MEKALA KAMESWARA RAO,,SATTENAPALLI vs. THE DEPUTY COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE,, VIJAYAWADA

assessee for the AYs 2006-07 to 2012-13 against the order of the Learned Commissioner of Income Tax (Appeals)-1, Visakhapatnam in 322, 276, 469, 470, 471, 472 /2015-16/CIT(A)- 3/VSP/2016-17, 2017-18 dated 30/07/2018 arising out of the order passed U/s 144 r.w.s153C of the Income Tax Act, 1961 [the Act].

Subsequently, notice U/s. 153C r.w.s 153A of the Act dated 23/07/2013 was issued and served on the assessee on 29/07/2013 requiring the assessee to file the return of income for the AY 2006-07.

Since the assessee failed to file the return of income, notice u/s. 142(1) of the Act dated 26/08/2013 was issued and served on the assessee on 30/08/2013. Assessee failed to comply with this notice u/s. 142(1) of the Act. The Ld AO then issued a show cause notice dated 19/11/2013 to show cause the reason as to why an action u/s. 276CC of the Act should not be initiated for the failure to furnish the return of income for the AY 2006-07. Citing the non-compliance, again the Ld. AO issued another show cause notice on 11/02/2014 and served upon the assessee on 15/02/2014. Finally in response to the show cause notice dated 11/02/2014, the assessee appeared on 20/02/2014 and promised to file the return of income on or before 25/02/2014. Further, the Ld. AO issued one more show cause notice on 12/03/2014 proposing to assess the income of Rs. 55,97,500/- along with the notice u/s 142(1) of the Act issued and served upon the assessee on 13/3/2014. The assessee did not comply with this notice also. The Ld. AO therefore completed the assessment U/s. 144 r.w.s 153C of the Act as proposed in the show cause notice dated 12/3/2014. The Ld. AO has also further initiated proceedings U/s. 271(1)(b) &271(1)(c) of the Act. Aggrieved by the order of the Ld. AO, the assessee filed an appeal before the Ld. CIT(A). The assessee raised various additional grounds of appeal before the Ld. CIT(A). The Ld.CIT(A) admitted the additional grounds as it was connected to the root of the matter. The Ld. CIT(A) sought remand report from the Ld. AO on the additional grounds raised by the assessee. The Ld. AO submitted his remand report covering all the issues. Subsequently, this remand report was forwarded to the assessee for a rejoinder. The assessee submitted its rejoinder to the Ld. CIT(A). The assessee also raised various legal grounds in his rejoinder to the remand report.

Considering the submissions made by the assessee, the Ld. CIT(A) rejected the legal grounds raised by the assessee and partially allowed the appeal for the assessment years 2006-07 and 2007-08 while dismissing the appeals for the AY 2008-09 to 2012-13. Aggrieved by the order of the Ld. CIT(A), the assessee carried the matter before the Tribunal.

4. The assessee has raised 17 grounds before the Tribunal.

However, from the file notings we find that the assessee has not pressed the Grounds No. 1, 2, 3, 4, 5, 6, 7, 8, 10, 12 & 17. The remaining grounds are extracted herein below for adjudication.

“9. (i) Ld. CIT(A) failed to notice that there is no evidence that the officer having jurisdiction over the case of Ravipati Nageswara Rao was satisfied as required U/s. 153C of the Act that gold, bullion, jewellery, valuable article or thing or books of account or documents belonging to the appellant were seized. The AO did not refer to the panchanama in the case of Sri Ravipati Nageswara Rao to show that any gold, bullion, jewellery, valuable article or thing or books of account or documents were seized. (ii) Ld. CIT(A) is not justified in ignoring the CBDT circular No. 24/2015 dated 31/12/2015 placed before him according to which satisfaction has to be of the Assessing Officer having jurisdiction in the case of searched person.

11. The Ld. CIT(A) has failed to appreciate the distinction between search in RNR’s case and survey in assessee’s case while deciding the validity of initiation of proceedings u/s. 153C. None of the seized documents listed in the remand report of the AO belonging to the assessee nor do they relate to current assessment year, nor any of them considered in the assessment order. Therefore initiation of proceedings U/s. 153C is invalid.

13. The assessment year 2006-07 is not a preceding assessment year. It falls beyond the period of 6 preceding assessment years because under the first proviso to section 153C the date of initiation of the search has to be construed as the date of receiving the books of account or documents or assets seized by the AO. The date of the receiving the books of account in this case is 23/07/2013.

14. The Ld. CIT(A) is not justified in sustaining additions of both Rs. 25,00,000/- of entire opening capital on the liabilities side and Rs. 20,00,000/- of loans and advances plus Rs. 1,97,500/- appearing on the assets side. 15. Ld. CIT(A) is not justified in restricting agricultural income received to Rs. 1,50,000/- instead of Rs. 3,00,000/- received in the year, thereby sustaining the same as income from other sources. 16. Ld. CIT(A) is not justified in sustaining the addition to the extent of Rs. 4,00,000/- incurred for purchase of Venkateswara Nagar Plot. The profit shown is in conformity with provisions of section 44AD of the Act. The addition made increases the profit which would be against the provisions of section 44AD of the Act.”

The Ld DR supported the order of Revenue authorities.

We find from records that similar ground was also raised before the Ld. CIT(A). The Ld. CIT(A) while adjudicating the grounds observed that in the remand report the Ld. AO has categorically mentioned the reasons for issue of notice U/s. 153C of the Act on being satisfying that the incriminating material found and seized at the time of search and seizure operations U/s. 132 of the Act are relating to survey operations conducted u/s. 133A of the Act in the group cases related to the assessee and hence notice U/s. 153C is to be issued to the assessee requiring him to furnish the return of income for the AYs 2006-07 to 2011-12. The Ld. CIT(A) in his findings in para 8.2(b) has considered the similar ground raised before him and is decided as follows:

“8.2(b) I have carefully considered the plea of the Ld. Authorized Representative on the issue of “satisfaction” recorded by the Assessing Officer. The argument is rejected since the Assessing Officer has categorically mentioned in the remand report: “It is a partnership firm wherein Mr. Nageswara Rao was the Mg. Partner in whose residence search operation was conducted. This case is notified to Central Circle, Vijayawada in F.No. Juris./CIT/GNT/11-12, Dated 16/12/2011. As the Assessing Officer is satisfied that the incriminating material found and / or seized and / or impounded at the time of search and seizure operation U/s. 132 or related survey operation was conducted U/s. 133A. In other cases of this group, is also related to the assessee and also since the above persons and / or other person on whom search and seizure operations were conducted has financial transactions of a personal nature and / or other business transactions with the assessee, a notice U/s. 153C is to be issued to the assessee required to furnish the return of income for all the AYs beginning from 2006-07 to 2011-12.” It is clear from the note that there are ample materials in both the cases of Sri Ravipati Nageswara Rao and impounded material in the case of the appellant as stated earlier in the order. Accordingly, the AO has issued notice U/s. 153C on 23/07/2013 along with notice U/s. 142(1) calling for the return of income for the AY 2006-07. The appellant chose not to file the return of income though there are prima facie transactions indicating taxable income. It is the argument of Authorized Representative of the appellant that requirement of section 153C is nto mentioned in the satisfaction note is devoid of fact. The Assessing Officer has mentioned about the incriminating material ;such as Annexure RNR/A/18, Annexure RNR/A/1, Annexure A/RNR/23 to 39, Annexure RNR/A/1 (pages 1 to 83 and Annexure RNR/A/8 etc. The relevant material seized indicates the investments made by the appellant in the properties and his real estate business with Sri Ravipati Nageswara Rao is clearly brought out in the statements recorded on various dates. The transactions in the seized material is owned up by the appellant before the ADIT (Inv.). Therefore, the satisfaction of the Assessing Officer is not abstract in this case. It is certain that the seized material relates to the appellant’s real estate business. Thus, the appellant’s contention that the material is not belonging to the appellant for the AY 2006-07 is not correct, hence rejected. In view of the above facts and circumstances, the legal ground raised by the appellant is rejected. The proceedings U/s. 153C initiated by AO is held as valid.”

The Ld DR supported the order of Revenue authorities.

Before us, since there is no representation, based on the material available on record, we find that the Ld. CIT(A) has rightly examined the legal issue raised by the assessee and has rejected the same. The Ld. CIT(A) in his findings held as follows:

“(c)...................The Assessing Officer has issued notice U/s. 153C on 23/07/2013. The Assessing Officer is legally correct in issuing notice U/s. 153C of the Act. If the appellant’s submission is considered, but not agreed, there are no six preceding years. It is only five preceding years.

In that case, the assessment year for the year of search would get extended to the AY 2014-15 which is artificial assessment year due to the fact that there is no search in the financial year 2013-14 in the instant case. Such construction of provision leads to distortion and antivirus to the letter and spirit of the law. Therefore I am unable to find any reason to agree with the argument of the appellant that the AY 2006-07 is beyond six preceding AYs. Accordingly, the legal grounds and the additional grounds raised by the appellant are rejected being illogical and such situation amounts to ‘putting the cart before the horse.”

8. Therefore, we are of the considered view that the Ld. CIT(A) has rightly examined and adjudicated the issue and hence we find no infirmity in the order of the Ld. CIT(A) and therefore no interference is required on this issue.

9. Ground No. 14 is with respect to sustenance of additions of the opening balance of capital and loans and advances appearing on the assets side of the balance sheet. We find that the assessee has not filed his returns of income and has pleaded ignorance before the Ld. CIT(A) for non-filing of the return of income. The Ld. CIT(A) has carefully considered the submissions and in his findings held as follows:

“(c) I have carefully considered the order of the Assessing Officer and the submissions made by the appellant before the DDIT (Inv.) as well as before the Assessing Officer. The appellant’s authorized representative has filed the same details before me which were filed before the Assessing Officer. No new material was brought to my notice. Leave aside the sanctity of details filed from a while. The overall impression conveyed by the details is that the appellant is having taxable income but deliberately not filed the returns of income. He has confirmed the fact of non-filing the returns of income during the appellant proceedings but reasons were not made known except stating that the appellant did not understand the gravity of non-filing the return of income as he was illiterate and not aware of the consequences of non-filing. This plea of the appellant may look reasonable before conducting survey U/s. 133A of the Act. The same plea holds no water subsequent to survey operation due to the fact that the appellant appeared before lower authorities, filed details with the aid and service of professional, deposed statements and he was made aware of the consequences. Hence, the plea of ignorance is rejected and the conduct is contumacious to the authority.”

10. We are of the considered view that the Ld. CIT(A) has rightly considered the submissions of the assessee and adjudicated the issue and in the absence of any representation by the assessee before us, based on the material on record, we find no infirmity in the order of the Ld. CIT(A) and hence no interference is required on this ground.

11. Ground No.15 relating to restricting the agricultural income, we find from the order of the Ld. CIT(A) that the assessee has disclosed an agricultural income of Rs. 1.50 lakhs in the capital account filed before the Ld. AO. Therefore, the Ld. Revenue Authorities has considered the amount of Rs. 1.50 lakhs which is recorded in the books of accounts as agricultural income of the assessee for the relevant AY and accordingly allowed the same. Since there is no representation and no evidence submitted before us with respect to earning of the agricultural income of Rs. 3 lakhs, we are inclined to uphold the findings of the Ld. CIT(A) on this ground and hence this ground raised by the assessee is dismissed.

The assessee also not represented before us nor filed any evidence regarding the interest income and agricultural income which the assessee claims to have purchased the plot at Venkateswara Nagar for Rs. 6 lakhs. In the absence of any cogent evidence, the Ld. CIT(A) has confirmed the amount of Rs. 4 lakhs and therefore we are of the considered view that there is no infirmity in the order of the Ld. CIT(A) and hence we hereby dismiss the ground raised by the assessee.

3. The assessment has been completed only on the basis of data furnished by the assessee without any further particulars, the Learned CIT(A) ought to have held that there was no mens rea on the part of the assessee. The formality of not filing a return, in the circumstances, should not have been held against the assessee by the Learned CIT(A). There is no concealment in substance. (Tax Effect - Rs. 18,47,175/-)

Therefore penalty proceedings u/s. 271(1)(c) also are not valid in law. (Tax Effect - Rs. 18,47,175/-)

5. (a) In the appellate order against the assessment order, Learned CIT()A is not justified in ignoring the CBDT Circle No. 24/2015 dated 31.12.2015 placed before him according to which satisfaction has to be of the Assessing Officer having jurisdiction in the case of searched person. The initiation of proceedings u/s. 153C are invalid in law. Therefore penalty proceedings u/s. 271(1)(c) also are not valid in law.

(b) In the appellate order against the assessment order, Learned CIT(A) has erred on facts and in law in holding that initiation of proceedings u/s. 153C of Income Tax Act, 1961 (Act) by Deputy Commissioner of Income Tax, Central Circle, Vijayawada [A.O, hereinafter] is valid and that satisfaction u/s. 153C has been reached by him (A.O). As the assessment proceedings are not valid in law, the penalty proceedings also are not valid in law.

(c) Learned CIT(A) failed to notice that satisfaction of the A.O noted in the order sheet is not that any money, bullion, jewellery or other valuable thing or book of account or documents seized in search u/s. 153A, belong to the assessee. Initiation of proceedings u/s. 153C is invalid. As the proceedings u/s 153C are invalid, the penalty proceedings u/s. 271(1)(c) also are not valid in law.

(d) In the appellate order against the assessment order, Learned CIT(A) has not given any finding that any items seized during search in the case of Ravipati Nageswara Rao (RNR) belong to the assessee. He held that the items seized related to the assessee. According to provisions of Sec. 153C till amended w.e.f 01.06.2015 it is not sufficient if the scized material in the course of search of any person provide information related to transactions with the other person/s but it must belong to the other person/s for its application. As the assessment proceedings are not valid in law, the penalty proceedings also are not valid in law. (Tax Effect - Rs. 18,47,175/-) 6. In the appellate order against the assessment order, Learned CIT(A) failed to notice that satisfaction as stated by the AO is on the basis of documents impounded / seized during search and surveys of several connected persons in business and not on the basis of material seized during search as belonging to assessee. Initiation of proceedings u/s 153C is therefore invalid. The penalty proceedings u/s. 271(1)(c) also are not valid in law. (Tax Effect - Rs. 18,47,175/-) 7. Penalty proceedings u/s 271(1)(c) also are not valid in law because initiation of proceedings u/s 153C and assessment order are invalid in law.

This is because the assessment year 2006-07 is not a preceding assessment year. It falls beyond the period of 6 preceding assament years because under the first provisa to Sec. 153C the date of initiation of the search has to be construed as the date of receiving the books of account of documents of assets scised by the A.O. The date of the receiving the books of account in this case is 23.07.2013. (Tax Effect Rs. 18,47,175/-)

17. The assessee has raised identical grounds in its appeals to 592/Viz/2018. Therefore, for the sake of convenience, we shall take ITA No.586/Viz/2018 (AY 2006-07) as a lead appeal and proceed to adjudicate the same in the following paragraphs.

The Ld. Departmental Representative argued that the assessee is a regular non-filer of the return of income which tantamounts to concealment of income, even though the return of income was filed after the issue of notice U/s. 153C of the Act. Therefore, the penalty levied by the Ld. Revenue Authorities be sustained.

Pronounced in the open Court on the 30th November, 2022.