2014 (2) TMI 1131 - AT - Income Tax

Estimation of net profit - Whether the action of the CIT(A) in directing the AO to rework the net profit of the assessee at the lower rate of 0.14% as against the 0.99% estimated by the AO is correct Held that - Powers of the AO to re-open an assessment u/s. 147 is subject to limitation of time period as prescribed u/s. 149 of the Act - whether the return was processed u/s. 143(1) or u/s. 143(3), if the AO has a reason to believe that any income chargeable to tax has escaped assessment, he can re-open the assessment u/s. 147 by issuing notice u/s. 148 but within the time limit as prescribed u/s. 149 of the Act - The return was processed u/s. 143(1) of the Act but it has attained finality due to the expiry of limitation period of twelve months from the end of the month in which the return was filed - the assessment is deemed to be completed and not pending on the date of search on 14.08.2008 - no incriminating material was found from the premises of the assessee during the search u/s. 132 of the Act. Assessment u/s. 153A can be made on the basis of incriminating material found during the search Relying upon Jai Steel (India) v. ACIT 2013 (6) TMI 161 - RAJASTHAN HIGH COURT - in case nothing incriminating is found on account of search or requisition, the question of reassessment of the concluded assessment does not arise - Once assessment u/s. 143(3) had been annulled by higher authorities on the ground of legality of notice u/s. 143(2) of the Act, re-opening u/s. 147 on that very ground would mean nothing else but the abuse of process of law - the contention of the Revenue cannot be accepted that as the return was processed u/s. 143(1) and it was a mere intimation, the AO had reason to believe that income had escaped assessment and it was open to the AO to re-assess the income u/s. 153A, even without any incriminating material found during the search action decided against Revenue. Validity of assessment proceedings u/s 153A of the Act Held that - There is no condition in section153A that additions should be strictly made on the basis of evidence found during the course of search or other post search material or information available with the AO which can be related to the evidence found and that the seized material can be relied upon to also draw inference that there can be similar transactions throughout the relevant period, yet, at the same time it has been further observed that this however, does not mean that assessment u/s 153 A can be arbitrarily made without any relevance or nexus with the seized material. The reassessments made by the AO under section 153A, without any incriminating material being found during the search action conducted u/s. 132 of the Act, were not in accordance with law - the same are hereby set aside and the consequential result is that the return/original assessments which have acquired finality are to be reiterated. Since the cross-objections of the assessee have been allowed, the dispute relating to the additions made in consequence of the reassessments made u/s. 153A does not survive Decided in favour of Assessee.

Issues Involved:
1. Validity of assessment under Section 153A of the Income Tax Act.
2. Estimation of net profit by the Assessing Officer (AO).
3. Disallowance of deductions under Chapter VI.
4. Credit of tax paid.

Detailed Analysis:

1. Validity of Assessment under Section 153A:
A search and seizure operation was conducted on the assessee on 14.08.2008, leading to the issuance of a notice under Section 153A by the AO to file returns for six years. The assessee argued that no incriminating material was found during the search, making the reassessment under Section 153A invalid. The AO contended that the absence of books of accounts, claimed to be destroyed in a flood, itself constituted incriminating evidence. The Tribunal noted that the return was processed under Section 143(1) and had attained finality due to the expiry of the limitation period. Citing the Special Bench decision in "All Cargo Global Logistics Ltd." and the Rajasthan High Court ruling in "Jai Steel (India) v. ACIT," the Tribunal held that reassessment under Section 153A requires incriminating material found during the search. Since no such material was found, the reassessment was deemed invalid.

2. Estimation of Net Profit:
The AO estimated the net profit of the assessee's proprietary concern at 0.99% based on the net profit ratio of similar businesses. The CIT(A) upheld the AO's action but directed the AO to re-compute the net profit at a lower rate of 0.14%. The revenue appealed against this reduction. Given the Tribunal's decision on the invalidity of the reassessment under Section 153A, the issue of net profit estimation became moot.

3. Disallowance of Deductions under Chapter VI:
The AO disallowed the deductions claimed by the assessee under Chapter VI due to the lack of supporting documentation, which the assessee claimed was destroyed in a flood. The CIT(A) directed the AO to allow the credit of tax paid as per the records. However, since the reassessment itself was invalidated, the disallowance of deductions also did not survive.

4. Credit of Tax Paid:
The CIT(A) directed the AO to verify the records and allow the credit of tax paid. This directive was contingent on the validity of the reassessment, which was subsequently set aside by the Tribunal. Therefore, the issue of credit of tax paid also did not survive.

Conclusion:
The Tribunal held that the reassessments made by the AO under Section 153A were not in accordance with the law due to the absence of incriminating material found during the search. Consequently, the original assessments, which had attained finality, were to be reiterated. The cross-objections filed by the assessee were allowed, and the appeals filed by the revenue were dismissed.

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