2013 (1) TMI 162 - HC - Income Tax

Jurisdiction of AO u/s 158BD - Undisclosed income of any other person - search under Section 132 - AO treated the claim of the assessee regarding receipt of service charges as income from house property Whether the notice of Search & Seizure dated 28.10.1997 satisfied the requirement of Section 158BD? - Held that - As decided in MANISH MAHESHWARI and INDORE CONSTRUCTION P. LTD. Versus COMMISSIONER OF INCOME-TAX 2007 (2) TMI 148 - SUPREME COURT OF INDIA the conditions precedent for invoking the provisions of Section 158-BD are required to be satisfied before the provisions of the said chapter are applied in relation to any person other than the person whose premises had been searched or whose documents and other assets had been requisitioned under Section 132-A of the Act. There is no recording of any satisfaction that any undisclosed income belongs to the respondent/assessee. The communication dated 28.10.1997 merely indicates that books of accounts pertaining to the respondent assessee/assessees were seized and were lying in the custody of the Assessing Officer in respect of the Mody Group of cases. It was further indicated in the communication that since the AO at New Delhi had jurisdiction over the assessee, it was proposed that necessary proceedings may be adopted against the assessee in accordance with the provisions of chapter XIVB of the said Act. There is no satisfaction recorded by the said AO of the Mody Group of companies that any undisclosed income belonged to the assessee. As such the very first mandatory condition precedent for assuming jurisdiction under Section 158BD and subsequently under Section 158 BC has not been satisfied. This failing on its own would render the entire proceedings to be without jurisdiction - in favour of assessee.

Summary

Issues Involved:
1. Jurisdiction under Section 158BD of the Income Tax Act.
2. Classification of income from service charges.
3. Disallowance of expenses related to service charges.
4. Addition on account of enhancement of Notional Annual Letting Value.
5. Set-off of loss on the sale of shares.

Detailed Analysis:

1. Jurisdiction under Section 158BD of the Income Tax Act:
The primary issue was whether the Assessing Officer (AO) correctly assumed jurisdiction under Section 158BD. The Tribunal concluded that the AO wrongly assumed jurisdiction as there was no recorded satisfaction that any undisclosed income belonged to the respondent/assessee. This conclusion was supported by the Supreme Court's decision in Manish Maheshwari v. A.C.I.T, which mandates that satisfaction must be recorded by the AO that any undisclosed income belongs to a person other than the one searched. The communication dated 28.10.1997 from the AO of the searched person to the AO of the respondent/assessee did not record such satisfaction, rendering the proceedings without jurisdiction.

2. Classification of income from service charges:
The Tribunal held that the AO incorrectly treated the service charges received by the assessee as income from house property. The Tribunal found that the transactions were duly recorded in the books of accounts maintained in the regular course of business, and no undisclosed income was detected. Hence, the classification of service charges as income from house property by the AO was incorrect.

3. Disallowance of expenses related to service charges:
The Tribunal also addressed the issue of disallowance of expenses related to earning service charges. Since the service charges were not considered income from house property, the corresponding expenses could not be disallowed. The Tribunal deleted the disallowance made by the AO.

4. Addition on account of enhancement of Notional Annual Letting Value:
The Tribunal deleted the addition of Rs. 17,17,263/- made by the AO on account of the enhancement of Notional Annual Letting Value. The Tribunal found no basis for such enhancement as no adverse material was found during the search to justify the addition.

5. Set-off of loss on the sale of shares:
The Tribunal allowed the assessee to set off the loss amounting to Rs. 1,76,52,477/- on the sale of shares. The Tribunal found that all transactions were recorded in the regular books of accounts, and no undisclosed income was detected. Thus, the set-off of the loss was permissible.

Conclusion:
The Tribunal's decision was upheld by the High Court, which found no substantial question of law arising for consideration. The appeal was dismissed, affirming that the AO had wrongly assumed jurisdiction under Section 158BD, and the Tribunal's findings on the classification of income, disallowance of expenses, enhancement of Notional Annual Letting Value, and set-off of loss were correct.