DCIT CC -7(2) , MUMBAI vs. M/S. DEWAL ENGINEERING PVT. LTD, MUMBAI

Facts in brief are that search action under section 132 of the Act was conducted in the case of Thakkar & Ashar group on 05/07/2017. Thereafter a notice under section 153C of the Act dated 26/09/2019 was issued to the assessee. During the course of search action, it was noticed that assessee company has received unsecure loan amount of Rs.4,30,00,000/- during the year under consideration from the following concerns:- Sr.No. Name of the Company Amount (Rs.) 1. Disha Plastics Ltd 40,00,000 2. Empower Industries Ltd 75,00,000 3. Mahan Industries Ltd 1,00,00,000 4. Sanguine Media Ltd 60,00,000 5. Shree Ganesh Spinners Ltd 1,00,00,000 6. S.S. 55,00,000 Total 4,30,00,000/- One of the directors of the assessee company, Shri Devkumar Amrutlal Thakkar was confronted with this fact and he, in his statement, stated that 2 ITA 466/Mum/2021 3 ITA 2268/Mum/2021 he was not aware about the aforesaid loans taken by the assessee company. After taking into consideration the aforesaid facts, the Assessing Officer concluded that the aforesaid loan transactions of the assessee company were not genuine, therefore, the loan amount of Rs.4,30,00,000/- was treated as unexplained under section 68 of the Act and added to the total income of the assessee.

The assessee filed appeal before the Ld.CIT(A). The Ld.CIT(A) deleted the addition holding that there was nothing on record to hold a view that the impugned addition was made out of any incriminating material found and seized during the course of search. The relevant operative portion of the decision of the Ld.CIT(A) is reproduced below:- “6.2.10.1 find that in the assessment order, the additions have primarily been made on' the basis of statements of Shri Dev Kumar Thakkar, who had stated that he was not aware of any transactions relating to this company. It was also observed in the assessment order that the assessee has taken loans from some of the companies controlled by accommodation entry provider Shri Shirish Shah and Shri Jagdish Purohit, but these observations are also not supported by any evidence found during the course of search. 6.2.11. In the present case at hand, the AO did not have time to issue notice u/s 143(2) of the Act on date of issue of notice u/s 153C which is 26.09.2019. It is apparent from perusal of first proviso to section 153C(1) of the Act that the 'date of handing over of seized material' has to be taken as 'date of initiation of search' for the purpose of determination of the years of abatement of assessment proceedings as provided in Second Proviso to Section 153A. Since, the AO has not mentioned the date of handing over of seized material in the case of the assessee, the same has to be taken as date of issue of notice u/s 153C, which is 26.09.2019 and hence, the assessment for the year under reference was an unabated assessment. Since, the proceedings for A.Y. 2011-12 has not abated and the assessment for the said assessment year already stood completed, the contention of the assessee is that the AO was empowered only to make additions based on the incriminating material found and seized during the course of search operation, it is a material fact on record that the AO had failed to bring on record any incriminating material either during the course of the assessment proceedings or the remand proceedings, despite being provided with several opportunities. In fact, a perusal of the material on record clearly reveals that the contention of the Appellant is true that not even a 3 ITA 466/Mum/2021 4 ITA 2268/Mum/2021 single incriminating material has been identified as found during the course of search which could be held as pertaining to the assessee or which could prove any evidence as to the fact that the unsecured loans were not genuine so as to make additions in the assessment proceedings in pursuance of issue of notice u/s 153C of the Act. In fact, there is no discussion in the assessment order about any specific incriminating material, which have been found during the course of search operation in relation to the impugned unsecured loans raised by the Appellant, neither any such evidence was brought on record during the course of remand proceedings. 6.2.12. In the detailed submissions made before me, the assessee has contended that the Ld. AO has primarily relied upon the statement of Shri Dev Kumar Thakkar recorded u/s. 132(4) of the Act. But, in a reply to show cause notice, it was clarified to the Id. AO that although Shri Thakkar was director of the appellant company, he was not associated with the day-to-day functions of this company. It was also submitted that statement of Shri Thakkar was recorded in the capacity of proprietor of M/S Best Enterprises, which was functioning from the same premises, which is apparent from his statement itself. It was further submitted that Shri Thakkar stated that Shri Kirit Nagda could be aware of the details of the transaction and statement of Shri Kirit recorded during the course of search and it is evident from his statement on oath that there are no findings or any adverse observations nor any comments challenging the genuineness of companies and their transactions. It was accordingly contended that merely because Shri Thakkar was not aware of the transactions of the assessee company, no adverse view could be taken on the basis of the same as to the genuineness of the transactions of the assessee company. It was further submitted that in any case, Shri Thakkar has retracted his statement vide affidavits dated 12.07.2017 and 31.07.2017, which were filed before the Assessing Officer on 11.12.2019. The assessee submitted that vide these affidavits Shri Thakkar has clarified that his statement regarding the assessee company were incorrect. As such, there is nothing incriminating in his said statement to form any adverse view as to genuineness of transaction of the assessee company. 6.2.13. The assessee further submitted that even this statement of Shri Thakkar is very general, non-revealing and vague. The assessee further submitted that in any case the statement of Shri Thakkar is not in respect of any document found during the course of search and, therefore, additions cannot be made on the basis of such statement. In this regard, the assessee placed reliance on the several decisions including in the case of Hon'ble Delhi High Court in the case of CIT vs. Harjeev Aggarwal (Supra), CIT vs. Best Infrastructure (India Pvt. Ltd.) (Supra) and PCIT vs. Saumya Construction (Pvt. Ltd.) (Supra). 6.2.14. The assessee further submitted that the Ld. AO has made the additions solely on the basis of the said statements and even no adverse evidence was brought on record even during the course of assessment proceedings as to the genuineness of the loans despite the fact that the details of all the loan transactions were duly filed during the course of assessment proceedings and the Id. AO has also made enquiries by issuing notices u/s 133(6) and no adverse evidences were found even during the 4 ITA 466/Mum/2021 5 ITA 2268/Mum/2021 course of assessment proceedings despite of enquiries having been done by the Id. AO. It was, therefore, submitted by the assessee that even on merit there was no reason or occasion to make such additions which were made merely on the basis of conjecture and surmises. 6.2.15. I have considered the facts of the case. It is evident from the assessment order that the Ld. AO has not referred to any documents found or seized during the course of search. The additions are primarily based on the basis of statements of Shri Thakkar. On perusal of his statement, as reproduced in the assessment order, it is evident that he has merely stated that he is not aware of the existence of the assessee company at the given address and that Mr. Thakkar would be knowing about the company. As such, he has not categorically said that the assessee company did not exist at the given address. Shri Devkumar Thakkar, in his statement have said that he is not aware of the transactions of the assessee company, which he has retracted subsequently on 12.07.2017 & 31.07.2017, which was filed before learned AO on 11.12.2019. Although there is a considerable time gap in filing of the retraction statement before learned AO, the claim of the assessee is that he was not actively involved with the functioning of the assessee company and, therefore, it was not expected that he will be aware of the transactions of the company and his statement has no evidentiary value.. 6.2.16. On careful perusal of the facts, it is evident that even if retraction of Shri Thakkar is not taken into account, in his statements he has merely said that he is not aware of the transactions of this company and that his name was misused by Shri Kirit Nagda in making him a director of the company. But he did not say it categorically that the impugned transactions per se are not genuine or bogus. The claim of the assessee that his statement is vague and general appears to be justified. Merely because he had stated that he was not aware of the transactions of the assessee company, in my considered view, that itself would not be sufficient to hold that all the transactions of the assessee company are non-genuine without having support of other evidences that too in an assessment u/s 153C which has not abated. 6.2.17. However, irrespective of the merit of the facts, what is required to be adjudicated as to these grounds is whether the Ld. AO had jurisdiction to make addition in an assessment u/s 153C for an assessment year which is not abated merely on the basis of statements recorded during the course of search which are not with reference to any documents or material seized during the course of search. 6.2.18. The fact of the matter is that no evidence was found during the course of search to indicate introduction of unaccounted cash / funds in the form of unsecured loans. Therefore, the contention of the assessee that the conclusion based on the facts relied upon by the Id. AO that the unsecured loans taken by the assessee company, are unexplained, is unsubstantiated and not based on any evidence found during the course of search appears to be justified. In fact, the Id. AO could not even find any evidence to treat the same as bogus during the course of enquiry conducted during assessment proceedings as notices issued u/s 133(6) were duly replied and the impugned transactions were confirmed by the respective parties. - v; 5 ITA 466/Mum/2021 6 ITA 2268/Mum/2021 6.2.19. The Hon'ble Bombay High Court in case of CIT vs. Continental Warehousing Corporation [374 ITR 645], has held that when the assessment has attained finality, then the AO while passing the independent assessment order u/s 153C of the Act can't disturb the assessment / reassessment order which has attained finality, unless the materials gathered in the course of the proceedings u/s 132 of the Act establish that the reliefs granted under the finalized assessment/reassessment were contrary to the facts unearthed during the course of search operation. Further, upon perusal of SLP No. 18560 of 2015 dated 12/10/2015 admitted by Hon'ble Supreme Court against the decision of Hon'ble Bombay High Court rendered in CIT Vs. Continental Warehousing Corporation (supra), it is found that Hon'ble Apex Court has only admitted SLP against the ruling of the Hon'ble Bombay High Court's finding. However, it is seen that the Hon'ble Apex Court has not stayed or suspended the operation of the decision of the Hon'ble Bombay High Court in any manner and, therefore, at the moment, the decision of jurisdictional High Court is binding.

We have duly considered the contentions advance by Mr. Maratha, however, are unable to agree with him. The ITAT, after perusing the relevant records, including the orders passed by the Revenue Authorities, observed as follows:

Respectfully following the precedents as aforesaid, as aforesaid, we quash the assessment made u/s. 153(C)/143(3) of the IT. Act, 1961 and decide the legal issue in favour of the Assessee and accordingly, allow the Cross Objection filed by the assessee.

In our view, a plain reading of Section 158BB(1) of the Act does not contemplate computing of undisclosed income solely on the basis of a statement recorded during the search. The words "evidence found as a result of search" would not take within its sweep statements recorded during search and seizure operations. However, the statements recorded would certainly constitute information and if such information is relatable to the evidence or material found during search, the same could certainly be used in evidence in any proceedings under the Act as expressly mandated by virtue of the explanation to Section 132(4) of the Act. However, such statements on a standalone basis without reference to any other material discovered during search and seizure operations would not empower the AO to make a block assessment merely because any admission was made by the Assessee during search operation.

A plain reading of Section 132 (4) of the Act indicates that the authorized officer is empowered to examine on oath any person who is found in possession or control of any books of accounts, documents, money, bullion, jewellery or any other valuable article or thing. The explanation to Section 132 (4), which was inserted by the Direct Tax Laws (Amendment) Act, 1987 w.e.f. 1st April, 1989, further clarifies that a person may be examined not only in respect of the books of accounts or other documents found as a result of search but also in respect of all matters relevant for the purposes of any investigation connected with any proceeding under the Act. However, as stated earlier, a statement on oath can only be recorded of a person who is found in possession of books of accounts, documents, assets, etc. Plainly, the intention of the Parliament is to permit such examination only where the books of accounts, documents and assets possessed by a person are relevant for the purposes of the investigation being undertaken. Now, if the provisions of Section 132(4) of the Act are read in the context of Section 158BB(1) read with Section 158B(b) of the Act, it is at once clear that a statement recorded under Section 132(4) of the Act can be used in evidence for making a block assessment only if the said statement is made in the context of other evidence or material discovered during the search. A statement of a person, which is not relatable to any incriminating document or material found during search and seizure operation cannot, by itself, trigger a block assessment. The undisclosed income of an Assessee has to be computed on the basis of evidence and material found during search. The statement recorded under Section 132(4) of the Act may also be used for making the assessment, but only to the extent it is relatable to the incriminating evidence/material unearthed or found during search. In other words, there must be a nexus between the statement recorded and the evidence/material found during search in order to for an assessment to be based on the statement recorded.

It is also necessary to mention that the aforesaid interpretation of Section 132(4) of the Act must be read with the explanation to Section 132(4) of the Act which expressly provides that the scope of examination under Section 132(4) of the Act is not limited only to the books of accounts or other assets or material found during the search. However, in the context of Section 158BB(1) 8 ITA 466/Mum/2021 9 ITA 2268/Mum/2021 of the Act which expressly restricts the computation of undisclosed income to the evidence found during search, the statement recorded under Section 132(4) of the Act can form a basis for a block assessment only if such statement relates to any incriminating evidence of undisclosed income unearthed during search and cannot be the sole basis for making a block assessment.

If the Revenue's contention that the block assessment can be framed only on the basis of a statement recorded under Section 132(4) is accepted, it would result in ignoring an important check on the power of the AO and would expose assessees to arbitrary assessments based only on the statements, which we are conscious are sometimes extracted by exerting undue influence or by coercion. Sometimes statements are recorded by officers in circumstances which can most charitably be described as oppressive and in most such cases, are subsequently retracted. Therefore, it is necessary to ensure that such statements, which are retracted subsequently, do not form the sole basis for computing undisclosed income of an assessee. (emphasis supplied) 6.2.24. This position was reiterated by Hon'ble Delhi High Court in the case of Pr. CIT Vs. Best Infrastructure (India) Pvt. Ltd., 397 ITR 182 (Delhi.), in order dated 01.08.2017. The relevant finding of the Hon'ble High Court is reproduced as under: "38. Fifthly, statements recorded under Section 132 (4) of the Act of the Act do not by themselves constitute incriminating material as has been explained by this Court in Commissioner of Income Tax v. Harjeev Aggarwal (supra). Lastly, as already pointed out hereinbefore, the facts in the present case are different from the facts in Smt. Dayawanti Gupta v. CIT (supra) where the admission by the Assessees themselves on critical X_ aspects, of failure to maintain accounts and admission that the seized documents reflected transactions of unaccounted sales and purchases, is non-existent in the present case. In the said case, there was a factual finding to the effect that the Assessees were habitual offenders, indulging in clandestine operations whereas there is nothing in the present case, whatsoever, to suggest that any statement made by Mr. Anu Aggarwal or Mr. Harjeet Singh contained any such admission." 6.2.25. In Commissioner of Income Tax-14, Mumbai v. Rakesh Ramani [2018] 94 taxmann.com 461 (Bombay), it was held that in course of block assessment, wherein the assessee brought on record various documents to establish that jewellery seized from him actually belonged to his employer, impugned addition made in respect thereof merely on ground that assessee in course of statement made under section 132, had admitted that said jewellery belonged to him, could not be sustained. 6.2.26. In this regard, it is pertinent to note that the statements recorded during the course of search would certainly constitute information and if such information is relatable to the evidence or material found during search, the same could certainly be used as evidence in any proceedings under the Act as expressly mandated by virtue of the explanation to Section 132(4) of the Act. However, such statements on 9 ITA 466/Mum/2021 10 ITA 2268/Mum/2021 a standalone basis without reference to any other material discovered during search and seizure operations would not empower the AO to make an assessment u/s 153A/153C for the assessment years which had attained finality and which are un- abetted. 6.2.27. A plain reading of Section 132(4) of the Act indicates that the authorized officer is empowered to examine on oath any person who is found in possession or control of any books of accounts, documents, money, bullion, jewellery or any other valuable article or thing. The explanation to Section 132 (4), which was inserted by the Direct Tax Laws (Amendment) Act, 1987 w.e.f. 1st April, 1989, further clarifies that a person may be examined not only in respect of the books of accounts or other documents found as a result of search but also in respect of all matters relevant for the purposes of any investigation connected with any proceeding under the Act. However, as stated earlier, a statement on oath can only be recorded of a person who is found in possession of books of accounts, documents, assets, etc. Plainly, the intention of the Parliament is to permit such examination only where the books of accounts, documents and assets possessed by a person are relevant for the purposes of the investigation being undertaken. Now, if the provisions of Section 132(4) of the Act are read in the context of Section 158BB(1) read with Section 158B(b) of the Act, it is at once clear that a statement recorded under Section 132(4) of the Act can be used in evidence for making a block assessment only if the said statement is made in the context of other evidence or material discovered during the search. A statement of a person, which is not relatable to any incriminating document or material found during search and seizure operation cannot, by itself, trigger a block assessment. The undisclosed income of an Assessee has to be computed on the basis of evidence and material found during search. The statement recorded under Section 132(4) of the Act may also be used for making the assessment, but only to the extent it is relatable to the incriminating evidence/material unearthed or found during search. In other words, there must be a nexus between the statement recorded and the evidence/material found during search in order to for an assessment to be based on the statement recorded. v - 6.2.28. It is also necessary to mention that the aforesaid interpretation of Section 132(4) of the Act must be read with the explanation to Section 132(4) of the Act which expressly provides that the scope of examination under Section 132(4) of the Act is not limited only to the books of accounts or other assets or material found during the search. However, in the context of Section 158BB(1)of the Act which expressly restricts the computation of undisclosed income to the evidence found during search, the statement recorded under Section 132(4) of the Act can form a basis for a block assessment only if such statement relates to any incriminating evidence of undisclosed income unearthed during search and cannot be the sole basis for making a block assessment. 6.2.29. I have also taken note of the fact that the Search operation was not conducted in the case of the assessee. The assessment in the case of the assessee was made u/s 153C of the Act, claiming to be on the basis of material found during 10 ITA 466/Mum/2021 11 ITA 2268/Mum/2021 the course of search conducted in the case of some other person. As such, even the presumption, as expressly provided in Section 132(4A) of the Act, does not hold good in the case of the assessee as the search was not conducted in the case of the assessee. 6.2.30. In view of the above finding of the Hon'ble High Courts statements of Shri Thakkar recorded under section 132(4) of the Act alone cannot be considered as incriminating material unless any corroborating incriminating material is found during the course of the search which could be said to be belonging to /pertaining to or having any information relating to the assessee. Hence, there is nothing on record to hold a view that the impugned additions were made on the basis of any incriminating material found and seized during the course of search. In the given facts and circumstances of the case, the view taken by the Id.AO on this issue in this case cannot be upheld as the AO did not have jurisdiction to make additions during the impugned assessment without referring to any incriminating material found during the course of search. The addition of Rs. 4.30 crore made on account of unsecured loans received are accordingly directed to be deleted for AY 2011-12. Grounds No. 1, 3 and 4 of the appeal are accordingly ALLOWED.”

During the course of appellate proceedings, the Ld.DR has supported the order of the Assessing Officer.

On the other hand, the Ld.Counsel contended that no incriminating material was found during the course of search operation. He also referred the decision of ITAT, Mumbai Bench in the case of Dy.CIT vs M/s Dadashree Remedies Pvt Ltd in dated 28/09/2022. The Ld.Counsel also supported the order of Ld.CIT(A). 6. Heard both the sides and perused the material on record. It is undisputed fact that during the course of search and seizure action no incriminating material was found and seized on the basis of which impugned addition was made by the Assessing Officer as elaborated in the findings of the Ld.CIT(A) supra. Therefore, following the decision of Hon’ble jurisdictional High Court, Mumbai, in the case of CIT vs Continental Warehousing Corporation 374 ITR 645(Bom) and decision in the case of Murli Agro Products Ltd vs CIT 49 taxmann.com 172 and various other decisions as discussed in the finding of Ld.CIT(A) (supra), we do not find any merit 11 ITA 466/Mum/2021 12 ITA 2268/Mum/2021 in the appeal of the Revenue. Therefore, all the three grounds of appeal