HITESHI LEASING AND HOUSING PVT LTD,NEW DELHO vs. DCIT, CIRCLE-1, FARIDABAD

At the outset of the hearing, ld. AR for the assessee submitted that assessee has filed additional ground of appeal

That the approval granted under section I53D is mechanical and without application of mind.”

Ld. AR further submitted that the list of documents mentioned in para 3 hereinabove, cannot be regarded as incriminating as they don't suggest any income escaping assessment as the effect of those documents have been duly incorporated in the books and balance sheet of the Assessee Company. He further submitted that the DCIT Central Circle (1) passed a detailed order of 12 pages but has nowhere stated what was in these documents which are used to reopen the Assessment Proceedings u/s 153C and how they were incriminating documents.

Considered the rival submissions and material available on record. We observe that the coordinate Bench in the case of DMG Finance Investment Private Limited order dated 28.11.2024 (supra), wherein the facts and circumstances are identically similar to the present case, has dealt the similar legal issue and decided the same in favour of the assessee. The relevant findings of the Coordinate Bench are reproduced as under:- “9. Accordingly, we first take up the merits of the grounds and for that we have carefully gone through the material before us and the submissions of learned representatives of both the sides. To be fair to the Shri. Debesh Panda, Ld. Spl. Counsel for the department, we have reproduced his written submissions, in totality. We find that the learned Spl. counsel for the Department has made strenuous efforts to defend the order of ld. AO and to point out the shortcomings in the order of ld. CIT(A), however, when the ld. Spl. Counsel for the Department was requested to explain as to how the disputed documents fall into that category of ‘incriminating material’, he was not able to, point out from the contents of the disputed documents itself, as to if there was anything in the form of any absolute admission against the interest of the assessee, that any of the investor companies or anyone operating these companies had received any funds, by any means, from the assessee company or anyone operating the assessee company. He was unable to cite from the disputed documents that there was any evidence emanating from the documents themselves which show that cash was given by the assessee company or anyone operating the assessee company in lieu of the share capital receipts.

All that was attempted to be canvassed by the Ld. Spl. Counsel for the Department was to draw inferences after inferences, from the existence of these documents themselves and from the fact of having been found at the time of search and that as possibly these disputed documents were prepared contemporaneous to the application for subscribing to the share capital, in a way, that these disputed documents will enable the assessee company or its operators to subsequently deal with the allotted shares, without any intervention of the investor companies or their operators. Meaning thereby, that the application for subscription of the shares and the payment of share capital, was a sham transaction, of which the assessee company was beneficiary and therefore for the purpose of section 68 of the Act, the assessee company has failed to rebut the onus of explaining the genuineness of the transaction.

Thus the first question to be determined is as to find if the disputed documents fall into the scope of ‘incriminating material’? To be precise whether in spite of their being nothing emanating in the form of an admission of fact disclosing incorrect reporting of income or undisclosed income, merely the circumstances surrounding the existence of certain documents found during search, alone can be considered as ‘incriminating material’.

In regard to this controversy, we find that the learned Spl. counsel for the Department has relied the ratio of Hon’ble jurisdictional High Court, in the case of Dayawanti v. CIT (2017)390 ITR 496, to argue that once the seized material gives rise to ‘belief’ in the mind of the assessing officer, then that is sufficient to consider the ‘seized material’ to be ‘incriminating material’ and that CIT(A) was wrong in the approach having presuppositions that unless a document carries a stamp of incrimination on its forehead, its contents need not be examined and the belief created thereby, is wholly irrelevant.

In that case by drawing inferences or any process of reasoning, preponderance of probabilities or circumstances should first explore how the seized material reflects on total income for the search assessment. Thus, where the seized material is sought to be considered as incriminating material, it has to have in its body some narration or even omission of facts which lead to instant conclusion that there may be a source of undisclosed income of assessee and the incriminating document establishes the same without any necessity of an exercise of drawing inferences beyond the content.

The fact in issue, to ascertain if the seized material is incriminating in nature, may vary according to the nature of alleged act of misreporting or concealment of income, its source, investment etc.. Thus it is in accordance with the nature of allegations the seized material has to be examined and then based on the contents of the seized material a conclusion has to be drawn that the content establishes the fact in issue.

Like in case in hand the allegations are of introduction of own funds by way of bogus share capital receipt through shell companies. This fact in issue, certainly required that the disputed documents had some information about some trail of transaction which is of incriminating nature so as to constitute incriminating material. However, as we go through the assessment order we find that the ld. AO has not spelt out any information of incriminating nature spilling out of the disputed documents. The assessing officer seems to have been convinced himself on his understanding of the seized documents that as the seized documents are generally used for transactions of bogus share capital receipt so they are incriminating material for the purpose of search assessment.

It can be observed from the impugned assessment order that same is marred by use of language which in no manner would suggest that any document was specifically examined in its nature or contents to give the finding that as to how that seized document is ‘incriminating material’. Except for inferences and presumptions, drawn on assessing officer’s own prudence, the conclusion was arrived.

In this context we note that the assessing officer has drawn an inference on the basis of some shareholders being common with another company to make it ‘evident’ that both the company’s investments bear the same colour and nature. Ld. AO has also half heartedly relied the statement of Sh. Sushen Mohan Gupta recorded under section 132(4), but without actually bringing on record of assessment order as to what was incriminating against the assessee company. The relevant part is reproduced from Page No. 3 and 4 of the assessment order as follows; “Thus, the shareholders/share capital subscribers of M/s Spiral E- Systems Private Limited being same as that of M/s American Hotels and Restaurants Pvt. Ltd, it is evident that the share application/ share capital subscription received by M/s Spiral E-Systems Private Limited from these very/same share capital applicants/subscribers bears the same color and nature as that of the share capital subscription received by American Hotels and Restaurants Pvt. Ltd. from these very/same share capital subscribers.” “During the course of search proceedings, the documents found and seized as Annexure A-29 (i.e. pertaining to share capital subscription in M/s Spiral E-Systems Private Limited), were also confronted to Sh. Sushen Mohan Gupta, who in his statement recorded on oath (as aforesaid) on 04.01.2020 had stated that his brother Sh. Sushant Mohan Gupta is aware about these transactions.” 18.1 Regarding allegation of common share subscribers, Ld. Counsel of assessee has submitted that only two share subscribers are common l.e. Madhav Fincap Pvt. Ltd. and M/s Ladliji Enterprises Pvt. Ltd. which subscribed the share capital in M/s Spiral E Systems Pvt. Ltd. as well as American Hotels and Restaurants Pvt. Ltd. Thus, it cannot be said that share capital subscription in Spiral E Systems Pvt. Ltd. bears the same colour as that of American Hotels and Restaurant Pvt. Ltd. 18.2 It can be observed that infact Sh. Sushen Mohan Gupta in his statement merely stated that his brother, Sushant Mohan Gupta is aware about the share capital subscription of Spiral E Systems Pvt. Ltd and did not make any adverse remark about the share capital subscription of Spiral E System Pvt. Ltd. Besides, none of the statements of Sh. Sushen Mohan Gupta was provided to the assessee company during the course of assessment proceedings before utilizing the same against it. Otherwise too, in Best Infrastructure (India) (P.) Ltd [2017] 397 ITR 82 (Delhi HC), Hon'ble Delhi High Court has held that Statements recorded under section 132(4) do not by themselves constitute incriminating material.

It can next be observed from the assessment order that the assessee’s submission that seized material as Annexure A-29 are not of incriminating nature and there was no evidence of any cash given for share capital subscription was outrightly discarded by the assessing officer by following observations at the concluding part of page No. 10 and beginning of page No. 11 as follows:- “ As per para 4(a) of the above submissions, the assessee has contended that the documents seized as annexure A-29 are not incriminating in nature and there was no evidence of any cash given for share capital subscription.

This is defended, by the Ld. Spl. Counsel as ‘belief’ of the Ld. AO and which accordingly to Ld. Spl Counsel was not appreciated by the Ld. CIT(A), making impugned order, not sustainable. On this aspect, on going through the assessment order we find that the ld. AO has merely raised questions to himself which as per the ld. Spl Counsel, was the belief of ld. AO, which has not been accepted by ld. CIT(A), however, we are of view that this ‘belief’ of ld. AO was of some consequence and relevant had the ld. AO based it on some finding of fact by discussion of disputed documents. Merely posing questions to oneself without reference to facts does not form a belief. The foundation of belief is acceptance of something which is true or correct. Else it is merely surmises and conjectures which cannot be basis to hold the seized material be incriminating and which fails to pass the rigour of tests for completing a search assessment on basis of incriminating material.

It can be observed from the impugned assessment order that assessing officer has laid more emphasis on the examination of the reasons for investment, financials of the investor companies, their assets, taxable income etc., for drawing a conclusion that investor companies were shell companies and based upon this conclusion a backward flip is taken to draw an inference that existence of the disputed documents and the possession with the assessee makes these disputed documents ‘incriminating material’ for purpose of section 68 of the Act.

We are of considered view that it is only after establishing that seized material is incriminating the same can be relied for the purpose of seeking an explanation from an assessee for the purpose of section 68 of the Act. However, here in the case in hand the assessing officer has first examined the veracity of the investment and then concluded that the seized material is incriminating material.

Thus, whatever submissions the learned spl. counsel for the Department has made bringing forth as to how the disputed documents have in themselves certain contents which make them incriminating material has not at all been examined and brought on record in the assessment order. On the contrary the assessing officer has preferred to complete the search assessment on the basis of principles of preponderance of probabilities and circumstantial evidence. The findings of Ld. AO in that regard on page No. 28 are required to be reproduced below:- …………………..

We are equally inclined to accept that the seized materials which included the alleged incriminating material were primarily statutory records required to be maintained under the relevant Companies law provisions. These alleged incriminating material were also of the nature which any assessee would have kept as record of past transactions or for future convenience references. Indeed there may be suspicion for having certain documents in the blank form or in pre-mediated arrangement, but in the absence of any material coming forth at the time of seizure showing there was any cash transacted in lieu of share capital receipt, merely on suspicion, an incriminating 1st appellate authority. 34.1 We observe that ld. Spl. Counsel in written submissions has mentioned that the seized share transfer forms admittedly do not carry any endorsement reflecting the payment of stamp duty. These could not thus have been acted upon by any statutory authority, given the statutory bar under the Indian Stamp Act, 1899and could not thus be the “statutory record” of the assessee or investor companies. Similarly the ld. Spl. Counsel has submitted that to the extent the Affidavit (for instance, at Pg. 34 of Paper Book (Seized Material) Vol-I) is shorn of material particulars, such as Share Certificate No./Distinctive No., etc.,it could not have been used for any statutory proceedings, which demonstrates yet again, the utter perversity of the impugned order passed by the Ld. CIT (A). We are of considered view then how such documents become incriminating. That somehow, only fortifies the findings of ld.CIT(A), as such documents turn out to be a dumb documents, having no legal sanctity on their own. 34.2 Here we find substance in the contention of Ld. Counsel of the assessee that the judicial decisions seems to be more in favour of the assessee to hold that Balance Sheets. Profit & Loss account, ITRs and ROC data and blank share transfer forms and Power of Attorney of investor companies cannot be termed as incriminating material. Reliance in this regard as placed by ld. Counsel of assessee on following judgements, bolsters his submissions:- a) M/s Prakash Industries Ltd. bearing ITA nos. I.T.As. No.4039, 4040, 4041, 4042 & 4043/DEL/2017; Delhi bench of ITAT order dated 18.06.2021. b) M/s. Gee Ispat Pvt. Ltd., New Delhi US Acit4256-4259/Del/2014 and M/s Gee Ispat Pvt. Ltd., V ACIT ITA No. 5424.5425.5475.5476/Del/2014 c) PCIT v. Sunway Realtech (P.) Ltd. [2022] 142 taxmann.com 477 (Delhi) d) PCIT v. Panchmukhi Management Services Pvt. Ltd. (Delhi IIC)2022] Taxscan (HC) 712 e) Sunny Infraprojects Ltd. - of f) Index Securities Pvt. Ltd. (86 taxmann.com 84) g) Therapeutic India Pvt. Ltd. (ITA No. 4515/Del/2012 h) M/S. Brahamputra Finlease (P) Ltd. V DCIT, 59 35. There is no substance to allege that the learned CIT (A) proceeded on a predetermined notion to hold there was nothing unusual about the documents.

Respectfully following the above decision, we are inclined to come to a conclusion that satisfaction note recorded by the AO is vague and not as per the provisions of section 153C of the Act in order to assume the jurisdiction. Further, we observe that ld. DR relied on the decision of K. Krishnamurthy (supra) and we observe that the Hon’ble Supreme Court observed that the material found during the search at any place, whether at the premises of the searched person or third person are all considered to be found in the course of search. This is only to indicate the material found during the search and how it has to be treated. It does not mean that the Assessing Officer can treat the same as incriminating material without following the due process of law as indicated u/s 153A r.w.s. 153C in the case of material found during the search. It is the duty of Assessing Officer to verify the documents found during the search, if it is related to the searched person, he has to record satisfaction even it is found from third person. Similarly if any material found with the Assessing Officer of other person. The Assessing Officer of other person also has to follow the due process of law to record his satisfaction before proceeding to initiate the proceedings. Therefore, the case law relied by the ld. DR is distinguishable. Therefore, we are inclined to allow the additional grounds raised