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TMI Blog2017 (5) TMI 1224X X X X Extracts X X X X X X X X Extracts X X X X ..... f this Court in Smt. Dayawanti Gupta v. CIT (2016) 390 ITR 496 (Del) (hereafter Dayawanti Gupta). The Revenue's submission is that the invocation of Section 153A of the Act to re-open concluded assessments of the AYs earlier to the year of search is justified even in the absence of incriminating material found during the search qua each such earlier AY. For reasons to follow, the Court does not agree with the above submissions of the Revenue. 3. Since there are typographical errors in the memoranda of appeals, and the corresponding appeal numbers before the ITAT, the Court sets out in a tabulated form all the appeal numbers, the AY and the corresponding ITA Nos.: S.No. ITA No. of Revenue's appeal in this Court Assessment Year (AY) Corresponding ITA No. of ITAT (i) 306/17 2004-05 2437/Del/12- In revenue's appeal memo the ITA No. of ITAT order is inadvertently mentioned as 2413/Del/12 since that was the ITA No. of the Assessee's appeal before ITAT dismissed IA for non-prosecution. (ii) 307/17 2003-04 2412/Del/12 (iii) 308/17 2000-01 2409/Del/12 (iv) 309/17 2001-02 2410/Del/12 (v) 310/17 2002-03 2411/Del/12 Background facts 4. The facts leading to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2(1) of the Act were also issued. Assessment orders 9. On 28th December, 2007, separate assessment orders were passed by the AO in respect of the AYs 2000-01, 2001-02, 2002-03, 2003-04 and 2004-05. The AO dealt with the issue of 'franchisee commission'. He noted that as per the trading and profit and loss account ('P & L Account') for the AY 2004-05, the Assessee had claimed Rs. 60,066. It was noted that as in the preceding years, a substantial amount was claimed on account of franchisee commission which was debited to the P&L Account i.e., the franchisee commission paid to various parties, the Assessee was thus asked to furnish copies of accounts of the franchisees with their complete addresses. The AO noted that the addresses of the franchisees were not revealed and on a perusal of the copy of the accounts of the said franchisees, there were glaring discrepancies in the details filed. 10. In the assessment orders passed for AYs 2001-02 to 2003-04 also, there was a similar discussion regarding the franchisee commission payments and the AO found no justification for such payments. Consequently, the amount of the franchisee commission claimed by the Assessee in each of the years ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al evidence. The additional evidence was also contested by the AO as not supporting the Assessee's explanation regarding the payment of franchisee commission. A rejoinder was filed thereto by the Assessee. 16. It must also be noticed at this stage that on 23rd September, 2010, during the pendency of the proceedings before the CIT (A) when a remand report was sought from the AO, the Assessee offered a very detailed explanation on the following topics to the AO during the remand proceedings: (i) Addition of Rs. 13,79,801/- on account of franchisee commission (rent); (ii) Addition of Rs. 88 lakhs on account of undisclosed franchisee commission; (iii) Addition of Rs. 17,32,511/- on account of security deposits; (iv) Addition of Rs. 6,64,910/- on account of undisclosed income from self-controlled outlets; and (v) Non-submission of books of account during the assessment proceedings under Section 153A /143(3). 17. In respect of last topic regarding non-submission of books of accounts, the Assessee stated as under: "In this context, we would like to reiterate that the assessee has been maintaining regular books of accounts on TALLY software on Computer and have filed regular Income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... admitted to have 52 owned and controlled/operating franchisee outlets, the CIT(A) noted that the AR of the Assessee had submitted that there were only 21 franchisees in FY 200304. In his order in the appeal for the AY 2004-05 in paragraph 6.2.3, the CIT(A) noted as under: "6.2.3 Since the appellant had made a request to call for the assessment record for verification of her contentions, the AO was asked to be present during hearing on 11/11/2011. On that date the AO Shri D.S. Rathi' appeared along with the assessment records and the appellant's AR also appeared along with originals of the Franchise Agreements Financial Year wise for F.Y 2001-02 to 2005-06 in support of the appellant's claim that she had different number of Franchise/retail outlets in different years under appeal as stated by the appellant in her affidavit The originals were verified by the AO and copies thereof have been placed on record the AR submitted that there were only 21 franchises in F Y 2003-2004 Notings have accordingly been made by undersigned in the order sheet which has been signed by Shri Rathi, the Ld. AO, Shri Rajesh Jain, the Ld. AR of the appellant and the undersigned." 22. The addi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the addition of Rs. 13,79,801/- made by the AO on account of expenditure not related to business (being the payment of rent); (ii) Deletion of addition of Rs. 88 lakhs on account of undisclosed franchisee commission; (iii) Allowing relief of Rs. 14,04,175/- out of total addition of Rs. 17,32,511/- on account of non-refundable security; (iv) Deletion of addition of Rs. 6,64,910/- on account of suppression of income from self-controlled outlets; (v) Allowing of relief of Rs. 12,07,705/- out of total addition of Rs. 14,49,246/- made by the AO on account of suppression of closing stock. 27. Each of the five grounds was rejected by the ITAT. Consequently, ITA No. 2437/Del/2012 filed by the Revenue for AY 2004-05 was dismissed on merits. The corresponding appeal of the Assessee for the said AY being ITA No. 2413/Del/2012 was dismissed for non-prosecution since none appeared for the Assessee before the ITAT. The present appeals 28. It must be noticed here that before this Court, there are five appeals filed by the Revenue. ITA Nos. 308/2017, 309/2017 and 310/2017 and 307/2017 are directed against the common impugned order of the ITAT in ITA Nos. 2409/Del/2012, 2410/Del/2012, 2411 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AO on estimate basis; and (b) Deletion of addition of Rs. 13.79 lakhs made by the AO with respect to rent payment. Questions of law 33. Consequently, while admitting these appeals, the Court frames the following questions of law: (i) Was the Revenue justified in invoking Section 153A of the Act in relation to AYs 2000-01 to AYs 2003-04? (ii) With reference to AY 2004-05, was the ITAT correct in confirming the orders of the CIT(A) to the extent it deleted the additions made by the AO to the taxable income of the Assessee of franchisee commission in the sum of Rs. 88 lakhs and rent payment for the sum of Rs. 13.79 lakhs? Submissions of the Revenue 34. Mr. Ashok Manchanda, learned counsel appearing for the Revenue, made the following submissions: (a) The quashing by the ITAT of the AO's assessment orders for the AYs 2000-01 to 2003-04 by placing reliance on the decision of this Court in Kabul Chawla (supra) on the ground that no incriminating material was found or seized relatable to the said AYs was legally and factually erroneous. Apart from the seized unaccounted cash of Rs. 14,50,000/-, which was surrendered as part of the undisclosed income by the Assessee, there were " ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... record specific findings for each of the seized documents. A good part of the information contained in the said documents was incriminating in nature i.e., "which does not appear to have been recorded or reflected in the books of account." It is stated that it was for this reason that the Assessee did not produce its books of accounts during the assessment proceeding in spite of several opportunities. This left the AO with no alternative but to assess and estimate the Assessee's income on the basis of evidence and information coming on record during the search and survey operation and the subsequent investigations on an 'estimate basis'. Reliance was placed on the decisions in CIT v. Anil Kumar Bhatia (2013) 352 ITR 493 (Del); Filatex India Ltd. v. CIT (2015) 229 Taxman 555 (Del) and CIT v. Chetan Das Lachman Das [2012] 254 CTR 392 (Del). It is submitted that in each of the said cases, there was very little seized material only for one AY and yet the Court sustained additions made in other AYs even where there was no such incriminating evidence. It is pointed out that in Filatex India Ltd. v. CIT (supra), the addition made only on the basis of the statement of a General Manager ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ailed to give an opportunity to the AO in that regard before admitting the additional ground. The ITAT, therefore, ought to have remanded the matter to the file of AO. Submissions on behalf of the Assessee 35. Mr. Piyush Kaushik, learned counsel appearing for the Assessee, in reply, has submitted as under: (a) The fact of the matter was that there was no incriminating material seized during the search and seizure operations for the AYs 2000-01 to 2003-04. The action under Section 153A of the Act was a consequence of the search operations under Section 132. Section 153A should not be read in isolation from Section 132 of the Act. Only a valid search and seizure satisfying all the requirements of Section 132(1)(a),(b) and (c) could form the foundation for the assumption of jurisdiction under Section 153A of the Act. (b) The search operation under Section 132 of the Act could be initiated only against a person who is considered to be in possession of undisclosed income or property. Section 153A was not meant to provide a second or a third inning to the AO so as to complete a normal scrutiny assessment. The existence of incriminating material was therefore a sine qua non for the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Sunrise Tooling System Pvt. Ltd. 2014-TIOL-134-HC-DEL-IT and the decision dated 2nd January, 2013 in Tax Case No. 8/1999 of the Jharkhand High Court in Shree Ganesh Trading Co. v. Commissioner of Income-Tax. Reference was also made to the instructions issued by the Central Board of Direct Taxes ('CBDT') on 10th March, 2003 and 18th December, 2014 emphasizing that the Department should "strictly avoid obtaining admission or undisclosed income under coercion/undue influence" during search and seizure operations. 36. Both counsel have filed written note of submissions to supplement their oral submissions. On the side of the Revenue, elaborate written submissions dated 26th April, 2017 (running into 26 pages) and 2nd May, 2017 (running into 13 pages) have been submitted. On the side of the Assessee, written submissions dated 26th April, 2017 (running into 11 pages) and 3rd May, 2017 (running into 3 pages) have been submitted. Analysis of the material recovered during search 37. At the outset, it requires to be noticed that what was actually seized from the various premises during the course of the search were the following: Items Premises J-238, Sainik Far ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Distinction between statements under Sections 132 (4) and 133 A 40. The main plank of Mr. Manchanda's submission was that the disclosure made by Mr. Pawan Gadia in his statement under Section 133A was sufficient to be construed as incriminating material qua all the aforementioned AYs, the assessment for which could be re-opened by invoking Section 153A of the Act. It is significant that while in the written submission dated 26th April, 2017, Mr. Manchanda termed the statement of Mr. Pawan Gadia as "the statement dated 23rd December, 2005 recorded under Section 132(4) of the Act", he was careful to describe it as such in the subsequent written submission dated 2nd May, 2017. This was for a good reason. The statement was in fact not under Section 132(4) of the Act but under Section 133A of the Act. There is a difference between a statement made during a survey under Section 133A of the Act and that made during the course of search under Section 132 (4) of the Act. Section 132(4) of the Act states that the authorized officer may, during the course of search and seizure, "examine on oath any person who is found to be in possession or control of any books of account, documents, monies, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecember, 2005. Mr. Manchanda has referred to the following questions and answers: Q.1 What is your identity? Ans: I am Pawan Gadia s/o Sh.M.S. Gadia R/o ........., New Delhi working at Satya Farm... Q.2 What kind of job you look after? Ans: I supervise the work of the companies (1) M/s Ferns" & Petal Trading Pvt. Ltd., (2) M/s. FNP Pvt. Ltd. (3) M/s FNP Events &. Wedding, M/s Flowered Touch India Pvt. Ltd. & (5) M/s FNP Petals Pvt. Ltd.... Q. 4 How much salary are you drawing? Ans: Rs. 30,000/- per month. ... Q.7 What is your financial arrangements with franchisees? Ans: They give one time license fee which is not refundable and Further as per the terms and conditions mutually agreed franchises commission... ... Q.19 I am showing you page 19 of Annexure A-6 which has details of sale costing. Can you show me sale bill to confirm these sales. Ans: The paper which you have shown is a draft model for costing purposes only. Q20 I am showing page no.13 of Annexure A-6 explain this. Ans: This. is the various reports for management control purpose showing the variations between budgeted and actual realization. Q21 I am showing page 80 of A-5, can you reconcile this figure wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been easy for the Investigating Officer to ask Mr. Pawan Gadia of the particular AY to which the document related to. However, that was not done. Therefore, all that we have is the statement of Mr. Pawan Gadia which makes a disclosure about the earlier undisclosed income and stating that the offer of such income was being made "to buy peace of mind". Therefore, the statement recorded under Section 133A of the Act of Mr. Gadia can hardly be said to be incriminating material for all the AYs in question. Other incriminating material? 45. Were there any other materials unearthed during the search that could be said to be incriminating qua each of the AYs in question? In trying to answer this question, there were two broad submissions made by Mr. Manchanda - one was a legal submission that there was no need for the existence of such incriminating material to justify the re-opening of the assessment for the earlier six years prior to the year of search. For this, reliance was placed on the decision in Dayawanti Gupta (supra). The second was that since the Assessee never produced the books of accounts, it was not possible for the AO to record a specific finding regarding each of the sei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he AO because the Assessee did not produce its books of accounts. It appears that the Revenue did have access to the entire books of accounts of the Assessee which were also shown to have also been maintained in soft form on the computers of the Assessee which were already seized by the Revenue during search operations. 47. The offer of Rs. 1.10 crores as undisclosed franchisee fee was made only for the year of search and not for the earlier years. In fact, there was no material on the basis of which the franchisee income could have been added for the earlier years. What the AO did, as was noted by the CIT(A), was to proceed on the basis as if there should have been such undisclosed franchisee income in the earlier AYs as well because the modus operandi of the Assessee during those was the same. The AO also presumed that the number of outlets remained constant in all the AYs from 2000-01 to 200607. He proceeded to estimate the undisclosed income at a certain percentage of the amount disclosed by the Assessee in the year of search. The AO presumed that the Assessee had 52 owned/controlled franchisee outlets during October to December, 2007 and would have had the same numbers during ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ade by Mr. Gadia as pointing to the factum of appointment of franchisees by the Assessee, which information, according to him, was not known earlier. He also pointed out to the practice of collecting a non-refundable license fee and non-refundable deposits which facts were not earlier known but for the search conducted. As rightly pointed out by Mr. Kaushik, learned counsel for the Respondent, that nothing was brought on record by the AO to show that there was failure on part of the Assessee to make a disclosure as regards the franchisee income in any of the earlier years. The incriminating material had to be in relation to any income that was not disclosed in the earlier returns. There was no such incriminating material to show that there was a failure by the Assessee to disclose any franchisee income for those earlier years. The disclosure by the Assessee on account of 'undisclosed franchisee commission' was relevant only for the year of search and not for the earlier years. 51. The CIT(A) has undertaken a very exhaustive exercise in respect of each of the AYs with respect to the number of franchisee outlets operating every year. He called for a remand report from and provided a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5. On the legal aspect of invocation of Section 153A in relation to AYs 2000-01 to 2003-04, the central plank of the Revenue's submission is the decision of this Court in Dayawanti Gupta (supra). Before beginning to examine the said decision, it is necessary to revisit the legal landscape in light of the elaborate arguments advanced by the Revenue. 56. Section 153A of the Act is titled "Assessment in case of search or requisition". It is connected to Section 132 which deals with 'search and seizure'. Both these provisions, therefore, have to be read together. Section 153A is indeed an extremely potent power which enables the Revenue to reopen at least six years of assessments earlier to the year of search. It is not to be exercised lightly. It is only if during the course of search under Section 132 incriminating material justifying the re-opening of the assessments for six previous years is found that the invocation of Section 153A qua each of the AYs would be justified. 57. The question whether unearthing of incriminating material relating to any one of the AYs could justify the re-opening of the assessment for all the earlier AYs was considered both in CIT v. Anil Kuma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... material being found during the search under Section 132 of the Act, the Revenue sought to justify initiation of proceedings under Section 153A of the Act and make an addition under Section 68 of the Act on bogus share capital gain. The order of the CIT(A), affirmed by the ITAT, deleting the addition, was not interfered with." 59. In Kabul Chawla (supra), the Court referred to the decision of the Rajasthan High Court in Jai Steel (India), Jodhpur v. ACIT (2013) 36 Taxman 523 (Raj). The said part of the decision in Kabul Chawla (supra) in paras 33 and 34 reads as under: "33. The decision of the Rajasthan High Court in Jai Steel (India), Jodhpur v. ACIT (supra) involved a case where certain books of accounts and other documents that had not been produced in the course of original assessment were found in the course of search. It was held where undisclosed income or undisclosed property has been found as a consequence of the search, the same would also be taken into consideration while computing the total income under Section 153A of the Act. The Court then explained as under: "22. In the firm opinion of this Court from a plain reading of the provision along with the purpose and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... found during the course of search in respect of an issue, then no additions in respect of any issue can be made to the assessment under Section 153A and 153C of the Act. The legal position was thereafter summarized in Kabul Chawla (supra) as under: "37. On a conspectus of Section 153A(1) of the Act, read with the provisos thereto, and in the light of the law explained in the aforementioned decisions, the legal position that emerges is as under: i. Once a search takes place under Section 132 of the Act, notice under Section 153 A (1) will have to be mandatorily issued to the person searched requiring him to file returns for six AYs immediately preceding the previous year relevant to the AY in which the search takes place. ii. Assessments and reassessments pending on the date of the search shall abate. The total income for such AYs will have to be computed by the AOs as a fresh exercise. iii. The AO will exercise normal assessment powers in respect of the six years previous to the relevant AY in which the search takes place. The AO has the power to assess and reassess the 'total income' of the. aforementioned six years in separate assessment orders for each of the six ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The Gujarat High Court referred to the decision in Kabul Chawla (supra), of the Rajasthan High Court in Jai Steel (India), Jodhpur v. ACIT (supra) and one earlier decision of the Gujarat High Court itself. It explained in para 15 and 16 as under: "15. On a plain reading of section 153A of the Act, it is evident that the trigger point for exercise of powers thereunder is a search under section 132 or a requisition under section 132A of the Act. Once a search or requisition is made, a mandate is cast upon the Assessing Officer to issue notice under section 153A of the Act to the person, requiring him to furnish the return of income in respect of each assessment year falling within six assessment years immediately preceding the assessment year relevant to the previous year in which such search is conducted or requisition is made and assess or reassess the same. Since the assessment under section 153A of the Act is linked with search and requisition under sections 132 and 132A of the Act, it is evident that the object of the section is to bring to tax the undisclosed income which is found during the course of or pursuant to the search or requisition. However, instead of the earlier r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the assessment should connected With something round during the search or requisition viz., incriminating material which reveals undisclosed income. Thus, while in view of the mandate of sub-section (1) of section 153A of the Act, in every case where there is a search or requisition, the Assessing Officer is obliged to issue notice to such person to furnish returns of income for the six years preceding the assessment year relevant to the previous year in which the search is conducted or requisition is made, any addition' or disallowance can be made only on the basis of material collected during the search or requisition, in case no incriminating material is found, as held by the Rajasthan High Court in the case of Jai Steel (India) v. Asst. CIT (supra), the earlier assessment would have to be reiterated, in case where pending assessments have abated, the Assessing Officer can pass assessment orders for each of the six years determining the total income of the assessee which would include income declared in the returns, if any, furnished by the assessee as well as undisclosed income, if any, unearthed during the search or requisition. In case where a pending reassessment under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t there had to be incriminating material qua each of the AYs in which additions were sought to be made pursuant to search and seizure operation. The Calcutta High Court in CIT-2 v. Salasar Stock Broking Ltd. (supra), too, followed the decision of this Court in Kabul Chawla (supra). In CIT v. Gurinder Singh Bawa (supra), the Bombay High Court held that: "6...once an assessment has attained finality for a particular year, i.e., it is not pending then the same cannot be subject to tax in proceedings under section 153A of the Act. This of course would not apply if incriminating materials are gathered in the course of search or during proceedings under section 153A of the Act which are contrary to and/or not disclosed during the regular assessment proceedings." 63. Even this Court has in CIT v Mahesh Kumar Gupta (supra) and The Pr. Commissioner of Income Tax-9 v. Ram Avtar Verma (supra) followed the decision in Kabul Chawla (supra). The decision of this Court in Pr. Commissioner of Income Tax v. Kurele Paper Mills P. Ltd. (supra) which was referred to in Kabul Chawla (supra) has been affirmed by the Supreme Court by the dismissal of the Revenue's SLP on 7th December, 2015. The de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e in the sum of Rs. 1.10 crores was only for the year of search and not for the earlier years. As already noticed, the books of accounts maintained by the Assessee in the present case have been accepted by the AO. In response to question No. 16 posed to Mr. Pawan Gadia, he stated that there was no possibility of manipulation of the accounts. In Dayawanti Gupta (supra), by contrast, there was a chart prepared confirming that there had been a year-wise non-recording of transactions. In Dayawanti Gupta (supra), on the basis of material recovered during search, the additions which were made for all the years whereas additions in the present case were made by the AO only for AY 2004-05 and not any of the other years. Even the additions made for AYs 2004-05 were subsequently deleted by the CIT(A), which order was affirmed by the ITAT. Even the Revenue has challenged only two of such deletions in ITA No. 306/2017. 68. In para 23 of the decision in Dayawanti Gupta (supra), it was observed as under: "23. This court is of opinion that the ITAT's findings do not reveal any fundamental error, calling for correction. The inferences drawn in respect of undeclared income were premised on th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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