Facts of the Case

The case arose from a search and seizure operation conducted under Sections 132 and 133A of the Income Tax Act on 8 July 2015 against M/s K.R. Pulp & Papers Ltd. and its group entities. During the investigation, the Managing Director, Shri Madho Gopal Agarwal, allegedly admitted that undisclosed income was routed through bogus Long Term Capital Gains (LTCG) entries via penny stock transactions.

The respondent-assessee, Ms. Kavita Agarwal, filed her return pursuant to notice under Section 153A declaring income including capital gains. She had purchased shares of M/s KGN Industries Ltd. and earned LTCG of ₹37,79,449, which was claimed as exempt under Section 10(38).

The Assessing Officer treated the LTCG as unexplained credit under Section 68 on the basis of statements recorded during search and added the amount to income. The CIT(A) upheld the addition. However, the ITAT deleted the addition holding absence of incriminating material.

Issues Involved

  1. Whether addition under Section 68 can be made in a completed assessment under Section 153A in absence of incriminating material found during search.
  2. Whether statements recorded under Section 132(4) alone constitute incriminating material.
  3. Whether LTCG claimed as exempt under Section 10(38) can be treated as bogus solely based on third-party statements.

Petitioner’s Arguments (Revenue)

  • The ITAT erred in holding that no corroborative material existed.
  • Statements of Shri Madho Gopal Agarwal indicated bogus LTCG transactions.
  • Conduct of family members, who disclosed income and paid tax, corroborated the statement.
  • Therefore, additions made by the AO were justified.

Respondent’s Arguments (Assessee)

  • No incriminating material was found during the search relating to the assessee.
  • The assessment for AY 2011-12 was already completed on the date of search.
  • Statements under Section 132(4) cannot be treated as incriminating material without corroboration.
  • Reliance placed on settled law including CIT vs. Kabul Chawla.

Court Findings / Judgment

  • No incriminating material was found during the search relating to the assessee.
  • Statements recorded under Section 132(4) do not constitute incriminating material without supporting evidence.
  • There was no reference to M/s KGN Industries Ltd. in the statement or documents relied upon.
  • The assessment for the relevant year was already completed; hence, no addition could be made without incriminating material.

The Court relied on established precedents including:

  • CIT vs. Kabul Chawla (2016) 380 ITR 573
  • PCIT vs. Meeta Gutgutia (2017) 395 ITR 526
  • CIT vs. Best Infrastructure India Pvt. Ltd. (2017) 397 ITR 82
  • PCIT vs. Anand Kumar Jain (HUF) 432 ITR 384

Important Clarification

  • In case of completed assessments, additions under Section 153A can only be made if incriminating material is found during search.
  • Mere statements or disclosures without corroborative evidence are insufficient.
  • Section 153A does not permit arbitrary reassessment unrelated to seized material.

Link to download the order -https://delhihighcourt.nic.in/app/case_number_pdf/2022:DHC:2947-DB/58928072022ITA2322022_220704.pdf

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