2022 (8) TMI 968 - HC - Income Tax

Assessment u/s 153A - Authorisation and assessment in case of search or requisition - Constitutional validity of Section 292CC inserted by the Finance Act, 2012 alleging it to be violative of Articles 14, 19 and 21 of the Constitution of India - non-disclosure of reason to believe or reason to suspect - constitutional validity of the provisions has been challenged mainly on the ground that they could not have been made retrospectively to take away the existing rights - violation of principles of natural justice - HELD THAT - The revenue cannot be allowed to take a stand in contradiction to what was taken by them in the earlier W.P and an order without a clarification that the reliance of the statement of witness would be for corroboration of the material collected during the course of search and seizure. It could have been otherwise after affording an opportunity of cross-examination to the assessee, because even for corroboration, the statement was used against the petitioner firm. The loose sheets could not have been relied upon in the absence of supportive evidence to prove it. Therefore, we conclude the issue aforesaid in favour of the assessee and against the revenue. The matter would thus require to be remanded for a fresh assessment. Maintainability of writ petition - Assessment order has been passed in violation of the principles of natural justice as held by us while dealing with the issue aforesaid, the writ petitions to challenge the assessment orders would be maintainable even if we ignore that the constitutional validity of certain provisions has been challenged. In fact, violation of the principles of natural justice would itself be a ground to allow the jurisdiction of this court under Article 226 of the Constitution of India because it violates Articles 14 and 19 of the Constitution of India. It is also when challenge to the authorization of warrant for search has also been made for want of competence of the officer. It is alleging that warrant for search was not issued by the competent officer and, therefore, the search itself would vitiate. In view of the aforesaid, the writ petitions would be maintainable. Constitutional validity of Section 292CC of the Act of 1961 brought by the Finance Act of 2012 giving retrospective effect - Explanations added to Section 132(1), 132(1A) and 132A(1) of the Act of 1961 have been given retrospective effect for the purpose given in the objects and reasons for such amendment. The retrospectivity of the amendment is affecting the case on hand, because at the time when search was conducted, the Explanations introduced by the Finance Act, 2017 were not available. The reason to believe or reason to suspect is to be examined at the time of hearing of the appeal by the CIT(A) or the ITAT, but in view of the addition of Explanations by the Finance Act of 2017, the aforesaid power would not be available to the CIT(A) and the ITAT as such, though the said restriction does not apply to the High Court and the Supreme Court. As however a fact that the CIT(A) and ITAT cannot consider the reason to believe or reason to suspect on merit, but was only for limited purpose. In view of the above, even if the explanations to the provisions referred to above have been added by the Finance Act, 2017, it cannot be said to be offending Articles 14, 19 or 21 of the Constitution of India and otherwise retrospectivity of the amendment is permissible unless it remains otherwise unconstitutional. Thus, we summarily reject the challenge to the addition of Explanations to Sections 132(1), 132(1A) and 132A(1) of the Act of 1961 by the Finance Act of 2017 and hold it to be constitutionally valid. Non consideration of Special Audit Report - The special audit has contained three figures based on the extent of expenses allowable under the Act of 1961, whereas the question of disallowance under Section 37 of the Act of 1961 lies entirely with the assessing authority and can be challenged only on merits before the Commissioner of Income Tax (Appeals). The case of the revenue is that the special audit report is relied by the petitioner only to the extent that there is no link to trace the evidence against the petitioner. The said opinion was given by the special auditor in contradiction. However, these arguments have been raised, but the reasons do not find place in the assessment orders, which very summarily refused to rely on the special audit report. We conclude the issue holding that though the special audit report is not binding on the revenue, the reasons for discarding it have to be recorded by the assessing authority after proper discussion and could not have been discarded summarily, thus needs to be considered appropriately on remand of the case. Validity of warrant of Authorisation - We have gone through the search panchanamas and find that other than one search warrant issued under the authorization of the Additional Commissioner of Income Tax, the other warrants of authorisation were issued by the Deputy Commissioner of Income Tax and other officers below the rank of Additional Commissioner of Income Tax, who are not having authority for issuance of authorisation on their own, unless so authorised by the Principal Director General or Director General or Principal Director or Director or the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner or Additional Director or Additional Commissioner or Joint Director or Joint Commissioner. The petitioner has raised an issue on the authorisation of the warrants because if the Deputy Commissioner of Income Tax has authorised the warrant of search without authorisation in his favour, it would offend Section 132 of the Act of 1961 and the issue goes to the root of the case. Thus, we find a case to remand the issue to the assessing authority keeping it open to the assesse to raise the argument aforesaid and in that case, the assessee would be disclosed and allowed to peruse the authorisation of warrant of search. It is not only that authorization should be of the competent authority, but it is on satisfaction of the authority that search warrant can be issued and it can be only of the competent officer. Therefore, we hold that if the search warrant was not issued by the competent officer, then it would vitiate the search and, accordingly, the issue aforesaid would be analyzed by the assessing authority while passing the assessment order afresh on remand of the case. It would be in the light of the finding recorded above. Proceedings u/s 153A - As considered the rival submissions of the parties and find that the panchanamas issued by the respondents in certain cases were in the names of three individuals and in some cases it is even in the name of the firm, apart from the three individuals. The material collected pursuant to the search jointly conducted against the three persons and the firm would not require to be dealt with under Section 153C, but would be under Section 153A of the Act of 1961. It is, however, necessary to clarify that if the material collected in the search against such person is used against other person, then proceeding can be taken under Section 153C of the Act of 1961 and not under Section 153A of the Act of 1961. Whether the material collected in the case of search upon the individuals can be considered in the hands of the firm without following the mandate of Section 153C and in the order under Section 153A of the Act of 1961 would be permissible in law is another issue that requires consideration. Thereby on remand, the assessing authority would examine the issue aforesaid. Addition of Income based on same set of material against two assessee - AO has assessed the income with addition of income in the hands of the yard owners and at the same time the same material was used against the petitioner firm and, therefore, one and the same material was used for addition of income in the hands of the yard owner and the petitioner firm. The approach of the same assessing authority in doing so is wholly illegal. In fact, same material could not have been used for addition of income of the yard owner and the petitioner firm. Search was conducted in the joint names of three persons, namely Mr.Prem Kumar, Mr.K.Sreenivasalu and Mr.J.Sekar Reddy, and if the material collected therein was to be used for addition of the income of the petitioner firm, the assessing authority should have arrived at a conclusive satisfaction that the said material belongs to the petitioner firm and represents and discloses its income. Instead of discharging the onus of such satisfaction before using the material against the petitioner firm, the assessing authority strangely first used the same material for addition of income of the yard owners showing it to be their income and in contrast made addition of income on the basis of some material subsequently in the hands of the petitioner firm. The assessment against the yard owners named above was completed under Section 153C of Act of 1961 on 29.8.2021. The same assessing authority thereafter passed the assessment order against the petitioner firm, though prior to it he was satisfied that material found from the search belongs to the yard owners. Therefore, addition of income in the hands of the petitioner firm becomes illegal. The issue aforesaid goes to the root of the case and, therefore, on remand the assessing authority would be directed to make assessment afresh eliminating the material used in the assessment of the yard owners to make addition of income of the petitioner firm. Disallowance u/s 40A(3) - It was not a case where the petitioner firm has claimed certain expenditure where the question of its allowance or disallowance would become relevant. It is a case of computation of income of the petitioner firm by the assessing authority on the basis of certain seized documents comprising loose sheets, etc., keeping the regular books of accounts of the petitioner firm aside. The disallowance under Section 40A(3) of the Act of 1961 could not have applied in these circumstances. We find substance in this argument, however, we are not dealing with quantum of income in this order and the same be considered in remand proceedings. While we hold the provisions of Section 292CC and the Explanations added to Sections 132(1), 132(1A) and 132A of the Act of 1961 to be constitutionally valid, an interference with the assessment orders is made for the reasons recorded above and, accordingly, the assessment orders are set aside with remand of the case to the assessing authority to pass assessment orders afresh and it would be after taking into consideration the findings recorded by this court. The assessee would be at liberty to advance all the submissions in that regard. Writ petitions are disposed of.

Summary

Issues Involved:
1. Constitutional Validity of Section 292CC and Explanations to Sections 132(1), 132(1A), and 132A of the Income Tax Act, 1961.
2. Challenge to Assessment Orders for the Years 2014-2015 to 2017-2018.
3. Violation of Principles of Natural Justice.
4. Non-Consideration of Special Audit Report.
5. Validity of Warrant of Authorization.
6. Proceedings under Section 153A vs. 153C of the Income Tax Act.
7. Addition of Income Based on Same Set of Materials Against Two Assessees.
8. Disallowance of Expenditure under Section 40A(3) of the Income Tax Act.

Detailed Analysis:

1. Constitutional Validity of Section 292CC and Explanations to Sections 132(1), 132(1A), and 132A of the Income Tax Act, 1961:
The petitioner challenged these provisions on the grounds of retrospectivity and violation of natural justice. The court upheld the constitutional validity of Section 292CC and the Explanations, stating that retrospective amendments are permissible unless unconstitutional. The court noted that the amendments were clarificatory and did not affect the petitioner's case as the search was conducted after the amendments.

2. Challenge to Assessment Orders for the Years 2014-2015 to 2017-2018:
The petitioner contested the assessment orders, alleging they were passed in violation of natural justice and based on invalid search warrants. The court found merit in the petitioner's claims and set aside the assessment orders, remanding the case for fresh assessment while considering the court's findings.

3. Violation of Principles of Natural Justice:
The petitioner argued that the department relied on witness statements without allowing cross-examination, contrary to a sworn affidavit in a previous writ petition. The court held that using statements without cross-examination violated natural justice principles and was contemptuous. The court emphasized that even for corroboration, statements should not be used without cross-examination.

4. Non-Consideration of Special Audit Report:
The petitioner claimed the special audit report, which found no evidence against them, was ignored. The court agreed that while the report is not binding, it should not be dismissed without cogent reasons. The court directed the assessing authority to consider the special audit report appropriately on remand.

5. Validity of Warrant of Authorization:
The petitioner questioned the competence of the officers issuing the search warrants. The court noted that warrants were issued by officers below the rank of Additional Commissioner, who were not authorized unless specifically empowered. The court directed the assessing authority to verify the authorization of the officers involved.

6. Proceedings under Section 153A vs. 153C of the Income Tax Act:
The petitioner argued that proceedings should have been under Section 153C as the search was primarily against individuals, not the firm. The court clarified that material collected in a joint search could be used under Section 153A, but if used against a person not searched, Section 153C should apply. The assessing authority was directed to re-examine this issue on remand.

7. Addition of Income Based on Same Set of Materials Against Two Assessees:
The petitioner contended that the same materials were used to add income to both yard owners and the petitioner firm. The court found this approach illegal, as the same material cannot be used for adding income to different assessees. The court directed the assessing authority to eliminate such duplicative additions on remand.

8. Disallowance of Expenditure under Section 40A(3) of the Income Tax Act:
The petitioner challenged the disallowance of business expenditure, arguing Section 40A(3) does not apply when income is computed from seized documents rather than regular books. The court found merit in this argument but left the quantum of income to be considered in remand proceedings.

Conclusion:
The court upheld the constitutional validity of the challenged provisions but found substantial procedural violations in the assessment process. The assessment orders were set aside, and the case was remanded for fresh assessment, ensuring compliance with natural justice principles and proper consideration of all relevant issues.