M/S. H.M. CONSTRUCTIONS,BANGALORE vs. DEPUTY COMMISSIONER OF INCOME TAX, CENTRAL RANGE - 1(4), BANGALORE

There was another Search and Seizure carried out by the competent authority under Sec.132 of the Act, in the residence of Smt.Adlene Kagoo, who is stated to be a trusted employee of one Mr.P.Dayanand Pai, on 12.4.2011. Mr.P.Dayanand pai, is the key person of Dayanand Pai Group of Companies. In the course of search of Adlene Kagoo certain Compact Discs(CD), pen drives and other electronic records were found besides loose papers. They were all seized. Among the seized document, what is relevant and important for the present appeal are the print out taken from the Seized CD in the form of a ledger and this is referred to as “Dummy (Tally Training Environment) {DTEE}. The data contained in DTEE contained day to day receipts and payments transactions-cash, bank and journal entries allegedly maintained by Smt.Adlene Kagoo on instructions from Mr.P.Dayanand Pai.

Based on the documents found in the search conducted in the case of Smt. Adlene Kagoo, the AO proceeded to make assessment for all the Assessment Years. Based DTTE, the AO made some additions. We shall first deal with the additions made in AY 2006-07 to 2009-10 that are challenged in the appeals to70/Bang/2017. According to the Revenue, the DTEE contained details of payment made by the assessee to Shri. P. Dayananda Pai outside the books of accounts in cash. The AO has set out in detail the aforesaid payments which total a sum of Rs.7,75,00,000/- in Assessment Year 2006-07. Similarly, in Assessment Year 2007-08, the AO relying the documents seized in the premises of Smt. Adlene Kagoo came to the conclusion that assessee had given a sum of Rs.13,08,00,000/- to Shri. P. Dayananda Pai as loan from undisclosed sources.

In so far as the additions of Rs.7,75,00,000/- made in Assessment Year 2006-07 is concerned, the additions have been made by the AO with the observations that DTTE contained payments made outside the books of accounts. The AO has referred to Dummy (Tally Training Environment) page 2 & 4 and concluded that the Assessee has made certain payments in page 4 to 7 of the order of assessment. According to the AO, those made by the assessee to M/s Dayanand Pai were outside the books of accounts in cash. The payments are made for the purposes mentioned against the same, which are not finding place in the regular books of accounts maintained by the assessee. The summary of the cash payments so made according to the AO were a total sum of Rs. 7,75,00,000/-. According to the AO, the contents of the DTTE match with the parent documents maintained by Mr. P. Dayanand Pai. According to the AO, entries in the tally package are nothing but the accounts maintained by Mr.P.Dayanand Pai in respect of the actual transactions between the Assessee and Mr.P.Dayanand Paid leading to an inescapable conclusion that the contents of these documents are correct. The Assessee by letter dated 11.3.2014 asked for copies of the vouchers of the documents should be provided to it. According to the AO, the existence or otherwise of any such vouchers is known only to the assessee and hence the AO was not in a position to provide the same. According to the AO, the documents found were pertaining to purely cash transactions between the Assessee and P.Dayanand Pai and the method of maintenance of these documentation is known only to them . The AO therefore concluded that the amounts appearing in the above documents should be brought to tax as under: AY Total amounts paid Total amounts paid Total towards transactions at towards transactions at Pages 39 &4 Page 2 & 33 2006-07 25000000 52500000. 77500000

In so far as the additions made in Assessment Year 2007-08 is concerned, on the basis of similar observations and placing reliance on DTTE page 2 and 4, the AO made an addition of Rs.5,10,00,000/- as cash payments not reflected in the books of account on the same basis on which addition was made in AY 2006-07. Besides the above, the made an addition of Rs.18,73,29,601/- on the basis of documents seized in the course of search in the case of Smt.Adlene Kagoo. The relevant observations of the AO were as follows: II. Interest charged: Further, the assessee has raised certain amounts as interest from M/s Dayanand Pai. The documents show that the assessee had made computations at 14%, 18% and 24%. However an analysis of the relevant pages, namely, 10,11,12,13,14,15,16,45,46,47 of the documents show that he has charged interest at 18%. The working of the interest actually charged by the assessee is at Page 45, based on 18% interest. Rest of the documents are .supportive documents for the same. Based on the workings, the assessee has written letters to M/s Dayanand Pai, which are appearing in pages 47,16,14,12. The details of interest charged by the assessee are as under: AY Interest Charged 2007-08 5529601 2008-09 10202005 2009-10 1552636 The assessee was asked to explain these transactions.

Similar addition of interest were made for Assessment Years 2008-09 and 2009-10 of Rs. 1,02,02,005 and Rs.15,52,636, respectively.

On appeal by the assessee against the aforesaid additions, the CIT(A) gave partial relief in some of the Assessment Years. The additions made by the AO and the relief given by the CIT(A) is summarized as follows:

Aggrieved by the orders of the CIT(A), the assessee is in appeal for AY 2006-07 to 2009-10. Though the assessee has filed application for raising additional grounds, at the time of hearing, the preliminary grounds with regard to whether the impugned assessment can be done under section 153A of the Act on the basis of the material found in the case of some other person was argued before us. The said issue was raised by the assessee in ground No.5(i) to (iii) in all these appeals and the same reads as follows: 5. Grounds on whether Section 153A or 153C is applicable: i.The learned CIT (A) was not justified in law in confirming the additions based on the material seized from the search conducted in the case of Dr. P. Dayananda Pai in the premises of Mrs. Adelene Kagoo in the assessment order passed under Section 153A r.w.s 143(3) of the Act on the facts and circumstances of the case.

In so far as ground No.5(i) to (iii) raised by the assessee is concerned, we have already seen that the present proceedings were initiated under section 153A of the Act on the basis of search conducted in H. M. Constructions and group of cases on 30.06.2011. It is also clear from the discussion in the Order of Assessment based on which the impugned additions have been made that the basis of the addition is the document found in the course of search of in the case of Smt. Adlene Kagoo on 12.04.2011. Admittedly, none of the additions are based on any material found in the course of search conducted in the case of the assessee. In such circumstances, the question is whether the additions made on the basis of materials found in the course of search conducted in the case of Smt.Adlene Kagoo, without invoking the provisions of section 153C of the Act in the assessments concluded under section 153A of the Act pursuant the search conducted in the case of the assessee is sustainable.

In this regard, the learned AR drew the attention of the Bench to the provisions of Section 153C of the Act, which enable the AO of the person who is not searched under section 132 of the Act to take cognizance of materials seized in the course in the case of the person searched. It was submitted that section 153C of the Act requires recording of satisfaction that materials found in the course of search belongs to or pertains to some other person other than the person searched. Thereafter, these materials must be transmitted to the AO having jurisdiction over such other person, who has not been searched. The AO of the other person must thereupon record satisfaction that these materials have a bearing on the assessment of income of such other person. It is only thereafter that proceedings can be taken up for framing an assessment under section 153A against such other person. According to the learned AR, the AO while passing the order of assessments under section 153A of the Act had taken into account / considered materials found in the course of subsequent search in the case of Smt.Adlene Kagoo, without adopting and following the procedure laid down under section 153C of the Act. It was argued that the additions made by the AO in the order of assessment under section 153A of the Act, based on documents and materials found in the course of search in the case of Smt.Adlene Kagoo is contrary to law and hence these additions even to the extent sustained by the learned CIT(A) are legally untenable and are required to be deleted. In support of the aforesaid proposition of law, the assessee, inter alia, placed reliance on the decision of the Kolkata Bench of ITAT in the case of Krishna Kumar Singhania (168 ITD 217) (Kol. – Trib.). Reliance was also placed on the judgment of the Hon’ble Bombay High Court in the case of HDFC Bank Ltd., (174 DTR 92) (Bom).

he learned DR supported the impugned orders of assessment for Assessment Years 2006-07 to 2009-10 and submitted that the AO was fully justified in taking cognizance of the material found / seized in the course of search action in the case of Smt.Adlene Kagoo. It was submitted that the provisions of section 153C of the Act need not be invoked when assessment proceedings under section 153A of the Act are pending in the case of the assessee. It was also contended that there was no bar for making assessment by taking cognizance of material found / seized in the case of Smt.Adlene Kagoo.

We have carefully considered the rival submissions. The facts are not in dispute that the impugned additions were made in the case of the Assessee on hand on the basis of material found and seized from the premises of Smt.Adlene Kagoo. It is also amply clear that the AO did not invoke the provisions of Section 153C of the Act on receipt of the material; but rather chose to take cognizance of those materials in the course of pending assessment proceedings under section 153A of the Act for Assessment Years 2006-07 to 2009-10 that were before him. It is therefore clearly established that the AO has used seized material / documents found in the course of search conducted in the case of a third party (i.e., search of Smt.Adlene Kagoo) for making the additions in the hands of the assessee.

Section 153A of the Act, enables and empowers the AO to frame an assessment in the case of a person where search is initiated under section 132 of the Act for 6 Assessment Years immediately preceding the Assessment Year in which the search takes place. The first proviso to section 153A of the Act requires the AO to assess or re-assess each of the 6 Assessment Years immediately preceding the Assessment Year in which the search takes place. The second proviso to section 153 of the Act provides that pending assessment proceedings on the date of search shall abate and the assessments for those years have to be framed under section 153A of the Act. The provisions of section 153A of the Act reads as under:-

The provisions of Section 153C of the Act enjoins upon the AO of the person searched; that on being satisfied that books of account seized or requisitioned belongs to or pertain to some other persons, to handover the books of account to the AO having jurisdiction over such other person. Thereafter, the second AO, on being satisfied that the books of account and documents received have a bearing on the determination of the total income of the other person, should assume jurisdiction under section 153C of the Act. After assuming jurisdiction under section 153C of the Act, the AO proceeds to carry out an assessment in terms of section 153A r.w.s. 143(3) of the Act. In this regard, it is relevant to extract section 153C of the Act hereunder:-

From the above, it is seen that the jurisdictional conditions and circumstances prescribed by the legislature for assumption of jurisdiction and taking action under sections 153A and 153C of the Act are different and are not interchangeable. The jurisdiction to make an assessment under section 153A of the Act arises when there is a search conducted under section 132 of the Act. Whereas, jurisdiction to make assessment under section 153C of the Act arises when satisfaction is reached that the materials found in the course of search of some other person have a bearing on the determination of the income of the assessee. Further, in the first proviso to section 153C of the Act, it is provided that the reference to the date of search in the second proviso to section 153A of the Act; dealing with abatement of pending proceedings on the date of search; shall for the purpose of the persons proceeded under section 153C of the Act be construed as the date on which the seized materials are received by the AO.

In the present appeals for AY 2006-07 to 2009-10, there was a search under section 132 of the Act in the case of the assessee on 30.6.2011. No incriminating materials were found during the said search. It is not in dispute that none of the additions made in the aforesaid assessment years is based on material seized and found in the course of search conducted in the case of the assessee on 30.6.2011. After the search, notices under section 153A of the Act were issued on 30.11.2011 and thereafter assessments were framed by the AO. The material based on which the impugned additions were made by the AO were material found in the course of search of Smt.Adlene Kagoo on 12.4.2011. As per the second proviso to section 153C of the Act, the assessment proceedings pending under section 153A of the Act in the case of the assessee before the AO would abate on the date the AO receives the seized material from the AO of Smt.Adlene Kagoo and fresh proceedings under section 153C of the Act ought to have been initiated. However, it is seen that, upon receipt of the said information / materials, the AO did not assume jurisdiction under section 153C of the Act, but rather chose to use the said materials / information for making additions in the impugned orders of assessment concluded under section 153A of the Act. The AO has discussed these additions in the order of assessment and clear referred to the documents found in the course of search of Smt.Adlene Kagoo. Thus, the AO has not followed the procedure laid down in section 153C of the Act for taking cognizance of the material found / seized in the case of Smt.Adlene Kagoo and making an assessment with reference to those materials in the case on hand. The Kolkata Bench of ITAT in the case of Krishna Kumar Singhania (168 ITD 217) has considered the provisions of sections 153A and 153C of the Act and after examining the different scope of these two sections, at para 10 of its order, has held as under:- “We have heard the rival submissions. We find that it is not in dispute that there were no documents that were seized from the premises of the assessee except loose sheets vide seized document reference KKS / 1 comprising of 8 pages , for which satisfactory explanation has been given by the assessee and no addition was made by the Id AO on this seized document. The seized document used by the Id AO for making the addition in section 153A assessment is CG/1 to 11 and CG/HD/1 which were seized only from the office premises of Cygnus group of companies in which assessee is a director. In this regard, it would be pertinent to note that as per section 292C of the Act, there is a presumption that the documents , assets, books of accounts etc found at the time of search in the premises of a person is always presumed to be belonging to him / them unless proved otherwise. This goes to prove that the presumption derived is a rebuttable presumption. Then in such a scenario, the person on whom

The Hon’ble Bombay High Court in the case of HDFC Bank (supra) has also considered a similar question of law in the context of the erstwhile provisions of section 158BD of the Act. The provisions of section 158BD is the pre-cursor to the present provisions of section 153C of the Act; as the said provisions were required to be invoked for framing an assessment in the case of a person who was not searched, but materials indicating undisclosed income was found in the course of search conducted by the Department. In the aforesaid case of HDFC Bank (supra), Revenue sought to take cognizance of the search material and disallow depreciation in regular assessment proceedings and the provisions of section 158BD of the Act was not invoked. The Hon’ble Bombay High Court held that the scope of a regular assessment and the scope of assessment under section 158BD of the Act are different as they stand on different footings and has gone on to uphold the action of the Tribunal in holding that the provisions of section 158BD of the Act ought to have been invoked to make any disallowance of depreciation based on material found in the course of search conducted by the Department in the case of some other person. This judgment also supports the contention of the assessee that no addition could be made in the assessments framed under section 153A of the Act, based on materials found and seized from some other person, unless provisions of section 153C are invoked. The ITAT, Bengaluru Bench, in the case of Anil H. Lad and 1853/Bang/2013, order dated 28.06.2019, on identical facts, the Tribunal held that the additions and proceedings under section 153A of the Act on the basis of the material found in the case of some other assessee cannot be sustained.

We are of the view that the AO could not have taken cognizance of the seized documents and other material found and seized in the course of search conducted in the premises / case of Smt.Adlene Kagoo, while framing the orders of assessment under section 153A of the Act in the case the assessee. As a matter of fact, the ongoing assessment proceedings under section 153A of the Act would abate on receipt of these seized materials as per the second proviso to section 153C of the Act. We are of the view that in the event the AO wanted to take cognizance of the seized materials, he ought to have invoked the provisions section 153C of the Act after recording his satisfaction based on material sent by the AO of Smt.Adlene Kagoo. This jurisdictional pre-condition laid down by the Legislature of recording of satisfaction for taking action under section 153C of the Act cannot be side-stepped / brushed aside and additions be made in proceedings pending under section 153A of the Act as the scope of assessments framed under sections 153A and 153C of the Act are quite different. In that view of the matter, we hold that the additions made by the AO in the impugned orders of assessment for Assessment Years 2006-07 to 2009-10 cannot be sustained as they are contrary to the provisions of the Act and are therefore to be deleted. Hence, those additions to the extent sustained by the CIT(A) are hereby deleted. Consequently, Ground No.5 (i) to (iii) are allowed. In view of the aforesaid conclusions, we refrain from adjudication the other grounds raised