2017 (7) TMI 173 - AT - Income Tax

Tribunal Invalidates Additions Under Section 153C, Directs Acceptance of Declared Agricultural Income

M/s. Oleander Farms Pvt. Ltd. Versus DCIT, CC-47, Mumbai

The Tribunal allowed the appeal of the assessee, ruling that additions under Section 153C were unjustified without incriminating material. It invalidated ... Addition u/s. 153C - addition made under the head income from other sources and allowing as agricultural income - Held that:- The agricultural income declared by the assessee as returned ought to be accepted. Accordingly since the entire income of the assessee is from agricultural activities and hence exempt under section 10(1), the above issue will no longer survive. Further, in the order under section 143(3) passed earlier the AO had treated the same as agriculture income. Addition made on account of loan account written off invoking provisions of Section 41 - Held that:- Even if interest portion is considered as taxable as per the provisions of section 41(1) of the Act, the same has been claimed as deduction in earlier years against the agricultural income and hence remission of the same in current year ought to be treated as agricultural income and therefore, exempt u/s 10(1) of the Act. No incriminating material was found during the course of search, accordingly, addition made under section 153C in respect of assessment year which has already been completed under section 143 (3) has no legs to stand. Appeal of the assessee is allowed Issues Involved:1. Legality of additions made under Section 153C without incriminating material.2. Validity of non-recording of satisfaction before transferring the file.3. Additions made under Section 68 for unexplained cash credit.4. Classification of agricultural income as income from other sources.5. Addition on account of write-back of term loan and dividend income.Detailed Analysis:1. Legality of Additions Made Under Section 153C Without Incriminating Material:The assessee argued that additions under Section 153C were unjustified as no incriminating material was found during the search. The Tribunal noted that the assessment for AY 2005-06 was completed under Section 143(3) and thus, was not pending at the time of search. It relied on multiple judicial precedents, including the Special Bench decision in All Cargo Global Logistics Ltd., which held that in cases where assessments are not pending, additions under Section 153A/153C can only be made based on incriminating material found during the search. The Tribunal concluded that since no incriminating material was found, the additions were not justified.2. Validity of Non-Recording of Satisfaction Before Transferring the File:The assessee contended that no satisfaction was recorded in the file of the searched person before transferring the file to the AO of the assessee. The Tribunal emphasized the necessity of recording satisfaction as per the Supreme Court's ruling in M/s Calcutta Knitwears and the CBDT Circular No. 24/2015. It was noted that the satisfaction note was not provided to the assessee and there was no evidence of its recording. The Tribunal held that the absence of a properly recorded satisfaction note invalidated the proceedings under Section 153C.3. Additions Made Under Section 68 for Unexplained Cash Credit:The AO made additions under Section 68 for unexplained cash credits, arguing that the assessee received bogus share application money. The Tribunal observed that the assessee had provided various documents to substantiate the identity, genuineness, and creditworthiness of the share applicants. It was noted that the AO did not issue notices under Section 133(6) or summons under Section 131 to verify the details provided. The Tribunal concluded that the addition under Section 68 was not justified as it was not based on any incriminating material found during the search.4. Classification of Agricultural Income as Income from Other Sources:The AO reclassified the agricultural income declared by the assessee as income from other sources. The Tribunal referred to its earlier order for AY 2006-07 to 2010-11, where it accepted the assessee's claim of agricultural income based on the evidence provided, including the Inspector's report confirming agricultural activities. The Tribunal found no new material to contradict the assessee's claim and directed the AO to accept the agricultural income as declared.5. Addition on Account of Write-Back of Term Loan and Dividend Income:The AO added the amount written back from a term loan settlement to the income of the assessee. The Tribunal noted that the write-back included both principal and interest components. It held that the interest portion, if taxable under Section 41(1), should be treated as agricultural income, which is exempt under Section 10(1) since it was claimed as a deduction against agricultural income in earlier years. The Tribunal found no incriminating material to justify this addition under Section 153C.Conclusion:The Tribunal allowed the appeal of the assessee, holding that the additions made under Section 153C were not justified in the absence of any incriminating material found during the search. It also invalidated the proceedings under Section 153C due to the non-recording of satisfaction before transferring the file. The Tribunal directed the AO to accept the agricultural income as declared and found no merit in the additions made under Sections 68 and 41.