2018 (11) TMI 1736 - AT - Income Tax

Reopening of assessment u/s 147 - Addition u/s 69C on account of alleged unexplained expenditure - HELD THAT - Search operation was carried on in the premises of Santosh Group of Institutions. This means that any document found during the course of the search makes the assessee other person therefore the correct section for initiation of any proceeding against the assessee is section 153C of the Act. On identical set of facts the coordinate bench in the case of Sushil Gaur 2017 (8) TMI 482 - ITAT DELHI had the occasion to consider identical set of facts. In that case also the search in the premises of Santosh Medical College was under consideration. Respectfully following the findings of the coordinate bench. I am inclined to hold that the notice issued u/s 148 of the Act and assessment framed u/s 147 of the Act is void ab initio.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in the judgment are:

- Whether the reassessment proceedings initiated under section 147 read with section 143(3) of the Income Tax Act, 1961, are valid when based on information derived from a search conducted under section 132 of the Act on premises of a third party (Santosh Group of Institutions) and documents seized therein do not directly pertain to the assessee.

- Whether the Assessing Officer was correct in making an addition of Rs. 25 lakhs under section 69C of the Act on account of alleged unexplained expenditure (capitation/donation fees) for admission of the assessee's son.

- Whether the initiation of reassessment proceedings under section 147 and issuance of notice under section 148 is proper, or whether the correct procedure under section 153C of the Act should have been followed, given the source of information was a search of a third party's premises.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Validity of reassessment proceedings initiated under section 147/148 instead of section 153C

Relevant legal framework and precedents: Section 147 of the Income Tax Act empowers the Assessing Officer (AO) to reopen an assessment if there is reason to believe that income has escaped assessment. Section 148 provides for issuance of notice for such reassessment. However, section 153C specifically deals with assessment or reassessment in cases where a search or seizure has been conducted under section 132 of the Act in the premises of a third party. Section 153C mandates that any income escaping assessment discovered during such search relating to the "other person" (third party) must be assessed through a separate proceeding under section 153C, not under section 147.

Precedents relied upon include a coordinate bench decision in Sushil Gaur vs. ITO, where identical facts were considered. The ITAT in that case held that reassessment initiated under section 147/148 on the basis of documents found during a search of a third party was void ab initio and that section 153C was the proper provision to be invoked. The ITAT also referred to decisions such as ITO vs. Arun Kumar Kapoor (Amritsar Bench) and Rajat Shubra Chatterji vs. ACIT (Delhi Bench) which supported this legal position.

Court's interpretation and reasoning: The Court examined the reasons recorded by the AO for initiating proceedings under section 147 and found that the search was conducted at the premises of Santosh Group of Institutions, a third party. The seized documents indicated alleged donations/capitation fees paid by the assessee for admission of his son. Since the documents were found in the third party's premises, the assessee qualifies as an "other person" under the Act.

The Court reasoned that in such a situation, the correct legal procedure is to initiate proceedings under section 153C, which specifically governs assessment of income escaping assessment in cases of search/seizure of third party premises. The initiation of reassessment under section 147/148 without following section 153C was therefore held to be legally improper and void ab initio.

Key evidence and findings: The search was conducted on 27.06.2013 at Santosh Group of Institutions and Dr. P. Mahalingam's premises. Documents seized revealed alleged donation/capitation fees paid by the assessee. The assessee denied paying Rs. 25 lakhs of the alleged Rs. 40 lakhs, claiming part payment from cash savings and education loans. However, the AO relied on seized documents to make the addition.

Application of law to facts: Since the documents incriminating the assessee were found in the third party's premises, the reassessment should have been initiated under section 153C. The AO's failure to do so rendered the reassessment proceedings invalid.

Treatment of competing arguments: The Revenue argued in support of the AO's order and the addition. The assessee's counsel relied heavily on the coordinate bench decisions and the procedural requirements under the Act. The Court found the assessee's arguments persuasive and consistent with established precedents.

Conclusion: The reassessment proceedings initiated under section 147/148 were held to be void ab initio for non-compliance with the mandatory procedure under section 153C.

Issue 2: Addition of Rs. 25 lakhs under section 69C for unexplained expenditure

Relevant legal framework and precedents: Section 69C of the Income Tax Act deals with unexplained expenditure where the assessee fails to satisfactorily explain the source of certain expenditure, and the AO can make an addition to income accordingly.

Court's interpretation and reasoning: The Court did not proceed to adjudicate on this issue in detail because it quashed the reassessment proceedings on procedural grounds. Since the reassessment itself was void, the addition under section 69C could not stand.

Key evidence and findings: The AO relied on seized documents indicating alleged payment of capitation/donation fees. The assessee disputed the amount and source of payments. However, the Court did not delve into the merits of these factual disputes due to the procedural invalidity of the reassessment.

Application of law to facts: The issue became moot after the reassessment was quashed.

Treatment of competing arguments: The assessee challenged the addition on the basis of non-payment of the full amount and source explanation. The Revenue supported the addition. The Court declined to decide on this ground.

Conclusion: No adjudication on the addition under section 69C was made as reassessment was quashed.

3. SIGNIFICANT HOLDINGS

The Court held that:

"On having gone through the decisions cited above especially the decision of Amritsar Bench in the case of ITO vs. Arun Kumar Kapoor (supra), I find that in that case as in the present case before me, reassessment was initiated on the basis of incriminating material found in search of third party and the validity of the same was challenged by the assessee before the Learned CIT(Appeals) and the Learned CIT(Appeals) vitiated the proceedings. The same was questioned by the Revenue before the ITAT and the ITAT after discussing the cases of the parties and the relevant provisions in details has come to the conclusion that in the above situation, provisions of sec. 153 C were applicable which excludes the application of sections 147 and 148 of the Act. The ITAT held the notice issued under sec. 148 and proceedings under sec. 147 as illegal and void ab initio."

Core principles established include:

• Where a search and seizure under section 132 is conducted at the premises of a third party, any reassessment of income of the "other person" (third party) must be initiated under section 153C, not under section 147/148.
• Failure to follow the procedure under section 153C renders the reassessment proceedings and notice issued under section 148 void ab initio.
• Assessments framed in violation of this procedural requirement cannot be sustained.

Final determinations:

• The reassessment proceedings initiated under section 147/148 were quashed as void ab initio for non-compliance with section 153C.
• The addition of Rs. 25 lakhs under section 69C was not adjudicated upon due to quashing of the reassessment.
• The appeal filed by the assessee was allowed accordingly.