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आदेश/Order
Per Bench The captioned appeals have been preferred by the assessee against the separate orders of the Commissioner of Income Tax (Appeals)-5, Ludhiana [hereinafter referred to as CIT(A)], dated 26.04.2017 (in ITA Nos. 1022 & 1023/Chd/2017) 16.5.2017 (in ITA Nos. 1024 to 1026/Chd/2017) .
As the facts, circumstances and issues raised in all the appeals are identical, therefore, these have been heard together and are being decided by the common order for the sake of convenience.
ITA Nos. 1022 to 1026/Chd/2017- M/s RPA Developers, Ludhiana
ITA No. 1022/CHD/2017 is taken as lead case for narration of
facts.
ITA No. 1022/Chd/2017 (A.Y.2008-09)
The assessee has raised the following grounds of appeal :
That the Ld. CIT(A)-5, Ludhiana has wrongly passed the order u/s 250(6) of the Income-tax Act, 1961 against law & facts of the case.
That the assessment framed u/s 153C of the Act by the DCIT, Central Circle-III, Ludhiana is without jurisdiction.
That the assessment framed u/s 153C of the Act in absence of any satisfaction note is Null and void.
That the assessment framed u/s 153C of the Act without any reference to indiscriminating of seized material is nullity.
That the Ld. CIT(A)-5, Ludhiana failed to appreciate that the Ld. Assessing officer erred in law and fact of the case in disallowing interest of Rs. 4,70,846/- claimed u/s 36(1)(iii) of the Act without any base or reason thereof.
That the Ld. CIT(A)-5, Ludhiana failed to appreciate that the Ld. also erred in law & fact of the case in not allowing to carry forward business loss to the tune of Rs. 4,70,846/- contravening provisions of section 72 of the Act, without any base and reason thereof.
That the order passed by Ld. CIT(A)-5 is in contravention to expressed provisions of section 3 of the Income tax Act.
That the Ld. CIT(A) failed to appreciate that what is relevant for the purpose of section 3 of the Act is date of ‘set up’ and not the date of commencement of business.
That the appellant craves, leave to vary, alter or add any; grounds of appeal.
ITA Nos. 1022 to 1026/Chd/2017- M/s RPA Developers, Ludhiana
The brief facts relating to the issue are that a search action
u/s 132(1) of the Income-tax Act, 1961 (in short 'the Act') was
conducted at the premises of another assessee i.e Palace Jeweller
Group. During the course of search action, certain documents
belonging to the assessee were also found and seized. Thereafter,
proceeding u/s 153C were initiated against the assessee and
accordingly notice u/s 153C of the Act was issued to the
assessee. In response to the said notice u/s 153C of the Act, the
assessee filed written reply stating therein that the return filed u/s
139(1) on 31.7.2008 may be treated as filed in response to notice
u/s 153C of the Income-tax Act, 1961. Thereafter, the Assessing
officer under section 153C of the Act, made the impugned
additions on account of disallowance of loss claimed and interest
expenses claimed.
In appeal, the Ld. CIT(A) confirmed the addition made by the
Assessing officer.
Being aggrieved of the order of the CIT(A) on this issue, the
assessee, thus has come up on appeal before us.
At the outset, ld. counsel for the assessee has submitted that
the impugned additions have not been made by the Assessing
Officer on the basis of any alleged incriminating material fond
during the course of search at the premises of Palace Jewellers
Group. That the original assessment proceedings for the
assessment year under consideration had already attained finality
as on the date of search/issue of notice to the assessee and that
even the limitation period for issuance of notice u/s 143(2) of the
Act for initiation of scrutiny assessment proceedings had expired.
ITA Nos. 1022 to 1026/Chd/2017- M/s RPA Developers, Ludhiana
He, therefore, has contended that no additions were warranted on
any issue other than based on any incriminating material found
and seized during search action on the basis of which the
assessment was opened/carried out in the case of the assessee u/s
153C of the Act. He, in this respect, has relied upon the decision of
the Hon'ble Bombay High Court in the case of “All Cargo Global
Logistics Ltd.” 120 DTR 89 and of the Delhi High Court in the case
of “CIT Vs. Kabul Chawla” 234 Taxman 300 ( Delhi) and in
“Principal CIT Vs. Meeta Gutgutia Prop M/s Ferns ‘N’ Petals”, ITA
306/2017 and others decided vide order dated 25.5.2017.
The ld. DR on the other hand has submitted that original
assessment proceedings were not completed u/s 143(3) of the Act
rather the returns filed by the assessee were processed u/s 143(1)
of the Act and under the circumstances, the Assessing Officer was
empowered to examine and look into the issue as the same were not
looked into while processing the return u/s 143(1) of the Act. He,
therefore, has relied upon findings of the CIT(Appeals). However,
the ld. DR has been fair enough to admit that the additions in this
case have not been made on the basis of any incriminating material
found during the search action at the premises of Palace Jewellers
Group as referred to by the Assessing Officer on the basis of which
assessment proceedings in the case of the assessee u/s 153C were
initiated. He has also not disputed that the original assessments for
the assessment year under consideration stood completed and not
abated as on the date of search i.e. 31.10.2012 and on the date of
subsequent issue of notice u/s 153C of the Act on 09.09.2014.
ITA Nos. 1022 to 1026/Chd/2017- M/s RPA Developers, Ludhiana
We have heard the rival submissions and perused the material
on record. The issue relating to the validity of assessment made
under section 153A without having any incriminating material
found during the search action u/s 132 of the Act in case of
completed assessments, even where the original return was
processed under section 143(1) of the Act, has come into
consideration before the co-ordinate Mumbai Bench of the Tribunal
in the case of “The ACIT Cent. Cir. 33, Mumbai vs. Shri Jayendra P.
Jhaveri” ITA Nos.2141, 2142, 2143 & 2144/M/2012 & CO Nos.248,
249, 250 & 251/M/2013 decided on 20.02.2014 (One of us being
party to that order). The Tribunal has discussed the issue in detail
and has made the following observations:
“8. The learned DR has also filed written submissions. To stress his point that the return processed u/s. 143(1) cannot be said to be an assessment but a mere intimation, he has relied upon the judgment of Hon’ble Supreme Court in the case of “Rajesh Jhaveri Stock Brokers P. Ltd.” (2007) 291 ITR 500 (SC). His contention has been that in the case in hand the assessment was not done originally u/s. 143(3) hence the estimation in question has been rightly made u/s. 153A of the Act by the AO. He has further contended that the principal laid down by the Special Bench of the Tribunal in the case of “All Cargo Global Logistics Ltd.” 137 ITD 287 can be applied to the case where the original assessment was completed u/s. 143(3) of the Act and not to the case where the return was processed u/s. 143(1) of the Act. 9. We have considered the submissions of the learned DR. So far so the reliance placed by him in the case of “Rajesh Jhaveri Stock Brokers P. Ltd.” (supra) is concerned, we may observe that the issue before the Hon’ble Supreme Court in that case was regarding the reopening of the assessment u/s. 147 of the Act. The Hon’ble Supreme Court held that the proposition of law laid down by the Hon’ble Gujarat High Court in the case of “Adani Exports v. Deputy CIT”, (1999) 240 ITR 224 (Guj) was not applicable in that case. In the case of “Adani Exports” (supra), where the assessment was made u/s. 143(3) of the Act, and the AO did not hold any belief that income had escaped assessment on account of erroneous computation, the re- opening u/s. 147 made merely on the basis of audit objections was held to be bad in law by the Hon’ble High
ITA Nos. 1022 to 1026/Chd/2017- M/s RPA Developers, Ludhiana
Court. In the case of “Rajesh Jhaveri Stock Brokers P. Ltd.” (supra), the Hon’ble Supreme Court while interpreting the provisions of section 143(1) and section 143(3) (as were in force during the relevant time period) has held that in case of assessment made u/s. 143(3), the assessment is made by the AO by applying his mind whereas in case of processing of return u/s. 143(1) of the Act, there is no application of mind by the AO and as such, if a new material comes into the knowledge of the AO and the requirements of section 147 of the Act are fulfilled, the AO is free to initiate proceedings u/s. 147 and the failure to take steps u/s. 143(3) will not render the AO powerless to initiate re-assessment proceedings even when intimation u/s. 143(1) had been issued. So the proposition of law laid down in the case of “Rajesh Jhaveri Stock Brokers P. Ltd.” (supra) relates to the powers of the AO for re-opening of assessment u/s. 147in relation to the assessment proceedings conducted under section 143(1) viz-a-viz u/s 143(3) of the Act. (as were in force during the relevant period, since section 143 has been further amended vide Finance Act 2008 w.e.f 01.04.2008.) It is to be noted that powers of the AO to re-open an assessment u/s. 147 is subject to limitation of time period as prescribed u/s. 149 of the Act. So the reasonable conclusion will be that whether the return was processed u/s. 143(1) or u/s. 143(3), if the AO has a reason to believe that any income chargeable to tax has escaped assessment, he can re-open the assessment u/s. 147 by issuing notice u/s. 148 but within the time limit as prescribed u/s. 149 of the Act. 10. So far so, the question as to the processing of return u/s. 143(1) viz-a-viz assessment made u/s. 143(3) is concerned, it may further be observed that after processing of return u/s. 143(1) the same can be assessed u/s. 143(3) by issue of notice u/s. 143(2) subject to its issuance within the limitation period of 12 months from the end of the month in which return is furnished as per the proviso to clause (ii) of section 143(2) [as was existing at the time of relevant assessment year]. Once the limitation period as prescribed vide proviso to clause (ii) of sub section (2) of section 143 is expired, it is not open to the AO to assess the income u/s. 143(3) of the Act and the return filed by the assessee u/s. 139 is deemed to be accepted, which however, can be re-opened u/s. 147 of the Act subject to the fulfillment of ingredients of section 147 and within the time period as prescribed u/s. 149 of the Act, as discussed in the preceding para. So under such circumstances if the return is processed u/s. 143(1) and not u/s. 143(3) and after the prescribed period of limitation, the same cannot be assessed u/s. 143(3) though it may be interpreted as mere intimation assessment or otherwise, but the same shall be deemed to be accepted by the AO and it will not have any different colour other than the return which is processed u/s. 143(3) of the Act. The only distinguishing feature as held by the Hon’ble Supreme Court in the case of “Rajesh Jhaveri Stock Brokers P. Ltd.” (supra), would be
ITA Nos. 1022 to 1026/Chd/2017- M/s RPA Developers, Ludhiana
that if to a set of facts and circumstances, the AO has applied his mind and he was of the belief that there was no escapement of income then for invoking the provisions of section 147 of the Act, he is precluded, on the basis of same facts and circumstances, to say that he has reason to believe that income of the assessee has escaped assessment. Whereas in case of returns processed u/s. 143(1), since the AO does not apply his mind, such a defense is not available to the assessee. However, that proposition of law does not help the revenue in the present case which is a case of assessment/re-assessment u/s. 153A of the Act. 11. Admittedly, in the case in hand, the return was processed u/s. 143(1) of the Act but the same has attained finality due to the expiry of limitation period of twelve months from the end of the month in which the return was filed. Hence, the assessment is deemed to be completed and not pending on the date of search on 14.08.2008. Admittedly, no incriminating material was found from the premises of the assessee during the search u/s. 132 of the Act. The Special Bench of the Tribunal in the case of “All Cargo Global Logistics Ltd.”(supra), has held that assessment u/s. 153A can be made on the basis of incriminating material found during the search. The Hon’ble Rajasthan High Court in the case of “Jai Steel (India) v. ACIT” (2013) 259 CTR 281 has held that in case nothing incriminating is found on account of search or requisition, the question of reassessment of the concluded assessment does not arise. Under such circumstances, it is not open to the assessee to seek deduction or claim expenditure which has not been claimed in the original and already concluded assessment, in the case of assessment u/s. 153A in pursuance of search action. Hon’ble High Court rejected the argument of the learned counsel for assessee to the effect that once the notice u/s. 153A is issued, the assessments for six years are at large both for the AO and the assessee. It has been further held by the Hon’ble High Court that the provisions of section 153A to 153C cannot be interpreted to be further innings to the AO and/or assessee beyond the provisions of section 139(return of income), 139(5) (revised return of income), 147 (income escaping assessment) and 263(revision of orders) of the Act. The Hon’ble High Court has further observed that the words “assess” or “re-assess” 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 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 interpretation that for the completed assessments, the same can be tinkered only on the basis of the incriminating material found during the course of search or requisition of
ITA Nos. 1022 to 1026/Chd/2017- M/s RPA Developers, Ludhiana
documents. The Hon’ble High Court while reproducing the proposition of law laid down by the Hon’ble Supreme Court in the case of “K P Varghese v. ITO” (1981) 24 CTR 358 “that it is recognized rule of construction that a statutory proviso must be so construed, if possible, that absurdity and mischief may be avoided” has observed that if the argument of the counsel for the assessee was to be accepted, it would mean that even in case where the appeal arises out of the completed assessment has been decided by the CIT(A) or Tribunal and the High Court, on a notice issues u/s. 153A of the Act, the AO would have power to undo what has been concluded by the High Court. Any interpretation which leads to such conclusion has to be repelled and/or avoided as held by the Hon’ble Supreme Court in the case of K P Varghese (supra). Almost similar proposition of law has been laid down by the co-ordinate bench of the Tribunal Bench of the Tribunal in the case of “M/s Deepa Restaurant & Bar P. Ltd.” in ITA No.1336/M/2012 decided on 05.02.2014 (one of us being the party of the said order) wherein, it has been observed that where the scrutiny assessment order u/s. 143(3) of the Act was set aside by the higher authorities that, itself, cannot be a ground for re-opening the assessment u/s. 147 of the Act on the plea that since scrutiny assessment has been annulled on the legality of notice u/s. 143(2) of the Act and the case has not been heard at any of the stage hence, there was a reason to believe that the income assessed in this case has escaped assessment. The co-ordinate Bench in the above said case has further held that such an action cannot be allowed under the law as it may amount to defeating one of the statutory provisions in the grab of acting under other provisions of the statute. Once assessment u/s. 143(3) had been annulled by higher authorities on the ground of legality of notice u/s. 143(2) of the Act, re-opening u/s. 147 on that very ground would mean nothing else but the abuse of process of law. Hence, the contention of the learned DR that as the return was processed u/s. 143(1) and it was a mere intimation hence, the AO had reason to believe that income had escaped assessment and it was open to the AO to reassess the income u/s. 153A, even without any incriminating material found during the search action, is not tenable. 12. The learned DR has further relied on the judgment of the Hon’ble Andhra Pradesh High Court in the case of “Gopal Lal Badruka Vs. DCIT”, 346 ITR 106 (AP) to stress the point that the AO can use evidence other than that found during the course of search while framing the assessment u/s. 153A of the Act. The said judgment of Hon’ble Andhra Pradesh High Court has been duly discussed by the Special Bench of the Tribunal in the case of “All Cargo Global Logistics Ltd.” (supra), holding that the same was distinguishable on the facts. In the case of “Gopal Lal Badruka Vs. DCIT” (Supra), incriminating
ITA Nos. 1022 to 1026/Chd/2017- M/s RPA Developers, Ludhiana
evidence was found in relation to eight plots of land but no evidence was found in respect of 24 plots. Since incriminating material was found in respect of eight plots, Hon’ble Court held that the AO can estimate the income in respect of all 32 plots. The fact was that incriminating material was found in that case. The other judgment of the Hon’ble Delhi High Court in the case of “CIT vs. Chetan Dass Lachman Dass” [2012] 211 Taxmann 61, strongly relied upon by the learned DR, is also of no help to the revenue but to the assessee only. In the said case the Hon’ble Delhi High Court, in para 11 of the order, though has held that there is no condition in section153A that additions should be strictly made on the basis of evidence found during the course of search or other post search material or information available with the AO which can be related to the evidence found and that the seized material can be relied upon to also draw inference that there can be similar transactions throughout the relevant period, yet, at the same time it has been further observed that this however, does not mean that assessment u/s 153 A can be arbitrarily made without any relevance or nexus with the seized material. The proposition of law which emerges out in the light of the law laid down by the Rajasthan High Court in the case of “Jai Steel (India) (supra)”, Hon’ble Gujarat High Court in the case of “Gopal Lal Badruka” (supra) and also by the Hon’ble Delhi High Court in the case of “Chetan Dass lachman Dass” is that where incriminating material is found during the search action, the AO while making assessment u/s. 153A can take note of other materials on record, which are relevant and connected to the material found during the search and inference can be drawn relating to other transactions of similar nature. However, when no incriminating evidence is found during search, it is not open to the AO to make re-assessment of concluded assessment in the garb of invoking the provisions of section 153A. As observed above, such an action will defeat the other relevant provisions of the Act and also the rights of the assessee accrued therein.”
The above decision has also been followed by another co-
ordinate bench of the Tribunal in the case of Atul Barot (HUF) vs.
DCIT” in ITA No.2889/M/2011 & ors. decided on 26.02.2014. We
agree with the view taken by the co-ordinate bench of the Tribunal
in the case of ‘Shri Jayendra P Jhaveri” (Supra). Further, the issue
is squarely covered in favour of the assessee by the decision of the
Hon'ble Delhi High Court in the case of CIT Vs Kabul Chawla (2016)
ITA Nos. 1022 to 1026/Chd/2017- M/s RPA Developers, Ludhiana 10
380 ITR 573 (Del) followed by the Hon'ble Gujrat High Court in the
case of PCIT Vs RSA Digi Prints 2017 (9) TMI 530. Reliance in this
respect can also be placed upon decision of Hon'ble Bombay High
Court in the case of CIT Vs Continental Warehousing Corporation
(2015) 374 ITR 645 (Bom.), decision of Hon'ble Calcutta High Court
in the case of PCIT Vs Salasor Stock Broking Ltd. 2016 (8) TMI
1131 and decision of Hon'ble Delhi High Court in the case of
‘Principal CIT Vs. Meeta Gutgutia Prop M/s Ferns ‘N’ Petals”, ITA
306/2017 and others decided vide order dated 25.5.2017 wherein
the Hon'ble High Courts have been unanimous to hold that in
relation to the assessments which have already been concluded,
the AO is precluded from making additions on any other issue
except relating or concerning to the incriminating material found
during the search action. The Assessing Officer cannot disturb the
assessment order or reassessment order which has attained
finality, unless the material gathered in the course of proceedings
u/s 153A of the Act establishes that relief granted under the final
assessment/reassessment was contrary to the fact unearthed
during the course of 153A proceedings.
Since the very initiation of assessment proceedings u/s 153C in case of a person other than the searched person are
based on the incriminating material/documents found in the
premises of the searched person relatable to that ‘other
person’ hence, the above proposition of law can be well applied in relation to the said ‘other person’ also in whose
case assessment proceedings are initiated/carried out u/s
153C of the Act, i.e. the assessee before us. In view of this,
aforesaid case laws can be well applied to the case of the
ITA Nos. 1022 to 1026/Chd/2017- M/s RPA Developers, Ludhiana
assessee. In view of this, we do not find any justification on the
part of the lower authorities for making the impugned addition in
the already concluded assessments in the case of the assessee
when no additions have been made by the Assessing Officer on
the basis of alleged incriminating material found during the
search action at the premises of third party.
In view of this, the appeal of the assessee in ITA No.
1022/CHD/2014 is hereby allowed
ITA Nos.1023 to 1025/Chd/2017:
As the facts, circumstances and issues raised in all the
appeals are identical, therefore, our findings and decision in ITA
No.1022/CHD/2017 would apply with equal force to other appeals
also. Accordingly, these appeals of the assessees are also allowed.
In the result, the appeals of the assessees are hereby
allowed.
ITA No. 1026/Chd/2017 – A.Y. 2013-14
So far as the assessment year 2013-14 is concerned, the
original assessment in this case stood abated as on the date of
issuance of notice to the assessee u/s 153 of the Act. The sole
ground taken in this appeals is relating to disallowance of interest
u/s 36(1) (iii) of the Act.
During the assessment proceedings, the Assessing officer
noticed that the assessee paid interest on unsecured loans @ 12%
and on the other hand interest free advances were given by the
assessee firm to Shri Naveen Bhatia. The assessee was asked to
ITA Nos. 1022 to 1026/Chd/2017- M/s RPA Developers, Ludhiana
explain why proportionate interest may not be disallowed in
respect of the aforesaid interest free advances given by the
assessee. The assessee explained that the loans were given for
business purposes. Further that even otherwise the assessee was
possessed of sufficient own / interest free funds to make the
aforesaid advances. The assessee firm had capital to the extent of
Rs. 34,61,814/- and further the assessee had received advances
from customers of Rs. 18,75,000/-. The assessee had neither paid
any interest on the partner’s capital nor to the customers from
whom the advances have been received. That since the amount of
capital and the advances received from customer was much more
than the advances given to Shri Naveen Bhatia of Rs. 5 lacs, hence
no disallowance u/s 36(1)(iii) was attracted. The Assessing officer,
however, observed that on the amount which was payable to Shri
Naveen Bhatia, the assessee had paid interest to him and on the
other hand, when the money was given to him, no interest was
charged from him. He, therefore, made the impugned disallowance
u/s 36(i)(iii) in respect of interest advanced of Rs. 5 lacs given by
the assessee to Shri Naveen Bhatia. The Ld. CIT(A) confirmed the
aforesaid addition.
We have considered the rival submissions and have gone
through the record. The Ld. Counsel of the assessee has submitted
that the assessee has sufficient interest free funds to make the
aforesaid advance of Rs. 5 lacs to Shri Naveen Bhatia. So far as the
argument that the assessee had paid interest to Shri Naveen
Bhatia, the Ld. Counsel for the assessee has explained that prior to
making of the aforesaid advances, certain amount was outstanding
ITA Nos. 1022 to 1026/Chd/2017- M/s RPA Developers, Ludhiana
of Shri Naveen Bhatia against the assessee upon which interest was
paid. However, after squaring off the amount, certain advances were
made by the assessee to Shri Naveen Bhatia out of his own interest
free funds out of business expediency.
We find that though the assessee has claimed that advances
were out paid out of the business expediency, however, considering
that the assessee has his own sufficient funds to meet the
aforesaid advances, we find that the issue is squarely covered in
favour of the assessee by the decision of the Hon'ble Supreme Court
in the case of ‘Hero Cycles P. Ltd Vs. CIT’, 379 ITR 347 (SC),
and of the Hon'ble Bombay High Court on in the case of ‘CIT
Vs. Reliance Utilities & Power Ltd.’ 313 ITR 340, wherein, the
Hon'ble Courts have held that where the own funds of the
assessee are sufficient to meet the interest free advances
given during the year, then the presumption would arise that
such advances or investments have been made out of the own
funds of the assessee. It is the prerogative of the assessee either
to advance interest free or internet bearing advances. The
disallowance u/s 36(1)(iii) is attracted when the assessee uses
interest bearing funds in respect of which interest is claimed as
business expenditure for making interest free advances for non-
business purposes. However, as per the proposition of law laid
down by the Hon'ble Courts, in the case of Hero Cycles P. Ltd Vs.
CIT’ (supra) and various other case laws wherein, it has been
held by the higher Courts that if the assessee has availability
of own sufficient funds to make the investment, then the
presumption would be that investment has been made from own
ITA Nos. 1022 to 1026/Chd/2017- M/s RPA Developers, Ludhiana 14
funds and no disallowance u/s 36(1)(iii)would be attracted under those circumstances.
In view of this, the appeal of the assessee is hereby allowed.
In the result, all the appeals filed by the assessee are hereby allowed.
Order pronounced in the Open Court on 16.10.2018
Sd/- Sd/- (अ�नपूणा� गु�ता / ANNAPURNA GUPTA) (संजय गग� / SANJAY GARG) �या�यक सद�य/ Judicial Member लेखा सद�य/ Accountant Member Dated : 16.10.2018 “आर.के.”
आदेश क� ��त�ल�प अ�े�षत/ Copy of the order forwarded to : 1. अपीलाथ�/ The Appellant 2. ��यथ�/ The Respondent 3. आयकर आयु�त/ CIT 4. आयकर आयु�त (अपील)/ The CIT(A) 5. �वभागीय ��त�न�ध, आयकर अपील�य आ�धकरण, च�डीगढ़/ DR, ITAT, CHANDIGARH 6. गाड� फाईल/ Guard File
आदेशानुसार/ By order, सहायक पंजीकार/ Assistant Registrar