M/S KURELE PAN PRODUCTS PVT. LTD.,,DEHRADUN vs. ACIT, NEW DELHI

Brief facts qua the aforesaid legal issue are that, Assessee Company was subject to search and seizure operation u/s 132(1) on 9.1.2009; and accordingly notice u/s 153A was issued on 30.11.2009. Here in this case, earlier assessment was completed u/s 143(3), vide order dated 28.12.2007, wherein addition of Rs. 1,51,600/- was made on account of disallowance of directors remuneration and addition of Rs. 10 lac was made on account of unexplained share capital. Such an assessment order had attained finality before the date of search and accordingly, in terms of second proviso to section 153A such an assessment has to be treated as unabated assessment. Ld. AO without referring to any seized material or any incriminating evidence found during the course of search has made addition after referring to the balance sheet already there on record, from where he found that assessee has received fresh share capital to the tune of Rs. 1,50,000/- from seven parties. The relevant observation of the AO reads as under:-

Before us the Ld. Counsel for the assessee, Shri Sanjay Kumar first of all drew our attention to the copy of “Panchnama” prepared in the case of assessee and also relevant observations and findings of the AO and Ld. CIT (A) to point out that it is an admitted fact that the addition made by the AO is not based on seized material / documents found during the course of search. In such a situation, addition is beyond the scope of section 153A and in support he relied upon the following judgments:-

He further submitted that during the course of the original assessment proceedings, the entire balance sheet, profit and loss account were subject to detailed scrutiny by the AO which is evident from various notices and replies filed by the assessee as given in the paper book from pages 1 to 61. Once the entire issue of fresh share application money received by the assessee during the year as appearing in the balance sheet, has been examined by the AO, then without their being any seized material, no further addition can be made based on same material. Thus, addition made by the AO and as sustained by the Ld. CIT (A) should be deleted on this ground.

On the other hand, Ld. DR though did not controvert the contention that there is no incriminating material found at the time of search, but he submitted that once notice u/s 153(3) is issued to the assessee then it is incumbent upon the assessee to file the return of income and AO has all the powers to assess and reassess the total income for the year and same cannot be restricted to the seized material. He too relied upon the judgment of Hon’ble High Court in the case of CIT vs. Anil Kumar Bhatia.

After considering the aforesaid submission and on perusal of the relevant finding given during the impugned order, we find that there is no dispute that earlier the assessment was completed u/s 143(3) vide order dated 28.12.2003 and such assessment order has attained finality on the date of search i.e., 19.1.2009. Thus, such an assessment cannot be reckoned as abated assessment in terms of second proviso to section 153A. Once assessment relating to any assessment year falling within the period of six months assessment years has attained finality and is not treated as abated, then in view of the principle and ratio laid down by the Hon’ble Jurisdictional High Court in series of judgments no addition can be made unless same are based on incriminating material / evidence found during the course of search. This proposition of law has been well settled and reiterated by the Hon'ble Delhi High Court in the case of CIT vs. Kabul Chawla reported in [2016] 380 ITR 573 (Delhi) and has been reiterated in the case of Pr. CIT vs. Meeta Gutgutia reported in [2017] 152 DTR 153 (Delhi).

The Hon'ble High Court has also taken note of the judgment of their earlier judgment in the case of CIT vs. Anil Kumar Bhatia reported in [2013] 352 ITR 493 (Del) and observe that this was not the issue before the Court. Again in the case of Pr. CIT Vs. Meeta Gutgutia’s (supra), their Lordships have again reiterated the same principle in a very detailed manner and have also distinguished one of 7 their earlier judgment in the case of Smt. Dayawanti Gupta reported in 390 ITR 496. The relevant observations made by their Lordships are as under:- “56. Section 153A of the Act is titled "Assessment in case of search or requisition". It is connected to Section 132 which deals with 'search and seizure'. Both these provisions, therefore, have to be read together. Section 153A is indeed an extremely potent power which enables the Revenue to reopen at least six years of assessments earlier to the year of search. It is not to be exercised lightly. It is only if during the course of search under Section 132 incriminating material justifying the re-opening of the assessments for six previous years is found that the invocation of Section 153 A qua each of the AYs would be justified. 57. The question whether unearthing of incriminating material relating to any one of the AYs could justify the reopening of the assessment for all the earlier AYs was considered both in Anil Kumar Bhatia {supra) and Chetan Das Lachman Das {supra). Incidentally, both these decisions were discussed threadbare in the decision of this Court in Kabul Chawla {supra). As far as Anil Kumar Bhatia {supra) was concerned, the Court in paragraph 24 of that decision noted that "we are not concerned with a case where no incriminating material was found during the search conducted under Section 132 of the Act. We therefore express no opinion as to whether Section I53A can be invoked even under such situation". That question was, therefore, left open. As far as Chetan Das Lachman Das {supra) is concerned, in para 11of the decision it was observed: "11. Section 153A (1) (b) provides for the assessment or reassessment of the total income of the six assessment years immediately preceding the assessment year relevant to the previous year in which the search took place. To repeat, there is no condition in this Section that additions should be strictly made on the basis of evidence found in the course of the search or other post-search material or Information available with the Assessing Officer which can be related to the evidence found. This, however, does not mean that the assessment under Section 153A can be arbitrary or made without any relevance or nexus with the seized material. Obviously an assessment has to be made under this Section only on the basis of seized material."

In Kabul Chawla {supra), the Court discussed the decision in Filalex India Ltd. {supra) as well as the above two decisions and observed as under: "31. What distinguishes the decisions both in CIT v. Chetan Das Lachman Das {supra), and Filatex India Ltd. v. CIT-IV {supra) in their application to the present case is that in both the said cases there was some material unearthed during the search, whereas in the present case there admittedly was none. Secondly, it is plain from a careful reading of the said two decisions that they do not hold that additions can be validly made to income forming the subject matter of completed assessments prior to the search even if no incriminating material whatsoever was unearthed during the search.

Recently by its order dated 6th July 2015 in of 2015 {Pr. Commissioner of Income Tax v. Kurele Paper Mills P. Ltd.), this Court declined to frame a question of law in a case where, in the absence of any incriminating material being found during the search under Section 132 of the Act, the 9 Revenue sought to justify initiation of proceedings under Section I53A of the Act and make an addition under Section 68 of the Act on bogus share capital gain. The order of the CIT (A), affirmed by the ITAT, deleting the addition, was not interfered with.”

In Kabul Chawla {supra), the Court referred to the decision of the Rajasthan High Court in Jai Steel (India) v. Assn. CIT [2013] 36 taxmann.com 523/219 Taxman 223. The said part of the decision in Kabul Chawla {supra) in paras 33 and 34 reads as under: '33. The decision of the Rajasthan High Court in Jai Steel (India), Jodhpur v. A CIT {supra) involved a case where certain books of accounts and other documents that had not been produced in the course of original assessment were found in the course of search. It was held where undisclosed income or undisclosed property has been found as a consequence of the search, the same would also be taken into consideration while computing the total income under Section 153A of the Act. The Court then explained as under: "22. In the firm opinion of this Court from a plain reading of the provision along with the purpose and purport of the said provision, which is intricately linked with search and requisition under Sections 132 and 132A of the Act, it is apparent that: (a) the assessments or reassessments, which stand abated in terms of II proviso to Section 153A of the Act, & 4680/DEL/2014 20 the AO acts under his original jurisdiction, for which, assessments have to be made; (b) regarding other cases, the addition to the income that has already been assessed, the assessment will be made on the basis of incriminating material; and (c) in absence of any incriminating material, the completed assessment can be reiterated and the abated assessment or reassessment can be made.”

The argument of the Revenue that the AO was free to disturb income de hors the incriminating material while making assessment under Section 153A of the Act was specifically rejected by the Court on the ground that it was "not borne out from the scheme of the said provision" which was in the context of search and/or requisition. The Court also explained the purport of the words "assess" and "reassess", which have been found at more than one place in Section 153A of the Act as under: "26. The plea raised on behalf of the assessee that as the first proviso provides for assessment or reassessment of the total income in respect of each assessment year falling within the six assessment years, is merely reading the said provision in isolation and not in the context of the entire section. The words 'assess' or 'reassess'-have been used at more than one place in the Section and a harmonious construction of the entire provision would lead to an irresistible conclusion that the word assess has been used in the context of an abated proceedings and reassess has been used for completed assessment proceedings, which would not abate as they are not pending on the date of initiation of the search or making of requisition and which would also necessarily support the & 4680/DEL/2014 21 interpretation that for the completed assessments, the same can be tinkered only based on the incriminating material found during the course of search or requisition of documents."

Thus, the Hon'ble High Court after detail analysis concluded that, whence there is no incriminating material qua each of the assessment year roped in under section 153A, then, no addition can be made while framing the assessment under section 153A.

The aforesaid principle and ratio are clearly applicable on the facts of the present case also, as admittedly no incriminating material relating to these assessment years or as a matter of fact for any of the assessment years were found during the course of search and accordingly, the originally assessed income. 11. Accordingly the addition of Rs. 1,35,000/- is directed to be deleted being beyond the scope of assessment u/s 153A.

In the result appeal of the assessee is allowed.