2023 (8) TMI 436 - AT - Income Tax

Assessment u/s 153A - legality of search conducted u/s 132 and consequent assessment proceedings in light of jurisdiction of the assessing officer - Legality of Addl. CIT's approval u/s. 153D - HELD THAT - The provisions of section 153D of the Act, deals with prior approval necessary for assessment in cases of search u/s 132 or requisition u/s 132A of the Act. As per said section, no order of assessment or reassessment shall be passed by the Assessing Officer below the rank of Joint Commissioner in respect of each assessment year referred to in section 153A(1)(b) of the Act without prior approval of Addl. CIT/Joint. CIT u/s 153D of the Act. In the present case, there is no dispute with regard to the fact that the assessment order has been passed with prior approval from the Range head in terms of section 153D of the Act From the arguments of the assessee itself, it appears that there was lot of deliberations on draft assessment order passed by the AO, in light of various incriminating material found during the course of search and appraisal report submitted by the DDIT-(Inv.) on various issues including additions to be made towards undisclosed income on account of difference in net profit as per seized tally and net profit as per ITR filed for relevant assessment year and also additions towards undisclosed income arising out of bogus bought note purchases and sales and undisclosed income arising from bogus purchases through dummy entities. In the note submitted to the AO, the Addl. CIT categorically observed that on verification of seized material with ITR filed by the assessee there is a difference in income reported for various assessment years. Likewise, the Addl. CIT had also discussed the issue and gave directions to the Assessing Officer to resubmit the draft assessment order. Therefore, it cannot be said that approval granted u/s. 153D of the Act, is mechanical and without application of mind Internal correspondence between the AO and the investigation officer is confidential and extended part of appraisal report, which cannot be shared with the assessee. CIT(A), after considering relevant facts and also taken note of provisions of section 153D came to the conclusions that in absence of availability of any documentary evidence, in respect of claim of the appellant with regard to deviation note, the arguments of the assessee can be said to be unsubstantiated. In our considered view, the findings of the facts recorded by the Ld. CIT(A) on appraisal of relevant facts is in accordance with law, because from the materials available on record, and also on the basis of arguments of the assessee, it is abundantly clear that there is enough proof to conclude that the Addl. CIT has given approval u/s. 153D of the Act after great deliberations with draft assessment order passed by the AO in light of seized material and appraisal report submitted by DDIT(Inv) and thus, in our considered view the arguments of the assessee on this issue for all assessment years is fails. Thus, we reject grounds of appeal of the assessee on this issue for all the assessment years. Issuance of notice u/s 153C in violation of 4th proviso to section 153A(1) - The mandatory conditions that the seized material and other documents and evidences in the possession of the assessing officer should reveal that income, represented by an asset, has escaped the assessment for the relevant assessment year or years and such income escaping assessment should be in excess of Rs 50 lakhs have not been satisfied in the appellant's case. The discussion made in the preceding paragraphs has brought out the fact that no undisclosed asset has been found in the case of the appellant which represents the income escaping assessment for the relevant assessment years. It is interesting to note that no undisclosed asset has been brought to tax by the assessing officer even in the assessment order passed u/s 153C r.w.s 143(3) of the Act, for AY 2010-11. The CIT(A) after considering relevant facts rightly held that the reasons recorded by the AO in the satisfaction note do not bring out satisfaction of the mandatory conditions prescribed in the 4th proviso to sec 153A(1) which necessitate issue of notice for assessment years beyond six assessment years and thus, annulled the assessment orders passed by the Assessing Officer for AY 2010-11. Therefore, we are of the considered view that, there is no error in the reasons given by the ld. CIT(A) to annulled the assessment for Asst. years 2010-11 and thus, we reject grounds of appeal filed by the revenue and uphold the order of the CIT(A) for Asst. year 2010-11. Validity of notice u/s. 153C - In this case, if you go through satisfaction note recorded by the Assessing Officer in light of incriminating material referred to in the said satisfaction note, it is abundantly clear that the Assessing Officer does not verified the incriminating material to arrive at a satisfaction that there is undisclosed income for these assessment years. CIT(A) after considering relevant facts in their order clearly held that there is no incriminating material in the possession of the AO to arrive at a satisfaction that there is undisclosed income for these assessment years to issue notice u/s. 153C and thus, rightly held that notice u/s. 153C of the Act is invalid and consequent Assessment order passed u/s. 143(3) r.w.s. 153C of the Act are void ab initio and liable to be quashed. Thus, the order of the CIT(A) should be upheld. Validity of notice u/s. 153C and consequent assessment order on the ground that the seized electronic device has been imaged into the hard disk and from the above it is evident that working copies have been prepared from the imaged disk - The handing over of the seized electronic device ANN/VP/ED/S-2 by the assessing officer of the searched person to the assessing officer of the appellant has to be seen in the said context and such handing over has to be construed as handing over of the working copy of the imaged data of the original seized electronic device. We are not inclined to agree with the contention of the appellant that the assessing officer could not have examined and verified the seized electronic device ANN/VP/ED/S-2 as it was seized on 07.07.2018 and was opened subsequently only on 09.09.2020. It has to be construed that the assessing officer has examined and verified the contents of the said seized device by going through the contents of the working copy of the same. We, therefore, reject the contentions of the assessee. Under reporting of income - Assessing Officer has adopted incorrect figure to arrive at a conclusion that there is a under reporting of income for assessment year 2015-16 which necessitate issue of notice u/s. 153C of the Act. Since, there is no difference between net profit as per seized tally from electronic device ANN/VP/ED/S2 and income as per ITR, in our considered view the satisfaction recorded by the Assessing Officer for issue of notice u/s. 153C of the Act is not based on any evidences and thus, on the very count itself, it could be seen that notice u/s. 153C of the Act for assessment year 2015-16 is without jurisdiction and thus, we are of the considered view that notice u/s. 153C and consequent assessment order passed by the Assessing Officer is invalid in law and liable to be quashed. Hence, we quash notice u/s. 153C of the Act and consequent assessment order for assessment year 2015-16. For assessment year 2015-16 - As the satisfaction note recorded by the Assessing Officer does not have any reference to incriminating materials found during search and thus, in our considered view there is no valid satisfaction as required u/s 153C to issue notice. Thus, the findings of the ld. CIT(A) in as much as annulling the assessments for AY 2016-17 to 2018-19 is on sound footing and does not call for any interference from us. Thus, we are inclined to uphold the findings of the ld. CIT(A) and dismiss grounds taken by the revenue for Asst. years 2016-17 to 2018-19. Similarly, we quash notice u/s. 153C of the Act for assessment year 2015-16 and annulled consequent assessment order passed by the Assessing Officer for assessment year 2015-16. Accordingly, we allow the grounds of the assessee. Additions towards under reporting of income being difference between net profit as per seized tally data and ITR filed - There is no difference between net profit as per seized electronic device and net profit in ITR filed for the assessment year 2010-11. The CIT(A) after considering relevant facts has rightly deleted additions made by the Assessing Officer and thus, we are inclined to uphold the findings of the ld. CIT(A) and direct the Assessing Officer to delete additions towards under reporting of income. Difference between income as per ITR and income as per seized electronic device is due to the depreciation provided as per section 32 of the Act, for assessment year 2015-16 to 2017-18 and for assessment year 2018-19 it was due to disallowance of interest on TDS, EPF and GST - We find that the difference noticed by the Assessing Officer is on account of providing depreciation and disallowance of certain inadmissible expenses and thus, we are of the considered view that the assessee has explained difference noticed by the Assessing Officer with necessary evidences. CIT(A) after considering relevant facts rightly deleted additions made by AO. Therefore, we are of the considered view that there is no error in the reasons given by the CIT(A) to delete additions towards difference between net profit as per tally and income as per ITR for assessment year 2010-11, 2015-16 to 2018- 19. Thus, we are inclined to uphold the findings of the ld. CIT(A) and reject ground taken by the revenue. Addition towards undisclosed income arising from bogus bought note purchases and sales - As on analysis of the purchase procedures of the appellant, the special auditor stated that documents such as weighment slip, purchase order, test report etc., that are present for the purchases from a dealer are not of any use in the case of purchases made from farmers/agents through bought notes in view of the different characteristics associated with such purchases. Therefore, it is very clear that unaccounted income computed by the AO on the basis of non existent bought notes is nothing but additions made on the basis of statement of employees alone. As we have already noted in earlier paragraphs of this order, the statements given by various employees are not based on any evidences found during the course of search but purely on mistaken of facts. The CIT(A), after considering relevant facts has rightly deleted additions made by the Assessing Officer towards unaccounted income arising from bogus bought note purchases and sales for assessment year 2015-16 2016-17. Undisclosed income arrived by AO on account of purchase inflation through dummy entities - HELD THAT - We are of the considered view that the finding of the assessing officer that the appellant indulged in bogus purchases through dummy entities and corresponding bogus sales to suppress its income is unsustainable on facts. The CIT(A) after considering relevant facts has rightly deleted additions made by the Assessing Officer and thus, we are inclined to uphold the findings of the ld. CIT(A) and direct the assessing officer to delete the additions. Addition u/s 69C towards unexplained expenditure quantified by the special auditor in their second audit report submitted u/s 142(2A) - Whether apportionment based on estimation for arriving at unexplained expenditure u/s 69C in the hands of the appellant by the CIT(A) is not permissible in a search assessment u/s 153C without bringing proper evidence on record as to the identity of the persons who incurred the expenditure ? - HELD THAT - The entries in Erandamthall are not identified to any person or entity. There is no finding as to which financial year said expenditure relates to. In absence of any finding as to nature of expenditure and person to whom such expenditure belongs to, no addition can be made u/s 69C of the Act on suspicious and surmise manner. Further, it is a matter on record that the Assessing Officer has totally ignored second special audit report submitted by the auditor in terms of section 142(2A) of the Act, in respect of Erandam Thall and its contents. If the Assessing Officer had taken into cognizance of second audit report and verified the observations of the auditor with reference to Erandam Thall, in our considered view probably the Assessing Officer would have verified unidentified entries as quantified by the special auditor to quantify unexplained expenditure. Since, the Assessing Officer ignored the special audit report in total and made additions on the basis of statements of employees towards unexplained expenditure u/s. 69C of the Act, in our considered view, the Assessing Officer has miserably failed and missed an opportunity to determine the true and correct undisclosed income of the assessee in respect of unexplained expenditure. From the findings of the special auditor itself, it is very clear that the source for Erandamthall is from withdrawal from bank, receipt of sale proceeds which has been already recorded in the regular books of accounts maintained by appellant and other three entities. Therefore, on this count also there cannot be any addition u/s. 69C - Since, the unidentified entries are not conclusively established by any evidence or material on record to prove that said entries represents unexplained expenditure of the assessee, and further to any particular financial year, in our considered view enhancement of assessment and consequent additions u/s. 69C of the Act made by the CIT(A) cannot be sustained. In our considered view, the CIT(A) is completely erred in making addition towards unexplained expenditure on the basis of Erandamthall. Therefore, we are of the considered view that the additions made u/s 69C and further apportioned to appellant for the assessment years 2015-16 to 2018-19 cannot be sustained. Validity of Special audit reports u/s 142(2A) of the Act and its rejection by the Assessing Officer - If you see the intention and purpose behind the introduction of special audit in the statue, the purpose is to assist the Assessing Officer to determine correct taxable income of an assessee from the books of accounts and other documents found during the course of search. Therefore, in our considered view, the Assessing Officer having appointed special auditor, cannot ignore the audit report unless he makes out a case with reasons that the special audit report is incomplete or the auditor has not carried out the audit as per the standard auditing procedures. In this case, if we go through the reasons given by the Assessing Officer to reject special audit report for all assessment years, we find that the Assessing Officer has rejected said audit report on flimsy grounds without any finding as to how observation of the special auditor is incorrect. Further, it is nowhere provided that special audit report is binding or the assessment shall be made in conformity with special audit report. However, if there is no adverse material or adverse circumstances or the findings of the Assessing Officer during assessment proceedings is contrary to the special audit report, then such report has to be considered and relied upon. In our considered view, the Assessing Officer is completely erred in rejecting/discarding the special audit report without any valid reason. The CIT(A) after considering relevant facts, has rightly accepted special audit reports submitted u/s 142(2A) of the Act, and thus, we reject grounds taken by the revenue.

Summary

Issues Involved:
1. Legality of search and assessment proceedings.
2. Validity of statements recorded and their retraction.
3. Approval granted under section 153D.
4. Validity of notice under section 153C for various assessment years.
5. Additions towards under-reported income and bogus purchases.
6. Enhancement of assessment and addition under section 69C.
7. Validity of special audit reports under section 142(2A).

Summary:

1. Legality of Search and Assessment Proceedings:
The assessee challenged the legality of the search conducted under section 132 of the Income Tax Act and subsequent assessment proceedings, arguing that the transfer of jurisdiction was not in accordance with section 127. The tribunal held that the transfer of cases was within the powers of the Principal Director General or Principal Chief Commissioner and that the procedure under section 127 was followed, dismissing the assessee's grounds on this issue.

2. Validity of Statements Recorded and Their Retraction:
The assessee contended that the statements recorded from its employees during the search were obtained under coercion and were later retracted. The tribunal noted that retraction of a statement should not be rejected merely because it was made after the search. The tribunal upheld the CIT(A)'s findings that the retractions were valid and acceptable wherever the statements were shown to be contrary to other facts available on record.

3. Approval Granted Under Section 153D:
The assessee argued that the approval granted under section 153D was mechanical and without application of mind. The tribunal found that the approval was given after deliberations and was not mechanical, thus rejecting the assessee's grounds on this issue.

4. Validity of Notice Under Section 153C:
The tribunal examined the validity of notices issued under section 153C for various assessment years. For AY 2010-11, the tribunal upheld the CIT(A)'s decision that the notice was invalid as the conditions prescribed under the fourth proviso to section 153A(1) were not satisfied. For AY 2015-16, the tribunal found that there was no difference between the net profit as per the seized tally and the income reported in the ITR, making the notice under section 153C invalid. For AYs 2016-17 to 2018-19, the tribunal upheld the CIT(A)'s decision that the satisfaction note recorded by the Assessing Officer did not have any reference to incriminating materials, making the notices invalid.

5. Additions Towards Under-Reported Income and Bogus Purchases:
The tribunal upheld the CIT(A)'s decision to delete additions made towards under-reported income for AY 2010-11, 2015-16 to 2018-19, finding that the Assessing Officer had incorrectly computed the differences. The tribunal also upheld the deletion of additions towards unaccounted income arising from bogus bought note purchases and sales for AY 2015-16 and 2016-17, and from dummy entities for AY 2017-18 and 2018-19, finding that the Assessing Officer's conclusions were based on incorrect assumptions and statements that were later retracted.

6. Enhancement of Assessment and Addition Under Section 69C:
The tribunal found that the CIT(A) was incorrect in making additions towards unexplained expenditure under section 69C based on entries in Erandamthall, as these entries were not conclusively established by evidence. The tribunal directed the Assessing Officer to delete the additions made under section 69C for AY 2015-16 to 2018-19.

7. Validity of Special Audit Reports Under Section 142(2A):
The tribunal upheld the CIT(A)'s decision to accept the special audit reports submitted under section 142(2A), rejecting the Assessing Officer's reasons for disregarding the reports. The tribunal found that the special audit was conducted in accordance with auditing standards and that the Assessing Officer's rejection of the reports was unfounded.

Conclusion:
The tribunal dismissed the appeals filed by the revenue and partly allowed the appeals filed by the assessee, directing the deletion of various additions and upholding the validity of the special audit reports.