CHINNASWAMY SUNDER RAJU,BANGALORE vs. ASSISTANT COMMISSIONER OF INCOME-TAX, CENTRAL CIRCLE-2(4), BENGALURU

Subsequently the assessee was issued a notice, dated 25/06/2021, u/s 153A for the A.Y. 2017-18 and thirty days time was granted. The assessee filed a return of income u/s 153A on16.02.2022 admitting the income of Rs. 31,47,412/-after providing multiple opportunities, subsequently notice u/s 143(2) dated 07.03.2022 was issued and other statutory notices were issued to the asseseee. In response to the notices the assessee had premeditatedly made all the submissions only at the end of the assessment proceedings that have limitation to complete.

During the course of search proceedings, it was found that during the year under consideration net taxable capital gain of RS. 126,53,72,971 in hands of Shri S. Sunder Raju was set off against business loss on account of depreciation claimed with respect to Plant and Machinery of a Solar Plant set up at Ryapte, Tumkur district Karnataka. It was asked to justify the eligibility of claim of Page 11 of 23 depreciation loss claimed during the year and various opportunities were granted but the assessee replied at the fag end of the assessment proceedings on 24.03.2022 and 29.03.2022. Further it was noticed that the assessee is the managing director of the ACT and director of more than 100 companies. He is also a trustee of A S Kuppa Raju and Brothers Charitable Foundation runs Atria Institute of Technology. The AO made analysis of income declared in the past years and found that prior and post transfer of shares of ACT the assessee was not engaged in the generation of power. Generation of power has been declared as business of the proprietary concern only for FYs relevant to AY 2017-18 and part of 2018-19. The data was taken from ITBA 360-degree profiling from investigation module of ITBA. During the search proceedings u/s 132 of the Act in the case of Brindavan Power Private Limited at the residence of Shri Bala Venkata Subramanyam Chinni Chief Financial Officer (CFO) at Plot No. 350, Shiva Sadan, 14th Cross 9th Main, 2nd stage Indiranagar, Bangalore on 1712.2020 documents were found and seized in the folder marked as Annexure- A/ABPPL/BVSC/01. The same document has been scanned in the assessment order. The AO called information from Karnataka Power Transmission Corporation Limited and found that in all the correspondence addressed to C S Sunder Raju, as partner of M/s Prepetual Investments and not in the individual capacity in the name of asseseee. It was also noted that the licence was not granted in the name of the assessee and assessee had claimed depreciation. AS per discussion at para No. 9and 10 in the assessment order it was concluded that the assessee neither owned the business and nor has used the Plant and Machinery for the purpose of business, thus the assessee was clearly not eligible for depreciation as per section 32 of the Act., accordingly he disallowed the setoff of Loss claimed of Rs. 118,24,27,640/-. Further the AO disallowed the Long Term capital Gain of Rs. 13,90,558/- and deemed dividend of Page 12 of 23 Rs. 2,41,72072/- and the assessment was duly completed u/s 153A by order dated 31/03/2022, where the taxable income was determined at Rs. 121, 16, 35,238/-, 7. Aggrieved from the above order the assessee filed appeal before the ld. CIT (A) The ld. CIT(A) partly allowed for statistical purpose. Aggrieved from the order of the ld. Cit (A) the assessee filed appeal before the ITAT.

The ld. AR of the assessee reiterated the submissions made before the lower authorities and submitted that the AO by making various additions in scrutiny proceedings u/s 143(3), .the issues on which the additions are made by the AO were on record, available during the assessment proceedings completed by order dated 21/11/2019The assessee, aggrieved by the same, filed an appeal before the Commissioner of Income Tax Appeals, which came to be dismissed. The assessee, who is in appeal before us, in addition to the grounds of appeal

The Learned DR relied strongly upon the orders of the AO and the CIT A and reiterated that the arguments advanced by the assessee are incorrect and that the additions made by the AO in the assessment order are correct, as per seized material referred above and that these additions need to be sustained.

We have perused the assessment order and find that all three additions made by the AO are not based on any incriminating material which was found and seized in the search proceedings conducted on the assessee and that all additions made are based on either material found and seized in the case of Atria Brindavan Power Pvt Ltd and / or information obtained under 133(6) from certain third parties and / or information gathered during survey proceedings conducted u/s 133A of the Act in the case of certain third parties.The issues on which additions are made are all recorded and disclosed in the books of accounts maintained by the assesse. It is also an undisputed fact that the transactions / business activity/ claim of depreciation etc., in respect of which the AO has made these additions are all recorded in the books of accounts,and which were available before the AO during the complete scrutiny proceeding which was concluded by Page 14 of 23 an assessment order u/s 143(3) dated 21/11/2019. In fact, the AO has made several additions to the returned income in the scrutiny proceedings and these additions are also pertaining to the very same transaction/ business activity/claim of depreciation for which additions are made in the assessment order passed u/s 153A of the Act. Since this is an unabated assessment, 14. Further in the report of the AO, obtained and filed by the Learned DR we find that the only material that was found and seized in the search conducted in the case of the assessee is marked as A/SCR/XR2/01. We also find from the assessment order that no addition is made based on this seized material. In fact, there is no mention at all of this seized material in the assessment order. One another important fact, as urged by the learned AR in his arguments, that needs to be considered here is that the material seized during the search proceedings conducted in the case of M/s Atria Brindavan Power Pvt Ltd, is a legal opinion given by M/s King and Partridge on a question, whether a proposed succession of a sole proprietorship, by a company, after due compliance of the conditions laid down in the Income Tax Act, would enable the same to be exempt from Capital Gains Tax. The query raised is not about the set off,of the Income from Capital Gains against Depreciation Loss, as wrongly stated by the AO in the assessment order. The AO is clearly wrong in concluding that the material indicates income escaping assessment in the hands of the assessee and that it denotes intention to evade taxes. The conclusion drawn by the AO is completely erroneous and the said material seized in the search of M/s Atria Brindavan Power Pvt Ltd, does not give any indication of an attempt by the assessee to evade taxes. This seized material is not incriminating in nature and also cannot be said to be representing or even indicative of any income escaping assessment. The entire series of transaction which are listed in the said opinion are actually carried out by the assessee and recorded in the books of accounts and income therefrom is declared in his returns. There is no transaction which is not recorded. The query Page 15 of 23 raised by the assessee, seeking the opinion, is whether the activities proposed by the assessee are in order and whether the understanding of the assessee of the provisions of Income Tax relevant to these transactions is correct. The opinion does not in in any way indicate or reveal that the assessee is seeking advice with a view to evade taxes. In fact, the said opinion cannot be called as an incriminating material.

In the Report of the AO, filed by the Learned DR, it is submitted that the issue of notice u/s 153A for the impugned assessment Year is legally correct. The AO has relied upon an order of the Supreme Court in SLP No.14277 of 2023, where the Hon’ble Supreme Court, admitting of the SLP ordered issue of notice and that the SLP be tagged with another SLP No. 14464/2022, filed by the assessee therein namely one M/s SRS Mining, in which the Apex Court has admitted the SLP of the assessee and granted interim stay of the order of the Madras High Court in SRS Mining vs Union of India reported in 141 taxmann. Com 272 (Madras), order dated 10th August 2022, to the extent it was against the assessee therein.

By virtue of the same it can be inferred that the stay granted by the Apex Court helps the assessee more than the Revenue as the stay is on those issues which were held in favour of the Revenue by the High Court. The learned AR has also filed a copy of the question of law raised by the Revenue in the said SLP, which is on whether disallowance of claim in terms of section 40A can be made based on seized materials which do not form part of books of accounts of the assessee. This question of law raised by the revenue has no relevance to this Additional Ground No.3 in the case of this assessee. We also find that this question of law has been raised in the other SLP’s filed by the Revenue pertaining to the assessee therein and has no bearing on the question of law which is now before us.

The assessee has also relied upon a decision of a coordinate ‘B, bench of this ITAT in the case of a group concern, M/s Atria Wind (Kadambur) Pvt Ltd vs DCIT in order dated 15/10/2024, where the bench held that a concluded assessment cannot be disturbed in the absence of incriminating material being found in the search of the assessee. In fact, the coordinate bench after due examination, has held that the very same seized material, ie. the legal opinion obtained from M/s King and Partridge, Advocates, and which forms the basis for disturbing the originally concluded assessment, cannot be termed to be a material which is incriminating in nature.

In the present case, it is clear from the assessment order that all additions made are based on either material found and seized in the search conducted in the case of Atria Brindavan Power Pvt Ltd and / or information obtained under 133(6) from third parties and / or information gathered during survey proceedings conducted u/s 133A of the Act in the case of certain third parties and hence the Page 17 of 23 assumption of jurisdiction and issue of notice u/s 153A, for the A.Y. 2017-18, is clearly bad in law and consequently the assessment order passed u/s 153A, dated 31/03/2022, is also held to be bad in law and is therefore set aside.

Additional Ground No.2 The assessee has urged that if at all any assessment was warranted, based on the document which was seized in the search of Atria Brindavan Power Pvt Ltd, the AO ought to have initiated proceedings u/s 153C of the Act and not u/s 153A. We have already held, while adjudicating Addnl Ground No.3, that initiation of proceedings u/s 153A was without jurisdiction and the notice as well as the assessment order is bad in law. The Hon’ble Apex Court in the case of ITO vs Vikram Sujitkumar Bhatia 149 taxmann.com 149 (SC), has categorically held that when material which is found in the search of a person is incriminating in nature and indicates escapement of income in the hands of another person, then the AO of that another person can bring the same to tax in the hands of that another person only u/s 153C and not otherwise. In view of this decision, it is to be necessarily concluded that the AO of this assessee, had to initiate proceedings u/s 153C, if he wanted to use the seized material found in the search of M/s Atria Brindavan Power Pvt Ltd and not u/s 153A.

The reliance placed by the Learned DR on the order of the Apex Court admitting its SLP in the case of SRS mining, has already been discussed while dealing with Additional Ground No.3 and the same does not help the Revenue in the appeal before us.

The Learned AR during the course of hearing drew our attention to the copy of the notice issued u/s 153A, dated 25/06/2021, which did not contain the basis for issue of notice u/s 153A, other than stating that the same was being issued, pursuant to the provisions of Section 153A.

The Learned AR also relied upon the decision of the Bombay High Court in the case of M/s Underwater Services Co. Ltd vs ACIT (448 ITR 691) wherein a Division Bench of the Hon’ble Bombay High Court has held that it was necessary that the notice issued u/s 153A contain the basis of issue of notice, such as the seized materials u/s 132 of the Act , based upon which the said notice is issued, or the books of accounts or other documents requisitioned u/s 132A, based on which the notice is issued. The Hon’ble High Court held that a notice issued u/s 153A which does not give the details of the basis on which the notice is issued is bad in law. The Bombay High Court proceeded to quash the notice issued and restored the matter to the file of the AO, giving him liberty to issue a fresh notice, in accordance with law.

The learned DR raised an objection that the assessee could not challenge the notice u/s 153A as he did not object to the same when the file of the assessee was centralized and he was provided an opportunity to file objections to the centralization, if any. The learned DR opined that the assessee ought to have placed his objections when he was given an opportunity to do so before the file Page 19 of 23 was centralized and having not done so, he is prevented from raising this objection before the ITAT.

The Learned AR countered this argument by stating that no notice had been issued u/s 153A of the Act before the file was centralized. The objection or no objection to centralization, does not in any way affect this ground. Non objection to centralization does not empower the AO to issue a notice which is bad in law. Further a pure legal ground, which goes to the root of the matter, as in the present case, could be advanced at the appellate stage, for the first time and the fact that the same was not advanced during the assessment or prior to the assessment is no bar to take such legal grounds for the first time before the appellate authorities.

We are in agreement with the learned AR on this issue in view of the decision of the Apex Court in the case of CIT Vs. Singhad Education Society 84 taxmann.com 290, where the Apex Court held that pure legal grounds which go the root of the matter can be taken up at the appellate stage and need to be adjudicated by the appellate authorities.

On request, the Learned DR was also given time to seek a report from the AO on the additional and other legal grounds, raised by the assessee, including whether the notice issued contained any annexures which explained the basis for issue of notice.

The Learned DR has obtained and filed a report from the AO and we find nothing in the said report which contradicts the averments of the assessee on this issue as there is no evidence of the AO having given the basis for issue of the said notice.

We have examined the impugned notice issued u/s 153A of the Act for the A.Y. 2017-18 and find that the same is similar to the one issued in the case before the Bombay High Court. The Notice does not contain the basis for the issue of Page 20 of 23 the notice. It does not mention the material seized u/s 132 nor any books of accounts or other documents requisitioned u/s 132A of the Act, which formed the basis for the issue of the said notice. The Decision of the Bombay High Court is all the more relevant for the impugned assessment year 2017-18 as the same was subjected to complete scrutiny, prior to the search, and assessment completed u/s 143(3), making it an assessment year which does not abate u/s 153A. The presence of incriminating material seized during the search of the assessee, pertaining to the impugned unabated assessment year, is a sine qua non to disturb the completed assessment in view of the decision of the Hon’ble Supreme Court in the case of Abhisar Buildwell Pvt Ltd 149 taxmann.com 349, which has categorically held that a completed assessment cannot be disturbed in the absence of incriminating material, pertaining to such unabated assessment year, being found in the search of the assessee.

In view of the fact that the impugned notice issued u/s 153A of the Act, for the A.Y. 2017-18, does not spell out the basis on which the said notice is issued, we are of the opinion that the ratio of the decision of the Bombay High Court in the case of M/s. Underwater Services Co. Ltd Vs. ACIT (448 ITR 691), applies to the facts of the case. However, in view of the fact that we have already held Additional Grounds No.2 and 3 in favour of the assessee, this ground becomes academic in nature.

We also deem it important advert to those facts which are on record and which have not been proved be false by any material which was found and seized in the search conducted on the assessee, to support the case of the AO that the assessee did not own the Solar Power Plant and was not entitled to depreciation thereon and also that the Solar Power Plant had not produced power on or before 30.09.2016, to be entitled to depreciation for a full year.

In view of the above conclusions drawn, all the three additional grounds are held in favour of the assessee and against the Income Tax Department. Further in view of the above conclusions drawn by us, all other grounds of appeal