2025 (6) TMI 1529 - AT - Income Tax

Validity of Assessment u/s 153C - absence of any incriminating material having a bearing on the income for the year under consideration - characterization of benefits arising under a Joint Development Agreement (JDA) - HELD THAT - The incriminating material which was seized had to pertain to the A.Y in question for which the Assessing Officer has issued notice u/s 153C and in the absence of the document which were seized have any co-relation document wise and A.Y-wise with the income assessable to tax has escaped assessment the requirement u/s 153C of the Act is not satisfied. It is a mandatory condition for initiation of proceedings u/s 153C of the Act that the AO is satisfied that the seized document is an incriminating material and also having a bearing on determination of total income for a particular A.Y or for all the A.Ys. In the case in hand what is referred by the AO is JDA which is otherwise duly recorded in the books of account as the amount received by the assessee as refundable security is reported in the balance sheet of the assessee as well as in the cash book and bank account of the assessee. Therefore at the first stage the JDA would not constitute an incriminating material as the amount received on account of refundable security would not be held as income even in case of transfer of immovable property as defined u/s 2(47)(v) r.w.s. 53 of Transfer of Property Act as held in case of Smt. Shanta Vidya Sagar Annam 2025 (1) TMI 460 - TELANGANA HIGH COURT In the case in hand the JDA is not an agreement to sell and further the AO has not disputed the fact that the assessee has treated the land in question as stock-in-trade and therefore the receipt of refundable security under the JDA would not ipso facto be an income much less an undisclosed income or income assessable to tax has escaped the assessment. Accordingly satisfaction recorded by the AO is very vague without specifying the linkage between the seized material and bearing on the income of a particular assessment year or more than one particular assessment year and therefore the same is not in accordance with the provisions of the Act and consequently the proceedings initiated by the AO u/s 153C on the basis of invalid satisfaction are also not sustain able in law and liable to be quashed. Assessee appeal allowed.

Summary

The core legal questions considered by the Tribunal in these cross appeals concern the validity of initiation of proceedings under section 153C of the Income Tax Act, 1961 (the Act) in the absence of incriminating material having a bearing on the assessment year (AY) under consideration, and the correctness of certain disallowances made by the Assessing Officer (AO) relating to interest expenditure and other expenses. Additionally, the appeals raise issues regarding the characterization of benefits arising under a Joint Development Agreement (JDA) and the appropriate quantum of disallowance of interest expenditure attributable to diversion of interest-bearing funds.

These issues can be grouped as follows:

1. Whether the initiation of proceedings under section 153C of the Act was valid, given the absence of incriminating material specifically linked to the AY 2009-10.

2. Whether the Assessing Officer was justified in making additions to income on account of business income pursuant to the JDA, and relatedly, whether the receipt under the JDA constitutes a "benefit" taxable under section 28(iv) of the Act.

3. Whether the disallowance of interest expenditure and other expenses to the extent of 50% was justified.

Issue 1: Validity of Initiation of Proceedings under Section 153C

Legal Framework and Precedents: Section 153C of the Act permits the Assessing Officer to assess or reassess the income of a person other than the searched person if any books of account, documents, or assets seized or requisitioned during a search pertain to such other person. However, the initiation of proceedings under this section is contingent upon the AO being satisfied that the seized material has a bearing on the determination of the total income of such other person for the relevant AY or years.

Precedents emphasize that the incriminating material must be linked to the AY for which reassessment is sought. The Supreme Court in CIT vs. Singhad Technical Education Society held that the absence of a document-wise and AY-wise correlation between seized material and income escaping assessment renders the satisfaction recorded under section 153C invalid. Similarly, the Delhi High Court in Saksham Commodities Ltd. stressed that the AO must form an opinion that the seized material is likely to influence the determination of total income for the AYs in question. The Court underscored that the power under section 153C is enabling but not a statutory compulsion to reassess all AYs mechanically.

Court's Interpretation and Reasoning: The Tribunal analyzed the statutory provisions and the jurisprudence, concluding that the relevant date for assessing whether an assessment is pending or completed is the date the AO receives the seized documents pertaining to the other person. In the instant case, the assessment for AY 2009-10 was completed prior to the AO recording satisfaction on 4th August 2015, and thus was not pending.

The AO's satisfaction note referred to the JDA and certain annexures but failed to specify which seized documents pertained to the assessee or had a bearing on the income for AY 2009-10 or any other AY. The Tribunal found that the satisfaction was vague and did not fulfill the jurisdictional requirement of establishing a nexus between the seized material and escaped income for the relevant AY.

Key Evidence and Findings: The primary document cited by the AO was the JDA dated 19th April 2008, which was already recorded in the assessee's books as stock-in-trade and work-in-progress. The amount received under the JDA was treated as refundable security and reflected in the balance sheet and bank accounts. The AO did not dispute these facts.

Application of Law to Facts: Given that the JDA was already accounted for and the amount received was refundable security, it could not be considered incriminating material or undisclosed income. The Tribunal relied on the jurisdictional High Court's ruling that receipt of refundable security under a JDA does not constitute income under section 2(47)(v) of the Act and related provisions.

Treatment of Competing Arguments: The Revenue contended that the assessee had not undertaken any development activity under the JDA and that the refundable deposit was business income. However, the Tribunal noted that the AO did not dispute the accounting treatment and the refundable nature of the amount. The assessee's contention that the initiation of proceedings was without valid satisfaction was supported by binding precedents.

Conclusions: The Tribunal held that the initiation of proceedings under section 153C was invalid due to lack of valid satisfaction and absence of incriminating material linked to the AY 2009-10. Consequently, the assessment framed under section 153C was quashed.

Issue 2: Taxability of Benefits under the Joint Development Agreement

Legal Framework and Precedents: Section 28(iv) of the Act taxes any benefit or perquisite arising from business or profession. The question was whether the entitlement arising on signing the JDA constituted a taxable benefit. The Revenue argued that the upfront payment of Rs. 20 crores received as refundable security under the JDA was a benefit taxable under section 28(iv).

Court's Interpretation and Reasoning: The Tribunal noted that the JDA was not an agreement to sell but a development agreement, and the amount received was refundable security. The AO did not dispute the refundable nature or the accounting treatment. The Tribunal referred to the jurisdictional High Court decision that such refundable security under a JDA does not amount to income or benefit under section 28(iv).

Key Evidence and Findings: The assessee's books of account and balance sheet reflected the refundable security, and no evidence was found that the amount was retained as income or that the development activity was completed to crystallize any benefit.

Application of Law to Facts: The Tribunal applied the principle that income accrues only when a right to receive is vested and the benefit is realized or realizable. Since the amount was refundable and the JDA was not an agreement to sell, no benefit arose for taxation in AY 2009-10.

Treatment of Competing Arguments: The Revenue's contention that the upfront payment was a benefit was rejected as it conflicted with the facts and judicial precedents. The Tribunal emphasized that taxability must be determined on legal principles rather than accounting practices.

Conclusions: The Tribunal held that no taxable benefit arose under section 28(iv) from the JDA in the year under consideration.

Issue 3: Disallowance of Interest Expenditure and Other Expenses

Legal Framework and Precedents: The Assessing Officer disallowed 50% of the interest expenditure on interest-free advances given to sister concerns, interest on TDS, and certain site expenses under sections 37(1) and related provisions. The CIT(A) upheld partial disallowance but reduced it to 50%. The assessee challenged the disallowances as illegal and unsupported by evidence.

Court's Interpretation and Reasoning: Since the initiation of proceedings under section 153C was quashed, the Tribunal found the other grounds raised by the assessee and Revenue to be infructuous. The validity of the assessment itself was undermined by the invalid initiation.

Key Evidence and Findings: The Tribunal did not delve into the merits of the disallowances as the primary issue of jurisdiction was dispositive.

Application of Law to Facts: The Tribunal applied the principle that if the assessment is invalid due to lack of jurisdiction or satisfaction, the consequential additions and disallowances cannot stand.

Treatment of Competing Arguments: The Tribunal did not adjudicate on the competing contentions on disallowance due to the quashing of the assessment proceedings.

Conclusions: The disallowances upheld by the CIT(A) were set aside as the assessment itself was invalid.

Significant Holdings:

"It is a mandatory condition for initiation of proceedings u/s 153C of the Act that the Assessing Officer is satisfied that the seized document is an incriminating material and also having a bearing on determination of total income for a particular A.Y or for all the A.Ys."

"The mere existence of a power to assess or reassess the six AYs immediately preceding the AY corresponding to the year of search or the 'relevant assessment year' would not justify a sweeping or indiscriminate invocation of Section 153C."

"The jurisdictional AO would have to firstly be satisfied that the material received is likely to have a bearing on or impact the total income of years or years which may form part of the block of six or ten AYs and thereafter proceed to place the assessee on notice under Section 153C."

"The initiation of proceedings u/s 153C as well as framing of assessment for the year under consideration is invalid and liable to be quashed in the absence of valid satisfaction and incriminating material."

"The receipt of refundable security under the JDA would not ipso facto be an income much less an undisclosed income or income assessable to tax has escaped the assessment."

The Tribunal's final determination was to allow the assessee's appeals and dismiss the Revenue's appeals, quashing the initiation of proceedings and assessment under section 153C for AY 2009-10, and consequently setting aside the additions and disallowances made in the assessment.