‘Base Note’ from French Govt. is Not Incriminating Material for Income Tax Addition u/s 153A: Bombay HC [Read Order]

The Bombay High Court recently clarified that a “base note” received from the French Government under international information exchange arrangements does not constitute incriminating material for making income tax additions under Section 153A of the Income Tax Act, 1961, when no other evidence was found during the course of a search.

The respondent-assessee, Milan Kavin Parikh had filed his return of income for the relevant assessment year on October 16, 2006, declaring a total income of ₹2,23,167. Parikh stated that he was a Director of M/s Mahendra Brothers Exports Private Limited and a partner in M/s Ketan Brothers Exports.

On August 8, 2011, the Income Tax Department conducted a search and seizure operation under Section 132 of the Income Tax Act, 1961 in the case of Mahendra Brothers Exports Pvt. Ltd. and other group concerns, after the Department received information relating to alleged undisclosed overseas bank accounts.

Following the search, the Assessing Officer (AO) initiated proceedings under Section 153A and made substantial additions on the basis of information received from French authorities, alleging undisclosed foreign income linked to bank accounts with HSBC Bank (Suisse) SA, Geneva.

The additions were primarily based on a document described as a “base note”, which contained information suggesting that the assessee was the beneficial owner of certain foreign bank accounts. Relying on this base note, the AO proceeded to treat the alleged peak balance of USD 2,43,132.65 in the foreign accounts as unexplained income and brought them to tax while framing assessments under Section 153A.

The assessee challenged the additions before the Commissioner of Income Tax (Appeals) and subsequently before the Income Tax Appellate Tribunal. The Tribunal deleted the additions, holding that no incriminating material was found during the search and that the entire case of the Revenue rested on post-search information received from foreign authorities.

The ITAT also noted that the assessee consistently denied being the beneficial owner of the foreign bank accounts and that the department had not found any incriminating material during the search to go through with the additions.

Aggrieved, the Revenue approached the Bombay High Court contending that the base note constituted credible information sufficient to sustain additions under Section 153A, even in the absence of material seized during the search.

The Division Bench of Justice G.S. Kulkarni and Justice Aarti Sathe noted that the base note relied upon by the Revenue was a document that was obtained after the search, and not during the search action.

The Division Bench relied on the Supreme Court ruling in PCIT v. Abhisar Buildwell (P) Ltd (2023), where it was categorically held that no addition can be made by the AO in the absence of any incriminating material found during the course of search under Section 132 or requisition under Section 132A of the Income-tax Act.

The Apex Court had further clarified in Abhisar Buildwell that completed/unabated assessment can be re-opened by the AO only in exercise of powers under Section 147/148 of the Income Act.

Accordingly, the Court dismissed the Revenue’s appeal, holding that a base note received from the French Government cannot be treated as incriminating material for income tax additions under Section 153A.

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