ITAT Ahmedabad Sends Section 153A Additions Back to CIT(A) for Fresh Decision Based on Search Material

1. Overview of the Dispute

The Income Tax Appellate Tribunal, Ahmedabad Bench, considered two connected appeals filed by the Revenue in the case of DCIT Vs Jankhit Chandulal Prajapati for A.Y. 2013-14 and A.Y. 2014-15. Both appeals arose from a common order passed by the CIT(A), Ahmedabad dated 25.05.2023, in assessments framed under Section 153A of the Income Tax Act 1961.

The central controversy was whether the additions made by the Assessing Officer (AO) under Section 68 on account of unsecured loans and advances against Banakhat, as well as related commission and interest disallowance, could be sustained in Section 153A proceedings in the absence of what the CIT(A) termed as “incriminating material” found during search.

The Tribunal concluded that:

  • The CIT(A) erred in deleting the additions purely on the technical ground that no incriminating material was found.
  • The evidence relied upon by the AO, including seized digital data and materials gathered in post-search investigations, fell within the expression “found in the course of search” as interpreted by the Hon’ble Supreme Court in K. Krishnamurthy vs. DCIT, 171 com 413.
  • Since the CIT(A) had not examined the factual merits (particularly the assessee’s claim of repayment of loans/advances), the matter required reconsideration on merits.
  • Accordingly, the issues were remanded back to the CIT(A) for fresh adjudication for both A.Y. 2013-14 and A.Y. 2014-15.

2. Factual Matrix and Search Proceedings

2.1 Search under Section 132 and Initiation of Section 153A

A search and seizure operation under Section 132 was conducted on 08.10.2020 in the “Popular Group” cases. The residential and/or business premises of the assessee, Shri Jankhit Chandulal Prajapati, formed part of this search action.

Consequent to the search:

  • Assessments under Section 153A were initiated for multiple assessment years.
  • Various loose sheets and electronic records were found and seized.
  • The assessee’s accounting data was found to be maintained in Tally software, and this digital Tally data was seized.

2.2 Credits in the Nature of Loans and Banakhat Receipts

On analysis of the seized Tally records, the AO noticed:

  • Substantial credits from eleven Kolkata-based entities.
  • These credits were reflected as:
    • Unsecured loans, and
    • Amounts received under Banakhat (advance on proposed sale).
  • The period covered by these credits spanned from F.Y. 2012-13 to F.Y. 2019-20.
  • The aggregate amount received from these eleven entities totalled Rs. 35,56,77,701/-.

The details of year-wise additions finally made by the AO were as under:

  • A.Y. 2013-14 – Rs. 24,49,94,071/-
  • A.Y. 2014-15 – Rs. 10,00,00,000/-
  • A.Y. 2018-19 – Rs. 1,06,83,630/-
    Total – Rs. 35,56,77,701/-

Besides the principal additions, the AO:

  • Estimated commission at 2% on the alleged accommodation entries, and
  • Disallowed interest expenditure claimed on such loans/advances.

3. Investigation into Kolkata-Based Companies

3.1 Link with Entry Operators and Shell Entities

During the assessment process, the AO examined:

  • Information shared by the Investigation Wing, Kolkata.
  • A database of shell companies made available by the Kolkata Directorate.

From this material, it emerged that:

  • All eleven entities from which the assessee had allegedly received loans/Banakhat advances were registered with RoC, Kolkata.
  • Search and survey actions had been conducted in Kolkata against certain entry operators who controlled or managed these companies.
  • Statements recorded from these entry operators revealed that such companies were used as fronts for:
    • Providing accommodation entries.
    • Facilitating laundering of unaccounted income by way of unsecured loans and share premium.

One such statement was that of Shri Beni Prasad Lahoti, an alleged entry operator, whose explanation of the modus operandi was reproduced by the AO in the assessment order.

3.2 Commission under Section 131 and Field Enquiries

To further corroborate the nature of these entities, the AO:

  • Issued commissions under Section 131 to the Investigation Wing, Calcutta, for making local enquiries.
  • The enquiries reportedly revealed that:
    • The companies were not found functioning at their registered office addresses.
    • Certain directors, whose statements were recorded, expressed lack of knowledge or awareness about the impugned transactions and credits.