Additions By AO On The Basis Of Suo-Moto Disclosure Before The Settlement Commission, Not Permissible If The Settlement Was Aborted: ITAT Mumbai

The Assessee Sawarmal Hisaria was into the business of trading of shares and commodities, and had filed his income tax return for the relevant assessment year. Subsequently, the Assessee filed an application before the Income Tax Settlement Commission (ITSC) with respect to several assessment years. The application filed by the Assessee was rejected by the ITSC on the ground that the conditions under Section 245C(1) of the Income Tax Act were not fulfilled, and the matter was returned to the Assessing Officer (AO). Thereafter, search and seizure operations were conducted with respect to the Assessee and the AO made additions to Assessee's taxable income on account of additional income offered by the Assessee before the ITSC. The Assessee challenged the additions made by the AO by filing an appeal before the Commissioner of Income Tax (Appeals) (CIT(A)). The CIT(A) upheld the additions made by the AO. Against the order passed by the CIT (A), the Assessee filed an appeal before the ITAT.

The Assessee submitted before the ITAT that no incriminating material was found after the search and seizure operation was conducted by the revenue authorities and hence, the additions made by the AO were not sustainable in the eyes of law. The Assessee averred that the disclosure made by the Assessee before the ITSC was purely made on ad-hoc basis to avoid litigation and for peace of mind. The revenue department submitted that the AO was within his right to use the material brought before the ITSC by the Assessee.

Section 245C (1) of the Income Tax Act provides that an assessee, at any stage of a case relating to him, may make an application containing a full and true disclosure of his income which has not been disclosed before the Assessing Officer, the manner in which such income has been derived and the additional amount of income tax payable by him on such income, to the Settlement Commission to have the case settled.

The ITAT observed that during the search and seizure operations carried out by the revenue authorities, no incriminating material was unearthed. The ITAT noted that the AO had made additions to Assessee's taxable income on the basis of admission made by the Assessee before the ITSC, and apart from the additional income suo-moto declared by the Assessee before the ITSC, no other addition had been made by the AO for the relevant assessment year.

The ITAT noted that the co-ordinate Bench of the ITAT in the case of M/s Anantnadh Constructions and Farms (P) Ltd versus DCIT (2017) had ruled that after reopening of the assessment order no addition can be made on the basis of the income suo-moto offered by the assessee before the ITSC, if the settlement was aborted for any reason mentioned under the Income Tax Act.

The ITAT ruled that during the search and seizure operations conducted by the authorities, no incriminating material was found or seized, therefore no addition could be made by the AO while framing assessment under Section 153A read with Section 143(3) of the Income Tax Act.

The ITAT thus held that when the proceedings before the ITSC fail on the ground that the assessee had failed to fulfil the conditions laid down under Section 245 of the Income Tax Act, the AO is required to decide the issue independently and is not permitted to make any addition to assessee's income merely on the basis of the suo-moto disclosure made by it before the ITSC. The ITAT added that the disclosure made before ITSC is made on ad-hoc basis only.

The ITAT held that the CIT(A) had erred in upholding the addition made by the AO in the absence of any incriminating material, merely on the basis of the suo-moto disclosure made by the Assessee before the ITSC. The ITAT ruled that since the proceedings before the ITSC got aborted due to non-fulfilment of conditions by the Assessee, the additions made by the AO on the basis of the admission made before the ITSC was not sustainable.

The ITAT thus allowed the appeal of the Assessee Sawarmal Hisaria and ordered the additions made by the AO to be deleted.

Case Title: Late Shri Sawarmal Hisaria versus Dy. CIT, Mumbai

Dated: 05.04.2022 (ITAT Mumbai)

Representative for the Appellant: Dharmesh Shah

Representative for the Respondent: Anil Kumar Das

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