2013 (4) TMI 665 - AT - Income Tax

Validity of assessments u/s.153C - search and seizure operation u/s.132 covering the residential premises as well as business premises of assessee - appellant challenged the proceeding initiated u/s.153C on the ground that no satisfaction was recorded by the A.O. of case in which a search conducted - Held that - For initiating proceeding u/s.153C, it is not necessary that these books of account should be incriminating. When books of account of the appellant found and seized from the search place of the partner of the firm, the A.O. is fully empowered to initiate proceeding u/s. 153C against the firm i.e. other person. The A.O. of the both partners as well as firm was same therefore, no separate satisfaction is required to be recorded as held in case of CIT v. Panchajanyam Management Agencies & Services 2010 (11) TMI 366 - Kerala High Court . In assessee s case, in all the years, no scrutiny assessment has been made by the A.O. The return of the appellant had been process u/s. 143 (1) (a) and it was held by in case of Asstt. CIT v. Rajesh Jhaveri Stock Brokers (P.) Ltd. 2007 (5) TMI 197 - SUPREME Court intimation u/s.143(1)(a) cannot be treated to be an order of assessment and there being no assessment u/s.143(1)(a). The Section 153D has been amended w.e.f. 01.06.2007 whereas the A.O. has passed orders u/s. 153C in all the years on 24/03/2006. Thus, no approval of JCIT/ACIT is required. Thus CIT(A) was right in confirming the action of the A.O. u/s.153 - Against assessee. Addition of capital gain u/s. 45(4) relying on CIT v. A.N. Naik Associates 2003 (7) TMI 46 - BOMBAY High Court - Held that - As per Section 2(47) the distribution of capital assets that dissolution of a firm would be regarded as transfer. It is now clear that when the assets are transferred to a partner that falls within the expression otherwise and the rights of the other partners in those assets of the partnership firm extinguished. In appellant s case, the land and building had been revalued as against book value and credited the amount on account of revaluation in the respective partners capital account in their ratio in the firm. The retiring partner paying his share. As decided in Suvardhan v CIT 2006 (8) TMI 142 - KARNATAKA High Court any distribution of capital assets and dissolution of firm was chargeable tax as the income of the firm in the light of the fact that a transfer had taken place. In this case, one partner retired and two were continue in the partnership firm. The Court held that provisions of Section 45(4) is applicable as it amounts to transfer. Hence, capital gain is applicable - the assessee s case is fully covered u/s. 45(4) - Against assessee. Disallowance of salary and wages - Held that - Nothing incriminating documents for inflating on wages were found, whatever found incriminating has been considered in case of partner who had disclosed the additional income under this head. A.O. made addition on the basis of presumption that in case of firm also such types of inflation on wages had been made. But the burden on the revenue to prove that wages expenses had been inflated by the appellant which has not been discharged by bringing out any evidence on record. Thus the order of the CIT(A) reversed. The assessee s appeal on this ground is allowed.

Summary

Issues Involved:
1. Validity of assessments under Section 153C.
2. Addition of capital gains under Section 45(4) for A.Y. 1999-2000.
3. Disallowance of salary and wages.

Issue-wise Analysis:

1. Validity of Assessments under Section 153C:

The primary issue was whether the proceedings initiated under Section 153C of the IT Act were valid. The assessee argued that no satisfaction was recorded by the A.O. of the case in which the search was conducted, and no documents or assets belonging to the firm were found during the search. The CIT(A) observed that during the search at the residence of Shri Yakub A. Colddrink, documents and books pertaining to the firm were found and seized, which revealed unaccounted job work income. The CIT(A) rejected the assessee's ground, stating that the books of account found and seized from the partner's residence belonged to the firm, thus justifying the initiation of proceedings under Section 153C.

The Tribunal upheld the CIT(A)'s decision, stating that the A.O. is empowered to initiate proceedings under Section 153C when books of account belonging to the assessee are found and seized from the search premises of the partner. The Tribunal cited the case of CIT v. Panchajanyam Management Agencies & Services, which held that the A.O. need not record separate reasons if the same A.O. has jurisdiction over both the partner and the firm. Thus, the first ground of appeal in all years was dismissed.

2. Addition of Capital Gains under Section 45(4) for A.Y. 1999-2000:

The second issue was the addition of capital gains under Section 45(4) of the IT Act due to the reconstitution of the partnership firm. The A.O. observed that the firm revalued its assets and credited the revaluation amount to the partners' capital accounts, leading to payments to retiring partners. The A.O. invoked Section 45(4), treating the revaluation and payments as a transfer of capital assets, resulting in a capital gain addition of Rs. 23,93,040/-.

The CIT(A) confirmed the addition, referencing the decision in CIT v. A.N. Naik Associates, which held that reconstitution of a firm involving asset revaluation and payment to retiring partners constitutes a transfer under Section 45(4). The Tribunal upheld the CIT(A)'s decision, stating that the revaluation and payment to retiring partners amounted to a transfer of capital assets, thus attracting capital gains tax under Section 45(4).

3. Disallowance of Salary and Wages:

The third issue was the disallowance of salary and wages due to alleged inflation of expenses. The A.O. observed discrepancies in the books of account and vouchers, leading to the conclusion that wages were inflated. Additions were made based on the ratio of salary and wages to income and disclosures made by the partner during the search.

The Tribunal, however, found that no incriminating documents regarding inflated wages were found during the search of the firm. The evidence was found only in the partner's case, who had disclosed additional income. The Tribunal held that the burden of proof was on the revenue to show that the firm had inflated wages, which was not discharged. Consequently, the Tribunal reversed the CIT(A)'s order on this ground and allowed the assessee's appeal regarding the disallowance of salary and wages.

Conclusion:

In the combined result, the Tribunal partly allowed the assessee's appeal in all years, upholding the validity of assessments under Section 153C and the addition of capital gains under Section 45(4) but reversing the disallowance of salary and wages.