2012 (5) TMI 294 - AT - Income Tax

Tribunal invalidates assessment under section 153C, deletes additions related to share application money.

The Tribunal allowed the appeal in ITA No.92/LKW/2011 by declaring the assessment under section 153C read with section 153A invalid and deleting the ... Assessment in case of search or requisition - Assessment of other persons where seized or requisitioned material belongs to them - satisfaction of the Assessing Officer before handing over seized or requisitioned materials - Initiation of proceedings under section 153C contingent on prior proceedings under section 153A - Requirement of handing over seized books/documents to Assessing Officer having jurisdiction over other person - Burden on assessee to explain share application money and scope of addition under section 68Satisfaction of the Assessing Officer before handing over seized or requisitioned materials - Initiation of proceedings under section 153C contingent on prior proceedings under section 153A - Requirement of handing over seized books/documents to Assessing Officer having jurisdiction over other person - Validity of assessments framed under section 153C read with section 153A of the Act where no prior action under section 153A had been taken and no satisfaction was recorded by the Assessing Officer of the searched/requisitioned person. - HELD THAT: - The Tribunal held that sections 153A and 153C form a statutory scheme for assessment in search/requisition cases: section 153A provides the procedure where a search/requisition is made, and section 153C applies when the Assessing Officer concerned is satisfied that seized or requisitioned money, books, documents or assets belong to a person other than the person in respect of whom search/requisition was made, in which case the material must be handed over to the Assessing Officer having jurisdiction over that other person. Action under section 153C therefore presupposes that proceedings under section 153A in respect of the searched/requisitioned person have been initiated and that the Assessing Officer has formed the requisite satisfaction before handing over materials. In the present case notice under section 153C read with section 153A was issued to the assessee on the basis of a letter received on 22.12.2004, whereas notices under section 153A to the searched/requisitioned parties were issued only later (24.2.2006). No satisfaction or handing over of materials by the Assessing Officer of the searched/requisitioned persons is on record prior to the impugned notice. Consequently initiation of proceedings under section 153C was premature and legally impermissible, and the assessment framed thereon is unsustainable. [Paras 13, 14, 19, 20, 21]Assessment under section 153C read with section 153A was quashed; the assessment framed consequent to the impugned notice is knocked down.Burden on assessee to explain share application money and scope of addition under section 68 - Reopening/Addition in hands of alleged bogus shareholders - Sustainability of addition made under section 68 in respect of share application money. - HELD THAT: - On merits the Tribunal applied the principle in CIT v. Lovely Exports (as relied upon) that where share application money is paid by alleged bogus shareholders, the proper course is to investigate and, if necessary, reopen or assess the individual shareholders; additions in the company cannot be sustained merely on suspicion when the statutory scheme permits action against the real recipients. The Tribunal found the issue squarely covered in favour of the assessee and deleted the addition made under section 68. [Paras 22, 23]Addition under section 68 deleted and the assessee's appeal on this ground allowed.Confirmation of disallowances after appellate scrutiny - Validity of disallowances of certain expenses upheld by the Tribunal. - HELD THAT: - The Tribunal noted that no argument was advanced before it against the disallowances aggregating to the claimed amounts and, upon perusal, found no infirmity in the order of the CIT(A). Accordingly, the disallowances were confirmed. [Paras 25]Disallowances confirmed; that part of the appeal is dismissed.Final Conclusion: The appeals were allowed in part: assessments framed pursuant to the notices issued under section 153C read with section 153A were quashed for being premature and without the requisite satisfaction/handing over by the Assessing Officer of the searched/requisitioned persons; the addition under section 68 was deleted in favour of the assessee; disallowances of certain expenses were confirmed. Issues Involved:1. Validity of assessment under section 153A read with section 153C of the Income-tax Act, 1961.2. Addition of share application money under section 68 of the Act.3. Disallowance of expenses under various heads.Issue-wise Detailed Analysis:1. Validity of Assessment under Section 153A read with Section 153C:The primary issue in these appeals is the validity of the assessment framed consequent to the notice issued under section 153A read with section 153C of the Income-tax Act, 1961. The assessee argued that the initiation of proceedings under section 153C read with section 153A was invalid as there was no requisite satisfaction recorded by the Assessing Officer of the searched parties before handing over the relevant materials to the Assessing Officer having jurisdiction over the assessee. The Tribunal noted that the search was conducted by the Central Excise Department on M/s Chandra Kamal Corporation and M/s Virat Overseas Pvt. Ltd., and documents were seized. However, no material was received by the Assessing Officer having jurisdiction over the assessee from the Assessing Officer of the searched parties after valid satisfaction recorded by him.The Tribunal emphasized that for initiating action under section 153C, there must be a satisfaction recorded by the Assessing Officer having jurisdiction over the searched party that the seized material pertains to the assessee. It was found that no such satisfaction was recorded, and the proceedings under section 153C were initiated based on a letter received by the Additional CIT. The Tribunal held that without initiating action under section 153A upon the searched party, action under section 153C cannot be initiated upon another person. Consequently, the assessment framed under section 153C read with section 153A was not sustainable in the eyes of law and was knocked down.2. Addition of Share Application Money under Section 68:On the merits of the case, the Tribunal addressed the addition of Rs.51,70,000 made under section 68 of the Act, which pertains to the share application money received by the assessee. The assessee placed heavy reliance on the judgment of the Hon'ble Supreme Court in the case of CIT v. Lovely Exports Pvt. Ltd., where it was held that if the share application money is received from alleged bogus shareholders whose names are given to the Assessing Officer, the Department is free to reopen their individual assessments but cannot add the same in the hands of the assessee-company. The Tribunal agreed with this view and deleted the additions made by the Assessing Officer and confirmed by the CIT(A) on account of share application money.3. Disallowance of Expenses under Various Heads:In ITA No.93/LKW/2011, an additional ground was raised regarding the disallowance of expenses aggregating to Rs.1,62,000 under various heads. No argument was raised by the assessee's counsel on this issue. The Tribunal carefully perused the order of the CIT(A) and found no infirmity therein, thus confirming the disallowance of expenses.Conclusion:In conclusion, the Tribunal allowed the appeal of the assessee in ITA No.92/LKW/2011 by knocking down the assessment framed under section 153C read with section 153A and deleting the additions made on account of share application money. In ITA No.93/LKW/2011, the Tribunal partly allowed the appeal by confirming the disallowance of expenses while deciding other issues in favor of the assessee.