2016 (6) TMI 1254 - AT - Income Tax

Assessment u/s 153A - addition u/s 40A - Held that - undisputedly and admittedly, assessment for both the A.Ys. 2007-08 and 2008-09 has been completed on the date of search, i.e before 22.3.2011 and in this situation, as per ratio and summarised legal position laid down by Hon ble High Court, in the case of Kabul Chawla 2015 (9) TMI 80 - DELHI HIGH COURT para 37(vii) completed assessment can be interfered by the AO while making assessment u/s 153A r.w.s 143(3) of the Act 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 by the assessee or made known in the course of original assessment to the AO. Since no incriminating material pertaining to additions made by the AO u/s 40A(3) of the Act was unearthed during the course of search or requisition of documents or any subsequent post search enquiry or investigation and on the date of search assessment for both the A.Ys already stood completed, then no additions could have been made to the income already assessed in the original assessment proceedings. On the basis of foregoing discussion, we are inclined to hold that the assessment orders framed by the AO u/s 153A r.w.s 143(3) of the Act for both the A.Ys and additions made therein u/s 40A(3) of the Act are bad in law and thus the same are not sustainable - Decided in favour of assessee.

Summary

Issues Involved:
1. Validity of assessment framed under section 153A of the Income Tax Act, 1961.
2. Disallowance of expenditure under section 40A(3) of the Income Tax Act.
3. Applicability of the decision in CIT Vs. Kabul Chawla.
4. Jurisdiction of the Assessing Officer (AO) under section 153A.
5. Treatment of cash payments exceeding prescribed limits under section 40A(3).

Detailed Analysis:

1. Validity of Assessment Framed Under Section 153A:
The case revolves around the validity of assessments framed under section 153A of the Income Tax Act, 1961. The assessee challenged the legality of the assessment orders, arguing that no incriminating material was found during the search that could justify the additions made by the AO. The Tribunal observed that the assessments for both the A.Ys. 2007-08 and 2008-09 were completed on the date of the search. As per the legal position laid down by the Hon'ble High Court in the case of CIT Vs. Kabul Chawla, completed assessments can only be interfered with if incriminating material is found during the search. Since no such material was found, the Tribunal held that the assessment orders framed under section 153A were not valid and sustainable.

2. Disallowance of Expenditure Under Section 40A(3):
The AO made a sole addition on account of disallowance of expenditure under section 40A(3) of the Act. The CIT(A) upheld the disallowance but directed the AO to reduce the value of work in progress by the amount of disallowance. The Tribunal noted that the disallowance was not based on any incriminating material found during the search. The assessee argued that the payments were made for acquiring stock in trade and other materials, and thus, section 40A(3) should not apply. The Tribunal agreed with the assessee, stating that since no incriminating material was found, the disallowance under section 40A(3) was not sustainable.

3. Applicability of the Decision in CIT Vs. Kabul Chawla:
The Tribunal extensively discussed the applicability of the decision in CIT Vs. Kabul Chawla. The Hon'ble High Court in Kabul Chawla held that completed assessments can only be interfered with if incriminating material is found during the search. The Tribunal noted that the decision in Kabul Chawla is binding and applicable to the present case. Since no incriminating material was found during the search, the additions made by the AO were not justified. The Tribunal rejected the Revenue's contention that the decision in Kabul Chawla has no precedentiary value.

4. Jurisdiction of the Assessing Officer (AO) Under Section 153A:
The Tribunal examined the jurisdiction of the AO under section 153A. The Revenue argued that the AO has the power to reassess total income even if no incriminating material is found. However, the Tribunal, relying on the decision in Kabul Chawla, held that the AO can only interfere with completed assessments based on incriminating material found during the search. Since no such material was found in the present case, the AO's jurisdiction to make additions was not valid.

5. Treatment of Cash Payments Exceeding Prescribed Limits Under Section 40A(3):
The Tribunal considered the treatment of cash payments exceeding prescribed limits under section 40A(3). The Revenue argued that cash payments made for acquiring stock in trade attract the provisions of section 40A(3). The Tribunal, however, noted that the payments were made for genuine transactions and were covered under Rule 6DD of the I.T. Rules, which provides exceptions to section 40A(3). The Tribunal held that the disallowance under section 40A(3) was not justified as the payments were made for genuine reasons and no incriminating material was found during the search.

Conclusion:
The Tribunal allowed the appeals of the assessee for both the assessment years and set aside the assessment orders framed under section 153A. The Tribunal held that the additions made by the AO under section 40A(3) were not sustainable as no incriminating material was found during the search. The Tribunal also dismissed the appeal of the Revenue and the cross objections of the assessee as infructuous. The order was pronounced in the open court on 17.06.2016.