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2011 (6) TMI 831 - AT - Income TaxAssessment u/s 153C - Satisfaction for issuing Notice by AO - AO issued a notice u/s 153C to verify certain transactions regarding lease agreement found during search and seizure operation u/s 132 - Assessee s stated that such order is unlawful and invalid - Issue is whether any satisfaction at all is required to be arrived at by the AO of the person who was searched u/s.132 regarding any undisclosed income of the person who was not subjected to a search HELD THAT - The ITAT Delhi in the case of JINDAL STAINLESS LIMITED. VERSUS ASSISTANT COMMISSIONER OF INCOME-TAX. 2008 (4) TMI 357 - ITAT DELHI-G had dealt with this issue held that the AO has to follow the condition precedent for proceeding u/s.153-C in the same manner as the AO would do for proceeding u/s.158BD. The Hon ble Tribunal in this regard referred to the decision of the Hon ble Supreme Court in the case of MANISH MAHESHWARI AND INDORE CONSTRUCTION P. LTD. VERSUS COMMISSIONER OF INCOME-TAX 2007 (2) TMI 148 - SUPREME COURT and have held that satisfaction that undisclosed income belongs to the person other than the one who is searched u/s.132 has to be arrived at by the AO before proceeding to hand over seized document to the AO of the person who was not searched. We therefore hold following the decision of the ITAT Delhi Bench referred to above that the AO has to record satisfaction regarding existence of undisclosed income before proceeding u/s.153-C. Whether satisfaction about undisclosed income of the Assessee have been arrived at by the AO? - The assessee has been declaring income from letting out of the property regularly in its books of account. The factum of the assessee receiving income in the form of rent is very much in the knowledge of the department HELD THAT - In our view the satisfaction required for proceedings under section 153C cannot be reduced to a mere formality of forwarding the documents found in the course of search which did not belong to the person searched and which belonged to the person against whom proceedings under section 153C are sought to be initiated. In the present case we are of the view that that there was no satisfaction regarding existence of any undisclosed income which warrants proceedings under section 153 of the Act. We therefore hold that the necessary satisfaction does not exist for the proceedings under section 153C of the Act. On this ground the assessment is annulled - Decision in favour of Assessee. Income Received from letting out - Business Income or not? - Assessee carries out business of property dealing where he earns income from selling and letting out of property - The properties let out did not get good price and therefore retained and let out temporarily. Since the letting was incidental to business - such income must be treated as business income. HELD THAT - It can be said that the assessee did not cease to carry on the business of purchase and sale of properties. The expenses sought to be disallowed by the AO were required to be incurred by the assessee. Therefore notwithstanding the fact that the rental income is to be assessed under the head income from House property still the assessee would be entitled to the deduction of the aforesaid expenses. Therefore the impugned additions deserve to be deleted even on merits. In our view even on merits the assessee deserves to succeed. We therefore direct that the impugned addition be deleted. All the appeals of the assessee are accordingly allowed - Decision in favour of Assessee.
Issues Involved:
1. Validity of the notice issued under section 153C. 2. Jurisdiction of the Assessing Officer (AO) under section 153C. 3. Compliance with principles of natural justice. 4. Classification of income from property (business income vs. income from house property). 5. Allowability of expenses claimed by the assessee. Issue-Wise Detailed Analysis: 1. Validity of the Notice Issued Under Section 153C: The assessee challenged the validity of the notice issued under section 153C, arguing that the conditions for issuing such a notice were not satisfied. The search was conducted on another entity, and documents belonging to the assessee were found. The AO issued a notice under section 153A instead of 153C, which was later corrected. The tribunal held that the AO must record satisfaction regarding the existence of undisclosed income before proceeding under section 153C. The satisfaction note merely indicated the need to verify transactions, which was insufficient to establish undisclosed income. Hence, the tribunal annulled the assessment on this ground. 2. Jurisdiction of the Assessing Officer (AO) Under Section 153C: The tribunal examined whether the AO had the proper jurisdiction to proceed under section 153C. It was found that the AO must be satisfied that the seized documents indicate undisclosed income. The tribunal noted that the assessee had already declared the income from the lease in its books and returns, and there was no prima facie evidence of undisclosed income. Therefore, the tribunal concluded that the necessary satisfaction for invoking section 153C was not present, rendering the AO's jurisdiction invalid. 3. Compliance with Principles of Natural Justice: The assessee argued that the AO's order was against the principles of natural justice as proper opportunity for hearing was not provided. The tribunal considered the remand report and found that the AO had recorded satisfaction and provided adequate opportunity for the assessee to present its case. The tribunal upheld the CIT(A)'s view that the proceedings were conducted fairly and in compliance with natural justice. 4. Classification of Income from Property (Business Income vs. Income from House Property): The AO treated the rental income as income from house property, while the assessee claimed it as business income. The tribunal examined the assessee's business activities, which included dealing in properties and earning rental income temporarily until the properties could be sold. The tribunal found that the assessee had consistently declared income from property sales as business income in previous years. Therefore, the tribunal concluded that the rental income should be treated as business income, not income from house property. 5. Allowability of Expenses Claimed by the Assessee: The AO disallowed certain expenses claimed by the assessee, arguing they were not necessary for earning rental income. The tribunal reviewed the expenses and the assessee's business activities, concluding that the expenses were incurred in the course of the assessee's business. The tribunal held that the expenses were allowable deductions, even if the rental income was assessed under the head of income from house property. Conclusion: The tribunal allowed the appeals of the assessee, annulling the assessment under section 153C due to the lack of proper satisfaction regarding undisclosed income. It also directed that the rental income be treated as business income and allowed the claimed expenses as deductions. The tribunal's decision emphasized the importance of proper jurisdiction and adherence to legal procedures in tax assessments.
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