The Income Tax Appellate Tribunal, Jaipur Bench, has set aside an assessment framed under Section 153C of the Income Tax Act, 1961, for Assessment Year 2014-15, holding that the alleged incriminating document did not relate to the impugned assessment year and was not adverse to the assessee. The Tribunal emphasized that for invoking jurisdiction under Section 153C, the material must pertain to the assessment year in question and establish a prima facie link to the assessee's income. The decision underscores the importance of strict compliance with jurisdictional prerequisites and the need for material to be both relevant and contemporaneous to the assessment year under scrutiny.
Background & Facts
The Genesis of the Search Action
A search action was conducted on 02.08.2017 on Sh. Jaipal Singh, a member of the Kiran Fine Jewellers Group. During the search, an agreement to sell dated 03.11.2012 was seized from Sh. Jaipal. The agreement recorded that Rs.40,00,000 had been paid in cash by Sh. Jaipal to the assessee, Sh. Chhotu Ram Kumawat, for the purchase of a ground floor flat at Plot No.35, Chitragupt Nagar, Jaipur. The agreement also noted the cancellation of the transaction within 17 days, on 20.11.2012.
Key Facts
- The assessee was a builder who had constructed six flats in Plot Nos.34 and 35, Chitragupt Nagar, Jaipur.
- The agreement to sell (Exhibit 1, Annexure A-S, pages 43-46) recorded a sale consideration of Rs.40,00,000 for the ground floor flat.
- The registered sale deed for the ground floor flat was executed on 11.10.2013 for Rs.21,25,000, with Rs.17,00,000 paid by cheque and Rs.4,25,000 in cash.
- The first floor flat was sold on 03.01.2014 for Rs.22,31,000.
- The second floor flat was sold in Assessment Year 2015-16 for a consideration less than Rs.40,00,000, and no addition was made by the Assessing Officer (AO) for that year.
- Sh. Jaipal retracted his statement on 21.07.2017, stating that the agreement for Rs.40,00,000 was entered only to facilitate a bank loan and was subsequently cancelled.
Procedural History
- 12.05.2021: Assessment order passed under Section 153C for Assessment Year 2014-15, adding Rs.18,75,000 and Rs.17,69,000 as suppressed sale consideration for the ground floor and first floor flats, respectively.
- 15.10.2025: Commissioner of Income Tax (Appeals) [CIT(A)] upheld the assessment, holding that the seized document was incriminating and the AO had validly assumed jurisdiction under Section 153C.
- 25.05.2026: Appeal filed before the Income Tax Appellate Tribunal (ITAT), Jaipur Bench.
- 21.07.2026: ITAT pronounced its order, allowing the appeal and quashing the assessment.
Relief Sought
The assessee sought deletion of the additions of Rs.18,75,000 and Rs.17,69,000, challenging the validity of the assessment framed under Section 153C and the merits of the additions made.
The Legal Issue
The central question was whether the Assessing Officer could validly assume jurisdiction under Section 153C of the Income Tax Act, 1961, to frame an assessment for Assessment Year 2014-15 based on a document that:
- Pertained to Assessment Year 2013-14 and not 2014-15.
- Recorded a transaction that was cancelled within 17 days and did not reflect any actual or intended sale.
- Was not adverse to the assessee when read as a whole.
Arguments Presented
For the Appellant (Assessee)
- The agreement to sell dated 03.11.2012 was cancelled on 20.11.2012, and therefore, did not constitute incriminating material for Assessment Year 2014-15.
- The transaction recorded in the agreement pertained to Assessment Year 2013-14, and the AO could not have assumed jurisdiction for Assessment Year 2014-15 based on material relating to a preceding year.
- The addition made in the hands of Sh. Jaipal for Assessment Year 2013-14 had been deleted by the ITAT in its order dated 11.03.2025 in ITA Nos.115 to 120/JPR/2024.
- The AO had accepted the sale consideration for the second floor flat in Assessment Year 2015-16 at a value less than Rs.40,00,000, indicating that the statement of Sh. Jaipal was not conclusive.
- The assessee was denied the opportunity of cross-examination of Sh. Jaipal, violating the principles of natural justice.
The assessee relied on the decision of the Hon'ble Supreme Court in Commissioner of Income-tax-III, Pune v. Sinhgad Technical Education Society [(2017) 84 taxmann.com 290 (SC)], which held that for a valid assumption of jurisdiction under Section 153C, there must be adverse material found during the search on a third person relating to the assessee pertaining to the assessment year for which jurisdiction is assumed.
For the Respondent (Revenue)
- The Ld. CIT(A) upheld the assessment, holding that the seized document was incriminating and the AO had validly recorded satisfaction under Section 153C.
- The Revenue contended that the AO was not required to conclusively prove concealment at the stage of satisfaction, and only a prima facie linkage of the document with the assessee and relevance to income was sufficient.
- The Revenue relied on the statement of Sh. Jaipal, who had initially admitted to purchasing the flats for Rs.40,00,000.
The Court's Analysis
The ITAT examined the legal framework governing assessments under Section 153C and the evidentiary standards required for invoking jurisdiction. The Tribunal noted that Section 153C empowers the AO to assess a person other than the searched person if the AO is satisfied that any books of account or other documents seized during the search belong to or relate to such other person. However, the material must pertain to the assessment year in question and must be adverse or incriminating in nature.
The Tribunal observed that the agreement to sell dated 03.11.2012 was cancelled on 20.11.2012, and the transaction recorded therein did not pertain to Assessment Year 2014-15. The Tribunal held:
"The alleged document found during search on Mr. Jaipal, though pertains to an agreement to sell dated 03.11.2012, the said document also records cancellation of the agreement within 17 days dated 20.11.2012. The cancellation noted in the said agreement ... clearly states that though in writing, it was agreed between the assessee and Mr. Jaipal to have undertaken the transaction of sale of ground floor of the property for Rs.40,00,000/- in cash, but orally, the parties had agreed otherwise and the sum of Rs.40,00,000/- had not been given to by Jaipal to the assessee and the agreement had been cancelled."
The Tribunal further noted that the transaction recorded in the agreement pertained to Assessment Year 2013-14, and the AO had made an addition in the hands of Sh. Jaipal for that year, which was subsequently deleted by the ITAT. The Tribunal held:
"It is evident therefore, that the alleged document found during search on Mr. Jaipal was clearly not any incriminating material having any impact on the determination of income of the assessee and neither did the said document pertain to the impugned assessment year."
The Tribunal also emphasized that the principles of natural justice required the assessee to be given an opportunity of cross-examination, especially when the statement of a third party was relied upon to make a substantial addition to income. The Tribunal held that the addition made was not sustainable on merits, as there was no basis for treating the sale consideration of the flats at Rs.40,00,000.
The Verdict
The ITAT allowed the assessee's appeal in full. The assessment framed under Section 153C for Assessment Year 2014-15 was quashed as without jurisdiction. The additions of Rs.18,75,000 and Rs.17,69,000 were directed to be deleted. The Tribunal held that the material seized did not constitute incriminating material for the impugned assessment year and the transaction recorded therein pertained to the preceding assessment year. The appeal was allowed with no order as to costs.
What This Means For Similar Cases
Jurisdictional Prerequisites Under Section 153C Are Non-Negotiable
- The material relied upon must pertain to the assessment year in question and must be adverse or incriminating in nature.
- The AO must record satisfaction that the material relates to the assessee and pertains to the assessment year for which jurisdiction is assumed.
- Practitioners must scrutinize the nexus between the seized material and the assessment year before advising clients on the validity of assessments framed under Section 153C.
Documentary Evidence Must Be Read Holistically
- The Tribunal emphasized that documents must be read as a whole, and not in isolation.
- A document recording a transaction that was subsequently cancelled within a short span cannot be treated as incriminating material for a later assessment year.
- Practitioners should highlight the context and subsequent events to challenge the Revenue's reliance on isolated documents.
Natural Justice and Cross-Examination Rights
- The Tribunal underscored the importance of the principles of natural justice, especially when third-party statements are relied upon to make substantial additions.
- Practitioners should insist on cross-examination rights where third-party statements form the basis of additions, particularly in search assessments.
Consistency in Revenue's Approach
- The Tribunal noted that the AO had accepted the sale consideration for the second floor flat in Assessment Year 2015-16 at a value less than Rs.40,00,000, indicating inconsistency in the Revenue's approach.
- Practitioners should leverage such inconsistencies to challenge the Revenue's stand in similar cases.
