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Facts
A search and seizure operation on the assessee's premises revealed inflated capital expenditure on bogus Plant & Machinery to claim excess depreciation and interest on term loans, along with stock discrepancies. The assessee had suo-motto disallowed depreciation but contested the disallowance of interest and the taxing of stock differences. For certain assessment years, the Assessing Officer also made additions based on material found from a third party during a search, without following the due procedure under Section 153C.
Held
The Tribunal dismissed the Revenue's appeals concerning the disallowance of interest and the treatment of stock discrepancies, upholding the CIT(A)'s view that term loans were used for fixed assets and stock netting-off was permissible. For the assessee's appeals, the Tribunal ruled that assessments made under Section 153A, especially for unabated assessment years, are invalid if no incriminating material directly related to the assessee is found during search or if additions are based on third-party material without adhering to Section 153C. Appeals for later assessment years were dismissed as withdrawn.
Key Issues
Whether interest on borrowed capital used for allegedly bogus plant & machinery is disallowable; Whether netting off of excess and deficit stock is permissible and the method of taxing stock discrepancies; Whether assessments under Section 153A without incriminating material for unabated years or based on third-party material without Section 153C compliance are valid.
Sections Cited
143(1), 153A, 127, 143(2), 245C(1), 245D(2C), 142(1), 143(3), 36(1)(iii), 69B, 69, 132(4), 132, 132A, 147, 148, 153B, 153C
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Income Tax Appellate Tribunal, VISAKHAPATNAM “DIVN” BENCH, VISAKHAPATNAM
Before: SHRI V. DURGA RAO, HON’BLE & SHRI S BALAKRISHNAN, HON’BLE
Per contra, the Ld. DR submitted that the assessee has 33. voluntarily accepted about the purchase of bogus assets and has wrongly claimed depreciation on such bogus assets. Since the assessee has voluntarily accepted, it is incriminating in nature and hence, the assessment order passed by the Ld. AO U/s.143(3) r.w.s 153A of the Act is valid in law.
We have heard both the sides and perused the material 34. available on record as well as the orders of the Ld. Revenue Authorities. It is an undisputed fact that the case was taken up for scrutiny and income of the assessee was assessed U/s. 143(3) of the Act vide order dated 30/12/2010. The search was initiated in Maa MahamayaGroup on 19/08/2011 and completed on 09/12/2011. It is very clear that the assessment for the impugned assessment year is unabated / completed before the search and seizure operations. We also find that the purchase of capital goods and the depreciation claimed by the assessee was very much available before the Ld. AO while framing the assessment U/s. 143(3) of the Act. The relevant financials including the P & L Account, Balance Sheet and Schedules, Tax Audit Report were available before the Ld. AO which was considered by the Ld. AO while passing the assessment for the A.Y.2008-09 on 30/12/2010. However, the Ld. AO has not raised any objections with respect to the bogus purchases and capitalization of the same while framing the scrutiny assessment. However, while framing the assessment U/s. 143(3) r.w.s 153A of the Act, the Ld. AO observed that the assessee has resorted to inflation of capital expenditure to claim depreciation and interest on the Term Loan. It is a settled law that when section 153A of the Act is invoked, the reopening of an unabated assessment can be made only on the basis of incriminating material for that assessment year. In the instant case, there is no dispute that the assessment is unabated and the Ld. AO has merely relied upon the details already available before him in the form of financial statements to make an addition while framing the assessment U/s. 153A of the Act. The Hon’ble Supreme Court in the case of Pr. CIT vs. Abhisar Buildwell (P.) Ltd (supra) held as follows:
“14. In view of the above and for the reasons stated above, it is concluded as under: i) that in case of search under Section 132 or requisition under Section 132A, the AO assumes the jurisdiction for block assessment under section 153A; ii) all pending assessments/reassessments shall stand abated; iii) 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 iv) 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 132A of the Act, 1961. 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.”
Further, in the case of Pr.CIT v. Index Securities Pvt. Ltd. (supra) relied on by the Ld.AR it was held that the seized document must be incriminating and must relate to the respective assessment year which is sought to be reopened. It was also held that the financial statements would not be said to be incriminating. Accordingly, in respect of completed assessment / unabated assessments no addition can be made by Assessing Officer in absence of any incriminating material found during course of search under section 132 or requisition under section 132A of the Act. We are of the considered view that there is no merit in the argument of the Ld. DR and the assessment order passed U/s. 143(3) r.w.s 153A of the Act cannot be justified without incriminating material being the basis for reopening of such assessment U/s. 153A of the Act. Respectfully following the above referred judicial precedents, we are inclined to quash the assessment order which is bad in law. Accordingly, Ground No.3 raised by the assessee is allowed.
In the result, appeal of the assessee is allowed.
(AY: 2009-10) - (Assessee’s appeal)
This appeal filed by the assessee is against the order of the Ld.CIT(A), Visakhapatnam-3 in DIN & Order No. ITBA/APL/S/250/2024- 25/1072433965(1), dated 22/01/2025 arising out of the order passed U/s. 153A r.w.s 143(3) of the Act, dated 25/04/2019.
The assessee has raised the following grounds of appeal:
“1. On the facts and circumstances of the case, the Ld. CIT(A) erred in both law and facts while passing the order.
2. On the facts and circumstances of the case, the Ld. CIT(A) is not justified in dismissing the ground with regard to the claim that the assessment order dated 24/04/2019 for the AY 2009-10 is barred by limitation as per the provisions of section 153B of the Act.
On the facts and circumstances of the case, the AO is not justified in making additions without incriminating material as the current assessment year is unabated assessment. Accordingly, the addition made is without jurisdiction and is unsustainable in law.
Any other ground or grounds that may be urged at the time of hearing of the appeal.”
The assessee has raised the above grounds of appeal which are identical to that of the grounds of appeal for the AY 2008-09 in ITA.No.140/Viz/2025 which is adjudicated in the above paragraphs of this order. Considering the similarity of the issues involved in these appeals and since no proceedings under the Act are pending before any authority for the impugned assessment year, our decision rendered in (AY 2008-09) mutatis mutandis applies to the assessee’s appeal in (AY 2009-10) also. Accordingly, the appeal filed by the assessee is allowed.
In the result, appeal filed by the assessee is allowed.
(AY: 2010-11) - (Assessee’s appeal)
This appeal filed by the assessee is against the order of the Ld.CIT(A), Visakhapatnam-3 in DIN & Order No. ITBA/APL/S/250/2024- 25/1072433478(1), dated 22/01/2025 arising out of the order passed U/s. 153A r.w.s 143(3) of the Act, dated 25/04/2019.
The Ld. AO has made various additions as detailed in the 41. assessment order dated 25/04/2019. On being aggrieved, the assessee carried the matter in appeal before the Ld. CIT(A). The Ld. CIT(A), partly allowed the appeal of the assessee. Aggrieved by the order of the Ld.CIT(A), the assessee is in appeal before us by raising the following grounds:
“1. On the facts and in the circumstances of the case, the Ld. CIT(A) erred in both law and facts while passing the order.
On the facts and in the circumstance of the case, the Ld. CIT(A) is not justified in dismissing the ground with regard to the claim that the assessment order dated 25/04/2019 for the AY 2010-11 is barred by limitation as per the provisions of section 153B of the Act.
3. On the facts and circumstance of the case, the Ld. CIT(a) is not justified in confirming the addition of Rs. 5.61 Crs made by the Assessing officer.
4. The addition of Rs. 5.61 Crs made assessment order passed U/s. 153A is without jurisdiction and unsustainable in law, as the said order has been passed based on the material seized during the search in the case of persons other than the assessee and since the scope of assessment U/s. 153A does not extend to such material which is not seized in the case of the assessee.
Any other ground or grounds that may be urged at the time of hearing of the appeal.”
Grounds No. 1 and 5 are general in nature and need no adjudication.
Ground No.2 is not pressed by the Ld. AR and therefore, this ground is dismissed as not pressed.
Grounds No. 3 and 4 related to the addition of Rs. 5.61 Crs made by the Ld. AO in the assessment order passed U/s. 153A of the Act. The Ld. AR submitted that the Ld. AO by relying on the search operations in the case of M/s. Maheswari Group in the F.Y. 2010-11, certain data relating to the transactions of Maa Mahamaya Industries Private Limited were found along with the papers belonging to M/s. Maheswari Group. According to the data, there were two accounts in the name of Maa Mahamaya Industries Limited and Maa Mahamaya Industries Private Limited-2. The second account contained various receipts, payments made to Maa Mahamaya Industries Private Limited. On analyzing the accounts, the Ld. AO found that there are certain cheque payments made by Maa Mahamaya Industries Private Limited to M/s. Maheswari Brothers and cash was received back by Maa Mahamaya Industries Private Limited. These cash entries were not available in the books of Maa Mahamaya Industries Private Limited. The Ld. AO therefore issued a notice U/s. 153A of the Act,dated 5/6/2012 calling for the return of income which was served on the assessee on 14/06/2012. The Ld. AO thereafter issued a show cause notice dated 6/12/2012 requiring the assessee to show cause as to why the inflated expenditure should not be disallowed. After considering carefully the reply by the assessee, the Ld. AO did not accept the reason stated by the assessee and proceeded to add Rs. 5,61,00,000/- as bogus expenditure to the returned income of the assessee. On being aggrieved by the addition made by the Ld. AO, the assessee filed an appeal before the Ld. CIT(A). The Ld. CIT(A) partly allowed the appeal of the assessee. On being aggrieved by the order of the Ld. CIT(A), the assessee is in appeal before us by raising the above-mentioned grounds of appeal.
45. The main submission of the Ld. AR is that the documents were seized in the premises of Maheswari Group during the survey operations and hence, the Ld. AO should have framed the assessment after following the due procedure laid down under section 153C of the Act and after recording satisfaction. The Ld.AR also submitted that the Ld.AO cannot frame the assessment U/s. 153A of the Act for an assessee with respect to the documents seized from the premises of other party. He therefore pleaded that since the AO has not followed the procedure prescribed under section 153C of the Act, the order of the Ld. AO is void-ab-initio and hence the addition of Rs.5.61 Crores is not sustainable.
Per contra, the Ld. DR relied on the orders of the Ld.Revenue Authorities.
We have heard both the sides and perused the material available on record as well as the orders of the Ld. Revenue Authorities. It is an undisputed fact that certain incriminating material relating to the transactions with the assessee were found during the search operation in the Maheswari Group. The Ld. AO by relying on the data seized during the search in the case of Maheswari Group proceed to make an addition of Rs. 5.61 Crs. The Ld. AO has observed cash receipts on various dates by the assessee in return to the cheques paid for purchase of raw material from the ledger accounts seized from the premises of Maheswari Group. However, we noticed that the Ld.AO has not issued any notice U/s. 153C of the Act by recording satisfaction which he ought to have issued for the reasons that the incriminating material were seized from the third-party premises other than the assessee. In the absence of any satisfaction not recorded as mandated by the provisions of section 153C of the Act, the assessment made U/s.153A of the Act is incorrect. The coordinate Bench of this Tribunal in the case of Asst. CIT vs. L.V. Beach City Property Promoters in (AY 2018-19), dated 25/09/2024 vide para 16 of the order has held as follows: “16. The Ld. AO has also not brought on record to prove the nexus between the assessee and the incriminating documents seized to invoke section 153A of the Act. Consistently following the decision of the Bench, in the case of NavyaHasini and Harshitha Constructions and Developers vs. ACIT (supra) and GoluguriNagi Reddy vs. ACIT (supra), we are of the considered view that the Assessing Officer has erred in framing the assessment based on seized material from third party premises under section 153C of the Act. Further, the admission of SLP as pointed by the Ld. DR is of no help to the revenue as Hon’ble Supreme Court of India has not stayed the decision of the Hon’ble High Court. We are therefore of the considered view that the assessment order framed under section 153A of the Act based on the material seized from the search operation from third party premises is not valid in law and therefore we find that the Ld. CIT(A) has rightly adjudicated the issue while setting aside the assessment U/s. 153A of the Act, and hence, we find no infirmity in the order of the Ld. CIT(A).”
By respectfully following the view taken by this Bench, we are inclined to dismiss the addition made by the Ld. AO for Rs. 5.61 Crs based on the incriminating material available in the third-party premises without following the procedure prescribed U/s. 153C of the Act. Therefore, Grounds No. 3 and 4 raised by the assessee are allowed.
In the result, appeal of the assessee is allowed. 49.
& 144/Viz/2025 (AY: 2011-12 & 2012-13) (Assessee’s appeals) 50. At the outset, the Ld. AR submitted that the assessee’s appeals for the AYs 2011-12 and 2012-13 may be permitted to be withdrawn. The Ld. DR did not raise any objection to the prayer of the Ld. AR for withdrawal of the assessee’s appeals for the AYs 2011-12 and 2012-13. Therefore, the assessee’s appeals in & 144/Viz/2025 are dismissed as withdrawn.
In the result, both the assessee’s appeals for the AY 2011-12 and 2012-13 are dismissed.
Pronounced in the open Court on 13th May, 2025.