2014 (7) TMI 1384 - AT - Income Tax

Section 153C proceedings invalid when assessment based solely on disclosed material without incriminating evidence from search

The ITAT Visakhapatnam held that proceedings under section 153C were invalid where the assessment was based solely on disclosed material in books of ... Validity of proceeding u/s 153C - reference to any incriminating material found as a result of search - AO completed the assessment by disallowing the agricultural income declared by the assessee in the original return of income filed by him treating it as unexplained credit - CIT(A) sustained 50% of the addition made by the assessing officer as unexplained credit - HELD THAT:- We have dealt with identical issue in case of another group company viz. M/s. Avinash Estates & Resorts Ltd [2014 (10) TMI 668 - ITAT VISAKHAPATNAM] as held that assessment made by the assessing officer is on the basis of the entries made in the books of accounts and income disclosed in the return of income much prior to search and which has no reference to any incriminating material found as a result of search and seizure operation, we are of the view that the proceeding initiated u/s 153C of the Act is invalid in law. The matter can also be looked into from another angle. As rightly been stated by the Ld. A.R., on the date notice was issued u/s 153C of the Act, there is no assessment proceeding pending before the assessing officer for the aforesaid assessment year. Therefore, in absence of any incriminating material showing concealed/undisclosed income of the assessee, the assessing officer could not have proceeded to assess income which has already been reflected in the books of accounts and disclosed in the return of income filed by the assessee. Even otherwise also, conclusion drawn by the assessing officer in the assessment order that the agricultural income is unexplained also found to be not on cogent material, because of the fact that the CIT(A) has accepted 50% of the income shown as agricultural income against which the department is not in appeal. Also in the remand report, the assessing officer himself has accepted that the assessee has earned income from coconut trees and casurina plantation which can be considered as agricultural income. In aforesaid view of the matter, the proceeding initiated u/s 153C of the Act in absence of any incriminating material and only on the basis of the material already disclosed by the assessee is invalid and consequently the assessment orders passed are also unsustainable in law. In present case also assessment made by the AO is not with reference to any incriminating material found as a result of search. Therefore, respectfully following the aforesaid decision of the coordinate bench, we quash the assessment order passed for all these assessment years. Decided in favour of assessee. Issues Involved:1. Validity of proceedings under Section 153C of the Income Tax Act.2. Merits of additions made by the Assessing Officer (AO) concerning agricultural income.Issue-wise Detailed Analysis:1. Validity of Proceedings under Section 153C of the Income Tax Act:The first issue pertains to the validity of the proceedings initiated under Section 153C of the Income Tax Act. The assessee, engaged in the real estate business, had filed its return declaring 'NIL' income and agricultural income of Rs. 1,82,000/-. Following a search and seizure operation conducted on another individual, the AO initiated proceedings under Section 153C, disallowing the agricultural income and treating it as unexplained credit. The assessee challenged this addition before the CIT(A), who upheld the validity of the proceedings but allowed 50% of the agricultural income. Still aggrieved, the assessee appealed further.The Tribunal examined the conditions under Section 153C, which allows proceedings if incriminating materials pertaining to another person are found during a search. The Tribunal referred to a similar case (M/s. Avinash Estates & Resorts Ltd.), where it was held that the materials found did not indicate concealed income and were not incriminating. It was emphasized that the AO must have seized materials directly linked to undisclosed income to initiate proceedings under Section 153C. In the present case, the AO's assessment did not reference any seized materials, and the income assessed was already reflected in the books and returns filed by the assessee. Thus, the Tribunal found no justification for initiating proceedings under Section 153C and quashed the assessment orders for all the assessment years.2. Merits of Additions Made by the Assessing Officer Concerning Agricultural Income:The second issue concerns the merits of the addition made by the AO regarding the agricultural income. The AO had rejected the assessee's claim of agricultural income, treating it as unexplained credit under Section 68. The CIT(A) provided partial relief by modifying the addition. The Tribunal, referring to a similar case (M/s. Avinash Estates & Resorts Ltd.), directed the AO to disallow only 25% of the agricultural income declared by the assessee. Following this precedent, the Tribunal directed the AO to disallow 25% of the agricultural income in the present case as well.Conclusion:The Tribunal quashed the assessment orders for the assessment years 2004-05 to 2008-09 due to the invalidity of proceedings under Section 153C, as no incriminating material was found. For the assessment year in ITA No. 379/Vizag/2014, the Tribunal directed the AO to disallow 25% of the agricultural income declared by the assessee. The appeals for ITA Nos. 375 to 378/Vizag/2014 were allowed, and ITA No. 379/Vizag/2014 was partly allowed.