2022 (6) TMI 1302 - AT - Income Tax

Validity of Assessment u/s 153C - evidences incriminating from search - loan given to family members - as argued seized material was not incriminating material and these were transactions which were recorded in the regular books and consequently no assessment u/s.153C of the Act is liable to be made - HELD THAT - A perusal of the Annexure-A annexed to the satisfaction note, reproduced hereinabove, by the AO of the person searched shows that in the seized material SMLO-52, there is a ledger which contains the loan taken from IFCI Factors Ltd. Admittedly, the ledger account is part of the regular books of the assessee and the same cannot be treated as an incriminating material. However, the information that the loan has been given to Shri Vikash Gupta and his family members out of the said loan taken by the assessee company from IFCI Factors Ltd. has come out of the evidence found in the course of search. The evidence in relation to the impugned assessment years have been found in the course of search on Shivom Minerals Ltd. but relating to the assessee. When evidence relating to the assessee has been found and the same has been made available by the AO of the person searched to the AO of the person in respect of whom the evidence has been found then the AO of the person in respect of whom the evidence has been found would have to examine the same. Here, clearly evidence in the form of ledger and the transactions of giving the loan to Shri Vikash Gupta and his family members have been found and handed over to the AO of the assessee. Whether the said evidence is incriminating or not would have no bearing insofar as the AO of the searched person is concerned, but the evidence having been provided to the AO of the person in respect of whom the evidence has been found, it is the duty of such AO to examine and verify the same. For the purpose of verification the only option available to the AO is to initiate the proceedings u/s.153C of the Act, for that relevant assessment years to which those evidence relate. That is exactly what the AO has done in the present case. Once the assessment is opened u/s.153C provisions of the regular assessments would come into play and such additions and disallowance as is possible under regular assessment would have to be done by the AO. Again that is what the present AO has done. This being so, clearly evidence in relation to the relevant assessment years having been found in the course of search conducted in the premises of M/s Shivom Minerals Ltd. and its group, that such evidence having been provided to the AO of the assessee to whom such evidences were related to, the proceedings initiated u/s.153C of the Act are valid insofar as such evidence relates to the assessment years to which the evidences were found. Once the proceedings u/s.153C of the Act are initiated rightly, the consequential assessment is a forlorn conclusion. In these circumstances, we find no error in the order of the AO and that of the ld.CIT(A) on this issue. In view of the above, the additional grounds filed by the assessee stand rejected.

Summary

Issues Involved:
1. Violation of natural justice.
2. Validity of the remand report and reliance on it without a hearing.
3. Validity of simultaneous proceedings under Sections 153C and 143(3).
4. Validity of reassessment under Section 143(3) after completion of original assessment.
5. Legality of the transfer of jurisdiction without proper procedure.
6. Relevance and incriminating nature of seized documents.
7. Disallowance of interest expenditure and its justification.

Detailed Analysis:

1. Violation of Natural Justice:
The assessee argued that the impugned order violated natural justice principles as it relied on the remand report dated 24/05/2018 without granting an opportunity for a hearing or clarification. The original assessment order dated 31/12/2016 was also passed within four days of issuing notice without a hearing opportunity.

2. Validity of the Remand Report and Reliance on it Without a Hearing:
The assessee contended that the remand report contradicted the documents on record and that no loans were availed from IFCI during the relevant year. The adverse conclusions were based on presumptions rather than evidence. The Tribunal found that the remand report was not appropriately considered, and the assessee was not given a fair chance to clarify doubts.

3. Validity of Simultaneous Proceedings Under Sections 153C and 143(3):
The assessee argued that proceedings under Sections 153C and 143(3) were initiated simultaneously, which is legally impermissible as the prerequisites and timelines for both sections differ. The Tribunal upheld this argument, noting that simultaneous proceedings are not allowed and thus invalidated the assessments.

4. Validity of Reassessment Under Section 143(3) After Completion of Original Assessment:
The assessee claimed that the reassessment under Section 143(3) was not maintainable as the original assessment for the relevant year was already completed on 26/02/2015. The Tribunal agreed, stating that reassessment under Section 153C is permissible only to the extent of seized documents not available during the previous scrutiny assessment.

5. Legality of the Transfer of Jurisdiction Without Proper Procedure:
The assessee argued that the transfer of jurisdiction from Kolkata to Sambalpur was done without giving an opportunity to the appellant, violating Section 127 of the Income Tax Act. The Tribunal found that the transfer order was placed on record on December 26, 2016, whereas the satisfaction note under Section 153C was recorded on December 27, 2016, making the transfer without jurisdiction and void ab initio.

6. Relevance and Incriminating Nature of Seized Documents:
The assessee contended that the seized documents did not belong to or relate to the appellant and were not incriminating. The Tribunal examined the seized materials and found that they were part of the regular books of accounts and not incriminating. The Tribunal relied on the decision of the Hon'ble Supreme Court in Sinhgad Technical Education Society, which emphasized that incriminating material must pertain to the assessment years in question.

7. Disallowance of Interest Expenditure and Its Justification:
The assessee argued that the entire interest expenditure was for business purposes, including interest-free loans given in previous years. The Tribunal found that the disallowance of interest expenditure was unjust as it was a strategic business decision arising due to commercial expediency. The Tribunal noted that the AO did not appropriately consider the business benefits derived from the interest-free loans in subsequent years.

Conclusion:
The Tribunal found significant procedural and substantive errors in the assessment orders. The simultaneous proceedings under Sections 153C and 143(3) were invalid, the reassessment under Section 143(3) was not maintainable, and the transfer of jurisdiction was void ab initio. The seized documents were not incriminating, and the disallowance of interest expenditure was unjustified. Consequently, the Tribunal quashed the assessment orders for both assessment years under consideration.