2015 (8) TMI 1597 - AT - Income Tax

Validity of Assessment u/s 153A - if no incriminating material found in search - HELD THAT - The assessing officer while passing the assessment order u/s 153A cannot disturb the assessments/reassessment order which had attained finality unless material gathered in the course of search establishes that the earlier assessment finalized is contrary to the fact. ITAT Special Bench in the case of All-Cargo Global Logistic Ltd 2012 (7) TMI 222 - ITAT MUMBAI(SB) has reiterated this proposition. Now this decision of the Special Bench has now been upheld by the Hon ble Bombay High Court since reported in 2015 (5) TMI 656 - BOMBAY HIGH COURT wherein the Hon ble Bombay High Court held that if there was no incriminating material found during the course of search then within the scope of section 153A no addition can be made where the assessment are not abated and only pending assessment are open for all kind of additions including the materials found during the course of search and also otherwise. Thus respectfully following the ratio laid down by the Hon ble jurisdictional High Court we hold that none of the additions and disallowance made by the Assessing Officer and confirmed by the CIT (A) can be sustained because admittedly no incriminating material has been found qua the addition made by the Assessing Officer in the assessment year. Accordingly ground no. 1 raised by the assessee is treated as allowed. Computing the income under the head house property - Addition on account of deduction of municipal taxes from the annual letting value - assessee has debited municipal taxes in the profit and loss account for all the assessment years in question and claimed it as allowable business expenditure - AO noted that while computing the annual letting value (ALV) the assessee has not reduced the municipal taxes paid which has resulted in claiming higher amount of deduction u/s 24(a) - HELD THAT - Proviso to section 23 lays down in very clear terms that if the property is in occupation of the tenants then the tax levied by local authority in respect of that property shall be deducted in determining the annual value of the property only to the extent such taxes are borne by the owner. In the present case all the municipal taxes having been borne by the tenants and not by the assessee as an owner we are of the view that the learned CIT (Appeals) was fully justified in directing the AO not to reduce the amount of municipal taxes from annual letting value for the purpose of computing income of the assessee from house property. The impugned order of the learned CIT(Appeals) on this issue is therefore upheld dismissing ground of the Revenue s appeal. Disallowance of total legal and professional expenses - these expenses incurred in connection with the immovable properties for the various assessment years - AO held that these expenses have been incurred in connection with the properties which have been developed and intended for deriving the rental income and therefore same cannot be said to be incurred for the purpose of business thus disallowed these expenses on the ground that it is not allowable u/s 24 - CIT(A) directed the AO to disallow the expenses based on the percentage of income and allow only to the extent of percentage of service charges - HELD THAT - As consistent with the earlier years precedence and respectfully following the same we uphold the working of the CIT (A) for allowing the legal and professional charges and accordingly ground no. 2 raised by the revenue is dismissed. Disallowance on account of foreign travel expenses - assessee submitted that the clientele from whom the rental income are being received are foreign based companies and hence in order to fetch more business and also to retain existing foreign clientele the directors of the company need to undertake foreign travel to lease and negotiate within foreign companies - HELD THAT - We find that the assessee is in the business of development of property and ancillary services. It has established a huge retail mall which known as High Street Phoenix Mall wherein large number of foreign brand shops have been opened. It has come up with the Mall known as Palladium in High Street Phoenix which consists of various foreign brand shops. For getting such kind of foreign clientele the directors of the company have been regularly visiting foreign countries. In earlier years such a claim of expenses has been allowed from the stage of the Tribunal after detail examination and discussion therefore consistent with the view taken in the earlier years we also allow the foreign travelling expenses. Disallowance of total commission and brokerage expenses - assessee submitted that the parties who bring clients for rental were paid brokerage and commission expenses and since the assessee was in receipt of service charges also form the parties to whom the business premises was let out therefore the claim of the assessee is allowable under the head business income - HELD THAT - CIT (A) though agreed in principle that the disallowance made by the Assessing Officer is correct however agreed with the alternate contention of the assessee that the brokerage and commission expenses which are allocated in ratio of rent and service payment are to be allowed to the extent they are allocated for the earning of the services charges. This allocation is in tune with the findings given in the earlier years by the CIT (A) and such a methodology of allocation has also been approved by the Tribunal. CIT (A) has directed the AO to disallow in the ratio of rental and service charges which has been dealt at page 16 of the appellate order. Since this methodology is conformity with the earlier years approved by the Tribunal accordingly we also affirm the same that the brokerage and commission which is allocable to earning of service charges is allowable and which is allowed to rental income is to be disallowed. Ground as raised by the revenue is thus dismissed. Bogus purchases - Addition under the head income from other sources on account of undisclosed income in respect of transaction in relation to accommodation bills - CIT(A) deleted addition - HELD THAT - After making the addition in the aforesaid manner i.e. by reducing the WIP by the quantum of alleged bogus purchase the AO has further made the addition on the ground that the assessee must have received the equivalent amount of cash from the bogus purchases. We are unable to appreciate as to how such an addition can be made again. Firstly even going by the version of the AO if the assessee has paid cheque to the parties for the purchase of material then such a cheque is duly reflected in the cash book / books of account of the assessee. If the assessee has received back the equivalent amount of cash then how an addition can be made for the same amount again as undisclosed income or outside the books because it is the same money which has been received back - Secondly there is no actual evidence to prove that assessee has received cash on account of bogus purchase transaction at least nothing has been brought on record even after extensive search and seizure action and enquiry by the department. No availability of cash was found during the course of search and seizure proceedings. Thus no addition on account of alleged receipts of cash in the hands of the assessee can be made. Even otherwise also if the addition has already been upheld by CIT (A) on account of bogus purchases by reduction in WIP then again adding the same amount as alleged cash receipts would amount to double addition and double taxation which cannot be sustained at all. The finding of the CIT (A) as recorded above is not only factually correct but also in accordance with the provisions of the law and accordingly such a finding of the CIT (A) is affirmed. Addition u/s 69C - addition is flowing from the interpretation of the seized document which is a print out of a Email dated 17th May 2006 - HELD THAT - During the course of entire search and seizure action and post search enquiry neither the buyer nor the recipient has admitted that cash of such magnitude has been transacted. No material or evidence have been found either in the course of search nor has been brought by the Assessing Officer in the post search enquiry that assessee has paid any cash amount. Thus there seems to be no justification to make addition which is purely based on presumption that part amount must have been paid in cash sans any evidence or corroborative material. Even the seized paper also does not suggest cash element. One most important aspect brought on record at the first appellate stage is the rate of the properties in question for which compensation has been paid for vacating the premises. Thus in absence of any evidence or material on record to prove that assessee has paid any amount in cash over and above the amount shown in the books or without there being any enquiry such an addition made by the AO and confirmed by the CIT(A) cannot be sustained and accordingly the amount added u/s 69C is deleted. Disallowance u/s 14A r.w. Rule 8D - assessee company had shown dividend income which was claimed as exempt u/s 10(34) - satisfaction of the AO before making addition - HELD THAT - The satisfaction of the AO is a mandatory requirement to trigger the computation mechanism of Rule 8D. Here in this case once the assessee has given all the detail of its accounts nature of expenses incurred; explained that the expenses claimed has direct relation with the earning of business income and also why such an expenditure cannot be held to be attributable for earning of exempt income then the AO was required under the law to examine the correctness of the claim and record his satisfaction that he is not satisfied with such a claim by setting out the reasons in the assessment order. However in the present case such a mandatory requirement as enshrined in sub-section (2) of section 14A and rule 8D(1) has not been complied with. Once that is so he cannot proceed to enhance the disallowance u/s 14A over and above offered by the assessee. Accordingly the disallowance made by the Assessing Officer and partly sustained by the CIT (A) is deleted on this preliminary ground and thus ground no. 2 raised by the assessee is treated as allowed.

Summary

The core legal issues considered by the Tribunal in the appeals arising from the assessments for the years 2002-03, 2006-07, 2007-08, and 2008-09 primarily relate to the scope and application of section 153A of the Income Tax Act concerning search and seizure proceedings, the treatment of municipal taxes in computation of annual letting value, allowance of legal and professional expenses, foreign travel expenses, commission and brokerage payments, additions on account of bogus accommodation entries, disallowance under section 14A read with Rule 8D, and additions under section 69C relating to unexplained cash payments.

Regarding the assessment year 2002-03, the principal issue was whether additions and disallowances could be made under section 153A in respect of an assessment year for which the assessment had already attained finality before the date of search and seizure, in the absence of any incriminating material found during the search. The assessee contended that since the assessment was completed and not pending (non-abated), no additions could be made unless incriminating material was discovered. The revenue argued that issuance of notice under section 153A empowered the Assessing Officer (AO) to reassess income, including scrutinizing declared income.

The Tribunal analyzed the statutory framework of section 153A, which mandates that assessments pending on the date of search are abated and reassessed, but assessments already finalized do not abate as per the second proviso to section 153A. The Tribunal relied on authoritative precedents, including decisions of the Bombay High Court and Rajasthan High Court, and the ITAT Special Bench decision in All-Cargo Global Logistic Ltd, which was upheld by the Bombay High Court. These authorities established that for non-abated assessments, additions can only be made on the basis of incriminating material found during the search having a live nexus with the additions. Without such material, the finalized assessment cannot be disturbed. The Tribunal quoted the principle from Murli Agro Products Ltd. that "the AO while passing the assessment order u/s 153A cannot disturb the assessments/reassessment order which had attained finality, unless material gathered in the course of search establishes that the earlier assessment finalized is contrary to the fact."

Applying this principle, the Tribunal held that since no incriminating material was found relating to AY 2002-03, the additions and disallowances confirmed by the CIT(A) could not be sustained. Consequently, the assessee's appeal was allowed and the revenue's appeal dismissed for AY 2002-03.

For the assessment years 2006-07, 2007-08, and 2008-09, the issues raised by the revenue included the disallowance of municipal taxes from annual letting value (ALV), allowance of legal and professional expenses, foreign travel expenses, commission and brokerage payments, additions on account of bogus accommodation entries, and disallowance under section 14A read with Rule 8D.

On the issue of municipal taxes, the Assessing Officer had disallowed municipal taxes from the computation of business income and allowed the same as a deduction from ALV under the head "Income from house property." The assessee contended that municipal taxes were borne by tenants as per lease agreements, and hence, no deduction should be made from ALV. The Tribunal, following the proviso to section 23(1) and consistent earlier decisions including a Calcutta High Court ruling and the Tribunal's own orders for earlier years, held that where municipal taxes are borne by tenants, the amount should not be deducted from ALV. This view was affirmed for all relevant years, dismissing the revenue's grounds on this issue.

Regarding legal and professional expenses, the Assessing Officer disallowed a portion of such expenses on the ground that they related to development of properties to be let out and thus not allowable under section 24 for business income. The CIT(A) accepted the principle but allowed a proportionate allocation of expenses corresponding to service charges income, based on the ratio of rental income to service charges. The Tribunal upheld this apportionment, relying on earlier decisions in the assessee's own case, and dismissed the revenue's appeal on this ground.

The foreign travel expenses claimed by the assessee were disallowed by the AO for lack of documentary evidence supporting their business purpose. The assessee's case was that foreign travel was necessary to maintain and expand foreign clientele for the retail mall properties. The CIT(A) and Tribunal, consistent with earlier years' findings, accepted the business necessity and allowed the expenses.

On commission and brokerage expenses, the AO disallowed the entire amount, asserting that commission is paid for introduction of new clients and not for rendering service charges. The CIT(A) allowed a proportionate deduction corresponding to the service charges income, following earlier precedents. The Tribunal affirmed this approach, allowing the commission and brokerage expenses allocable to service charges and disallowing the balance.

A significant issue pertained to additions on account of alleged bogus accommodation entries relating to purchases from three entities found to be providing accommodation bills. The AO added the value of such bogus purchases as income from other sources and reduced the capital work-in-progress (WIP) accordingly. The assessee contended that no benefit was derived as these amounts were capitalized and no depreciation or expenditure claims were made. The CIT(A) confirmed the bogus nature of purchases based on statements of the entities and lack of cross-examination by the assessee, upheld the reduction of WIP, but deleted the addition of the same amount as income from other sources to avoid double taxation. The Tribunal concurred, holding that once the WIP was reduced, adding the same amount again as income would amount to double addition, which is impermissible. It also noted absence of evidence of receipt of cash corresponding to bogus purchases during search and seizure.

In the assessee's appeal for AY 2007-08, the issue arose regarding addition of Rs. 4 crores under section 69C, alleged to represent unexplained cash payments to two parties for surrender of tenancy rights. The AO relied on a seized email printout indicating a negotiation for Rs. 8 crores, with a remark that payment should be "cheque only," and inferred that Rs. 4 crores must have been paid in cash. The assessee denied any cash payment, asserting that the final agreed amount was Rs. 4 crores paid by cheque only, and the email reflected only a negotiation stage. The CIT(A) upheld the addition, reasoning that similar cash payments were admitted in other cases and the rate per square foot was consistent with the addition.

The Tribunal, however, analyzed the seized document and surrounding facts, observing that the email showed negotiation, not final settlement, and explicitly stated payment was to be "cheque only." It found no evidence of actual cash payment or receipt during search or post-search proceedings. It also noted that including the alleged cash payment would result in an improbably high rate per square foot compared to subsequent years. Therefore, the Tribunal deleted the addition under section 69C, holding that addition based solely on presumption without corroborative evidence cannot be sustained.

For AY 2008-09, the assessee challenged partial confirmation of disallowance of legal and professional expenses and disallowance under section 14A read with Rule 8D. The Tribunal upheld the disallowance of legal and professional expenses to the extent they related to earning rental income (chargeable under "Income from house property") and not business income, consistent with earlier years' findings.

Regarding disallowance under section 14A, the AO made disallowance on account of expenditure attributable to exempt dividend income, applying Rule 8D formula without recording satisfaction as mandated by section 14A(2) and Rule 8D(1). The assessee submitted detailed accounts and explanations, showing no expenditure attributable to exempt income. The CIT(A) reduced the disallowance but upheld a portion based on 0.5% of average investments.

The Tribunal held that recording of satisfaction by the AO regarding the correctness of the assessee's claim is a mandatory precondition to invoke Rule 8D disallowance. Since the AO did not record such satisfaction or reasons for rejecting the assessee's claim, the disallowance could not be sustained. The Tribunal deleted the disallowance under section 14A in entirety, allowing the assessee's appeal on this ground.

The revenue's grounds challenging the CIT(A) orders on municipal taxes, legal and professional expenses, foreign travel expenses, and bogus accommodation entries for AYs 2006-07, 2007-08, and 2008-09 were dismissed, following consistent application of principles and earlier decisions.

In conclusion, the Tribunal's significant holdings include the following:

"The AO while passing the assessment order u/s 153A cannot disturb the assessments/reassessment order which had attained finality, unless material gathered in the course of search establishes that the earlier assessment finalized is contrary to the fact."

"Where municipal taxes are borne by tenants as per lease agreements, such taxes are not deductible from annual letting value under section 23(1)."

"Legal and professional expenses incurred in relation to earning rental income are not allowable as business expenses under section 24, but may be allowed proportionately if related to service charges income."

"Foreign travel expenses incurred for business purposes to maintain and expand clientele are allowable."

"Commission and brokerage expenses are allowable proportionately to the income to which they relate."

"Additions on account of bogus accommodation entries confirmed by reduction of capital work-in-progress cannot be added again as income to avoid double taxation."

"Additions under section 69C require corroborative evidence; addition based solely on presumption without evidence cannot be sustained."

"Disallowance under section 14A read with Rule 8D requires prior recording of satisfaction by the Assessing Officer regarding correctness of the assessee's claim; absence of such satisfaction invalidates the disallowance."

These principles were applied to allow the assessee's appeals for AYs 2002-03 and 2007-08, partly allow for AY 2008-09, and dismiss the revenue's appeals for AYs 2002-03, 2006-07, 2007-08, and 2008-09.