2018 (3) TMI 1174 - AT - Income Tax

Assessment u/s 153C - Held that - AO of the searched person and the other person is the one and the same, then also the Assessing Officer has to record his satisfaction in the case of the other person i.e., other than the searched person. In view of the facts in entirety and the dictum of Hon ble Supreme Court in the case of CIT Vs. Calcutta Knitwears 2014 (4) TMI 33 - SUPREME COURT which was further adopted by CBDT vide Circular No.24/2015 dated 31st December, 2015, respectfully following the same, we are of the view that in the present case, the assumption of jurisdiction by the Assessing Officer for issuance of notice u/s 153C of the Act and consequent assessment framed is bad in law. Consequently, we hold that the assessment order passed by the Assessing Officer was bad in law - Decided in favour of assessee.

Summary

Issues Involved:
1. Assumption of jurisdiction by the Assessing Officer under Section 153C of the Income-tax Act, 1961.
2. Validity of the notice issued under Section 153C.
3. Legality of the assessment framed under Section 153C.
4. Merits of the additions made by the Assessing Officer.

Issue-wise Detailed Analysis:

1. Assumption of Jurisdiction by the Assessing Officer under Section 153C:
The assessee challenged the assumption of jurisdiction by the Assessing Officer (AO) for framing the assessment under Section 153C, arguing that the assumption of jurisdiction was bad in law and the consequent assessment was illegal and void ab initio. The Tribunal noted that the satisfaction note recorded by the AO did not indicate that the seized material was incriminating or had any bearing on the income of the assessee. The Tribunal emphasized that the satisfaction note must be prepared by the AO in the case of the searched person, as per the Supreme Court's decision in CIT Vs. Calcutta Knitwears. The Tribunal concluded that the assumption of jurisdiction by the AO was bad in law, leading to the quashing of the assessment order.

2. Validity of the Notice Issued under Section 153C:
The assessee contended that the notice issued under Section 153C was illegal, invalid, and bad in law. The Tribunal observed that the seized documents (pages 44 to 65 of Annexure A-2(25)) were purchase bills of the assessee company and were duly recorded in the books of account. These documents could not be considered incriminating for the purpose of issuing a notice under Section 153C. The Tribunal also noted that the satisfaction note was recorded in the case of the assessee and not in the case of the searched person, which was contrary to the Supreme Court's guidelines in Calcutta Knitwears. Therefore, the notice issued under Section 153C was deemed invalid.

3. Legality of the Assessment Framed under Section 153C:
The Tribunal found that the assessment framed under Section 153C was based on ad-hoc disallowances of expenses without correlating them with any incriminating material. The AO had disallowed various expenses on the grounds that they were related to paper transactions and not actual business activities. However, the Tribunal noted that the seized documents were not incriminating and the satisfaction note did not provide a basis for assuming jurisdiction. Consequently, the Tribunal held that the assessment framed under Section 153C was illegal and quashed the assessment order.

4. Merits of the Additions Made by the Assessing Officer:
The AO had made several additions to the returned income, disallowing expenses such as manufacturing expenses, professional and legal charges, traveling expenses, vehicle maintenance hire charges, consultancy charges, selling expenses, interest paid to the bank, interest paid to others, and bank charges and commission. The CIT(A) had deleted these additions on merits, concluding that the expenses were directly relatable to the business activities of the assessee. The Tribunal did not adjudicate on the merits of these additions, as it had already quashed the assessment order on jurisdictional grounds.

Conclusion:
The Tribunal allowed the cross-objections filed by the assessee, quashed the assessment order, and dismissed the appeals filed by the Revenue. The Tribunal's decision was based on the invalid assumption of jurisdiction by the AO, the invalidity of the notice issued under Section 153C, and the lack of incriminating material to support the assessment. The decision was pronounced in the open court on 06.03.2018.