2017 (12) TMI 1892 - AT - Income Tax

Validity of reassessment proceeding u/s 147 v/s assessment u/s 153C - HELD THAT - As noted by the AO in the assessment order that during the course of search operation carried out u/s. 132 in the case of ARPL seized material was found which reflected that there was unexplained investment of Rs. 9, 90, 145/- made by the assessee. On the basis of this evidence found in the course of search the AO invoked the provisions of section 147 after duly recording the reasons for reopening of the assessment and a notice u/s. 148 of the Act was issued on 16.04.2012 which was duly served on the assessee. Hence it is seen that the search in the present case was carried out on 03.12.2010 and therefore for Assessment Year 2010-11 section 153C can be invoked but for AY 2011-12 being the year of search section 153C cannot be invoked and therefore in respect of Assessment Year 2010-11 these Tribunal orders cited by assessee are applicable and respectfully following the same hold that the assessment order framed by the AO u/s. 147 for Assessment Year 2010-11 is bad in law because the same should have been made by the AO u/s. 153C. Since in AY 2010 11 the assessment order itself is quashed the issue on merit do not call for any adjudication. Accordingly the assessment order in Assessment Year 2010-11 is quashed. Addition based on seized material - AO has simply said that assessee did not satisfy this claim. In the order of CIT(A) also this is only basis given by CIT(A) to reject the explanation of the assessee that no evidence was placed on record to justify the explanation of the assessee. In my considered opinion assessee has to explain the seized paper and if the explanation of the assessee is rejected cogent reasons should be given for such rejection. Explanation of the assessee is reasonable that these are rough estimated figures noted out of memory about opening balance of capital of HUF and its income over the years and the same is supported by the Balance Sheet of HUF except odd figures. We feel it proper to accept the explanation of the assessee in the facts of the present case thus delete the addition on the basis of this seized material. Addition on non-materialization of the transaction - As from seized material find that in the same amount is mentioned with one name but the date mentioned has been struck down. In my considered opinion the seized material itself suggests that since the date is struck down it may be a case of non-materialization of the transaction and therefore on this issue also find force in the submissions of ld. AR of assessee and therefore this addition is also deleted. Ground is allowed. Addition on the basis of this dumb document - From the seized material available it is seen that there is noting of a few amounts only without any name or date. As per the page 8 of the assessment order also it comes out that the AO has invoked the provisions of section 292C without any concrete finding that this document has any relation with the assessee. Section 292C comes into operation if the document in question is found in the possession of the assessee ion course of search. In the present case section 292CD is not applicable because the document in question is not found in the possession of the assessee and it was found in course of search at the premises of ARPL. Hence any addition on the basis of this dumb document is not justified without establishing any connection with the assessee and therefore this addition is also deleted. Ground allowed. Addition advanced by daughter to various concerns - As documents have to be accepted and as per the same the source of fund is properly explained in the hands of Ms. N S Swetha daughter of the assessee and therefore this addition is also deleted. Ground is also allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in these appeals relate primarily to the validity and applicability of the reassessment proceedings initiated by the Assessing Officer (AO) under the Income-tax Act. Specifically:

• Whether the reopening of assessment for Assessment Year (AY) 2010-11 under section 147 of the Income-tax Act was valid, or whether the provisions of section 153C should have been invoked given that the reassessment was based on material found during a search under section 132 in the case of a third party (M/s. Anantha Refinery Pvt. Ltd.).
• Whether for AY 2011-12, being the year of search, the provisions of section 153C are applicable or the AO was justified in reopening the assessment under section 147.
• On the merits for AY 2011-12, whether the additions made by the AO on the basis of seized documents (including unexplained investments, alleged loans, and interest income) were justified.
• Whether the AO and the Commissioner of Income Tax (Appeals) [CIT(A)] erred in treating certain capital balances and scribbled notes found in seized material as taxable income without proper evidence or explanation.
• Whether the AO erred in levying interest under sections 234A, 234B, and 234C of the Income-tax Act.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Validity of reassessment proceedings for AY 2010-11 under section 147 vs. applicability of section 153C

Relevant legal framework and precedents: Section 147 allows reopening of assessments if the AO has reason to believe income has escaped assessment. Section 153C specifically applies where a search under section 132 is conducted in respect of a person (other than the assessee), and the AO finds books of account or documents belonging to the assessee. Section 153C provides a special procedure for reassessment in such cases, superseding sections 139, 147, 148, 149, 151, and 153.

Precedents cited include Tribunal decisions in Rajat Shubra Chatterji vs. ACIT and ITO vs. Shri Arun Kumar Kapoor, which held that if reassessment is based on seized material from a search conducted in the premises of a third party, the AO must proceed under section 153C and not section 147/148. Failure to do so renders the reassessment invalid and void ab initio.

Court's interpretation and reasoning: The Tribunal examined the facts that a search was conducted on 03.12.2010 in the case of M/s. Anantha Refinery Pvt. Ltd. (ARPL), and seized material reflected unexplained investment by the assessee. The AO issued notice under section 148 and reopened the assessment under section 147. The Tribunal noted that since the reassessment was based on material found during the search of ARPL (a third party), the proper procedure was to invoke section 153C for AY 2010-11.

The Tribunal relied on the cited precedents and observed that section 153C supersedes section 147/148 in such circumstances. The AO's failure to follow section 153C rendered the reassessment for AY 2010-11 invalid. Consequently, the Tribunal quashed the assessment order for AY 2010-11 without entering into the merits.

Key evidence and findings: The seized material marked A/NSN/1 contained entries indicating unexplained investment by the assessee. The search was conducted in ARPL's premises, not the assessee's. The AO's notice and reassessment were issued under section 147/148, not under section 153C.

Application of law to facts: Given the search was on a third party and material seized pertained to the assessee, section 153C was the applicable provision. The AO's failure to invoke section 153C invalidated the reassessment proceedings.

Treatment of competing arguments: The Revenue argued in support of the AO's proceedings under section 147. The Tribunal rejected this, emphasizing the statutory mandate of section 153C and the precedents mandating its application in such facts.

Conclusions: The reassessment for AY 2010-11 under section 147 was held invalid and quashed. The appeal for AY 2010-11 was allowed accordingly.

Issue 2: Applicability of section 153C for AY 2011-12 (year of search)

Relevant legal framework: Section 153C applies to assessments or reassessments arising from material found during search operations. However, the year in which the search is conducted (year of search) is treated differently, and section 153C is generally not invoked for that year.

Court's reasoning: The Tribunal held that for AY 2011-12, being the year of search, section 153C is not applicable. Therefore, the AO was justified in proceeding under section 147 for reassessment in AY 2011-12.

Conclusions: The grounds challenging the reopening under section 147 for AY 2011-12 were rejected.

Issue 3: Merits of additions for AY 2011-12 based on seized documents and alleged unexplained income

Relevant legal framework: The AO can make additions based on seized documents if they establish unexplained income. Section 292C provides presumptions regarding documents found during search, but the document must be found in the possession of the assessee for the presumption to apply.

Court's interpretation and reasoning: The AO made several additions based on scribbled notes in seized material, including:

• Rs. 19,00,000/- treated as money lent by the assessee (HUF capital balance)
• Rs. 2,28,000/- treated as interest income
• Additions of Rs. 89,000/-, Rs. 6,30,000/-, and Rs. 1,53,000/- as unexplained income
• Rs. 1,00,000/- addition for a proposed hand loan transaction that did not materialize
• Rs. 1,70,000/- addition based on a document found in premises of ARPL
• Rs. 7,17,000/- advanced by the assessee's daughter to various concerns

The assessee explained that the scribbled notes were rough estimates prepared by the granddaughter from memory, reflecting the opening capital balance and income of the HUF over the years, supported by the HUF's balance sheet. The Tribunal found no cogent reasons in the assessment order or CIT(A) order rejecting this explanation and held that the explanation was reasonable and supported by documentary evidence.

Regarding the Rs. 1,00,000/- addition, the Tribunal noted the date was struck off in the seized material, indicating the transaction did not materialize, thus deleting the addition.

For the Rs. 1,70,000/- addition, the Tribunal observed that the document was found in ARPL's premises, not the assessee's, and lacked any connection with the assessee. Hence, section 292C presumptions did not apply, and the addition was deleted.

For Rs. 7,17,000/- advanced by the assessee's daughter, the Tribunal accepted the explanation and evidence of the daughter's income tax returns and balance sheets, which showed advances to ARPL and related concerns. The addition was deleted.

Key evidence and findings: Seized material (pages 27-29 of paper book), HUF balance sheets, copies of IT returns filed by the daughter for multiple years, and the absence of any concrete findings by AO linking certain seized documents to the assessee.

Application of law to facts: The Tribunal applied the principle that an assessee's explanation must be accepted unless cogent reasons exist for rejection. The rough estimates and ledger evidence were sufficient to explain the seized notes and alleged unexplained income. Additions based on documents not found in the assessee's possession or on unsubstantiated presumptions were disallowed.

Treatment of competing arguments: The Revenue's support for the AO and CIT(A) orders was rejected due to lack of concrete evidence and failure to provide cogent reasons for rejecting the assessee's explanation.

Conclusions: Additions relating to the HUF capital balance, scribbled notes, proposed hand loan, and advances by the daughter were deleted. Grounds 5, 6, 7, 8, 9, and 10 were allowed in part.

Issue 4: Levy of interest under sections 234A, 234B, and 234C

The Tribunal noted that ground no. 11 regarding interest was consequential and dependent on the outcome of the additions. Since certain additions were deleted, the interest levied would be correspondingly adjusted.

3. SIGNIFICANT HOLDINGS

On the validity of reassessment proceedings under section 147 versus section 153C, the Tribunal held:

"In view of the provisions of section 153C of the Act, section 147/148 stand ousted. In the instant case, the procedure laid down under section 153C has not been followed by the A.O. and, therefore, assessment has become invalid."

"The CIT (A) was justified in following the ratio laid down by the Hon'ble Supreme Court in the case of Manish Maheshwari Vs. ACIT... wherein it has been held that if the procedure laid down in section 158BD is not followed, block assessment proceedings would be illegal. The CIT (A) has correctly observed that the provisions of section 153C are exactly similar to the provisions of section 158BD of the Act in block assessment proceedings."

On the merits of additions based on seized material, the Tribunal emphasized the principle:

"Assessee has to explain the seized paper and if the explanation of the assessee is rejected, cogent reasons should be given for such rejection. Explanation of the assessee is reasonable... supported by the Balance Sheet of HUF except odd figures."

"Any addition on the basis of this dumb document is not justified without establishing any connection with the assessee."

Final determinations:

• Assessment for AY 2010-11 framed under section 147 is quashed as invalid; section 153C should have been invoked.
• Reassessment for AY 2011-12 under section 147 is valid as section 153C does not apply to the year of search.
• Additions based on rough estimates in seized material, proposed but unmaterialized transactions, and advances by the daughter with proper documentary evidence are deleted.
• Addition based on documents not found in the assessee's possession and without connection to the assessee is deleted.
• Interest levied is consequential and to be adjusted accordingly.
• Appeal for AY 2010-11 allowed; appeal for AY 2011-12 partly allowed.