2014 (7) TMI 1385 - AT - Income Tax

Validity of proceeding u/s 153C - AO completed the assessment by disallowing the agricultural income declared by the assessee in the original return of income filed by him treating it as unexplained credit - HELD THAT - As assessment made by the AO is not with reference to any incriminating material found as a result of search. Therefore respectfully following the M/s. Avinash Estates Resorts Ltd 2014 (10) TMI 668 - ITAT VISAKHAPATNAM decision of the coordinate bench we quash the assessment order passed for all these assessment years. Decided in favour of assessee.

Summary

Issues Involved:
1. Validity of proceedings under Section 153C of the Income Tax Act.
2. Merits of additions made by the Assessing Officer.
3. Treatment of agricultural income as unexplained credit under Section 68 of the Act.

Detailed Analysis:

1. Validity of Proceedings under Section 153C of the Income Tax Act:
The primary issue in these appeals is the validity of proceedings initiated under Section 153C of the Income Tax Act. The assessee, engaged in real estate business, had filed returns declaring 'NIL' income and agricultural income. Following a search and seizure operation on another individual, the Assessing Officer (AO) initiated proceedings under Section 153C against the assessee. The AO disallowed the agricultural income, treating it as unexplained credit. The CIT(A) upheld the validity of the proceedings but allowed 50% of the agricultural income.

The Tribunal examined whether the seized materials had any incriminating evidence against the assessee that justified the initiation of proceedings under Section 153C. It was noted that the assessment order did not specify any incriminating materials found during the search. The Tribunal referred to a similar case of M/s. Avinash Estates & Resorts Ltd., where it was held that the materials must indicate concealed or suppressed income for Section 153C to apply. Since the AO did not link the additions to any seized materials, the Tribunal concluded that the proceedings under Section 153C were invalid.

2. Merits of Additions Made by the Assessing Officer:
The Tribunal also addressed the merits of the additions made by the AO. The AO had treated the agricultural income declared by the assessee as unexplained credit under Section 68. The CIT(A) allowed 50% of the agricultural income, sustaining the remaining 50% as unexplained credit. The Tribunal found that the AO had accepted the income declared by the assessee except for the agricultural income, which was treated as unexplained credit without any incriminating material. The Tribunal emphasized that the AO could not initiate proceedings under Section 153C based on materials already disclosed in the regular assessment.

3. Treatment of Agricultural Income as Unexplained Credit under Section 68:
In the appeal related to the assessment year 2008-09, the Tribunal addressed the issue of treating agricultural income as unexplained credit under Section 68. The AO had rejected the assessee's claim of agricultural income and treated it as unexplained credit. The CIT(A) provided partial relief by modifying the addition. The Tribunal referred to its decision in the case of M/s. Avinash Estates & Resorts Ltd., where it directed the AO to disallow only 25% of the agricultural income declared by the assessee. Following this precedent, the Tribunal directed the AO to disallow 25% of the agricultural income in the present case as well.

Conclusion:
The Tribunal quashed the assessment orders for all the assessment years under appeal due to the invalidity of the proceedings initiated under Section 153C. Consequently, the other issues relating to the merits of the additions became academic and were not adjudicated. For the assessment year 2008-09, the Tribunal directed the AO to disallow 25% of the agricultural income declared by the assessee. The appeals were allowed in favor of the assessee, with partial relief granted for the assessment year 2008-09.