2015 (11) TMI 1307 - AT - Income Tax

Validity of action and notice u/s 153C - Held that - In the present case, the base of document does not belong or belongs to the present assessee as the Assessing Officer of the other person himself was not clear in his mind that whether this chart belongs to or belong to the present assessee, therefore, he made jugglery of words by mentioning that the company wise non appearing in these pages will be treated as documents pertaining to all respective companies including the assessee company appearing in the said chart. In this situation, we are inclined to hold that the reasons recorded by the Assessing Officer of the present assessee for initiation of action u/s 153C of the Act and issuance of notice under the said provision do not quash the requirement of said provision as accepted in the Act at the time of recording satisfaction. It is also relevant to mention that the so-called seized document i.e. chart cannot be held as belongs to or belong to the present assessee and on this ground also, the validity of reasons recorded comes within the teeth of proposition laid down in the case of Pepsico Holding Pvt. Ltd. (2014 (8) TMI 898 - DELHI HIGH COURT) and Pepsi Food Pvt. Ltd. vs CIT 2014 (8) TMI 425 - DELHI HIGH COURT . Respectfully following the proposition laid down by Hon ble Jurisdictional High Court, we are inclined to hold that the reasons recorded for action u/s 153 of the Act and issuance of notice under the said provision was not only bad in law but void ab initio which cannot be held as sustainable and consequently, we quash the same. Accordingly, C.O. of the assessee is hereby allowed. Addition on account of interest free loan & advances - CIT(A) deleted the addition - Held that - CIT(A) placing reliance on the judgment of Hon ble Delhi High Court in the case of SSP Aviation Ltd. vs DCIT (2012 (4) TMI 335 - DELHI HIGH COURT) held that the impugned addition based on disallowance of interest does not relate to emanating from the allegation of suppression of sales or receipt of unaccounted cash in sale of flats. Further, the first appellate authority also noted that the advances made to these persons/entities by the assessee firm were to raise capital for the purpose of business and also that these transactions are not in the nature of business advances. The Ld. CIT(A) also noted that the interest payment made by the assessee to Bank of Maharashtra also does not appear to have any nexus with the money advanced as all payments. In the light of above noted facts, when we analyse the action of the A.O. and contentions of the Ld. Ld. DR, we observe that aforesaid observations of the Ld. CIT(A) have not been controverted by them. - Decided against revenue. Addition on account of bogus purchases of raw material - CIT(A) deleted the addition - Held that - CIT(A) rightly noted that in the eventuality when assessee failed to produce alleged vendors, the appropriate course of action for A.O was to inform VAT authorities about the tax said to be deducted by the sellers so that the deposit of VAT tax could have been verified by them. Simultaneously, the A.O of the vendors could have also been informed about the sales made and to verify whether these sales had been reflected in their respective tax returns. The Ld. CIT(A) also mentions that the A.O could also have investigated bank accounts of the parties (Vendors) available with him and none of these courses have been taken by the A.O. The First Appellate Authority rightly concluded that instead of adopting said available courses, the A.O proceeded to made disallowance and addition for non-production of vendors parties and adverse inference drawn by the A.O was pre-mature and without any sound basis. The Ld. CIT(A) rightly concluded that u/s 153C of the Act, the A.O cannot travel beyond the satisfaction recorded and the impugned addition based on alleged bogus purchases does not pertain to or emanate from allegation of suppression of sales or receipt of unaccounted cash in the sale of flats. - Decided against revenue.

Summary

Issues Involved:

1. Validity of notice under Section 153C of the Income Tax Act.
2. Addition on account of bogus purchases.
3. Addition on account of notional interest disallowed from expenditure claimed by the assessee.

Detailed Analysis:

1. Validity of Notice under Section 153C of the Income Tax Act:

The primary issue revolves around the validity of the notice issued under Section 153C. The assessee challenged the jurisdiction of the Assessing Officer (AO) on the grounds that the notice was illegal and without jurisdiction. The assessee argued that no documents belonging to them were found during the search and seizure operation, and the satisfaction note did not meet the legal requirements. The Tribunal noted that the AO of the searched person must be satisfied that the documents seized belong to a person other than the searched person. The Tribunal referred to several judgments, including Pepsi Food Pvt. Ltd. vs ACIT and Pepsico India Holdings Pvt. Ltd. vs ACIT, which emphasized the need for cogent material to establish that the documents belong to another person. The Tribunal concluded that the satisfaction note did not indicate that the seized documents belonged to the assessee, and the AO's assumption of jurisdiction under Section 153C was invalid. Consequently, the notice issued under Section 153C and all subsequent proceedings were quashed.

2. Addition on Account of Bogus Purchases:

The AO made an addition on account of bogus purchases, alleging that the purchases were not genuine as the vendors could not be physically produced for verification. The assessee provided purchase bills, freight bills, and weigh bills to support the genuineness of the transactions. The Tribunal observed that the AO did not find any defects in the documentary evidence provided by the assessee. The Tribunal noted that the AO should have informed the VAT authorities to verify the tax deducted and the AO of the vendors to check if the sales were reflected in their tax returns. The Tribunal concluded that the adverse inference drawn by the AO was premature and without a sound basis. The Tribunal upheld the CIT(A)'s order, which deleted the addition on account of bogus purchases.

3. Addition on Account of Notional Interest Disallowed from Expenditure Claimed by the Assessee:

The AO disallowed notional interest from the expenditure claimed by the assessee, arguing that the assessee did not charge interest on advances given to certain parties while paying interest on borrowed funds. The assessee contended that the advances were made to raise capital for business purposes and were not in the nature of business advances. The CIT(A) found that the interest payments made by the assessee did not have any nexus with the money advanced, as all payments were related to term loans from the bank. The Tribunal agreed with the CIT(A)'s findings and noted that the AO's observations were not supported by evidence. The Tribunal upheld the CIT(A)'s order, which deleted the addition on account of notional interest disallowed from expenditure claimed by the assessee.

Conclusion:

The Tribunal quashed the notice issued under Section 153C and all subsequent proceedings, allowed the cross-objections of the assessee, and dismissed the appeal of the Revenue on both grounds of bogus purchases and notional interest disallowed from expenditure claimed by the assessee. The decision was pronounced in the open court on 23.11.15.