2022 (11) TMI 1422 - AT - Income Tax

Section 153C additions require incriminating material for unabated assessments, AO cannot make additions without evidence

M/s. Essel Mining & Industries Limited Versus Deputy Commissioner of Income Tax Central Circle, Mumbai And Joint Commissioner of Income Tax Central Circle 1 (4) Mumbai Versus M/s. Essel Mining & Industries Limited

The ITAT Mumbai held that for unabated/concluded assessments under section 153C, additions cannot be made without incriminating material found during ... Validity of assessment framed u/s 153C - differential treatments for abated assessments and unabated assessments - Allowability of disallowances and additions without the existence of incriminating material for the year under consideration received from the AO of the searched person - Whether the addition could be framed u/s 153A of the Act in respect of a concluded proceeding without the existence of any incriminating materials found in the course of search is permissible? HELD THAT:- The provisions of section 132 relied upon by the revenue would be relevant only for the purpose of conducting the search action and initiating proceedings u/s 153A - Once the proceedings u/s 153A are initiated, which are special proceedings, the legislature in its wisdom bifurcates differential treatments for abated assessments and unabated assessments. As in respect of abated assessments (i.e pending proceedings on the date of search) , fresh assessments are to be framed by the ld AO u/s 153A of the Act which would have a bearing on the determination of total income by considering all the aspects, wherein the existence of incriminating materials does not have any relevance. In respect of unabated assessments, the legislature had conferred powers on the ld AO to just follow the assessments already concluded unless there is an incriminating material found in the search to disturb the said concluded assessment. In our considered opinion, this would be the correct understanding of the provisions of section 153A of the Act , as otherwise, the necessity of bifurcation of abated and unabated assessments in section 153A of the Act would become redundant and would lose its relevance.The arguments of the ld. DR deserves to be rejected herein. Thus none of the additions that were made by the ld. AO were based on reliance placed on search materials received from the AO of the searched person. We hold that assessment for A.Y.2009-10 had originally been completed u/s.143(3) of the Act dated 30/12/2011. Notice u/s.153C of the Act was issued to the assessee only on 26/11/2014. Hence, on the said date i.e. 26/11/2014, no proceedings of the assessee were pending. Hence, we hold that A.Y.2009-10 becomes an unabated / concluded assessment on the date of assumption of jurisdiction u/s.153C. The law is very well settled that in respect of concluded assessments, the earlier assessment completed should not be disturbed in the search assessments without existence of any incriminating material relatable to such assessment year. Thus we direct the ld. AO to re-compute the total income of the assessee by accepting the income declared in the return filed in response to notice u/s.153C of the Act without making any additions or disallowances thereon, both under normal provisions of the Act as well as in the computation of book profits u/s 115JB of the Act. Decided in favour of assessee. Issues Involved:1. Validity of proceedings under Section 153C read with Section 153A of the Income Tax Act.2. Re-examination of issues that had obtained finality under Section 143(3).3. Consideration of incriminating materials for making additions or disallowances.4. Addition on account of alleged illegal mining.5. Valuation of closing stock of sub-grade Iron Ore including Royalty.6. Impact of non-reporting of sub-grade production on successive assessment years.Issue-wise Detailed Analysis:1. Validity of Proceedings under Section 153C read with Section 153A:The assessee challenged the initiation of proceedings under Section 153C read with Section 153A, arguing that the Assessing Officer (AO) had no valid grounds for such initiation. The Tribunal examined whether the AO relied on any incriminating material received from the AO of the searched person. The Tribunal concluded that the AO did not rely on any such material, rendering the initiation of proceedings under Section 153C invalid for the assessment years concerned.2. Re-examination of Issues Finalized under Section 143(3):The Tribunal addressed whether the AO could re-examine claims that had obtained finality under Section 143(3). It was held that for concluded assessments, the AO cannot disturb the findings without any incriminating material found during the search. The Tribunal emphasized that the assessment for the year 2009-10 was already concluded under Section 143(3) and could not be reopened without incriminating evidence.3. Consideration of Incriminating Materials:The Tribunal scrutinized whether the additions and disallowances made by the AO were based on any incriminating material found during the search. It was determined that none of the additions, including disallowances under Section 14A, prior period expenses, penalty charges, carbon credit, and illegal mining, were based on such materials. The Tribunal reiterated that for concluded assessments, any additions must be based on incriminating materials found during the search.4. Addition on Account of Alleged Illegal Mining:The AO made an addition based on the Justice M.B. Shah Commission report, which pointed out discrepancies in the assessee's production data. The Tribunal found that this addition was not based on any incriminating material seized during the search and therefore could not be sustained. The Tribunal noted that the only incriminating material, Annexure A-8 (a petty cash book), did not relate to the assessment years in question.5. Valuation of Closing Stock Including Royalty:The assessee argued that royalty should not be included in the valuation of the closing stock of sub-grade Iron Ore, as royalty is applicable only on actual dispatches from the mines. The Tribunal did not specifically address this issue in its final decision, as the primary grounds were resolved in favor of the assessee, rendering other grounds academic.6. Impact of Non-reporting of Sub-grade Production:The assessee contended that if there was an addition on account of non-reporting of sub-grade production in a particular year, the impact should be given in successive years. The Tribunal did not specifically address this issue in its final decision, as the primary grounds were resolved in favor of the assessee, rendering other grounds academic.Conclusion:The Tribunal allowed the appeals of the assessee for both the assessment years 2009-10 and 2010-11, directing the AO to re-compute the total income without making any additions or disallowances. The appeals of the Revenue were dismissed, and the Tribunal emphasized that no additions or disallowances could be made in the search assessments under Section 153C without incriminating materials. The order was pronounced on 15/11/2022.