2014 (8) TMI 827 - AT - Income Tax

Invalid Section 153A assessments overturned by ITAT due to lack of incriminating material

The ITAT allowed the assessee's appeals for the assessment years 2004-05 to 2007-08, ruling that the assessments under Section 153A of the IT Act were ... Validity of assessments u/s 153A – Held that:- For the AYs 2004-05 to 2007-08, the assessee has already filed returns of income within time before the search - assessee produced books of account and relevant details before the AO, which is evident from the copies of the order sheet placed on record and the AO after examining the books of account and the details furnished by the assessee accepted the returned income – as per second proviso to section 153A(1)(b) of the IT Act, no assessment would be deemed to be pending in the year under appeal on the date of initiation of search and as such, the same could not be said to have abated – relying upon CIT vs. Smt. Shaila Agarwal [2011 (11) TMI 213 - ALLAHABAD HIGH COURT] - no assessment proceedings were pending against the assessee for the AYs under appeals on date of search so as to abate any assessment or re-assessment - second proviso to section 153A would clearly apply - when nothing incriminating material was found in the course of search relating to AYs 2004-05 to 2007-08, completed / finalized assessments for such years could not be disturbed and as such invoking of the provisions of section 153A against the assessee in these years would not be valid and no addition could be made against the assessee - Decided in favour of Assessee. Addition on account of suppressed production – Low yield ratio - Held that:- Zarda is excisable item/goods and subjected to inspection and control by the Excise Authorities and it is admitted fact that the Excise Department accepted the manufactured goods and cleared the goods manufactured on duty paid. Such a circumstance also supports the explanation of the assessee that there is no suppression of the yield – following the decision in CIT vs. Mascot (India) Tools and Forgings Pvt. Ltd. [2009 (7) TMI 675 - ALLAHABAD HIGH COURT] - there is no question of any suppression of sales in the case of assessee as no material was found during the course of search of any sales made by the assessee outside the books of account - CIT(A) has invoked his powers u/s. 251 of the IT Act for the purpose of rejection of books of account u/s 145(3), which have not been rejected by the AO, but there is no observation in the appellate order if the CIT(A) while using such powers, issued any show cause notice to the assessee for taking any adverse inference which has not been taken by the AO in the assessment order - such powers should not have been used against the assessee without affording opportunity of being heard to the assessee. CIT(A) also noted that the AO had worked out the value of suppressed production on the average cost price, but the same is not correct as concealed production would result in sale to fetch unaccounted income - The findings of the CIT(A) also suggest that even part addition sustained by the CIT(A) and the addition made by the AO was wholly unjustified - on mere comparison of cases without bringing adequate material on record, the CIT(A) should not have sustained part addition without considering the principle of law that the entire sales would not be profit of the assessee - the authorities below were not justified in making or confirming any addition against the assessee – Decided in favour of assessee. Bogus Liabilities – Held that:- The details would clearly reveal that the sundry creditors are coming up from earlier years except in one case which was a new party - there is no question of making any addition against the assessee in assessment year under appeal in respect of old balances - total liabilities most of the times have reduced, therefore, in assessment year 2004-05, the matter requires reconsideration at the level of CIT(A) to verify the old balances, which if coming from earlier years should have been deleted and for the new parties, the assessee would be required to furnish evidences to prove the genuineness of the same - the AO has not done any exercise in this matter and old liabilities coming up from earlier years have been added without any just cause – thus, the matter is remitted back to the CIT(A) with a direction to re-decide the issue after verifying the old balances coming up from earlier years and in case the balances are coming up from earlier years, no addition should be made against the assessee and for new items appearing for the first time under sundry creditors, the assessee shall have to furnish the evidences before the CIT(A) for verification of the same – Decided in favour of Assessee. Addition of construction of building on the basis of DVO’s report – Held that:- CIT(A) followed his order in the case of M/s. Kesarwani Sheetalaya for the AY 2005-06 and confirmed the addition - Since the issue is restored for re-consideration, CIT(A) is bound to pass reasoned order - assessee contended that the books of account have not been rejected and following the decision in Sargam Cinema Versus. Commissioner of Income-tax [2009 (10) TMI 569 - Supreme Court of India] - when books of account of the assessee are not rejected, the AO cannot refer the matter to the DVO - difference may be around 10% or so as per valuation shown by the assessee and the report given by the DVO, which should have been ignored for the purpose of making addition – the matter is to be remitted back for reconsideration – Decided in favour of Assessee. Various expenses disallowed – Held that:- The nature of business of assessee is manufacturing of tobacco and must have the dust and other ingredients while working of labourers - assessee has filed chart showing history of expenditure incurred on these heads - some vouchers have not been produced or that personal user are not ruled out, it would not be proper to delete the entire additions - it is excessive in nature and needs reduction to a reasonable extent because most of the expenses are incurred for business purposes - the disallowance of expenses on all the heads is reduced to 5% of the total claim on different heads of expenses – Decided partly in favour of Assessee. Bogus Purchases – Held that:- The assessee contended that genuine purchases have been made from M/s. Cosmos Elmek and the purchases are entered into the books of accounts - The payments are made through bank drafts, which are also entered into the books of account - No material was found during the course of search to prove that it was bogus purchase - The sales made by M/s. Cosmo Elmek have been accepted by the Sales Tax Authorities and was genuine party - The AO merely on the basis of test check and statement of the driver of the vehicle, who was not subjected to cross examination, held the purchases to be suspicious, as the transportation by other vehicle was found doubtful - This itself is no ground to consider the purchases to be bogus - CIT(A) was justified in deleting the addition – Decided against Revenue. Issues Involved:1. Validity of assessments under Section 153A of the IT Act.2. Addition on account of suppressed production.3. Bogus liabilities.4. Addition on account of construction of building based on DVO's report.5. Disallowance of various expenses.6. Bogus purchases from M/s. Cosmo Elmek.7. Bogus purchases from M/s. Sarita Industries.Detailed Analysis:1. Validity of Assessments under Section 153A of the IT Act:The assessee argued that the assessments under Section 153A were invalid as no incriminating material was found during the search, and the assessments were based on regular books of account already scrutinized in earlier assessments. The CIT(A) upheld the assessments, but the ITAT found that since no incriminating material was found during the search, the assessments for the years 2004-05 to 2007-08 could not be disturbed. The ITAT relied on the jurisdictional High Court decision in CIT vs. Smt. Shaila Agarwal and the ITAT Special Bench decision in All Cargo Global Logistics Ltd., concluding that the assessments were invalid and deleted all additions made under Section 153A.2. Addition on Account of Suppressed Production:The AO made substantial additions for alleged suppressed production based on discrepancies in the production process and the non-maintenance of detailed records. The CIT(A) reduced the additions by comparing the yield percentages with other similar businesses but still upheld part of the additions. The ITAT found that the AO's calculations were incorrect and that the CIT(A)'s reliance on comparable cases was not justified. The ITAT deleted the entire addition, noting that the assessee's yield percentages had been accepted in earlier years, and no incriminating material was found during the search.3. Bogus Liabilities:The AO added certain liabilities as bogus, which were shown under 'others' in the balance sheet. The CIT(A) confirmed the addition, stating that the assessee failed to provide evidence for these liabilities. The ITAT found that most of these liabilities were carried forward from earlier years and directed the CIT(A) to verify the old balances and delete the additions if they were indeed carried forward from earlier years.4. Addition on Account of Construction of Building Based on DVO's Report:The AO made additions based on the DVO's report, which valued the cost of construction higher than what was declared by the assessee. The CIT(A) upheld the addition. The ITAT referred to the Supreme Court decision in Sargam Cinema and the Allahabad High Court decision in CIT vs. Lucknow Public Educational Society, which held that without rejecting the books of account, the AO could not refer the matter to the DVO. The ITAT set aside the addition and directed the CIT(A) to reconsider the issue.5. Disallowance of Various Expenses:The AO made disallowances on various expenses such as entertainment, shop, telephone, generator, motor vehicle, and petrol expenses, citing unverifiable vouchers and personal use. The CIT(A) confirmed these disallowances. The ITAT found the disallowances excessive and reduced them to 5% of the total claimed expenses, noting that similar expenses had been allowed in earlier years without significant disallowances.6. Bogus Purchases from M/s. Cosmo Elmek:The AO treated purchases from M/s. Cosmo Elmek as bogus based on discrepancies in transportation details. The CIT(A) found the party to be genuine but still upheld part of the addition. The ITAT deleted the entire addition, noting that the party was genuine, assessed to tax, and the purchases were made through banking channels. Similar purchases in earlier and subsequent years were accepted by the department.7. Bogus Purchases from M/s. Sarita Industries:The AO treated purchases from M/s. Sarita Industries as bogus based on discrepancies in transportation details. The CIT(A) upheld the addition. The ITAT deleted the addition, noting that the purchases were genuine, payments were made through banking channels, and similar purchases in earlier and subsequent years were accepted by the department.Conclusion:The ITAT allowed the appeals of the assessee for the assessment years 2004-05 to 2007-08, deleted all additions made under Section 153A, and directed the CIT(A) to reconsider certain issues. The departmental appeals were dismissed.