Clarification of Appellate Powers in Section 153A Proceedings: Delhi High Court’s New Precedent

Introduction

This case, Divine Infracon Pvt Ltd v. PR Commissioner of Income Tax 3, was decided by the Delhi High Court on January 8, 2025. It arose from the Assessee’s challenge under Section 260A of the Income Tax Act, 1961, against an order passed by the Income Tax Appellate Tribunal (ITAT). The dispute focused on two principal questions:

1. Whether the Assessing Officer (AO) was justified in making certain additions under Section 68 of the Income Tax Act for Assessment Year (AY) 2009-10, following a search and seizure under Section 132 of the Act.
2. Whether the ITAT had erred by adjudicating the merits of the addition of INR 4.30 crores without having the Commissioner of Income Tax (Appeals) [CIT(A)] render a finding on those merits.

The parties to the case were Divine Infracon Pvt Ltd (the “Assessee”), a real estate development and hotel business entity, and the Principal Commissioner of Income Tax–3 (the “Revenue”). The decision clarifies an important point of appellate practice under Section 153A of the Income Tax Act where no finding on merits had been rendered by the CIT(A).

Summary of the Judgment

The Delhi High Court held that while the CIT(A) had allowed the Assessee’s appeal solely on the ground that no incriminating material was found during the search, it had not addressed the validity of the INR 4.30 crores addition under Section 68 of the Act. The ITAT, however, proceeded to rule favorably for the Revenue on that addition—despite the CIT(A) having failed to render any findings of fact or law on that issue. The High Court concluded that the ITAT erred in deciding an issue on which the CIT(A) had not ruled.

Consequently, the Court directed that the portion of the ITAT’s order affirming the Section 68 addition be set aside, and the matter be remanded back to the CIT(A) to properly adjudicate the Assessee’s appeal on the merits. At the same time, the question about the AO’s authority to frame an assessment for AY 2009-10 was settled in the Revenue’s favor, meaning the AO retained the power to reassess the income even if no incriminating material was found, given that the earlier assessment was considered to have “abated.”

Analysis

Precedents Cited

The Judgment references several precedents and principles crucial to understanding its outcome:

• All Cargo Global Logistics Ltd. v. DCIT: The ITAT Special Bench decision explained how, after a search, the assessment for concluded years can be reassessed only on the basis of incriminating material found during the search. If no such material is discovered, no new additions can ordinarily be made.
• Anil Kumar Bhatia & Others (Delhi High Court): This clarified that once a notice is issued under Section 153A, the AO is empowered to reopen or reassess total income, but only if undisclosed or incriminating material emerges from the search. Otherwise, the previously assessed income stands intact.

These precedents influenced the CIT(A)’s conclusion that the provisions of Section 153A could not be invoked in the absence of any newly discovered incriminating material. However, it was crucial that the CIT(A) also address the AO’s alternative additions made under Section 68 of the Act.

Legal Reasoning

The High Court stressed that an appellate tribunal (the ITAT) must confine itself to deciding those questions that actually arise from the order of the CIT(A). Here, the CIT(A) disposed of the Assessee’s appeal solely on the ground that Section 153A did not apply because no incriminating evidence was found. The CIT(A) did not address the contested addition on its merits—namely whether the loans in question were accommodation entries or genuine transactions.

The ITAT, in effect, ruled on Ground No. 2 (the Section 68 addition) even though that question was not decided by the CIT(A). By doing so, the ITAT went beyond the scope of its review because there was no CIT(A) finding on the merits to affirm or override. This constituted an error in law, and the High Court concluded that the question required remission to the CIT(A) for proper analysis and determination in the first instance.

Impact

This Judgment has two major implications:

1. Preservation of Appellate Hierarchy: The High Court’s ruling clarifies that the ITAT cannot assume jurisdiction over issues the CIT(A) has not decided. Even if the Revenue or the Assessee invokes those issues in an appeal, the CIT(A) must first record findings on them. This serves to maintain a structured appellate process and ensures factual aspects are settled at the correct level.
2. Scope of Section 153A Assessments: The Court reaffirmed previous jurisprudence that the AO is permitted to reassess the income for a given assessment year once a notice under Section 153A is issued. However, such reassessment should be supported by relevant and incriminating material or permissible reexamination of existing records where the assessment has abated. This standpoint alleviates confusion regarding the necessity of fresh incriminating material to justify an addition but underscores the need for due adjudication at all appellate levels.

Complex Concepts Simplified

Below are explanations of some legal and procedural complexities addressed by the Court:

• Section 153A of the Income Tax Act: Enables the AO to issue notices and reopen assessments for six previous assessment years when a search under Section 132 is conducted. If assessment proceedings are pending for any of these years on the search date, they “abate,” and the AO can independently reexamine the income undeterred by earlier findings, though reliance on incriminating material is essential if the assessment was previously closed.
• Incriminating Material: Documents or evidence discovered during the search that indicate undisclosed income or transactions not previously recorded in the Assessee’s books or returns. If no such material is found, the AO’s scope to make new additions to income is severely restricted unless an assessment is open or the law otherwise allows reconsideration.
• Accommodation Entries: Transactions (often in the form of loans, share capital, or other receipts) considered to be sham or fake, designed to hide undisclosed income. Under Section 68, if the nature and source of the credit are not adequately explained, it can be treated as unexplained income and taxed accordingly.
• Appellate Hierarchy: In Indian tax law, the first appeal from the assessment order goes to the CIT(A). If either party is dissatisfied, the next appeal goes to the ITAT. When hearing an appeal, the ITAT should generally confine itself to issues decided by the lower appellate authority—unless it is a matter that the lower authority should have but failed to address.

Conclusion

The Delhi High Court’s decision in Divine Infracon Pvt Ltd v. PR Commissioner of Income Tax 3 underscores the principle that appellate bodies must observe proper appellate discipline. Specifically, the ITAT exceeded its jurisdiction by ruling on the Section 68 addition’s merits when the CIT(A) had disposed of the appeal solely on the “lack of incriminating material” ground, without ruling on the factual correctness of the addition.

The Court remanded the case to the CIT(A) to decide the fate of the INR 4.30 crore addition on its merits, clarifying that the CIT(A) is the appropriate forum to consider and record factual findings for disputed additions. This maintains proper judicial hierarchy, ensures that matters are fully and fairly adjudicated at each level, and provides important guidance to taxpayers, tax practitioners, and Revenue authorities regarding the scope of appellate jurisdiction under Section 153A.