Revenue's appeal dismissed: ITAT ruling on invalid assessment under Section 153C upheld

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Case Name: 

Principal Commissioner of Income Tax (High Court of Delhi)

ITA 323/2016

Date: 31st May 2016

Key Takeaways:

1. The court upheld the ITAT's decision that the initiation of proceedings under Section 153C was invalid.

2. The interpretation of "belong to" vs "pertain to" in Section 153C was crucial to the case.

3. The timing of the amendment to Section 153C played a significant role in the court's decision.

Issue: 

Did the ITAT err in holding that the assessment framed by the Assessing Officer under Section 143(3) read with Section 153C of the Income Tax Act, 1961 was invalid?

Facts:

1. A search took place on September 9, 2010, in the 'Amrapali group' of cases.

2. A notice under Section 153C of the Act was issued to the Assessee (a partnership firm) on April 12, 2012.

3. The Assessing Officer made additions of Rs.1,12,60,413/- for bogus purchases and Rs.1,71,85,440/- for notional interest on an interest-free loan.

4. The CIT(A) rejected the challenge to the validity of the assessment but deleted the additions.

5. The Revenue filed an appeal, and the Assessee filed a cross-objection before the ITAT.

6. The ITAT ruled that the initiation of proceedings under Section 153C was bad in law.

Arguments:

Revenue's argument:

- The two documents recovered in the search of the "Amrapali Group" should be considered as belonging to the Assessee, which is part of the group.

Assessee's argument:

- The satisfaction note by the AO stated that the documents "pertain" to the Assessee, not "belong" to it.

- The amendment to Section 153C, replacing "belong or belongs to" with "pertain or pertains to," was effective from June 1, 2015, after the search and notice in this case.

Key Legal Precedents:

1. Pepsico India Holdings Pvt. Ltd. v. ACIT (2014) 50 Taxmann.com 299 (Del)

2. Pepsi Food Pvt. v. ACIT (2014) 52 Taxmann.com 220 (Del)

These cases were cited by the ITAT in support of its decision that the initiation of proceedings under Section 153C was bad in law.

Judgement:

The High Court dismissed the Revenue's appeal, agreeing with the ITAT's decision. The court found that the ITAT did not err in holding the assessment to be unsustainable in law. The court emphasized that the amendment to Section 153C, which changed the wording from "belong or belongs to" to "pertain or pertains to," was only effective from June 1, 2015, whereas the search in this case took place on September 9, 2010, and the notice under Section 153C was issued on April 12, 2012.

FAQs:

1. Q: What was the main issue in this case?

  A: The main issue was whether the assessment framed under Section 143(3) read with Section 153C of the Income Tax Act was valid.

2. Q: Why did the court dismiss the Revenue's appeal?

  A: The court agreed with the ITAT's decision that the initiation of proceedings under Section 153C was invalid because the documents in question did not "belong" to the Assessee at the time of the search and notice.

3. Q: What role did the amendment to Section 153C play in this case?

  A: The amendment, which changed the wording from "belong or belongs to" to "pertain or pertains to," was crucial. However, it came into effect after the search and notice in this case, so it didn't apply here.

4. Q: What precedents did the ITAT rely on?

  A: The ITAT relied on two Delhi High Court cases: Pepsico India Holdings Pvt. Ltd. v. ACIT and Pepsi Food Pvt. v. ACIT.

5. Q: What's the significance of this judgment for similar cases?

  A: This judgment emphasizes the importance of the timing of legislative amendments and their applicability to ongoing cases. It also reinforces the interpretation of "belong to" in Section 153C prior to its amendment.

CM No.21925/2016

1. Since the amendment application is filed at an initial stage of the appeal i.e. before notice is issued, the application is allowed. The amended memo of appeal is taken on record.

ITA 323/2016

2. The Revenue has filed this appeal against the order dated 23rd November, 2015 passed by the Income Tax Appellate Tribunal (‘ITAT’) in ITA No.6205/Del/2013 in C.O. No.150/Del/2014 for the Assessment Year (‘AY’) 2009-10.

3. The question that is sought to be urged is whether the ITAT erred in holding that the assessment framed by the Assessing Officer (‘AO’) under Section 143(3) read with Section 153C of the Income Tax Act, 1961 (‘Act’) was invalid?

4. A search took place on 9th September, 2010 in the 'Amprapali group' of cases. Subsequently, a notice dated 12th April, 2012 under Section 153C of the Act was issued to the Assessee, which is a partnership firm. In the ensuing assessment proceedings, the AO made an addition of Rs.1,12,60,413/- on account of bogus purchases of raw materials and of Rs.1,71,85,440/- on account of notional interest on the interest free loan.

5. Before the Commissioner of Income Tax (Appeal) [‘CIT(A)’], the question of validity of the assessment was also challenged by the Assessee apart from the merits of the additions. By the order dated 18th September, 2013, the CIT(A) rejected the challenge to the validity of the assessment. However, the additions on the bogus purchases of raw materials and the addition on account of interest were deleted.

6. An appeal was filed by the Revenue and a cross-objection by the Assessee before the ITAT. The cross objection by the Assessee was specific to the issue of two documents stated to have been recovered during the search which did not belong to the Assessee and, therefore, could not form the basis for initiating proceedings against the Assessee under Section 153 C of the Act. The ITAT was of the view that the said document i.e. a chart at pages 53 and 54 of Annexure A-1 did not belong to the Assessee. Following the decisions of this Court in Pepsico India Holdings Pvt. Ltd. v. ACIT (2014) 50 Taxmann.com 299 (Del) and Pepsi Food Pvt. v. ACIT (2014) 52 Taxmann.com 220 (Del), the ITAT held that the initiation of proceedings against the Assessee under Section 153C of the Act was bad in law.

7. Mr. Rahul Chaudhary, learned Senior Standing counsel for the Revenue submitted that the two documents in question recovered in the search of the “Amrapali Group” should be taken to belong to the Assessee which is a part of the said Group. Mr. Arvind Kumar, learned counsel for the Assessee, on the other hand pints out that even in the satisfaction note recorded by the AO, the said documents were stated to “pertain” to the Assessee and not belong to it. It is further pointed out by Mr. Arvind Kumar, and rightly, that the amendment to Section 153C which replaced the words “belong or belongs to” with the words “pertain or pertains to” was made only with effect from 1st June, 2015 whereas the search in the present case took place on 9th September 2010 and the notice under Section 153C was issued on 12th April, 2012.

8. Consequently, the ITAT cannot be said to have erred in holding the assessment to be unsustainable in law. No substantial question of law arises.

The appeal is dismissed.

S. MURALIDHAR, J

VIBHU BAKHRU, J

MAY 31, 2016