The provisions with respect to assessment in the case of search was earlier contained in Section 153A of the Income Tax Act, 1961. Although after the finance Act, 2021 the assessment in the case of search has been combined with the reassessment proceedings and now the relevant Sections are from 147 to 151 of the Act. Nevertheless, a lot of contentious issues with respect to Section 153A and Section 153C are still pending before various courts. It is a well settled proposition that the provisions of Section 153A as well as 153C can be initiated only in a case where incriminating material has been found in the course of search.

The Income Tax Department has been taking a liberal view with respect to what constitutes as incriminating material. In the case of a company which has received investment from its shareholders, a number of documents with respect to the investor company were being treated as incriminating documents. The Departments view has been that the presence of original share certificate and other documents in the premises of the investee company reflects connivance and the investment is not genuine but an accommodation entry. This issue was recently examined by the Hon’ble Delhi High Court and it was held that original share certificates found in the premises of the issuing company does not constitute as incriminating material as the investor is not a IIIrd party. The Hon’ble Delhi High Court in the case of PCIT v. Panchmukhi Management Services Pvt. Ltd. (ITA 319/2022, Delhi HC) examined the aforesaid issue wherein the original share certificates issued by the Minda Group of Companies to the investor M/s Panchmukhi Management Services Pvt. Ltd. were found during the search conducted in the premises of the Minda Group of Industries. In fact, it was the contention of the Department that even the financial statements of the investor company M/s Panchmukhi Management Services Pvt. Ltd.  found in the premises of Minda Group constitutes as incriminating material based on which action under Section 153A as well as 153C can be initiated against the issuing as well as the investor company.

The moot question in the aforesaid case was whether the share certificate found can be inferred as incriminating for attracting the aforesaid provisions. The judgement has brought in further clarity in the concept of incriminating material.    

In the present case, it was distinctly emphasized that the original share certificate found at the premises were of the issuing company allotted to the investor company only and not of any IIIrd party and thus, the same cannot be considered as incriminating so as to warrant such additions against the investor or investee company.  

In other words, an incriminating material is the heart and soul for attracting the provisions relating to assessment / reassessment proceedings in the case of search and seizure operations and the essence for any document to be reckoned as incriminating is that the said document should be corroborative and indicative of any undisclosed Income.     

In conclusion, the concept of incriminating material has been in dispute in the past many years and the sole source of clarity has been the judgements which has over the years given a definite shape and perspective to the said concept. Similarly, the aforesaid judgement has brought in a little more clarity to the documents which can be indicative of being incriminating material.