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Failure by CIT(A) and ITAT to disclose incriminating material against the accused led to the court finding no substantial question of law arising in the case, hence leading to its dismissal: The High court of Delhi

No assessment/reassessment proceedings were pending when search action took place and hence no assessment was abated. The addition made by the AO is not based on any incriminating document/seized material found during the course of search and seizure action u/s 132 of the Act and accordingly the same were deleted. In further appeal preferred by the Revenue before the ITAT, the findings of the CIT(A) were confirmed. The aforesaid has been established in a landmark case of this court and has laid the premise for the Delhi High Court to be followed in the case of PR. Commissioner of Income Tax (CENTRAL)- 3 v. M/S Jaypee Financial Services Ltd [ ITA 42/2021 & CM No.6138/2021] which was decided by a two-judge bench comprising Justice Manmohan and Justice Navin Chawla on 20th July 2021.

The facts of the case are as follows. the assesse is a company engaged in trading of equity shares, securities and commodities through recognized exchanges. It filed its return of income on 31.10.2007 declaring total income of Rs. 86,67,680/-. The return was processed on 21.02.2009. Subsequently, on 30.03.2012, a search and seizure operation under Section 132 was initiated in the case of the assesse, as part of Jaypee Group. During search, data of the computers found at the premises was cloned and seized along with certain documents. On the basis of the Auditor Report and the response of the assessee, the AO concluded that in the case of member (broker) group companies of the assessee, the Client Code Modification is by and large not for genuine reasons and is rather for extraneous considerations. The net effect of profit and loss shifting in the code of assessee-company has been suppressed in its books of accounts. Accordingly an amount of Rs. 14,97,45,205/- was added to the income on account of Client Code Modification. Further, a sum of Rs. 22,242/- was also disallowed under section 40A(3) of the Act and added to the income of the assessee for expenditure incurred in cash by the assessee beyond the limit prescribed under the Income Tax Act. The total income was assessed as Rs.15,84,35,130/.

earned senior standing counsel for the Revenue, further submits that findings of the ITAT are perverse in as much as the incriminating material was in fact found during the course of search and therefore additions were justified. In support of his submissions, he refers to para 2 of the assessment order which records that “during the course of search incriminating documents and evidences have been found and seized. The data in the computer was also cloned and seized along with physical documents”. Mr. Sharma further submits that at the stage of passing of the assessment order, the decision of CIT Vs. Kabul Chawla (supra) was not available and therefore, assessing officer did not consider it necessary to give a complete description of the incriminating material by recording the details of the panchnama.

The court perused the facts and arguments. It was of the opinion that “Both the CIT(A) as well as the ITAT have held in the instant case that the addition is not based on any incriminating material found during the course of search and the assessment was not pending on the date of search. The observations of the assessing officer relied upon by Mr. Sharma do not give us any insight or clue about the ‘incriminating material’ which is claimed to be in existence. In the proceedings before the CIT(A) as well as the ITAT, the Revenue has not made any attempt so as to disclose the incriminating material. Even in the present appeal, the revenue is unable to explain or give us any indication about the same. The findings of facts returned by CIT(A) and ITAT are not be interfered with lightly. The view taken by the tax authorities based on the decision of CIT Vs. Kabul Chawla (supra) cannot be held to be perverse. The questions of law proposed by the Revenue are squarely covered by the aforesaid judgment. In view of the above, no question of law, much less a substantial question of law, arises for our consideration. Accordingly, the present appeal, along with pending application, is dismissed.”

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