Assessment u/s 153A based on pre-search enquiries and not on incriminating material unearthed during search seizure operation u/s 132 invalid – ITAT

Assessment u/s 153A based on pre-search enquiries and not on incriminating material unearthed during search seizure operation u/s 132 invalid – ITAT

ABCAUS Case Law Citation:
960 2016 (06) ITAT
Date/Month of Order/Judgment – June, 2016
Assessment Year: 2006-07 & 2007-08

Important Judgments Cited/Relied upon:
CIT vs. Kabul Chawla – 380 ITR 173 (Del.).

Brief Facts of the Case:
A search and seizure operation was conducted under section 132 of the Income-tax Act, 1961 on 27-03-2012.However, the assessee company had filed its return of income for the AY 2006-07 on 28.11.2006, which was processed u/s 143(1) and no notice u/s 143(2) was issued till the date of search. The  assessment for the AY 2007-08 was completed u/s 143(3) on 29.12.2009. However, in response to the notice u/s 153, the assessee declared deemed dividend income u/s 115JB. From the pre-search/post search enquiry, it transpired that the assessee company was involved in the real estate business and was indulged into inflating the cost of project by debiting bogus expenses by raising bill from non-existing parties or entry providers. Summons were issued to the aforesaid parties returned unserved. Even the notices issued u/s 133(6) to the aforesaid parties were either received back unserved with remarks “incomplete address, without house number” or no reply was received at all. Consequently, while framing assessment u/s 153A, the payments made to these parties were treated as bogus expenses and added to the total income of the assessee.

Contentions of the Assessee:
It was submitted that since on the date of search, assessment already stood completed and no fresh material was unearthed to make reassessment, the assessment order is not sustainable.

Questions of Law Framed by ITAT:
ITAT observed that that the assessment orders u/s 153 had no reference of any material unearthed during the search operation and framed the following question;

whether the AO is justified to complete the assessment u/s 153A by making an addition of Rs.2,34,54,000/- for AY 2006-07 and Rs.7,12,00,000/- for AY 2007-08 even in the absence of any incriminating material

Important Excerpts from ITAT Judgment:

However, in the backdrop of aforesaid undisputed facts discussed in the preceding paras and law laid down by Hon’ble jurisdictional High Court in the case cited as Kabul Chawla (supra), we are of the considered view that completed assessment interfered with by the AO u/s 153A and confirmed by the ld. CIT (A) are not sustainable in the eyes of law for the following reasons:-

(i) that in the instant case, undisputedly the AO has not made assessment on the basis of incriminating material unearthed during search and seizure operation conducted u/s 132 rather proceeded u/s 153A of the Act on the basis of some pre-search enquiries to make an addition as has specifically been recorded in para 6 of the assessment order that, “Pre search enquiries revealed that M/…………….. the flagship company involved in the real estate business of the ………………… group is indulged in inflating the cost of the project by debiting bogus expenses by raising bills from the non-existing parties or the entry providers.”

(ii) that the ratio of the judgment in case of Kabul Chawla (supra) is required to be extracted by perusing the judgment in entirety and not by picking up the favourable sentences and by ignoring the unfavourable one. Highlighted portion of para 37 (iv), (v), (vi) & (vii) of Kabul Chawla (supra) is crux of the issue involved which is applicable to the facts and circumstances of the case;

(iii) that the ratio of the judgment Kabul Chawla (supra) is that in all circumstances, completed assessment can be interfered with by the AO u/s 153A only on the basis of incriminating material unearthed during the course of search;

(iv) that not only this, the addition in this case has been made by the AO u/s 153A on the sole ground that assessee has failed to produce the parties with whom the assessee company has transacted during the year under assessment who have failed to turn up despite the issue of notice u/s 133 (6) of the Act;

(v) that the contention of the ld. DR that the assessment qua the AY 2006-07 was pending as on date of search as mere issuances of acknowledgement by the ministerial staff does not imply that assessment has been completed, is not tenable in the face of undisputed fact that when within the prescribed period, no notice u/s 143 (2) has been issued prior to the date of search, assessment is deemed to be completed;

(vi) that there is not an iota of material with the AO to initiate proceedings u/s 153A what to talk of incriminating seized material;

(vii) that the ld. CIT (A) affirmed the assessment order by relying upon the decisions relied upon by Hon’ble jurisdictional High Court in the case cited as Filatex India Ltd. vs. CIT-IV – (2014) 49 Taxmann.com 465 (Delhi) which has been distinguished in the Kabul Chawla (supra) on the ground that in the said case, there was some material unearthed during the search whereas in the instant case there is admittedly no incriminating material unearthed during the search to proceed u/s 153A.