KOCHI, SEPT 21, 2015: THE issue before the Bench is - Whether the documents found during the course of search can be considered as incriminating material to initiate proceedings u/s 153C, even if assessment u/s 143(1) had attained finality before satisfaction was recorded by the AO. NO is the verdict.
Facts of the case
The assessee is engaged in the business of manufacture of cartons and sale thereof. Search and seizure operations were carried out in the premises of M/s. Matha Enterprises Ltd. on 13-02-2007. One of the Directors of the assessee company was a partner in M/s. Matha Enterprises. During the course of search, a bunch of loose sheets containing balance sheet, P&L account etc. were found which pertained to the assessee company, M/s. Royal Cartons (P) Ltd.. According to counsel for the assessee, the balance sheet and profit and loss account of the assessee company, i.e., M/s. Royal Cartons (P) Ltd. for the period 01/04/2005 to 31/03/2006 were found which were forwarded to the concerned AO by the search team. Based on the balance sheet and profit and loss account pertaining to AY 2006-07, AO issued notice u/s. 153A r.w.s. 153C. In response to the said notice, assessee filed its return of income declaring loss of Rs.2,65,510/-, which was originally returned. The assessee filed its return of income for the AY 2005-06 and the same was processed u/s. 143(1) and intimation was forwarded to the assessee. The return was processed after initiating the search proceedings in the case of M/s. Matha Enterprises Ltd. It was well-settled that a return processed u/s. 143(1) can be taken up for scrutiny by issuing notice u/s. 143(2) within a period of 12 months from the date of filing of return of income. In this case, notice u/s. 143(2) could have been issued on or before 31/03/2007. No such notice having been issued, the proceedings u/s. 143(1) attained finality. The jurisdiction of assessee was originally vested with AO, Ward-1, Ernakulam w.e.f. 27/11/2007. It was transferred to Central Circle-I, Ernakulam. Accordingly jurisdiction, to initiate the proceedings u/s. 153C, was conferred on the Deputy Commissioner of Income-tax, Central Circle-I only on 27/11/2007; thereafter seized documents were transferred to Dy.CIT. The balance sheet found during the course of search was for the period 1.4.2005 to 31.03.2006 which was relevant for AY 2006-07. Therefore, according to the assessee, no incriminating material pertaining to previous year 2004-05 was found during the course of search so as to assume jurisdiction u/s. 153C. AO observed that as per the balance sheet, as on 31/03/2005, filed alongwith the return of income by the assessee, unsecured creditors during the year were to the tune of Rs.12,42,000/- and the assessee did not file confirmation letters of the sundry creditors. Therefore, AO treated the same as unexplained cash credits and completed the assessment u/s. 153C.
On appeal before CIT(A), assessee contended that sufficient opportunity was not given by AO and therefore, the proceedings were not valid either u/s. 153A or 153C. It had also contended that even the additions made by AO had no legs to stand. The CIT(A) considered all the issues but chose to delete the additions on merits. Therefore, the Revenue preferred an appeal before the Tribunal and the assessee, by way of Cross Objections, contended that AO made the additions u/s. 153C without obtaining any incriminating material during the course of search and he erred in making addition merely on the basis of figures available in balance sheet filed alongwith the return. The appeal and the Cross Objections were heard by the Division Bench. The Judicial Member observed that the proceedings were initiated against the assessee, u/s. 153C, by treating the assessee company as a person other than the searched person. In such an event, as per proviso to section 153C, the date on which the books of account, documents etc are forwarded and received by AO having jurisdiction over such other person, shall be the relevant date for consideration as to whether the jurisdiction was invoked properly or not. In other words, that date should be determined as the date of initiation of search. In this case, the seized documents would have been handed over to AO on or after 27/11/2007 by which date assessment proceedings completed on the strength of return filed on 27/03/2006 attained finality. Since assessment proceedings attained finality, by operation of law, the same cannot be re-opened by invoking provisions of section 153C. The Judicial Member extracted the provisions of section 153C to highlight that the said section comes into play only when an assessment had to be made on a person, other than a person searched, subject to fulfilling two conditions, i.e., (1) a finding that money bullion, jewellery or other valuables or books of account or other documents seized belongs to a person other than the searched person (2) the same had to be handed over to the AO having jurisdiction over such person, other than searched person, for proceeding further. Thereafter the concerned AO had to record satisfaction. As per the proviso to section 153C, the date of initiation of search proceedings u/s. 132 was the date of receipt of books of account, etc. by AO having jurisdiction over such other person.
The Judicial Member observed that the proceedings were initiated against the assessee, u/s. 153C , by treating the assessee company as a person other than the searched person. In such an event, as per proviso to section 153C, the date on which the books of account, documents etc are forwarded and received by AO having jurisdiction over such other person, shall be the relevant date for consideration as to whether the jurisdiction was invoked properly or not. In other words, that date should be determined as the date of initiation of search. In this case, the seized documents would have been handed over to AO on or after 27/11/2007 by which date assessment proceedings completed on the strength of return filed on 27/03/2006 attained finality. Since assessment proceedings attained finality, by operation of law, the same cannot be re-opened by invoking provisions of section 153C. As per the proviso to section 153C, the date of initiation of search proceedings u/s. 132 was the date of receipt of books of account, etc. by the AO having jurisdiction over such other person. The Judicial Member has also relied upon the provisions of section 153A and second proviso thereto which provides for procedure for making a block assessment and observed that only such assessments, which are pending on the date of initiation of proceedings u/s. 132, shall not be abated. In other words, if the assessment was completed or terminated by operation of law on the basis of the return of income filed in the regular course, the assessment proceedings shall not be abated. On conjoint reading of section 153A and 153C and the facts of the case, the Judicial Member was of the view that the assessment proceedings for assessment year 2005-06 can be said to have been terminated by operation of law as on 31/03/2007. If the AO seeks to initiate proceedings u/s. 153C, he has to prove that there was some incriminating material for the year under consideration. In fact, balance sheet as on 31/03/2005 clearly shows the position of sundry creditors and hence, it was deemed to have been taken into consideration by the AO at the time of processing of the return. It was also not in dispute that there was no material found during the course of search operations for the AY 2005-06. The AO, in the proceedings u/s. 153C, made addition on the basis of the balance sheet as on 31/03/2005 which was filed alongwith the return of income as on 27/03/2006 itself. In such circumstances, the JM concluded that in the absence of any incriminating material found during the course of search, the AO cannot re-open the assessments completed on the basis of the return filed by the assessee on 27/03/2006 wherein the unsecured creditors of Rs.12,42,000/- was disclosed. He, accordingly, deleted the addition on the ground of lack of jurisdiction to initiate proceedings u/s. 153C.
The Accountant Member was however of the opinion that the bunch of loose sheets containing balance sheet and profit and loss account reveals the income of the assessee which would be sufficient for the Assessing officer to reopen the assessments u/s. 153C. In his opinion, the documents seized during the course of search in the premises of the assessee, can be treated as incriminating material. The Ld. AM also extracted provisions of section 153A and 153C of the Act and observed that proviso to section 153A mandates Assessing officer to assess or reassess the total income in respect of each assessment year falling within six assessment years. The proviso further mandates that any assessment or re-assessment in respect of any of those six years which are pending shall not abate. In his opinion, a careful perusal of the provisions show that the assessments have to be compulsorily made for all the six years and nowhere it is mentioned that no regular assessment or re-assessment can take place for any particular year if there is no incriminating material found. In this regard, he relied on the decision of the Shyam Lata Kaushik vs. ACIT (114 ITD 305) wherein it was held that there is no requirement for an assessment made u/s. 153A to be based on any material seized in the course of search. Similar view was taken in the case of Shivnath Rai Harnarain (India). He was also of the opinion that the assessments can be reopened by the Assessing officer even if there is no incriminating material found during the course of search. He was also of the opinion that the material found in the course of search is sufficient to initiate proceedings u/s. 153C. Thereafter, the Accountant Member considered the legality of the additions by going through the material placed before the CIT(A). It may be noticed that the Judicial Member having quashed the proceedings, there was no occasion for him to consider the order of the CIT(A) on merits. The Accountant Member noticed that the CIT(A) deleted the addition of Rs. 2 lakh received from Shri Nelson stating that Mr. Nelson had enough resources in the form of agricultural income. The AM was of the opinion that the assessee having produced documents for the first time before the CIT(A), the issue deserves to be remitted back to the file of the Assessing officer. Similar view was taken in respect of other additions.
Having heard the matter, the Tribunal third member held that,
++ we have also gone through the provisions of section 153A which provides for procedure for making block assessment. Second Proviso to section 153A clearly says that the assessment or re-assessment, if any, relating to any assessment year falling within the period of six assessment years pending on the date of initiation of search u/s 132 shall abate. In other words, if the assessment is completed or terminated by operation of law on the basis of the return of income filed in the regular course, the assessment proceeding shall not be abated. Therefore, in respect of pending assessment proceedings on the date of the search, the assessment shall be made on the basis of the seized material and other material found on record. However, in respect of the assessment proceeding which is not pending on the date of search has to be made only on the basis of the material found during the course of search operation. The completed proceedings on the date of search cannot be reopened by AO. In the case before us, admittedly, the assessee has filed the return of income on 27-03-2006. The period of 12 months for issuing notice u/s 143(2) expires on 31-03-2007. It is also not disputed that the Commissioner of Income-tax by an order dated 27-11- 2007, in exercise of his powers u/s 127(2) transferred the jurisdiction from Ward.1, Ernakulam to DyCIT / ACIT, Central Circle.1, Ernakulam. Therefore, the assessing officer of the assessee, the DyCIT / ACIT Central Circle, Ernakulam might have received the records on or after 27-11-2007 only and certainly not before that. Therefore, the assessment proceedings on the basis of the return of income filed in the regular course on 27-03- 2006 got terminated by operation of law on 31-03-2007. In other words, the assessment proceedings on the basis of the return of income filed on 27-03-2006 is not pending as on 27-11-2007 when the assessing officer is supposed to have received the seized document of the assessee;
++ hence, the income disclosed in the return filed in regular course on 27-03-2006 on the basis of the balance-sheet as on 31-03-2005 cannot be disturbed by the assessing officer unless there is a specific material found during the course of search operation. In this case, it is not in dispute that there is no material found during the course of search operation for the assessment year 2005-06. The assessing officer made the addition only on the basis of the balance-sheet as on 31-03-2005 which was filed by the assessee originally alongwith the return of income filed on 27-03-2006 itself. Therefore, even if the copy of the said document was found on the date of search still, that document cannot be treated as seized material. In other words, the copy of the balance-sheet s on 31-03-2005 is very much available with the revenue authorities along with the return of income filed on 27-03-2006. Therefore, this Tribunal is of the considered opinion that in the absence of any material found during the course of search operation, the assessing officer cannot reopen the assessment completed on the basis of the return filed by the assessee on 27-03-2006 wherein the unsecured creditors of Rs.12,42,000 was disclosed. Hence, the CIT(A) has rightly deleted the addition. We do not find any infirmity in the order of the CIT(A). The same is upheld. In the result, the cross objection of the assessee stands allowed and the appeal of the revenue stands dismissed;
++ the Accountant Member was of the opinion that any document found can be treated as incriminating material. With due respects, I am of the firm view that such document should reflect something to indicate that in the year under consideration, the assessee has not disclosed income whereas, in the instant case, the assessee has filed its return of income much before the date of search and on the strength of the profit and loss account and the balance sheet filed before the Assessing officer, the return was processed u/s. 143(1) of the Act. In fact, there was clear finding by the CIT(A) in his order, in respect of assessment year 2006- 07, wherein it was stated that there was no incriminating document found during the course of search; the Revenue has not preferred any appeal against the order of the CIT(A). Under these circumstances, it cannot be said that the same document can be treated as incriminating material for the assessment year under consideration. Since Point No. 1 is decided in the negative, i.e. the document found cannot be considered as incriminating document, Question No. 2 does not require adjudication and therefore, need not be answered;
++ Since there was a difference of opinion between the two Members constituting the Division Bench of ITAT, Cochin, the matter was referred to the Third Member by the Hon'ble President u/s. 255(4) of the Act. The Third member has agreed with the view taken by the Judicial Member in respect of both the questions referred above. Accordingly, as per the majority view, the appeal filed by the revenue is dismissed and the Cross Objection filed by the assessee is allowed;
++ in the result, the appeal filed by the revenue stands dismissed and the Cross Objections filed by the assessee is allowed.
Regards
Prarthana Jalan
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