2014 (1) TMI 1076 - AT - Income Tax

Tribunal rules in favor of assessee, deems Section 153C assessments invalid. Disallowance of expenses overturned.

M/s. Parivar Properties Pvt. Ltd. Versus Deputy Commissioner of Income Tax

The Tribunal ruled in favor of the assessee, holding that the assessments under Section 153C were not valid due to the absence of incriminating material ... Whether the assessment has been framed on the basis of material seized during the search operation - Held that:- Following ACIT Vs. PACL India Ltd [2013 (10) TMI 520 - ITAT DELHI] - Only where original assessment proceedings are pending on the date of the search or on the date when the reference has been received by the Assessing Officer of the other person from the Assessing Officer of the searched person, the issues outside the scope of search material can be raised as those original assessment proceedings stand merged/abated in the proceedings under Section 153A/153C of the Act - In the case where the assessments are not pending on the date of the search or on the date of receipt of the reference by the Assessing Officer of the other person, then no addition on the issues which pertained to the original assessment can be raised. In respect of all the assessment years under consideration, the assessments were not pending on the date, the search had taken place - No addition can be made while making the assessment for the assessment years under consideration by making the disallowances which is not based on seized material or any incriminating material found during the course of search - Decided in favour of assessee. Issues Involved:1. Validity of assessments framed under Section 153C of the Income-tax Act, 1961.2. Disallowance of capitalization of expenses in the cost of fixed assets.Issue-wise Detailed Analysis:1. Validity of Assessments Framed Under Section 153C:The assessee challenged the validity of the assessments framed under Section 153C, arguing that the assessments were not based on material seized during the search operation. The search and seizure operation under Section 132 took place on 31st July 2008, and documents belonging to the assessee were seized. Notices under Section 153C were issued for six assessment years preceding the year of search. The assessee filed returns declaring nil income for these years, which were accepted under Section 143(1).The CIT(A) upheld the validity of the assessments, stating that under Sections 153A/153C, the Assessing Officer must issue notices and assess or reassess income for the specified years, regardless of whether undisclosed income was found during the search. The CIT(A) emphasized that the legislature did not restrict assessments under these sections to undisclosed income found during the search.The Tribunal noted that no incriminating material was found during the search, and the assessments were not pending at the time of the search. The Tribunal referred to various judicial precedents, including the Delhi High Court's decision in SSP Aviation Ltd. and the Special Bench of ITAT in All Cargo Global Logistics Ltd., which held that additions should be restricted to incriminating material found during the search. The Tribunal concluded that since no incriminating material was found, the assessments were not valid, and the additions made by the Assessing Officer were not justified.2. Disallowance of Capitalization of Expenses:The assessee capitalized expenses such as security, legal and professional, interest, telephone, and electricity expenses in the value of fixed assets. The Assessing Officer disallowed these expenses, arguing that they were meant for keeping the company or assets in existence and were not related to the acquisition or improvement of fixed assets. The CIT(A) confirmed this disallowance.The Tribunal observed that the expenses were capitalized in the original returns filed under Section 139 and that no business activity was carried out by the assessee during the relevant years. The Tribunal referred to the decision of the Special Bench in All Cargo Global Logistics Ltd., which held that in the absence of incriminating material, the Assessing Officer cannot make additions by disallowing expenses that were already disclosed. The Tribunal concluded that the disallowance of expenses was not justified as it was not based on any incriminating material found during the search.Conclusion:The Tribunal allowed the appeals of the assessee, holding that the assessments under Section 153C were not valid in the absence of incriminating material found during the search. The disallowance of capitalization of expenses was also deleted. The decision was pronounced in the open court on 20th December 2013.