2020 (10) TMI 1018 - AT - Income Tax

Revision u/s 263 - Short term capital gain computation - CIT-A directing the Assessing Officer to re-compute the income of the assessee after examining in detail, the claim made by the assessee in the form of cost of improvement - assessee in response to notice u/s. 153A filed return of income on 29.08.2013 for A.Y. 2008-09 admitting an income - HELD THAT - Admittedly in this case no incriminating material was found in the search proceedings leading to disallowance of expenditure incurred on furniture and fittings. When there is no incriminating material found in the course of the search either originally when the search took place on 06.11.2007 or on 18.07.2012 whether addition/disallowance can be made based on the findings of the Ld. CIT in the proceedings u/s. 263 of the Act is the issue to be decided. In the assessee s case the Assessing Officer proposed to disallow the expenditure claimed by the assessee towards furniture and fittings and the Addl. CIT by order dated 31.12.2009 u/s. 153D accepted the claim of the assessee. From the above order of the Addl. CIT it can be seen that the claim of the assessee was accepted after examining the relevant documents, invoices etc., by making an observation that the claim made by the assessee with regard to allowance for renovation of interior work and furniture and fittings is acceptable based on these directions of the Addl. CIT u/s. 153D/144A the Assessing Officer completed the assessment u/s.143(3)/153A of the Act accepting the claim of the assessee. When once the Assessing Officer passed Assessment Order based on the directions of the Addl. CIT who has examined the issue with reference to the documents and evidences furnished by the assessee such Assessment Order cannot be held to be erroneous. The commissioner while passing the order u/s. 263 of the Act in fact made an observation that it can be inferred that the Range Head had failed to cause any enquiry in this regard blaming the Range Head for not conducting proper enquiry. CIT is inferring that Addl. CIT has not conducted proper enquiry. This is only an inference. The order passed by the Ld. Addl. CIT u/s. 153D clearly states that he has looked into the documents and annexures thereon and on satisfying himself of the evidences directed the Assessing Officer that the claim of the assessee is acceptable. Therefore, when the view taken by the Addl. CIT and the Assessing Officer can be accepted as one of the possible views, Assessment Order cannot be treated as erroneous even though some prejudice caused to the revenue. When the assessment order passed by the Assessing Officer u/s. 143(3)/153A is not erroneous, the findings of the Ld.CIT(Central) in his order passed u/s. 263 has no relevance and such order of the Ld.CIT is not sustainable in law. Assessment u/s 153A - Legal proposition that addition/disallowance should be made based only on the materials seized/unearthed during the course of search proceedings. Thus, we direct the Assessing Officer to delete the disallowance of expenditure incurred towards furniture and fittings and compute the income accordingly.

Issues Involved:
1. Validity of the order passed under Section 263 of the Income Tax Act.
2. Legality of the assessment order under Section 143(3) read with Section 153A and Section 263.
3. Time limitation for passing the reassessment order.
4. Admissibility of additional grounds of appeal.
5. Requirement of incriminating material for making additions in reassessment proceedings.

Detailed Analysis:

1. Validity of the Order Passed Under Section 263:
The assessee contended that the original assessment under Section 143(3) read with Section 153A was valid as no incriminating material was found during the search. The Commissioner of Income Tax (CIT) passed an order under Section 263 directing the Assessing Officer (AO) to re-compute the income after examining the claim of cost of improvement. The Tribunal noted that the AO had followed the directions of the Additional Commissioner under Section 144A, who had examined the evidence and accepted the claim. Therefore, the Tribunal held that the order passed by the CIT under Section 263 was invalid as it was based on an incorrect assumption that the issue was not examined during the original assessment.

2. Legality of the Assessment Order Under Section 143(3) Read with Section 153A and Section 263:
The Tribunal observed that the reassessment order passed on 27.02.2015 was based on the directions given in the order under Section 263. Since the order under Section 263 was invalid, the reassessment order based on it was also invalid. The Tribunal further noted that no incriminating material was found during the search to justify the disallowance of the expenditure on furniture and fittings. Therefore, the reassessment order was not sustainable in law.

3. Time Limitation for Passing the Reassessment Order:
The assessee argued that the reassessment order was barred by limitation as it was passed beyond the permissible period. The Tribunal agreed, noting that the reassessment should have been completed within two years from the end of the financial year in which the order under Section 263 was passed, i.e., by 31.03.2014. Since the reassessment order was passed on 27.02.2015, it was barred by limitation and hence invalid.

4. Admissibility of Additional Grounds of Appeal:
The Tribunal admitted the additional grounds of appeal raised by the assessee, which challenged the validity of the order under Section 263. The Tribunal held that since the additional grounds were purely legal and went to the root of the matter, they were admissible for adjudication.

5. Requirement of Incriminating Material for Making Additions in Reassessment Proceedings:
The Tribunal emphasized that additions in reassessment proceedings under Section 153A can only be made based on incriminating material found during the search. Since no such material was found in the assessee's case, the disallowance of expenditure on furniture and fittings was not justified. The Tribunal cited several judicial precedents supporting this view, including decisions from the Bombay High Court and the Andhra Pradesh High Court.

Conclusion:
The Tribunal allowed the appeals of both assessees, holding that:
- The order under Section 263 was invalid.
- The reassessment order was barred by limitation and invalid.
- No additions could be made in the absence of incriminating material found during the search.

Order Pronounced:
The appeals were allowed, and the disallowance of expenditure on furniture and fittings was directed to be deleted. The order was pronounced on 21.10.2020.

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