ITAT Rules Unsigned Draft Agreement Cannot Justify ALV Enhancement in Section 153A Proceedings

The Income Tax Appellate Tribunal, Chandigarh Bench, in the matter of Raman Goyal Vs DCIT, delivered a crucial ruling reinforcing the narrow scope of additions permissible under Section 153A of the Income Tax Act in search-related proceedings. The Tribunal unequivocally declared that an unsigned draft agreement discovered during search operations amounts to nothing more than "waste paper" and fails to qualify as incriminating material. Consequently, any attempt to enhance the Annual Letting Value (ALV) of property based solely on such unsigned documentation is legally unsustainable.

Background Facts of the Case

The assessee owned a residential property situated in Delhi with a 50% undivided share in the said property. Throughout the relevant assessment years—2015-16, 2018-19, and 2019-20—the property was actually leased out, generating annual rental income of Rs.1,80,000/-. Being a co-owner with 50% ownership rights, the assessee consistently disclosed her proportionate rental income of Rs.90,000/- per annum in her regular income tax returns filed for each of these years.

Search operations under Section 132(1) were subsequently conducted on 13.12.2020 at multiple premises connected with M/s Nectar Lifesciences Limited and M/s Avensis Exports Pvt. Ltd., being associate entities. Since the assessee was identified as a connected person to these business establishments, the search operation extended to her as well. Following the search, notices under Section 153A were issued on 13.08.2021, requiring the assessee to file returns for the relevant assessment years.

Assessing Officer's Approach and Enhancement

During the course of search proceedings, the Assessing Officer discovered an unsigned draft agreement purportedly relating to the Delhi property. Based solely on this unsigned document, the AO formed the opinion that the fair Annual Letting Value of the entire property under Section 23(1) of the Income Tax Act should be determined at Rs.3,00,000/- instead of the actual rent of Rs.1,80,000/- received and disclosed by the assessee.

Applying this enhanced valuation, the AO computed the assessee's 50% share at Rs.1,50,000/-. Since the assessee had already declared Rs.90,000/- as her rental income, the AO proceeded to add the differential amount after granting standard deduction applicable to income from house property. This computational approach resulted in an addition of Rs.42,000/- being made in each of the three assessment years under consideration.

The assessee challenged these additions before the Commissioner of Income Tax (Appeals), but the appellate authority confirmed the Assessing Officer's view through orders dated 08.11.2024 for all three years. Aggrieved by this confirmation, the assessee preferred appeals before the Income Tax Appellate Tribunal, Chandigarh Bench.

Identical Issue Decided in Earlier Years

The Tribunal noted that an identical controversy involving the same assessee had already been adjudicated for assessment years 2016-17 and 2017-18. In that earlier round of litigation, the Tribunal had examined the same factual matrix wherein additions of Rs.42,000/- each year were made on account of alleged understatement of rental value for the Delhi property.

For assessment year 2016-17, no scrutiny notice under Section 143(2) had been issued within the prescribed time limit, meaning the original assessment had attained finality well before the search date. Similarly, for assessment year 2017-18, though a scrutiny assessment had been completed under Section 143(3) on 04.12.2019, it had attained finality prior to the search conducted on 13.12.2020.

In both those years, the Tribunal held that since the assessments had already concluded before search operations, any additions could only be sustained if based on incriminating material discovered during the search. The Tribunal found that the unsigned agreements allegedly showing higher rental potential did not constitute incriminating material, and consequently deleted the additions.

Tribunal's Analysis: Meaning of Incriminating Material

The Tribunal emphasized the fundamental legal principle governing additions in search cases where assessments have attained finality prior to the search date. Relying on the landmark judgment of the Hon'ble Supreme Court in Abhisar Buildwell Pvt. Ltd. 454 ITR 212, the Bench reiterated that in such circumstances, additions are permissible exclusively on the foundation of incriminating material unearthed during search operations.