2015 (9) TMI 961 - AT - Income Tax

Addition on unsecured creditors - Validity of proceedings u/s 153C - Held that - Second Proviso to section 153A clearly says that the assessment or re-assessment if any relating to any assessment year falling within the period of six assessment years pending on the date of initiation of search u/s 132 shall abate. In other words if the assessment is completed or terminated by operation of law on the basis of the return of income filed in the regular course the assessment proceeding shall not be abated. Therefore in respect of pending assessment proceedings on the date of the search the assessment shall be made on the basis of the seized material and other material found on record. However in respect of the assessment proceeding which is not pending on the date of search has to be made only on the basis of the material found during the course of search operation. The completed proceedings on the date of search cannot be reopened by the assessing officer. In the case before us admittedly the assessee has filed the return of income on 27-03-2006. The period of 12 months for issuing notice u/s 143(2) expires on 31-03-2007. It is also not disputed that the Commissioner of Income-tax by an order dated 27-11- 2007 in exercise of his powers u/s 127(2) transferred the jurisdiction from Ward.1 Ernakulam to DyCIT / ACIT Central Circle.1 Ernakulam. Therefore the assessing officer of the assessee the DyCIT / ACIT Central Circle Ernakulam might have received the records on or after 27-11-2007 only and certainly not before that. Therefore the assessment proceedings on the basis of the return of income filed in the regular course on 27-03- 2006 got terminated by operation of law on 31-03-2007. Assessment proceedings on the basis of the return of income filed on 27-03-2006 is not pending as on 27-11-2007 when the assessing officer is supposed to have received the seized document of the assessee. Hence the income disclosed in the return filed in regular course on 27-03-2006 on the basis of the balance-sheet as on 31-03-2005 cannot be disturbed by the assessing officer unless there is a specific material found during the course of search operation. In this case it is not in dispute that there is no material found during the course of search operation for the assessment year 2005-06. The assessing officer made the addition only on the basis of the balance-sheet as on 31-03-2005 which was filed by the assessee originally alongwith the return of income filed on 27-03-2006 itself. Therefore even if the copy of the said document was found on the date of search still that document cannot be treated as seized material. In other words the copy of the balance-sheet s on 31-03-2005 is very much available with the revenue authorities along with the return of income filed on 27-03-2006. Therefore this Tribunal is of the considered opinion that in the absence of any material found during the course of search operation the assessing officer cannot reopen the assessment completed on the basis of the return filed by the assessee on 27-03-2006 wherein the unsecured creditors of 12, 42, 000 was disclosed. Hence the CIT(A) has rightly deleted the addition. - Decided against revenue. CROSS Objection - AR now submitted before us that the framing of assessment u/s 153C r.w.s 153A/143(3) of the Act is bad in law - Held that - Since there was a document found in the case of search action which belongs to the assessee and on that basis notice us 153A was issued so as to frame assessment u/s 153C of the Act and the conditions precedent for issuance of notice is fulfilled ; therefore the AO has taken action u/s 153C of the Act which is valid. Accordingly the Cross Objection filed by the assessee is dismissed. - Decided against assessee.

Summary

Issues Involved:
1. Validity of proceedings under Section 153C of the Income Tax Act.
2. Justification for setting aside the CIT(A)'s order for re-examination on merits.

Issue-wise Detailed Analysis:

1. Validity of Proceedings under Section 153C:
The primary question was whether documents found during a search can be considered incriminating material to initiate proceedings under Section 153C, even if the assessment under Section 143(1) had been completed and attained finality before the satisfaction was reached by the Assessing Officer (AO) who initiated proceedings under Section 153C. The Third Member agreed with the Judicial Member's view that the assessment proceedings for the assessment year 2005-06 had attained finality by 31/03/2007, and thus could not be reopened under Section 153C without any incriminating material found during the search. The Judicial Member highlighted that the balance sheet and profit and loss account found during the search were already filed with the return on 27/03/2006 and processed under Section 143(1). Therefore, these documents could not be considered as incriminating material for reopening the assessment. The Third Member emphasized that the legislature's intention behind the amendment to Section 153C was to ensure that only incriminating material found during a search could trigger proceedings under this section, preventing undue hardship and unintended consequences. The opinion was that the Assessing Officer could not reopen the assessment for the year 2005-06, which had attained finality, in the absence of any incriminating material found during the search.

2. Justification for Setting Aside the CIT(A)'s Order for Re-examination on Merits:
The second issue was whether the Accountant Member was justified in setting aside the order of the CIT(A) on merits for re-examination if the proceedings under Section 153C were valid. The Judicial Member did not address this issue on merits as he had quashed the proceedings under Section 153C. However, the Accountant Member had considered the merits and suggested that the CIT(A)'s order should be remitted back to the AO for re-examination, as the assessee had produced new evidence before the CIT(A) for the first time. The Third Member did not find it necessary to adjudicate this issue since the proceedings under Section 153C were deemed invalid due to the lack of incriminating material. Therefore, the question of setting aside the CIT(A)'s order for re-examination did not arise.

Conclusion:
The appeal filed by the revenue was dismissed, and the cross-objection filed by the assessee was allowed. The Tribunal concluded that the documents found during the search could not be considered incriminating material to initiate proceedings under Section 153C, and thus, the AO was not justified in reopening the assessment for the year 2005-06, which had attained finality. Consequently, the issue of setting aside the CIT(A)'s order for re-examination was rendered moot.