M/S. ARORA JEWELLERS PVT. LTD.,DELHI vs. ACIT, NEW DELHI

Briefly stated, the facts of the case are that the assessee company was incorporated on 4.7.2001. A search and seizure operation u/s 132 of the Act was carried out on 9.12.2005 at the business premises of the assessee company as well as at the residences of its directors. Notice u/s 153A was issued on 13.8.2007 requiring the assessee to file its return of income. The assessee filed return for the A.Y. 2002-03 on 13.12.2007 declaring loss of Rs.3,12,877/-. No undisclosed income was offered in the return filed pursuant to notice u/s 153A. Since this was the first year of the operations of the company, the AO required the assessee to furnish complete details of share application/capital amounting to Rs.37,74,000/-. The assessee did not furnish any details, such as, the names and addresses of the persons who applied for the share capital. In this backdrop of the facts, the AO made addition of Rs.37.74 lac as unexplained share application money. The assessee filed appeal against the assessment order furnishing certain details qua the addition made by the AO. The ld. first appellate authority called for the remand report from the AO and, thereafter, the comments of the assessee on the remand report. On appreciation of the evidence before him, the ld. CIT(A) deleted the addition of Rs.10,10,000/-, representing the receipt of share application money from certain parties who had confirmed the transactions. This resulted into sustenance of addition to the tune of Rs.27.64 lac against which the assessee has come up in appeal before us.

Apart from certain grounds taken in the Memorandum of Appeal, the assessee, during an earlier hearing before the tribunal, raised an additional ground, reading as under:-

This aforesaid ground was taken up for admission. After entertaining arguments from both the sides, the Bench, vide its order dated 27th January, 2015, admitted the additional ground but adjourned the hearing of the appeal at the request of the ld. DR.

The ld. AR opened his arguments on the additional ground by submitting that the assessment order passed u/s 143(3) of the Income-tax Act, 1961 (hereinafter also called ‘the Act’) read with section 153A be quashed because the addition sustained in the first appeal amounting to Rs.27.64 lac is not based on any incriminating material found during the course of search and, hence, the same should be deleted. In support of the deletion of addition, the ld. AR relied on the judgment of the Hon’ble jurisdictional High Court in CIT vs. Kabul Chawla (2016) 380 ITR 573 (Del). On a specific query from the Bench, the ld. AR submitted that the assessee did file its return of income for the year under consideration within the time prescribed u/s 139(1) of the Act.

We have heard the rival submissions and perused the relevant material on record. Section 153A(1) provides that the AO shall assess or reassess the total income of six assessment years immediately preceding the assessment year relevant to the previous year in which the search is conducted etc. In the instant case, search was conducted on 9.12.2005.

We have noticed above that in the scheme of assessment of search cases u/s 153A, there are six assessment years involved in total. There can be two types of assessment years, namely, the assessment years with completed assessments and the assessment years with non-completed assessments. The assessment years with completed assessments mean the assessment years for which either the assessments were completed by the AO u/s 143(3) or section 144 before the date of search or the assessment years for which the regular assessments were not taken up after the filing of the returns by the assessee and further the time limit for issuing notice u/s 143(2) expired on the date of search. As per the scheme under the Act, a return filed by the assessee is first processed by the A.O. u/s 143(1)(a) in which total income is computed after making the specified adjustments. As per clause (b), tax and interest, if any, is computed on the basis of the total income computed under clause (a).

The assessment years with non-completed assessments mean the assessment years for which the assessments were pending on the date of search, that are abated in terms of the express provision of the second proviso to section 153A. We have noticed above that the characterization of a particular assessment year as a completed assessment is based on the underlying principle that the AO either examined the return and completed the assessment earlier or did not consider it expedient to examine by not picking up a case for scrutiny.

Now we come to the second aspect of the types of additions. There can be two broad categories of additions that can be made in the assessment made u/s 153A. First are the additions based on incriminating material found during the course of search (hereinafter also called as `the additions of the first type’) and second are the other additions not based on incriminating material found during the course of search, that is, the additions on the basis of the disclosed particulars of income and the material produced by the assessee or gathered by the AO during the course of assessment proceedings etc. (hereinafter also called as `the additions of the second type’).

With the advent of the judgment in Kabul Chawla (supra), the AO’s power has been curtailed in making additions of the first type in respect of the completed assessments. Per contra, if the assessment for any of the six assessment years is not complete on the date of search, then there is no impediment on the AO to restrict the additions only to the first type. Thus, in a case also where no original return was filed, the AO will be entitled to make additions, both of the first and the second types. The ld. AR vehemently contended that the AO cannot make additions of the second type u/s 153A even in the cases of non- completed assessment at the time of search. It was argued that unless some incriminating material is found during the course of search, no addition can be made either in the case of completed assessments or non-completed assessments. This view was canvassed by relying on para 37(v) of the judgment in the case of Kabul Chawla (supra), which says that : `In absence of any incriminating material, the completed assessment can be reiterated and the abated assessment or reassessment can be made.’ We do not find any force in this argument. It is clear from this para itself that only the completed assessments are reiterated in the absence of incriminating material. Thus, it is patent that insofar as the non-completed assessments are concerned, the additions can be made on the basis of some disclosed or undisclosed material/evidence other than the incriminating material. This position becomes further clear from para 37(vi) of the judgment, which states that : `Insofar as pending assessments are concerned, the jurisdiction to make the original assessment and the assessment under Section 153A merges into one. 12 Only one assessment shall be made separately for each AY on the basis of the findings of the search and any other material existing or brought on the record of the AO.’ This shows that such assessments are based not only on the findings of the search, but also any other material existing or brought on the record of the AO. The position that the completed assessments are not to be interfered unless some incriminating material is found and not the pending assessments becomes more lucid from para 37(vii), which states in unambiguous terms that : `Completed assessments can be interfered with by the AO while making the assessment under Section 153A only on the basis of some incriminating material unearthed during the course of search …. which were not …. already disclosed or made known in the course of original assessment.’ We, ergo, jettison the contention that even in the non-completed assessments on the date of search, additions can be made only of the first type, that is, for which some incriminating material is found.

The overall position is thus summarized that for the assessment years having completed assessments as on the date of initiation of search, the AO, in making assessment u/s 153A, can make additions only on the basis of incriminating material. Years having completed assessments mean the years for which either the assessments were formally completed before the date of search or time limit for issuing notice u/s 143(2) was exhausted. For the assessment years having non- completed assessments as on the date of initiation of search, the AO, in making assessment u/s 153A, can make additions both on the basis of incriminating material found during the course of search and also the disclosed or undisclosed particulars of income and the material produced by the assessee or gathered by the AO during the course of assessment etc. Years having non-completed assessments mean the years for which either the assessments were formally pending on the date of search or no valid returns were filed by the assessee prior to the search.

Adverting to the facts of the instant case and the legal position discussed above, we agree, in principle, with the contention of the ld. AR that if no incriminating material is found during the course of search in respect of any year with completed assessment, then, no fresh addition can be made and the assessment u/s 153A will be a repetition of income determined in the already concluded assessment. However, in order to be eligible for this preferential treatment, the assessee needs to prove that no incriminating material was found during the course of search and further that he had already filed return for such assessment year and no assessment was pending as on the date of initiation of search.

In so far as the finding of any incriminating material during the course of search qua the addition sustained in the first appeal amounting to Rs.27.64 lac is concerned, we find from the assessment order as well as the impugned order that there is no reference whatsoever to any incriminating material. The ld. DR also could not bring to our notice any incriminating material found during the course of search casting doubt on the genuineness of the share application money amounting to Rs.27.64 lac received by the assessee. In such circumstances, we are satisfied that the first condition for availing the privileged treatment is satisfied in the instant case. As regards the second condition, namely, the completion of assessment for the year under consideration before the date of search, we find that there is no discussion in the assessment order about any assessment for such year having been already completed before issuance of notice u/s 153A. Further, our attention has not been drawn towards any material to indicate that the assessment for the year under consideration stood completed before the date of search. The ld. AR has also not brought to our notice a copy of the return filed by the assessee u/s 139 before the date of search. In such a situation, we are unable to conclusively hold whether the assessment for the year was completed or not-completed on the date of search in terms of our above discussion. As such, we set aside the impugned order and remit the matter to the file of AO for first ascertaining the factum of the instant year, being a completed or non-completed assessment year and thereafter, decide the fate of addition accordingly and in line with the discussion made above. Needless to say, the assessee will be allowed a reasonable opportunity of being heard in determining the above aspect of the matter. 16

In the result, the appeal is allowed for statistical purposes.

This assessment year is one of the six assessment years referred in section 153A of the Act. The assessee’s share capital increased from Rs.1 lac in the immediately preceding year to Rs.39.11 lac during the year under consideration. In the absence of any adequate details forthcoming from the side of the assessee, the AO made addition of Rs.38.11 lac. The assessee filed certain fresh material before the ld. CIT(A), who called for the remand report from the AO. On examination of the entire material available with him, the ld. CIT(A) deleted addition of Rs.13 lac, for which confirmations were already filed and accordingly sustained the remaining addition at Rs.25.11 lac. The Revenue’s appeal for the instant year was dismissed earlier because of low tax effect.

The assessee has raised additional ground on the same lines as discussed above for the A.Y. 2002-03. Similar arguments were advanced both by the ld. AR and the ld. DR. It is the common submission that the facts and circumstances of this legal issue are mutatis mutandis similar to those for the assessment year 2002-03.

In the result, the appeal is allowed for statistical purposes.

The facts for this assessment year are also similar to the foregoing two assessment years. The AO made an addition of Rs.6 lac on account of unexplained share capital, which got reduced to Rs.2 lac in the first appeal. The Revenue’s appeal for the instant year was dismissed earlier because of low tax effect. The assessee is aggrieved against the sustenance of addition to this extent.

The ld. AR again pressed the additional ground by contending that no incriminating material was found in the course of search relating to the addition of Rs.2 lac representing the amount of share application money received from Shri Magan Murti and hence this addition be 18 deleted. This was opposed by the ld. DR who contended that the time limit available for completion of the assessment u/s 153 for this year was two years from the end of the relevant assessment year, meaning thereby, up to 31.3.2007. Since the search took place on 9.12.2005, the ld. DR contended that this assessment year should be considered as a year of non-completed assessment and, hence, the preferential treatment of making additions only on the basis of incriminating material found during the course of search, should not be extended to the assessee.

We have heard the rival submissions and perused the relevant material on record. The moot question is whether this is a year with completed or non-completed assessment as on the date of initiation of search. The ld. DR harped on the time limit given u/s 153 for the completion of assessment which, in his opinion, is decisive to conclude that it was a case of non-completed assessment. In our considered opinion, the view propounded by the ld. DR is bereft of force. We have held supra that the decisive test is the time limit for issuing notice u/s 143(2). There is a marked difference between the time limit for issuing notice as given in section 143(2) and time limit for completing assessment u/s 153. Obviously, no assessment can be taken up without issuing notice within the time prescribed u/s 143(2). If the time limit for issue of notice has expired, the AO cannot take up scrutiny assessment, even if the time limit for passing the order u/s 153 is available. Thus, the crucial factor is the time limit for issuing notice and not the passing of the assessment order as urged by the ld. DR.

Reverting to the facts for the assessment year under consideration, we find that section 143(2) gives time limit for issuing a notice for the instant year as twelve months from the end of the month in which the return is furnished. If, on the date of search, such time limit for issuing notice u/s 143(2) already stood expired and no notice was issued up to that date, then assessment for such year ceases to be non-completed.

On merits, the ld. AR argued that out of total addition of Rs.6 lac made by the AO, the ld. CIT(A) deleted the addition of Rs.4 lac, thereby sustaining the addition at Rs.2 lac, being the amount of share application money received from Smt. Magan Murti. He contended that confirmation from this share applicant was filed during the course of assessment proceedings and, hence, the addition should not have been made or confirmed. The ld. AR invited our attention towards page 35 of the paper book, being, a copy of the confirmation of this person. This was controverted by the ld. DR who submitted that the assessee did not file any confirmation before the AO, either during the assessment or the remand proceedings. That was stated to be the reason why the remand report, whose copy is available on pages 16 onwards of the paper book, does not contain any reference of the so-called confirmation filed by the assessee.

After considering the rival submissions and perusing the relevant material on record, we find that though a copy of confirmation has been placed on page 35 of the paper book, but the ld. AR failed to draw our attention towards acknowledgement of this confirmation by the office of the AO or any covering letter filed before the AO with this confirmation.

In the result, the appeal is allowed for statistical purposes.

This is the last year of the six assessment years as per section 153A of the Act. The AO made an addition of Rs.9,60,000/- towards unexplained share application/share capital. The ld. CIT(A) got convinced with the source of share application money and genuineness of transactions for a sum of Rs.7,50,000/- and sustained addition for the remaining sum of Rs.2.10 lac. The Revenue’s appeal for the instant year was dismissed earlier because of low tax effect.

In support of the additional ground, the ld. AR, again, submitted that no incriminating material was found qua the receipt of share application money of Rs.2.10 lac and, hence, such addition be deleted at the threshold. This was countered by the ld. DR.

Having heard the rival submissions and perused the relevant material on record, we find that the legal ground raised by the assessee cannot be allowed. Even if it is presumed for a moment that the assessee did file its return of income u/s 139(1) before the date of search, still, this year cannot be considered as a year of completed assessment on the date of initiation of search. It is so for the reason that the time limit for issuing notice u/s 143(2), being twelve months from the end of the month in which return is furnished, did not expire on the date of search, which took place on 9.12.2005. This means that the AO had time for issuing notice u/s 143(2) on the date of search, thereby, making it as a year of non-completed assessment. As such, the preferential treatment to the assessee ceases to be available. In such a year of non-completed assessment, the AO can charge to tax both the types of incomes, viz., the income based on incriminating material and the income based on disclosed/undisclosed particulars etc. other than the incriminating material found during the course of search. Thus, the additional ground raised by the assessee fails.

Coming to the merits of the addition of Rs.2.10 lac, being the amount of share application money received from Ms Arti, we find that though the assessee filed confirmation in respect of the amount allegedly received from Ms Arti, however, it is recorded in the remand report that she stated before the AO to have never invested any money with the assessee and further that a fraud was played by the company with the Income-tax Department by forging her signature. The ld. AR assailed the correctness of the statement made by Ms Arti about the forging of her signature by contending that she paid share application money through banking channel and her bank particulars were given in the confirmation filed. He argued that the AO did not allow any opportunity to the assessee to cross-examine Ms Arti before accepting her vacillating versions. This argument was also taken up by the assessee before the ld. CIT(A).

We find that there is an apparent contradiction in the stand of Ms Arti. Even if we assume that her confirmation was forged by the assessee, but, the fact is that this amount reached the assessee through her bank account. In view of the admission by Ms Arti before the AO that she did not invest any money with the assessee company, it was incumbent upon the AO to allow cross-examination to the assessee, so that the truth could be brought out. There is no mention anywhere either in the remand report or the impugned order that the assessee was allowed opportunity to cross-examine Ms Arti. Under these circumstances, we set aside the impugned order and remit the matter to the file of AO for allowing a cross-examination of Ms Arti to the assessee and then decide about the fate of addition.

In the result, the appeal is partly allowed for statistical purposes.