2016 (7) TMI 1361 - AT - Income Tax

Disallowance u/s 40A(3) - AO jurisdiction to pass the assessment order u/s 153A - no notice u/s 143(2) was issued - Held that - Assessee in the instant case filed original return of income u/s 139(1) of the Act on 24.10.2005. A copy of the return physically received by the Department on 05.11.2005, is placed on record. AR contension that no notice u/s 143(2) was issued by the AO for the instant year remained uncontroverted on behalf of the Revenue. This shows that the assessee filed its return u/s 139(1) of the Act which was duly processed u/s 143(1) of the Act, thereby assigning finality to the assessment, because no notice u/s 143(2) was issued for completing assessment u/s 143(3). It indicates that the assessment for the instant year stood completed on the date of search. Going by the verdict given by the Hon ble Delhi High Court in the case of Kabul Chawla (2015 (9) TMI 80 - DELHI HIGH COURT) that no addition can be made otherwise than those based on incriminating material found during the course of search in the case of completed assessments on the date of initiation of search, we find that the instant disallowance u/s 40A(3), which is not based on any incriminating material found during the course of search, cannot be sustained. We, therefore, order for the deletion of the addition on this legal ground. - Decided in favour of assessee.

Summary

Issues:
Confirmation of disallowance under section 40A(3) based on jurisdiction of assessment order under section 153A.

Analysis:
The appeal before the Appellate Tribunal ITAT, Delhi pertained to an order by the CIT(A) for the assessment year 2007-08. The sole issue raised was the confirmation of disallowance of ?8,40,000 under section 40A(3) of the Income Tax Act, contending that the Assessing Officer lacked jurisdiction to pass the assessment order under section 153A.

The facts revealed that the assessee was involved in transactions related to immovable and moveable property. A search and seizure operation under section 132 was conducted in DS Group cases, leading to the issuance of a notice under section 153A. The assessee declared a loss in response to the notice. Subsequently, the Assessing Officer disallowed a sum of ?8,40,000 under section 40A(3) for cash payments made for land purchase, which was upheld by the CIT(A).

The assessee argued that the disallowance under section 40A(3) lacked incriminating material found during the search and was unjustified as the assessment for the year was already completed before the search. Citing the judgment in CIT vs. Kabul Chawla, it was contended that no addition can be made without incriminating material post the assessment completion. The Revenue opposed this argument.

Upon considering the submissions and evidence, the Tribunal referred to the Kabul Chawla case, emphasizing that additions without incriminating material post assessment finalization are impermissible. Notably, the assessee had filed the return under section 139(1), which was processed under section 143(1) without a subsequent notice under section 143(2), indicating finality of assessment pre-search. Consequently, the disallowance under section 40A(3) lacking incriminating material was deemed unsustainable, leading to its deletion.

Given the legal stance adopted, the Tribunal did not delve into the merits of the disallowance under section 40A(3), as the primary legal issue was resolved in favor of the assessee. Consequently, the appeal was allowed, and the addition was directed to be deleted based on the legal ground established.

In conclusion, the Tribunal's decision highlighted the importance of incriminating material for post-assessment additions, ensuring the protection of assessee rights and upholding the principles of natural justice in tax assessments.