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Income Tax Appellate Tribunal, “C” BENCH: BANGALORE
Before: SHRI INTURI RAMA RAO & SHRI LALIT KUMAR
Per SHRI INTURI RAMA RAO, AM:
These are appeals filed by the revenue and Cross Objections by the assessee-company directed against different orders of ld. CIT(A), Mysore both dated 28.08.2014 for the Assessment Years 2007-08 and 2008-09.
& 1443/Bang/2014 & C.O. Nos. 211 & 212/Bang/2015 Page 2 of 12
2. Now we take up the appeal and Cross Objection filed for Assessment Year 2007-08.
Briefly the facts of the case are as under.
4. The respondent assessee is a company. It is engaged in the business of Builders and Developers. The original return of income for Assessment Year 2007-08 was filed on 06.10.2008 disclosing a total income of Rs. 1,92,83,060/-. Subsequently, a search and seizure operation u/s. 132 of the Income Tax Act were conducted in the residential premises of Managing Director of the assessee company viz. Shri B.T. Dayananda Reddy on 28.02.2008. It is stated that the search and seizure action in the residential premises of the Managing Director of the respondent assessee company was in relation to the search and seizure operation in respect of M/s. Ittina Properties (P) Ltd. and group of cases. During the course of search and seizure operations, it was stated that certain incriminating material was found relating to the respondent assessee company and consequently notice dated 23.02.2009 u/s. 153C of the Act was issued to the respondent assessee requiring it to file the return of income. In response to said notice, return of income same as the original return of income was filed on 08.06.2009. Against said return of income the assessment was completed by the ld. ACIT, Central Circle (1) (2), Bangalore vide order dated 31.12.2009 passed u/s. 143(3) r.w.s. 153C of the IT Act at a total income of Rs. 5,20,37,160/-. While doing so, the ld. Assessing Officer made the following additions. i) Disallowance u/s. 40A(3) ii) Loss on sale of land – Mysore Branch iii) M/s. Trinity Sun Rise iv) Bad Debts v) Compensation paid vi) Disallowance u/s. 40A(3) & 1443/Bang/2014 & C.O. Nos. 211 & 212/Bang/2015 Page 3 of 12
5. Being aggrieved by the above additions, an appeal was preferred before the ld. CIT(A), Mysore who vide impugned order granted the relief after considering the submissions, evidence filed before him, granted relief except on the item of addition on account of loss on sale of land at Mysore of Rs. 6,50,500/-. Being aggrieved, the revenue is in appeal before us in . The assessee had filed C.O. vide C.O. No. 211/Bang/2015. Since the CO raised by the assessee company goes to the root of the matter, we shall now take up the CO.
6. The respondent assessee company raised the following grounds of objections.
1. The order of the learned Commissioner of Income-tax [Appeals] in so far as it is against the Respondent / Cross Objector are opposed to law, weight of evidence, natural justice, facts and circumstances of the case.
The Respondent / Cross Objector denies itself liable to be assessed under section 143 [3] r.w.s. 153 C of the Act under the impugned order on the ground that:-
i. The search initiated in the case of the searched person is illegal and ultra vires the provisions of section 132[1][a], [b] & [c] of the Act; ii. That the search is conducted not on the basis of any prior information or material inducing any belief but purely on the suspicion and therefore, the action under section 132[2] is bad in law [224 ITR 19 [SC] ] and consequent assessment under section 153A is null and void-ab-inito on the parity of the ratio of the decision of the Hon'ble Apex Court in the case of Ajith Jain, reported in 260 ITR 80 and consequently the order of assessment passed under section 153C of the Act is bad in law. iii. The learned authorities below has not discharged the burden of proving that there is a valid initiation of search under section 132[1][a], [b] & [c] of the Act, its execution and its completion in accordance with law to render the proceedings valid and to assume jurisdiction to make an assessment under section 153A of the Act and consequently no proceedings moreso the proceedings under section 153C of the Act initiated on the Respondent / Cross Objector do not have legs to stand.
& 1443/Bang/2014 & C.O. Nos. 211 & 212/Bang/2015 Page 4 of 12
3. The learned Commissioner of Income-tax [Appeals] failed to appreciate that the order of assessment passed by the learned assessing officer under section 143 [3] r.w.s. 153C of the Act is bad in law as the mandatory conditions to invoke the jurisdiction under section 153 C of the Income-tax Act, 1961 did not exist or having not been complied with and consequently the assessment made on the Respondent / Cross Objector under section 143 [3] r.w.s. 153C is bad in law for want of requisite jurisdiction. Reliance is placed on the decision of the Hon'ble Apex Court in the case of Manish Maheshwari Vs. ACIT & Another, reported in 289 ITR 341.
Without Prejudice the Respondent / Cross Objector denies itself liable to be assessed over and above the total income returned by the Respondent / Cross Objector of Rs. 1,92,83,060/- under the facts and circumstances of the case.
Without prejudice to the right to seek waiver as per the parity of reasoning of the decision of the Hon'ble Apex Court in the case of Karanvir Singh 349 ITR 692, the Respondent / Cross Objector denies itself liable to be charged to interest under section 234 A, 234 B and 234 C of the Income Tax Act under the facts and circumstances of the case. Further the levy of interest under section 234 A, 234 B and 234 C of the Act is also bad in law as the period, rate, quantum and method of calculation adopted on which interest is levied are all not discernable and are wrong on the facts of the case.
The Respondent / Cross Objector craves leave of this Hon'ble Tribunal to add, alter, delete or substitute any of the grounds urged above.
7. In view of the above and other grounds that may be urged at the time of hearing of the Cross Objection, your Respondent / Cross Objector humbly pray that the Cross Objection may be allowed in the interest of equity and justice.”
The main issue raised in the Cross Objection is regarding the validity and challenging the jurisdiction of the Assessing Officer u/s. 153C of the Act. It is a contention of the assessee company that there is no nexus between the seized material and the additions made and therefore the assessment made is bad in law. Even the ld. CIT could not controvert this submission despite an opportunity given to her to verify the assessment records. & 1443/Bang/2014 & C.O. Nos. 211 & 212/Bang/2015 Page 5 of 12
We have heard the rival submissions and perused the material on record.
On the mere perusal of the assessment order, it is clear that the additions were not made with reference to any seized material found in case of searched person viz., Shri B.T. Dayananda Reddy. There is no whisper or reference to any seized material in the assessment order. The additions were made based on the reappreciation of the material and documents that were part of the record filed by the assessee along with the original return of income. The Assessing Officer had placed reliance upon the existing documents that were disclosed by the assessee along with the original return of income. It is not the case of the revenue that there is abatement of assessment proceedings under the provisions of section 153C of the Act. The seized material should be incriminating in nature and it should be in relation to the assessee of the assessment year under consideration. This is a condition which is a sinquan for valid exercise of jurisdiction u/s. 153C of the Act, failure to satisfy this condition renders the assessment to be null and void. Reliance in this regard can be placed on the recent decision of Hon’ble Supreme Court in the case of CIT vs. Sinhgad Technical Education Society as reported in 397 ITR 344, wherein, the Hon’ble Apex Court held that in the absence of nexus between the seized material and the additions made, the necessary condition precedent for valid jurisdiction under section 153C is not satisfied. The relevant portion of this judgement is as under. “16. In these appeals, qua the aforesaid four Assessment Years, the assessment is quashed by the ITAT (which order is upheld by the High Court) on the sole ground that notice under Section 153C of the Act was legally unsustainable. The events recorded above further disclose that the issue pertaining to validity of notice under Section 153C of the Act was raised for the first time before the Tribunal and the Tribunal permitted the assessee to raise this additional ground and while dealing with the same on merits, accepted the contention of the assessee.
First objection of the learned Solicitor General was that it was improper on the part of the ITAT to allow this ground to be raised, & 1443/Bang/2014 & C.O. Nos. 211 & 212/Bang/2015 Page 6 of 12 when the assessee had not objected to the jurisdiction under Section 153C of the Act before the AO. Therefore, in the first instance, it needs to be determined as to whether ITAT was right in permitting the assessee to raise this ground for the first time before it, as an additional ground.
18. 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 153C 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 153C 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 153C of the Act. Para 9 of the order of the ITAT reveals that the 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, learned senior counsel appearing for the respondent, argued that notice in respect of Assessment Years 2000-01 and 2001-02 was even time barred.
19. We, thus, find that the ITAT rightly permitted this additional ground to be raised and correctly dealt with the same ground on merits as well. Order of the High Court affirming this view of the Tribunal is, therefore, without any blemish. Before us, it was argued by the respondent that notice in respect of the Assessment Years 2000- 01 and 2001-02 was time barred. However, in view of our aforementioned findings, it is not necessary to enter into this controversy.
Insofar as the judgment of the Gujarat High Court relied upon by the learned Solicitor General is concerned, we find that the High Court in that case has categorically held that it is an essential condition precedent that any money, bullion or jewellery or other valuable articles or thing or books of accounts or documents seized or requisitioned should belong to a person other than the person referred to in Section 153A of the Act. This proposition of law laid down by the High Court is correct, which is stated by the Bombay High Court in the impugned judgment as well. The judgment of the Gujarat High Court in the said case went in favour of the Revenue & 1443/Bang/2014 & C.O. Nos. 211 & 212/Bang/2015 Page 7 of 12 when it was found on facts that the documents seized, in fact, pertain to third party, i.e. the assessee, and, therefore, the said condition precedent for taking action under Section 153C of the Act had been satisfied.
Likewise, the Delhi High Court also decided the case on altogether different facts which will have no bearing once the matter is examined in the aforesaid hue on the facts of this case. The Bombay High Court has rightly distinguished the said judgment as not applicable giving the following reasons: “8. Reliance on the judgment of the Division Bench of the High Court of Delhi reported in case of SSP Aviation Ltd. Vs. Deputy Commissioner of Income Tax (2012) 346 ITR 177 is misplaced. There, search was carried out in the case of “P” group of companies. It was found that the assessee before the Hon’ble Delhi High Court had acquired certain development rights from “P” group of companies. Based thereon, the satisfaction was recorded by the Assessing Officer and he issued notice in terms of Section 153C. Thereupon the proceedings were initiated under section 153A and the assessee was directed to file returns for the six assessment years commencing from 2003-04 onwards. The assessees filed returns for those years but disclosed Nil taxable income. These returns were accepted by the Assessing Officer, however, in respect of the assessment year 2007-08 there was a significant difference in the pattern of assessment for this year also, the return was filed for Nil income but there were certain documents and which showed that there were transactions of sale of development rights and from which profits were generated and taxable for the assessment year 2007-08. Thus, the receipt of Rs.44 crores as deposit in the previous year relevant to the assessment year 2008-09 and later on became subject matter of the writ petition before the Delhi High Court. That was challenging the validity of notice under section 153C read with section 153A. In dealing with such situation and the peculiar facts that the Delhi High Court upheld the satisfaction and the Delhi High Court found that the machinery provided under section 153C read with section 153A equally facilitates inquiry regarding existence of undisclosed income in the hands of a person other than searched person. The provisions have been referred to in details in dealing with a challenge to the legality and validity of the seizure and action founded thereon. We do not find anything in this judgment which would enable us to hold that the tribunal’s understanding of the said legal provision suffers from any error apparent on the face of the record. The Delhi High Court judgment, therefore, will not carry the case of the revenue any further.” We, thus, do not find any merit in these appeals.”
& 1443/Bang/2014 & C.O. Nos. 211 & 212/Bang/2015 Page 8 of 12
In the light of this legal position since in the present case there was no reference to the seized material and nexus between the seized material and the addition made, the addition cannot be sustained and there is no valid exercise of jurisdiction u/s. 153C. As a consequence of which the assessment order dated 31.12.2009 is not valid under law.
The Cross Objection filed by the assessee company is allowed.
Revenue appeal Assessment Year 2008-09:- 12. Since in the Cross Objection filed by the assessee company who held that assessment order is not valid in law, appeal filed by the revenue in is dismissed. in Assessment Year 2008-09:-
The assessee company had not filed the return of income voluntarily u/s. 139(1) even there was failure on part of the assessee in respond to notice u/s. 142(1) issued on 24.02.2009. Subsequently the Assessing Officer issued notice u/s. 142(1) of the Act requiring the assessee to produce the books of account and other documents. Subsequently, the return of income was filed on 21.10.2009 declaring income of Rs. 1,89,149/- and the assessment was completed by the ACIT, Central Circle – 1(2), Bangalore vide order dated 31.12.2009 passed u/s. 143(3) of IT Act at a total income of Rs. 1,14,82,150/-. While doing so the Assessing Officer disallowed a sum of Rs. 27,25,725/- by holding as under and also disallowed the bad debts of Rs. 5,68,497/- in respect of St. Mary’s Educational Trust and Rs. 79,98,779/- and in respect of Sri Balaji Builders and Developers on the ground that the debts have not become bad. The relevant findings of the AO are as under. “7. The assessee has shown under Project Advances, M/s.Gancon Project at Rs.2 crores as on 31.3.2005. As per the bank account the & 1443/Bang/2014 & C.O. Nos. 211 & 212/Bang/2015 Page 9 of 12
assessee has issuod two cheques of Rs.one crore each during the F.Y.2004-05 and the cheques were realized on 4.4.05. The total amount received as on 31.3.08 is Rs.2,59,28,314/-. The assessee has shown Rs.32,02,589/- as income from this. It is stated that the assessee ha paid interest. The assessee has not produced any documentary evidence and the purpose and the nature of loan and the details of interest paid. In the absence of any details, the difference of Rs.27,25,725/- is added to the income. Additions : Rs.27,25,725/-“
Being aggrieved, an appeal was preferred before CIT(A). The CIT(A) after calling for the remand report had deleted the addition on account of interest of Rs. 27,25,725/- based on the remand report of the Assessing Officer wherein the Assessing Officer had admitted that the said amount is not in the nature of interest, but the bank charges. As regards, the bad debts written of in the sum of Rs. 5,68,497/-, the same was confirmed as the amount written off was not in the nature of debts. As regards the amount of written off of bad debts of Sri Balaji Builders and Developers, the CIT(A) after considering the remand report and the submission of the assessee company allowed / granted relief by holding as under. “10.3 I have carefully considered the submissions of the appellant as well as the comments of the A.O. in the remand report. The appellant had entered into a Memorandum of Agreement with Sri. Balaji Builders & Developers for the development of a project called Gold View Apartments vide a Memorandum of Agreement dated 02.04.2005 pursuant to the agreement certain advances to Sri. Balaji Builders & Developers on various dates towards the development of project (A copy of the MOA was made part of the Written Submissions by the appellant). Bills were raised on the appellant and the same was paid by the appellant. The costs incurred towards development of the project were shown under the head advances in the books of the appellant. As seen from the ledger copies furnished by the appellant, the appellant had a running account of payments to the party. As and when bills are submitted, the same were also recorded. The bills were submitted by the said party till 25.04.2006. The appellant subsequently made a payment of Rs.25,00,000/- on 07.02.2007 and another Rs.25,00,000/- on 29.05.2007 which together with the earlier balance constituted this outstanding figure. The bills for these advances are not reflected in the ledger account. However, considering the fact that the appellant has sold substantial flats and held the balance, the works apparently are executed. Hence, this is definitely a business expenditure which should be taken as project cost.
& 1443/Bang/2014 & C.O. Nos. 211 & 212/Bang/2015 Page 10 of 12
10.4 I have considered the contentions and explanations of the appellant and the material available on record. The amount written off by the appellant of Rs. 79,98,779/- is towards the project undertaken by the appellant and the said amount which is written off as bad debt though technically is not correct definitely is in the nature of business expenditure. Hence, I find substance in the claim of the appellant in the written submission that the said amount of Rs. 79,98,779/- is to be appropriated towards the cost of the project. Accordingly, AO is directed to treat this as project cost. In effect, this ground is allowed.”
Being aggrieved the revenue is in appeal before us. The grounds of appeal filed by the revenue challenges the relief granted by CIT(A) on the bad debts written off. The ld. CIT(DR) argued that the CIT(A) ought not to have granted the relief. On the other hand, the ld. counsel supported the order of CIT(A).
We have heard the rival submissions and perused the material on record. The only issue in this grounds of appeal is whether the CIT(A) was justified in granting relief on the addition made in respect of bad debts written off. The only grounds on which the AO has made addition is that the assessee has failed to prove that debt has become bad. After considering the submission that the amount advanced to Sri Balaji Builders and Developers was for the development of project called Gold View Apartments in terms of Memorandum of Agreement dated 02.04.2005 and these amounts were shown as cost by developer of the project and finally this project could not be completed by them and the same was written off in the books of accounts as bad debts. It is the contention of the assessee-company that if not as a bad debt the same should be allowed as a business loss, once the amounts written off in the books of account is bad debt, the same should be allowed as a bad debt and is no longer requirement of law to prove that the debt has become really bad. In this regard the reliance was placed by the assessee-company on the decision of Hon’ble Supreme Court in the case of T.R.F. Ltd. Vs. CIT as reported in 323 ITR 397. The assessee-company also made alternative to submission that if not as & 1443/Bang/2014 & C.O. Nos. 211 & 212/Bang/2015 Page 11 of 12
a bad debt the same should be allowed as a business loss after placing reliance on the following decisions. “a. Harshad J Choksi Vs. CIT, 80 DTR 20 [Born]; wherein the Hon'ble Court has held that "If a deduction is not allowable as bad debt, there is no bar in claiming the loss as a business loss, if the same is incidental to carrying on of business. b. CIT, Mysore Vs. Y. V.Sreenivas Murthy, 63 ITR 306 [Mysore High Court] c. CIT Vs. Abdul Razak & Co., 136 ITR 825 [Guj] d. Tar & bitumen Products Ltd., Vs. CIT, 136 ITR 833 [Cal], e. CIT Vs. Sri. Vinayaga Pictures, 161 ITR 65 [Mad], f. CIT Vs. K.M.Mody, 141 ITR 903 [Born], g. Bilasrai Juharmal Vs. CIT, 141 ITR 915 [Born], h. CIT Vs. Cresent Films (P) Ltd., 248 ITR 670 [Mad], i. CIT Vs. Essen (P) Ltd., 49 ITR 109 [Mad]”
The ld. CIT(A), after considering the above submissions had allowed the relief. The ld. CIT(DR) has not placed any material on record controverting the findings of CIT(A) and since the order of CIT(A) is inconsonance with well settled position of law on the issue, we do not find any reason to interfere with the order of CIT(A). Hence the appeal filed by the revenue is dismissed.
C.O. No. 212/Bang/2015 in ITA No. 1443/Bang/2014:-
17. The Cross Objection filed by the assessee-company challenging the very validity of assessment order passed as there was no incriminating material found as a result of search action in the premises of the Managing Director of the assessee-company. Mere perusal of the assessment order would show that the assessment order was not framed as a consequence of the incriminating material. There is a abatement of assessment proceedings. In the revenue appeal we had confirmed the order of ld. CIT(A) granting relief.
In the result, the issues in the Cross Objections raised have become infructuous and dismissed as such. & 1443/Bang/2014 & C.O. Nos. 211 & 212/Bang/2015 Page 12 of 12
In the result both the appeals filed by the revenue and the Cross Objections filed by the assessee are dismissed.
Pronounced in the open court on this 19th day of January, 2018.