2015 (10) TMI 2023 - AT - Income Tax

Assessment Orders Quashed & Income Adjustment Allowed | Appeals Partly Allowed

The Tribunal quashed the assessment order for AY 2007-08 due to the absence of recorded satisfaction under Section 153C. For AY 2008-09, the rejection of ... Validity of proceedings initiated u/s 153C - rejection of books of accounts - unaccounted income in respect of automobile business - Held that:- In the absence of any defect noticed in the automobile business, we are of the view that the assessing officer was not justified in rejecting the book results of automobile business and estimating the income of the assessee. We notice that the Ld. CIT(A) also has upheld the rejection of books of accounts without bringing on record any defects in the books of accounts. Accordingly, we set aside the order of Ld. CIT(A) as well as A.O. with regard to the rejection of books of accounts Since we have held that the rejection of books of accounts was not proper, the consequent estimation of profit from automobile business is also liable to be cancelled. Accordingly the orders of the lower authorities on this issue also set aside, meaning thereby the income disclosed by the assessee in respect of automobile business in the revised return of income shall remain. Claim of set off - Held that:- We have noticed that the Ld. CIT(A) has given telescoping benefit in respect of ₹ 92 lakhs offered by the assessee against the income estimated from automobile business. Since we have cancelled the estimation of income from automobile business, the additional income of ₹ 92 lakhs assessed by the assessing officer is required to be sustained, subject to the claim of set off claimed before the tax authorities. The nature of additional income of ₹ 92 lakhs offered in 2008-09 is the unaccounted payment made for purchase of the property (Cash outflow). So one is income component and another one is investment component. In these kind of situations only, i.e., when cash inflow and cash flow are assessed as income, normally the claim of set off of one against the another shall be claimed. There is justification in making such a claim, since both income and investment should not be assessed separately, otherwise it may result in double assessment of same income. Hence, we find merit in the contention of the assessee that the unaccounted income of ₹ 20 lakhs offered in the assessment year 2007-08 should be adjusted against the undisclosed investment made in assessment year 2008-09. Accordingly, we direct the assessing officer to allow set off of this amount also. Issues Involved:1. Scope of assessment under Section 153A read with Section 153C of the Income Tax Act.2. Recording of satisfaction for initiating proceedings under Section 153C.3. Rejection of books of accounts and estimation of income from automobile business.4. Separate addition of commission income and unaccounted payments.5. Telescoping benefit of unaccounted income against estimated income from automobile business.Detailed Analysis:1. Scope of Assessment under Section 153A read with Section 153C:The assessee argued that the additions made by the assessing officer were outside the scope of assessment proceedings under Section 143(3) read with Section 153C. The search and seizure operation conducted under Section 132 in the case of Sri A.T. Rayudu revealed incriminating documents related to the assessee company. Notices under Section 153C were issued on 15.12.2008, served on 24.12.2008. The assessee contended that the assessment for AY 2007-08 was not pending on the date of issuing notice under Section 153C, and hence, the assessing officer could disturb completed assessments only based on incriminating materials found during the search.2. Recording of Satisfaction for Initiating Proceedings under Section 153C:The assessee contended that the assessing officer of the searched person did not record satisfaction as required under Section 153C, making the proceedings liable to be quashed. The assessee relied on the Andhra Pradesh High Court decision in Sri Rao Subba Rao (HUF), which emphasized the necessity of recording satisfaction. The department argued that since the assessing officer for both the searched person and the assessee was the same, recording satisfaction was a mere formality. However, the Tribunal, referencing the M.P. High Court decision in CIT Vs. Mechmen 11C, held that recording satisfaction is mandatory even if the assessing officer is common. The absence of recorded satisfaction led to the quashing of the assessment order for AY 2007-08.3. Rejection of Books of Accounts and Estimation of Income from Automobile Business:For AY 2007-08, the assessing officer rejected the books of accounts and estimated the business income at Rs. 37.18 lakhs, also assessing Rs. 20 lakhs as unaccounted income and Rs. 3.5 lakhs received by the staff. The CIT(A) confirmed the rejection but directed the deletion of the Rs. 23.45 lakhs commission income addition. The Tribunal noted that no defects were pointed out in the books of accounts for the automobile business. The additional income admitted by the director related to commission and unaccounted payments for property purchases, not linked to the automobile business. Thus, the rejection of books and estimation of income were not justified, leading to the setting aside of the orders of the lower authorities.4. Separate Addition of Commission Income and Unaccounted Payments:For AY 2008-09, the assessing officer assessed Rs. 92 lakhs as additional income based on the director's sworn statement, despite the director's subsequent retraction. The CIT(A) confirmed the rejection of books and the assessment of Rs. 3 lakhs as unexplained payment but gave telescoping benefit for the Rs. 92 lakhs against the estimated income from the automobile business. The Tribunal held that since the rejection of books was not proper, the estimation of profit was also liable to be cancelled, sustaining the additional income of Rs. 92 lakhs assessed by the assessing officer.5. Telescoping Benefit of Unaccounted Income against Estimated Income from Automobile Business:The assessee sought to set off Rs. 20 lakhs offered in AY 2007-08 against the Rs. 92 lakhs addition in AY 2008-09. The Tribunal agreed, noting that the Rs. 20 lakhs was unaccounted commission income (cash inflow) and the Rs. 92 lakhs was an unaccounted payment for property (cash outflow). To avoid double assessment, the set-off was justified, directing the assessing officer to allow this adjustment.Conclusion:The Tribunal quashed the assessment order for AY 2007-08 due to the lack of recorded satisfaction under Section 153C. For AY 2008-09, the Tribunal set aside the rejection of books and the estimation of income, sustaining the additional Rs. 92 lakhs income with the allowance of set-off for Rs. 20 lakhs. Appeals were partly allowed for both parties.