NEELAM PRAMOD MEHTA,MUMBAI vs. ACIT, CENTRAL CIRCLE 8(2), MUMBAI

The brief facts, as emerging from the assessment orders and the orders of the learned CIT(A), are that a search and seizure action under section 132 of the Act was carried out on 04.10.2018 in the case of M/s Shine Shilpi Jewellers Pvt. Ltd. and its group concerns. The residential premises of Shri Pramod S. Mehta, husband of the assessee and a director in the searched group, were also covered under the search. Consequent to the search, proceedings under section 153C were initiated in the case of the assessee. For Assessment Year 2013-14, notice under section 153C was issued on 30.12.2019 and the assessment was thereafter completed under section 153C read with section 143(3) on 26.04.2021. Similar assessments were framed for Assessment Years 2014-15 and 2015-16.

The assessee had originally disclosed the relevant transactions in her regular books of account and returns of income. The assessment orders record that in Assessment Year 2013-14 the assessee had received an unsecured loan of Rs.30,50,000/- from M/s Saffron Gems Pvt. Ltd. The Assessing Officer treated the said loan as unexplained cash credit under section 68. The Assessing Officer also disallowed interest of Rs.2,61,851/- relating to the said loan by invoking section 69C of the Act. For Assessment Year 2014-15, no fresh principal loan was brought to tax; the addition relates to interest of Rs.4,99,500/- claimed by the assessee on the loan received from M/s Saffron Gems Pvt. Ltd. in the earlier year. Likewise, for Assessment Year 2015-16, the addition relates to interest of Rs.5,20,588/- claimed on the said loan.

The case of the Assessing Officer, as reflected from the assessment orders, is essentially that during the search the directors/key persons of the group were unable to furnish satisfactory details regarding the lenders and the agents through whom the loans were allegedly arranged. The Assessing Officer further relied upon spot verification conducted at the addresses of the lender entities and the alleged non-availability of the lender at the registered address. The Assessing Officer thereafter made further enquiries regarding the lender and considered the documents furnished during the assessment proceedings. On this basis, the Assessing Officer concluded that M/s Saffron Gems Pvt. Ltd. was a paper entity and that the loan represented an accommodation entry.

The assessee challenged the assessments before the learned CIT(A), inter alia, on the ground that the assessment years under consideration were unabated/completed assessment years as on the date of search and that no incriminating material relatable to the impugned loan or interest expenditure had been found during the course of search. It was specifically contended that statements of the directors, statements of third parties, spot verification of the lender's premises, a statement recorded from Shri Deepak Jain during a subsequent search, and material collected during post-search or assessment proceedings could not be treated as incriminating material found during the search so as to permit additions in completed assessments.

The learned CIT(A), however, rejected the contention. In substance, the learned CIT(A) held that the statements recorded during the search, the inability of Shri Pramod Mehta and other persons to furnish details of the agents or lenders, and the contemporaneous spot verification showing that the lender was not found at its registered address constituted incriminating material. The learned CIT(A) further held that the subsequent appearance of the lender during remand proceedings and the documents furnished thereafter did not efface the findings obtained during the search. The additions and disallowances were accordingly sustained.

Before us, the learned Authorised Representative (ld.AR) submitted that the assessments for all the three years were unabated as on the date of search and that the entire additions were made without reference to any seized document or other material found during the search which revealed that the loan received by the assessee represented her undisclosed income. It was submitted that the loan transaction was duly recorded in the books of account, was received through banking channels, interest was paid through banking channels after deduction of tax at source, and the loan was subsequently repaid. It was contended that the material relied upon by the Assessing Officer and the learned CIT(A) merely raised doubts regarding the transaction and could, at the highest, justify further enquiry, but could not constitute incriminating material for the purpose of disturbing an unabated assessment.

The Ld.AR further placed reliance upon the decision of the Coordinate Bench of this Tribunal in the case of M/s Sapphire Developers v. ACIT, in ITA Nos.4344 to 4348/Mum/2026 dated 07.09.2026. It was submitted that in that case also the Revenue had relied upon statements recorded during the search, spot verification of the lender and subsequent enquiries to treat unsecured loans as accommodation entries. After examining the entire material, the Coordinate Bench held that the statements and field inquiry contemporaneous with the search did not reveal the impugned loan to be undisclosed income and that material gathered during a subsequent third-party search or during the assessment proceedings could not itself satisfy the requirement of incriminating material laid down by the Hon’ble Supreme Court in PCIT v. Abhisar Buildwell P. Ltd. 454 ITR 212.

The Ld.AR also relied upon the subsequent decision of the Coordinate Bench in the case of Nikita Shilpin Tater v. ACIT, in ITA Nos.4095 to 4100/Mum/2026 dated 09.09.2026. It was submitted that in that case also the Coordinate Bench considered an unsecured loan from M/s Saffron Gems Pvt. Ltd. and held that the material relied upon by the Revenue, including statements, third-party information and post-search enquiries, did not constitute incriminating material so as to justify an addition in an unabated assessment. The Coordinate Bench consequently deleted the principal addition and the consequential interest additions.

The learned Departmental Representative (ld.DR), on the other hand, supported the orders of the lower authorities. It was submitted that the search proceedings had brought out circumstances which cast serious doubt upon the genuineness of the loan transactions. It was contended that the inability of the persons examined during search to furnish the details of the agents through whom the loans were arranged and the result of the spot verification of the lender constituted incriminating material. According to the ld.DR, once such material had been found during the search, the Assessing Officer was entitled to examine the genuineness and creditworthiness of the lender and make the additions under sections 68 and 69C.

We have carefully considered the rival submissions and perused the material available on record. We have also considered the assessment orders, the orders of the learned CIT(A), and the grounds raised by the assessee in all the three appeals. The principal issue which arises for our consideration is whether, in the facts of the present case, the material relied upon by the Assessing Officer and the learned CIT(A) satisfies the requirement of incriminating material found during the course of search so as to permit an addition in respect of an assessment year which had already attained finality and was unabated on the date of search.

At the outset, we find from the orders of the learned CIT(A) that the assessments for the three years under consideration had already been completed and were unabated as on the date of search. In fact, in respect of Assessment Years 2014-15 and 2015-16, the learned CIT(A) has expressly recorded that the assessments were unabated. There is no finding before us that any of the three assessment years was pending before the Assessing Officer on 04.10.2018. Thus, the limitation governing additions in completed or unabated assessments becomes directly relevant.

The Hon’ble Supreme Court in PCIT v. Abhisar Buildwell P. Ltd. has settled the legal position that in respect of completed or unabated assessments, the power to make additions in search assessment proceedings is conditioned upon the existence of incriminating material found during the course of search. The search assessment cannot be converted into a fresh assessment of the completed assessment merely because a search has taken place. The material found during search must therefore have a nexus with the addition sought to be made.

In the present case, the impugned addition for Assessment Year 2013-14 is the unsecured loan of Rs.30,50,000/- received from M/s Saffron Gems Pvt. Ltd. The assessment order does not identify any seized document, loose paper, electronic record, asset, diary, ledger or other material found during the search which records or establishes that the said amount of Rs.30,50,000/- represented the assessee's undisclosed income or that the assessee had introduced her own unaccounted money in the guise of the said loan.

What has principally been relied upon is the statement of Shri Pramod Mehta and statements of other persons regarding the manner in which loans were allegedly arranged through agents, together with the inability of such persons to furnish complete particulars of the agents or lenders at the time of search. The Department also conducted spot verification of the registered address of the lender and found that the lender was not available at that address. These facts may undoubtedly have provided a basis for the Department to undertake further investigation into the transaction. However, the question before us is not whether these circumstances justified an enquiry into the genuineness of the loan. The question is whether they constitute incriminating material found during search which establishes that the particular loan of Rs.30,50,000/- received by the assessee represented undisclosed income.

In our considered view, there is an important distinction between material which raises a suspicion or provides a starting point for further investigation and incriminating material which reveals undisclosed income of the assessee. The fact that a person examined during search could not furnish the name or particulars of an agent through whom loans had allegedly been arranged does not, by itself, establish that the particular loan recorded in the books of the assessee represented her undisclosed income. Similarly, the fact that the lender was not found at its registered address during a spot verification does not, by itself, establish that the specific amount of Rs.30,50,000/- received by the assessee was her own unaccounted money.

We also find considerable significance in the fact that the loan itself was a disclosed entry in the books of account of the assessee. The existence of the loan entry was not discovered for the first time as a consequence of the search. The Revenue's case is that the disclosed entry was not genuine. Therefore, for purposes of disturbing the completed assessment, what was required was material found during the search which demonstrated the falsity of the disclosed entry and connected the particular transaction with undisclosed income. Merely pointing out deficiencies in the explanation furnished by the assessee during the assessment proceedings cannot substitute for such search material.

The distinction assumes further importance because the Assessing Officer proceeded to examine the identity, creditworthiness and genuineness of the lender during the assessment proceedings. The documents such as the lender's financial statements, bank statements, income-tax records and other information were considered in determining whether the requirements of section 68 had been satisfied. These matters may be relevant for deciding the merits of a section 68 addition in an assessment validly open for examination. They cannot, however, retrospectively become incriminating material found during the search.

The same reasoning applies to the statement of Shri Deepak Jain recorded on 10.11.2019 during a separate search proceeding. Such statement was recorded more than a year after the search in the present group on 04.10.2018. It was not material found during the search which resulted in the present proceedings. Further, the material relied upon by the Revenue does not establish that the said statement contained a specific admission that the particular loan received by the assessee from M/s Saffron Gems Pvt. Ltd. represented her undisclosed income. Consequently, such subsequent statement cannot supply the foundational requirement which was required to exist as on the date of the search.

We find that the facts of the present case are materially similar to those considered by the Coordinate Bench in M/s Sapphire Developers. In that case also, the Revenue relied upon statements recorded during the search, field inquiry concerning the lender and material gathered subsequently. The Coordinate Bench examined the nature of each category of material and held that the statements and field inquiry contemporaneous with the search did not reveal the impugned loan to be undisclosed income, whereas the material obtained during a subsequent third-party search or during assessment proceedings could not itself satisfy the requirement of incriminating material. The Coordinate Bench accordingly deleted the additions and consequential interest disallowances.

The reasoning of the Coordinate Bench in M/s Sapphire Developers applies with greater force where, as in the present case, no year-specific seized document relating to the loan of Rs.30,50,000/- has been identified either in the assessment order or in the order of the learned CIT(A). The Revenue has not brought before us any seized material which records that the assessee had introduced her own unaccounted money through M/s Saffron Gems Pvt. Ltd. The conclusion that the lender was not genuine has essentially been reached after considering statements, spot verification and subsequent enquiries.

We also find that the decision in Nikita Shilpin Tater is directly relevant. In that case, the Coordinate Bench considered the very same lender, M/s Saffron Gems Pvt. Ltd., and examined the contention that the statements, third-party information and post-search enquiries constituted incriminating material. The Coordinate Bench held that the disclosed loan entry could not itself be treated as incriminating material unless its falsity was established on the basis of material found during the search. Having found no such material, the Coordinate Bench deleted the principal addition and consequently the interest disallowance. The Coordinate Bench thereafter followed the same reasoning in respect of the interest additions for the subsequent assessment years.

In the present case also, the Revenue has essentially proceeded from the premise that the assessee failed to satisfactorily establish the identity, genuineness and creditworthiness of M/s Saffron Gems Pvt. Ltd. Such failure, even if assumed for the sake of argument, pertains to the merits of the explanation under section 68. It does not by itself satisfy the anterior jurisdictional requirement applicable to an unabated assessment. The jurisdictional requirement and the evidentiary burden under section 68 operate at two different stages and cannot be conflated.

The learned CIT(A) has treated the inability of the persons examined during search to provide details of the lenders or agents, together with the result of spot verification, as incriminating material. With respect, in the light of the subsequent decision of the Coordinate Bench in M/s Sapphire Developers, such circumstances cannot be regarded as sufficient where they do not themselves reveal that the particular loan constituted undisclosed income of the assessee. The contemporaneous enquiry may create a reason to investigate the transaction, but the material must still have the requisite nexus with undisclosed income before it can support an addition in an unabated assessment.

We may also observe that the subsequent appearance of the lender or production of its documents during remand proceedings does not determine the jurisdictional issue either way. Those documents may be relevant while examining the genuineness of the transaction on merits. However, the existence or absence of incriminating material found during the search has to be determined with reference to the material actually found during the search itself. Subsequent evidence cannot retrospectively acquire the character of search material.

We therefore hold that in Assessment Year 2013-14 the addition of Rs.30,50,000/- under section 68 was not based upon any incriminating material found during the search having a direct nexus with the impugned loan and undisclosed income of the assessee. Consequently, the addition could not have been made in the completed/unabated assessment under section 153C.

The disallowance of interest of Rs.2,61,851/- for Assessment Year 2013-14 is consequential to the allegation that the underlying loan of Rs.30,50,000/- was non-genuine. No separate incriminating material relating to the said interest expenditure has been identified as having been found during the search. Once the underlying principal addition cannot be sustained in the unabated assessment in the absence of requisite incriminating material, the consequential interest disallowance under section 69C also cannot survive.

We accordingly allow the grounds raised by the assessee challenging the additions in Assessment Year 2013-14 on the basis of absence of incriminating material and delete the addition of Rs.30,50,000/- under section 68 as well as the consequential addition of Rs.2,61,851/- under section 69C. In view of our decision on the jurisdictional issue, the grounds challenging the addition on merits, including the grounds concerning identity, genuineness and creditworthiness of the lender, source of funds, repayment through banking channels and the alleged violation of principles of natural justice and the additional ground raised based upon the Hon’ble Supreme Court Judgment in the case of CIT v. Jasjit Singh 155 taxmann.com 155, are rendered academic and do not require separate adjudication.

We now turn to Assessment Year 2014-15. In this year, no fresh principal amount has been added. The Assessing Officer has disallowed interest of Rs.4,99,500/- claimed by the assessee on the unsecured loan received from M/s Saffron Gems Pvt. Ltd. The learned CIT(A) has sustained the disallowance on the reasoning that the loan was non- genuine and that the findings during the search, including the statements and spot verification, constituted incriminating material.

The assessment for Assessment Year 2014-15 was completed prior to the search and was unabated as on 04.10.2018. The interest expenditure sought to be disallowed relates to the disclosed loan transaction which had already been reflected in the books of account. No separate seized material relating specifically to the interest expenditure of Rs.4,99,500/- has been identified. The entire basis of the disallowance is the Revenue's conclusion that the underlying loan from M/s Saffron Gems Pvt. Ltd. was not genuine.

Once the foundation of the disallowance is examined in the light of the legal principle governing unabated assessments, the same conclusion necessarily follows. The statements and field inquiry relied upon by the Revenue do not establish that the particular interest expenditure represented undisclosed income of the assessee. Nor has any seized material been brought on record which reveals that the interest entry recorded in the books represented expenditure connected with undisclosed income.

The decision of the Coordinate Bench in M/s Sapphire Developers is directly applicable to this aspect as well. The Coordinate Bench specifically held that where the interest disallowance was based upon the conclusion that the underlying loan was non-genuine and no independent incriminating material relating to the interest expenditure had been found during search, the consequential interest disallowance also could not be sustained in an unabated assessment.

We therefore hold that the disallowance of Rs.4,99,500/- under section 69C in Assessment Year 2014-15 cannot be sustained in the absence of incriminating material found during the search having a direct nexus with the impugned interest expenditure or undisclosed income of the assessee. The said addition is accordingly deleted. The remaining grounds relating to the merits of the loan transaction and the consequential interest expenditure are rendered academic.

In Assessment Year 2015-16 also, the assessment was completed and was unabated on the date of search. The Assessing Officer disallowed interest of Rs.5,20,588/- claimed by the assessee on the unsecured loan received from M/s Saffron Gems Pvt. Ltd. The learned CIT(A) sustained the addition on substantially the same reasoning adopted for the earlier years, namely, that the statements recorded during search, the inability of the key persons to furnish details of the loan arrangement and the contemporaneous spot verification of the lender constituted incriminating material.

On examination of the record, however, we find no year-specific seized material relating to the interest expenditure of Rs.5,20,588/- which reveals that the expenditure represented undisclosed income of the assessee. The addition is entirely consequential to the Revenue's conclusion that the underlying loan was not genuine. The issue is therefore squarely covered by the reasoning already recorded by us while adjudicating Assessment Years 2013-14 and 2014-15.

The decision of the Coordinate Bench in Nikita Shilpin Tater assumes particular relevance for this year. In that case also the issue concerned interest claimed in subsequent assessment years in respect of the unsecured loan from M/s Saffron Gems Pvt. Ltd. After deleting the principal loan addition in the lead year, the Coordinate Bench held that the consequential disallowances of interest in the subsequent assessment years could not independently survive.

Respectfully following the aforesaid decisions of the Coordinate Benches and applying the ratio of the Hon’ble Supreme Court in PCIT v. Abhisar Buildwell P. Ltd. to the facts before us, we hold that the disallowance of Rs.5,20,588/- under section 69C in Assessment Year 2015-16 cannot be sustained in the absence of incriminating material found during the search having a direct nexus with the impugned expenditure or the assessee's undisclosed income. The said addition is accordingly deleted.

Before parting, we consider it appropriate to clarify the precise scope of our finding. We are not examining in these appeals, and consequently are not recording any independent finding, as to whether M/s Saffron Gems Pvt. Ltd. was in fact a genuine lender or whether the assessee had otherwise discharged the burden cast upon her under section 68. Those questions would arise for consideration on merits only if the statutory jurisdictional requirement for making an addition in the completed/unabated assessments were first satisfied. In the present case, that foundational requirement has not been established.

The fact that the Department may have gathered information raising doubts about the lender, or that the Assessing Officer may have considered the assessee's explanation insufficient during the assessment proceedings, cannot by itself enlarge the scope of an assessment in respect of an unabated year. The search provisions do not permit a completed assessment to be reopened for making an addition merely because, after the search, the Assessing Officer is able to gather material which could have been used in a regular assessment.

We accordingly hold that the additions impugned in all the three appeals are outside the permissible scope of the assessments framed under section 153C read with section 143(3), there being no incriminating material found during the search having the requisite nexus with the respective additions. The additions of Rs.30,50,000/- and Rs.2,61,851/- for Assessment Year 2013-14, Rs.4,99,500/- for Assessment Year 2014- 15, and Rs.5,20,588/- for Assessment Year 2015-16 are accordingly deleted.

In the result, ITA No.4309/Mum/2026 for Assessment Year 2013-14, ITA No.4310/Mum/2026 for Assessment Year 2014-15 and ITA No.4311/Mum/2026 for Assessment Year 2015-16 are allowed in the above terms. The grounds challenging the additions on merits are treated as academic in view of our decision on the jurisdictional issue.