By TIOL News Service

NEW DELHI, DEC 24, 2015: THE issue is - Whether amendment made in Section 153C whereby words 'pertain to' and 'relate to' have been inserted by Finance Act, 2015 has prospective effect w.e.f 1-6-2015. YES is the answer.

Facts of the case

A) The search and seizure operation was conducted on 9.9.2010 in Amrapali Group of cases. Subsequently, a notice u/s 153C of the Act was issued on 12.4.12 to the present assessee and in response assessee filed return to the said notice. Further, the Assessing Officer assessed taxable income of the assessee by making two additions viz. first addition on account of bogus purchases and second addition on account of notional interest disallowed from expenditure claimed by the assessee under the head of interest on term loan. The assessee preferred an appeal before the CIT(A) agitating the validity of notice u/s 153C of the Act as well as on merit agitating the additions made by the assessee. The CIT(A) granted relief to the assessee on both the grounds on merit and deleted both the said additions. However, the first appellate authority dismissed the legal ground of the assessee upholding the validity of notice u/s 153C of the Act as within valid jurisdiction of the AO.

B) The revenue found that the assessee has not charged interest in respect of advances of Rs. 21.48 lac given to the persons closely connected nor any goods have been received from them and on the other hand, the assessee has taken huge interest bearing loan from Bank of Maharashtra and has also paid Rs. 3.17 crores thereon. Further, the A.O proceeded to make proportionate disallowance of Rs.1.71,85,440/- reducing the interest claim of the assessee.

C) The assessee also challenged transactions held as bogus purchases by AO submitted all relevant purchase bills, freight bills and Dharma Kanta Weigh Bills but the A.O simply noted that the assessee failed to produce these alleged vendors, hence he proceeded to make further addition treating the same as bogus purchases without any basis and cogent reasoning.

Having heard the parties, the Tribunal held that,

Validity of notice u/s 153C

++ the court viewed that from bare reading of provisions of section 124 of the Act, it is amply clear that this provision mandates about the territorial jurisdiction of the Assessing Officer over any one and a rider has been put about challenge of assessee regarding territorial jurisdiction by this provision, hence, the court declined to accept the contention of revenue that the assessee cannot agitate validity of notice u/s 153C u/s 124 of the Act;

++ it was observed that the Assessing Officer of the other person has noted the details of companies and their managers of Amrapali Group and subsequently it has been mentioned that during the course of search, incriminating documents as to unaccounted cash receipts totalling to Rs.31.33 crore were seized which have been admitted to be unaccounted by the management of search person/entity, hence surrendered as unexplained income in the books of M/s Ultra Homes Construction (P) Ltd. The Assessing Officer of the other person noted that "however, the receipt of unaccounted cash and payment of unaccounted expenses by the management in respect of Amrapali Grand is imminently possible which is also evident by the documents seized ". In view of logical and vigilant reading of reasons recorded by the Assessing Officer of the other person set out in the earlier paras, it is clear that the reasons have been recorded by the person other than the person searched and in the very first part of allegations, the Assessing Officer of the other person noted that a detailed chart showing company wise information will be treated as document pertaining to respective companies appearing in the said chart. From these observations of the Assessing Officer of the other person, the court can safely infer that according to the Assessing Officer himself, there were, in fact, no documents belonging to the assessee but certain information in the form of chart showing details of company wise projects, which was recovered during the search and seizure operation on Amrapali group, has been treated as documents pertaining to all the respective companies appearing in the said chart including the present assessee;

++ in the said stipulations of reasons recorded, the court is unable to see any observations or facts or any other material which was recovered or unearthed during the search and seizure operation on Amrapali group on 9.9.2010. The court may point out that the Assessing Officer the reasons recorded himself noted that during the course of search, incriminating documents as to the unaccounted cash receipts totalling to Rs.31.33 crore were seized which have been admitted to have been unaccounted by the management of search entity and the same was surrendered as unexplained income in the books of M/s Ultra Home Construction (P) Ltd. which is a company of Amrapali Group. In this position, when the unaccounted cash receipts have been accounted and surrendered as unexplained income to M/s Ultra Home, the court are unable to see any other incriminating material or document etc. which could lead the Assessing Officer of other person to record his satisfaction that documents etc. belong to or belongs to the present assessee (other person) were seized during search and seizure operation on Amrapali group. In this position, when the unaccounted cash receipts have been accounted and surrendered as unexplained income of M/s Ultra Home, the court is unable to see any other incriminating material or document etc. which could lead the Assessing Officer of other person to record his satisfaction that documents etc. belong to or belongs to the present assessee (other person) were seized during search and seizure operation on Amrapali group;

++ this court is unable to hold that the only basis of reasons recorded for action u/s 153C of the Act before the Assessing Officer of the other person i.e. present assessee was a chart containing details of provision of 12 companies of Amrapali Group including present assessee but this chart does not qualify the definition of document belonging to person other than the searched person viz. the present assessee and for initiation of action and issuance of notice u/s 153C of the Act but seizure of document etc. belonging to other person is a prerequisite and in absence of search and seizure operation proceedings u/s 153C of the Act, notice under the said provision cannot be initiated and issued against such other person. Relying on various similar cases, it is held that whenever a document is found from a person who is being searched, the presumption is that the said documents belong to that person and it is for the Assessing Officer of the searched person to rebut that presumption and come to a conclusion or satisfaction that the document, in fact, belongs to somebody else. It was further held that there must be cogent reason available with the AO before he/she arrives at the satisfaction that the seized document does not belong to the searched person but to somebody else and surmises and conjectures cannot take place of satisfaction. In the present case, undisputedly and admittedly, there was no satisfaction note recorded by the AO of the person searched. This being the position, the first step prior to the issuance of notice u/s 153C of the Act has not been fulfilled by the AO of the person searched i.e. Amrapali group. When the court proceed to evaluate the validity of reasons recorded by the Assessing Officer of the other person for issuance of notice and initiation of proceedings u/s 153C of the Act, then from the reasons recorded, it is amply clear that the AO has merely picked of the sized material which is, in fact, a chart showing detail of provision of Amrapali group company including name of the present assessee of Amrapali Grand but this cannot be held as belong to or belongs to the present assessee. It is further observed that even the Assessing Officer of the other person has not used the words "belong to or belongs to" in the reasons recorded and he has noted that the company wise information appearing in these pages will be treated as document pertaining to all the respective companies appearing in the said chart. DR has pointed out that as per amended section 153C of the Act, the word 'pertains to' is sufficient for valid assumption of jurisdiction, issuance of notice u/s 153C of the Act. However, the court do not agree with this contention of the CIT DR as the present case is relevant to assessment year 2009-10 and the amendment inserted in section 153C of the Act by Finance Act 2015 is applicable w.e.f. 1.6.2015 and onwards which cannot be taken as retrospective for placing word 'pertain to" or "pertains to". Per contra, from the reading of pre-revised section 153C, it is clear that there were words 'belong to' or 'belongs to' a person other than the person referred to in section 153C of the Act and in the present case, the Assessing Officer of the other person has not mentioned 'belongs to' or 'belong to' in the reasons recorded clearly demonstrate that the Assessing Officer himself was not sure about the chart which was used as 'pertain to' the present assessee as to whether the same can be treated as 'pertain to' or 'pertains to' the present assessee. This ambiguous state of mind of the Assessing Officer of the other person clearly demonstrates that the Assessing Officer proceeded to initiate proceedings and to issue notice u/s 153C of the Act without assumption of valid jurisdiction for the same. At this stage, it is profitable to take a note to make it clear that the Assessing Officer should not confuse the expression 'belong to' with the expression 'relates to' or 'refers to', meaning thereby that as per dicta laid down by Jurisdictional High Court, the main requirement is that the reason for initiation of action and issuance of notice u/s 153C, the AO of the other person is mandatorily required to record that the documents etc. belong to belongs to the other person and over such other person, he has jurisdiction to assess;

++ in this situation, the court is inclined to hold that the reasons recorded by the Assessing Officer of the present assessee for initiation of action u/s 153C and issuance of notice under the said provision do not quash the requirement of said provision as accepted in the Act at the time of recording satisfaction. Thus, the court is inclined to hold that the reasons recorded for action u/s 153 of the Act and issuance of notice under the said provision was not only bad in law but void ab initio which cannot be held as sustainable and consequently, the court quash the same;
Notional Interest;

++ on appeal by the assessee, CIT(A) granted relief with a conclusion that the impugned addition based on disallowance of interest does not relate to emanating from the allegation of suppression of sales or receipt of unaccounted cash in sale of flats. Further, the first appellate authority also noted that the advances made to these persons/entities by the assessee firm were to raise capital for the purpose of business and also that these transactions are not in the nature of business advances. The CIT(A) also noted that the interest payment made by the assessee to Bank of Maharashtra also does not appear to have any nexus with the money advanced as all payments. In the light of above noted facts, it was held by Tribunal when it the action of the A.O. and contentions of the DR, observed then aforesaid observations of the CIT(A) have not been controverted by them. Accordingly, there is no valid reason to interfere with the order of the first appellate authority;

Recording of satisfaction u/s 153C

++ it is observed that the CIT(A) rightly noted that in the eventuality when assessee failed to produce alleged vendors, the appropriate course of action for A.O was to inform VAT authorities about the tax said to be deducted by the sellers so that the deposit of VAT tax could have been verified by them. Simultaneously, the A.O of the vendors could have also been informed about the sales made and to verify whether these sales had been reflected in their respective tax returns. The CIT(A) also mentions that the A.O could also have investigated bank accounts of the parties (Vendors) available with him and none of these courses have been taken by the A.O. The First Appellate Authority rightly concluded that instead of adopting said available courses, the A.O proceeded to made disallowance and addition for non-production of vendors parties and adverse inference drawn by the A.O was pre-mature and without any sound basis. The CIT(A) rightly concluded that u/s 153C of the Act, the A.O cannot travel beyond the satisfaction recorded and the impugned addition based on alleged bogus purchases does not pertain to or emanate from allegation of suppression of sales or receipt of unaccounted cash in the sale of flats. Accordingly, there is hardly any perversity or any other valid reason to interfere with the impugned order and thus the sam is upheld on this issue of additions in regard to purchases.

(See 2015-TIOL-2119-ITAT-DEL)