ITAT Delhi annuls Section 153A assessment in absence of incriminating material during search

1. Background of the dispute

The Delhi Bench of the Income Tax Appellate Tribunal in the case of Pegasus Integrated Systems Pvt. Ltd. Vs ACIT (ITA No. 1469/DEL/2022) dealt with a challenge to an assessment framed under Section 153A of the Income Tax Act 1961 for Assessment Year 2013-14.

The appeal arose from the order of the CIT(A)-26, New Delhi dated 02.06.2022. The core controversy was whether, for an assessment year where proceedings stood completed on the date of search, additions could be sustained under Section 153A in the absence of any incriminating material unearthed during search and seizure action.

The assessee had originally filed its return of income on 30.09.2013. This return was processed under Section 143(1) through an intimation dated 18.04.2014. No notice under Section 143(2) was issued or served within the statutory time limit, and therefore, the Tribunal held that the assessment had already attained finality (i.e. it was a completed/unabated assessment) when the search took place on 23.07.2015.

A search and seizure operation under Section 132 was conducted on 23.07.2015 and subsequent dates in the group cases of Shri Deepak Agarwal, Shri Mukesh Kumar and others. The group was treated by the Department as being involved in providing accommodation entries. The assessee company was one of the cases covered in this search action.

Pursuant to the search, notices under Section 153A were issued. In response, the assessee filed a return declaring total income of Rs. 16,760/-. During the consequent assessment proceedings, the Assessing Officer focused on certain share capital and loan transactions received by the assessee from TMR Projects Pvt Ltd, another group entity.

2. Additions made in Section 153A assessment

2.1 Focus on share capital and loan from TMR Projects Pvt Ltd

During the Section 153A assessment, the Assessing Officer examined:

  • Share application money of Rs. 2,00,00,000/- received from TMR Projects Pvt Ltd, and
  • An unsecured loan of Rs. 10,00,000/- from the same entity.

The statement of the assessee’s Director, Shri Maninder Singh Sahni, recorded under Section 132(4), was heavily relied upon by the Assessing Officer. According to the assessment order, the Director stated that for the relevant previous year, TMR Projects Pvt Ltd was not engaged in any real business, and that purchase and sale transactions were routed through that company using the services of alleged entry operators Shri Mukesh Kumar and Shri Deepak Agarwal.

On this basis, the Assessing Officer concluded that:

  • The assessee did not satisfactorily discharge the onus under Section 68 with respect to the Rs. 2 crore share capital, and
  • The assessee similarly could not substantiate the genuineness and source of the Rs. 10 lakh loan from TMR Projects Pvt Ltd.

Accordingly:

  • An addition of Rs. 2,10,00,000/- was made under Section 68 (Rs. 2 crore share capital plus Rs. 10 lakh loan), and
  • A further addition of Rs. 2,10,000/- was made under Section 69C as alleged commission expenditure for procuring the accommodation entry, computed at 1% of Rs. 2.10 crore.

The Assessing Officer also disallowed preliminary expenses of Rs. 80,861/-.

2.2 First appellate order

The assessee carried the matter before the CIT(A)-26, New Delhi. The CIT(A) upheld:

  • The addition of Rs. 2,00,00,000/- under Section 68 on account of share capital,
  • The addition of Rs. 10,00,000/- under Section 68 for unsecured loan,
  • The addition of Rs. 2,10,000/- under Section 69C towards alleged commission, and
  • The disallowance of preliminary expenses of Rs. 80,861/-.

Aggrieved, the assessee preferred an appeal before the ITAT Delhi.

3. Grounds raised before the ITAT

The assessee challenged the Section 153A assessment both on jurisdictional and substantive grounds. Key pleas included:

  • The original return for AY 2013-14 was filed on 30.09.2013 and processed under Section 143(1) on 18.04.2014.
  • As no notice under Section 143(2) was issued up to 30.09.2014, the assessment had already stood completed as on the search date 23.07.2015.
  • Therefore, AY 2013-14 was a completed/unabated assessment year on the date of search.
  • In line with the judgment of the Hon’ble Delhi High Court in CIT Vs Kabul Chawla, 380 ITR 573, additions in such unabated years under Section 153A can be made only if they are supported by incriminating material found during the search.
  • No incriminating document or material was found in the course of search relating to the impugned share capital and loan.
  • The only material referred to by the Assessing Officer was the statement of Shri Maninder Singh Sahni under Section 132(4), which, according to the assessee, neither contained an admission of undisclosed income nor pointed to any unrecorded or bogus transaction.