2015 (6) TMI 762 - AT - Income Tax

Validity of Section 153C proceedings challenged - Deemed dividend addition u/s.2(22)(e) - Held that - Neither there existed any incriminating material as contemplated u/s.153C of the Act nor is the present a case of a valid satisfaction recorded therein. We reiterate that this is a case of search proceedings wherein the Revenue s powers have to be strictly interpreted. We conclude accordingly that the initiation of section 153C proceedings against the assessee under challenge is liable to be quashed. The assessee s legal grounds succeeds. - Decided in favour of assessee.

Summary

Issues Involved:

1. Deemed dividend addition under Section 2(22)(e) of the Income Tax Act, 1961.
2. Validity of proceedings under Section 153C of the Income Tax Act, 1961.
3. Admission of additional grounds by the assessee.

Issue-wise Detailed Analysis:

1. Deemed Dividend Addition under Section 2(22)(e):

The assessee challenged the addition of deemed dividends under Section 2(22)(e) of the Income Tax Act, 1961, amounting to Rs. 11.50 lacs for A.Y. 2006-07 and Rs. 36,38,108/- and Rs. 2,58,175/- for A.Y. 2007-08. The Assessing Officer (AO) added these amounts as deemed dividends based on unsecured loans received from the searched entity. The CIT(A) upheld these additions, leading to the assessee's appeal.

2. Validity of Proceedings under Section 153C:

The assessee contended that the AO erred in issuing notice under Section 153C and passing the assessment order under Section 143(3) read with Section 153C when no incriminating material was found during the search of the third party. The Tribunal noted that the AO's satisfaction note did not pinpoint any money, bullion, jewellery, or other valuable articles or documents belonging to the assessee as required under Section 153C. The Tribunal emphasized that the discovery of incriminating material is a sine qua non for initiating proceedings under Section 153C. The Tribunal referred to the decision in ACIT vs. Gambhir Silk Mills, affirmed by the jurisdictional High Court, which held that the absence of incriminating material invalidates Section 153C proceedings. Additionally, the Tribunal highlighted that the satisfaction note should have been recorded in the case file of the searched party, even if the AO for both the searched party and the assessee was the same. The Tribunal concluded that the initiation of Section 153C proceedings against the assessee was invalid and quashed the proceedings.

3. Admission of Additional Grounds by the Assessee:

The assessee filed additional grounds challenging the validity of Section 153C proceedings, arguing that their omission in the main grounds of appeal was unintentional. The Tribunal admitted these additional grounds, citing the Supreme Court decisions in NTPC v. CIT and Jute Corporation of India Ltd. v. CIT, which allow for the admission of legal issues at any stage in the interest of natural justice. The Tribunal found that the additional grounds went to the root of the matter and proceeded to decide on them.

Conclusion:

The Tribunal allowed the assessee's appeals, quashing the Section 153C proceedings due to the absence of incriminating material and improper recording of satisfaction. The Tribunal's decision emphasized the strict interpretation of the Revenue's powers in search proceedings and upheld the legal principles governing the initiation of proceedings under Section 153C. The assessee's appeals for both A.Y. 2006-07 and 2007-08 were allowed.