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Commissioner Of Income Tax (C)-I Vs. Mgf Automobiles Ltd.
August, 26th 2015
$~8 & 9
+      ITA 13/2014
       COMMISSIONER OF INCOME TAX (C)-I          ..... Appellant
                   Through: Mr. N.P. Sahni, Senior Standing
                            Counsel with Mr. Nitin Gulati, Advocate


       MGF AUTOMOBILES LTD.                      ..... Respondent
                   Through: Ms. Premlata Bansal, Senior Advocate
                           with Mr. Sunil Magon, Advocate

+      ITA 14/2014

       COMMISSIONER OF INCOME TAX (C)-I          ..... Appellant
                   Through: Mr. N.P. Sahni, Senior Standing
                            Counsel with Mr. Nitin Gulati, Advocate


       MGF AUTOMOBILES LTD.                     ..... Respondent
                   Through: Ms. Premlata Bansal, Senior Advocate
                            with Mr. Sunil Magon, Advocate

       %             13.08.2015

        Dr. S. Muralidhar, J.
        1. These two appeals by the Revenue under Section 260A (1) of the

ITA Nos.13 & 14 of 2014                          `           Page 1 of 8
        Income Tax Act, 1961 (,,Act) are directed against the common order
        dated 28th June, 2013 passed by the Income Tax Appellate Tribunal
        (ITAT) in ITA Nos. 4212 and 4213/DEL/2011 for the Assessment
        Years (AYs) 2004-05 and 2005-06.

        2. The Respondent Assessee is a company dealing in the business of
        car dealership and service station. During the AY 2004-2005 it
        entered into amalgamation agreement with Compact Motors Limited
        (CML). Pursuant to an order passed by the High Court on 27th
        September 2004, the amalgamation of CML with the Assessee was
        made effective from 1st April, 2003.

        3. In terms of Section 72A of the Act it was permissible for the losses
        of the amalgamating company (i.e. CML) to be set off or carried
        forward in the assessment of the amalgamated company (i.e. the
        Assessee) subject to the fulfilment of conditions stipulated in Section
        72A(2) of the Act. Relevant to the present appeals is the condition
        under Section 72A(2)(b)(i) which requires the amalgamated company
        to hold continuously for a minimum period of five years from the
        date of amalgamation "at least three fourths of the book value of
        fixed assets of the amalgamating company acquired in a scheme of

        4. For AY 2004-05 returns were to be filed on or before 30th October
        2004. The Assessee filed its return on 30th October 2004 under
        Section 139 (1) of the Act declaring Nil income. For the AY 2005-06,

ITA Nos.13 & 14 of 2014                              `            Page 2 of 8
        it filed its return on 27th October 2005 declaring an income of
        Rs.50,04,700. The last dates by which the Revenue could resort to
        Section 143(3) of the Act were 31st March, 2007 and 31st March
        2008 respectively. In the return for AY 2004-05, the Assessee had set
        off the losses of CML to the extent of Rs.l,65,09,929.93 against the
        Assessees business income pursuant to the amalgamation as ordered
        by the High Court. In the AY 2005-06, the Assessee set off the
        balance unadjusted carried forward loss of the earlier year.

        5. A search took place in the Assessees premises on 12th September,
        2007. During the search cash of Rs.48lakhs was seized. The Court
        had been shown by Mr. N.P. Sahni, learned Senior Standing counsel
        for the Revenue, a photocopy of the panchnama and the inventory
        prepared at the time of search. The inventory prepared includes books
        of accounts, some bunch of loose papers, an external hard disk, a
        computer server etc.

        6. It is not in dispute that on 6th October, 2007 a major fire took place
        at Mayur Bhawan which houses the offices of the Income Tax
        Department. It is stated by Mr. Sahni that in the said fire whatever
        was seized by the Department in the form of the books of accounts,
        bunch of loose papers etc. were completely burnt and destroyed. In
        other words, none of the materials seized during the search from the
        premises of the Assessee could be retrieved or salvaged.

        7. Consequent upon the search, the Assessing Officer (AO)

ITA Nos.13 & 14 of 2014                               `             Page 3 of 8
        proceeded with the assessment and passed separate assessment orders
        dated 23rd December, 2009 for the two AYs in question. The AO
        disallowed the set off of the losses of CML against the business
        income of the Assessee for the AYs in question on two grounds. One,
        since neither the Assessee nor CML was an ,,industrial undertaking
        within the meaning of Section 72 A (7) (aa) of the Act. Secondly, the
        Assessee failed to retain three-fourths of the book value of the fixed
        assets as required by Section 72 A (2) (b) (i) of the Act since it had
        during AY 2007-2008 sold the land of CML valued at Rs.37,93,375.

        8. The Commissioner of Income Tax (Appeals) [CIT (A)], by orders
        dated 18th July 2011 for each of the two AYs, dismissed the
        Assessees appeals.

        9. The ITAT has by the impugned order dated 28th June 2013
        allowed the Assessees appeals. Relying on the decision of this Court
        in CIT v. Anil Kumar Bhatia (2013) 352 ITR493 (Del) and of the
        Rajasthan High Court in Jai Steel (India) Jodhpur v. Asst.
        Commissioner of Income Tax (2013) 36 523 (Raj),
        the ITAT came to the conclusion that the additions could have been
        made by the AO "only if some incriminating document was found
        during search." The ITAT recorded in its order that: "In the present
        case it is apparent that on the date of search on 12/09/07, the
        assessments for assessment year 2004-05 & 2005-06 were already
        completed. There was no incriminating material found during search
        for these years as is apparent from arguments of Ld. AR and from

ITA Nos.13 & 14 of 2014                             `            Page 4 of 8
        records and Ld. Departmental Representative did not bring to our
        notice regarding any incriminating material having been found during
        search." The ITAT also noted: "During proceedings before us the
        bench had asked a question to Ld. AR as to whether any statement u/s
        132 (4) was recorded during search to which the Ld. AR replied in
        negative and Ld. Departmental Representative also showed his
        ignorance about such statement. This question was asked because the
        view of the Bench is that if during course of search some statement is
        recorded u/s 132(4) and in that statement certain facts are recorded
        from the interpretation of which Assessing Officer could conclude
        that there was some undisclosed income then that statement can be
        considered as incriminating material."

        10. By order dated 12th May 2014 the following two questions were
        framed by the Court:
               (i) Did the ITAT fall into an error in deleting the
               additions made in the case of the Respondent Assessee
               for AYs 2004-05 and 2005-06 on the ground that no
               incriminating material was found during the search
               conducted in Assessee's premises on 12th September
               2007, in respect of its claims?

               (ii) Were the additions made by the AO which were
               directed to be deleted by the ITAT and are stated to be
               based on post search enquiries, warranted in the
               circumstances of the case?

ITA Nos.13 & 14 of 2014                             `            Page 5 of 8
        11. This Court has heard the submissions of Mr. N.P. Sahni, learned
        Senior Standing Counsel for the Revenue and Mrs. Prem Lata Bansal,
        learned Senior counsel for the Respondent Assessee.

        12. To begin with, what is striking is the fact that nowhere in the
        Assessment Orders for the AYs in question has the AO noted the
        stark fact that the material purportedly seized by the Revenue during
        the search was completely and irretrievably destroyed in a fire that
        took place on 6th October 2007 in Mayur Bhawan. While a
        photocopy of the panchnama showing what was seized is available,
        the material itself is not and in fact was not available with the AO
        when the assessment proceedings, consequent upon the search, took
        place. Further, as noted by the ITAT, no statement under Section
        132(4) was recorded during the search. Therefore, there was no
        material, much less any incriminating material, recovered during the
        search which could form the basis of the AOs assessment order in
        terms of Section 153 A of the Act.

        13. Consequently, the Court is unable to appreciate on what basis the
        AO has in the assessment orders for the AYs in question proceeded to
        discuss the facts relating to the sale of land by the Assessee in the AY
        2007-08 and conclude that the Assessee as an amalgamated company
        failed to comply with the requirements of Section 72-A (2) (b) (i) of
        the Act. The court enquired from Mr. Sahni whether there is any
        indication anywhere in the assessment orders that the information

ITA Nos.13 & 14 of 2014                               `            Page 6 of 8
        regarding the land of CML having been sold by the Assessee during
        the AY 2007-2008 was obtained as a result of any material gathered
        during the search or any information obtained during the search. Mr.
        Sahni candidly answered in the negative.

        14. Mr. Sahni volunteered that it should have been possible for the
        Revenue to resort to Sections 147/148 of the Act and re-opened the
        assessments on the basis of the information received regarding the
        sale by the Assessee of the land of CML during AY 2007-08. The
        Court considers the said submission to be hypothetical since the fact
        remains that the Revenue has thought it fit to resort to a search in
        terms of Section 132 of the Act followed by proceedings under
        Section 153A(1) of the Act. As far as the Court is concerned, in these
        proceedings, it is called upon to decide the legality of the assessment
        orders passed under Section 153A of the Act.

        15. The inescapable conclusion therefore is that the AO proceeded to
        frame assessments under Section 153 A of the Act relying on some
        information not unearthed during the search. Further, whatever was
        recovered during the search having been destroyed in a fire was not
        available with the AO when he framed the assessments.
        Consequently, the assessment orders passed with reference to Section
        153 A (1) of the Act were unsustainable in law.

        16. Question (i) framed by the Court is answered in the affirmative,
        i.e. in favour of the Assessee and against the Revenue. Question (ii) is

ITA Nos.13 & 14 of 2014                               `            Page 7 of 8
        answered in the negative, i.e. by holding that additions as ordered by
        the AO were not warranted in the facts and circumstances.

        17. The appeals are accordingly dismissed.

                                                     S.MURALIDHAR, J

                                                     VIBHU BAKHRU, J
        AUGUST 13, 2015

ITA Nos.13 & 14 of 2014                              `           Page 8 of 8
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