2018 (12) TMI 642 - AT - Income Tax

Disallowing exemption u/s 10(38) for capital gain - assessment made erroneously in an assessment order passed under section 153A r.w.s. 143(3) because no incriminating material was found during the course of search - Held that - As on the date of search, assessments already stood completed and no incriminating material was unearthed during the search, therefore, no addition should have been made to the income of the assessee. AO has not made reference to any seized material found during the course of search while considering this issue. Therefore, disallowance under section 10(38) is beyond the scope of section 153A and not sustainable. We allow this ground and delete impugned disallowance - Decided in favour of assessee

Summary

Issues:
- Disallowance of exemption under section 10(38) of the Income Tax Act for capital gain.
- Scope of section 153A of the Income Tax Act regarding incriminating material found during search.

Analysis:
1. The assessee appealed against the order of the ld.CIT(A) regarding the disallowance of exemption under section 10(38) for a capital gain. The AO disallowed the exemption in the assessment order passed under section 153A, stating no incriminating material was found during the search. The ld.CIT(A) upheld this disallowance, emphasizing that exemption under section 10(38) does not apply to transfers by way of conversion of capital asset into stock-in-trade. The assessee contended that the law on the scope of section 153A was not developed until specific judgments, arguing against the disallowance.

2. The Tribunal analyzed the legal proposition on the scope of section 153A as summarized by the Hon’ble Delhi High Court in various cases. It was established that assessments pending at the time of search abate, and the AO can only make additions based on incriminating material found during the search. The Tribunal referred to judgments emphasizing that additions under section 153A must be supported by seized material. In the absence of incriminating material, completed assessments can be reiterated, as held in previous court decisions.

3. The Tribunal highlighted the importance of incriminating material in the assessment process under section 153A. Citing the case law, the Tribunal emphasized that additions or disallowances can only be made based on material found during the search. The Tribunal noted that the AO did not refer to any seized material related to the disallowance under section 10(38) in the assessment order. Therefore, the disallowance was deemed beyond the scope of section 153A and was not sustainable. Consequently, the Tribunal allowed the appeal and deleted the impugned disallowance under section 10(38) of the Act.

4. The judgment concluded by pronouncing the order in favor of the assessee on 10th December 2018 in Ahmedabad. The detailed analysis of the legal issues surrounding the disallowance of exemption under section 10(38) and the scope of section 153A highlighted the significance of incriminating material in assessments under the Income Tax Act. The decision provided clarity on the application of exemptions and the necessity of seized material to support additions or disallowances under section 153A.