ASSISTANT COMMISSIONER OF INCOME TAX CENTRAL CIRCLE-2(1), BANGALORE vs. M/S LAKSHMI VENKETESH MINERALS , HOSPET

Common issues are involved in all these appeals and arises out of identical facts and circumstances. We therefore deem it fit and convenient to pass a common order.

We shall first take up for consideration the first set of appeals pertaining to assessee Sri Lakshmi Venkateshwara Minerals, Hospet. The assessee is a partnership firm. The business of the firm was trading in iron ore. The partners of the partnership firm were Mr. K. Mahesh Kumar, Mr. K. Kumar, Mr. K. Sadashiva & Mr. I. Yerriswamy.

There was a search & seizure action conducted on 25.11.2010 u/s. 132 of the Income Tax Act, 1961 [the Act] in the case of K. Mahesh Kumar, who happens to be one of the partner of assessee firm. Since the assessee was not subjected to search u/s. 132 of the Act, proceedings consequent to search in the case of K. Mahesh Kumar was initiated u/s. 153C of the Act. It may be mentioned that the case of K. Mahesh Kumar who was subjected to search as well as the assessee, Sri Lakshmi Venkateshwara Minerals, were centralized and the DCIT, Central Circle 2(1), Bangalore was the Officer who ultimately concluded the assessment in the case of Sri Lakshmi Venkateshwara Minerals as well as the assessee.

The requirement to invoke proceedings u/s. 153C of the Act is that if any money, bullion, jewellery or other valuable article or thing or any books of account or documents are found in a search u/s. 132 and the AO is satisfied that the money, bullion, jewellery or other valuable article or thing to 1818 & 1789 to 1791/Bang/2017 Page 4 of 25 belongs to, or books of account or documents found relate to, a person other than the person who was subjected to a search u/s. 153A of the Act, then those assets or books of account and documents seized should be handed over to the AO of the other person and that AO will proceed in accordance with the provisions of section 153A of the Act. The 2nd condition for proceeding u/s. 153C is that the assets or books of account or documents seized should have a bearing on the determination of total income of the other person. In other words, the documents should be incriminating in nature.

The assessee filed return of income in response to the notice issued u/s. 153C dated 18.11.2011. In the course of assessment proceedings the assessee could not participate in the proceedings and therefore the AO proceeded to frame the assessment in the absence of proper details from the assessee. The AO made a disallowance of 20% of the expenses claimed in the P&L account. The gross receipts and expenses claimed in the P&L account for AYs 2008-09 to 2010-11 were as follows:-

The AO disallowed 20% of the expenses for the reason that the details of expenses were not furnished by the assessee in the course of assessment proceedings. to 1818 & 1789 to 1791/Bang/2017 Page 6 of 25 9. The AO also noticed that for AY 2008-09 total credit in the books of account was Rs.3,84,24,996 comprising cash credit of Rs.60,10,500 and cheque credit of Rs.3,24,17,496.

The AO noticed that the assessee has already shown gross receipts from business of Rs.3,13,25,578. Difference of sum of Rs.3,84,24,996 and gross receipts from business of Rs.3,13,25,578 which was a sum of Rs.71,02,418 was treated as unexplained business receipts and added to total income of assessee. This addition was, however, made on a protective basis and the AO has given the following reasons for doing so:-

For the AY 2010-11, the addition made was for the following reasons:-

The same amount shall be substantively added in the hands of Mr Mahesh. The digital data-seized during the course of search in the case of Mr Mahesh, Annexed as 'Payment betails.xls`, 'Sha Received amount 01.02.2010.xls clearly records the transactions done by Mr Mahesh for the period 10-11-2009 to 31-07-2010. Moreover in the letter dated 28-03-2011, Mr Mahesh has owned up to having done business of transportation and trading of iron ore in his various concerns. One such concern he has mentiones is M/s Lakshmi venkateshwara minerals. Hence the above amount is substantively added in the hands of Mr Mahesh for AY 2010-11.”

Aggrieved by the aforesaid addition, the assessee preferred appeals before the CIT(Appeals). As far as addition on account of disallowance of expenses made for the 3 assessment years are concerned, the first submission of the assessee was that there was no incriminating material found in the course of search so as to warrant an enquiry into the quantum of expenses claimed by the assessee in the P&L account. It was the plea of assessee that in an assessment u/s. 153C of the Act, incriminating material having not been found in the course of search, no addition can be made. It was also submitted that disallowance of expenses @ 20% was without any basis and cannot be sustained.

The CIT(Appeals), however, upheld the addition made by the AO. The CIT(A) did not address the issue as to whether, addition can be made to 1818 & 1789 to 1791/Bang/2017 Page 9 of 25 in an assessment u/s. 153C of the Act in the absence of any incriminating material pertaining to the said addition.

As far as protective addition made in the hands of assessee and substantive addition in the hands of K. Mahesh Kumar are concerned, the CIT(Appeals) deleted the addition made by the AO by observing that addition made protectively in the hands of assessee and substantively in the hands of K. Mahesh Kumar was confirmed in the hands of K. Mahesh Kumar on substantive basis. The CIT(Appeals) therefore deleted the addition on protective basis in the hands of assessee.

Aggrieved by the order of the CIT(Appeals) in sustaining the disallowance of expenses made by the AO the assessee has preferred the appeals and aggrieved by his order in deleting the protective assessment made in the hands of assessee of undisclosed income, the revenue has preferred appeals before the Tribunal.

We have heard the submissions of the ld. counsel for the assessee and the ld. DR.

The first submission of the ld. counsel for the assessee was that the satisfaction recorded by the AO before proceeding to invoke the provisions of section 153C in the case of assessee is not in accordance with law and therefore assumption of jurisdiction is itself not in order and therefore the order of assessment for all the 3 years are liable to be annulled as bad in law. The relevant grounds of appeal raised by the assessee before the Tribunal which are identical in all the cases are as follows:-

It was his submission that in the case of assessee, there is no such application of mind as to what is the material based on which the AO came to the conclusion that the seized material in the search of K. Mahesh Kumar belonged to assessee or as to how such material were incriminating in nature. His submission was that the satisfaction note must speak on how such a satisfaction was arrived at by the AO. According to him, in the present case, the satisfaction recorded by the AO does not confirm to the requirements of a valid satisfaction for invoking the provisions of section 153C of the Act. He then drew our attention to a decision of the Hon’ble Supreme Court in the case of CIT v. Sinhgad Technical Education Society, 397 ITR 344 (SC) wherein the principle for proceedings u/s. 153C of the Act were laid down as follows:-

It was submitted that the very initiation of proceedings u/s.153C without recording proper satisfaction as contemplated in law, will make the entire proceedings void ab initio and therefore the assessment orders for all the three AY 2008-09 to 2010-11 should be annulled.

Without prejudice to the above submission, the second submission of the ld. counsel for the assessee was that additions made by the AO in all the assessment years are not based on any incriminating material found in the course of search of K. Mahesh Kumar which pertained to the assessee. In this regard, he also pointed out that in respect of the protective addition made in the hands of assessee, the documents that were found belonged to Mr. K. Mahesh Kumar and not the assessee. Our attention was also drawn to the fact that documents belonging to Mr.K.Mahesh Kumar were found and Mr.K.Mahesh Kumar admitted undisclosed income in his hands and that disclosure or admission had not nexus or connection whatsoever with the Assessee. Our attention was drawn to a decision of the Bangalore Bench of the Tribunal in the case of Yunus Zia v. DCIT, to 130/Bang/2013 for AYs 2003-04 to 2007-08 48,86,94,442, order dated 20.3.2020 wherein the Tribunal has after analysis of the legal position come to the conclusion that an addition u/s. 153A of the Act cannot be made de hors incriminating material found in the course of search. According to him, the above observations made in the context of section to 1818 & 1789 to 1791/Bang/2017 Page 14 of 25 153A will apply with greater force in assessment u/s. 153C of the Act, which is the relevant provision under which assessment was made from which assessment the present appeal arises.

In this regard, the learned counsel for the Assessee brought to our notice that assessments were for AYs 2008-09 to 2010-11 were already completed prior to the search and therefore the AO cannot make an assessment or addition without any incriminating material. In this regard it was clarified that as per the proviso to section 153C(1) of the Act, the date of search in the case of the Assessee will be the date on which the AO of the searched person hands over the seized material to the AO of the other person. It is undisputed that it was only on 18.11.2011 such handing over took place and therefore that dated i.e., 18.11.2011 has to be regarded as the date of search in terms of 1st proviso of section 153C(1) of the Act. The relevant dates with regard to the assessment in the case of the Assessee for AY 2008-09 to 2010-11 having already been completed prior to the date of Search in the case of the Assessee i.e., prior to 18.11.2011 are as follows:- AY Date of filing of Date of issue of Remarks return of income notice u/s. 143(2) 2008-09 07.10.2008 20.9.2009 No notice u/s. 143(2) issued. 2009-10 05.12.2009 30.9.2010 No notice u/s. 143(2) issued. 2010-11 13.10.2010 30.9.2011 No notice u/s. 143(2) issued.

It was thus contended by ld. counsel for the assessee that since pursuant to the return of income filed by the assessee for the 3 assessment years, the acknowledgement has already been issued by the AO and since no further proceedings by issue of notice u/s. 143(2) within the time contemplated by law was issued, those assessments become final and can to 1818 & 1789 to 1791/Bang/2017 Page 15 of 25 be disturbed only if incriminating material is found in the course of search. He highlighted the fact that both the additions made in all the three AYs have no relevance whatsoever to any material found in the course of search which are alleged to be relating to the Assessee. Since the additions in question have been made without any reference to any incriminating material found as a result of search, both the additions made by the AO deserves to be deleted. It was submitted by him that in respect of the addition made of undisclosed income on a protective basis, the said addition was rightly deleted by the CIT(A).

The ld. DR relied on the orders of CIT(Appeals) in respect of the addition sustained by the CIT(A) and the order of the AO in so far as the addition made by the AO that was deleted by the CIT(A).

We have given a careful consideration to the rival submissions. The provisions of section 153C(1) reads as follows:-

The Assessments in the present case relate to the period prior to the amendment referred to above. The aforesaid amendment has been held to be clarificatory in nature and therefore has to be held as applicable retrospectively from the inception of Sec.153C of the Act in the statue, by the ITAT Kolkata Bench in the case of Trishul Hi-Tech Industries Vs. DCIT IT(SS)A.Nos.84-86/Kol/2011 (AY 04-05, 05-06 & 06-07) order dated 24.9.2014. In the aforesaid decision the Hon’ble Kolkata Bench of ITAT, after considering the amended provisions of Sec.153C of the Act by the Finance Act, 2014, held that the provisions of Sec.153C of the Act as amended by Finance (No.2) Act, 2014 though is made applicable on and from 1.10.2014, is also relevant for earlier assessment years as it cures the infirmities of the previous legislation and also makes the provisions workable by avoiding absurd consequences. Accordingly, such provision is to be given retrospective operation and is also applicable to pending proceedings. In proceedings u/s.153C of the Act, the Assessee would not be a person who was subjected to a search u/s.132 of the Act and therefore proceedings u/s.153A of the Act could not be initiated against the Assessee. Even if no incriminating material whatsoever are found in the course of a to 1818 & 1789 to 1791/Bang/2017 Page 17 of 25 search relating to some other person, in terms of Sec.153-C of the Act, prior to its amendment by the Finance Act, 2014 w.e.f. 1-10-2014, the AO has to proceed to issue notice u/s.153C of the Act for making an assessment of income for the periods referred to in Sec.153A of the Act. This would cause undue hardship. Take for instance in the course of search of a person a copy of sale deed of some other person is found which does not per se indicate any undisclosed income and based on which on adverse inference can be drawn, the AO, however, has to make an assessment in the case of the other person u/s.153C of the Act for the six assessment years referred to in Sec.153A of the Act, even if no incriminating material was found in the course of search. This created hardship and this was the reason why the provisions of Sec.153C of the Act were amended by the Finance Act, 2014. With the amendment by the Finance Act, 2014, the AO of the other person after receiving the material from the AO of the Searched person has to make an Assessment based on the material so received by him which has a bearing on the determination of the total income of the other person. This is clear from the amended provisions of the law which reads thus:

We are in respectful agreement with the view expressed by the ITAT Kolkata Bench in the case of Trishul Hi-Tech (supra). We may also add that it is settled rule of construction that every statute is prima facie prospective unless it is expressly or by necessary implication made to have retrospective operation. Ordinarily the Courts are required to gather the intention of the legislature from the overt language of the provision as to whether it has been made prospective or retrospective, and if retrospective, then from which date. What happens sometimes is that the substantive provision, as originally enacted or later amended, fails to clarify the intention of the legislature. In such a situation, if subsequently some amendment is carried out to clarify the real intent, such amendment happens to be retrospective from the date the earlier provision was made effective. Such clarificatory or explanatory amendment is declaratory. As the later amendment clarifies the real intent and declares the position as was originally intended, it takes retroactive effect from the date the original provision was made effective. Normally such clarificatory amendment is made retrospectively effective from the earlier date. It may so happen that sometimes the clarificatory or explanatory provision introduced later to depict the real intention of the legislature is not specifically made retrospective by the statute. Notwithstanding the fact that such amendment to the substantive provision has been given prospective effect, nonetheless the judicial or quasi-judicial authorities, on a challenge made to it, can justifiably hold such amendment to be retrospective. The justification behind giving retrospective effect to such amendment is to apply the real intention of the legislature from the date such provision was initially introduced. The intention of the legislature while introducing the provision is to 1818 & 1789 to 1791/Bang/2017 Page 19 of 25 gathered, inter alia, from the Finance Bill, Memorandum Explaining the Provision of the Finance Bill. Any amendment to the substantive provision which is aimed at clarifying the existing position or removing unintended consequences to make the provision workable has to be treated as retrospective notwithstanding the fact that the amendment has been given effect prospectively. The above principles, if applied to the amendment to the provisions of Sec.153C of the Act by the Finance Act, 2014, can lead to only one conclusion that the said amendment is clarificatory and therefore should be held to be retrospective in operation.

A plain reading of the amended provisions of section 153C(1) of the Act, would show that the AO is required to arrive at a satisfaction that the seized assets, books of account or documents belongs to or relates to a person other than the person was subjected to search. For arriving at such a satisfaction, it is necessary for the AO to prima facie spell out the nature of seized documents and how it belongs to or relates to the assessee. Before the Hon’ble High Court of Karnataka in the case of IBC Knowledge Park, 385 ITR 346 [Kar] the issue for consideration and adjudication was whether the Tribunal was right in holding that it was not necessary to record a satisfaction to the effect that seized material shows undisclosed income. While deciding this issue, the High Court came to the conclusion at para 50 thereof, that “the detection of seized material leading to an inference of undisclosed income is a sine qua non for invocation of section 153C of the Act”. The Honble Court came to the above conclusion after considering the decision of the Hon’ble Apex Court in the cases of Manish Maheshwari Vs. ACIT (289 ITR 341) and CIT Vs. Calcutta Knitwears (2014) 362 ITR 673 and other judgments of the Hon’ble Apex Court and other Hon’ble High Courts and CBDT, Circular No.24/2015 dated 31.12.2015. to 1818 & 1789 to 1791/Bang/2017 Page 20 of 25 The Hon’ble High Court also took the view that the AO is expected to spell out as to how the documents were incriminating in nature and prima facie represent undisclosed income. In this regard, we also find that in the order of assessment, the AO has not proceeded to make any assessment on the basis of material referred to in the satisfaction note. On the other hand, he has made additions which are not based on any seized material which pertains to assessee. Such a course is not permissible u/s. 153C of the Act as laid down by the Hon’ble High Court of Karnataka in the case of IBC Knowledge Park (supra). The decision of the Hon’ble Supreme Court in the case of Sinhgad Technical Education Society (supra) also supports the plea of the assessee that additions made cannot be sustained in the absence of any incriminating material.

In the present case, the assessment in all the three AYs 2008-09 to 2010-11 have already been completed prior to the date of search in the sense that the return filed by the Assessee was accepted and no assessment u/s.143(3) of the Act was framed within the time contemplated in law. The proceedings for these Assessment years were not pending and did not abated by virtue of the second proviso to Sec.153A(1) of the Act, which provides that any assessment proceedings for any of the six assessment years set out in Sec.153A (1) of the Act, which is pending as on the date of initiation of search u/s.132 of the Act, such assessment proceedings would abate and the AO will make one assessment after considering the original return of income as well as materials found in the course of search. The assessment proceedings which have been completed as on the date of search u/s.132 of the Act will however continue to remain valid. Thus the former proceedings are referred to as “abated assessment proceedings” and the latter proceedings are referred to as “unabated assessment proceedings”. to 1818 & 1789 to 1791/Bang/2017 Page 21 of 25 31. Therefore the scope of making assessment of total income u/s.153C of the Act in an unabated assessment proceedings is limited and can be only of assessing income that is not disclosed which is detected or which emanates from material found in the course of search of some other person and which relate to the Assessee. Since the impugned addition of disallowance of expenses are not based on any incriminating material found during the course of search, the additions are liable to be deleted. As far as the addition made on protective basis for AY 2008-09 to 2010-11 are concerned, the said addition was made not on the basis of any incriminating material found in the search of K.Mahesh Kumar which relate to the Assessee and therefore the said addition can also not be sustained as it is contrary to the provisions of Sec.153C of the Act. There is no basis for protectively assessing the income in the hands of the Assessee and substantively in the hands of K.Mahesh Kumar. There is no material to show that the income declared by K.Mahesh Kumar is either his income or that of the Assessee. From the fact that K.Mahesh Kumar was a Partner in the Assessee firm it cannot be concluded that the income declared by K.Mahesh Kumar in his hands was either his income or the income of the partnership firm in which he was a partner. The declaration of income by K.Mahesh Kumar is in his hands and not in the hands of the Assessee firm in his capacity as partner. Even going by the theory of the AO that there are differences in the credits in the bank account which have to be regarded as undisclosed business receipts, such differences in the credits in the bank account was not found as a result of search in the case of K.Mahesh Kumar. As we have already observed assessment u/s.153C of the Act has to be based on material found in the course of search which are relate to or belong to Assessee.

Since the additions are deleted on merits, we do not wish to address the arguments made by the learned counsel for the Assessee that the to 1818 & 1789 to 1791/Bang/2017 Page 22 of 25 condition precedent for initiating proceedings u/s. 153C of the Act have not been satisfied in the present cases and therefore the assessment is liable to annulled. In view of the above conclusion, we don’t deem it necessary to deal with the other grounds raised by the assessee and revenue in the respective appeals. Accordingly, the appeals of the assessee are allowed, while the appeals of the revenue are dismissed.

We shall not take up the second set of appeals. The assessee, Sri Lakshmi Venkateshwara Transport, in these cases is also a partnership firm engaged in the business of transport. Mr.K.Mahesh Kumar is a partner in this partnership firm also. The two additions made in the hands of this assessee are identical to the two additions made in the case of other assessee viz., Sri Lakshmi Venkateshwara Minerals viz., disallowance of expenses and protective assessment of undisclosed business income with substantive addition in the hands Mr.K.Mahesh Kumar. The assessee in these set of appeals has challenged the disallowance of expenses @ 20% made by the AO and confirmed by the CIT(Appeals). The assessee has also raised grounds with regard to validity of initiation of proceedings u/s. 153C of the Act and the validity of additions made therein de hors material found in the course of search that relate to the Assessee. These grounds are identical to grounds raised in the case of Sri Lakshmi Venkateshwara Minerals.

As far as the assessment in these set of appeals are concerned, the order of the AO makes a reference to the search in the case of K. Mahesh Kumar on 25.10.2020. The satisfaction note recorded by the AO for proceeding to frame an assessment against the Assessee is identical for all the three AY 2008-09 to 2010-11 and it reads thus: to 1818 & 1789 to 1791/Bang/2017 Page 23 of 25 “Name of the Assessee : M/s. Lakshmi Venkateshwara Transport Address : 21st Ward, Bellary Road Circle, Opp: Lucky Tyres Hospet Pin: 583 201 P.A.N : ABHF58469H Asst. Year : 2008-09

It is further seen from the satisfaction note filed before us that the reference is to a search in the case of one Dada Peer. The date of handing over of the seized material on 18.11.2011 which is the same date as in the first set of cases i.e., the case of other assessee, Sri Lakshmi Venkateshwara Minerals. The seized document referred to as Document A/DP/10 Pages 34 to 36. Therefore, there is a contradiction in the assessment order and satisfaction note with regard to the person searched. The assessment order refers to search in the case of K.Mahesh Kumar. Be that as it may. As far as this assessee is concerned, all the to 1818 & 1789 to 1791/Bang/2017 Page 24 of 25 assessments for 3 assessment years became final prior to the date of handing over the assessee’s documents i.e., 18.11.2011. Relevant dates in this regard are as follows:-

The arguments advanced by the parties are identical to the arguments advanced in the first set of appeals. We have already examined the legal position with regard to validity of initiation of proceedings u/s. 153C of the Act de hors incriminating material found in the course of search which belong or relate to the assessee. Admittedly, no such incriminating material was found in respect of any of the additions made by the AO which has nexus to the assessee. The Assessment for AY 2008-09 to 2010-11 were already completed in the case of the Assessee prior to the date of search. Therefore the scope of making assessment of total income u/s.153C of the Act is limited and can be only of assessing income that is not disclosed which is detected or which emanates from material found in the course of search of some other person and which relate to the Assessee. Since the impugned addition of disallowance of expenses are not based on any incriminating material found during the course of search, the additions are liable to be deleted. As far as the addition made on protective basis for AY 2008-09 to 2010-11 are concerned, the said to 1818 & 1789 to 1791/Bang/2017 Page 25 of 25 addition was made not on the basis of any incriminating material found in the search of K.Mahesh Kumar which relate to the Assessee and therefore the said addition can also not be sustained as it is contrary to the provisions of Sec.153C of the Act.

In these circumstances, we are of the view that the additions made by the AO in the proceedings u/s. 153C also cannot be sustained. Accordingly, these additions in so far as the Assessee’s appeals are concerned are deleted and in so far as the revenue’s appeal is concerned, we uphold the order of the CIT(A). The assessee’s appeals are allowed, while the revenue’s appeal is dismissed.

In the result, all the appeals of the assesses are allowed, while the appeals by the revenue are dismissed.