TaxTMI 
TaxTMI 
2016 (5) TMI 372
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....e, while ITA.Nos.403/2009 C/w. ITA.Nos.402/2009, 394/2014 & 271/2015, 399/2014, 400/2014 & 351/2015, 402/2014 & 352/2015 are filed by the Revenue. 3. By order dated 3/8/2015, the appeals filed by the assessee were admitted on the following substantial questions of law: (a) Whether the Tribunal was right in holding that the initiation of proceedings and the consequent order passed under Section 153C of the Act were valid, on a mere coincidence that the appellant was also carrying on its business in the searched premises along with the searched persons? (b) Whether the Tribunal was correct in holding that the assessment under Section 153C was valid despite there being no satisfaction recorded that the documents found during the search on 17.06.2008 were incriminating in nature and prima facie represented undisclosed income? (c) Whether the Tribunal was justified in rejecting the contention of the appellant that proceedings under Section 153C ought to be initiated only for assessment years in respect of which the documents were found during the search? (d) Whether the Tribunal was correct in upholding the validity of the order under Section 153C ....
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.... is engaged in the business of development of properties, construction and engineering activities and such other activities in relation to development of properties. One Mr.Yunus Zia, Mr.Ziaulla Sheriff and M/s.India Builders Corporation were subjected to a search operation on 17/6/2008 under Section 132 of the Income Tax Act, 1961 (hereinafter referred to as "the Act" for short). The assessee i.e., M/s. IBC Knowledge Park Pvt. Ltd., has its registered office at the ver same premises where the search was conducted. During the search operation, certain documents and books of accounts ybelonging to the assessee were seized from the premises searched. Documents of the assessee seized during the search operation were transferred by the Assessing Officer, who searched the premises, to the Deputy Commissioner of Income Tax, Central Circle-1(3) (hereinafter referred to as "the Assessing Officer") of the assessee. The Assessing Officer issued notice under Section 153C of the Act. The assessee requested the Assessing Officer to furnish reasons for initiating action under that section. The Assessing Officer, then proceeded to pass assessment orders under Section 143(3) read with Section 153C....
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....Sri. K.VS.Aravind, learned counsel for the Revenue, Sri. K.P.Kumar, learned Senior Counsel appearing for Sri.J.Suryanarayana, learned counsel for M/s. King & Partridge as well as Sri. A.Shankar, learned counsel for the assessee and perused the material on record. We now consider the substantial questions of law raised by the Revenue in seriatim along with the submissions of the learned counsel. 12. The first substantial question of law is with regard to depreciation allowable in respect of electrical installations, elevators, DG sets installed in the building, which have been let-out by the assessee, which is receiving rental income from the said building. The Appellate Commissioner had directed the Assessing Officer to allow depreciation on DG sets, transformers, photocopier system and security camera, but not elevators (lifts). Aggrieved by the finding, the Revenue had filed the appeal and the assessee has taken a ground in the cross-objection before the Tribunal. The Tribunal on going through the agreement of lease entered into by the assessee with various lessees held that the agreement indicated that rentals of the building and rent for the electrical installation were b....
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....s, DG sets etc., are not integral to the building as such, the income received from providing such facilities has to be charged under the head profits and gains of business and profession and therefore, depreciation has to be allowed. That reference made to Section 24 of the Act by the counsel for the Revenue is incorrect. He, therefore, contended that the Tribunal has rightly granted the depreciation on elevators also. 15. We have considered the aforesaid submissions in light of the lease agreement dated 11/8/2003, which was submitted during the course of arguments. On perusal of the said agreement, relevant portions of Clause 1 provides as under: "1. The LESSORS doth hereby grant on lease and the LESSEE doth hereby take on lease the Demised Premises (Demised Premises are described in Schedule "B" hereto). a) (i) The first term of the lease for the Demised Premises shall be for a period of Five (5) years, commencing from the date provided in Clause 1 (b) below, at a monthly rent at the rate of Rs. 22/-(Rupees Twenty Two only) per sq. ft. (of which 18% shall be towards Electro Mechanical charges throughout the tenure of the lease) calculated for the fi....
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....as under: "3 a) The LESSORS agree that it is imperative for the quiet and peaceful occupation and use of the Demised Premises by the LESSEE and for the purpose the LESSEE intends to occupy and use the Demised Premises, that the Demised Premises have, at all times, the provision of services and facilities stipulated in Annexure II and as per the specifications and requirements stipulated therein, Annexure V and elsewhere in this lease or any of the annexures, which include but are not limited to requisite lifts and generators, Primary Power and 100% Power Back-up for Common Areas, cleanliness and upkeep of Tower A maintenance of lawn security services, water etc. for Tower A and such necessary area of IBC Knowledge Park for ingress and egress to and from Tower "A". Accordingly, the LESSORS shall provide and agree to be responsible for ensuring that the services and facilities set out in Annexure II and provision of primary power and 100% power backup for common Areas, and in the manner they are set out in this lease and all the Annexures, are provided to the LESSEE by the LESSORS at all times while the LESSEE is in occupation of the Demised Premises or any portion ....
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....om business i.e., in respect of sale of building and therefore, interest could not be allowed as business expenditure. According to the Revenue, under Section 24, only interest on amount borrowed for the purposes of acquisition or construction of the property is eligible for deduction. But the assessee had not sold any building and therefore, the business of the assessee had not commenced. The stand of the Revenue is that the sale of flats or building constructed was a sine qua non for commencement of its business. 18. On the other hand, the assessee had contended that it had purchased land and on obtaining sanctioned plan had started construction and had completed a few towers by 31/3/2004. Therefore, assessee's business had commenced. Disallowance of interest was incorrect. The Tribunal noted that the assessee was in the business of developing immovable property and selling them. During the financial year 2003-04, it has constructed M/s. IBC Knowledge Park Pvt. Ltd., on Bannerghatta Road, Bengaluru. Disputes arose between the assessee and Bengaluru Housing Development and Investment, a partnership firm with whom assessee had entered into a joint development agreement. On a....
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....K.Raheja Development [102 ITD 414], which has been held to be correct by this court. We hold that the Tribunal was right in giving relief to the assessee and the findings of the Tribunal would not call for any interference. Accordingly, the second substantial question of law is answered against the Revenue. 23. Third substantial question of law is with regard to the disallowance of interest of Rs. 1,91,14,354/-. The Assessing Officer had held that the balance sheet did not reflect any accrued interest and hence, the same could not be allowed as a deduction. The Appellate Commissioner had directed the Assessing Officer to allow deduction on payment of interest. As noted from the order, in ITA.Nos.903 to 906/Bang/2013, letter dated 30/9/2006 was filed by the assessee before the Assessing Officer, which was furnished to the Tribunal as well. The Appellate Commissioner had held that the detailed working of interest on borrowings for Tower 'A' were furnished and that Tower 'A' had been let-out and the interest pertaining to the said aspect amounted to Rs. 1,91,14,354/- paid during the previous years. The Tribunal held that there was no infirmity in the order of the Ap....
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.... to be disallowed as it was not meant for management of construction, but on other expenses, such as advertisement, sales promotion etc. Therefore, the income had to be assessed under the head income from other sources. The Tribunal held that the income had to be assessed as business income and the assessee could not have received a sum of Rs. 78.25 lakh without incurring expenses. Therefore, 25% of the gross fee earned was allowed as expenses. 28. Learned counsel for the Revenue contended that the assessee had not produced any evidence with regard to the claim of Rs. 1,29,08,375/- as construction management fee for being deducted from the income. He contended that the said expense related to the property constructed and the assessee had let-out the said property and had received rental income from the house property. Hence, expenses in that regard did not arise. 29. Per contra, assessee's counsel supported the finding of the Tribunal by contending that the assessee had earned income of Rs. 78.25 lakh as construction management fee. It had set up the interiors of M/s.Accenture Services Pvt. Ltd., and the aforesaid disputed amount was the expenses incurred in the process. ....
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....r Section 153C is issued, the Assessing Officer must be satisfied that the documents seized have a bearing on the total income of the assessee, which is not so in the present case. In support of these legal propositions, learned Senior Counsel for the assessee, Sri.K.P.Kumar, relied on certain decisions which shall be adverted later. 32. Learned Senior Counsel further contended that the documents belonging to the assessee which were seized during the search of the aforesaid three parties were bound to be found in the premises searched as it carries on business from the very same premises. Merely because documents of the assessee were found and seized, proceedings under Section 153C could not have been initiated. The requisite procedure under Section 132 of the Act cannot be ignored while invoking Section 153C of the Act. Further, for the accounting year 2004-05, assessment had been completed on 12/12/2006 and thus, the assessment proceedings did not abate. Hence, no order under Section 153C could have been made except with regard to any undisclosed income based on incriminating material. That the Revenue has filed an appeal against the order of the Tribunal in this regard, which....
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....losed income must be found. Thus, according to learned counsel, detection of any undisclosed income during search operation or requisition is not a sine qua non for reopening of assessment under Sections 153A and 153C and that the finding of the Tribunal in that regard is not correct. 35. He further submitted that as per the earlier scheme under Sections 158BC and 158BD of the Act, block assessment had to be made for six assessment years preceding previous year in which the search or requisition was made and until the date of commencement of the search or date of such requisition in the previous year in which the search was conducted or requisition made. That is not so under the present scheme as an independent assessment could be made. That in the instant case, out of six assessment years, no undisclosed income was found for the assessment year 2004-05 and hence, the assessment under Section 153C of the Act was not valid and the original assessment was reiterated, but all the six assessment years were rightly reopened under Section 153C of the Act. 36. Thus, according to learned counsel for Revenue, the finding of the Tribunal that assessment under Sections 153A and 153C hav....
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....come. Therefore, unless the documents seized prima facie showed undisclosed income, Section 153C of the Act could not be invoked. That before any satisfaction under Section 153C of the Act was recorded, the Assessing Officer must make enquiries and find out prima facie that the documents represented undisclosed income. It was also contended that the assessment under Section 153A read with Section 153C could be made only in respect of those assessment years relating to the documents detected. 41. The Tribunal while considering the aforesaid contentions held that the assessee shared common business premises with the person searched. But the fact that it ipso facto could not face proceedings under Section 153C of the Act, unless there was undisclosed income on the part of the assessee detected in the search operation, was not correct. Also, it was not necessary that satisfaction should be recorded regarding the seized articles found in the course of search which lead to undisclosed income at the stage of detection during the course of search. The Tribunal also held that once the condition for invoking Section 153A was satisfied, the Assessing Officer could proceed in accordance wit....
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....f such search and do all other things necessary as prescribed under Section 132 of the Act. 45. Sections 153A, 153B and 153C were inserted by the Finance Act, 2003, with effect from 1/6/2003. They have replaced the post-search block assessment scheme in respect of any search or requisition made after 31/5/2003. Sub-section (1) of Section 153A inter alia deals with assessment in case of search or requisition. It begins with a non obstante clause and states that notwithstanding anything contained in Sections 139, 147, 148, 149, 151 and 153, in the case of a person where a search is initiated under Section 132 or books of account, other documents or any valuable assets are requisitioned under Section 132A, the Assessing Officer shall issue notice to such person requiring him to furnish within such period, as may be specified in the notice, return of income in respect of each assessment year falling within six assessment years referred to in clause (b) of Section 153(1) in the prescribed form and verified in the prescribed manner and setting forth such other particulars as may be prescribed and the provisions of the Act shall, so far as may be, apply accordingly as if such return we....
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....under Section 132 or requisition is made under Section 132A and in respect of such assessment year - (a) no return of income has been furnished by such other person and no notice under sub-section (1) of Section 142 has been issued to him, or (b) a return of income has been furnished by such other person but no notice under subsection (2) of Section 143 has been served and limitation of serving the notice under sub-section (2) of Section 143 has expired, or (c) assessment or reassessment, if any, has been made, before the date of receiving the books of account or documents or valuable assets seized or requisitioned by the Assessing Officer having jurisdiction over such other person, such Assessing Officer shall issue notice and assess or reassess total income of such other person of such assessment year in the manner provided in Section 153A. 47. Chapter XIV-B consists of Section 158B to 158BH, inserted with effect from 01/07/1995, deals with special procedure for assessment in search cases. The Finance Act, 1995 inserted Chapter XIV-B in the Act, incorporating a new scheme of block assessment in cases relating to search conducted under Section 132 of the Act or requisitions mad....
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....of accounts, documents or valuable assets of third parties indicating their undisclosed income found during the search or requisition under Section 132/132A leading to a prima facie tax liability. A special procedure is contemplated in such cases. Such books of accounts, documents or valuable assets are required to be handed over by the Assessing Officer having jurisdiction over the persons searched requisitioned to the assessing officer of a third party on his satisfaction that they belong to a third party before handing over. 49. On a conjoint reading of the aforesaid provisions, it becomes clear that a search can take place only when a concerned officer has information and reason to believe that any person is in possession of any valuable assets, which has not been or would not be disclosed under the Act. In such a case, a search can take place. Following the search, if any books of account, other documents, any valuable assets is or are found in the possession or control of any person in the course of a search, then the books of account or other documents or valuable assets could be seized. Under Section 153A, the satisfaction regarding an inference of liability must be reco....
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....sment pursuant to a search operation is detection of undisclosed income. In fact, the initiation of search proceeding is also based on possession of information and reason to believe that a person is in possession of certain valuable assets, which has not been or would not be disclosed under the Act. The same is nothing but 'undisclosed income' as defined in Clause (b) of Section 158B(b) of the Act. This becomes even more clear on a comparison of section 132(1)(c) with Section 158B(b) of the Act. It is for the above reason that Sections 153A and 153C begin with a non obstante clause in order to make these provisions exclusive of Sections 139, 147, 148, 149, 151 and 153 of the Act. If a search operation does not lead to detection of undisclosed income as defined in Chapter XIV-B of the Act, then no purpose would be served in reopening the assessment already completed. Also, if there is no detection of any undisclosed income, then there would be no need for pending assessment to abate. Thus, when particulars of income declared in the return is already available with the Assessing Officer, such income cannot form part of undisclosed income even if such return is filed beyond t....
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....would apply in the case of any person in respect of whom search has been carried out under Section 132A or documents or assets have been requisitioned under Section 132A. Section 158BD, however, provides for taking recourse to a block assessment in terms of Section 158BC in respect of any other person, the conditions precedents wherefor are : (i) Satisfaction must be recorded by the Assessing Officer that any undisclosed income belongs to any person, other than the person with respect to whom search was made under Section 132 of the Act; (ii) The books of account or other documents or assets seized or requisitioned had been handed over to the Assessing Officer having jurisdiction over such other person; and (iii) The Assessing Officer has proceeded under Section 158BC against such other person. The conditions precedent for invoking the provisions of Section 158BD, thus, are required to be satisfied before the provisions of the said chapter are applied in relation to any person other than the person whose premises had been searched or whose documents and other assets had been requisitioned under Section 132A of the Act." In that case, it was held that the Assessing Offic....
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.... the order of the Assessing Officer, the assessee therein had filed an appeal before the Appellate Authority, who had partly allowed the appeal. The Revenue had carried the matter further by filing an appeal before the Tribunal and the assessee therein filed cross-objection. The Tribunal rejected Revenue's appeal, which filed an appeal before the High Court, which also rejected the Revenue's appeal and confirmed the order of the Tribunal. The Revenue, then approached the Hon'ble Supreme Court. While dealing with various provisions of Chapter XIV-B of the Act pertaining to assessment in the case of search operation, the Hon'ble Supreme Court held that Section 158BD of the Act deals with undisclosed income of any other person. On the question of recording satisfaction that there is an undisclosed income, which had been traced where a person was searched under Section 132 of the Act or books of accounts, other documents or valuable assets are requisitioned under Section 132A of the Act, the Hon'ble Supreme Court opined as under: "We would certainly say that before initiating proceedings under section 158BD of the Act , the Assessing Officer who has initiat....
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....cer who has jurisdiction over such other person. The satisfaction note could be prepared at either of the following stages: (a) at the time of or along with the initiation of proceedings against the searched person under Section 158BC of the Act; (b) along with the assessment proceedings under Section 158BC of the Act; and (c) immediately after the assessment proceedings are completed under Section 158BC of the Act of the searched person." In that case, the Hon'ble Supreme Court remanded the matters to the concerned High Court for consideration of the individual cases in light of observations made above on the scope and interpretation of Section 158BD of the Act. (b) In Commissioner of Income Tax vs. M/s. Lancy Constructions [ITA.No.528/2014 & connected matters disposed of by this Court on 15/12/2015], it was held that there were no incriminating documents during the course of search on the basis of which additions could have been made by the Assessing Officer. That the accounts which were submitted by the assessee at the time of regular assessment were duly verified during the course of such assessment and accepted by the Assessing Officer. In the absence of ....
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....(ii) Assessment and re-assessments pending on the date of the search shall abate. The total income for such assessment years will have to be computed by the Assessing Officers as a fresh exercise. (iii) The Assessing Officer will exercise normal assessment powers in respect of the six years previous to the relevant assessment year in which the search takes place. The Assessing Officer has the power to assess and re-assess the "total income" of the six years in separate assessment orders for each of the six years. In other words, there will be only one assessment order in respect of each of the six assessment years in which both the disclosed and the undisclosed income would be brought to tax. (iv) Although Section 153A does not say that additions should be strictly made on the basis of evidence found in the course of the search, or other post-search material or information available with the Assessing Officer which can be related to the evidence found, it does not mean that the assessment can be arbitrary or made without any relevance or nexus with the seized material. Obviously, an assessment has to be made under this section only on the basis of the seized material. (v) In the ab....
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....5 (Delhi)], the court rejected the argument that during assessment under Section 153A additions had to be restricted or limited to incriminating material only, found during course of search. (c) In Savesh Kumar Agarwal vs. Union of India ((2013) 35 Taxmann.com 85 (Allahabad)], the question considered was whether on receipt of satisfaction note, the Assessing Officer had not found anything adverse against the assessee and seized goods having been released in favour of the assessee, notice could be issued under Section 153C of the Act to file returns for six years. The stand of the Revenue therein was that the Assessing Officer could still proceed under Section 153A of the Act in order to find out the source of income. In that case the writ petition filed under Article 226 of the Constitution of India challenging the notice was dismissed on the premises that the power under Section 153C exists in the Assessing Officer, if he is satisfied with regard to the need for examination of the source of income. (d) In Dr. K.M. Mehaboob vs. DCIT [(2012) 26 Taxmann.com 54 (Kerala)], it was held that unlike under Section 158BD, for transferring a file under Section 153C, there i....
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....e court did not express any opinion as to whether Section 153 A can be invoked in a case where no incriminating material was found during the search as it was in fact dealing with a case where incriminating material had been found. 54. On a consideration of the relevant sections as well as judicial precedent referred to above, what emerges is that, Section 158BD of the Act deals with undisclosed income of a third party. However, insofar as the incriminating material of the searched person or other person detected during the course of search is concerned, the same can be considered during the course of assessment. Further, such incriminating material must relate to undisclosed income which would empower the Assessing Officer to upset or disturb a concluded assessment of the other person. Otherwise, a concluded assessment would be disturbed without there being any basis for doing so which is impermissible in law. Even in case of a searched person, the same reason would hold good as in case of any other person. As observed by us, detection or the existence of incriminating material is a must for disturbing the assessment already made and concluded. But, at the same time, such can b....
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....ew of the above, filing of appeals on the issue of recording of satisfaction note should also be decided in the light of the above judgment. Accordingly, the Board hereby directs that pending litigation with regard to recording of satisfaction note under section 158BD/153C should be withdrawn/not pressed if it does not meet the guidelines laid down by the Apex Court." As per the aforesaid circular, at the time of or along with initiation of the proceedings, against the searched person or third party under Section 153C or in the course of assessment proceedings under Section 153C of the Act or immediately after the assessment proceedings are completed under Section 153C of the Act, recording of satisfaction is required. 55. If the observations made by the Tribunal are considered in this regard, it is noted by the Tribunal that it is not necessary that satisfaction should be recorded that documents or valuable assets found in the course of search showed undisclosed income. In view of the aforesaid discussion, we do not think that such can be the correct position of law. 56. Further, in the judgments referred to by the learned counsel for the Revenue, where incriminating mate....