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Facts
The assessee appealed against an order confirming an addition of Rs. 3,98,31,520 made under Section 56(2)(vii)(c) of the Income-tax Act. The addition was based on the alleged undervaluation of shares allotted to the assessee during an assessment year that was already concluded. The issue arose from a search that found shares were issued at a face value of ₹10 but valued at ₹90.
Held
The Tribunal held that for an addition to be made pursuant to a search, it must be strictly based on incriminating material found during the search. The Tribunal found no reference to any such material in the assessment order. The Tribunal also noted that a statement recorded under Section 132(4) without corroborating incriminating material cannot be considered incriminating material itself. Therefore, the addition made was not based on any incriminating material.
Key Issues
Whether additions made under Section 153A in a concluded assessment year, without any incriminating material found during search, are valid? Whether a statement recorded under Section 132(4) without corroborating evidence constitutes incriminating material?
Sections Cited
143(3), 153A, 56(2)(vii), 132(4), 139(1), 127, 132, 132(4), 158BB(1), 158B(b), 158BC
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Income Tax Appellate Tribunal, “A” BENCH : BANGALORE
Before: SHRI PRASHANT MAHARISHI & SHRI SOUNDARARAJAN K.
Per Prashant Maharishi, Vice President
This appeal is filed by Kayum Razak Dhanani (the assessee/appellant) for the assessment year 2015-16 against the appellate order passed by the CIT(Appeals)-15, Bangalore [ld. CIT(A)] dated 31.1.2024 wherein the appeal filed by the assessee
against the assessment order passed u/s. 143(3) r.w.s. 153A of the Income-tax Act, 1961 [the Act] dated 29.12.2019 by the DCIT, Central Circle 2(2), Bengaluru [ld. AO] was dismissed confirming the addition of Rs.3,98,31,520 u/s. 56(2)(vii)(c) of the Act.
The assessee is aggrieved and in appeal before us.
The assessee has also raised additional ground of appeal as follows:-
1. The authorities below failed to appreciate that the AY 2013-14 being an unabated assessment year, no additions could have been made in the absence of the incriminating material as per the provisions of section 153A of the Act and consequently the assessment order passed u/s. 143(3) r.w.s. 153A of the Act and the additions made therein are without jurisdiction on the facts and circumstances of the case.
2. The notice issued under section 153A of the Act is bad in law in as much as it does not contain whether the ld. Assessing Officer proposes to assess or reassess the income of the appellant and consequently the notice issued under section 153A of the Act is invalid and the entire assessment proceedings is bad in law and void ab initio on the facts and circumstances of the case.
The learned authorised representative in prayer for admission of the additional ground submits that the authorities below failed to appreciate that the impugned assessment year 2015-16 is being an unabated assessment year and no addition could have been made in the absence of the incriminating material as per the provisions of section 153A of the act and consequently the assessment order passed under section 143 (3) of the act read
with section 153A of the act and addition made therein are without jurisdiction on the facts and circumstances of the case. It was further submitted that that the impugned ground of appeal is jurisdictional, goes to the root of the matter and no fresh facts are required to be investigated and therefore should be admitted.
The learned departmental representative vehemently objected to the admission of the additional ground and submitted that the assessee has not raised this ground of appeal before the learned lower authorities and therefore the assessee is not now entitled to raise the same.
We have carefully considered the rival contention and find that the impugned ground of appeal raised by the assessee as additional ground is a jurisdictional ground which can be raised at any time during the course of the appellate proceedings if the facts are available on record and further no fresh facts are required to be investigated. It is also a fact that this is a legal ground and therefore we admit the same.
7. Thus as the additional ground goes to the root of the matter that whether the addition has been made in the hands of the assessee based on any incriminating material found during the course of search or not is a question. The basic facts recorded shows that search under section 132 of the income tax act was conducted in the case of the assessee at flat No. 502, Bengaluru on 10 January 2018 in connection with the search proceedings in the group case of M RG of hospitality group. The assessee is an individual and filed his return of income under section 139 (1) for assessment year 2015 – 16 on 25th of August 2015 at a total income of ₹ 27,343,010/–. The assessee derives income from business and income from other sources. Pursuant to the search the notification under section 127 of the act was passed on 15/5/2018 centralising the case of the assessee. The notice under section 153A of the act was issued on 5/2/2019 in response to which the assessee filed his return of income on 10 August 2019 at a total income of ₹ 27,333,410/–. Subsequently notice under section 143 (2) of the act was issued on 16 August 2019.
The issue in the appeal shows that during the course of search proceedings it was found that allotment and transfer of shares with related parties took place at below par price of M/s barbecue Nation hospitality Ltd. The shares were issued at the price of ₹ 10 per share however as on the date of issue it was valued at approximately ₹ 90/– as the net asset value of each of the shares and therefore the provisions of section 56 (2) (vii) of the act is applicable.
During the course of search sworn statement was recorded of Mr Kaushal Kumar Verma under section 132 (4) of the act and further the statement of the assessee under section 132 (4) of the act was also recorded on 11/1/2018 wherein in answer to question No. 18 he has stated that net asset value of each share on the date of the transfer was ₹ 90 and he agrees that the income has not been disclosed on the said being the difference between the fair market value and consideration paid. He also agreed that on allotment of 22,52,124 shares the income from other sources in the hands of the assessee and his family
members arrive at ₹ 180,169,920 and he agreed to pay tax on this.
Accordingly the learned assessing officer noted that there is an under valuation of shares to the extent of ₹ 180,169,920/– on account of under valuation of shares of barbecue nations private limited in the hands of the assessee, and show cause notice was issued on 12/11/2019. On the basis of the submission filed by the assessee on 27/11/2019 it was found that in the board meeting held on 12/8/2014 the company has allotted 22,52,124 equity shares of ₹ 10 each to the several persons wherein the assessee has been allotted a share of ₹ 4,978,940/– being 4,97,894 shares whose net asset value is ₹ 90 but is allotted to the assessee at ₹ 10 per share and therefore the difference is chargeable to tax on assessee at ₹ 39,831,520/– . Accordingly the above sum was added to the total income of the assessee by assessment order dated 29/12/2019 passed under section 143 (3) read with section 153A of the income tax act 1961 determining the total income of the assessee at ₹ 67,174,529/–.
The assessee aggrieved with the same preferred an appeal before the learned CIT – A who passed an appellate order on 31/1/2024 wherein it has been held that there is a change in the capital structure of the company and there has been a fresh infusion of funds into that company. There is an intention to evade tax which is discernible from the fact that when the shares have been issued on conversion of warrants to the assessee on 12/8/2014 at the face value of ₹ 10 each in the same shares of the company have been issued at a price of ₹ 334.54 on 12/4/2013 to the another
company and for ₹ 620 on 12/05/2016 to the assessee himself. Accordingly appeal of the assessee was dismissed.
The learned authorised representative submitted that the addition in this case has been made on the basis of the information found in the draft red herring prospectus which is a public document and further on the basis of the minutes of the meeting of the issuer company. He submits that search took place on 10 January 2018, as on that date the assessment year 2015 – 16 was concluded assessment year and not open. Such assessment year could have been disturbed only on the basis of incriminating material found during the course of search. For this proposition he relied upon the decision of the honourable Supreme Court in case of tangible Commissioner of income tax versus Abhisar Buildwell private limited (2023) 454 ITR 212 (SC). He further stated that though the assessee has disclosed the above amount in his statement under section 132 (4) of the act but such disclosure is not an incriminating material. For this proposition he relied upon the several other judicial precedents.
The learned departmental representative vehemently submitted that according to the paragraph No. 7.1 of the assessment order the assessing officer has categorically stated that during the course of search proceedings it was found that allotment and transfer of shares with related parties have taken place at the face value whereas the market value of the share is quite high. He submitted that the contention of the assessee is not valid.
We have carefully considered the rival contention and perused the orders of the learned lower authorities. In this case the fact shows that assessee has been allotted 4,97,895 shares at the face value of ₹ 10 each amounting to ₹ 497,800,940/–. As on the date of issue of the shares ₹ 90/– was the net asset value of each share of barbecue Nation hospitality Ltd. Therefore, the addition of ₹ 39,831,520 was made in the hands of the assessee by invoking the provisions of section 56 (2) (vii) of the act. This addition has been made based on the details found in the red herring prospectus as well as in the minutes of the issuing company where the assessee is also a promoter. The red herring prospectus as well as the minutes of the board meeting of the company who issued the shares could not be said to be an incriminating material. For the first reason that both are the public documents, and the red herring prospectus is issued to the public at large in terms of the provisions of securities and exchange board of India act.
Therefore if there is any addition which is required to be made in pursuance of search, it has to be strictly based on incriminating material found during the course of search. This is the mandate of the decision of the Hon'ble Supreme Court in the case of The Principal Commissioner of Income-tax, Central-3 vs. Abhisar Build well (P.) Ltd. [2023] 149 taxmann.com 399 (SC)/ [2023] 293 Taxman 141 (SC)/[2023] 454 ITR 212 (SC)[24-04- 2023] [TS-202-SC-2023] . On examination of the assessment order, we do not find any reference to any incriminating material found during the course of search.
The second issue that arises is that the director assessee has disclosed the above sum in his statement under section 132 (4) of the act.
It is the claim of the ld. CIT DR that statement made by the assessee u/s. 132(4) of the Act is incriminating material. The statement of the assessee is reproduced at page 5 of the assessment order. Q.No. 18 it did not relate to reference to any material found during search. In any case, statement u/s. 132(4) of the Act is without any incriminating material. The statement u/s. 132(4) also cannot be said to be incriminating material. This is also because of the reason that no person can incriminate himself by making a statement against himself. Honourable Delhi High court in case of PCIT V Best Infrastructure Private limited [ 397 ITR 82 ] (Delhi) PCIT vs Best Infrastructure (India) (P) Ltd [TS-5668-HC-2017(Delhi)-O] where the question was.
"Whether having regard to the materials seized in the course of search under section 132 and the statements made on behalf of the assessee, additions made by the Assessing Officer under section 153A, were not justified as held by the Income-tax Appellate Tribunal?"
The Honourable High court held that: -
"38. Fifthly, statements recorded under section 132(4) of the Act do not by themselves constitute incriminating material as has been explained by this court in CIT 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 assesses themselves on critical 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 assesses 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.
In CIT v. Anand Kumar Jain (HUF), (2021) 432 ITR 384: 2021 SCC Online Del 5706: (2021) 320 CTR 656 Honourable Delhi High court has held as under: -
"9. In CIT v. Harjeev Aggarwal [2016] 6 ITR-OL 504 (Delhi) ; [2016] 290 CTR 263 ; [2016] SCC OnLine 1512** this court had held as follows (page 515 of 6 ITR-OL):
"In view of the settled legal position, the first and foremost issue to be addressed is whether a statement recorded under section 132(4) of the Act would by itself be sufficient to assess the income, as disclosed by the assessee in its statement, under the provisions of Chapter XIV-B of the Act.
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 Assessing Officer to make a block assessment merely because any admission was made by the assessee during search operation.
.. . However, as stated earlier, a statement on oath can only be recorded of a person who is found in possession of books of account, documents, assets, etc. Plainly, the intention of Parliament is to permit such examination only where the books of account, 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 for an assessment to be based on the statement recorded.
In CIT v. Shri Ramdas Motor Transport [1999] 238 ITR 177 (AP), a Division Bench of the Andhra Pradesh High Court, reading the provision of section 132(4) of the Act in the context of discovering undisclosed income, explained that in cases where no unaccounted documents or incriminating material is found, the powers under section 132(4) of the Act cannot be invoked.. ..
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 account 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.
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 Assessing Officer and would expose the 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.
In CIT v. Naresh Kumar Agarwal [2014] 369 ITR 171 (T&AP), a Division Bench of the Telangana and Andhra Pradesh High Court held that a statement recorded under section 132(4) of the Act which is retracted cannot constitute a basis for an order under section 158BC of the Act.. . ."
This case was challenged in the Supreme Court and SLP No. 13345 of 2018 was admitted. But subsequently, it was dismissed as withdrawn. Thus, the decision in Best Infrastructure(supra) has not been disturbed.
This case was subsequently referred to a larger Bench in the case of CIT v. M.S. Aggarwal(2018) 406 ITR 609 (Delhi) ; (ITA 169/2005), where subsequently the question was not answered as the referral court dismissed the same on account of low tax effect on August 9, 2019. Thus, the decision in Harjeev Aggarwal (supra) continues to be the prevailing legal position.
Thus, the Decision of Best Infrastructure PCIT vs Best Infrastructure (India) (P) Ltd [TS-5668-HC-2017(Delhi)-O] holding that merely a statement u/s 132 (4) without incriminating material cannot be called incriminating material.
In view of the above facts, we hold that in the concluded assessment for assessment year 2015 – 16 the addition made by the learned assessing officer of ₹ 39,831,522/– is not based on any incriminating material and therefore the additional ground filed by the assessee succeeds in appeal of the assessee is allowed.
Pronounced in the open court on this 24th day of November, 2025.