In its recent judgment, Delhi High Court has ruled that where on the date of the search assessment stands completed and no incriminating material was unearthed, no additions can be made to the income already assessed

Case Details:
ITA-707, 709 and 713 of 2014;           AY 2002-03, 2005-06 and 2006-07
Commissioner of Income Tax (Central)-III (Appellant) vs Kabul Chawla (Respondent)
Date of Judgment: 28-08-2015

Question before the Court:
Whether the additions made to the income of the Respondent Assessee for the said AYs under Section 2(22)(e) of the Income Tax Act, 1961 („Act‟) were not sustainable because no incriminating material concerning such additions were found during the course of search and further no assessments for such years were pending on the date of search?

Case Law Referred:
CIT v. Ankitech Pvt. Ltd. (2011) 11 Taxmann. Com 100 (Del)
Madugula Venu v. Director of Income Tax [2013] 29 Taxmann.Com 200 (Delhi)
CIT v. Chetan Das Lachman Das (ITA-2021/2010)
Filatex India Ltd. v. CIT-IV [2014] 49 Taxmann.Com 465 (Delhi)
M/s. Canara Housing Development Company v. The DCIT) Karnataka High Court (ITA-38/2014)
Commissioner of Income Tax v. Continental Warehousing Corporation Ltd. [2015] 58 Taxmann.Com 78 (Bom)

Facts of the Case(s):
A search was carried out u/s 132 on 15-11-2007 on BPTP Ltd., a leading real estate developer along with the premises of the assessee and his wife who were controlling the group. As on the date of the search, no assessment proceedings were pending for AYs 2002-03, 2005-06 and 2006-07. For the said AYs, assessments had already been made under Section 143(1) of the Act. Later the assessment for all the three years were completed u/s 153A with additions. Additions made included a substantial amount on account of deemed dividend under Section 2 (22) (e) of the Income Tax Act, 1961 corresponding to the additions made on protective basis in the hands of companies in which the assessee was a substantial shareholder.

The Assessee filed rectification application u/s 154 on the ground that the accumulated profits of the companies paying the dividend were less than the amount of loan or advance given by them to the recipient companies. However AO did not accord to the application.

On Appeal CIT(A) upheld the assessment holding that giving such loans or advances to the sister concerns was with the ultimate aim of making the money available to the shareholders of such sister concerns.

On further appeal, ITAT set aside the assessment ruling that the additions made were not based on any incriminating material found during search operation and are not sustainable in law.

Contention of the Revenue:
Before Delhi High Court, the Income tax Department contended that there was no mention in Section 153A of the Act that any incriminating material had to be found during the search in order that an assessment could be framed in terms of the first proviso to Section 153A(1) for those AYs where the assessment already stood completed on the date of the search.

Held:
The Delhi High Court held that since o n the date of the search all the three assessments had already stood completed and since no incriminating material was unearthed during the search, no additions could have been made to the income already assessed. The Court summaries the legal position as under:

Summary of the legal position

37. On a conspectus of Section 153A(1) of the Act, read with the provisos thereto, and in the light of the law explained in the aforementioned decisions, the legal position that emerges is as under:

i. Once a search takes place under Section 132 of the Act, notice under Section 153 A (1) will have to be mandatorily issued to the person searched requiring him to file returns for six AYs immediately preceding the previous year relevant to the AY in which the search takes place.

ii. Assessments and reassessments pending on the date of the search shall abate. The total income for such AYs will have to be computed by the AOs as a fresh exercise.

iii. The AO will exercise normal assessment powers in respect of the six years previous to the relevant AY in which the search takes place. The AO has the power to assess and reassess the 'total income' of the aforementioned six years in separate assessment orders for each of the six years. In other words there will be only one assessment order in respect of each of the six AYs “in which both the disclosed and the undisclosed income would be brought to tax”.

iv. Although Section 153 A does not say that additions should be strictly made on the basis of evidence found in the course of the search, or other post-search material or information available with the AO which can be related to the evidence found, it does not mean that the assessment “can be arbitrary or made without any relevance or nexus with the seized material. Obviously an assessment has to be made under this Section only on the basis of seized material.”

v. In absence of any incriminating material, the completed assessment can be reiterated and the abated assessment or reassessment can be made. The word 'assess' in Section 153 A is relatable to abated proceedings (i.e. those pending on the date of search) and the word 'reassess' to completed assessment proceedings.

vi. Insofar as pending assessments are concerned, the jurisdiction to make the original assessment and the assessment under Section 153A merges into one. Only one assessment shall be made separately for each AY on the basis of the findings of the search and any other material existing or brought on the record of the AO.

vii. Completed assessments can be interfered with by the AO while making the assessment under Section 153 A only on the basis of some incriminating material unearthed during the course of search or requisition of documents or undisclosed income or property discovered in the course of search which were not produced or not already disclosed or made known in the course of original assessment.

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