A search assessment requires incriminating material, not just regular books of account.

By | October 1, 2025
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A search assessment requires incriminating material, not just regular books of account.

Issue

Can additions be made in a search assessment under Section 153A of the Income-tax Act, 1961, for completed or “unabated” assessment years if those additions are not based on any “incriminating material” found during the search, but are instead derived from a review of the taxpayer’s regular books of account?

Facts

  • A search and seizure operation was conducted on the business group to which the assessee belonged.
  • Consequently, a search assessment under Section 153A was initiated against the assessee for multiple years, from AY 2013-14 to 2018-19.
  • The assessments for the earlier years in this block (AY 2013-14 to 2016-17) were “completed or unabated assessments,” meaning the normal time limit for opening them for scrutiny had already expired before the search.
  • The Assessing Officer (AO) made additions in these years for alleged bogus expenditure and also disallowed Employee Stock Option Plan (ESOP) expenses.
  • The crucial fact was that the documents and schedules that the AO relied upon to make these additions were found to be part of the assessee’s regular books of account and not some hidden or undisclosed material.

Decision

The court ruled decisively in favour of the assessee.

  • It reaffirmed the settled legal principle, established by the Supreme Court, that for completed or unabated assessments, an addition under Section 153A can only be made on the basis of incriminating material found and seized during the search.
  • It held that documents, ledgers, and schedules that are part of the regular books of account do not qualify as incriminating material. Incriminating material is evidence of undisclosed income that is found outside of the regular books.
  • Since the additions made for the completed years were not based on any such incriminating material, the AO had acted beyond their jurisdiction in disturbing the completed assessments. The assessment order for those years was therefore quashed.
  • Separately, the court also confirmed the general principle that ESOP expenses are an allowable business deduction.

Key Takeways

  1. The “Incriminating Material” Rule is a Crucial Safeguard: For assessments that are already time-barred for regular scrutiny, a search does not give the tax department a free pass to re-audit the entire book. The AO’s power is restricted to making additions only based on new, incriminating evidence that is unearthed during the search.
  2. Your Regular Books are Not “Incriminating”: Your own books of account, ledgers, and supporting documents that you maintain in the normal course of business and which could have been examined in a regular assessment are not considered “incriminating material.” The department can’t use a search as an excuse to conduct a second, deeper audit of your already-closed books.
  3. Completed vs. Abating Assessments: This rule only applies to “completed” or “unabated” assessments. For “pending” or “abating” assessments (where the time limit for scrutiny had not expired on the date of the search), the AO can re-examine any issue, even without incriminating material.
  4. ESOPs are a Deductible Expense: The ruling also confirms the well-established legal position that the discount on shares issued to employees under an ESOP is a legitimate form of employee compensation and is deductible as a business expense under Section 37(1).
IN THE ITAT MUMBAI BENCH ‘E’
Deputy Commissioner of Income-tax
v.
Hardcastle Restaurants (P.) Ltd.
ANIKESH BANERJEE, Judicial Member
and Miss Padmavathy S., Accountant Member
IT Appeal Nos. 4213, 4215, 4224,, 4311, 4313 and 4315 (Mum.) of 2024
C.O. Nos. 198 to 203 (Mum) of 2024
[Assessment years 2013-14 to 2018-19]
JANUARY  14, 2025
K. Shivram and Shashi Bekal for the Appellant. Biswanath Das, CIT DR for the Respondent.
ORDER
1. Instant appeals of the revenue and the cross objections by the assessee were filed against the combined order of the Learned Commissioner of Income-tax (Appeals)-49, Mumbai [for brevity, ‘Ld.CIT(A)]passed under section 250 of the Income-tax Act, 1961 (for brevity the “Act”) for Assessment Years 2013-14 to 2018-19, date of order 26/06/2024. The impugned order was emanated from the orders of the Learned Assistant Commissioner of Income-tax, Central Circle-7(1), Mumbai (for brevity the “Ld. AO”), orders passed under section 153A of the Act, date of orders, 07/07/2021 for A.Y. 2013-14 and 2018-19 and 23/06/2Q21 for A.Ys. 2014-15 to 2017-18.
2. All the appeals and cross objects have same nature of facts and a common issue. Accordingly, for convenience, we pass a combined order after taking care of all assessment years. ITA No.4224/Mum/2024 and Cross ObjectionNo-199/Mum/2024 for Assessment Year 2014-15 are taken as lead case.
ITA No. 4224/Mum/2024 (A.Y. 2014-15)
Grounds
“1. “On the facts and in the circumstances of the case and in law, the Ld. CIT(A) was correct and justified in deleting the disallowance made by AO of Rs. 43,01,386/-on account of expenditure on ESOP without considering the fact the same is nature of contingent and notional in nature.”
2. “On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the addition made by AO u/s 69C of the Act of Rs. 3,17,02,898/- being bogus expenditure without appreciating the fact that during the assessment proceedings the assessee could not prove the genuineness of expenditure under consideration.”
3. “On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the addition made by AO u/s 69C of the Act of Rs. 3,17,02,898/- being bogus expenditure without disregarding the judicial pronouncement made by Hon’ble Calcutta High Court in the case of CIT v. Precision Finance Pvt Ltd 208 ITR 465 Cal. (1994) and ITAT Mumbai in the case of Vijay B Shah (HUF) v. ITO 17(3)(5), Mumbai.”
C.0.199/Mum/2024 (A.Y, 2014-15)
Ground
1. That on the facts and circumstances of the case and in law, the learned CIT(A) erred in confirming the order passed by Ld. AO under section 153A of the Income-tax Act, 1961 (Act), ignoring that the original proceedings were complete under section 143(3) of the Act on December 26, 2016, therefore in the absence of any noting evidence during search proceedings conducted on April 17, 2018, the proceedings under section 153A of the Act is bad in law and liable to be quashed.
2. The Respondent craves leave to add, amend, alter or delete any or all the above grounds of appeal.”
3. The brief facts of the case are that a search and seizure operation under section 132(1) of the Act was conducted in the case of Jatia group and related cases on 17/04/2018 and the premises of assessee were also covered by the search. Consequent to the search action, the Ld.AO issued notice under section 153A of the Act to the assessee for the impugned assessment year on 23/10/2019. In response to the same, the assessee filed return of income on 22/11/2019, declaring same income as declared in the return filed under section 139 of the Act. During the assessment proceedings, the Ld.AO added back the expenses on ESOP amount to Rs.43,01,386/- and the expenses under section 69C related to AlPs, M/s Balbhadra Enterprises and M/s Sandip Heavy Lifters & Movers total amount to Rs.3,17,02,898/-. All the expenses and ESOP expenses were duly declared in the return of income and the assessee audited its books under section 44AB of the Act. Finally, the assessment order was carried before the Ld. CIT(A) and the assessee assailed both the legal and factual grounds before the Ld. CIT(A). The assessee challenged the jurisdiction of the Ld.AO related to assessment under section 153A of the Act in absence of the incriminating material. The Ld.CIT(A) passed a speaking order and rejected the legal grounds of the assessee. But related to ESOP and expenses disallowed under section 69C are partly allowed. Being aggrieved on the impugned appeal order, the revenue filed appeal and the assesse filed cross objection before the Tribunal.
4. The Learned Departmental Representative (“Ld. DR”) at the outset, submitted that the tax effect involved in ITA No. 4313/Mum/2024 for AY 2017-18 is below the monetary limit prescribed by the Central Board of Direct Taxes (CBDT) in Circular No. 9/2024 [F.No. 279/Misc/M-74/2024-ITJ] dated 17/09/2024. Consequently, the appeal would become infructuous. The Learned Authorised Representative (“Ld. AR”) concurred with the observation made by the Ld. DR. In view of this agreed position, ITA No. 4313/Mum/2024 is dismissed as infructuous. As a result, Cross Objection No. 202/Mum/2024 filed by the assessee also becomes infructuous.
Accordingly, both the appeal filed by the revenue and the cross-objection filed by the assessee are dismissed on account of the tax effect being below the prescribed threshold.
5. The Ld. ARcontended that the entire assessment was concluded without the consideration of any incriminating material. The addition on account of expenses related to Employee Stock Option Plans (ESOP) is squarely covered by the decision of the co-ordinate bench of the ITAT, Mumbai Bench “D,” in the case of DCIT v. Kotak Mahindra Bank Ltd 223/168 ITD 529 (Mumbai). That decision was rendered in light of the judgment of the Special Bench of the Tribunal in Biocon Limited v. DCIT (LTU) 335/144 ITD 21 (Bangalore – Trib.), which held that the discount on shares allotted by an assessee to its employees under an ESOP scheme, out of its share capital, is allowable as a deduction under section 37(1) of the Act. The same view was upheld by the Hon’ble Karnataka High Court in CIT v. Biocon Ltd  1/430 ITR 151 (Karnataka). Relying on these precedents, the addition in question stands deleted based on the binding authority of the Hon’ble Karnataka High Court and the co-ordinate bench of the ITAT- Mum.
Regarding the addition under section 69C, the Ld. AR invited our attention to paragraph (b) of the appellate order, which reads as follows:
“(b) Expenses treated as Bogus amounting to Rs.3,17,02,898/-u/s 69C of the Act. The learned Assessing Officer has treated expenditure of Rs.3,17,02,898/- as bogus and treated income of the appellant u/s 69C of the Act. The Assessing Officer has issued show cause notice dated 14-04-2021 to produce below three parties along with documentary evidence for ascertaining their genuineness and creditworthiness for the expenses of Rs 3,17,02,898/- as under:
Sr. No.Name of the PartyNature of transactionAmount
1ALP’s (AAMFA9279P)Civil Construction Work at various restaurants97,45,204
2Balbhadra Enterprises (ABRPA8385N)Manpower services for door to door delivery of food1,00,73,658
3Sandip Heavy Lifters Movers. (ABTFS3663F)Logistic Services for Capital Goods and Other Goods1,18,84,036
TOTAL3,27,02,898

 

In response to said notice, the appellant vide its letter dated 17-04-2021 submitted to the learned Assessing Officer on 19-04-2021 all documentary evidences like ledger accounts, bank statements reflecting payments through banking channel, TDS certificates above three parties and invoices raised by them upon the appellant along with all supporting documents thereof which amply prove the identity of the above three parties as well as the genuineness of the transactions with them. The submissions made by the appellant as mentioned above were not accepted and the learned Assessing Officer disallowed A expenses of Rs:3,17,02,898/- treating same as bogus expenses u/s 69C of the Act.”
The Ld. AR, however, restricted his arguments to the legal issue, relying upon the judgment of the Hon’ble Supreme Court in PCIT v. Abhisar Buildwell (P) Ltd  399 (SC), which categorically held that no addition can be made by the Assessing Officer in respect of completed or unabated assessments unless incriminating material is found during a search conducted under section 132 of the Act or a requisition under section 132A of the Act. This view was reiterated when the Hon’ble Supreme Court dismissed the Revenue’s review petition in PCIT v. Abhisar Buildwell (P.) Ltd.  257 (SC)].
The Ld. AR also placed reliance on the following judicial precedents:
i.Hon’ble Delhi High Court in PCIT v. Meeta Gutgutia  287/ Pr. CIT v. Meeta Gutgutia  384 (Delhi) : It was held that invoking section 153A to reopen concluded assessments for years preceding the year of search was unjustified in the absence of incriminating material found during the search. The Hon’ble Supreme Court dismissed the Revenue’s SLP in PCIT v. Meeta Gutgutia  441 (SC)].
ii.Jurisdictional High Court in CIT v. Gurinder Singh Bawa 398/[2016] 386 ITR 483 (Bombay) : The court held that where no incriminating material was found during a search, proceedings under section 153A were without jurisdiction.
iii.Jurisdictional High Court in CIT v. Deepak Kumar Agarwal, 3/398 ITR   22 (Bombay): It was held that an assessment under section 153A could only be made based on incriminating material found during a search.
iv.Jurisdictional High Court in CIT v. Continental Warehousing Corporatoin (Nhana Sheva) Ltd  78/374 ITR 645/232  270 (Bombay) : The court ruled that in the absence of incriminating material, no additions could be made in respect of finalized assessments. The department accepted this proposition, as the Supreme Court’s SLP in CIT, Delhi-1 v. Container Corporation of India Ltd.  334 (SC) did not raise this issue
Relying on the above judgments, the Ld. AR asserted that the additions made under sections 69C and 153A of the Act were untenable in law.
6. The DR vehemently argued and relied on impugned assessment order. On legal issue the Ld. DR invited our attention in observation made by the Ld. CIT(A) in paragraph no 11.4.3. in impugned appellate order which is reproduced as below: –
“11.4.3 It can be seen that as per the above decision, in case of unabatedassessments, the A.O would assume the jurisdiction to assess or reassess thetotal income taking into consideration the incriminating material and also theother material available with the A.O. Hence, once the A.O assumesjurisdiction on the basis of incriminating material unearthed during the search, the other material available can also be considered for the addition. Therefore, even though no incriminating material regarding the ESOP expenditure was foundduring the search, the A.O can make the addition on this issue as the incriminatingmaterial regarding the other issue (bogus expenditure) as discussed above wasfound during the search. Hence the contention of the appellant on this issue isrejected.”
7. We have considered the arguments presented by both parties and perused the documents on record. Upon examination, we note that the assessments for Assessment Years2013-14 to AY 2016-17 are categorized as completed or unabated assessments. As per Section 153A of the Act, these assessments should be supported by incriminating material. However, the assessment for AY 2018-19 is classifie as an abated assessment and is not supported by incriminating material. For clarity we reproduce below the chart submitted by the Ld. AR.

2015-16NONASeptember 30, 2016

AYIncriminating Material foundScrutiny completed U/s 143(3) of the Act onAssessment U/s 143(1) of the Act and the last date for issuance Notice U/s 143(2) of the Act ended on
2013-14NOJuly 03,2015NA
2014-15NODecember 26,2016NA
2016-17NONASeptember 30, 2017
2018-19NONA

 

We observe that, for AY 2018-19, the addition was made solely on account of the disallowance:of ESOP expenses. However, based on the ruling of the Hon’ble Karnataka High Court in Biocon Ltd. (supra) and the decision of the ITAT Mumbai Bench in Kotak Mahindra Bank Ltd. (supra), ESOP expenses are considered allowable under Section 37 of the Act. So, we upheld the issue as decided by the Ld.CIT(A).
On the other hand, the assessee raised the argument that the assessment is invalid as it was made without any incriminating documents, relying on the Hon’ble Supreme Court’s judgment in Abhisar Buildwell (P.) Ltd. (supra). We have respectfully considered the Supreme Court’s decision; however, it pertains only to unabated assessments and does not apply to abated assessments. Accordingly, the assessee’s ground is dismissed.
Consequently, the grounds raised by the Revenue in ITA No. 4311/Mum/2024 for AY 2018-19 and the assessee’s cross-objection in CO No. 203/Mum/2024 are dismissed.
8. Considering the AY 2014-2015, the Ld. CIT(A) has not correctly applied the ruling laid down in Abhisar Buildwell (P.) Ltd.(supra), wherein it was held that additions not based on incriminating material must be accompanied by such material. The Ld. CIT(A), in the appellate order, observed that the addition pertaining to ESOP was related to non-incriminating material, while the addition under Section 69C was purportedly based on incriminating material. Upon review, we find that the additions under Section 69C were based on statements recorded by the Revenue, without any corroborating evidence on record to substantiate that the said additions were based on actual incriminating material.lt is observed that the disallowed expenses were added back based on the following:
a.M/s Balabhadra Enterprises: The addition relied on a third-party statement by the landlord of the concerned party.
b.M/s ALP: The notice issued was returned unserved, and the entity was found to have no existence at the registered address.
c.M/s Sandip Heavy Lifters & Movers: Statements of the assessee’s taxation head and directorw£r%recorded on 04/05/2018. But there is no such any adverse statement by the director assessee.
The assessee disclosed the said expenses in its regular books of accounts, deducted TDS on payments, and filed TDS returns as required. No concealment of income or irregularity was detected during the search operation.
The Ld.Ld. AR relied on a series of judgments establishing the jurisdictional requirement for issuing notices under Section 153A in the absence of incriminating material.
We respectfully rely on the decision of the Hon’ble Supreme Court in Pr. Abhisar Buildwell (P.) Ltd. (supra), which held as follows:
“12. If the submission on behalf of the Revenue that in case of search even where no incriminating material is found during the course of search, even in case of unabated/completed assessment, the AO can assess or reassess the income/total income taking into consideration the other material is accepted, in that case, there will be two assessment orders, which shall not be permissible under the law. At the cost of repetition, it is observed that the assessment under section 153A of the Act is linked with the search and requisition under sections 132 and 132A of the Act. The object of Section 153A is to bring under tax the undisclosed income which is found during the course of search or pursuant to search or requisition. Therefore,only in a case where the undisclosed income is found on the basis of incriminating material, the AO would assume the jurisdiction to assess or reassess the total income for the entire six years block assessment period even in case of completed/unabated assessment. As per the second proviso to Section 153A, only pending assessment/reassessment shall stand abated and the AO j^j/j^yquld assume the jurisdiction with respect to such abated assessments. It does not provide that all completed/unabated assessments shall abate if the submission on behalf of the Revenue is accepted, in that case, second proviso to section 153A and sub-section (2) of Section 153A would be redundant and/or rewriting the said provisions, which is not permissible under the law.”
Thus as held by the Hon’ble Apex Court, incriminating evidence/material must necessarily be found during the course of a search conducted on the concerned assessee. In the present case, the material relied upon forms part of the assessee’s regular books of accounts. Documents and schedules related to regular books of accounts cannot be treated as corroborating evidence for the purposes of incriminating material.
We respectfully follow the binding precedents of the Hon’ble Supreme Court, the Hon’ble Jurisdictional High Court, and the Hon’ble Delhi High Court. Consequently, the impugned assessment order passed under Section 153A, in the absence of incriminating material, is held to be beyond jurisdiction, and the additions made therein are quashed.
Accordingly, the legal ground raised by the assesseein CO 199/Mum/2024for AY 2014-15 is upheld.
Since the legal issue is adjudicated in favour of the assessee, the factual issues remain academic and do not require adjudication.
9. The facts and circumstances in other appeals and the other cross objections for AY 2013-14, 2015-16 & 2016-17are identical to the one decided above, so the decision arrived at shall apply mutatis mutandis to those appeals and cross r.-objections also.
10. In the result, the all the appeals filed by the revenue are dismissed and the cross objections CO No.198 to 201/Mum/2024, filed by the assessee are allowed; whereas assessee’sC.O.No.202& 203/Mum/2024are dismissed.