Vindhyawasini Stone Products v ACIT: ITAT Allahabad on Incriminating Material

Vindhyawasini Stone Products, a Sonebhadra-based assessee, appealed to ITAT Allahabad against an addition of Rs 3,49,812 made as "unexplained royalty payment" in an assessment framed under the search-assessment provisions. The appeal raised two lines of attack. One was that the approval under Section 153D was mechanical. The other was that the addition could not stand under Section 153A without incriminating material. The Tribunal decided the case on the second line. It held that the District Magistrate's letter on which the addition rested was not recovered in the search and so was not incriminating material.

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The case at a glance

• Parties: Vindhyawasini Stone Products vs ACIT, (Cc), Allahabad
• Bench: Income Tax Appellate Tribunal - Allahabad
• Date: 13 March 2026
• Court level: Tribunal (ITAT)
• Sections engaged: 153A, 153D
• Outcome: Partial relief

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Facts of the case

The appeal (ITA No. 33/ALLD/2023, AY 2010-11) was filed by the assessee against the order of the CIT(A)-3, Lucknow, which had dismissed its appeals against an assessment order passed by the AO on 23.12.2021. The assessed income was Rs 3,57,567. That figure included an addition of Rs 3,49,812 on account of unexplained royalty payment. The grounds of appeal show that the addition was made on the basis of a District Magistrate report dated 13.12.2012. The assessee contended that necessary details and evidence on the royalty payments had been filed before the lower authorities.

After filing its grounds, the assessee also filed a petition with three additional grounds. These challenged the assessment on the footing that the Section 153D approval was mechanical and ritualistic. They also alleged that the draft assessment orders in almost 290 cases, including the assessee's, were approved in that manner.

At the hearing, the assessee's representatives pointed to a letter filed on 18.10.2024. According to that letter, the AO had forwarded 45 cases to the JCIT by a single letter on 25.03.2013, and the JCIT approved all of them on 26.03.2013. The assessee's side relied on Allahabad High Court decisions in PCIT vs. Siddhartha Gupta, PCIT vs. Sapna Gupta and PCIT & Ors vs. Subodh Agarwal. It also cited the ITAT Lucknow decision in Naveen Jain and Others vs. DCIT and the Orissa High Court decision in CIT vs. Serajuddin and Co. In response to an affidavit from the approving JCIT, it cited Mohinder Singh Gill vs. Chief Election Commissioner for the proposition that an order must be judged by the reasons stated in it. It also cited the Coordinate Bench decision in Vrushali Sanjay Shinde, and Shiv Kumar Nayyar vs. ACIT for the independence of the AO.

The Revenue, through the CIT(DR) and Sr DR, argued that whether approval under Section 153D was given with application of mind is a question of fact and not a legal issue going to the root. It said approval is an administrative act carrying a presumption of regularity, and that the assessee had produced no tangible material to rebut it. It also relied on CBDT general guidelines for search and seizure assessments dated 22.12.2006, which in its view showed the AO and the Range Head were jointly involved in the assessment process.

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Issues raised

• Whether the assessment, and specifically the addition for unexplained royalty payment, could be sustained under Section 153A when it rested on a District Magistrate's letter.
• Whether that letter was incriminating material recovered during the search, as required for additions in unabated assessments.
• Whether the approval under Section 153D was granted mechanically, so as to vitiate the assessment. This was raised through the additional grounds.
• Whether the assessee could raise the incriminating-material objection at that stage, given that the Supreme Court decision on which it relied post-dated the CIT(A)'s order.

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What the court held

The Tribunal concluded: "In the result, the appeal of the assessee is partly allowed." Ground no. 1 was allowed, and grounds no. 2 to 6 were held to be infructuous and dismissed as such.

The Tribunal reasoned that, as laid down by the Supreme Court, additions in unabated assessments under Section 153A must rest on incriminating material found during the search. For any other addition, it remains open to the Department to take recourse to the reassessment provisions. The Supreme Court decision relied on was rendered on 24.04.2023, after the CIT(A)'s order of 17.02.2023. The Tribunal therefore noted that the assessee had raised the issue at the first available opportunity, which it was entitled to do.

On the facts, the Tribunal found it "quite clear" that the District Magistrate, Sonebhadra's letter had not been recovered during the search and therefore did not constitute incriminating material. No addition was sustainable in an assessment under Section 153A or its companion provision, and the addition was held fit to be deleted. Because the addition fell as unsustainable in law, the remaining grounds, including those on the royalty merits and interest, were disposed of as infructuous.

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Strategy observations

1. Additional grounds were filed after the original appeal. The assessee filed a petition with three further grounds on the Section 153D approval. It supported them with a 92-page paper book containing the decisions relied upon.
2. The approval challenge was built on specific facts. The assessee's letter of 18.10.2024 pointed to 45 cases forwarded in one letter on 25.03.2013 and approved the next day. It paired this with Allahabad and Orissa High Court authority on mechanical approvals.
3. The assessee answered the JCIT's affidavit on principle. Citing Mohinder Singh Gill, it argued that reasons for an order cannot be supplemented later by affidavit, and it described the affidavit as an afterthought.
4. The Revenue's counter-position was recorded. It characterised the Section 153D approval as a question of fact attracting a presumption of regularity, and it relied on the 2006 CBDT guidelines on joint AO–Range Head involvement.
5. The incriminating-material objection was raised after a later Supreme Court ruling. The Tribunal accepted that this was the first available opportunity, because the ruling came after the CIT(A)'s order. The operative ground on which the assessee succeeded was this one, not the Section 153D challenge.

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Why this case matters

The order applies the incriminating-material requirement to a concrete fact pattern. The addition rested on a District Magistrate's letter dated 13.12.2012, a document the Tribunal found was not recovered during the search. The Tribunal held that such a document cannot support an addition in an unabated assessment under Section 153A.

The order also records that, once the addition failed on this ground, the Tribunal treated the other grounds as infructuous. The extensive Section 153D arguments therefore did not become the basis of the decision, even though they occupy much of the order. Section 153A search assessments frequently carry both challenges, mechanical approval and the lack of incriminating material, and here the Tribunal disposed of the case on the second.

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Source

This case is drawn from the TaxNoticeAI structured legal corpus (16,101 Indian tax judgments, CBIC circulars, ITAT rulings, AAR rulings, GSTAT rulings), sourced from indiankanoon.org and official court portals. Original document: https://indiankanoon.org/doc/107890353/