IN THE INCOME TAX APPELLATE TRIBUNAL
"SMC" Bench, Mumbai
Before Shri D. Manmohan, Vice President
ITA Nos. 1541 & 1543/Mum/2015
(Assessment Years: 2007-08 & 2009-10)
DCIT, Central Circle - 2(3) M/s. Empire Mall Pvt. Ltd.
Room No. 803, 8th Floor 105/106, Provouge House
Vs.
Old CGO Annex Bldg. Off New Link Road
Mumbai 400020 Andheri (W), Mumbai 400053
PAN - AABCE5637R
Appellant Respondent
CO Nos. 97 & 99/Mum/2015
(Assessment Years: 2007-08 & 2009-10)
M/s. Empire Mall Pvt. Ltd. DCIT, Central Circle - 2(3)
105/106, Provouge House Room No. 803, 8th Floor
Vs.
Off New Link Road Old CGO Annex Bldg.
Andheri (W), Mumbai 400053 Mumbai 400020
PAN - AABCE5637R
Appellant Respondent
Revenue by: Shri A.G. Bhatkar
Assessee by: Shri Rushabh Mehta
Date of Hearing: 30.09.2015
Date of Pronouncement: 12.10.2015
ORDER
Per D. Manmohan, V.P.
These cross appeals are directed against the orders passed by
CIT(A)-48, Mumbai and they pertain to assessment years 2007-08
and 2009-10.
2. In the appeals filed by the Revenue it was contended that the
CIT(A) was not justified in deleting the disallowance of `14,17,804/
17,48,744/- (for assessment years 2007-08 and 2009-10 respectively)
on account of administrative and other overheads without appreciating
the fact that the assessee had not commenced its business in as much
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M/s. Empire Mall Pvt. Ltd.
as construction of Mall started and continued upto A.Y. 2010-11 and
hence the expenditure, if at all, could have been capitalised as capital
work-in-progress and cannot be allowed as revenue expenditure.
3. By way of cross objection assessee contends that the
proceedings initiated under section 153C and the orders passed
thereof under section 143(3) r.w.s. 153C is bad in law in as much as
no incriminating material was found connected to the assessment
under consideration and the AO has issued notice without proper
recording of satisfaction.
4. I am concerned here with assessment years 2007-08 and 2009-
10. A search and seizure action under section 132 was carried out on
20.01.2012 at the office of Provogue India Ltd. and residence of its
Directors. The search action was completed on 17.03.2012. It
deserves to be noticed that for A.Y. 2007-08 assessee filed its regular
return of income under section 139 of the Act on 01.10.2007
declaring loss of `13,21,804/- and for A.Y. 2009-10 return of income
was filed on 16.09.2009 declaring loss of `14,11,167/-. Since no
notice was issued under section 143(2) of the Act returns are deemed
to have been processed under section 143(1) of the Act and they
reached finality on 31.03.2009 and 31.03.2011 respectively; both the
dates falling before the search action took place.
5. During the course of search, of the office premises of Provogue
India Ltd., loose papers with serial No. 9 to 32 have been found and
seized, which are Trial Balances of the following three companies: -
i. Alliance Mall Developers Co. Pvt. Ltd.
ii. Hagwood Commercial Developers Pvt. Ltd.
iii. Empire Mall Pvt. Ltd.
Since the documents belonging to assessee-company have been
seized in the search action, satisfaction note for initiating proceedings
under section 153C has been recorded and notice under section 153A
r.w.s. 153C was issued on 13.08.2013 in response to which the
assessee declared nil income. The AO noticed that the assessee
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M/s. Empire Mall Pvt. Ltd.
debited huge expenditure in the Profit & Loss Account out of which a
portion was shown as preliminary expenditure whereas according to
the AO the entire expenditure fall under that category. So he
disallowed a sum of `14,17,804/- for A.Y. 2007-08 and `17,48,744/-
for A.Y. 2009-10 on the ground that it is capital expenditure incurred
prior to commencement of business.
6. Aggrieved, assessee contended before the CIT(A) that the
proceedings under section 143(3) r.w.s. 153C are bad in law. It was
also contended that disallowance of administrative and other
overhead expenditure is not in accordance with law.
7. It may be noticed that the main plea of the assessee was that
for the years under consideration there is no assessment pending as
on the date of search and more over there is not even incriminating
material found during the course of search which belonged to the
assessee. In fact no undisclosed income or property was discovered in
the course of search and hence proceedings under section 153C would
not have been initiated. The CIT(A) observed that the decisions
rendered in the context of section 153A by various courts are equally
applicable in the context of the provisions of section 153C of the Act.
He relied upon the decision of the Hon'ble Delhi High Court in the case
of CIT vs. Anil Kumar Bhatia (82 CHH 113) wherein the court observed
that it is mandatory on the part of the AO to initiate proceedings under
section 153A of the Act, consequent to the search and seizure action
under section 132(1) of the Act; having initiated the proceedings AO is
empowered to examine all the material, including the material found
during the search and seizure proceedings. In his opinion the action
under section 153C is analogous to section 153A. Thus he concluded
that there is no infirmity in the action of AO in issuing notice under
section 153C of the Act.
8. As regards the contention of the assessee on merits, i.e. no
addition/disallowance can be made since the same is not based on any
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M/s. Empire Mall Pvt. Ltd.
incriminating material, the learned CIT(A) admitted, in para 5.5 of his
order, that the AO has not made any disallowance on the basis of any
incriminating material found during the search and also observed that
there was no prior assessment order under section 143(3) of the Act.
He also observed that when a return is processed under section 143(1)
of the Act it is merely a check on accuracy of computation and
calculation of taxes due. The claims relating to expenditure and income
is not examined and therefore the AO is entitled to examine all aspects
by issuing notice under section 153C of the Act. The next contention of
the assessee was that the AO was not justified in holding that the
business was not set up and commenced. The case of the assessee
company was that it had already set up and commissioned its
business. Explaining further it was contended that business cannot be
a continuous course of activity and it is not necessary that all the
activities should be started at the same time. Land was acquired,
clearing of plot, levelling and excavation work began in A.Y. 2007-08,
consent was obtained from Maharashtra Pollution Control Board and
clearance for conversion of land from MIDC was obtained. This is a
case of a company which is already formed and commenced its activity
of setting up of the Mall. Therefore, the CIT(A) was of the opinion that
the expenditure incurred by the assessee is allowable as deduction.
He, therefore, set aside the disallowance made by the AO.
9. Aggrieved by the order of deletion of addition, Revenue is in
appeal before the Tribunal whereas the assessee challenged, by way
of cross objections, the validity of reopening of assessment by issuing
notice under section 153C of the Act.
10. At the time of hearing the learned counsel submitted that
assessments for the years under consideration have already attained
finality before the date of initiation of search and as per the first
proviso to section 153C of the Act, no incriminating material has been
found during the course of search. Explanation to Section 153A and
Explanation 3 to section 147 speak of bringing to tax such income
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M/s. Empire Mall Pvt. Ltd.
which has escaped assessment and only when some income escaped
assessment then other additions can be sustained. In other words, if
no addition is made on the basis of which an assessment is sought to
be reopened then other additions/disallowances cannot be sustained.
Reference was also made to the amendment to section 153C of the
Act wherein it is stated that the AO can proceed against the person
other than searched person if he is satisfied that the books of account
or documents or assets seized have a bearing on determination of the
total income of such other person for the relevant assessment year
or years referred to in sub-section (a) of section 153A. It was
contended that though the amendment was brought into the statute
book by Finance Act, 2014, the court have held that the same is
curative and clarificatory in nature to make the provisions of section
153C workable and therefore it is retrospective in nature. He also
relied upon the latest decision of the Hon'ble Delhi High Court in the
case of CIT vs. Kabul Chawla (judgement mated 28.08.2015) wherein
the court observed that completed assessments can be interfered
with by the AO while making assessment under section 153A only on
the basis of some incriminating material unearthed during the course
of search proceedings. Similarly the Hon'ble Bombay High Court in
the case of CIT vs. Continental Warehousing Corporation (Nhava
Sheva) Ltd. 374 ITR 645 held, in the context of provisions of section
153A, that no addition can be made in respect of assessment which
have become final if no incriminating material is found during the
search. Reliance was also placed upon the decision of the ITAT Cochin
(Third Member) in the case of DCIT vs. Royal Cartons Pvt. Ltd. (ITA
472/Coch/2013 dated 16.09.2015) wherein the Third Member
observed, in the contest of provisions of section 153C, that in respect
of completed assessment or assessments terminated by the operation
of law on the basis of regular return filed, the addition has to be
made only on the basis of the material found during the course of
search operation. This decision was based on another Third Member
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M/s. Empire Mall Pvt. Ltd.
decision in the case of Trishul Hi-Tech Industries vs. DCIT (2014-
TIOL-862-ITAT-KOL) wherein the Bench observed that the provisions
of section 153C of the Act was amended to obviate practical
difficulties which arose in its interpretation from time to time. When
seized material is sent to the Assessing Authority having jurisdiction
over the other person the Assessing Authority, receiving such seized
material, should not act mechanically without any verification and in
fact proceeding mechanically is not the intention of the Legislature.
Therefore, in order to eliminate such situation it was made clear that
based on incriminating material the AO is competent to issue notice
under section 153C only in respect of such assessment years. In
other words, where there is no incriminating material found relating
to the assessment year the assessment for such year cannot be
disturbed. Thus there is a need for assessment year specific
information in possession of the AO.
11. It may be noticed that the Revenue relied upon the decision of
the Hon'ble Delhi High Court in the case of SSP Aviation Ltd. 346 ITR
177 wherein it says that in view of provisions of section 153C
satisfaction that is required to be reached by AO having jurisdiction
over searched person is that valuable article or books of account
seized belong to a person other than searched person and it is not
necessary that document seized must show undisclosed income. The
decision was rendered on the peculiar facts of that case and the
court was concerned with forwarding of documents from the officer
who carried out the search to the AO concerned and it is not with
regard to the AO who had to issue a notice under section 153C of
the Act. On the contrary, in the case of Hagwood Commercial
Developers Pvt. Ltd. (ITA No. 1305/Mum/2015 dated 22.05.2015),
which is one of the parties referred to during the search conducted
in the premises of Provogue (India) Ltd., the Bench observed that
issuance of notice under section 153C without any incriminating
material is not sustainable in law. With regard to the decision of the
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M/s. Empire Mall Pvt. Ltd.
Hon'ble Kerala High Court in the case of Dr. K.M. Mehaboob vs. DICT
26 taxmann.com 54 the learned counsel submitted that the decision
was rendered in connection with the power of the AO of searched
party to record satisfaction and it is not with regard to the AO who
has to issue notice under section 153C of the Act. He thus strongly
submitted that the notice issued under section 153C is bad in law
and consequently the proceedings completed only on the strength of
the notice issued also deserves to be quashed.
12. On the other hand, the learned D.R. relied upon the orders
passed by the Hon'ble Delhi High Court and Hon'ble High of Kerala to
submit that it is not necessary for the AO concerned to examine as to
whether the incriminating documents are related to the year under
consideration or not and once the assessments are reopened by
issuing notice under section 153C of the Act the AO is free to make
any addition though the addition may not be with reference to the
incriminating documents found during the course of search.
13. I have carefully considered the rival submissions and perused
the record. It is not in dispute that the assessments in both the cases
have attained finality by operation of law in as much as the assessee
filed returns of income before the search and seizure action took
place and even the proceedings under section 143(1) of the Act have
attained finality before the date of receipt of the files by the AO
concerned. Under identical circumstances the ITAT Mumbai "SMC"
Bench in the case of Hagwood Commercial Developers Pvt. Ltd
observed that the notice issued under section 153C without
incriminating material is not sustainable in law. The ITAT Cochin
(Third Member) also had an occasion to consider identical issue
wherein it was observed that the amendments made to section 153C
are clarificatory and retrospective in operation and unless there is
incriminating material for each assessment year the AO cannot
initiate proceedings under section 153C particularly when the
assessment under section 141(1) is deemed to be completed and
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M/s. Empire Mall Pvt. Ltd.
attained finality before satisfaction was recorded by the AO. I have
also noticed that the decisions relied upon by the learned D.R. are
distinguishable on facts in as much as the Hon'ble Delhi High Court
and Hon'ble Kerala High Court have not directly dealt with the issue
of the powers of AO who has to issue notice under section 153C of
the Act but they are concerned with transfer of files from the officer
who has conducted the search to the AO who has to issue notice to
third party. In other words, the power of the AO, who has to deal
with the third party under section 153C, was not the subject matter
of consideration in the aforecited cases, more particularly after the
amendment to section 153C of the Act which was considered by the
ITAT (Third Member) Kolkata as well Cochin. Having regard to the
circumstances of the case I am of the firm view that the order passed
under section 143(3) r.w.s. 153C is without jurisdiction and invalid in
law in as much as the learned CIT(A) admitted that no incriminating
material was found during the course of search concerning the
assessment years under consideration in respect of the assessee
herein. Since the notice issued under section 153C is held to be not
valid, the assessments made thereon have no legs to stand and
therefore it is not necessary to deal with the merits of the addition/
disallowance.
14. In the result, the appeals filed by the Revenue are treated as
dismissed on the ground that it is of academic importance whereas
the cross objections filed by the assessee are allowed.
Order pronounced in the open court on 12th October, 2015.
Sd/-
(D. Manmohan)
Vice President
Mumbai, Dated: 12th October, 2015
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M/s. Empire Mall Pvt. Ltd.
Copy to:
1. The Appellant
2. The Respondent
3. The CIT(A) 48, Mumbai
4. The CIT, Central-I, Mumbai
5. The DR, "SMC" Bench, ITAT, Mumbai
By Order
//True Copy//
Assistant Registrar
ITAT, Mumbai Benches, Mumbai
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