2014 (10) TMI 668 - AT - Income Tax

Validity of the proceeding initiated u/s 153C Held that - On a perusal of the assessment order, it is not forthcoming, what are the seized materials on the basis of which the assessing officer has initiated proceedings u/s 153C of the Act - the CIT(A) after examining the seized material has given a categorical finding that the so called seized materials by no stretch of imagination could be said to be belonging to the assessee Relying upon Vijaybhai N. Chandrani Versus Assistant Commissioner of Income-tax 2010 (3) TMI 770 - Gujarat High Court - the seized materials do not belong to the assessee - That besides, there are no incriminating materials indicating any undisclosed income of the assessee, which could have enabled the AO to invoke the provisions of section 153C of the Act - the income were determined for the assessment years 2001-02, 2002-03 & 2003-04 only on the ground that the assessee has not been approved u/s 10(23C) of the Act - The determination of income has absolutely no relation or relevance to the seized materials - the determination of income is on the basis of the impounded materials as a result of survey and not on the basis of any seized materials belonging to the assessee - the pre-conditions for assuming jurisdiction u/s 153C are not satisfied - the proceeding initiated u/s 153C of the Act is invalid in law. As rightly been stated by the assessee that on the date notice was issued u/s 153C of the Act, there is no assessment proceeding pending before the AO for the AY - in absence of any incriminating material showing concealed/undisclosed income of the assessee, the AO could not have proceeded to assess income which has already been reflected in the books of accounts and disclosed in the return of income filed by the assessee - conclusion drawn by the AO that the agricultural income is unexplained also found to be not on cogent material, because of the fact that the CIT(A) has accepted 50% of the income shown as agricultural income against which the department is not in appeal - in the remand report, the AO himself has accepted that the assessee has earned income from coconut trees and casurina plantation which can be considered as agricultural income - the proceeding initiated u/s 153C of the Act in absence of any incriminating material and only on the basis of the material already disclosed by the assessee is invalid and consequently the assessment orders passed are also unsustainable in law Decided in favour of assessee.

Summary

Issues Involved:
1. Validity of proceedings initiated under Section 153C of the Income-tax Act.
2. Merits of the addition made under Section 68 of the Income-tax Act regarding unexplained agricultural income.

Issue-wise Detailed Analysis:

1. Validity of Proceedings Initiated Under Section 153C of the Income-tax Act:

The appellant argued that the notice issued under Section 153C was not legally valid. The Tribunal examined whether the seized materials were incriminating and related to the assessee. The Tribunal noted that the materials found during the search were general and not incriminating. The assessment order did not specify how the seized materials led to the conclusion of concealed income. The Tribunal cited precedents, including the ITAT Vizag Bench cases of Sri Ram Educational Trust and Gadiraju Venkata Subba Raju, which emphasized that for proceedings under Section 153C to be valid, there must be incriminating material indicating undisclosed income. The Tribunal concluded that the materials did not justify initiating proceedings under Section 153C, as they were not incriminating and the income had already been disclosed in the books of accounts and returns filed before the search. Hence, the initiation of proceedings under Section 153C was deemed invalid.

2. Merits of the Addition Made Under Section 68 of the Income-tax Act:

The appellant contested the addition of Rs. 1,23,851 out of Rs. 2,43,151 towards unexplained agricultural income. The Tribunal reviewed the evidence and the findings of the assessing officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)]. The AO doubted the genuineness of the agricultural income based on field investigations and the condition of the land. The CIT(A), however, accepted that the assessee had earned some agricultural income but estimated it at 50% of the declared amount.

The Tribunal considered the remand report from the AO, which acknowledged that the land was agricultural and that income from coconut trees and casurina plantations could be considered agricultural income. The AO also accepted that interest on agricultural loans could be deducted from the agricultural income. The Tribunal found that the CIT(A) had not provided a clear rationale for limiting the agricultural income to 50%. Considering the remand report and the possibility of some inflation in the declared agricultural income, the Tribunal decided that a 25% disallowance of the claimed agricultural income would be reasonable. Thus, the Tribunal directed the AO to disallow 25% of the agricultural income shown by the assessee.

Conclusion:

The Tribunal quashed the assessment orders for the years where proceedings were initiated under Section 153C due to the lack of incriminating material. For the year assessed under Section 143(3), the Tribunal allowed the appeal in part by reducing the disallowance of agricultural income to 25%. The appeals in ITA Nos. 299 to 302/Vizag/2014 were allowed, and ITA No. 303/Vizag/2014 was partly allowed.