Bombay High Court Rules Against Income Tax Addition Without Incriminating Evidence Under Section 153A

The Bombay High Court recently ruled that income additions under Section 153A of the Income Tax Act, 1961 cannot occur unless incriminating evidence is discovered during a search, even if the Revenue utilizes information received from international authorities.

A Division Bench comprising Justice G.S. Kulkarni and Justice Aarti Sathe dismissed an appeal from the Revenue and supported the decision made by the Income Tax Appellate Tribunal (ITAT), Mumbai. The ITAT had previously annulled income additions nearing ₹28 crore against the taxpayer, Milan Kavin Parikh. The Bench stated:

“The approach taken by the Revenue lacked any incriminating materials or evidence, particularly that gathered during the conduct of the search. Furthermore, the basis for the Revenue’s claims was a document produced post-search which was not recovered during the search operations. Additionally, the assessment process had already been concluded, thus the post-search document could not serve as incriminating evidence for purposes of income assessment or reassessment.”

The taxpayer had submitted his income tax return for the Assessment Year 2006-07, reporting an income of roughly ₹2.23 lakh. Several years later, a search was performed by the Income Tax Department under Section 132 based on information from French authorities concerning purported undisclosed bank accounts held at HSBC Bank, Geneva.

The Revenue contended, primarily drawing from a document referred to as a “base note,” that the taxpayer was the beneficial owner of various foreign bank accounts linked to offshore entities, subsequently classifying these alleged peak balances as unaccounted income under Section 69 in the assessment drawn under Section 153A.

However, the ITAT overturned these income additions, concluding that no incriminating material was found during the search and noting that the taxpayer had consistently denied any connection to the foreign bank accounts. HSBC Bank, Geneva, had also verified in writing that the taxpayer did not maintain any account with them.

The Tribunal asserted that the “base note” obtained post-search could not qualify as incriminating material necessary for invoking Section 153A.

Section 153A permits the Income Tax Department to reassess a taxpayer's past income following a search conducted under Section 132 (search and seizure) or Section 132A (requisition).

Dissatisfied with the Tribunal’s ruling, the Revenue sought recourse to the High Court.

Affirming the Tribunal’s decision, the High Court noted that the entirety of the Revenue's case relied solely on material acquired after the search, that the alleged base note was not retrieved during the search, and that no evidence linked the taxpayer to the foreign bank accounts.

The Bench reiterated that Section 153A assessments are only valid when income not previously disclosed is unearthed during the search.

Drawing on the Supreme Court decision in PCIT v. Abhisar Buildwell (P) Ltd [2023] 149 taxmann.com 399 (SC), the Court emphasized that in assessments that are completed or unabated, no income additions could be made under Section 153A absent incriminating evidence during the search.

The Court clarified that if the Revenue intended to leverage post-search information, it could only pursue that through re-assessment processes under Sections 147/148, subject to applicable statutory guidelines.

Consequently, the Bench dismissed the Revenue's appeal and upheld the Tribunal’s judgment that the income additions against the taxpayer were legally indefensible.

Case Title: Pr. Commissioner of Income Tax (Central-1) v. Milan Kavin Parikh

Case No.: Income Tax Appeal No. 1827 of 2022

Appearance for Appellant: Mr. Suresh Kumar

Appearance for Respondent: Mr. Atul Jasani

Read also: SC ruling on Income-tax searches big relief to taxpayers