2022 (9) TMI 156 - AT - Income Tax

Assessment u/s 153A - Additions of contract income not offered for taxation - HELD THAT - As in the case of Pr. CIT v. Jaypee financial services 2021 (2) TMI 1186 - DELHI HIGH COURT held that where AO during the course of post search proceedings under section 153A against assessee-share trader found certain evidences showing client code modification done by assessee which were not for genuine reasons and, accordingly, made addition on account of such client code modification, since impugned addition was not made by AO based on any incriminating material found during search against assessee and assessment was not pending on date of search, impugned addition was unjustified and same was to be deleted. Department has not been able to produce any material to suggest / substantiate that the assessment order was passed on the basis of any incriminating material found during the course of search. In view of well settled proposition of law that completed assessment can be interfered by the Assessing Officer while making assessment u/s. 153A only on the basis of some incriminating material unearthed during the course of search documents or undisclosed income or property discovered in the course of search, which were not produced or not already disclosed or made in the course of original assessment, we are of the considered view that in the instant facts, CIT(A) has not erred in facts and in law in deleting the additions for assessment year 2007-08. Even on merits of the case, we find no infirmity in the observations made by the Ld. CIT(Appeals) in the appeal order. The Department has not been able to bring anything on record to point out any error in the factual findings of the CIT(Appeals) in the appeal order, while deciding the issue on merits. Accordingly, in our considered view, CIT(Appeals) has not erred in facts and in law in deleting the additions made on account of contract income not offered for taxation. Addition u/s 41(1) - CIT(Appeals) erred in facts and law in confirming the addition on the ground that the assessee has not been able to prove that the liability was actually subsisting at the end of the financial year.- Decided in favour of assessee.

Summary

Issues Involved:
1. Addition made on account of contract income not offered for taxation.
2. Restriction of addition under section 41(1) of the Act.

Analysis:

Issue 1: Addition made on account of contract income not offered for taxation:
The case involved an appeal by the Revenue against the order passed by the Ld. CIT(Appeals) for assessment years 2007-08 under section 153A r.w.s. 143(3) of the Income Tax Act, 1961. The Department contended that the Ld. CIT(A) erred in deleting the addition of Rs. 2,57,69,929 on account of contract income not offered for taxation. The assessee had initially declared a total income of Rs. 4,09,05,510, and the AO later added the undisclosed contract receipts of Rs. 2,57,69,929 from a project in Karnool. However, the Ld. CIT(A) allowed the appeal, citing that the AO failed to apply his mind and ignored relevant information, leading to a misapplication of mind. The Ld. CIT(A) also highlighted that no incriminating material was found during the search, and therefore, the additions were not justified. The Tribunal upheld the Ld. CIT(A)'s decision, stating that completed assessments can only be interfered with based on incriminating material found during the search, which was not the case here. The Tribunal dismissed the Department's appeal on this ground.

Issue 2: Restriction of addition under section 41(1) of the Act:
The second issue pertained to the restriction of the addition under section 41(1) of the Act. The Tribunal referred to a previous ruling in the case of M/s. Backbone Projects Ltd. where a similar issue was decided in favor of the assessee. In that case, it was established that the actual liability of the creditors was Rs. 8,97,893 and not Rs. 10,21,420 as contended by the Department. The Tribunal noted that the assessee had repaid a portion of the outstanding amount to creditors and had written off another sum, which was reflected as income in subsequent years. Based on these findings, the Tribunal concluded that the Ld. CIT(A) erred in confirming the addition under section 41(1) of the Act. As the issue had already been adjudicated in favor of the assessee in the previous ruling, the Tribunal dismissed the Department's appeal on this ground as well.

In conclusion, the Tribunal dismissed the Department's appeal on both grounds, emphasizing the importance of incriminating material in assessments under section 153A and highlighting the need for accurate assessment of liabilities under section 41(1) of the Act.