Pre-Search Material Cannot Be Basis For Additions In Completed Search Assessments: Bombay High Court

The Bombay High Court has recently reiterated that the Income Tax Department cannot make additions in a completed assessment under the search assessment provisions on the basis of material that was already in its possession before the search.

Dismissing two appeals filed by the Revenue, the court also held that the Department had failed to establish that the assessee owned the foreign bank accounts sought to be taxed.

A division bench of Justice B.P. Colabawalla and Justice Firdosh P. Pooniwalla observed, "only such additions could be made which were based on incriminating material found in the course of the search."

It further held, "The Base Note, which formed the sole basis for the additions as made by the Assessing Officer in respect of balances lying in the bank account of White Cedar Investments Ltd. and Ruby Enterprises Inc. held with HSBC Bank, Geneva, which was already available with the Revenue before the search, does not qualify as incriminating material found in the course of search."

The case concerned the assessment year 2006-07. Arunkumar Ramniklal Mehta's income tax return had attained finality because it was not selected for scrutiny within the prescribed period.

The dispute arose after the Government of India received a Base Note from the French Government under the Double Taxation Avoidance Agreement.

The note indicated that Mehta was a beneficiary of Oak Trust, which held investments in White Cedar Investments Ltd. and Ruby Enterprises Inc., two British Virgin Islands companies with bank accounts at HSBC Bank, Geneva. Based on that information, the Income Tax Department conducted search proceedings against entities of the Rosy Blue Group, including Mehta.

No incriminating material relating to the completed assessment was recovered during the search. Even so, the Assessing Officer treated the balances in the HSBC Geneva accounts as unexplained money.

It made a substantive addition of about ₹28.59 crore and a protective addition for the remaining amount, together aggregating about ₹200.12 crore. The additions were based on the Base Note.

The Commissioner of Income Tax (Appeals) deleted the addition relating to White Cedar Investments Ltd. but upheld a smaller addition relating to Ruby Enterprises Inc. Both Mehta and the Revenue challenged different parts of that order before the Income Tax Appellate Tribunal.

The tribunal allowed Mehta's appeal and dismissed the Revenue's appeal, holding that the completed assessment could not be disturbed because no incriminating material had been found during the search. It also concluded that the Department had failed to establish that Mehta owned the foreign bank accounts.

Before the High Court, the Revenue argued that the tribunal had wrongly restricted the scope of search assessments and that escaped income, including income relating to foreign assets, could be assessed on the basis of information received from the French authorities.

Rejecting the contention, the High Court relied on the Supreme Court's decision in Principal Commissioner of Income Tax v. Abhisar Buildwell (P.) Ltd. and its earlier ruling in PCIT v. Milan Kavin Parikh. It held that where an assessment has attained finality, additions can be made only on the basis of incriminating material unearthed during the search.

Information already available with the Department cannot be treated as incriminating material for the purposes of a search assessment. If the Department seeks to rely on such information, it must proceed under the statutory provisions governing reassessment, subject to fulfilment of the prescribed conditions.

The court also upheld the tribunal's conclusion that the additions could not be sustained because the Revenue had failed to establish that Mehta owned the money lying in the foreign bank accounts.

The bench observed, "for invoking the said provision, the Revenue has to first find an Assessee to be the owner of any money, bullion, jewellery or other valuable article, and such asset has not been recorded in his books of account."

It further held, "the Revenue has not discharged the burden of showing that the Respondent Assessee is the owner of the money lying in the said bank accounts."

The court noted that the HSBC Geneva accounts were maintained in the names of White Cedar Investments Ltd. and Ruby Enterprises Inc., not in Mehta's name.

HSBC Bank had confirmed that Mehta neither visited nor opened or operated those accounts. It also referred to material placed on record, including statements and correspondence from Dilip Mehta, Karl French and HSBC Bank, explaining that the investments had been made by the Estate of Late Ramniklal Mehta through White Cedar Investments Ltd.

Holding that the tribunal's findings had not been displaced by the Revenue and that the appeals raised no substantial question of law, the High Court dismissed both appeals

For Appellant/Revenue: Suresh Kumar

For Respondent/Assessee: Senior Advocate P.J. Pardiwalla, assisted by Mr. Nitesh Joshi