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2017 (5) TMI 1224
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.... reconsideration, particularly in light of a later decision of a coordinate Bench of this Court in Smt. Dayawanti Gupta v. CIT (2016) 390 ITR 496 (Del) (hereafter Dayawanti Gupta). The Revenue's submission is that the invocation of Section 153A of the Act to re-open concluded assessments of the AYs earlier to the year of search is justified even in the absence of incriminating material found during the search qua each such earlier AY. For reasons to follow, the Court does not agree with the above submissions of the Revenue. 3. Since there are typographical errors in the memoranda of appeals, and the corresponding appeal numbers before the ITAT, the Court sets out in a tabulated form all the appeal numbers, the AY and the corresponding ITA Nos.: S.No. ITA No. of Revenue's appeal in this Court Assessment Year (AY) Corresponding ITA No. of ITAT (i) 306/17 2004-05 2437/Del/12- In revenue's appeal memo the ITA No. of ITAT order is inadvertently mentioned as 2413/Del/12 since that was the ITA No. of the Assessee's appeal before ITAT dismissed IA for non-prosecution. (ii) 307/17 2003-04 2412/Del/12 (iii) 308/17 2000-01 2409/Del/12 ....
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....3A was issued to the Assessee on 12th December, 2006. Thereafter, notice dated 3rd October, 2007 along with questionnaire under Sections 143(2) and 142(1) of the Act were also issued. Assessment orders 9. On 28th December, 2007, separate assessment orders were passed by the AO in respect of the AYs 2000-01, 2001-02, 2002-03, 2003-04 and 2004-05. The AO dealt with the issue of 'franchisee commission'. He noted that as per the trading and profit and loss account ('P & L Account') for the AY 2004-05, the Assessee had claimed Rs. 60,066. It was noted that as in the preceding years, a substantial amount was claimed on account of franchisee commission which was debited to the P&L Account i.e., the franchisee commission paid to various parties, the Assessee was thus asked to furnish copies of accounts of the franchisees with their complete addresses. The AO noted that the addresses of the franchisees were not revealed and on a perusal of the copy of the accounts of the said franchisees, there were glaring discrepancies in the details filed. 10. In the assessment orders passed for AYs 2001-02 to 2003-04 also, there was a similar discussion regarding the franchisee commission payme....
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....warded the additional evidence to the AO for his comments. The AO then submitted a report dated 3rd March, 2011 opposing the request of the Assessee for permission to lead additional evidence. The additional evidence was also contested by the AO as not supporting the Assessee's explanation regarding the payment of franchisee commission. A rejoinder was filed thereto by the Assessee. 16. It must also be noticed at this stage that on 23rd September, 2010, during the pendency of the proceedings before the CIT (A) when a remand report was sought from the AO, the Assessee offered a very detailed explanation on the following topics to the AO during the remand proceedings: (i) Addition of Rs. 13,79,801/- on account of franchisee commission (rent); (ii) Addition of Rs. 88 lakhs on account of undisclosed franchisee commission; (iii) Addition of Rs. 17,32,511/- on account of security deposits; (iv) Addition of Rs. 6,64,910/- on account of undisclosed income from self-controlled outlets; and (v) Non-submission of books of account during the assessment proceedings under Section 153A /143(3). 17. In respect of last topic regarding non-submission of books of accounts, the As....
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....r than the AY 2000-01). The CIT(A) noted that in the proceedings before the CIT(A), the originals of the franchise agreements were verified by the AO contrary to what was noted by the AO that the Assessee had admitted to have 52 owned and controlled/operating franchisee outlets, the CIT(A) noted that the AR of the Assessee had submitted that there were only 21 franchisees in FY 200304. In his order in the appeal for the AY 2004-05 in paragraph 6.2.3, the CIT(A) noted as under: "6.2.3 Since the appellant had made a request to call for the assessment record for verification of her contentions, the AO was asked to be present during hearing on 11/11/2011. On that date the AO Shri D.S. Rathi' appeared along with the assessment records and the appellant's AR also appeared along with originals of the Franchise Agreements Financial Year wise for F.Y 2001-02 to 2005-06 in support of the appellant's claim that she had different number of Franchise/retail outlets in different years under appeal as stated by the appellant in her affidavit The originals were verified by the AO and copies thereof have been placed on record the AR submitted that there were only 21 franchises in F Y....
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....d by the Revenue for the said AY 2004-05 i.e., ITA 2437/Del/2012 on merits. The said appeal raised five grounds: one for each of the deletions ordered by the CIT(A) of the additions made by the AO as under: (i) Deletion of the addition of Rs. 13,79,801/- made by the AO on account of expenditure not related to business (being the payment of rent); (ii) Deletion of addition of Rs. 88 lakhs on account of undisclosed franchisee commission; (iii) Allowing relief of Rs. 14,04,175/- out of total addition of Rs. 17,32,511/- on account of non-refundable security; (iv) Deletion of addition of Rs. 6,64,910/- on account of suppression of income from self-controlled outlets; (v) Allowing of relief of Rs. 12,07,705/- out of total addition of Rs. 14,49,246/- made by the AO on account of suppression of closing stock. 27. Each of the five grounds was rejected by the ITAT. Consequently, ITA No. 2437/Del/2012 filed by the Revenue for AY 2004-05 was dismissed on merits. The corresponding appeal of the Assessee for the said AY being ITA No. 2413/Del/2012 was dismissed for non-prosecution since none appeared for the Assessee before the ITAT. The present appeals 28. It must be not....
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....000-01 up to AY 2003-04; and (ii) The validity of the order of the ITAT to the extent it has affirmed the orders of the CIT(A) for 2004-05 deleting only the following additions in respect of: (a) Franchisee Commission of Rs. 88 lakhs made by the AO on estimate basis; and (b) Deletion of addition of Rs. 13.79 lakhs made by the AO with respect to rent payment. Questions of law 33. Consequently, while admitting these appeals, the Court frames the following questions of law: (i) Was the Revenue justified in invoking Section 153A of the Act in relation to AYs 2000-01 to AYs 2003-04? (ii) With reference to AY 2004-05, was the ITAT correct in confirming the orders of the CIT(A) to the extent it deleted the additions made by the AO to the taxable income of the Assessee of franchisee commission in the sum of Rs. 88 lakhs and rent payment for the sum of Rs. 13.79 lakhs? Submissions of the Revenue 34. Mr. Ashok Manchanda, learned counsel appearing for the Revenue, made the following submissions: (a) The quashing by the ITAT of the AO's assessment orders for the AYs 2000-01 to 2003-04 by placing reliance on the decision of this Court in Kabul Chawla (s....
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....Despite sufficient opportunities provided to the Assessee by the AO to produce the books of accounts along with bill, vouchers etc. vide Questionnaire dated 3rd October, 2007 and 6th December, 2007, such books of accounts etc. were not produced. Therefore, it was not possible for the AO to record specific findings for each of the seized documents. A good part of the information contained in the said documents was incriminating in nature i.e., "which does not appear to have been recorded or reflected in the books of account." It is stated that it was for this reason that the Assessee did not produce its books of accounts during the assessment proceeding in spite of several opportunities. This left the AO with no alternative but to assess and estimate the Assessee's income on the basis of evidence and information coming on record during the search and survey operation and the subsequent investigations on an 'estimate basis'. Reliance was placed on the decisions in CIT v. Anil Kumar Bhatia (2013) 352 ITR 493 (Del); Filatex India Ltd. v. CIT (2015) 229 Taxman 555 (Del) and CIT v. Chetan Das Lachman Das [2012] 254 CTR 392 (Del). It is submitted that in each of the said cases, there ....
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....) was unsustainable since this ground had never been raised before the CIT(A). It was raised for the first time before the ITAT. Therefore, the AO or the CIT(A) had no occasion to deal with the said issue i.e., whether there was any incriminating material for each of the AYs in question. The ITAT failed to give an opportunity to the AO in that regard before admitting the additional ground. The ITAT, therefore, ought to have remanded the matter to the file of AO. Submissions on behalf of the Assessee 35. Mr. Piyush Kaushik, learned counsel appearing for the Assessee, in reply, has submitted as under: (a) The fact of the matter was that there was no incriminating material seized during the search and seizure operations for the AYs 2000-01 to 2003-04. The action under Section 153A of the Act was a consequence of the search operations under Section 132. Section 153A should not be read in isolation from Section 132 of the Act. Only a valid search and seizure satisfying all the requirements of Section 132(1)(a),(b) and (c) could form the foundation for the assumption of jurisdiction under Section 153A of the Act. (b) The search operation under Section 132 of the Act could be ....
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....tatement made during search under Section 132 (4) of the Act. The statement made during a survey, even if mistakenly taken on oath, has no probative or binding value as was explained in CIT v. Dhingra Metal Works (2010) 328 ITR 384 (Del) and in the case of CIT v. S. Khader Khan Son (2008) 300 ITR 157 (Mad); CIT v Sunrise Tooling System Pvt. Ltd. 2014-TIOL-134-HC-DEL-IT and the decision dated 2nd January, 2013 in Tax Case No. 8/1999 of the Jharkhand High Court in Shree Ganesh Trading Co. v. Commissioner of Income-Tax. Reference was also made to the instructions issued by the Central Board of Direct Taxes ('CBDT') on 10th March, 2003 and 18th December, 2014 emphasizing that the Department should "strictly avoid obtaining admission or undisclosed income under coercion/undue influence" during search and seizure operations. 36. Both counsel have filed written note of submissions to supplement their oral submissions. On the side of the Revenue, elaborate written submissions dated 26th April, 2017 (running into 26 pages) and 2nd May, 2017 (running into 13 pages) have been submitted. On the side of the Assessee, written submissions dated 26th April, 2017 (running into 11 pages) and 3rd ....
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.... the Assessee. It is another matter that the ITAT rejected the plea of the Revenue that for the said AY the CIT(A) wrongly deleted five of the additions made by the AO for that AY on such incriminating material. Consequently, this Court has to only examine the justification for invocation of Section 153A by the Revenue for AYs 2000-01 to 2003-04. Distinction between statements under Sections 132 (4) and 133 A 40. The main plank of Mr. Manchanda's submission was that the disclosure made by Mr. Pawan Gadia in his statement under Section 133A was sufficient to be construed as incriminating material qua all the aforementioned AYs, the assessment for which could be re-opened by invoking Section 153A of the Act. It is significant that while in the written submission dated 26th April, 2017, Mr. Manchanda termed the statement of Mr. Pawan Gadia as "the statement dated 23rd December, 2005 recorded under Section 132(4) of the Act", he was careful to describe it as such in the subsequent written submission dated 2nd May, 2017. This was for a good reason. The statement was in fact not under Section 132(4) of the Act but under Section 133A of the Act. There is a difference between a state....
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....n question apart from the year of search. Analysis of Mr. Gadia's statement 43. The second important aspect is that there is no statement of the Assessee herself recorded even under Section 133A of the Act. In this regard, it is important to examine what exactly is stated by Mr. Pawan Gadia on the date of the search and survey operations i.e., 23rd December, 2005. Mr. Manchanda has referred to the following questions and answers: Q.1 What is your identity? Ans: I am Pawan Gadia s/o Sh.M.S. Gadia R/o ........., New Delhi working at Satya Farm... Q.2 What kind of job you look after? Ans: I supervise the work of the companies (1) M/s Ferns" & Petal Trading Pvt. Ltd., (2) M/s. FNP Pvt. Ltd. (3) M/s FNP Events &. Wedding, M/s Flowered Touch India Pvt. Ltd. & (5) M/s FNP Petals Pvt. Ltd.... Q. 4 How much salary are you drawing? Ans: Rs. 30,000/- per month. ... Q.7 What is your financial arrangements with franchisees? Ans: They give one time license fee which is not refundable and Further as per the terms and conditions mutually agreed franchises commission... ... Q.19 I am showing you page 19 of Annexure A-6 which has details of sale costing. Ca....
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.... the answer to Question No. 22, Mr. Pawan Gadia was clear that the document at Annexure A-5 contained the "current year's account subject to finalization and therefore is reconcilable." Although it was repeatedly urged by Mr. Manchanda that the documents seized and furnished by Mr. Pawan Gadia pertained to the AYs other than the year of search, clearly, no such question was put to Mr. Pawan Gadia. It should have been easy for the Investigating Officer to ask Mr. Pawan Gadia of the particular AY to which the document related to. However, that was not done. Therefore, all that we have is the statement of Mr. Pawan Gadia which makes a disclosure about the earlier undisclosed income and stating that the offer of such income was being made "to buy peace of mind". Therefore, the statement recorded under Section 133A of the Act of Mr. Gadia can hardly be said to be incriminating material for all the AYs in question. Other incriminating material? 45. Were there any other materials unearthed during the search that could be said to be incriminating qua each of the AYs in question? In trying to answer this question, there were two broad submissions made by Mr. Manchanda - one was a lega....
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....fact remains that the books of accounts of the Assessee were not rejected by the AO. Even in the audit report under Section 44AB, no defect in the books of accounts maintained by the Assessee was pointed out. In the circumstances, it is not possible to accept the plea of the Revenue now made that the so-called additional incriminating material qua each of the AYs could not be verified and, therefore, not discussed by the AO because the Assessee did not produce its books of accounts. It appears that the Revenue did have access to the entire books of accounts of the Assessee which were also shown to have also been maintained in soft form on the computers of the Assessee which were already seized by the Revenue during search operations. 47. The offer of Rs. 1.10 crores as undisclosed franchisee fee was made only for the year of search and not for the earlier years. In fact, there was no material on the basis of which the franchisee income could have been added for the earlier years. What the AO did, as was noted by the CIT(A), was to proceed on the basis as if there should have been such undisclosed franchisee income in the earlier AYs as well because the modus operandi of the Asse....
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....nchisee commission was deleted by the CIT(A) and upheld by the ITAT, which is in conformity with the law explained by the Supreme Court in Dhirajlal Giridharilal v. CIT (supra) that mere suspicion would not be tantamount to evidence. In the instant case, the additions on account of franchisee commission by the AO was "on mere suspicion and not on any evidence whatsoever." 50. Mr. Manchanda was at pains to construe the statement made by Mr. Gadia as pointing to the factum of appointment of franchisees by the Assessee, which information, according to him, was not known earlier. He also pointed out to the practice of collecting a non-refundable license fee and non-refundable deposits which facts were not earlier known but for the search conducted. As rightly pointed out by Mr. Kaushik, learned counsel for the Respondent, that nothing was brought on record by the AO to show that there was failure on part of the Assessee to make a disclosure as regards the franchisee income in any of the earlier years. The incriminating material had to be in relation to any income that was not disclosed in the earlier returns. There was no such incriminating material to show that there was a failure ....
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....material which was subsequently unearthed during the search which was not already available to the AO. Consequently, the additions sought to be made by the AO on account of security deposits were rightly deleted by the CIT(A). 54. For all of the aforementioned reasons Question (ii) framed above is answered in the affirmative i.e., in favour of the Assessee and against the Revenue. Invocation of Section 153A for AYs 2000-01 to 2003-04 55. On the legal aspect of invocation of Section 153A in relation to AYs 2000-01 to 2003-04, the central plank of the Revenue's submission is the decision of this Court in Dayawanti Gupta (supra). Before beginning to examine the said decision, it is necessary to revisit the legal landscape in light of the elaborate arguments advanced by the Revenue. 56. Section 153A of the Act is titled "Assessment in case of search or requisition". It is connected to Section 132 which deals with 'search and seizure'. Both these provisions, therefore, have to be read together. Section 153A is indeed an extremely potent power which enables the Revenue to reopen at least six years of assessments earlier to the year of search. It is not to be exercised....
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....cisions that they do not hold that additions can be validly made to income forming the subject matter of completed assessments prior to the search even if no incriminating material whatsoever was unearthed during the search. 32. Recently by its order dated 6th July 2015 in ITA No. 369 of 2015 (Pr. Commissioner of Income Tax v. Kurele Paper Mills P. Ltd.), this Court declined to frame a question of law in a case where, in the absence of any incriminating material being found during the search under Section 132 of the Act, the Revenue sought to justify initiation of proceedings under Section 153A of the Act and make an addition under Section 68 of the Act on bogus share capital gain. The order of the CIT(A), affirmed by the ITAT, deleting the addition, was not interfered with." 59. In Kabul Chawla (supra), the Court referred to the decision of the Rajasthan High Court in Jai Steel (India), Jodhpur v. ACIT (2013) 36 Taxman 523 (Raj). The said part of the decision in Kabul Chawla (supra) in paras 33 and 34 reads as under: "33. The decision of the Rajasthan High Court in Jai Steel (India), Jodhpur v. ACIT (supra) involved a case where certain books of accounts and other documen....
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....d which would also necessarily support the interpretation that for the completed assessments, the same can be tinkered only based on the incriminating material found during the course of search or requisition of documents." 60. In Kabul Chawla (supra), the Court also took note of the decision of the Bombay High Court in Commissioner of Income Tax v. Continental Warehousing Corporation (Nhava Sheva) Ltd. [2015] 58 taxmann.com 78 (Bom) which accepted the plea that if no incriminating material was found during the course of search in respect of an issue, then no additions in respect of any issue can be made to the assessment under Section 153A and 153C of the Act. The legal position was thereafter summarized in Kabul Chawla (supra) as under: "37. On a conspectus of Section 153A(1) of the Act, read with the provisos thereto, and in the light of the law explained in the aforementioned decisions, the legal position that emerges is as under: i. Once a search takes place under Section 132 of the Act, notice under Section 153 A (1) will have to be mandatorily issued to the person searched requiring him to file returns for six AYs immediately preceding the previous year releva....
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.... High Court in Principal Commissioner of Income Tax v. Saumya Construction Pvt. Ltd. (supra). There, a search and seizure operation was carried out on 7th October, 2009 and an assessment came to be framed under Section 143(3) read with Section 153A(1)(b) in determining the total income of the Assessee of Rs. 14.5 crores against declared income of Rs. 3.44 crores. The ITAT deleted the additions on the ground that it was not based on any incriminating material found during the course of the search in respect of AYs under consideration i.e., AY 2006-07. The Gujarat High Court referred to the decision in Kabul Chawla (supra), of the Rajasthan High Court in Jai Steel (India), Jodhpur v. ACIT (supra) and one earlier decision of the Gujarat High Court itself. It explained in para 15 and 16 as under: "15. On a plain reading of section 153A of the Act, it is evident that the trigger point for exercise of powers thereunder is a search under section 132 or a requisition under section 132A of the Act. Once a search or requisition is made, a mandate is cast upon the Assessing Officer to issue notice under section 153A of the Act to the person, requiring him to furnish the return of income in....
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....arded as a key to the interpretation of the operative portion of the section and if there is no ambiguity in the language or if it is plain and clear, then the heading used in the section strengthens that meaning. From the heading of section 153. the intention of the Legislature is clear, viz., to provide for assessment in case of search and requisition. When the very purpose of the provision is to make assessment In case of search or requisition, it goes without saying that the assessment has to have relation to the search or requisition, in other words, the assessment should connected With something round during the search or requisition viz., incriminating material which reveals undisclosed income. Thus, while in view of the mandate of sub-section (1) of section 153A of the Act, in every case where there is a search or requisition, the Assessing Officer is obliged to issue notice to such person to furnish returns of income for the six years preceding the assessment year relevant to the previous year in which the search is conducted or requisition is made, any addition' or disallowance can be made only on the basis of material collected during the search or requisition, in ca....
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....ith respect to the sale transactions in the particular assessment year." 62. Subsequently, in Principal Commissioner of Income Tax- 1 v. Devangi alias Rupa (supra), another Bench of the Gujarat High Court reiterated the above legal position following its earlier decision in Principal Commissioner of Income Tax v. Saumya Construction P. Ltd. (supra) and of this Court in Kabul Chawla (supra). As far as Karnataka High Court is concerned, it has in CIT v. IBC Knowledge Park P. Ltd. (supra) followed the decision of this Court in Kabul Chawla (supra) and held that there had to be incriminating material qua each of the AYs in which additions were sought to be made pursuant to search and seizure operation. The Calcutta High Court in CIT-2 v. Salasar Stock Broking Ltd. (supra), too, followed the decision of this Court in Kabul Chawla (supra). In CIT v. Gurinder Singh Bawa (supra), the Bombay High Court held that: "6...once an assessment has attained finality for a particular year, i.e., it is not pending then the same cannot be subject to tax in proceedings under section 153A of the Act. This of course would not apply if incriminating materials are gathered in the course of search or ....
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....us transactions include purchase/ sales/ manufacturing trading of Gutkha, Supari made in cash outside Books of accounts and these are actually unaccounted transactions made by our two firms namely M/s Asom Trading and M/s. Balaji Perfumes." 67. By contrast, there is no such statement in the present case which can be said to constitute an admission by the Assessee of a failure to record any transaction in the accounts of the Assessee for the AYs in question. On the contrary, the Assessee herein stated that, he is regularly maintaining the books of accounts. The disclosure made in the sum of Rs. 1.10 crores was only for the year of search and not for the earlier years. As already noticed, the books of accounts maintained by the Assessee in the present case have been accepted by the AO. In response to question No. 16 posed to Mr. Pawan Gadia, he stated that there was no possibility of manipulation of the accounts. In Dayawanti Gupta (supra), by contrast, there was a chart prepared confirming that there had been a year-wise non-recording of transactions. In Dayawanti Gupta (supra), on the basis of material recovered during search, the additions which were made for all the years wher....