2019 (1) TMI 1493 - AT - Income Tax

Penalty u/s. 271(1)(c) - assessment u/s.153C - unexplained income - loan taken from firm stood dissolved - delay in recording satisfaction from the completion of the assessment of the person searched - income assessable in hands of firm after dissolution - Held that - The fact that the firm M/s. K. R. Boob & Sons got dissolved on 28-12-2003 and the assessee took over the dissolved firm as an individual, cannot alter the legal position which requires the assessment of the dissolved firm, if any, in the hands of the firm itself Once it is found as an admitted position that the entity taking loan from Shri Shriram H. Soni was M/s. K.R. Boob & Sons, a partnership firm, we fail to comprehend as to how the addition on account of interest and brokerage thereon could be made in the hands of the assessee in his individual capacity. We are satisfied that the addition in respect of any undisclosed income from the transaction of payment of interest and brokerage from undisclosed sources, if any, should have been considered only in the hands of M/s. K.R. Boob & Sons, a partnership firm and not the assessee. Since the instant additions have been made in the hands of the assessee, an individual, a hitherto partner of the firm M/s. K.R. Boob & Sons, we set-aside the same and order to delete them in the hands of the assessee. The AO is at liberty to take any other suitable remedial action as per the provisions of the Act, if any. We hold that the delay of 6-7 months in recording satisfaction from the completion of the assessment of the person searched cannot be held as vitiating the assessment on this count, but the delay beyond this period would call for quashing of assessment of the person other than the person searched on account of delay in recording satisfaction. CBDT Circular No.24/2015 dated 31-12-2015 has recognized that the judgment of Hon ble Supreme Court in CIT Vs. Calcutta Knitwears 2014 (4) TMI 33 - SUPREME COURT in the context of section 158BD applies to the assessment u/s.153C as well. As advert to the facts of the instant case, it is found that the assessment of Shri Shriram H. Soni, the person searched was completed on 27-03-2006. The AO of Shri Shriram H. Soni recorded satisfaction on 20-02-2007 and remitted the incriminating material etc. to the AO of the assessee. This shows that there was a delay of about 11 months from the completion of assessment of Shri Shriram H. Soni. Delay of around 11 monthly is clearly hit by the threshold period of 6-7 months, as held supra by us to be reasonable. Additions have been wrongly made and sustained. We, therefore, order to delete these additions. In view of our decision on the deletion of additions on merits, there remains nothing requiring imposition or confirmation of penalty u/s.271(1)(c) of the Act in respect of three assessment years under consideration. We, therefore, order to delete the penalty in all the three years under appeal. - Decided in favour of assessee.

Summary

Issues Involved:
1. Legitimacy of additions made under section 153C of the Income-tax Act, 1961.
2. Validity of penalty imposed under section 271(1)(c) of the Income-tax Act, 1961.
3. Timeliness of recording satisfaction by the Assessing Officer (AO) of the searched person before transmitting incriminating material.

Issue-wise Detailed Analysis:

1. Legitimacy of Additions under Section 153C:
The case involved the assessment of income for the years 2002-03, 2003-04, and 2004-05, following a search and seizure operation under section 132 of the Act. The AO concluded that the assessee borrowed ?10 lakhs from Shri Shriram H. Soni and paid interest and brokerage from undisclosed income. However, the Tribunal found that the cheques and promissory notes were issued by M/s. K.R. Boob & Sons, a partnership firm, and not by the individual assessee. The Tribunal held that any addition on account of interest and brokerage should be considered in the hands of the partnership firm and not the individual assessee. Consequently, the Tribunal ordered the deletion of the additions made in the hands of the individual assessee.

2. Validity of Penalty under Section 271(1)(c):
Given the Tribunal's decision to delete the additions on merits, the basis for imposing penalties under section 271(1)(c) for the assessment years 2002-03, 2003-04, and 2004-05 was nullified. The Tribunal ordered the deletion of the penalties imposed for all three years.

3. Timeliness of Recording Satisfaction:
The Tribunal examined whether the satisfaction recorded by the AO of Shri Shriram H. Soni before transmitting the incriminating material to the AO of the assessee was timely. The search in the case of Shri Shriram H. Soni was conducted on 29-07-2003, and his assessment was completed on 27-03-2006. The satisfaction note was recorded on 20-02-2007, almost 11 months after the completion of the assessment. The Tribunal referred to the Supreme Court's decision in CIT Vs. Calcutta Knitwears and subsequent High Court decisions, which indicated that a delay beyond 6-7 months in recording satisfaction would vitiate the assessment. Consequently, the Tribunal found the delay of about 11 months to be unreasonable and held that the assessment was invalid on this ground as well.

Conclusion:
The Tribunal allowed all six appeals, deleting the additions made under section 153C and the penalties imposed under section 271(1)(c) for the assessment years 2002-03, 2003-04, and 2004-05. The Tribunal emphasized that the additions should have been made in the hands of the partnership firm, not the individual, and found the delay in recording satisfaction by the AO to be unreasonable, thus invalidating the assessments.