2017 (5) TMI 1224 - HC - Income Tax

Validity of the invocation of Section 153A - Held that - Habitual concealing of income and indulging in clandestine operations and that a person indulging in such activities can hardly be accepted to maintain meticulous books or records for long. These factors are absent in the present case. There was no justification at all for the AO to proceed on surmises and estimates without there being any incriminating material qua the AY for which he sought to make additions of franchisee commission. ITAT was justified in holding that the invocation of Section 153A by the Revenue for the AYs 2000-01 to 2003-04 was without any legal basis as there was no incriminating material qua each of those AYs. - Decided in favour of assessee.

Issues Involved:
1. Validity of the invocation of Section 153A of the Income Tax Act for AYs 2000-01 to 2003-04.
2. Validity of the ITAT's confirmation of the CIT(A)'s deletion of additions made by the AO for AY 2004-05 on account of franchisee commission and rent payment.

Issue-wise Detailed Analysis:

1. Validity of the invocation of Section 153A for AYs 2000-01 to 2003-04:

The Revenue's main contention was that the decision in *Commissioner of Income Tax (Central-III) v. Kabul Chawla* required reconsideration in light of *Smt. Dayawanti Gupta v. CIT*. The Revenue argued that reopening concluded assessments under Section 153A was justified even without incriminating material found during the search. The Court did not agree with this submission.

The Court noted that the documents seized during the search pertained to the period 2002 to 2005. The Revenue claimed that these documents justified reopening assessments for earlier years. However, the Court observed that mere possession of documents does not constitute incriminating material. The Court emphasized that there must be specific incriminating material related to each AY to justify reopening.

The Court also distinguished between statements recorded under Sections 132(4) and 133A, noting that statements under Section 133A do not have the same evidentiary value as those under Section 132(4). The statement of Shri Pawan Gadia, recorded under Section 133A, was not considered sufficient incriminating material for reopening assessments for earlier years.

The Court reiterated the principles established in *Kabul Chawla*, emphasizing that completed assessments can only be interfered with based on incriminating material unearthed during the search. The Court found that the Revenue did not provide sufficient evidence of incriminating material for AYs 2000-01 to 2003-04, thus invalidating the invocation of Section 153A for these years.

2. Validity of the ITAT's confirmation of the CIT(A)'s deletion of additions for AY 2004-05:

The ITAT upheld the CIT(A)'s deletion of additions made by the AO for AY 2004-05 on account of franchisee commission and rent payment. The Revenue challenged this, arguing that the additions were justified based on the evidence found during the search.

The Court noted that the CIT(A) had thoroughly analyzed the additional evidence, including franchisee agreements, and found no justification for the additions made by the AO. The CIT(A) observed that the AO had not rejected the books of accounts and that the accounts had been tax audited without adverse comments. The disallowance of franchisee commission was found to be unsustainable.

Regarding the addition of undisclosed franchisee commission, the CIT(A) noted that the AO's addition was based on surmises and suspicion rather than concrete evidence. The CIT(A) found that the AO's estimation of undisclosed income for earlier years was not supported by any incriminating material. The Court upheld the CIT(A)'s findings, stating that the additions were based on mere suspicion and not on evidence.

The Court also addressed the issue of security deposits, noting that the AO had accepted the refundable security deposits as disclosed. The CIT(A) upheld the addition of non-refundable security deposits, finding that they were accounted for correctly. The Court found no basis for interfering with the CIT(A)'s findings on this issue.

Conclusion:

The Court concluded that the invocation of Section 153A for AYs 2000-01 to 2003-04 was invalid due to the lack of incriminating material for these years. The Court also upheld the ITAT's confirmation of the CIT(A)'s deletion of additions for AY 2004-05, finding that the additions were not supported by sufficient evidence. The appeals were dismissed, and the questions of law were answered in favor of the Assessee and against the Revenue.

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