed reliance upon the decision of the Hon’ble Supreme Court in PCIT vs. Abhisar Buildwell (P.) Ltd., reported in [2023] 149 taxmann.com 399 (SC).

4. Since this is a jurisdictional issue which goes to the root of the matter, we are considering the same at the outset.

5. The brief facts of the case pertaining to this issue, as emanating from the record, are: For the assessment years under consideration, the assessee filed its original return of income under section 139 of the Act, which was processed vide intimation issued under section 143(1) of the Act. Subsequently, on the basis of the search conducted in the case of M/s Lotus Farms and at the residence of Mr. Damodar Reddy under section 132 of the Act on 14.02.2020, proceedings under section 153C of the Act were initiated and notice under section 153C of the Act was issued to the assessee on 22.02.2021 after recording the satisfaction that the document found and seized during the course of search pertains to the assessee and the same have a bearing on the determination of the total income of the assessee for the assessment years under consideration. In response to the said notice, the assessee filed its return of income. Accordingly, statutory notices under section 143(2) and section 142(1) of the Act were issued and served on the assessee. Vide order passed under section 153C of the Act, for the assessment years under consideration, the Assessing Officer (“AO”) held that the farm maintenance expenses claimed by the assessee are bogus, as the assessee failed to furnish supporting bills/invoices. In this regard, the AO further noted that during the search proceedings in the case of M/s Lotus Farms, certain blank cash vouchers were confronted to the employees, who submitted that the said blank cash vouchers were printed to accommodate cash expenses incurred by the assessee and corresponding expenses were booked as farm maintenance expenses.

6. In its appeal before the learned CIT(A), the assessee specifically raised a ground challenging the assessment under section 153C in the absence of any incriminating material. The learned PCIT(A), vide impugned order, dismissed the said ground raised by the assessee, observing as follows: –

“6.6 The appellant has contented that the AO has erred in passing the order without any incriminating material on record. I have perused the report received from the AO and also rejoinder of the appellant. It is seen from the report that the search was conducted on 13.02.2020 in the case of M/s Lotus Firms at Flat no. 301 and 307, Renuka shakti Apartment, King Koti Road, Basheer Bagh, Hyderabad – 500029 and also at residence of Mr. Damodar Reddy, at Villa No. 229, Indu fortune Fields, phase 13, KPHB, Hyderabad – 500072. During the search, at the premise of M/s Lotus Firms document being referred as A/LF/132/LH5/02 Page No. 193 were found and seized which pertains to M/s Sri Lotus Chick Foods Pvt Ltd. Further, at the residence of Mr. Damodar Reddy at villa No. 229, Indu Fortune Fields, Phase 13, KPHB, Hyderabad – 500072, document being referred as A/LH2/132/1 Page No. 2 were found and seized which was also pertains to M/s Sri Lotus Chick Foods Pvt Ltd. The above referred seized document pertains to M/s Sri Lotus Chick Foods Pvt Ltd which is incriminating material. Hence, the additional ground raised, on lack of incriminating material is dismissed.”

7. Thus, the learned CIT(A) held that the documents found and seized during the course of search under section 132 of the Act on M/s Lotus Farms and Mr. Damodar Reddy are incriminating material and the same pertains to the assessee. Further, the learned CIT(A) also upheld the disallowance of farm maintenance expenses made by the AO. Being aggrieved, the assessee is in appeal before us.

8. We have considered the submissions of both sides and perused the materials available on record. As noted above, pursuant to the search under section 132 of the Act conducted in the case of M/s Lotus Farms and Mr. Damodar Reddy, wherein certain documents pertaining to the assessee were found and seized, proceedings under section 153C of the Act were initiated, and notice under section 153C of the Act was issued on 22.02.2021. On the basis of the material found and seized during the search, the AO disallowed the farm maintenance expenses claimed by the assessee by treating it as bogus. As per the assessee, the expenditure on account of farm maintenance was duly recorded in its audited financial statements for the assessment years under consideration, and thus, the documents found and seized during the course of the search cannot be held to be incriminating material. Therefore, it is the plea of the assessee that since the years under consideration are unabated years, no addition could have been made in the absence of incriminating material found during the course of the search.

9. Before proceeding further, it is relevant to note that as per the second proviso to section 153A(1) of the Act, any assessment or re-assessment pending on the date of initiation of search under section 132 of the Act or making of requisition under section 132A of the Act shall abate. In case of proceedings under section 153C of the Act, such a date is the date on which books of accounts or documents or assets, seized or requisitioned, are received from the AO of the searched person, as per the first proviso to section 153C(1) of the Act.

10. In the present case, it is evident from the record that the satisfaction under section 153C of the Act was recorded by the AO of the searched entity on 22.02.2021 and on the very same date notice under section 153C was issued. Therefore, the cut-off date for the purpose of the first proviso to section 153C(1) read with the second proviso to section 153A(1) of the Act is undoubtedly 22.02.2021. In the assessment years under consideration, the assessee filed its return of income under section 139 of the Act as follows: –

10. As per the Act, the time period prescribed for issuance of notice under section 143(2) of the Act for initiation of scrutiny proceedings is 6 months from the end of the financial year in which the return of income is filed. Therefore, in the facts and circumstances of the present case, it is evident that since no notice under section 143(2) of the Act was issued, the scrutiny proceedings for the years under consideration were already time-barred when the satisfaction note was recorded on 22.02.2021. Thus, we are of the considered view that the assessment years under consideration are unabated years.

11. In light of the above, it now needs to be examined whether any incriminating material was found during the course of the search, which led to the addition made vide assessment orders. We find that the AO of the assessee recorded the following reasons for initiating proceedings under section 153C of the Act: –

“Reasons for initiating action u/s. 153C of Income Tax Act, 1961 in the case of Sri Lotus Chick Foods Private Limited on 22.02.2021

1. Search & seizure action u/s 132 of the Income Tax Act, 1961 was carried out in the case of M/s Lotus Farms on 13.02.2020. The office premise of M/s Lotus Farms and residence of Mr. Damodar Reddy was searched and documents as per Panchanama were seized which pertains to Shri Lotus Chick Foods Pvt. Ltd (PAN: AAFCS1351L).

2. During the course of assessment proceedings u/s. 153A in the case of M/s Lotus Farms, on examining the documents seized from theoffice premise of M/s Lotus Farms and residence of Mr. Damodar Reddy, the undersigned in the capacity of Assessing Officer of Shri Lotus Chick Foods Pvt Ltd, was satisfied in terms of section 153C of the Income-tax Act, 1961 that certain documents as described as below pertains to Shri Lotus Chick Foods Pvt Ltd.

• • A/LF/132/LH5/02 Page no: 193
  • A/LH2/132/1 Page no: 2

3. In the capacity of Assessing Officer of Shri Lotus Chick Foods Pvt Ltd, I have examined the documents seized as mentiond as above and I am satisfied that the said doucments have a bearing on the determination of the total income of Shri Lotus Chick Foods Pvt Ltd for the assessment year 2014-15 to 2020-21.

4. Issue notice as per Section 153C for A.Y 2014-15 to 2020-21.”

12. Further, from the perusal of the seized material, which is placed in the paper book from Pages 4 – 7, we find that the same refers to the farm maintenance expenses incurred by the assessee from the financial years 2012-13 to 2019-20. As per the assessee, the farm maintenance expenses claimed to have been recorded in the material seized during the search have already been recorded and disclosed by the assessee in its audited financial statements for the years under consideration. Accordingly, as per the assessee, the said material is not incriminating. On the other hand, during the hearing, the learned Departmental Representative (“learned DR”) submitted that, since the documents found during the search were not properly explained by the assessee, they are incriminating in nature.

13. We find that the term “incriminating material” is not defined in the Act and the same has been interpreted by the Hon’ble Courts to be the information, documents or material, whether tangible or intangible, which is of such a nature that it incriminates or militates against the person in relation to whom it has been found. Thus, the nature of evidence or information gathered during the course of search should be of such a nature that it should not merely raise a doubt and suspicion but would prima facie prove that the real and true nature of the transaction between the parties is something different from the one recorded in the books/documents maintained in the ordinary course of business. Therefore, incriminating material can be understood to be the material that has prima facie the potential of identifying and disclosing income of the assessee under the Act.

14. We find that in the years under consideration, the assessee duly recorded farm maintenance expenses as part of “other expenses” in its financial statement. Further, in order to substantiate that the farm maintenance expenses, found from the seized material, have already been disclosed by the assessee in the years under consideration, the learned AR furnished the following breakup of expenditure in the financials: –

15. Therefore, having perused the details submitted by the assessee vis-a-vis the financial statements of the assessee for the years under consideration, we are of the considered view that material/documents found and seized during the course of search on M/s Lotus Farms and Mr. Damodar Reddy cannot be held to be incriminating material, as the expenditure on account of farm maintenance was already recorded by the assessee in its books for the year under consideration. We further find that in order to substantiate the genuineness of farm maintenance expenditure, the assessee furnished sample bills and also produced supplier confirmation before the AO, during assessment as well as remand proceedings during the pendency of its appeal before the learned CIT(A). However, the AO rejected the submission of the assessee on the basis that complete details of farm maintenance expenses were not furnished by the assessee and only sample details were filed. It is pertinent to note that despite furnishing details by the assessee, as noted in the impugned order, the AO did not highlight the existence of any incriminating material found during the course of the search to support the addition made in the hands of the assessee and continued to dispute the genuineness of farm maintenance expenditure incurred by the assessee. Thus, in the present case, it is evident that no incriminating material was found during the course of the search under section 132 of the Act on M/s Lotus Farms and Mr. Damodar Reddy.

16. In Abhisar Buildwell (P.) Ltd. (supra), the Hon’ble Supreme Court held that in respect of completed/unabated assessments, no addition can be made by the AO in the absence of any incriminating material found during the course of search under section 132 or requisition under section 132A of the Act. Further, even in cases where the assessment was made under section 153C of the Act, the Hon’ble Supreme Court in DCIT vs. U.K. Paints (Overseas) Limited, reported in (2023) 150 taxmann.com 108 (SC), upheld the findings of the Hon’ble High Court setting aside the assessment order in the absence of any incriminating material found either from the taxpayer or from the third party.

17. We find that in the case of the assessee’s sister concern, also proceedings under section 153C of the Act were initiated on the basis of the similar documents found and seized during the course of the same search under section 132 of the Act on M/s Lotus Farms and Mr. Damodar Reddy and farm maintenance expenditure was disallowed. The Coordinate Bench of the Tribunal in the case of the assessee’s sister concern, in M/s. Crystal Hatcheries Pvt. Ltd. vs. ACIT, in ITA No. 251 – 257/Bang/2025 for the assessment years 2014-15 to 2020-21, vide order dated 05.08.2025, deleted the disallowance made by the AO in respect of farm maintenance expenses on the basis that no incriminating material was seized during the search under section 132 of the Act. The relevant findings of the Coordinate Bench, in the aforesaid decision, are reproduced as follows: –

“11. We have heard the arguments of both sides and perused the material available on record.

12. In all the assessment years, the assessee had filed their return of income u/s. 139(1) of the Act. It was also found that the said returns were processed by the Ld.CPC u/s. 143(1) of the Act. Therefore the assessment has been completed by the CPC based on the returns filed u/s. 139(1) of the Act. In such circumstances, the assessments are unabated/ / completed assessments.

13. Now we will consider the search conducted on 13/02/2020 in the premises of M/s. Lotus Farms and at the residence of Mr. Damodar Reddy, Hyderabad and about the incriminating materials seized which are all connected to the business activities of the assessee. Based on the recovery of the said incriminating materials, the AO had issued a notice u/s. 13C of the Act since the search and seizure was conducted in a third party premises. But the foremost point to be decided is whether the incriminating materials seized by the authorities were used by the AO for the making the assessments u/s. 153C of the Act. From the records, we found that the assessee had claimed the farm maintenance expenses as expenses while filing the original return of income. The Ld.CPC had accepted the said claim and granted the benefit to the assessee. During the search, no undisclosed income was found out by the authorities based on the seizure of the incriminating materials.

14. When there is no incriminating materials seized by the authorities disclosing an undisclosed income, the AO cannot take any proceedings u/s. 153C of the Act. We have also perused the incriminating materials seized at the time of search and in no such materials, the authorities could find that some undisclosed incomes were recorded to invoke section 153C of the Act.

15. The Hon’ble Supreme Court in the case of PCIT vs. Abhisar Buildwell P. Ltd. in Civil Appeal No. 6580 of 2021 dated 24/04/2023 had elaborately dealt with this issue and held as follows:

“AT the cost of repetition, it is observed that the assessment under Section 153A of the Act is linked with the search and requisition under Sections 132 and 132A of the Act. 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 or 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.”

16. Therefor respectfully following the principles laid down by Hon’ble Supreme Court in the above said judgment, we are also deleting the disallowance made by the AO in respect of the farm maintenance expenses since there were no incriminating materials seized by the authorities during the search made u/s. 132 of the Act. In the assessment order made u/s. 153C of the Act, the AO had proposed to disallow the expenses claimed u/s. 37 of the Act since supporting bills / vouchers were not produced while issuing notice u/s. 153C of the Act. We do not think that the AO has jurisdiction to call for such details while issuing notice u/s. 153C of the Act when the assessment has already been completed u/s. 143(1) of the Act. We, therefore, allow the appeals, insofar as the disallowance of farm maintenance expenses are concerned, for all the years.

18. Since the assessment years under consideration are unabated/concluded years, respectfully following the decisions cited supra, we are of the considered view that in the absence of any incriminating material found during the course of the search, the addition made by the AO on account of farm maintenance expenses is unsustainable and thus, the same is deleted.

Accordingly, the grounds raised by the assessee in the appeals before us are allowed.

19. In the result, all appeals by the assessee are allowed.

Order pronounced in the open court on 10-Sept-2026.