2021 (10) TMI 696 - AT - Income Tax

Validity of assessment u/s 153C read with section 153A - Case was reopened u/s 147 of the Act and re-assessment order was framed u/s 143(3) - Assessment beyond the period of six assessment years - As argued AO has erred in making the addition to the assessment order passed u/s 143(3) read with section 153C of the Act in non abetted assessment order without any incriminating documents found during the course of search - HELD THAT - Assessments made in respect of assessment year 2003-04 and 2004-05 would be beyond the period of six assessment years as reckoned with reference to the date of recording of satisfaction by the AO of the searched person. In the case of a searched person the AO of the searched person assumes possession of seized assets/documents on search of the Assessee; the seized assets/documents belonging to a person other than a searched person come into possession of the AO of that person only after the AO of the searched person is satisfied that the assets/documents do not belong to the searched person. Thus, the date on which the AO of the person other than the one searched assumes the possession of the seized assets would be the relevant date for applying the provisions of Section 153A of the Act. We, therefore, accept the contention that in any view of the matter, assessment for AY 2003-04 and AY 2004-05 were outside the scope of Section 153C of the Act and the AO had no jurisdiction to make an assessment of the Assessee's income for that year. Assessment year was a concluded assessment on the date of search. This assessment should have been tinkered with , only if there is any incriminating material belonging to the assessee found during the course of search. We find that the ld AO has made an addition only on the basis of perusal of the profit and loss account which was already part of the assessment record earlier. Therefore, it is clear that the addition has not made on the basis of any incriminating material found during the course of search. Thus issue is squarely covered by the decision of the Hon'ble Delhi High Court in PCIT Vs. Kabul Chawla 2015 (9) TMI 80 - DELHI HIGH COURT - the addition could not have been made and hence deserved to be deleted. Even on the merits of the case, the ld CIT(A) has categorically held that the expenditure crystallized during the year and therefore, they are allowable as business expenditure during the year. The decision of the ld CIT(A) is also based on several decisions of the Hon'ble jurisdictional high court. The ld DR did not show us any infirmity in the order of the ld CIT(A) in deleting of the above addition or to state that expenses did not crystallize during this relevant financial year. We also do not find any reason to disturb the order of the ld CIT(A). Accordingly, even on the merits of the case the order of the ld CIT(A) is deserves to be upheld. - Decided in favour of assessee.

Summary

Issues Involved:
1. Deletion of prior period expenses.
2. Disallowance of provision for inventory.
3. Disallowance of liquidated damages.
4. Jurisdictional validity of reassessment under Section 153C.

Detailed Analysis:

Issue 1: Deletion of Prior Period Expenses
The Assessing Officer (AO) disallowed prior period expenses amounting to ?26,39,87,000, stating they were not crystallized during the relevant assessment year and were against accounting guidelines mentioned in AS-5 of ICAI. The CIT(A) deleted the disallowance, holding that the expenses crystallized during the year and were thus allowable. This was upheld by the Tribunal, noting the assessment was a concluded one and no incriminating material was found during the search to justify the addition. The Tribunal cited the decision in PCIT Vs. Kabul Chawla and CIT Vs. Sinhgadh Technical Educational Society, confirming that additions in concluded assessments must be based on incriminating material.

Issue 2: Disallowance of Provision for Inventory
The AO disallowed provisions for obsolete inventory, arguing they were contingent in nature. The CIT(A) deleted these disallowances, referencing earlier years where similar provisions were allowed and noting the provisions were not ad hoc but based on reducing the carrying value of inventory. The Tribunal upheld the CIT(A)'s decision, confirming the provisions were actual losses and allowable as business expenses. This was consistent across multiple assessment years, including 2002-03, 2003-04, 2004-05, 2005-06, 2006-07, and 2008-09.

Issue 3: Disallowance of Liquidated Damages
The AO disallowed liquidated damages, treating them as contingent liabilities. The CIT(A) deleted these disallowances, holding that liquidated damages were contractual obligations and not penalties. The Tribunal upheld this view, noting that such damages were part of the purchase contracts and incurred wholly and exclusively for business purposes. This was supported by various judicial precedents, including Huber Suhner Electronics Pvt. Ltd. Vs. DCIT and CIT Vs. R.D. Sharma & Co. The Tribunal confirmed the CIT(A)'s decision for multiple assessment years, including 2005-06, 2008-09, 2009-10, and 2010-11.

Issue 4: Jurisdictional Validity of Reassessment under Section 153C
The Tribunal examined whether the reassessment under Section 153C was valid in cases where the original assessment was concluded and no incriminating material was found during the search. The Tribunal held that for concluded assessments, reassessment could only be justified if based on incriminating material found during the search. This principle was applied consistently across multiple assessment years, leading to the deletion of additions made by the AO in the absence of such material. The Tribunal cited the decisions in CIT Vs. RRJ Securities Ltd and PCIT Vs. Kabul Chawla to support its findings.

Conclusion
All appeals filed by the AO were dismissed. The Tribunal consistently upheld the CIT(A)'s decisions to delete disallowances related to prior period expenses, provisions for inventory, and liquidated damages, emphasizing the necessity of incriminating material for reassessment in concluded assessments. The judgments were grounded in established legal principles and supported by relevant judicial precedents.