Assessment order quashed as proceedings invalid without incriminating material found during search operation

ITAT Bangalore quashed assessment order under section 153A for assessment year 2018-19. The tribunal held proceedings invalid as the assessee was not the person searched and no incriminating material was found during search conducted on 12th March 2020. The assessment year had already become unabated as notice period under section 143(2) expired on 30th September 2019. ITAT ruled that payments received by qualified consultant gynecologist from hospital constituted professional fees, not salary, evidenced by TDS deduction under section 194J rather than 192. Assessee was entitled to presumptive taxation benefit under section 44ADA, offering 50% of gross professional receipts as income. CIT(A) erred in dismissing appeal without adjudicating on merits. Assessment order was set aside and appeal allowed.

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The core legal questions considered by the Tribunal in these appeals concern the validity of assessment proceedings initiated under section 153A of the Income Tax Act, the nature of income received by the assessee from a hospital (whether salary or professional fees), the applicability of presumptive taxation under section 44ADA, and the procedural propriety of the appellate authority's dismissal of the appeal without adjudication on merits.

Regarding the jurisdictional validity of the assessment under section 153A, the Tribunal examined whether the assessee qualifies as a "person searched" within the meaning of the provision. The search warrant and authorization were issued in the name of the assessee's father, who was the managing partner of the firm under investigation. Although the residential premises of the assessee were searched, the Tribunal held that mere inclusion of premises does not confer jurisdiction under section 153A unless the individual's name appears on the search warrant. Consequently, the initiation of proceedings against the assessee under section 153A was held to be vitiated and void ab initio.

Even assuming the validity of proceedings under section 153A, the Tribunal noted the absence of any incriminating material found during the search relating to the assessee. The law is settled that additions under section 153A require discovery of incriminating evidence. Since the assessment year 2018-19 was an unabated assessment year with the time limit for issuing a notice under section 143(2) already expired prior to the search, the proceedings under section 153A lacked validity on this ground as well.

On the substantive issue of classification of income, the Assessing Officer (AO) treated the sum of Rs. 12,00,000 received by the assessee from Dr. Jayachandran & Co Hospital as salary income, disallowing the benefit of presumptive taxation under section 44ADA. The AO's reasoning was based on the fixed monthly payment structure, which was presumed to indicate an employer-employee relationship. The Tribunal rejected this view, emphasizing that a fixed payment does not ipso facto establish salary income. The assessee, a qualified consultant gynecologist, received fees for professional services, supported by the fact that tax was deducted at source under section 194J (fees for professional services) and not under section 192 (salary). No evidence was presented by the Revenue to demonstrate any employer-employee relationship, such as control, supervision, or entitlement to employment benefits. Therefore, the income was rightly classified as professional receipts.

Applying section 44ADA, which permits a presumptive taxation scheme for professionals, the Tribunal held that the assessee was entitled to declare 50% of gross professional receipts as income. The AO's addition of the entire amount to taxable income and disallowance of expenses was deemed arbitrary and contrary to settled legal principles.

The Tribunal also addressed the procedural conduct of the learned Commissioner of Income Tax (Appeals) [CIT(A)], who had dismissed the appeal on grounds of non-compliance with hearing notices without adjudicating the substantive issues. The Tribunal observed that an appellate authority is duty-bound to dispose of appeals judiciously by considering the facts and law rather than dismissing appeals summarily. The CIT(A)'s action was therefore found to be erroneous.

In conclusion, the Tribunal quashed the assessment orders passed under section 153A, held the proceedings invalid for want of jurisdiction and absence of incriminating material, and upheld the assessee's claim for presumptive taxation under section 44ADA. The appeals were allowed accordingly.

For the subsequent assessment year 2019-20, the Tribunal applied the same reasoning and findings as for the year 2018-19, allowing the appeal on identical grounds.

Significant holdings include the following verbatim legal reasoning: "The very initiation of proceedings under section 153A of the Act is against the assessee is vitiated and void ab initio" and "The AO's assumption that a fixed monthly payment necessarily implies an employer-employee relationship is legally and factually incorrect." The Tribunal established the principle that inclusion of residential premises in a search does not confer jurisdiction under section 153A unless the person's name is on the search warrant. It also reinforced that presumptive taxation under section 44ADA applies to professional fees even if received on a fixed monthly basis, absent evidence of an employer-employee relationship.

Final determinations were that the assessment proceedings under section 153A were invalid, the income received by the assessee was professional in nature and eligible for presumptive taxation, and the CIT(A)'s dismissal of the appeal without merit adjudication was improper. Both appeals were allowed, setting aside the impugned orders.

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