ITAT Chandigarh Quashes Valuation-Based Search Additions Devoid of Incriminating Evidence: An In-Depth Analysis of the Khanna Infrabuild Case
The jurisprudence surrounding search and seizure assessments under the Income Tax Act 1961 has witnessed significant crystallization, particularly concerning the evidentiary prerequisites for making additions to an assessee's income. A fundamental principle that has emerged is that in the absence of corroborative incriminating material discovered during a search, additions cannot be sustained merely on estimations or third-party valuations.
This principle was robustly reaffirmed by the Income Tax Appellate Tribunal (ITAT), Chandigarh, in the landmark consolidated appeals spearheaded by the case of Khanna Infrabuild Pvt. Ltd. Vs DCIT. Pronounced on 12 October 2023, the ruling dismantled massive additions amounting to Rs. 10,52,97,615 made by the Revenue. The Tribunal held that a Departmental Valuation Officer (DVO) report, being an estimate, cannot unilaterally justify undisclosed investment additions in an unabated assessment unless backed by concrete incriminating evidence seized during the search.
Factual Matrix of the Dispute
The controversy stems from a search and seizure operation executed under Section 132 of the Income Tax Act 1961 at the hotel premises of the assessee, Khanna Infrabuild Pvt. Ltd., on 21 February 2019.
The assessee, a company incorporated on 21 November 2012, was engaged in the business of establishing and running a hotel. During the assessment proceedings, the Assessing Officer (AO) scrutinized the company's balance sheets and observed that the total expenditure declared for the construction of the hotel building across multiple financial years stood at Rs. 6,14,92,469. Suspecting that the actual cost of construction was significantly higher than the recorded figures, the AO referred the matter to the Departmental Valuation Officer (DVO) to ascertain the true investment made in the property.
The DVO's Estimation and the AO's Computation
The DVO submitted a valuation report estimating the total cost of construction at a substantially higher figure of Rs. 20,21,69,800.
Simultaneously, the AO relied on a separate search action conducted earlier on 29.11.2018 at the premises of a third party, M/s Royal Builders. During that distinct operation, the search team impounded a document (Document No. 58) containing project-wise details dated 12.02.2016. According to the AO, this document indicated that the assessee had remitted payments totaling Rs. 6,76,00,000 (comprising Rs. 5,81,00,000 in cash and Rs. 1,15,00,000 via cheque) to M/s Royal Builders for hotel construction up to that date.
Relying on the DVO's inflated estimate, the AO proceeded to calculate the alleged unexplained investment. The AO did grant certain rebates:
- A 10% deduction for self-supervision of the construction.
- A 7.5% deduction representing discounts on the self-procurement of construction materials.
After applying this aggregate 17.5% rebate, the AO quantified the net unexplained investment at Rs. 10,52,97,615, spread across different financial years (including Assessment Year 2013-14 and subsequent years).