2020 (10) TMI 789 - AT - Income Tax

Assessment u/s 153A - undisclosed income of partner in assessee firm - incriminating material found in the course of search which belong or relate to the assessee or not? - satisfaction recorded by the AO before proceeding to invoke the provisions of section 153C in the case of assessee is not in accordance with law - protectively assessing the income in the hands of the Assessee - HELD THAT - Scope of making assessment of total income u/s.153C of the Act in an unabated assessment proceedings is limited and can be only of assessing income that is not disclosed which is detected or which emanates from material found in the course of search of some other person and which relate to the Assessee. Since the impugned addition of disallowance of expenses are not based on any incriminating material found during the course of search, the additions are liable to be deleted. As far as the addition made on protective basis for AY 2008-09 to 2010-11 are concerned, the said addition was made not on the basis of any incriminating material found in the search of K.Mahesh Kumar which relate to the Assessee and therefore the said addition can also not be sustained as it is contrary to the provisions of Sec.153C - no basis for protectively assessing the income in the hands of the Assessee and substantively in the hands of K.Mahesh Kumar. There is no material to show that the income declared by K.Mahesh Kumar is either his income or that of the Assessee. From the fact that K.Mahesh Kumar was a Partner in the Assessee firm it cannot be concluded that the income declared by K.Mahesh Kumar in his hands was either his income or the income of the partnership firm in which he was a partner. The declaration of income by K.Mahesh Kumar is in his hands and not in the hands of the Assessee firm in his capacity as partner. Differences in the credits in the bank account which have to be regarded as undisclosed business receipts, such differences in the credits in the bank account was not found as a result of search in the case of K.Mahesh Kumar. Since the additions are deleted on merits, we do not wish to address the arguments made by the learned counsel for the Assessee that the condition precedent for initiating proceedings u/s. 153C of the Act have not been satisfied in the present cases and therefore the assessment is liable to annulled - Decided against revenue.

Issues Involved:
1. Validity of initiation of proceedings under Section 153C of the Income Tax Act.
2. Disallowance of expenses claimed by the assessee.
3. Protective addition of undisclosed business receipts in the hands of the assessee and substantive addition in the hands of K. Mahesh Kumar.

Issue-wise Detailed Analysis:

1. Validity of Initiation of Proceedings under Section 153C:
The primary issue was whether the initiation of proceedings under Section 153C was valid. The requirement to invoke Section 153C is that the seized material must belong to or relate to a person other than the one searched and must have a bearing on the determination of the total income of such other person.

- Assessee's Argument: The assessee contended that the satisfaction recorded by the AO was not in accordance with the law. The assessee argued that the documents found during the search did not pertain to the assessee and were not incriminating in nature.
- Tribunal's Analysis: The Tribunal noted that the satisfaction note must clearly indicate the incriminating nature of the documents and how they relate to the assessee. The Tribunal referenced the Supreme Court's decision in CIT v. Sinhgad Technical Education Society, emphasizing that the seized material must pertain to the assessment years in question.
- Decision: The Tribunal found that the satisfaction recorded by the AO did not meet the legal requirements, as it did not adequately explain how the seized material was incriminating or related to the assessee. Therefore, the initiation of proceedings under Section 153C was deemed invalid.

2. Disallowance of Expenses Claimed by the Assessee:
The AO made a disallowance of 20% of the expenses claimed in the P&L account for the assessment years 2008-09 to 2010-11 due to the lack of detailed evidence from the assessee.

- Assessee's Argument: The assessee argued that there was no incriminating material found during the search that warranted an inquiry into the expenses claimed. The disallowance of 20% was arbitrary and without any basis.
- Tribunal's Analysis: The Tribunal emphasized that in the absence of incriminating material, no addition can be made in an assessment under Section 153C. The Tribunal also noted that the assessments for the relevant years were already completed and could only be reopened based on incriminating material found during the search.
- Decision: The Tribunal concluded that the disallowance of expenses was not based on any incriminating material and therefore deleted the additions.

3. Protective Addition of Undisclosed Business Receipts:
The AO made protective additions of undisclosed business receipts in the hands of the assessee while making substantive additions in the hands of K. Mahesh Kumar.

- Assessee's Argument: The assessee argued that the protective additions were unjustified as the documents found belonged to K. Mahesh Kumar and not the assessee. The income declared by K. Mahesh Kumar had no connection with the assessee.
- Tribunal's Analysis: The Tribunal noted that there was no material to show that the income declared by K. Mahesh Kumar was either his income or that of the assessee. The Tribunal stated that the additions must be based on material found during the search that relates to the assessee.
- Decision: The Tribunal deleted the protective additions, stating that they were not based on any incriminating material found during the search.

Conclusion:
The Tribunal allowed the appeals of the assessee and dismissed the appeals of the revenue. The initiation of proceedings under Section 153C was deemed invalid due to improper satisfaction recording. The disallowance of expenses and protective additions were deleted as they were not based on any incriminating material found during the search. The Tribunal emphasized the necessity of incriminating material for making additions under Section 153C.

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