No addition u/s 153C based on third party statements without having corroborating evidence

Olive Overseas Private Limited Vs DCIT (ITAT Delhi)

Conclusion: Merely relying on the statement of a third party without any corroborating evidence could not justify income tax additions. In the absence of incriminating material found during a search, AO could not enhance the taxable income in proceedings under section 153A.

Held: Search and seizure operation was conducted on LARA Group of cases under section 132. Notice under section 153A was issued and the assessment proceedings under section 153A were set in motion. Assessee filed return of income under section 153A declaring total income at Rs.35,16,760/- which was the same as ROI dated 30.09.2012 filed under section 139(1) prior to search. AO framed assessment order under section 153A wherein AO alleged that assessee company was involved in providing accommodation entries in consideration of commission income. AO estimated commission income @ 3% on alleged entries provided towards purchase and sales. The commission income was estimated at Rs.1,71,10,259/- towards such alleged entries. AO thus made an addition of Rs.1,35,93,504/- on account of unaccounted commission income over and above the income returned. Resultantly, the income was assessed at Rs.1,71,10,260/- as against the returned income of Rs.35,16,760/-. Assessee contended that additions made in Section 153A proceedings in question were beyond the remit of AO to make such additions solely based on a sketchy statement of accountant under Section 132(4) which statement was, in turn, based on confessional statement of the director Shri Praveen Kumar Jain in the previous search carried out on 01.10.2013 in the case of Shri Praveen Kumar Jain. It was further case of the assessee that the statement of Shri Praveen Kumar Jain given were irrelevant for the assessment years subsequent to the date of search and the averments made therein could not be applied to the subsequent years. It was held that in the absence of incriminating material found in the course of search, the legal foundation for making additions under section 153A in unabated assessment did not exist. Mere statement of a person under section 132(4) in the course of search, by itself, could not be regarded as incriminating material found in the course of search as held in the case of Pavitra Realcon Pvt. Ltd. and Anand Kumar Jain (HUF). The additions made on the basis of confessional statement without other material was thus unsustainable in law.

FULL TEXT OF THE ORDER OF ITAT DELHI

The captioned appeals arise from the respective First Appellate Order which, in turn, emanates from the respective assessment orders tabulated hereunder:

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2. The captioned appeals relates to assessment years 2012-13, 2013-14 & 2014-15 and 2015-16 where the original assessment stood completed or concluded at the time of search and assessment for these years thus stood unabated at the time of search. Facts in all these years are similar. For the sake of convenience, the facts concerning A.Y. 2012-13 is noted hereunder:

3. Briefly stated, the assessee company is stated to be engaged in the business of trading of diamonds and also engaged in providing short term finance and making investments and advancing funds to entities. A search and seizure operation was conducted on LARA Group of cases under section 132 of the Act on 02.06.2017. Pursuant thereto, notice under section 153A of the Act was issued and the assessment proceedings under section 153A of the Act were set in motion. The assessee filed return of income under section 153A of the Act declaring total income at Rs.35,16,760/- which is the same as ROI dated 30.09.2012 filed under section 139(1) of the Act prior to search. The Assessing Officer framed assessment order under section 153A of the Act wherein the AO alleged that assessee company is involved in providing accommodation entries in consideration of commission income. The Assessing Officer estimated commission income @ 3% on alleged entries provided towards purchase and sales. The commission income was estimated at Rs.1,71,10,259/- towards such alleged entries. The AO thus made an addition of Rs.1,35,93,504/- on account of unaccounted commission income over and above the income returned. Resultantly, the income was assessed at Rs.1,71,10,260/- as against the returned income of Rs.35,16,760/-. Similar additions have been made in respect of other assessment years with variations in the quantification of assessed income linked to alleged entries on account of purchases and sales in the respective assessment years.

4. Aggrieved by the aforesaid additions, the assessee preferred appeal before the CIT(A).

5. The CIT(A) however, confirmed the action of the AO and denied any relief whatsoever.

6. Further aggrieved, the assessee preferred appeal before the Tribunal.

7. Shri Arvind Kumar, Advocate, the learned Counsel for the assessee reiterated the facts placed before the lower authorities and submitted that both the Assessing Officer as well as the CIT(A) have misdirected themselves on law and facts and made arbitrary additions opposed to the position of law available in this regard. The learned Counsel submitted that the AO proceeded on the allegation that the assessee company has provided accommodation entries in the form of share application money / investments / loans and advances / purchases / sales. However, there is nothing on record to suggest that any evidence was found in the course of search to the effect that assessee company was engaged in providing accommodation entries as alleged. The impugned additions are merely based on statement of third party Shri Praveen Kumar Jain who was also searched in Oct, 2013.

7.1. In elaboration, the learned Counsel submitted that a search action under section 132 of the Act was initially conducted at the residence of Shri Praveen Kumar Jain, the director of the assessee company on 01.10.2013. In the course of that search, a statement of Shri Praveen Kumar Jain was recorded under section 132(4) of the Act. In such statement, Shri Praveen Kumar Jain made averments towards a modus operandi for providing accommodation entries through the companies where he is a director and charges a one time commission ranging between 1.25% to 2% on total transaction value of the accommodation entries. Shri Praveen Kumar Jain provided a list of 13 companies where he is a director. The assessee company herein namely; ‘Olive Overseas Pvt. Ltd.’ was also a part of list of companies provided by the Shri Praveen Kumar Jain.

7.2 Based on the statement of Shri Praveen Kumar Jain (which was subsequently retracted by him), the AO invoked the provisions of Section 153A of the Act in the case of Shri Praveen Kumar Jain. The provisions of section 153C were also parallely invoked in the case of assessee herein. Thus, the assessment for Assessment Years 2008-09 to 2014-15 were framed in the hands of the assessee company under section 153C of the Act wherein the AO estimated the net profit of the assessee company from bogus transactions in share application and loans and advances by applying commission rate of 2% or thereabout. The estimated profits was thus calculated for each assessment year on ‘protective basis’ in the hands of the assessee company for Assessment Years 2008-09 to 2014-15 while the said income made in the hands of the assessee company was simultaneously assessed on ‘substantive basis’ in the case of Shri Praveen Kumar Jain. The matter was carried to ITAT. The Tribunal passed a common order in the hands of the Shri Praveen Kumar Jain in ITA No.7191/Mum/2018 and ors. concerning Assessment Years 2008-09 up to 2014­15 order dated 19.01.2023 in which the substantive additions made in the hands of Shri Praveen Kumar Jain by the Revenue was confirmed and consequently the appeal of Shri Praveen Kumar Jain was dismissed. The substantive additions in the hands of Shri Praveen Kumar Jain was thus confirmed by the ITAT. Simultaneously, the Tribunal in ITA No.1402/Mum/2023 and others order dated 27.07.2023 concerning Assessment Years 2008-09 up to 2013-14 applied the decision rendered by the Tribunal in the case of Shri Praveen Kumar Jain (wherein the additions made on substantive basis were affirmed) and thus deleted the additions made by the AO on protective basis in the hands of assessee herein (Olive Overseas Pvt. Ltd.). The Co-ordinate Bench of ITAT observed that where the substantive additions stood upheld in the hands of Shri Praveen Kumar Jain, same additions on protective basis becomes unsustainable in the hands of third person i.e assessee herein.

7.3 The learned Counsel submitted that in this factual backdrop, the allegation of accommodation entries stood examined and concluded on the touchtone of section 153A and section 153C of the Act. Thereafter, a search under section 132 of the Act was conducted in the case of the assessee company this time on 02.06.2017. The learned Counsel contended that from the copy of Panchnama prepared during the search, it can be seen that no incriminating material in the form of books of accounts or documents were seized in the case of the assessee. What was seized was only a hard disk containing data in HP Laptop of one Shri Manish Jain, the erstwhile accountant of the assessee company. The statement on oath of Shri Manish Jain was recorded during the course of search, wherein the questions put in statement of Shri Praveen Kumar Jain recorded in the earlier search on him on 01.10.2013 was broadly reiterated to him by the Authorized Officer which was endorsed by the deponent Shri Manish Jain. In this regard, the learned Counsel referred to para 5.3 of the assessment order showing statement of Shri Manish Jain (the accountant of Shri Praveen Kumar Jain) under section 132(4) of the Act. The AO in para 5.3 referred to the relevant extract of the statement recorded under section 132(4) of the Act of Shri Manish Jain which is the sole basis for alleging engagement of assessee in providing accommodation entries. The learned Counsel adverted to the extract of the statement from where it is ostensible that the additions were made towards estimated commission on accommodation entries solely on the basis of outcome of previous search in 2013 in the case of Shri Praveen Kumar Jain. The learned Counsel thus submitted that the sole basis of the action of the AO in the present case is the statement of Shri Manish Jain which, in turn, is based on the search proceedings in 2013 in the case of Shri Praveen Kumar Jain.

7.4 The learned Counsel pointed out that based on such statement and no other material, the AO concluded that assessee has not done any actual business but only provided accommodation entries for which commission has been earned by the assessee herein. For making estimated additions towards purported commission income, the Assessing Officer also observed that Shri Praveen Kumar Jain has also admitted the carrying on the accommodation entries business in his statement in the course of search on 01.10.2013.

7.5 The learned Counsel thus submitted that in sum and substance, the additions made earlier in Section 153C proceedings have been reiterated and repeated in section 153A proceedings in the present case solely based on the statement of Shri Manish Jain and Shri Praveen Kumar Jain. There is no reference to any tangible material of any sort to implicate the assessee per se. No other enquiry with the alleged beneficiary of accommodation entries have been carried out at any stage. No material was found to vindicate the allegation of bogus entries of accommodation nature. The learned Counsel referred to the judgment rendered by the Hon’ble Supreme Court in the case of PCIT vs. Abhisar Builwell P. Ltd. (2023) 149 taxmann.com 399 (SC) to contend that the legal principles laid down in the judgment squarely applies to the facts of the present case. The assessments for A.Ys. 2012-13, 2013-14, 2014-15 & 2015-16 stood concluded at the time of search and therefore, in the absence of any incriminating material, the AO has no jurisdiction to enhance the taxable income in the search assessment carried out under section 153A of the Act.

7.6 The learned Counsel next submitted that without prejudice, mere statement of the accountant of the assessee/Shri Praveen Kumar Jain, cannot be regarded as incriminating material found in the course of search in the absence of any incriminating material to support and vindicate the averment made by the deponent of the statement. For this proposition, the learned Counsel relied upon the judgment rendered by the Hon’ble Delhi High Court in the case of PCIT (Central) vs. Anand Kumar Jain (HUF) and others in ITA No.23/2021 judgment dated 12.02.2021 and PCIT vs. Pavitra Realcon Pvt. Ltd. ITA No. 579/2018 judgment dated 29.05.2024. The learned Counsel pointed out that these judgments delivered by the Jurisdictional High Court has clearly held that existence of incriminating material found during the course of search is a sine qua non for making addition pursuant to search and seizure operation. The additions which is based on statement of the person found in search on standalone basis, without reference to any other material discovered during the search operation, cannot be regarded as incriminating material and thus do not empower the AO to make additions under section 153A of the Act. The learned Counsel thus submitted that the action of the AO and that of CIT(A) is outside the sanction of law and hence cannot be allowed to hold the field.

7.7 On similar lines, the learned Counsel pointed out that notwithstanding the fact that captioned appeals in relation to A.Ys. 2016-17, 2017-18 & 2018-19 stood abated at the time of search, in the absence of any substantive material on record, the additions in these years are also not permissible solely based on some unconfirmed and uncorroborated statement of Shri Manish Jain connected to earlier years. The learned Counsel pointed out that in the abated assessment years also, the statement of Shri Manish Jain is of no consequence as such statement could be relevant only to assessment years prior to 2014-15. Besides being unworthy of reliance, the statement given in relation to period up to Year 2013 cannot be interpolated and applied to subsequent years by indulging in rejection of books and estimation of income. The learned Counsel thus submitted that impugned additions in all the captioned appeals are wholly and justified and unsustainable in law.

8. The learned DR for the Revenue, on the other hand, relied upon the assessment order and first appellate order.

9. We have carefully considered the rival submissions and perused the material referred to and relied upon in the course of hearing.

9.1 It is the case of the assessee that additions made in Section 153A proceedings in question are beyond the remit of the Assessing Officer to make such additions solely based on a sketchy statement of accountant under Section 132(4) of the Act which statement is, in turn, based on confessional statement of the director Shri Praveen Kumar Jain in the previous search carried out on 01.10.2013 in the case of Shri Praveen Kumar Jain. It is further case of the assessee that the statement of Shri Praveen Kumar Jain given on 01.10.2013 are irrelevant for the assessment years subsequent to the date of search and the averments made therein cannot be applied to the subsequent years. The statement can possibly be useful only for the period prior to search. It is also the case of the assessee that the statement so given by Shri Praveen Kumar Jain was retracted by him and in any case, the statement was never confronted to the assessee.

9.2 It is also the case of the assessee that in the identical fact situation, the assessment was already framed under section 153C in the case of the assessee where the additions were made towards commission earned on alleged accommodation entries on protective basis in the hands of the assessee company and parallelly additions were also made on a substantive basis in the case of Shri Praveen Kumar Jain in the A.Y. 2008-09 to 2014-15. The Tribunal affirmed the substantive additions made in the case of Shri Praveen Kumar Jain and set aside the protective assessment in the case of the assessee in the proceedings initiated under section 153C of the Act.

9.3 As pointed out on behalf of the assessee, we observe that admittedly, no demonstrable incriminating material has been found in the course of search in the case of the assessee carried out in June, 2017. The statement of Shri Praveen Kumar Jain given in the previous search in the search case of Shri Praveen Kumar Jain on 01.10.2013 was confronted to the accountant of the assessee in the present search and certain confessions were obtained. The statement of Shri Praveen Kumar Jain was thus adopted for the purposes of additions under section 153A of the Act proceedings in the case of the assessee. The same statement was the basis for assessment under section 153C of the Act previously carried out in the case of the assessee. The issue already stood resolved in favour of the assessee by the ITAT in the earlier proceedings under section 153C of the Act.

9.4 In view of the judgment delivered in the case of Pr. CIT vs. Abhisar Builwell Pvt. Ltd. (supra) and plethora of judgments by the Hon’ble High Courts of different jurisdiction and applied by the Co-ordinate Benches of the Tribunal, it is trite that in the absence of incriminating material found in the course of search, the legal foundation for making additions under section 153A in unabated assessment do not exist. Coupled with this, mere statement of a person under section 132(4) of the Act in the course of search, by itself, cannot be regarded as incriminating material found in the course of search as held in the case of Pavitra Realcon Pvt. Ltd. and Anand Kumar Jain (HUF) (supra). The additions made on the basis of confessional statement without other material is thus unsustainable in law.

9.5 Thus, seen from any angle, additions made under section 153A of the Act for the captioned appeals are not permissible in law.

10. In the result, captioned appeals of the assessee for A.Ys. 2012-13 up to 2015-16 are allowed and the additions made in such appeals are stuck down.

11. All the facts in these appeals are identical to the facts involved in A.Ys. 2012-13 up to 2015-16. The only difference is that the assessment pertaining to A.Ys. 2016-17; 2017-18 and 2018-19 were pending at the time of search in the case of the assessee and therefore, stood abated pursuant to search.

12. The assessee contends that apart from the contentions raised for A.Ys. 2012-13 up to 2015-16 (unabated assessment), the additions in the A.Ys. 2016-17 to 2018-19 are made on the basis of uncorroborated and non-descript statement of Shri Manish Jain and Shri Praveen Kumar Jain. The statement of Shri Praveen Kumar Jain which is the basis of statement obtained from Shri Manish Jain in the present search, could only be possibly relevant to the assessment years which are prior to date of search falling in A.Y. 2014-15. Hence, there can be no justifiable reason on the part of the AO to reject the books of accounts and estimate the income of the assessee for subsequent year i.e. A.Ys. 2016-17 and 2018-19 in question.

13. We find merit in the plea of the assessee that a statement of Shri Manish Jain which is the solitary basis for resorting to estimated additions cannot be applied for period subsequent to the date of search. A person can give statement and divulge information only for the past transactions already carried out and the statement of a person cannot be extrapolated to the subsequent years. Besides, in the wake of the judgment rendered by the Hon’ble Delhi High Court in the case of Pavitra Realcon Pvt. Ltd. and Anand Kumar Jain (HUF)(supra) noted earlier, a bare statement of a person in the course of search without corroboration cannot be regarded as incriminating material per se. When the impugned additions are viewed without the help of the statement, there appears to be no material to justify the rejection of books and estimation of income. The action of the AO is not supported by the independent enquiry in the course of assessment either. Thus, action of the AO giving rise to additions/disallowances is wholly outside the sanction of law.

14. In the result, appeals of the assessee for A.Y. 2016-17; A.Y. 2017-18 and A.Y. 2018-19 deserves to be allowed.

15. Similar allegation of the assessee company operating as entry provider on commission basis was made by the AO in the case of the group company namely Nakshatra Business Pvt. Ltd. also. Other facts are identical. As noted earlier, the search was previously conducted in the case of Shri Praveen Kumar Jain on 01.10.2013 and based on search on him, the assessment was framed in the hands of assessee company under section 153C of the Act for A.Ys. 2008-09 to 2014- 15 Similar additions have again cropped up in the second round of search pursuant in the case of the assessee on 02.06.2017 where proceedings under section 153A of the Act was initiated. In the present cases also, it is the case of the assessee that the sole basis for additions made in the A.Ys. 2015-16 to 2018­19 in question is some self-inculpatory statement of Shri Praveen Kumar Jain and Shri Manish Jain without any corroborative material gathered in the course of search and subsequent thereto. Notwithstanding, in the absence of any cogent evidence, imputation of accommodation entries in relation to transactions executed post search is untenable.

16. For the reasons noted above, in the absence of any incriminating material discovered during the search, coupled with lack of any independent enquiry and cross examination of Shri Praveen Kumar Jain, the additions made based on a bare statement of a person on standalone basis is unsustainable in law. The additions made, thus, are without foundation.

17. The captioned appeals of the assessee are thus allowed.

18. In the combined result, all the captioned appeals of both assessee are allowed.

Order pronounced in the open Court on 08/10/2024.