Brief of the Case: In the case of CIT Vs. MGF Automobiles Ltd., Delhi High Court upheld the order of the ITAT that the additions could have been made by the AO only if some incriminating document was found during search. There was no incriminating material found during search. Hence, the Assessee’s appeal was upheld.
Facts of the Case: The Assessee was a company dealing in the business of car dealership and service station. During the A.Y.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. In terms of Section 72A of the IT 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 IT 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 amalgamation.”
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, 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 Assessee.s 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.
A search took place in the Assessee’s premises on 12th September, 2007. During the search cash of Rs.48 lakhs was seized. On 6th October, 2007 a major fire took place at Mayur Bhawan which houses the offices of the Income Tax Department. In the said fire none of the materials seized during the search from the premises of the Assessee could be retrieved or salvaged.
Consequent upon the search, the AO proceeded with the assessment and passed separate assessment orders 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 IT 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 IT Act since it had during AY 2007-2008 sold the land of CML valued at Rs.37,93,375.
On aggrieved Assessee preferred appeal before the CIT (Appeals), who dismissed the Assessee’s appeals.
Assessee further appealed before the ITAT, which allowed the Assessee’s appeals.
The Revenue questioned the correctness of the order of the ITAT before the High Court.
The following two questions were framed by the High 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?
Held by CIT (A): The CIT (Appeals) dismissed the appeals of the Assessee and upheld the assessment of the AO.
Held by ITAT: Relying on the decision of Delhi High 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 taxmann.com 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.” 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 the assessee and from records and Revenue did not bring to the notice regarding any incriminating material having been found during search. Hence, the Assessee’s appeal was upheld.
Held by High Court: The High Court observed that nowhere in the Assessment Orders for the AYs in question 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 panchanama 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 AO’s assessment order in terms of Section 153 A of the IT Act. Consequently, the High Court was 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 IT Act.
High Court concluded 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.
Thus, the Question (i) was answered in the affirmative, i.e. in favour of the Assessee and against the Revenue. Question (ii) was answered in the negative, i.e. by holding that additions as ordered by the AO were not warranted in the facts and circumstances.
The appeals filed by the Revenue were accordingly dismissed.