SMT. REDDY SANGEETHA,BENGALURU vs. DEPUTY COMMISSIONER OF INCOME-TAX, CENTRAL CIRCLE-1(3), BENGALURU

PER CHANDRA POOJARI, ACCOUNTANT MEMBER:

2.2 The common ground in all these appeals is that assessment passed u/s 143(3) r.w.s. 153A of the Income-tax Act,1961 ['the Act' for short] is bad in law and void-ab-initio since there was valid search conducted in the premises of the assessee. Consequently, the provisions of section 153A of the Act have no application and therefore, the assessment order passed deserve to be cancelled. The ld. A.R. also submitted before us that there was no justification to issue the warrant to search the premises of the assessee as the conditions specified in terms of section 132(1) of the Act did not exist and therefore, the search action is illegal and consequently the impugned assessment order deserves to be quashed. In our opinion, this ground has no merit since validity of search cannot be questioned before this Tribunal in view of the insertion of Explanation to section 132(1) of the Act/Finance Act, 2017 with retrospective effect from 1.4.1962. For the purpose of clarity we reproduce the said explanation:- to 1110/Bang/2022 Smt. Reddy Sangeetha, Bangalore

Page 3 of 23 “Explanation: For the removal of doubts, it is hereby declared that the reason to believe, as recorded by the Income Tax authority under this sub-section shall not be disclosed to any person or any authority or the Appellate Authority.” 2.3 This view was also fortified by the judgement of jurisdictional High Court in the case of Prathibha Jewellery House Vs. CIT (88 taxmann.com 94) (Karn.), wherein held as under: "10. Having heard the learned counsels for the parties, this Court is satisfied that the present writ petitions deserve to be dismissed for the following reasons:—

(i) That the decision of this Court in the case of C. Ramaiah Reddy (supra). which allowed the Appellate Authority to go into the question of validity of Search is a subject-matter of pending appeal before the Hon'ble Supreme Court and therefore, not only the Authorities of the Department, but even this Court should await the decision of Hon'ble Supreme Court on the said issue and cannot direct the Appellate Authorities like (CIT(Appeal) below by way of a writ of mandamus to go into the question of validity of search under Section 132 of the Act and it would be incongruous and not in deference to the pendency of aforesaid Civil Appeal No.2734/2013before the Hon'ble Supreme Court.

(ii) That even the law has been amended by insertion of the aforesaid Explanation by Parliament in Section 132 of the Act by the Finance Act, 2017 with retrospective effect from 1.4.1962. That Explanation also prohibits the Appellate Authorities to go into the reasons recorded by the concerned Income Tax Authority for directing Search against the assessee or tax- payer.

(iii) That this Amendment came after both, ITAT passed the order in the present case on 21.11.2014 as also the learned CIT(A) passed the impugned order aji 11.2.2015. Nonetheless, retrospective effect of the said amendment, will have its effect on the present case as well so long that the said Amendment holds the field Therefore, the Appellate Authorities of the Department cannot be expected to go into the said question. It is only for the Constitutional Courts to examine the vires and validity of such Amendment and for that, a separate writ petition is already said to be pending. However, no such challenge to the Amendment has been made in the present case.

11.In these circumstances, the impugned order Annexure-A dated 11.2.2015 passed by the learned CIT(A)cannot be faulted and it stands to the reason for the learned to 1110/Bang/2022 Smt. Reddy Sangeetha, Bangalore

Page 4 of 23 CIT(A) to have followed the Chattisgarh HighCourt's decision and refused to do so.”

2.4 Being so, in our opinion, there is no merit in the argument of ld. A.R. regarding validity of search carried out by the department u/s 132 of the Act and consequently framing of assessment cannot be questioned on this reason. This ground of appeal of the assessee in to 1110/Bang/2022 is dismissed. ITA No.1108/Bang/2022 (AY 2009-10):

3. Next ground in this appeal is with regard to sustaining addition of Rs.1,04,57,255/-. 3.1 Facts of the issue are that in the course of assessment, AO noticed that the assessee has shown opening capital of Rs.64,72,071/- as on 1.4.2008 in the capital account of the assessee. Further, assessee has shown another amount of Rs.39,85,184/- as bank receipts in the aforesaid capital reconciliation statement and noticing these facts, the ld. AO called for an explanation before the AO that assessee has earned a sum of Rs.1,04,57,255/- as professional charges in the earlier assessment year 2008-09 from M/s. Embassy Solutions Pvt. Ltd. and this was shown as opening capital of Rs.64,72,071/- and amount receivable from M/s. Embassy Services Pvt. Ltd. of Rs.39,85,184/-. The same has been shown in the financial statement and for the year ended on 31.3.2008, which is immediately preceding the financial year 2008-09 relevant to assessment year 2009-10. It was submitted that aforesaid professional charges were merely received during the year under appeal and deposited in bank account of the assessee. The assessee produced a ledger account of the assessee in the books of M/s. Embassy Services Pvt. Ltd and also the TDS certificate issued by the said company for the assessment year 2008-09 to substantiate the to 1110/Bang/2022 Smt. Reddy Sangeetha, Bangalore claim of the assessee that the aforesaid professional charges did not relate to the year under appeal and hence, the same were shown as opening capital and amount receivable from M/s. Embassy Services Pvt. Ltd. in the financial statement. The ld. AO did not accept the aforesaid computation of the assessee and since the assessee has received the aforesaid sum during the year under appeal and the same as considered as income of the assessee for the impugned assessment year 2009-10, since the assessee has not filed any return of income for the assessment year 2008-09 reporting the said income for the earlier assessment year 2008-09. The ld. AO also observed that the TDS certificate issued by M/s. Embassy Services Pvt. Ltd. cannot be proof for accrual of income in the earlier assessment year 2008-09 and since the assessee has not filed any agreement for rendering professional services, the ld. AO made an addition of Rs.1,04,47,255/- u/s 68 of the Act. Against this assessee is in appeal before us. 3.2 On appeal, the ld. CIT(A) observed that there is no necessity of seized material to make an addition while framing assessment u/s 153A of the Act by placing reliance on the judgement of Hon’ble Karnataka High Court in the case of Canara Housing Development Company (62 Taxmann.com 650) with regard to sustaining addition of Rs.39,85,184/-, he observed that on merit of the addition of Rs 39,85,184/- the claim of the assessee is that the same pertained to income already accrued in the AY 2008-09. However, this claim of the assessee is wholly unsubstantiated. In this regard the ld. CIT(A) observed that it is important to 'look into the reply dt. 24/11/2016 filed before AO during assessment proceedings. The same is reproduced as follows: to 1110/Bang/2022 Smt. Reddy Sangeetha, Bangalore to 1110/Bang/2022 Smt. Reddy Sangeetha, Bangalore 3.3 The ld. CIT(A) observed that on perusal of para 3 of this reply clearly shows that the assessee had admitted that she was not in a position to ascertain the exact year to which the amount of Rs 39,85,184/- relates and in para 4 the assessee had voluntarily offered the amount of Rs 39,85,184/- as her income for the year under consideration. Further, he observed that the total amount claimed to be income of AY 2008-09 is Rs 1,04,57,255/-, however the assessee was not able to explain this amount of Rs 39,85,184/- even on the basis of TDS certificate or the ledger account or confirmation from the clients. She was not able to explain as to why the amount was not appearing in the opening capital balance and her argument of 'mere error' was too flimsy to be accepted. That was why she had come forward with such admission during assessment proceedings. So the assessee cannot be aggrieved now. Considering above, the ld. CIT(A) upheld the addition to the extent of Rs39,85,184/-.

3.4 With regard to sustaining addition u/s 64,72,071/- the ld. CIT(A) has observed that the main reliance of the assessee is on pages 26 to 30A of the paper book filed during appellate proceedings. Page 26 is the ledger account forming part of the assessment order as annexure III. He observed that page nos. 27 and 30 exist in the paper book, which he ignored. Pages 28, 29 and 30A are reproduced as follows: to 1110/Bang/2022 Smt. Reddy Sangeetha, Bangalore to 1110/Bang/2022 Smt. Reddy Sangeetha, Bangalore to 1110/Bang/2022 Smt. Reddy Sangeetha, Bangalore 3.5 The ld. CIT(A) observed that pages 29 (Form 26AS) and 30A (Form 16A for period 01/10/2008 to 31/12/2008) shows that the same relate to AY 2009-10 i.e. the year under consideration and not to AY 2008-09 (FY 2007-08). So these documents do not show that the M/s Embassy Services had deducted tax at source on professional services fee of Rs 64,72,071/- accrued to the assessee in FY 2007- 08, as claimed by the assessee. Anyhow, a TDS certificate would not reflect the nature of payment i.e. whether the same was actual payment or a mere advance or accrual of income as tax is deducted at source on the basis of credit or actual payment, whichever is earlier. 3.6 As regards the confirmation filed from M/s Embassy, as reproduced supra, the ld. CIT(A) observed that here too there is nothing to show that the opening balance as on 01.04.2008 was the income of Rs 64,72,071/-, which had already accrued to the assessee in FY 2007-08 but pending payment. Here it is important to note that this account of the assessee in the books of M/s Embassy does not tally with the account of M/s Embassy in the books of the assessee (annexure III to the assessment order). The above confirmation from M/s Embassy although refers to period 01/04/2008 to 31/03/2009, but the same does not show details of the professional fees of Rs 53,80,972 and its payment, which has already been disclosed by the assessee in her books of account (annexure III to the assessment order) and reflected in the Form 26AS reproduced supra. So he opined that reliance cannot be placed on this document too. 3.7 The ld. CIT(A) further observed that the above factors compounded with the fact that the assessee was not able to produce any service agreement with M/s Embassy Services (a to 1110/Bang/2022 Smt. Reddy Sangeetha, Bangalore related party) pertaining to FY 2007-08, although huge amount of professional fee is being claimed to be involved; non availability of a bank account for receiving payments; falsely claiming that return of income was filed for AY 2008-09 but arguing during appellate proceedings that non-filing of return for AY 2008-09 could not make income of that year assessable in the year under consideration etc. lead to preponderance of probability being against the claim of the assessee that the amount of Rs 64,72,071/- received by her during the year under consideration was the accrued income of earlier year. 3.8 The ld. CIT(A) observed that the argument of the assessee that she has always been following mercantile system of accounting and so income already accrued in FY 2007-08 cannot be taxed in AY 2009-10, is also devoid of any merit. It is a case where the assessee has filed return of income for the first time for the year under consideration. So it is not a case that the assessee had been showing her income on mercantile basis year after year. The AO has observed that the assessee has not filed any return for AY 2008-09 or AY 2007-08. So he observed that the assessee is just trying to take advantage of the fact that in her case the AY 2008-09 is beyond the purview of the Section 153A of the Act and so she can safely claim that part of the receipts of the current year had already accrued to her in AY 2008-09 and thus the same cannot be taxed now. Since the assessee has claimed accrual of income in earlier years, the onus was on her to prove the same by bringing on record some positive evidence that services were rendered by her in FY 2007-08 and the terms and conditions of the agreement with the client provided accrual of income from time to time and that corresponding income had accrued to her in FY 2007-08. However, to 1110/Bang/2022 Smt. Reddy Sangeetha, Bangalore she has failed to discharge this onus. Against this assessee is in appeal before us.

Page 13 of 23 concerned, the same can be considered during the course of assessment. Further, such incriminating material must relate to undisclosed income which would empower the Assessing Officer to upset or disturb a concluded assessment of the other person. Otherwise, a concluded assessment would 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 in case of any other person as observed by us, detection or the existence of incriminating material is a must for disturbing the assessment already made and concluded. But, at the same time, such can be at three stages: one, at the stage when. the re- assessment is initiated, the second, at the stage during the course of reassessment and third, at u stage where the reassessment is altered by a different assessment in respect of searched person or in respect of third party. In this regard, reference may be made to the decision of Apex Court in case of M/ s. Calcutta Knitwear (supra) and based on the said decision, the CBDT has also issued circular dated 31.12.2015 vide No.24/ 2015.The relevant extract of the circular for ready reference can be extracted as under: “…………………..”” 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. 15:3A[I] 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. For the reasons aforesaid, substantial question of law in ITA Ncs.322/2018 to 324/2018, 354/2018 and 355/2018, substantial question of law No.1 in 382/2018 to 385/2018 and 197/2021 to 199/2021 and substantial question of law Nos.1 and 2 in ITA No.381/2018 are answered in favour of the assessee and against the Revenue.

Substantial question of Law No.2 in 383/2018 to 385/2018 is squarely covered by the ruling of the coordinate Bench of this 'Court in ITA No.352/2018 and connecter? matters (DI) 25.05.2021) wherein the said substantial question of law has been answered ir favour of the assessee and against the Revenue. to 1110/Bang/2022 Smt. Reddy Sangeetha, Bangalore

Page 14 of 23 Substantial question of law No.2 in and substantial question of law No.3 in ITA Nos.380/2018, 383/2018 to 385/2018 does not arise for our consideration since the same are not pressed by the Revenue.

Appeals stand disposed of accordingly.”

4.1 Same view was taken by the Hon’ble Delhi High Court in case of CIT Vs. Kabul Chawla (380 ITR 573) (Del.). Even Hon’ble Supreme Court in case of Principal CIT Vs. Abhisar Buildwell Pvt. Ltd. (116 CCH 307) (SC) has reiterated the same proposition as follows: “14. In view of the above and for the reasons stated ab e, it is concluded as under: i) that in case of search under Section 132 or requisition under Section 132A, the AO assumes the jurisdiction for block assessment under section 153A; ii) all pending assessments/reassessments shall stand abated; iii) in case any incriminating material is found/unearthed, even, in case of unabated/completed assessments, the AO would assume the jurisdiction to assess or reassess the 'total income' taking into consideration the incriminating material unearthed during the search and the other material available with the AO including the income declared in the returns; and iv) in case no incriminating material is unearthed during the search, the AO cannot assess or reassess taking into consideration the other material in respect of completed assessments/unabated assessments. Meaning thereby, in respect of completed/unabated assessments, no addition can be made by the AO in absence of any incriminating material found during the course of search under Section 132 or requisition under Section 132A of the Act, 1961. However, the completed/unabated assessments can be re-opened by the AO in exercise of powers under Sections 147/148 of the to 1110/Bang/2022 Smt. Reddy Sangeetha, Bangalore

Page 15 of 23 Act, subject to fulfilment of the conditions as envisaged/mentioned under sections 147/148 of the Act and those powers are saved.”

4.2 Now the contention of the ld. A.R. is that out of Rs.1,04,57,255/-, an amount of Rs.64,72,071/-, which was shown in balance sheet as on 31.3.2008 is receivable from M/s. Embassy Services Pvt. Ltd. and another amount of Rs.39,85,184/- is provision of consultancy charges receivables, which was specified as current assets in the balance sheet as on 31.3.2008. This amount has been accrued before 31.3.2008 which falls in the assessment year 2008- 09 and not in the assessment year 2009-10 and this also enclosed by the TDS Certificate in form no.16 issued by M/s. Embassy Services Pvt. Ltd. Admittedly, in this case, there was no seized material suggesting these additions. This has been shown by assessee in its balance sheet filed by assessee before ld. AO and also it is also admitted fact that an amount of Rs.64,72,071/- shown as opening balance as on 1.4.2008 and there was increase of Rs.39,85,184/- in capital account of the assessee. The contention of the ld. D.R. is that this income has been received by the assessee in the assessment year under consideration and same to be taxed. In our opinion, opening capital account balance as on 1.4.2008 cannot be taxed in the assessment year under consideration though it was received in the assessment year under consideration as the TDS for the same has been made in the earlier assessment year, which shows the amount accrued in earlier assessment years. Regarding the balance amount of Rs.39,85,184/-, the assessee has filed a letter before ld. Deputy Commissioner of Income-tax as follows: to 1110/Bang/2022 Smt. Reddy Sangeetha, Bangalore to 1110/Bang/2022 Smt. Reddy Sangeetha, Bangalore

Page 17 of 23 4.3 In our opinion, since the assessee has admitted that he is not able to explain the year in which it was received or accrued and voluntarily offered as income in the assessment year 2009-10, being so, we have no hesitation in sustaining this addition of Rs.39,85,184/-.

of the assessee is allowed. 7.1 In the result, assessee’s appeal in is partly allowed. (AY 2013-14):

8. In this appeal, the assessee has raised a ground with regard to sustaining addition of Rs.34,80,353/-, though there was no incriminating material found during the course of search action. 8.1 Facts of the case are that the ld. AO during the course of assessment proceedings noticed that assessee had claimed a sum of Rs.34,80,353/- as interest u/s 36(1)(iii) of the Act. The assessee explained that the said claim was made as the borrowed funds were used for the purpose of business. However, the ld. AO noticed that the assessee has given huge advances to sister concerns and related parties and the assessee has not explained the need for borrowed funds and held that assessee is not entitled for deduction u/s 36(1)(iii) of the Act. 8.2 On appeal, the ld. CIT(A) observed that there was no incriminating material to sustain this addition and addition is to be deleted. On the merit also submitted that the assessee is having own funds to advance to sister concerns. The ld. CIT(A) not agreeing with to 1110/Bang/2022 Smt. Reddy Sangeetha, Bangalore the contention of the ld. A.R., dismissed the appeal of the assessee. Against this assessee is in appeal before us. 8.3 The ld. A.R. submitted that the assessee had paid interest on borrowed capital and had claimed the same as a deduction in the original return of income filed by the assessee. There were no materials found at the time of search to consider that the aforesaid interest expenditure claimed by the assessee was not genuine. He further submitted that the learned A.O. failed to appreciate that the aforesaid disallowance made in the proceedings u/s. 153A of the Act was unjustified and unwarranted. It is submitted that the scope of the assessment proceedings u/s. 153A of the Act for the year under appeal was restricted to making the assessment based on the materials found and seized at the time of search. This is because the assessment proceedings for the year under appeal had not abated after the search was conducted and therefore the jurisdiction to make an assessment for the year after the search was restrictive one i.e., having regard to the materials found in course of search. Thus, the impugned disallowance made by the learned A.O. without any materials found and seized at the time of search to show that the said expenditure is not genuine is therefore opposed to law and hence, the same deserves to be deleted. It is prayed accordingly. 8.4 The ld. A.R. submitted that without prejudice to the above, the learned A.O. also ought to have appreciated that the assessee was entitled to the deduction u/s. 36[1][iii] of the Act. It is submitted that the learned A.O. ought to have appreciated the fact that the assessee is also engaged in real estate business and had used the borrowed funds for business to 1110/Bang/2022 Smt. Reddy Sangeetha, Bangalore purposes. Hence, he submitted that the disallowance made by the learned A.O. was purely on suspicion and surmise, assumption and presumptions and therefore, the same deserves to be deleted. 8.5 The ld. D.R. relied on the order of ld. CIT(A). 9. We have heard the rival submissions and perused the materials available on record. In the present case, assessee’s balance sheet reads as follows as on 31.3.2013:- to 1110/Bang/2022 Smt. Reddy Sangeetha, Bangalore 9.1 As seen from the above, assessee has used the money borrowed for acquisition of property at Singapore. However, there was another term loan availed from Vysya Co-operative Bank on which assessee paid the interest in this assessment year under consideration. The assessee is not able to explain the purpose of borrowing that term loan. 9.2 On the other hand, assessee made interest free advance to various parties, namely M/s. Embassy Services Pvt. Ltd., Manyata Developer Pvt. Ltd., Reddy Veeranna, Reddy Snehalata and Sundry advances. The assessee is not able to explain the sources to make interest free advance to these parties. Hence, it should be considered that assessee has used the borrowed funds from Vysya Co-operative Bank to advance these parties on which assessee claimed interest in its profit & loss account in the assessment yar under consideration at Rs.34,80,353/-, which cannot be allowed u/s 36(1)(iii) of the Act, since the loan has been borrowed for the purpose of business and not satisfy the conditions laid down in section 36(1)(iii) of the Act. Accordingly, the disallowance made by the lower authorities is justified. This ground of appeal of the assessee is dismissed. 9.3 The assessee has raised ground no.5 that assessee is not liable to be charged interest u/s 234A & 234B of the Act. In our opinion, this ground is consequential and mandatory in nature and is to be charged accordingly. This ground is dismissed. However, the assessee is at liberty to seek waiver before DG/CCIT, if so advised. 9.4 In the result, the assessee’s appeal in is dismissed. to 1110/Bang/2022 Smt. Reddy Sangeetha, Bangalore

Order pronounced in the open court on 29th Sept, 2023