2021 (11) TMI 928 - HC - Income Tax

Assessment u/s 153A - replacement of Chapter XIV-B provisions and introduced Sections 153A, 153B and 153C in the Act by Finance Act, 2003 - Whether search u/s 132 of the Act is sine qua non for initiation of proceedings under Section 153A of the Act but it is not dependent on any undisclosed income being unearthed during search? - HELD THAT - Section 153C provides that where an Assessing Officer is satisfied that any money, bullion, jewellery or other valuable article or thing or books of account documents seized or requisitioned belong or belongs to a person other than the person referred to in Section 153A, then the books of account, or documents or assets seized or requisitioned shall be handed over to the Assessing Officer having jurisdiction over such other person and that Assessing Officer shall proceed against such other person and issue such other person notice and assess or reassess income of such other person in accordance with the provisions of Section 153A. Assessing Officer while passing the order under Section 153A read with Section 143 3 of the Act, ordinarily cannot disturb the assessment/reassessment order which has attained finality, unless the materials gathered in the course of the proceedings establishes that the finalized assessments are contrary to the material unearthed during the course of 153A proceedings, as held by the Co-ordinate Bench of this Court in the case of IBC Knowledge Park (P) Ltd., supra. A concluded assessment could not be disturbed without there being any basis for doing so which is impermissible in law. Even in case of a searched person, the same reason would hold good. As observed in Canara Housing Development Company supra, the Assessing Officer is empowered to assess or reassess the total income of six assessment years i.e., the income which was returned in the earlier return, the income which was unearthed during search and also any income which was not disclosed in the earlier return or which was not unearthed during the search by separate assessment orders but in our considered view the completed assessments should be subject to the safeguards provided in IBC Knowledge Park (P) Ltd. 2016 (5) TMI 372 - KARNATAKA HIGH COURT As regards the pending assessments are concerned only one assessment shall be made separately for each assessment year on the basis of the income unearthed during search and any other material existing or brought on the record of the Assessing Officer. Even in the absence of any incriminating material abated assessment or reassessment could be done. The returns filed under Section 139 of the Act gets replaced by the returns filed under Section 153A 1 of the Act. Pending proceedings in appeal, revision/application shall not abate subsequent to initiation of Section 153A proceedings. Further, recording of satisfaction under Section 153A may not be necessary unlike Section 153C of the Act which mandates recording of satisfaction.- Decided in favour of assessee.

Issues Involved:
1. Validity of assessment orders under Section 143(3) read with Section 153A of the Income Tax Act, 1961.
2. Requirement of incriminating material for proceedings under Section 153A.
3. Allowance of depreciation on capitalization of expenditure.
4. Disallowance under Section 14A read with Rule 8D.
5. Disallowance under Section 40[a][ia] for non-deduction of TDS on payments to Directors.
6. Remanding matters to CIT (A) for examination of incriminating material.

Issue-wise Detailed Analysis:

1. Validity of Assessment Orders under Section 143(3) read with Section 153A:
The appeals were filed by the Revenue challenging the orders of the Income Tax Appellate Tribunal (Tribunal) which quashed the assessment orders passed under Section 143(3) read with Section 153A. The Tribunal followed the judgment of the Karnataka High Court in M/s Lancy Constructions, which held that in the absence of any incriminating material, proceedings under Section 153A cannot be initiated and concluded. The Revenue argued that the conditions for issuance of notice under Section 153A are well settled and that the proceedings cannot be held unjustifiable merely because no incriminating material was seized. The High Court, however, upheld the Tribunal’s decision, emphasizing that incriminating material is necessary for reopening assessments under Section 153A.

2. Requirement of Incriminating Material for Proceedings under Section 153A:
The High Court examined various judicial precedents, including the decisions in Canara Housing Development Company and M/s Lancy Constructions. The Court noted that while Section 153A allows the Assessing Officer to assess or reassess the total income of six assessment years, the initiation of proceedings under this section requires the presence of incriminating material. The Court reiterated that without such material, the Assessing Officer cannot disturb a concluded assessment, as this would amount to giving the Revenue a second opportunity, which is not permissible under the law.

3. Allowance of Depreciation on Capitalization of Expenditure:
The Tribunal allowed the assessee’s claim for depreciation on capitalization of expenditure incurred during the assessment years 2007-08 and 2008-09. The High Court upheld this decision, agreeing with the Tribunal’s interpretation of the relevant provisions of the Income Tax Act.

4. Disallowance under Section 14A read with Rule 8D:
The Tribunal restored the file to the assessing authority for disallowance made under Section 14A read with Rule 8D. The High Court noted that this issue was squarely covered by a previous ruling of the coordinate Bench of the Court, which had answered the substantial question of law in favor of the assessee.

5. Disallowance under Section 40[a][ia] for Non-Deduction of TDS on Payments to Directors:
The Tribunal set aside the disallowance made under Section 40[a][ia] for non-deduction of TDS on payments made to Directors towards sitting fees, holding that the amendment would apply for A.Y. 2014-15 onwards. The High Court did not find it necessary to address this issue as it was not pressed by the Revenue.

6. Remanding Matters to CIT (A) for Examination of Incriminating Material:
In some appeals, the Tribunal remanded the matter to CIT (A) to examine whether the assessment order was based on any incriminating material seized during the search. The High Court upheld this decision, emphasizing that the assessment or reassessment under Section 153A should be based on incriminating material found during the search.

Conclusion:
The High Court concluded that the substantial questions of law regarding the necessity of incriminating material for proceedings under Section 153A were answered in favor of the assessee and against the Revenue. The appeals were disposed of accordingly, with specific issues being addressed based on previous judicial precedents and interpretations of the relevant sections of the Income Tax Act.

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