2014 (9) TMI 625 - AT - Income Tax

Validity of assessment u/s 153C r.w.s. 143(3) Estimation of business income on higher side Assessment made on assumptions Held that - The mandatory conditions of recording satisfaction not complied with to invoke the jurisdiction u/s 153C of the Act - addition in search cases needs to be supported by the seized materials found at the time of search - no material seized in the search shows that it is undisclosed income - the addition is made on the basis of the scribbling found in the Cheque book counter foils found in the survey which was conducted subsequent to the search proceedings - The assessment is not on the basis of the information secured from the incriminating material but on assumption and presumption - Thus, the addition in assessment is bad in law on the facts and circumstances of the case AO has made addition as Unexplained investments by comparing the AO s own determined estimated income with that of the determined Unexplained investment and brought to tax the higher of the both, which is not permissible in search proceedings - the assessment is purely on the basis of surmises and estimate and it is not a case of any incriminating material seized during the course of search. The issue relating to validity of assessments made by the AO was not only specifically raised by the assessee in the appeals filed before the CIT(A), but it was also vehemently argued by making a detailed submission and this position, which is clearly evident that the legal issue challenging the validity of assessments was not given up by the assessee - the issue relating to validity of assessments is a legal issue and the assessee is entitled to raise the same for the first time even before the Tribunal as decided in National Thermal Power Corporation Ltd. v. CIT 1996 (12) TMI 7 - SUPREME Court thus, the matter is remitted back to the CIT(A) for adjudication Decided in favour of assessee.

Issues Involved:
1. Validity of assessments made under section 153C read with section 143(3).
2. Estimation of business income.
3. Addition on account of unexplained investment.
4. Disallowance of loss on deal cancellations.

Issue-wise Detailed Analysis:

1. Validity of Assessments Made Under Section 153C Read with Section 143(3):
The assessee challenged the validity of the assessments on the grounds that the mandatory conditions to invoke jurisdiction under section 153C did not exist. The assessee argued that the assessments were based on documents found during a survey under section 133A, not during a search under section 132. The assessee contended that the Assessing Officer (AO) did not record the necessary satisfaction that the undisclosed income belonged to the assessee, which is a prerequisite for invoking section 153C. The Tribunal noted that the grounds challenging the validity of assessments were specifically raised and argued before the CIT(A), but the CIT(A) erroneously dismissed these grounds as "not pressed." The Tribunal admitted the assessee's stand on this issue and remitted the matter back to the CIT(A) for a decision on the merits, emphasizing that the issue goes to the root of the matter.

2. Estimation of Business Income:
The AO estimated the assessee's income at 50% of the total land registrations for the assessment years 2007-08 and 2008-09, which was significantly higher than the 10% and 20% declared by the assessee. The CIT(A) found the AO's estimation excessive and reduced the net profit rate to 30%, considering the nature of the assessee's business and the evidence provided. The CIT(A) reasoned that the AO did not provide documentary evidence to support the higher estimation and acknowledged that the assessee had submitted details of receipts and expenses, albeit not fully vouched.

3. Addition on Account of Unexplained Investment:
For the assessment year 2007-08, the AO made an addition of Rs. 2,89,75,467 as unexplained investment under section 69, as the total investment exceeded the estimated business income. The CIT(A) accepted the assessee's explanation that the investments were made from advances received from various groups and directed the AO to compute the income by applying a 30% net profit rate to the total turnover, thus nullifying the unexplained investment addition.

4. Disallowance of Loss on Deal Cancellations:
The AO disallowed the assessee's claim for losses on deal cancellations. For the assessment year 2008-09, the CIT(A) found merit in the assessee's contention regarding the cancellation of certain deals resulting in losses and directed the AO to allow the claimed losses after verification. The CIT(A) instructed the AO to determine the income by applying a 30% net profit rate to the modified turnover after accounting for the deal cancellation losses.

Conclusion:
The Tribunal remitted the issue of the validity of assessments back to the CIT(A) for a decision on the merits, given its fundamental importance. The other issues, including the estimation of business income, addition on account of unexplained investment, and disallowance of loss on deal cancellations, were kept open, allowing both parties to raise them again in fresh appeals depending on the CIT(A)'s decision on the preliminary issue. The Tribunal thus disposed of all four appeals accordingly.

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