C5 INFRA PRIVATE LIMITED,SECUNDERABAD vs. ACIT, CENTRAL CIRCLE-2(3), HYDERABAD

The assessee challenged the action of the Assessing Officer before the learned CIT (A) and also filed the additional evidence to explain the details of the entries in the excel sheets as the said cash expenditure was duly recorded in the books of account. The learned CIT (A) called for a remand report and then passed the impugned order whereby the additions made by the Assessing Officer is confirmed to the extent of Rs.10,36,03,435/- and thereby granted part relief.

Before the Tribunal, the learned Counsel for the assessee submitted that the original assessment was completed u/s 143(3) of the Act on 18/12/2019 and therefore, the assessment for the year under consideration was not pending on the date of search u/s 132 i.e. 7/1/2021. The learned Counsel for the assessee has referred to the details as recorded in the excel sheets found during the course of search from the email ID of Shri B. Veeranjaneyulu, Sr. Accountant and submitted that all these entries as part of the excel sheets are duly recorded in the books of account of the assessee and were subject to examination by the Assessing Officer while passing the assessment u/s 143(3) of the Act. He has pointed out that during the assessment proceedings u/s 143(3), the Assessing Officer has also made disallowance u/s Page 4 of 38 40A(3) of the Act of Rs.31,10,332/- on account of cash expenses. The excel sheets were prepared by the Accountant for the internal purpose and therefore, the same cannot be treated as incriminating material when all the relevant details and material were before the Assessing Officer at the time of assessment u/s 143(3) of the Act. Out of these total expenses, the Assessing Officer has already made a disallowance of Rs.31,10,332/- u/s 40A(3) of the Act and therefore, the genuineness of the expenditure was not doubted by the Assessing Officer during the scrutiny assessment u/s 143(3). Once the entire expenditure was already recorded in the books of account of the assessee and was subject to scrutiny during the assessment u/s 143(3), then the alleged excel sheets cannot be treated as incriminating material. The learned Counsel for the assessee has filed the details of the cash expenditure incurred by the assessee under various heads and part of the expenditure recorded in the books of account duly shown in the ledger account as well as in the profit and loss account and subjected to verification and scrutiny of the Assessing Officer at the time of assessment u/s 143(3) of the Act. Therefore, the said excel sheets do not disclose any undisclosed income of the assessee, relevant to the A.Y under consideration. In support of his contention, he has relied upon the judgment of the Hon'ble Supreme Court in the case of Pr. CIT vs. Abhisar Buildwell (P) Ltd reported in 454 ITR 212 as well as the judgment of the Hon'ble Delhi High Court in the case of Rakesh Babbar vs. ACIT reported in 476 ITR 439. Thus, the learned AR has Page 5 of 38 submitted that when the alleged cash expenditure found in the excel sheet was duly recorded in the books of account of the assessee, then no addition can be made for the A.Y under consideration which was not pending as on the date of search and therefore, the additions made by the Assessing Officer and confirmed by the learned CIT (A) are liable to be deleted.

On the other hand, the learned DR has submitted that the assessee has not disputed the correctness of the excel sheets and therefore, the claim of the assessee that all the entries in the excel sheets are also duly recorded in the books of account cannot be accepted until and unless it is reconciled. The assessee has failed to establish that the entries in the excel sheets showing the cash expenditure are duly recorded in the books of account and therefore, it is an incriminating material for the purpose of assessment u/s 153A of the Act. The learned CIT (A) has called for the remand report from the Assessing Officer and then given the findings of the fact. Thus, the learned CIT (A) has sustained the addition to the extent of the cash expenditure not found recorded in the books of account. The learned DR has submitted that the Assessing Officer has made 4 additions of unexplained expenditure u/s 69 total amounting to Rs.16,61,77,796/-. Though the assessee has filed the ledger account of the respective parties, petty cash book, main cash book, bank statement and reconciliation statement during the remand proceedings, however, the learned CIT (A) has given the finding to the extent of additions Page 6 of 38 sustained that the assessee failed to explain the source of the remaining expenditure as recorded in the excel sheets and therefore, the relief was granted by the learned CIT (A) to the extent the entries in the excel sheet was found to be duplicate entries and further the expenditure which are already recorded in the books of account of the assessee. He has relied upon the impugned order of the learned CIT (A). The learned DR has also relied upon the judgment of the Hon'ble Gujarat High Court in the case of CIT vs. Hynoup Food & Oil Industries (P) Ltd reported in 290 ITR 702 (Guj.) and submitted that once the assessee has paid the amounts in cash in contravention of section 40A(3) of the Act, then the Assessing Officer is justified in making the disallowance u/s 40A(3) of the Act.

We have considered the rival contentions as well as the relevant material available on record. There is no dispute that initially the scrutiny assessment u/s 143(3) was completed in the case of the assessee on 18/12/2019 whereby the Assessing Officer made 2 disallowances i.e. (i) disallowance u/s 40A(3) of Rs.31,10,332/- and (ii) disallowance u/s 40(a)(ia) of Rs.3,99,982/-. Thus, the disallowance u/s 40A(3) was made by the Assessing Officer after considering the cash expenditure claimed by the assessee. During the search & seizure action, some excel sheets were found and seized from the email ID of Shri B. Veeranjaneyulu, Sr. Accountant which was marked as Annexure-A/CIPL/01. The total sum of the entries in the excel Page 7 of 38 sheets seized during the search & seizure action comes to Rs.15,51,77,796/-. Apart from the excel sheets, a loose sheet containing payments made to Krishna Filling Station to the tune of Rs.1.70 crore was also found and seized from the premises of M/s. Polomy Infra (P) Ltd. In the assessment proceedings of the said company M/s. Polomy Infra (P) Ltd, it was explained by the said company that out of Rs.1.70 crores, only Rs.60 lakhs, which is an RTGS transaction pertaining to it and the cash payment amounting to Rs.1.10 crore pertains to the assessee. During the scrutiny assessment, the assessee has confirmed the said payment of Rs.1.10 crores towards fuel charges. However, the Assessing Officer has made the addition of the total amount of the entries contained in the excel sheets as well as Rs.1.10 crores towards the cash payment to M/s Krishna Filling Station while framing the assessment u/s 153A of the Act. The Assessing Officer has made the additions based on the excel sheets as well as on account of payment to M/s Krishna Filling Station in para 5 to 6.2 as under:

On appeal, the learned CIT (A) has deleted certain additions which were found to be duplicate entries in the excel sheets, the details of which are reproduced by the learned CIT (A) at page Nos. 55 to 59 of the order as under:

The learned CIT (A) after considering the facts that the expenditure as found in the excel sheets is actually recorded in Page 19 of 38 the books of account has given a finding that, no addition can be made u/s 69C of the Act. However, since the payment was made in cash in contravention of section 40A(3), therefore, the Assessing Officer was directed to consider the disallowance u/s 40A(3) of the Act as held under page 61 as under: “To Summnarize, ize, the addition made of Rs.7,50,10,000/- by the Assessing Officer on account of unexplained expenditure is directed to be deleted and thus the balance amount of Rs.7,50,00,000/- (excluding one deposit of Rs. 10,000/ - in Canara bank) is hereby has to be disallowed u/s 40A(3) of the Act. It is however seen that the excel sheet also accounts for salary payments of a sum of Rs.25,00,000/-, Rs.3,00,000/-, Rs. 15,00,000/ on 12.08.2016, and BJ Rao salary payment of Rs.1,00,000/-and further site payments of Rs. 10,00,000/- on 19.11.2016. These could be salary payments to various people, in all fairness the appcllant is directed to give the brcakup of the said payents to the AO and the AO may consider he same as per provisions of section 40A(3) accordingly. Further, therc is "obc deposit" of Rs.2,50,000/- on 12.07.2016 and Rs.50,000/- on 27.07.2016 which scerms to be an bank deposit, the AO may also consider the same on account of proper filing by the appellant. The AO may also consider any other payments outside the purview of section 40A(3), subjcct to the proper evidences submitted by the appellant. Subject to the above dircctions, out of the said sum out of Rs.7,50,00,000/- has to be disallowed u/s 40A(3) of the Act and the addition of Rs.7,50,10,000/- on the identical sum as unexplained expenditure is deleted.”

Thereafter, the learned CIT (A) also considered another excel sheet entries as well as the remand report of the Assessing Officer and then given finding that some of the entries in the excel sheets are inter related and common entries in both the excel sheets and consequently, deleted the additions made by the Assessing Officer to the extent of the amount which are common Page 20 of 38 and duplicate entries in the excel sheets and sustained an addition of Rs.1,98,93,435/- out of the total amount in the first excel sheet of Rs.5,11,01,235/-. The rest of the additions made by the Assessing Officer based on the excel sheets were deleted by the learned CIT (A).

As regards the addition towards cash payment to M/s. Krishna Filling Station, the learned CIT (A) has upheld the disallowance made by the Assessing Officer to the extent of Rs.90 lakhs out of Rs.1,10,00,000/-. The learned Counsel for the assessee has took us to the details of expenditure found in the excel sheets as well as the payment made to the Krishna Filling Station and submitted that all these expenditures are already recorded in the books of account of the assessee. He has also submitted the expenditure which are found in the excel sheets and also recorded in the books of account being ledger account as well as profit and loss account. The relevant ledger of the parties concerned are placed in the paper book, the details of which corresponding to each expenditure are summarized as under:

In Commissioner of Income-tax (Central)-III v. Kabul Chawla : 2015 SCC OnLine Del 11555/[2015] 61 taxmann.com 412/234 Taxman 300/[2016] 380 ITR 573 (Delhi), the Divison Bench of this court (to which One of us - Vibhu Bakhru, J. is a member) had considered the question whether proceedings under Section 153A of the Act could be instituted in absence of any incriminating material unearthed during the search and had summarized the law as under: "Summary of the legal position 37. On a conspectus of Section 153-A(1) of the Act, read with the provisos thereto, and in the light of the law explained in the aforementioned decisions, the legal position that emerges is as under: (i) Once a search takes place under Section 132 of the Act, notice under Section 153-A(1) will have to be mandatorily issued to the person searched requiring him to file returns for six AYs immediately preceding the previous year relevant to the AY in which the search takes place. (ii) Assessments and reassessments pending on the date of the search shall abate. The total income for such AYs will have to be computed by the AOs as a fresh exercise. (iii) The AO will exercise normal assessment powers in respect of the six years previous to the relevant AY in which the search takes place. The AO has the power to assess and reassess the "total income" of the aforementioned six years in separate assessment orders for each of the six years. In other words there will be only one assessment order in respect of each of the six AYs 'in which both the disclosed and the undisclosed income would be brought to tax'.

In Principal Commissioner of Income-tax-4 v. Saumya Construction (P.) Ltd. [2017] 81 taxmann.com 292/[2016] 387 ITR 529 (Gujarat), a Division Bench of the Gujarat High Court had referred to the decision of this court in Kabul Chawla (supra) and concurred with the said view.

In Principal Commissioner of Income-tax, Central-3 v. Abhisar Buildwell (P.) Ltd. : (2024) 2 SCC 433/[2023] 149 taxmann.com 399/293 Taxman 141/454 ITR 212 (SC), the Supreme Court had considered the following question: "Whether the jurisdiction of the AO to make assessment is confined to incriminating material found during the course of search under Section 132 or requisition under Section 132-A or not i.e. whether any addition can be made by the AO in absence of any incriminating material found during the Page 30 of 38 course of search under Section 132 or requisition under Section 132-A of the 1961 Act or not." And, after referring to various decisions answered the said question in the affirmative.

If the submission on behalf of the Revenue that in case of search even where no incriminating material is found during the course of search, even in case of unabated/completed assessment, the AO can assess or reassess the income/total income taking into consideration the other material is accepted, in that case, there will be two assessment orders, which shall not be permissible under the law. At the cost of repetition, it is observed that the assessment under Section 153-A of the Act is linked with the search and requisition under Sections 132 and 132-A of the Act. The object of Section 153-A is to bring under tax the undisclosed income which is found during the course of search or pursuant to search or requisition. Therefore, only in a case where the undisclosed income is found on the basis of incriminating material, the AO would assume the jurisdiction to assess or reassess the total income for the entire six years block assessment period even in case of completed/unabated assessment. As per the second proviso to Section 153-A, only pending assessment/reassessment shall stand abated and the AO would assume the jurisdiction with respect to such abated assessments. It does not provide that all Page 32 of 38 completed/unabated assessments shall abate. If the submission on behalf of the Revenue is accepted, in that case, the second proviso to Section 153-A and sub-section (2) of Section 153-A would be redundant and/or re-writing the said provisions, which is not permissible under the law. *** *** *** 36. In view of the above and for the reasons stated above, it is concluded as under: 36.1. That in case of search under Section 132 or requisition under Section 132-A, the AO assumes the jurisdiction for block assessment under Section 153-A; 36.2. All pending assessments/reassessments shall stand abated; 36.3. 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 36.4 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 132-A of the 1961 Act. However, the completed/unabated assessments can be re-opened by the AO in exercise of powers under Sections 147/148 of the Act, subject to fulfilment of the conditions as envisaged/mentioned under Sections 147/148 of the Act and those powers are saved.

The question involved in the present set of appeals and review petition is answered accordingly in terms of the above and the appeals and review petition preferred by the Revenue are hereby dismissed. No costs."

The aforesaid decision was rendered in the context of Section 153A of the Act. However, the said decision would be equally applicable to initiation of assessment / reassessment under Section 153C of the Act. In Commissioner of Income- tax-III, Pune v. Sinhgad Technical Education Society [2017] Page 33 of 38 84 taxmann.com 290/250 Taxman 225/397 ITR 344 (SC), the Supreme Court accepted that the AO would have no jurisdiction to initiate proceedings under Section 153C of the Act absent any incriminating material found in case of a search conducted under Section 132 of the Act or requisition made under Section 132A of the Act. The relevant extract of the said decision is set out below: "17. The ITAT permitted this additional ground by giving a reason that it was a jurisdictional issue taken up on the basis of facts already on the record and, therefore, could be raised. In this behalf, it was noted by the ITAT that as per the provisions of Section 153-C of the Act, incriminating material which was seized had to pertain to the assessment years in question and it is an undisputed fact that the documents which were seized did not establish any co- relation, document-wise, with these four assessment years. Since this requirement under Section 153-C of the Act is essential for assessment under that provision, it becomes a jurisdictional fact. We find this reasoning to be logical and valid, having regard to the provisions of Section 153-C of the Act. Para 9 of the order of the ITAT reveals that ITAT had scanned through the Satisfaction Note and the material which was disclosed therein was culled out and it showed that the same belongs to Assessment Year 2004-05 or thereafter. After taking note of the material in para 9 of the order, the position that emerges therefrom is discussed in para 10. It was specifically recorded that the counsel for the Department could not point out to the contrary. It is for this reason the High Court has also given its imprimatur to the aforesaid approach of the Tribunal. That apart, the learned Senior Counsel appearing for the respondent, argued that notice in respect of Assessment Years 2000-01 and 2001-02 was even time-barred.

It is also relevant to refer the recent decision of this court in Saksham Commodities Ltd. v. Income Tax Officer [2024] Page 34 of 38 161 taxmann.com 485/464 ITR 1 (Delhi) wherein this court had observed as under: "49. That takes us to the principal question and which pertains to the nature of the incriminating material that may be obtained and the years forming part of the block which would merit being thrown open. Regard must be had to the fact that while section 153C enables and empowers the jurisdictional Assessing Officer to commence assessment or reassessment for a block of six assessment years or the "relevant assessment year", that action is founded on satisfaction being reached that the books of account, documents or assets seized "have a bearing on the determination of the total income of such other person". We in this regard bear in mind the well settled distinction which the law recognizes between the existence of power and the exercise thereof. Section 153C enables and empowers the jurisdictional Assessing Officer to assess or reassess the six assessment years or the "relevant assessment year". The Act thus sanctions and confers an authority upon the Assessing Officer to exercise the power placed in his hands for up to a maximum of ten assessment years. Despite the conferral of that power, the question which would remain is whether the facts and circumstances of a particular case warrant or justify the invocation of that power. It is the aforesaid aspect which bids us to reiterate the distinction between the existence and exercise of power.

What we seek to emphasize is that merely because section 153C confers jurisdiction upon the Assessing Officer to commence an exercise of assessment or reassessment for the block of years which are mentioned in that provision, the same alone would not be sufficient to justify steps in that direction being taken, unless the incriminating material so found is likely to have an impact on the total income of a particular assessment year forming part of the six assessment years immediately preceding the assessment year pertaining to the search year or for the "relevant assessment year".

Ultimately section 153C is concerned with books, documents or articles seized in the course of a search and which are found to have the potential to impact or have a bearing on an assessment which may be undergoing or which may have been completed. The words "have a bearing on the determination of the total income of such other person" as appearing in section 153C would necessarily have to be Page 35 of 38 conferred pre-eminence. Therefore, and unless the Assessing Officer is satisfied that the material gathered could potentially impact the determination of total income, it would be unjustified in mechanically reopening or assessing all over again all the ten assessment years that could possibly form part of the block of ten years.

The decisions which hold that an assessment is liable to be revised only if incriminating material be found, even if rendered in the context of section 153A, would clearly govern the question that stands posited even in the context of section 153C. It would be relevant to recall that the Division Bench in Kabul Chawla had observed that in the absence of any incriminating material, a completed assessment may be reiterated and the abated assessment or reassessment be concluded. The importance of incriminating material was further underlined in Kabul Chawla with the court observing that completed assessments could be interfered with, only if some incriminating material were unearthed. This aspect came to be reiterated in RRJ Securities when the court held that it would be impermissible to either reopen or reassess a completed assessment which may not be impacted by the material gathered in the course of the search and which may have no plausible nexus. The aforesaid position also comes to the fore when one reads para 17 of ARN Infrastructure and which annulled an action aimed at reopening assessments for years to which the incriminating document which was found did not relate. *** *** *** 54. In any case, Abhisar Buildwell, in our considered opinion, is a decision which conclusively lays to rest any doubt that could have been possibly harboured. The Supreme Court in unequivocal terms held that in the absence of incriminating material, the Assessing Officer would not be justified in seeking to assess or reassess completed assessments. Though the aforesaid observations were rendered in the context of completed assessments, the same position would prevail when it comes to assessments which abate pursuant to the issuance of a notice under section 153C. Here too, the Assessing Officer would have to firstly identify the assessment years to which the material gathered in the course of the search may relate and consequently it would only be those assessments which would face the spectre of abatement. The additions here too would have to be based on material that may have been unearthed in the course of the search or on the basis of material requisitioned.

The question whether a notice under Section 153C of the Act can be issued in respect of an assessment year in respect of which no incriminating material is found is no longer res integra. The AO does not have any jurisdiction to issue a notice under Section 153C of the Act if the search on which the said notice is premised, has not yielded any incriminating material having a bearing on the assessment of income of the assessee. The jurisdiction of the AO to issue a notice under Section 153C of the Act is predicated on the search under Section 132 of the Act or a requisition under Section132A of the Act, yielding any incriminating material and the AO of the searched person being satisfied that the assets so unearthed, documents, books of accounts or other material found during the search conducted under Section 132 of the Act or pursuant to a requisition made under Section 132A of the Act, belongs to or pertains to the assessee (other than the searched person) or contains any information relating to the assessee. Once this condition is satisfied, the AO can assume jurisdiction subject to being satisfied that the material has a bearing on the income of the assessee. In the present case, the said jurisdictional condition is not satisfied as the search has not yielded any incriminating material, which could confer jurisdiction to the AO to issue a notice under Section 153C of the Act in respect of AY 2018-19.”

In the result, appeal filed by the assessee is allowed.