2025 (2) TMI 391 - AT - Income Tax

Taxpayer wins partial relief in Section 153A assessment with 60% expenditure deduction allowed against unaccounted receipts

MSN Life Sciences Private Limited, Hyderabad Versus The Assistant Commissioner of Income Tax, Central Circle 2 (4), Hyderabad. And (Vice-Versa)

ITAT Hyderabad ruled on multiple issues in a Section 153A assessment case. The tribunal allowed 60% expenditure deduction against unaccounted cash ... Disallowance of claim of deduction of expenditure against the unaccounted cash receipts from sale of spent solvents / scrap - HELD THAT:- This issue is squarely covered in favour of the assessee by the decision of the ITAT Hyderabad Benches, in assessee’s own case for A.Y. 2015-16 [2024 (11) TMI 1424 - ITAT HYDERABAD] wherein the Tribunal has followed the decision in the case of MSN Pharmachem Private Limited for the A.Y 2019-20 [2024 (11) TMI 499 - ITAT HYDERABAD] where the Tribunal has directed the Assessing Officer to allow 60% of expenditure against unaccounted cash receipts from sale of spent solvents / scrap for the year under consideration. Validity of assumption of jurisdiction by the AO for issuance of notice u/s 153A - legality of ‘satisfaction note’ recorded - HELD THAT:- AO is having in possession books of accounts or other documents or evidence which reveal that the income represented in the form of “asset”, which has escaped assessment amounts to or is likely to amount to fifty lakh rupees or more in the relevant assessment year or in aggregate in the relevant assessment years. Therefore, we are of the considered view that the arguments of the assessee based on the ‘satisfaction note’, that the AO did not bring out the fulfillment of the conditions laid down for issuance of notice u/s 153A of the Act are devoid of merit and cannot be accepted. Unaccounted receipts from sale of spent solvents and scrap - If we consider the profits estimated from unaccounted cash receipts from sale of spent solvents and scrap which becomes the income of the appellant. Therefore, in our considered view, the profits estimated from sale of unaccounted spent solvents and scrap becomes income represented in the form of an “asset” being the advances given to the directors and other parties and therefore, the ‘satisfaction note’ recorded by the Assessing Officer, in light of said incriminating material constitutes fulfillment of the conditions laid down for issuance of notice u/s 153A of the Act for the assessment years in question. Thus, we consider that the arguments advanced by the learned counsel for the assessee on this issue is devoid of merit and are hereby rejected. Notice issued u/s 153A for the assessment years in question and consequent assessment order passed by the AO is valid and in accordance with the provisions of Section 153A(1) of the Act and 4th proviso provided therein. Thus, the grounds taken by the assessee challenging the legal validity of the assumption of jurisdiction by the AOis hereby rejected. Thus, ground no.5 is dismissed. ‘On Money’ payment made for purchase of land at Bibinagar - satisfaction note recorded by the AO u/s 153A did not refer to the issue of 'on-money' payments, which renders the addition jurisdictionally invalid - HELD THAT:- Undisputedly clear that the Assessing Officer is having incriminating material which suggests payment of ‘On money” for purchase of land at Bibi Nagar and this fact has been confirmed by the CMD of the company. Further, the arguments of the assessee that the material seized from the premises of CMD cannot be used for the assessment of the appellant is devoid of merit and against the law, because where simultaneous search is conducted in the group of cases and its directors, on any material found during the course of search, whether it is in the premises of assessee or from the group companies or from the director’s residential premises, the same can be used for making the assessment. Therefore, the arguments of the assessee that in the assessment framed u/s 153A of the Act material found in the third party premises cannot be used, is contrary to the law. Thus, we reject the arguments of the assessee. Therefore, we are of the considered view that the Ld.CIT(A) has rightly held that the addition is supported by seized material and corroborative evidence, which is sufficient to sustain the addition under Section 153A. Addition of deemed dividend (dividend distribution tax in the hands of the appellant) - HELD THAT:- Respectfully, following the decision of MSN Pharmachem Private Limited [2024 (11) TMI 499 - ITAT HYDERABAD] we set aside the order of the LD.CIT(A) on this issue and direct the Assessing Officer to delete the addition made u/s 2(22)(e) of the Act in the hands of the assessee. 1. ISSUES PRESENTED and CONSIDEREDThe core legal issues considered in this judgment include:Whether the deduction of expenditure against unaccounted cash receipts from the sale of spent solvents and scrap should be allowed.The legal validity of the assumption of jurisdiction by the Assessing Officer for the issuance of notice under Section 153A of the Income Tax Act.Whether the addition of deemed dividend under Section 2(22)(e) and the consequent dividend distribution tax under Section 115Q is justified.The validity of the addition of 'on-money' payment for the purchase of land.2. ISSUE-WISE DETAILED ANALYSISDeduction of Expenditure Against Unaccounted Cash ReceiptsRelevant Legal Framework and Precedents: The Tribunal considered past decisions, including the ITAT Hyderabad Benches' decision in the assessee's own case for A.Y. 2015-16, which allowed 60% of expenditure against unaccounted cash receipts.Court's Interpretation and Reasoning: The Tribunal emphasized that income cannot be earned without incurring expenditure and that the seized material should be read as a whole.Key Evidence and Findings: The seized pen drive contained Excel data showing cash inflow and outflow, corroborated by affidavits from employees.Application of Law to Facts: The Tribunal directed the AO to allow 60% of the receipts as expenditure against unaccounted cash receipts.Treatment of Competing Arguments: The Tribunal considered the arguments of both the assessee and the Revenue, ultimately siding with the assessee based on precedent and evidence.Conclusions: The Tribunal allowed 60% of the receipts as expenditure, reducing the taxable income from unaccounted cash receipts.Legal Validity of Assumption of Jurisdiction under Section 153ARelevant Legal Framework and Precedents: The Tribunal examined the conditions under the 4th proviso to Section 153A(1) of the Act.Court's Interpretation and Reasoning: The Tribunal found that the AO had sufficient evidence to assume jurisdiction, as the incriminating material revealed unaccounted receipts and advances to directors.Key Evidence and Findings: The Tribunal noted that the AO's satisfaction note was based on substantial evidence of unaccounted income.Application of Law to Facts: The Tribunal upheld the validity of the notice issued under Section 153A.Treatment of Competing Arguments: The Tribunal rejected the assessee's argument that the satisfaction note was insufficient.Conclusions: The Tribunal upheld the jurisdiction assumed by the AO under Section 153A.Addition of Deemed Dividend under Section 2(22)(e)Relevant Legal Framework and Precedents: The Tribunal referred to the provisions of Section 2(22)(e) and relevant case law, including the decision of the ITAT in MSN Pharmachem Pvt. Ltd.Court's Interpretation and Reasoning: The Tribunal concluded that the transactions were trade advances in the ordinary course of business, not loans or advances.Key Evidence and Findings: The Tribunal noted the commercial nature of transactions between group companies and the absence of personal benefit to shareholders.Application of Law to Facts: The Tribunal directed the deletion of additions made under Section 2(22)(e).Treatment of Competing Arguments: The Tribunal considered the Revenue's arguments but found them unsupported by evidence.Conclusions: The Tribunal deleted the addition of deemed dividend and the related tax.Addition of 'On-Money' Payment for Land PurchaseRelevant Legal Framework and Precedents: The Tribunal examined the validity of using seized material from a third party's premises.Court's Interpretation and Reasoning: The Tribunal found that the material sufficiently linked the appellant to the on-money payment.Key Evidence and Findings: The seized material and CMD's statement supported the addition.Application of Law to Facts: The Tribunal upheld the addition of Rs. 1,58,40,000 as on-money payment.Treatment of Competing Arguments: The Tribunal rejected the assessee's reliance on unrelated case law.Conclusions: The Tribunal confirmed the addition of on-money payment.3. SIGNIFICANT HOLDINGSThe Tribunal directed the AO to allow 60% of receipts as expenditure against unaccounted cash receipts, citing the principle that income cannot be earned without incurring expenditure.The Tribunal upheld the jurisdiction assumed by the AO under Section 153A, emphasizing the sufficiency of incriminating material.The Tribunal deleted the addition of deemed dividend under Section 2(22)(e), recognizing the transactions as trade advances and not loans or advances.The Tribunal confirmed the addition of on-money payment for land purchase, based on corroborative evidence linking the appellant.