2018 (4) TMI 1602 - AT - Income Tax

Assessment u/s 153A - absence of any incriminating material - Third member order - Difference of opinion - disallowing claim of losses and brought forward of losses - assessments have already completed - Held that - The crux of the matter is that only a part of the expenses representing loss for the assessment years 2004-05 and 2005-06 was disallowed and not allowed to be carried forward for set off against the income for assessment year 2006-07 simply on the ground that expenses were not fully verifiable since complete details were not furnished during the course of assessment proceedings. Admittedly, no incriminating material was found in respect of the assessment years under consideration. There is no reference whatsoever to any incriminating material found during the course of search casting shadow of doubt on the genuineness of such expenses. Since these expenses were claimed as deduction in the original returns and the Assessing Officer accepted the loss so declared except for making some modification for the assessment year 2005-06, the AO was supposed to restrict his exercise of completing assessments u/s 153A only to the amount of income/loss determined originally. It was not open to him to venture to re-examine the details in respect of expenses in assessment proceedings u/s 153A read with section 143(3) of the Act for the patent reason that, admittedly, no incriminating material in respect of such expenses was found during the course of search. CIT(A) was not justified in upholding the additions made by the AO for the years of completed assessments, which were not based on any incriminating material found during the course of search relating to such years and consequently denying the benefit of carry forward and set off of the resultant loss in subsequent year.

Issues Involved:
1. Whether the authorities were justified in invoking section 153A of the Income Tax Act for making additions by disallowing the claim of losses and carry forward of losses when no incriminating material was found during the search.
2. The applicability of precedents in cases where no incriminating material was found during the search.
3. The distinction between completed assessments and pending assessments in the context of section 153A.
4. The relevance of incriminating material found during the search for making additions in completed assessments.

Detailed Analysis:

1. Invocation of Section 153A:
The primary issue was whether the authorities were justified in invoking section 153A of the Income Tax Act to disallow the claim of losses and carry forward of losses in the absence of any incriminating material found during the search. The search and seizure operation under section 132 was conducted on the HBN group on 20.11.2009. The assessee filed returns declaring losses for the assessment years 2004-05, 2005-06, and claimed set off of these losses against positive income for the assessment year 2006-07. The Assessing Officer disallowed the carry forward of losses on the grounds that the expenses were not verifiable. The assessee contended that since no incriminating material was found during the search, the Assessing Officer was not within his power to disallow the losses.

2. Applicability of Precedents:
The Members differed on the application of precedents. The Accountant Member (AM) preferred the judgment in Dayawanti (2017) over Kabul Chawla (2016), arguing that even in the absence of incriminating material for the specific years, additions could be made if some incriminating material was found for any assessment year. The Judicial Member (JM) disagreed, emphasizing that no incriminating material was found for the years in question, and therefore, the losses should be allowed to be carried forward. The Third Member resolved this by favoring the Kabul Chawla precedent, which held that in the absence of incriminating material, no fresh additions could be made for completed assessments.

3. Completed Assessments vs. Pending Assessments:
The judgment distinguished between completed assessments and pending assessments. Completed assessments are those where either the assessments were completed under section 143(3) or the time limit for issuing notice under section 143(2) had expired. Pending assessments are those where the assessments were still pending on the date of the search and abate as per the second proviso to section 153A. In this case, the assessments for the years 2004-05, 2005-06, and 2006-07 were completed on the date of the search.

4. Relevance of Incriminating Material:
The judgment emphasized that for completed assessments, any additions under section 153A must be based on incriminating material found during the search. The AM's view that additions could be made even without incriminating material was rejected. The judgment cited the Supreme Court's decision in CIT vs. Sinhgad Technical Education Society (2017), which underscored the necessity of incriminating material for the relevant year to make any disallowance. The judgment concluded that since no incriminating material was found for the years in question, the losses determined in the original assessments should be allowed to be carried forward and set off against the income for the assessment year 2006-07.

Conclusion:
The judgment favored the view that in the absence of any incriminating material found during the search, the completed assessments should not be disturbed, and the losses claimed should be allowed to be carried forward. The CIT(A) was not justified in upholding the additions made by the AO, and the benefit of carry forward and set off of the resultant loss in subsequent years should be allowed. The matter was directed to be listed before the Division Bench for passing an order in accordance with the majority view.

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