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Facts
A search and seizure operation was conducted on the assessee's premises. Subsequently, a notice u/s 153A was issued. The AO disallowed the claim of interest on borrowed capital for AY 2015-16, alleging failure to furnish evidence of utilization for house property construction, without relying on incriminating material. For AY 2019-20, a similar disallowance was made.
Held
The Tribunal held that for AY 2015-16, the assessment was unabated as no proceedings were pending prior to the search, and thus additions could only be made based on incriminating material. Since no such material was found, the additions were unsustainable. For AY 2019-20, a similar reasoning applied.
Key Issues
Whether additions made under Section 153A are sustainable in the absence of incriminating material, especially when the assessment is unabated. Whether the assessment for AY 2015-16 was pending at the time of search.
Sections Cited
153A, 143(3), 132, 142(1), 143(2), 147, 139, 24(b)
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Income Tax Appellate Tribunal, ‘C’ BENCH, CHENNAI
Before: SHRI MANU KUMAR GIRI & SHRI S. R. RAGHUNATHA
PER S. R. RAGHUNATHA, ACCOUNTANT MEMBER:
1. These appeals by the assessee are filed against the separate orders of the Commissioner of Income Tax (Appeals), Chennai, for the assessment years 2019-20 and 2015-16 both dated 30.08.2024.
The assessee has raised the following common grounds of appeal:-
The order of the learned Commissioner Of Income Tax (Appeals)- 20, is wrong, illegal and is opposed to law.
:-2-: ITA. Nos.:2729 & 2730 /Chny/2024 2. The Ld. Commissioner of Income Tax (Appeals)-20 erred in upholding the order of assessment which is based only on suspicion and surmise and not based on any material evidence.
3. The learned CIT(A) ought to have seen that no incriminating material has been found/ discovered during the Search and Seizure operations and therefore the impugned disalloewance made by the assessing officer and sustained by the learned CIT(A) are bereft of jurisdiction and bad in law.
4. The learned CIT(A) ought to have seen that the impugned disallowance made by the Ld. A.O and sustained by the Ld.CIT(A) are bereft of jurisdiction and bad in law, since no incriminating material has been found/ discovered during the course of the Search and Seizure operations whicht is the basic requirement for making addition in proceedings initiated under section 153A.
The learned CIT (A) ought to have seen that although Section 153A does not say that additions should be strictly made on the basis of evidence found in the course of the search it does not mean that the assessment can be arbitrary made without any relevance or nexus with the seized material, obviously meaning that an assessment under section 153A has to be made only on the basis of seized material.
6. The Ld.CIT(A) has wrongly sustained the impugned disallowance of interest claimed on borrowed capital made u/s 24(b) in an unwarranted, whimsical and arbitrary manner, purely on the basis of surmises and conjectures.
7. The CIT(A) ought to have seen that the impugned disallowance made in assessment order is made only on the basis of suspicion and surmise. Suspicion however strong cannot take the place of evidence.
8. The learned CIT(A) has wrongly sustained the impugned disallowance of interest claimed on borrowed capital made u/ s 24(b) solely on suspicion, surmises and conjures without considering the fact that the entire transaction is supported by proper documentary material / evidence (s).
:-3-: ITA. Nos.:2729 & 2730 /Chny/2024 For these and other grounds that may be rendered at the time of hearing it is most humbly prayed that the Hon'ble Tribunal may be pleased to allow the appellants appeal and thus render justice.
The brief facts of the case are that the assessee is an individual engaged in the business of wholesale and retail trade of cosmetics and perfumes under the name and style of M/s.Cash and Carry. A search and seizure operation u/s.132 of the Income Tax Act, 1961 was conducted on the assessee’s residential-cum- business premises on 16.03.2021. Pursuant to the said search, a notice u/s.153A of the Act was issued to the assessee on 11.12.2021, requiring the assessee to file a return of income for six assessment years preceding the year of search, including Assessment Year 2015–16.
4. In compliance with the said notice, the assessee duly filed the return of income for A.Y. 2015-16 on 03.03.2022, declaring a total income of Rs.3,20,570/-. The return was duly e-verified on the portal. Despite the valid filing and verification of the return, the AO ignored the same and proceeded ex parte, as is evident from para 4 of the impugned assessment order.
5. The AO, pursuant to the search proceedings, passed the assessment order u/s.153A r.w.s. 143(3) of the Act, on 31.03.2022, determining the total income of the assessee at Rs.5,72,960/-. In the course of such assessment, the AO disallowed the claim of interest on borrowed capital on the ground that the assessee had failed to furnish evidence to substantiate that the borrowed funds were utilised for the construction of house property. The assessee respectfully submits that the said disallowance has been made in the absence of any incriminating material found during the course of the search, and hence is not sustainable in law.
:-4-: ITA. Nos.:2729 & 2730 /Chny/2024
Aggrieved by the order passed by the AO, the assessee preferred an appeal before the Commissioner of Income Tax (Appeals)-18. Before the First Appellate Authority, the assessee specifically challenged the jurisdiction of the AO to make an addition u/s.153A of the Act, in the absence of any incriminating material found during the course of the search. In support of this contention, reliance was placed on the judgment of the Hon’ble Supreme Court in the case of PCIT v. Abhisar Buildwell Pvt. Ltd.
The ld.CIT(A) vide order dated 30.08.2024 (Pages 9 –10, paragraphs 7.3 and 7.4 of the appellate order), upheld the jurisdiction of the AO, inter alia, on the following grounds: a) That the assessee had not filed any return of income prior to the date of search, despite having taxable income of Rs.3,20,570/-, as evident from the return filed pursuant to the notice issued u/s.153A of the Act;
b) That for the Assessment Year 2015–16, the time limit to issue notice u/s.148 was available up to 31.03.2022. Since the search was conducted on 16.03.2021 and the time limit for issuing notice u/s.148 of the Act had not expired as on the date of search, the assessment year in question was treated as an abated assessment.
Being aggrieved by the order of the First Appellate Authority, the assessee has preferred an appeal before us.
The ld.AR of the assessee submitted that in compliance with the notice issued u/s.153A of the Act, a return of income for the Assessment Year (AY) 2015–16 was duly filed on 03.03.2022, declaring total income. This return was filed within the time prescribed and prior to the completion of assessment. Further, the issuance of notice
:-5-: ITA. Nos.:2729 & 2730 /Chny/2024 u/s.143(2) dated 26.03.2022 by the AO unequivocally evidence the acceptance of this return as the basis of assessment under the provisions of Section 153A. The ld.AR submitted that the AO was thus bound to complete the assessment in accordance with the mandate of Section 153A r.w.s. 143(3) of the Act.
The ld.AR submitted that in the present case, it is an admitted position that the additions made by the AO particularly the disallowance of interest on borrowed capital are not supported by any incriminating material discovered during the search conducted u/s.132 of the Act on 16.03.2021. In the absence of any such material, the action of the AO in proceeding with the disallowance is without jurisdiction and vitiates the assessment order. In support of the aforesaid submission that assessee relies on the law laid down by multiple High Courts and confirmed by the Hon'ble Supreme Court in PCIT v. Abhisar Buildwell Pvt. Ltd. [(2023) 289 Taxman 295 (SC)], that in the case of an "unabated" assessment, the jurisdiction of the AO u/s.153A is restricted, and no addition can be made unless it is based on incriminating material unearthed during the course of search.
In the above pretext a critical issue for consideration is whether the assessment for AY 2015–16 was “pending” as on the date of the search. The Hon'ble Delhi High Court in CIT v. Kabul Chawla [(2016) 380 ITR 573 (Del)], followed in Abhisar Buildwell (supra), held that an assessment is treated as pending only if: a. A return had been filed and the time for issuance of notice u/s.143(2) had not expired; b. A notice u/s.142(1) of the Act had already been issued; or c. Reassessment proceedings u/s.147 had been initiated and were ongoing.
In the present case, none of the above conditions were satisfied: a. No return of income u/s.139 of the Act was filed by the assessee prior to the date of search.
:-6-: ITA. Nos.:2729 & 2730 /Chny/2024 b. No notice u/s.142(1) or 143(2) was issued prior to the search. c. No proceedings u/s.147 were pending or initiated prior to 16.03.2021. Therefore, the ld.AR submitted that assessment for AY 2015–16 was not pending and must be regarded as “unabated” within the meaning of law. Consequently, in the absence of incriminating material, no addition was legally sustainable.
Section 153A(1) mandates the AO to issue a notice requiring the assessee to furnish returns for six preceding assessment years. Sub- section (2) provides that if any assessment or reassessment proceeding is pending on the date of the search, such proceeding shall abate. The corollary is that where no such proceeding is pending, the earlier assessment survives, and the AO is restricted to reassessing only based on search-related material.
Thus, the statutory framework draws a clear distinction between: a. Abated assessments, where the AO has full power to reassess the entire income; and b. Unabated assessments, where the AO can only assess income based on incriminating material found during search.
In the instant case, the impugned additions do not stem from any such material, and hence the reassessment is infirm in law. In the light of the above submission the ld.AR submitted that the assessment order passed u/s.153A r.w.s. 143(3) for AY 2015–16 may kindly be quashed in its entirety, or in the alternative, the disallowance made without any basis in incriminating material may be deleted and justice rendered.
Per contra, the ld.DR strongly supported the orders of the AO as well as the ld.CIT (A) and submitted that there is no infirmity in the order and hence prayed for confirming the same.
:-7-: ITA. Nos.:2729 & 2730 /Chny/2024
We have heard the rival contentions perused the material available on record and gone through the orders of the authorities along with submissions and case laws relied upon by both the parties. Admittedly the assessee had not filed the return of income for the impugned assessment year 2015-16. The search conducted u/s.132 of the Act at the premises of the assessee on 16.03.2021. We note that the in compliance with the notice u/s.153A of the Act, the assessee duly filed the return of income for A.Y.2015-16 on 03.03.2022, declaring a total income of Rs.3,20,570/-. The return was duly e-verified on the portal. Despite the valid filing and verification of the return, the AO ignored the same and proceeded ex parte, as is evident from para 4 of the impugned assessment order. Further, the AO considering the details and explanations filed by the assessee, disallowed the interest payable on borrowed capital claimed under the head income from house property to the tune of Rs.2,52,390/- for want of evidence in support of the claim that the borrowed funds were utilised for the construction of the property. The said disallowance has been made without any incriminating material found during the search operations and the order was passed on 31.03.2022 of the Act u/s.153A of the Act.
We find that on appeal the ld.CIT(A) has confirmed the order of the AO in respect of grounds filed on merits in the order dated 30.08.2024. Apart from that the ld.CIT(A) dismissed the legal grounds of the assessee in respect of jurisdiction of the AO to make an addition u/s.153A of the Act, in the absence of any incriminating material found during the course of the search by relying on the judgment of the Hon’ble Supreme Court in the case of PCIT v. Abhisar Buildwell Pvt. Ltd. We find that the ld.CIT(A) vide order dated 30.08.2024 (Pages 9 –10, paragraphs 7.3 and 7.4
:-8-: ITA. Nos.:2729 & 2730 /Chny/2024 of the appellate order), upheld the jurisdiction of the AO, inter alia, on the following grounds: a) That the assessee had not filed any return of income prior to the date of search, despite having taxable income of Rs.3,20,570/-, as evident from the return filed pursuant to the notice issued u/s.153A of the Act; b) That for the Assessment Year 2015-16, the time limit to issue notice u/s.148 was available up to 31.03.2022. Since the search was conducted on 16.03.2021 and the time limit for issuing notice u/s.148 of the Act had not expired as on the date of search, the assessment year in question was treated as an abated assessment.
17. In the present case, the additions made by the AO particularly the disallowance of interest on borrowed capital are not supported by any incriminating material discovered during the search conducted u/s.132 of the Act on 16.03.2021. We find that the AO has not whispered a word about the incriminating material found during the search corresponding to the additions made in the assessment order. In the absence of any such material, the action of the AO in proceeding with the disallowance is without jurisdiction and vitiates the assessment order. In support of the aforesaid submission we take the guidance of the law laid down by multiple High Courts and confirmed by the Hon'ble Supreme Court in PCIT v. Abhisar Buildwell Pvt. Ltd. [(2023) 289 Taxman 295 (SC)], that in the case of an "unabated" assessment, the jurisdiction of the AO u/s.153A is restricted, and no addition can be made unless it is based on incriminating material unearthed during the course of search.
18. On perusal of the records we note that the assessment for AY 2015–16 was not “pending” as on the date of the search. The Hon'ble Delhi High Court in CIT v. Kabul Chawla [(2016) 380 ITR 573 (Del)], followed in Abhisar Buildwell (supra), held that an assessment is treated as pending only if:
:-9-: ITA. Nos.:2729 & 2730 /Chny/2024 a. A return had been filed and the time for issuance of notice u/s.143(2) had not expired; b. A notice u/s.142(1) of the Act had already been issued; or c. Reassessment proceedings u/s.147 had been initiated and were ongoing.
Considering the above ratio in the present case, none of the above conditions were satisfied: a. No return of income u/s.139 of the Act was filed by the assessee prior to the date of search. b. No notice u/s.142(1) or 143(2) was issued prior to the search. c. No proceedings u/s.147 were pending or initiated prior to 16.03.2021.
Therefore, the assessment for AY 2015–16 was not pending and must be regarded as “unabated” within the meaning of law. Consequently, in the absence of incriminating material, no addition was legally sustainable.
As per section 153A(1), the AO to issue a notice requiring the assessee to furnish returns for six preceding assessment years. Sub-section (2) provides that if any assessment or reassessment proceeding is pending on the date of the search, such proceeding shall abate. In case, no such proceeding is pending, the earlier assessment holds the field, and the AO is restricted to reassessing only based on search-related material which are incriminating to the income of such assessee.
Hence, we find that the impugned additions made by the AO for the A.Y. 2015-16, is based on the information available in the return of income but not on any incriminating material found during the search. Therefore, in the present facts and circumstances of the case and relying on the decision of the Hon'ble Supreme Court in PCIT v. Abhisar Buildwell Pvt. Ltd. (supra), we are of the considered opinion that :-10-: ITA. Nos.:2729 & 2730 /Chny/2024 the assessment concluded by the AO for the assessment year 2015-16 was unabated and hence any additions made without the incriminating material found in search operation is not sustainable in law. Hence, we set aside the order of the ld.CIT(A) by quashing the order of the AO as void ab initio.
ITA No.2729/Chny/2024 for the A.Y. 2019-20
For the Assessment Year (AY) 2019-20 the assessee filed his return of income on 16.07.2019 u/s.139 of the Income Tax Act, 1961 (the Act) admitting total income of Rs.4,57,820/-. Pursuant to the search operation, a notice u/s.153A of the Act was issued to the assessee on 11.12.2021, requiring the assessee to file a return of income for six assessment years preceding the year of search, including Assessment Year 2019–20.
In compliance with the said notice, the assessee filed his return of income u/s.153A on 03.03.2022, declaring total income at Rs.12,07,820/-. Thereafter, the AO issued notice u/s.142(1) dated 17.02.2022, followed by notice u/s.143(2) dated 26.03.2022. The AO thereafter passed assessment order u/s.153A r.w.s.143(3) on 31.03.2022, determining the total income of the assessee at Rs.15,72,420/- and in doing so the AO disallowed the claim of interest on borrowed capital on the ground that the assessee had failed to furnish evidence to substantiate that the borrowed funds were utilised for the construction of house property.
We observed that the ld.CIT(A) while disposing the legal ground raised by the assessee, referred the circular issued by the CBDT vide No.F.No.225/126/2020/ITA- II dated 30.09.2020 stating that for the AY 2019-20, the extended time limit was up to 30.09.2021 for issuing of notice u/s.143(2) to take up for scrutiny assessment.
:-11-: ITA. Nos.:2729 & 2730 /Chny/2024 However, on perusal of the said CBDT circular, we note that the extension of time limit for issuing notice u/s.143(2) of the Act, was only upto 31.10.2020 and not 31.10.2021 as stated by the ld.CIT(A) to dismiss the legal ground of the assessee in respect of treating the A.Y.2019-20 as unabated.
Therefore, we are of the considered view that in the present facts and circumstances of the case the A.Y. 2019-20 was unabated assessment and hence our adjudication given for the A.Y. 2015-16 (supra) is applicable mutatis mutandis to the A.Y.2019-20. Thus, we allow the appeal of the assessee on the legal ground for the A.Y. 2019-20.
In the result the appeals of the assessee for both the A.Y. 2015-16 and 2019- 20 are allowed. Order pronounced in the open court on 03rd June, 2025 at Chennai.