2020 (11) TMI 482 - AT - Income Tax

Assessment u/s 153C - recording of satisfaction or not - DR submitted that the assessment proceeding of the searched person was pending when the amendment in section 153C was made - Whether the material found at the premises of the searched person, would indicate that these documents falls in the category of documents, which could be termed as document belong to or belongs to the assessee or entry embedded in them falls within the ambit of expression pertains to or relates to ? - HELD THAT - A perusal of both the satisfaction would indicate that the AO nowhere observed that these documents belonged to the assessee i.e. Shri Dilipkumar Lalwani. He only observed that these documents contained information which relate to the assessee. Thus, it could be construed that documents seized during the course of search; again carried out in the cases of concerned third person, were observed as relates to the assessee. They do not belong to the assessee. A perusal of the satisfaction note would indicate that the AO nowhere held that documents belonged to the present appellants were found at the premises of searched person/entity. Though, section 153C is a procedural section, but the jurisdiction to assess an assessee under this section is being invoked with help of the section. The AO will be in a position to pass assessment order only if during the course of search, any money, bullion, jewellery and other valuable article or thing, or the documents found belong to other person prior to 1.6.2015, and the AO of the searched person was satisfied that such documents disclosed undisclosed income. The documents belonged to the appellants considered under this compartment of the arguments were not found, rather certain information relating to the assessees were found to be embedded in these documents, but prior to 1.6.2015, jurisdiction under section 153C cannot be invoked on the basis of such information. - Decided against revenue. Whether the assessment under section 153A is to be framed directly based on incriminating material found during the search carried out in the cases of the concerned assessee? - HELD THAT - For the purpose of section 153A that only seized material is required. However, if there is any other incriminating material belong to the assessee found at the premises of the some other person, then the assessment has to be made under other provisions and not under section 153A of the Act. See case of CIT Vs. Kabul Chawla 2015 (9) TMI 80 - DELHI HIGH COURT . In the present group of three assessee in different assessment years, search was conducted, but the additions have been made on the basis of the material found during the search relating to some third person. In other words, the AO has not made the addition on the basis of material found during the course of search of these three assessees. We will discuss the material considered by the AO in the subsequent part of his order. Primarily, after looking the material considered by the AO and compiled in tabular form by the ld.counsel for the assessee, we have verified that these additions are not based on the material found during the course of search conducted at the premises of these three assessee. Additions made by the AO in the case of Rajesh Sunderdas Vaswani in different assessment years are not sustainable, because they are not based on the seized material found during the course of search carried out at his premises. Similarly, the additions made in the case of Sanjeet Motors and Finance are also not sustainable. As far as addition in the case of Deepak Budharmal Vaswani is concerned the addition in the assessment year 2015-16 it deserves to be confirmed because the material to this effect was found during the course of search carried out at the premises of the assessee. The rest of the additions are not supported by any material which was discovered during the course of search at his premises. Whether the assessments framed under Section 153A of the Act were within the limitation or not? - HELD THAT - Search team has to justify in the order passed under Section 132(3) of the Act that books/documents/valuables are not practicable to seize along with the reasons other than those mentioned in second proviso to Section 132(1). A situation also arises where the authorised officers impose PO considering that the goods found in the search are not practicable to seize. On the subsequent visit, PO is revoked leading to inference that they consider that goods are now practicable to seize. But the authorised officer has not brought anything on record describing in the Panchnama or in the revocation order how it has become practicable to seize the documents. Conditions imposed under Section 132(3) of the Act for passing the prohibitory orders were not complied with. Accordingly, these orders passed under Section 132(3) of the Act have no validity in the eyes of law. Once the prohibitory orders in the case on hand has been held as invalid then the search concluded in the month of March 2015 shall be taken as the base for calculating the period of passing the assessment order as provided under Section 153B of the Act. In other words the time limit in the case on hand expires for passing the order as on 31 March 2017. Therefore, in the present case the orders have been framed beyond the time prescribed under the provisions of law. Bank lockers with respect to which prohibitory orders were passed under Section 132(3) of the Act were belonging to the other parties who are the income tax assessee. On this count only the prohibitory orders passed by the authorised officer in the name of the assessee in connection with the lockers held by other parties, though related to the assessee cannot be used for extending the time for the assessment provided under Section 153B of the Act. As we have held that assessment orders has been framed beyond the time provided under the statute which has no validity in the eyes of law, accordingly we quash the same. - Decided in favour of assessee. Validity of the proceedings u/s 147 - AR contended that search proceedings are the special proceedings as provided under Section 153A of the Act which has overriding effect over Section 147 - n whether the material found during the search proceedings under Section 132 of the Act can be used for invoking the provisions of income escaping assessment under Section 147 ? - HELD THAT - The assessment under Section 153A of the Act as a result of search is applicable for the specified number of 6 years. Provision of Section 153A(1)(b) provides that in case of search, six assessment years preceding to A.Y. in which search was conducted or requisition made will be assessed or reassessed. Thus the situation arises whether the materials discovered during search proceedings for beyond six preceding A.Y. can be used for invoking the provisions of Section 147 of the Act for the period not covered under the provisions of Section 153A of the Act. The answer stands in favour of the Revenue - no denial under the provisions of law for using the search material under the provisions of Section 147 of the Act in a situation where the period/year in dispute is not covered within the provisions of Section 153A of the Act. It is not out of place to mention that the conditions precedent to invoking the provisions to Section 147 of the Act have to be complied by the Revenue - material found during the course of search proceedings can be used for invoking the provisions of Section 147 of the Act. However, it is important to note that the provisions of Section 147 of the Act can be invoked only after complying the provisions/conditions as provided under Section 147/148/149/150 and 151. We are not inclined to disturb the finding of the authorities below. Hence the contention raised i.e. the provisions of Section 147 of the Act cannot be invoked in view of the fact that there was special proceedings under Section 153A of the Act in case of search, by the assessee is dismissed. Thus the contention of the assessee is hereby dismissed. Whether the information received from the investigation wing/search team would constitute 'reason to believe' empowering the Assessing Officer to reopen the assessment? - In the assessee's case, the crucial link between the information made available to the Assessing Officer and the formation of belief was absent. The reasons to believe recorded were not reasons but only conclusions and a reproduction of the information received from the Director (Investigation). Hence it is nothing but a Borrowed satisfaction . There is no mention in reasons recorded with respect to the fact that whether the assessee has filed original return or weather assessment under Section 143(3) was made earlier or not. if assessment under Section 143(3) completed earlier then how it was failure on the part of the assessee to disclose all material facts fully and truly during assessment proceeding for initiating reassessment proceeding after expiry of 4 year from the end of relevant assessment year. In the present case the search information received from the investigation wing was used to form the reason to believe by the AO but without applying the mind. Thus the reasons were merely recorded on the borrowed satisfaction by the AO. The source for all the conclusions was of the investigation report. The tangible material which formed the basis for the belief that income had escaped assessment must be evident from a reading of the reasons. The reasons failed to demonstrate the link between the tangible material and the formation of the reason to believe that income had escaped assessment. Third party information is only an information and does not constitute 'reason to believe' until and unless the third party information is subjected to investigation and on the basis thereof independent reasons are recorded by the Assessing Officer before issuance of notice under Section 148. On comparison of the additions proposed in the reason to believe recorded for the assessment under Section 147 of the Act with the actual addition made by the AO as contended by the learned DR we find that the additions which were proposed in the reasons recorded were not matching with the actual additions made by the AO in the assessment order under Section 147/143(3) of the Act. As such the amount of addition viz a viz the basis of re-opening as proposed in the reasons recorded were not matching with the addition made by the AO in the assessment framed under Section 147/143(3) of the Act. Accordingly, we hold that there cannot be any addition in the assessment framed under Section 147/143(3) . Addition on account of interest free loans and advances provided to the partners - HELD THAT - It was not mandatory to charge the interest on the amount of loans and advances given to the partners, rather it was based on the mutual acceptance of the partners. Accordingly, to our understanding, the assessee has not charged any interest from the partners on the amount of loan/advances provided to the partners. It was the wisdom of the assessee not to charge the interest from the partners and the AO cannot direct to do otherwise. In holding so we draw support and guidance from the judgment of Hon ble Gujarat High court in the case of Pr.CIT vs. Alidhra Taxspin Engineers. 2017 (5) TMI 1684 - GUJARAT HIGH COURT . We also find force in the alternate contention of assessee. The amount of interest which is in dispute pertains to the earlier assessment year. At all any adjustment if need to be made , then the AO can do so in the respective assessment years 2012-13 and 2013-14 without disturbing the same in the year under consideration. We are not impressed with the finding of the authorities below and therefore decline to uphold the same. Thus we set aside the finding of the learned CIT (A) and direct the AO to delete the addition made by him. - Decided in favour of assessee.

Summary

Issues Involved:
1. Validity of assessment proceedings under section 153C.
2. Whether assessments under section 153A should be based on incriminating material found during the search.
3. Whether assessments under section 153A were within the limitation period.
4. Validity of reopening assessments under section 147.
5. Specific addition of interest-free loans and advances to partners.

Issue-wise Detailed Analysis:

1. Validity of Assessment Proceedings under Section 153C:
The Tribunal examined whether proceedings initiated under section 153C were valid. It was argued that the search conducted on 10.03.2015 and concluded on 13.03.2015 should be governed by the law prior to the amendment effective from 1.6.2015. The Tribunal referred to the Gujarat High Court decision in Anil Kumar Gopikishna Agrawal Vs. ACIT, which clarified that the amended section 153C is prospective and applies only to searches conducted after 1.6.2015. Consequently, the Tribunal found that the AO did not record a finding that documents belonged to the assessees, which was a requirement before 1.6.2015. Therefore, the assessments under section 153C were quashed.

2. Whether Assessments under Section 153A Should Be Based on Incriminating Material Found During the Search:
The Tribunal held that assessments under section 153A must be based on incriminating material found during the search. It referred to the Gujarat High Court decision in Pr.CIT Vs. Saumya Construction P.Ltd., which stated that additions under section 153A can only be made based on incriminating material found during the search. The Tribunal found that the additions made by the AO were not based on material found during the search of the assessees but on documents found during searches of third parties. Consequently, the additions were not sustainable, and the appeals were partly allowed.

3. Whether Assessments under Section 153A Were Within the Limitation Period:
The Tribunal examined whether the assessments were completed within the statutory period. It was argued that the search concluded on 13.03.2015, and the assessments should have been completed by 31.03.2017. However, the AO treated the search as concluded in May 2015 due to prohibitory orders. The Tribunal referred to various judicial precedents, including the Karnataka High Court decision in C. Ramaiah Reddy vs. ACIT, which held that the period of limitation starts from the date on which the last of the authorization was executed. The Tribunal found that the prohibitory orders were not justified and quashed the assessments as time-barred.

4. Validity of Reopening Assessments under Section 147:
The Tribunal examined whether the reopening of assessments under section 147 was valid. It was argued that the AO did not independently verify the information received from the search team and merely relied on borrowed satisfaction. The Tribunal referred to judicial precedents, including the Bombay High Court decision in Principal Commissioner of Income-tax-5 v. Shodiman Investments (P.) Ltd., which held that reopening based on borrowed satisfaction is not valid. The Tribunal found that the AO did not apply his mind and quashed the assessments under section 147.

5. Specific Addition of Interest-Free Loans and Advances to Partners:
The Tribunal examined the addition made by the AO for interest-free loans and advances to partners. It was argued that the partnership deed did not mandate charging interest on such loans. The Tribunal referred to the Gujarat High Court decision in Pr.CIT vs. Alidhra Taxspin Engineers, which held that charging interest on partners' loans is not mandatory if the partnership deed provides for mutual understanding. The Tribunal found that the AO's addition was not justified and directed the deletion of the addition.

Conclusion:
The Tribunal quashed the assessments under sections 153C and 147 due to procedural lapses and lack of incriminating material. It also directed the deletion of the addition for interest-free loans and advances to partners. The appeals were partly allowed, and the assessments were dismissed as time-barred or invalid.