M/S. MURUDESHWAR CERAMICS LIMITED,BANGALORE vs. ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE- 2(3), BANGALORE

The contention of the learned A.R. is that the addition made in this case is not based on incriminating material found during the course of search in the case of the assessee. The addition made on presumption of alleged cash withdrawals from to 442/Bang/2020 Page 3 of 20 No. subcontractors of the assessee resulted in alleged inflation of expenses lies with the subcontractors. There was no seized material found during the course of search action in the case of the assessee. As such the assessment framed under Section 143(3) r.w.s. 153A of the Act is bad in law. According to the learned A.R. the material found in the case of another person cannot be basis for making addition in the case of assessee and subject matter of assessment under Section 143(3) r.w.s. 153A of the Act. As such the assessment order to be quashed.

On the other hand, the learned D.R. submitted that in this case there was search action under Section 132 of the Act and also there was search action in the related concerns, namely M/s. RNS Infrastructure Ltd. During the course of search of RNSI various seized materials were found in addition to the search action in the case of the assessee. Being so, when there is search in the case of the assessee under Section 132 of the Act and also search action in the case of other assessee, i.e. RNSI there is no necessity of framing two separate assessments, one under Section 153A and another under 153C of the Act. As such the AO framed the assessment under Section 153A of the Act, which is rightly framed. He supported the order of the AO. Further he stated that validity of framing assessment was not subject matter of appeal before the CIT(A). As such this is an additional ground which cannot be considered.

We have considered the rival contentions and carefully perused the material on record and case law cited by the parties. The issue before us relates to framing of assessment under Section 153A of the Act for assessment years 2007-08 to to 442/Bang/2020 Page 4 of 20 No. 2011-12. Admittedly there was search action in the case of the assessee on 17.02.2012. Various incriminating material were found. There was also search in the case of related party, i.e. RNSI on 16.02.2012 wherein a computer server was found and seized. The retrieved digital evidences show cash generation from subcontractors of M/s. Murudeshwar Ceramic Ltd. There was also cash generation of Rs.3.68 crores from various sources as per the digital evidence found in RNSI. On the basis of these evidences notice under Section 153A of the Act was issued. There was search in the case of assessee though incriminating material were found during the course of search of RNSI. The argument of the learned A.R. was that assessment should be framed under Section 153C of the Act and not under Section 153A of the Act. This argument of the assessee has no merit.

Under the provisions of Section 153A, the Assessing Officer is bound to issue notice to the assessee to furnish returns for each assessment year falling within the six assessment years immediately preceding the assessment year relevant to the previous year in which the search or requisition was made. Another significant feature of this Section is that the Assessing Officer is empowered to assess or reassess the "total income" of the aforesaid years. This is a significant departure from the earlier block assessment scheme in which the block assessment roped in only the undisclosed income and the regular assessment proceedings were preserved, resulting in multiple assessments. Under Section I53A, however, the Assessing Officer has been given the power to assess or reassess the 'total income' of the six assessment years in question in separate assessment orders. This means that there can be only to 442/Bang/2020 Page 5 of 20 No. one assessment order in respect of each of the six assessment years, in which both the disclosed and the undisclosed income would be brought to tax.

A question may arise as to how this is sought to be achieved where an assessment order had already been passed in respect of all or any of those six assessment years, either under Section 143(1))(a) or Section 143(3) of the Act. If such an order is already in existence, having obviously been passed prior to the initiation of the search /requisition, the Assessing Officer is empowered to reopen those proceedings and reassess the total income, taking note of the undisclosed income, if any unearthed during the search. For this purpose. the fetters imposed upon the Assessing Officer by the strict procedure to assume Jurisdiction to reopen the assessment under Sections 147 and 148, have been removed by the non obstante clause with which such section (1) of Section 153A opens. The time- limit within which the notice under Section 148 can be issued as provided in Section 149 has also been made inapplicable by the non obstante clause. Section 151 which requires sanction to be obtained by the Assessing Officer by issue of notice to reopen the assessment under Section 148 has also been excluded in a case covered by Section I53A. The time-limit prescribed for completion of an assessment or reassessment by Section 153 has also been done away with in a case covered by Section 153A. With all the stops having been pulled out the Assessing Officer under Section 153A has been entrusted with the duty of bringing to tax the total income of an assessee whose case is covered by Section 153A, by even making reassessments without any fetters, if need be. to 442/Bang/2020 Page 6 of 20 No.

Now there can be cases where at the time when the search is initiated or requisition is made, the assessment or reassessment proceedings relating to any assessment year falling within the period of the six assessment years mentioned above, may be pending. In such a case, the second proviso to sub-section (1) of Section I53A says that such proceedings "shall abate". The reason is not far to seek. Under Section 153A there is no room for multiple assessment orders in respect of any of the six assessment years under consideration. That is because the Assessing Officer has to determine not merely the undisclosed income of the assessee, but also the 'total income' of the assessee in whose case a search or requisition has been initiated. Obviously there cannot be several orders for the same assessment year determining the total income of the assessee. In order to ensure this state of affairs namely, that in respect of the six assessment years preceding the assessment year relevant to the year in which the search took place there is only one determination of the total income, it has been provided in the second proviso of sub-section (1) of Section 153A that any proceedings for assessment or reassessment of the assessee which are pending on the date of initiation of the search or making requisition "shall abate". Once those proceedings abate, the decks are cleared, for the Assessing Officer to pass assessment orders for each of those six years determining the total income of the assessee which would include both the income declared in the returns, if any, furnished by the assessee as well as the undisclosed income, if any, unearthed during the search or requisition. The position thus emerging is that where assessment or reassessment proceedings are pending to 442/Bang/2020 Page 7 of 20 No. completion when the search is initiated or requisition is made, they will abate making way for the Assessing Officer to determine the total income of the assessee in which the undisclosed income would also be included, but in cases where the assessment or reassessment proceedings have already been completed and assessment orders have been passed determining the assessee's total income and such orders are subsisting at the time when the search or the requisition is made, there is no question of any abatement since no proceedings are pending, in this latter situation, the Assessing Officer will reopen the assessments or reassessments already made (without having the need to follow the strict provisions or complying with the strict conditions of Sections 147, 148 and 151 and determine the total income of the assessee. Such determination in the orders passed under Section 153A it would be similar to the orders passed in any reassessment, where the total income determined in the original assessment order and the income that escaped assessment are clubbed together and assessed as the total income. In such a case, to reiterate, there is no question of any abatement of the earlier proceedings for the simple reason that no proceedings for assessment or reassessment were pending since they had already culminated in assessment or reassessment orders when the search was initiated or the requisition was made.

Thus, it is clear that once a search/requisition is made u/s 132 of the IT Act, the Assessing Officer is bound to issue notice u/s 153A to the assessee to furnish the return for each Assessment Years falling within six Assessment Years immediately preceding the Assessment Year relevant to the to 442/Bang/2020 Page 8 of 20 No. previous year in which search conducted or requisition was made. Consequently, the Assessing Officer is empowered to assess or reassess the total income of all these six Assessment Years.

Where the assessment is not pending on the date of initiation of search or making requisition, as the case may be, the assessment u/s. 153A would be in the nature of reassessment. Thus, the legislature has carved out the nature of assessment u/s 153A as assessment or reassessment in two different situations. According to the ld. AR, for AYs 2009-10 to 2012-13, wherein already assessment orders were passed u/s. 143(3) or time limit to issue notice u/s 143(2) is lapsed, the assessment u/s. 153A of the Act can be framed only on the basis of seized incriminating material. In these assessment years, initiating proceedings u/s. 153A is valid, however, the AO cannot resort to roving and fishing enquiry to find out whether any income has escaped assessment during the reassessment proceedings when there is no incriminating material found or seized during the course of search action u/s. 132 of the Act. In other words, we are of the opinion that AO was correct in law to issue notices u/s 153A for the years under consideration, as he was bound to pass Assessment orders in respect of all these concerned Assessment Years. However, addition in these Reassessment Years u/s 132 of the Act.

The ld. DR strongly relied on the decision of the Hon’ble Karnataka High Court in the case of Canara Housing Development Company Vs DCIT 274 CTR 122 (Karn) wherein it was held as follows:- to 442/Bang/2020 Page 9 of 20 No. “At this point, it is appropriate to draw inference from the Hon’ble Karnataka High Court judgment in the case of Canara Housing Development Co. (supra). In that case, the Assessee, which was carrying on real estate business filed its return for AY 2008-2009. His case was taken up under Section 143(3) of the Act and an order came to be passed on 31st December, 2010. Subsequently a search took place in the premises of the Assessee under Section 132 of the Act on 12th April, 2011. The judgment notes "in the course of search, incriminating material leading to undisclosed income was seized." The notice was issued to the Assessee under Section 153A(1) of the Act to file return of income on 13th January, 2012. Even while the return was under consideration, the CIT initiated proceedings under Section 263 of the Act on the ground that the order passed on 31st December, 2010 under Section 143(3) of the Act was prejudicial to the interests of the Revenue. When the CIT negated the objections of the Assessee to the said order, the Assessee appealed to the ITAT. The ITAT negated the plea of the Assessee that by virtue of the proceedings initiated under Section 153A of the Act, the assessment for six years stood reopened and it is for the assessing authority to pass appropriate order on the basis of the return filed under Section 153A(1)(a) of the Act.”

In the High Court the question was whether the CIT could invoke the power under Section 263 of the Act once the proceedings under Section 153A was initiated. The High Court in Canara Housing Development Co. (supra) answered the question in the negative. It referred to the decision of this Court in CIT v. Anil Kumar Bhatia (211Taxman 453 Delhi) and came to the conclusion that once proceedings are initiated under Section 153A of the Act the legal effect was that even where an assessment order is passed, it would stand reopened. In the eye of law there was no order of assessment. It meant that the AO "shall assess or reassess the total income of six assessment to 442/Bang/2020 Page 10 of 20 No. years. Once the assessment is reopened, the assessing authority can take note of the income disclosed in the earlier return, any undisclosed income found during search or and also any other income which is not disclosed in the earlier return or which is not unearthed during the search, in order to find out what is the "total income" of each year and then pass the assessment order.

It is important to note that Canara Housing (supra) was also a case where some material was unearthed during the search. Further, the High Court was clear that the addition to the income already disclosed would have to be based on some material unearthed during the search. This is clear from the observation in para 9 of the decision to the effect: "The AO is empowered to reopen those proceedings and reassess the total income, taking note of the undisclosed income, if any, unearthed during the search." It was further observed that in the facts of that case if the CIT had come across any income that the AO had not taken note of while passing the earlier order, "the said material can be furnished to the assessing authority" who will take note of it while determining total income.

In CIT Vs. Kabul Chawala 380 ITR 573 ( Delhi H.C) it was held that in the absence of any incriminating material, the completed assessment can be reiterated and the abated assessment or reassessment can be made. The relevant extract is reproduced below:-

In the above decisions it was further considered judgement in the case of Filatex India Ltd. v. CIT-IV (49 taxmann.com 465 (Delhi) reference pb 1387 and observed that one of the questions framed was whether the ITAT erred on facts and in law in not holding that re-computation of book profit, de- hors any material found during the course of search, in the order passed under Section 153A of the Act was without jurisdiction, being outside the scope of proceedings under that Section? The facts of the case were that there was incriminating material found during the course of search conducted in the premises of the Assessee on 18th January, 2006 and subsequent dates. This included a statement of the General Manager (Marketing). On the basis of the said material and statement additions were made to the disclosed income under Section 115 JB although no material was found specific to such addition. The Court held that under Section 153A "the additions need not be restricted or limited to the incriminating material, which was found during the course of search." Consequently even if no incriminating material was found for the addition under Section 115JB of the Act, since there was some incriminating material found which would sustain additions made and since the 'total income' had to be computed, they were sustained by the High Court.

In the present case, the Panchanama drawn by the search party shows that there was incriminating material in addition to the incriminating material found during the course of search in the case of RNSI. Being so, the case of the assessee shall fall to 442/Bang/2020 Page 13 of 20 No. under the provisions of Section 153A of the Act as there was a valid warrant of authorisation u/s. 132 issued to the assessee. Being so, the assessments in these assessment years are validly framed and hence we dismiss this ground of appeal.

The learned A.R. submitted that the assessee raised various grounds before the CIT(A) and she disposed of the appeal of the assessee without application of mind and in a mechanical manner as she disposed of appeals 23 assessees in group companies in a very short span of time. It is submitted that the CIT(A) had passed the impugned order without considering the materials on record. The Appellant had filed detailed submissions on legal and factual aspects concerning the case before the CIT(A). However, the impugned order was passed by CIT(A) without even making any reference to the submission filed by the Appellant and without any redressal of the issues raised therein by way of a speaking order.

It is further submitted that the appellant had made several requests to the AO, Pr. CIT and the CIT(A) to provide copy of the digital evidence relied upon by the AO for making the additions which are the subject matter of appeal before this Tribunal. Copies of correspondence with the AO, Pr. CIT and CIT(A) are placed on record. The Appellant vide letter dated 16.11.2019 in the last among several letters, had requested for the relevant material relied upon AO making the addition to be to 442/Bang/2020 Page 14 of 20 No. supplied in order to effectively controvert the additions, however no response forth came. Subsequently, the CIT(A) passed the impugned order in gross violation of the principles of natural justice and on facts of the case.

We have considered the rival contentions. The CIT(A) in this case has given number of hearings to the assessee on 14.8.2015, 10.12.2015, 5.12.2018, 25.11.2018, 6.2.2020 and 14.2.2020. The CIT(A) passed the order in these cases on 24.2.2020. As seen from the above, the CIT(A) has given ample opportunity of hearing to the assessee and after considering the arguments of the assessee passed the order after proper application of mind. The order of the CIT(A) is not to be scrutinised word by word or sentence by sentence, but it has to be seen that the appellate authority has considered the cumulative facts in totality to come to the conclusion in the present case. The CIT(A) considered the entire facts of the case and taken conclusive decision. Being so, it cannot be said that there was any violation of principles of natural justice.

The next common ground in all the appeals for consideration is with regard to disallowance of expenditure @ 50% and disallowance on adhoc basis in these assessment years. The appellant has made payments to the nine firms towards the transport and labour charges. It is the case of the assessing officer that the appellant used these nine firms to siphon out the cash by inflating the expenses. Thus, on the basis of certain alleged circumstantial evidence gathered during the search, he disallowed 50% of expenditure incurred by the firms as reasonable estimate of inflation of expenditure out of to 442/Bang/2020 Page 15 of 20 No. the cash withdrawals. The details of the cash withdrawal and the corresponding additions are as under:

It is submitted that all the nine firms are regularly assessed to Income Tax. The books of accounts of the said firms are duly audited. The firms are registered under the relevant provisions of the Provident Fund, ESI and allied regulations. Pursuant to the search in the premises of the appellant, the Revenue initiated re-assessment proceedings in the case of the said nine firms by issue of Notice u/s 148 for the previous six years. In the re-assessment proceedings, 50% of the expenses incurred in cash were disallowed. It is important to note that in the original assessment proceedings, the expenses as claimed by the firms was allowed in full. It is a matter of record that the said firms filed appeal. The Commissioner of Income Tax (Appeals)-6, deleted the additions vide order dated 01.03.2018. The operative para reads as under:- to 442/Bang/2020 Page 16 of 20 No. 8. " .................. The appellant has filed detailed written submissions justifying the claim of expenses and why they ought to be allowed despite being supported only by way of self made vouchers. It may be noted that in many an instance it may not be possible for an assessee to obtain a proper bill when he engages people in unorganised sectors to carry out works. Self made vouchers cannot be the sole reason for disallowance „

Further, it is submitted that the ITAT, Bengaluru, in the case of M/s. Mookambika Enterprises (i.e. one of the nine firms) in its order dated 07.07.2017 observed as under:

In the present case, the disallowance of expenditure is under the misconception that the nine firms were used to inflate the expenses and eventually the cash withdrawn was routed back to the appellant. It is submitted that, such a disallowance in the case of the nine firms were not upheld. Further, the Hon'ble Tribunal has held that such an expenditure incurred by the firm is neither bogus nor excessive. In view of these circumstances, it is prayed that the addition be deleted.

Without prejudice to the above said submission it is further submitted that the AO made adhoc disallowance without to 442/Bang/2020 Page 17 of 20 No. any specific findings or rejecting the books of accounts. It is a settled position of law that without rejecting the books of accounts adhoc additions are not sustainable. The appellant relied on decision of Hon’ble Supreme Court in the case of Pr.CIT Vs. M/s. R.G. Buildwell Engineers Ltd (2018). The assessee has filed the following:

Copy of the assessment order and the Appellate order in the case of M/s. Shivashakthi Associates.

Copy of the assessment order and the Appellate order in the case of M/s. Ramashree Associates. 3. Copy of the assessment order and the Tribunal order in the case of M/s. Mookambika Enterprises. 4. Copy of the assessment order and the Appellate order in the case of M/s. Rajashree Associates 5. Copy of the assessment order and the Appellate order in the case of M/s. Gokul Enterprises 6. Copy of the assessment order and the Appellate order in the case of M/s. Shivakrupa Associates

On the other hand, the learned D.R. relied on the or the of the CIT(A).

We have considered the rival contentions and case laws cited by the parties. In the cases from 2007-08 to 2011-12 assessment was framed under Section 143(3) r.w.s. 153A of the Act. Disallowance of expenditure made on the basis of presumption that there was inflation of expenditure. Thus, the AO estimated 50% claim by the assessee as inflated. The same was confirmed by the CIT(A). In our opinion all the expenditure claimed by the assessee to be supported by bills and vouchers and records. It is observed by the AO that certain expenditure to 442/Bang/2020 Page 18 of 20 No. claimed by the assessee were made on self-made vouchers which shows inflated expenditure. The assessee is not able to place necessary evidence to support the incurring of these expenditure and only made oral submission to support the claim. The claim of assessee is devoid of merits. Accordingly, we confirm the addition and dismiss this ground of appeal.

The assessee raised one more ground in assessment years 2009-10 & 2010-11 that the CIT(A) ought to have decide all the grounds of appeal. In our opinion the CIT(A) has decided the grounds before him. We do not find any merit in this ground and dismiss the same as the CIT(A) rightly decided the issue before him.

With regard to disallowance of depreciation in mining ore for assessment years 2013-14 to 2015-16, the assessee claimed depreciation on these labour charges, which has been capitalised by the assessee in its books. The AO observed that since labour charges was disallowed there cannot be grant of any depreciation on it. Since we have held that the amount incurred on labour charges was disallowed at 100 per cent and as such there was no addition to the assets and the assessee is not entitled for depreciation. Further, in the present case the assessee has not produced any evidence to show that the labour charges has been for development of mining quarry and which is ready to use, as such the assessee is not entitled for depreciation. Accordingly, we reject this ground of appeal.

In the result, all the appeals filed by the assessees are dismissed, except is partly allowed.