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Facts
A search under section 132 was conducted at the assessee firm's premises. During the search, a draft profit and loss account was found which differed from the final one, showing higher receipts. The partner admitted to suppressing receipts. The AO estimated suppressed profit and made an addition. The CIT(A) upheld the addition.
Held
The Tribunal held that in unabated assessment years, additions can only be made based on incriminating material unearthed during the search, not on confessions or extrapolations. Since no incriminating material was found for the year under consideration, and the only evidence was a retracted statement, the addition was deleted.
Key Issues
Whether additions can be made in an unabated assessment year based on a retracted statement and extrapolation without incriminating material found during a search.
Sections Cited
132, 153C
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Income Tax Appellate Tribunal, ‘A’ BENCH, BANGALORE
Before: SHRI WASEEM AHMED & SHRI KESHAV DUBEY
PER WASEEM AHMED, ACCOUNTANT MEMBER:
All these appeals are filed by the assessee against the order passed by the ld. CIT(A)-15, Bangalore vide order dated 18/02/2025 for the assessment years 2013-14 to 2016-17.
The 1st issue raised by the assessee is that the ld. CIT-A erred in 2. confirming the addition made by the AO despite the fact that there was no document of incriminating nature found during the search proceedings under section 132 of the Act.
- 1054/Bang/2025 Page 2 of 8 2.1 The assessee is a partnership firm. A search under section 132 of the Act was carried out on 29.11.2017 at its premises. During the search, a draft profit and loss account for the year ending 31.03.2017 was found. The figures in the draft profit and loss account were different from the final profit and loss account. In the draft profit and loss account, higher receipts and profits were shown. On being asked, Dr. K.C. Raju, a partner of the firm, admitted that there was suppression of receipts and profits. He stated that such suppression was around 40% of gross receipts. He also admitted that this practice was followed in earlier years too.
Based on the above, the Assessing Officer held that similar suppression must have happened in the year under consideration. Accordingly, he estimated suppressed profit at ₹48 lakhs, being 40% of gross receipts of ₹1.20 crores. Hence, the addition of ₹48 lakhs was made by the AO to the total income of the assessee.
Aggrieved assessee preferred an appeal to the learned CIT-A. Among various grounds of appeal, the assessee challenged that no addition can be made in the hands of the assessee for the year under consideration in the absence of any incriminating document found during the search operation. However, the learned CIT-A confirmed the order of the AO by observing as under:
“5.2.1 The questions to be answered in order to decide these grounds of appeal are as follows:
1. Whether, based on the facts of this case, there was any incriminating material on which this assessment was made.
ITA Nos.1051 - 1054/Bang/2025
Whether the statement recorded during the course of the search can be considered as incriminating material under the facts and circumstances of the case. 5.2.2 As far as the incriminating material is concerned, there was a search and seizure operation in the case of the appellant. During the search, two sets of Tally data were unearthed. One set showed the net income as per-the return of income i e , w i e the other showed a hig er figure of net profit due to higher total receipts. When confronted, the accountant of the appellant, in his statement, confessed that for the financial year 2016-17, he had prepared the accounts with gross receipts of Rs 2.41 crores and that Dr. KC Raju Reddy had asked him to reduce the gross receipts and thereby the net profit. Dr. KC Raju Reddy, in his statement, confirmed the accountant Shri Prashanth Kini's statement, and added that he had asked him to delete some cash vouchers/ bills for OPD and IPD patients. Based on this, the Assessing Officer determined an additional income for AY 2017-18 of Rs 79,21,667, and the appellant offered Rs 30 lakhs in the return of income filed for AY 2017-18 in response to 7e no ice under Section 153C.\Further, during the course of the search, unaccounted cash of Rs 1.2 crores was found and seized. This cash was purportedly included in the gross receipts for AY 2018-19 by the appellant. The details of the net profit shown in the returns of income filed by the appellant for various years are as follows: • AY 2013-14: Rs 30,39,900 • AY 2014-15: Rs 37,18,880 • AY 2015-16: Rs 30,92,940 • AY 2016-17: Rs 35,69,100 • AY 2017-18: Rs 23,12,680 • AY 2018-19: Rs 68,09,410 5.2.3 AY 2018-19 is an outlier because the appellant has offered to tax a net income of Rs 68,09,410, which includes the cash found and seized of Rs 1.2 crores, in the gross receipts. It can be safely deduced that, if not for search and seizure Rs 1.2 crores returned income for this year also be same range as the previous assessment years. This cash seizure, coupled with the fact that parallel books of accounts were found during the course of the search for AY 2017-18, proves that the appellant has been consistently and systematically involving the practice of reducing its gross recee is and thereby the taxable income. It is based on these facts unearthed during the search that a statement was recorded from Dr. KC Raju Reddy, in which he conceded that 40% of the gross receipts were being suppressed from AY 2013-14 onwards. Even though this statement was retracted by the appellant much later, this statement is not something without any basis or that was extracted under coercion. 5.3 Based on the above discussion, it can be seen that there is incriminating material unearthed during the search, which shows .
ITA Nos.1051 - 1054/Bang/2025
Page 4 of 8 systematic and consistent suppression of receipts over a period of time. Even though direct evidence is available only for AY 2017-18, the implication derived based on the seized material and an analysis of the return of income filed, as shown above, coupled with the fact that during the course of the search, a significant amount of cash was seized, it can be safely decided that assessment for this assessment year is based on incriminating material seized. Further, since the statement recorded from Dr. KC Raju Reddy was based on facts unearthed, it can also be considered as incriminating material. 5.3.1 Based on the above decision it is held that the assessment has been validly done under section 153C. Accordingly, the ground of appeal no.3 is dismissed.”
Being aggrieved by the order of learned CIT-A, the assessee is in appeal before us.
6 The learned AR before us filed a paper book running from pages 1 to 85 and submitted that no incriminating document for the year under appeal was found during the search. The only document found was a draft profit and loss account for the year ending 31.03.2017, which does not relate to the year under dispute. Hence, no addition can be made in respect of an unabated assessment year.
The ld. AR relied on the judgment of the Hon’ble Supreme Court in PCIT v. Abhisar Buildwell Pvt. Ltd. (2023) 149 taxmann.com 399 (SC), which clearly held that no addition can be made in an unabated assessment year unless incriminating material is found.
The AR further submitted that the partner’s statement was retracted, and hence cannot be used as the sole basis for addition. He also relied on CBDT Circular No. 286/2/2003-IT dated 10.03.2003 and Circular No. 286/98/2013-IT (Inv.II) dated 18.12.2014, which direct that .
ITA Nos.1051 - 1054/Bang/2025
Page 5 of 8 confessions during search should not be taken as the only basis of assessment.
On the other hand, the learned DR supported the orders of the AO and the ld. CIT(A). He submitted that the statement of the partner admitting suppression of receipts is an important piece of evidence. The retraction was after a long delay and hence deserves no credence.
The ld. DR also argued that the search revealed suppression of income in later years, which shows a continuing pattern. Therefore, the AO was justified in extrapolating the same for the year under appeal.
We have heard the rival contentions of both the parties and perused the materials available on record. The law on the subject is now well settled. The Hon’ble Supreme Court in PCIT v. Abhisar Buildwell Pvt. Ltd. (2023) 149 taxmann.com 399 (SC) has held: “In case no incriminating material is unearthed during the search, the AO cannot assess or reassess taking into consideration the other material in respect of completed assessments/unabated assessments. The scope of assessment under section 153A is limited to assessing undisclosed income and undisclosed assets unearthed during the search.”
11.1 The CBDT has also clarified this position through its instructions: • CBDT Circular No. 286/2/2003-IT (Inv.) dated 10.03.2003:
“While recording statements during the course of search, no attempt should be made to obtain confession as to the undisclosed income. Focus should be on collection of evidence of income which leads to information on what has not been disclosed or is not likely to be disclosed before the Income Tax Department.” • CBDT Circular No. 286/98/2013-IT (Inv.II) dated 18.12.2014:
ITA Nos.1051 - 1054/Bang/2025
“Instances have come to the notice of the Board where some assessees have claimed that they have been forced to confess undisclosed income during searches and later retracted. Such confessions do not serve any useful purpose. It is, therefore, advised that there should be focus and concentration on collection of evidence. Assessing Officers should rely upon evidences/materials gathered during search/survey operations or thereafter while framing the relevant assessment orders.”
11.2 Thus, both the Hon’ble Supreme Court and the CBDT have made it clear that in unabated assessments, additions can only be made on the basis of incriminating material unearthed during search and not merely on confessions or extrapolations. It is the admitted position that the year under consideration is unabated assessment year which was also not disputed by the learned DR of the revenue at the time of hearing.
11.3 Applying the above settled legal position to the facts of the present case, we find that the only seized document was a draft profit and loss account for A.Y. 2017-18, which does not pertain to this year. There was no incriminating material found for the present year. The entire addition rests on the statement of the partner recorded during search, which was later retracted. In light of the CBDT circulars, such confessions cannot be the sole basis for assessment. Moreover, as held in Abhisar Buildwell (supra), additions in unabated years are permissible only if supported by incriminating material. None exists here. The extrapolation by the AO from one year to another, without material for the relevant year, is against the settled law. Therefore, the addition of ₹48 lakhs made by the AO and sustained by the CIT(A) cannot be upheld. Hence, the addition of ₹48 lakhs is hereby deleted. Thus, the ground of appeal of the assessee is allowed.
- 1054/Bang/2025 Page 7 of 8 11.4 Regarding the issues raised by the assessee on merit of the case, we note that the appeal of the assessee has been decided in its favour on technical ground. Therefore, we are of the view that no separate finding is required to be given with respect to the grounds of appeal raised on merit of the case. As such, the learned AR and the DR also agreed not to adjudicate the issue raised by the assessee on merit of the case if the technical issue is decided in favour of the assessee. Accordingly, we dismiss the same as infructuous.
In the result, the appeal of the assessee is hereby partly allowed.
1053 and 1054/Bang/2025, appeals by the assessee for the AYs 2014-15 to 2016-17
The facts of the cases on hand are identical to the facts of the case discussed above, therefore, respectfully following the same, the appeals of the assessee are hereby partly allowed.
In the result, all the appeals of the assessee are hereby allowed.
In the combined result, all the appeal of the assessee are hereby allowed.