Disallowance u/s 69C not sustainable where all purchases recorded in books of account accepted by AO

Brief of the Case

ITAT Delhi held In the case of ACIT vs. M/s Command Detective & Securities Pvt. Ltd. that when all the purchases are accounted in the regular books of accounts, it means the source is explained and the provisions of section 69C are not applicable, as there was no unaccounted expenditure.The complete books of accounts were also produced before the AO and the same were examined and the AO has not pointed out any defect in the books of accounts produced by the assessee. Thus, the same stood accepted by the AO. The books of account maintained in the normal course of business are evidence under the ‘Evidence Act’ and ‘Income Tax Act’.

Facts of the Case

A search and seizure action u/s 132 was carried out in the cases of B.K. Dhingra, Smt. Poonam Dhingra & M/s Madhusudan Buildcon Pvt. Ltd. on 20.10.2008 and during the course Search & seizure action was carried out on the parties on 20/10/2008 and during the course of search at their residential premises certain documents belonging to the assessee were seized. On the basis of documents so found belonging to the assessee company, proceedings were initiated in the case of the assessee company u/s 153C read with section 153A . The case of assessee was initially centralized with ACIT, Central Circie-17 u/s 127 of the I.T. Act by Commissioner of Income Tax, Delhi-I, New Delhi. Notice u/s I53C was issued to the assessee by the then DCIT, Central Circle-17 on 08.07.20 1O, requiring the assessee company to file return within I5 days of the service of the notice. It was also stated in the letter. attached to the notice that earlier notice u/s I53A issued on 06.07.2010 to the assessee company requiring it to file returns for the A.Y s. 2003-04 to 2008-09 within 15 days of the service of the notices, may be treated as withdrawn as it was inadvertently issued. In response to notice u/s 153C, the assessee filed a return for assessment year 2003-04 on 06/09/2010 declaring nil income.

Notices u/s 142(1 )/143(2) dated 03/11/2010 along with the detailed questionnaire were issued and served upon the assessee. Thereafter AO examined all the details, and completed the assessment vide order dated 31.12.2010 passed u/s. 153C r.w.s. 143(3) of the I.T. Act, 1961 and made the various additions.

Contention of the Assessee

 The ld counsel of the assessee relied upon the order passed by the CIT(A).

Contention of the Revenue

 The ld counsel of the revenue supported the orders of Assessing Officer.

Held by CIT (A)

 CIT (A) partly allowed the appeal of the assessee. It was held that In the present case it is an undisputed fact that the whole of the purchases of various amounts respectively involved in each of the assessment years in question have been duly accounted for by the appellant in its books of accounts and more particularly when the books of accounts have not been rejected by the AO, no question of disallowance of purchases uls 69C arises. The judgement in the case of CIT vs. Mls Radhika Creation ITA No. 692/2009 by Hon’ble Delhi High Court is applicable to the present facts of the case as all the purchases are accounted in the regular books, the source is obviously explained. The provisions of sec 69C are not applicable as there was no unaccounted expenditure.

After the books of account regularly maintained in the course of business are furnished before the AO for verification, the AO may accept the same or after pointing out the specific defect may reject the books of account and determine appellant’s income as per the provision of sec. 145 of the I.T. Act. Undisputedly, in the instant case, the AO has not indicated any defect either in the system of accounting followed by the appellant or in the books of accounts. There is no issue regarding change in the method of accounting during the year under consideration as compared to earlier year. When opening stock stood accepted and the sales also stood accepted as income, there is no rationale of not accepting the purchase as expenditure.

Held by ITAT

Hon’ble Jurisdictional High Court in the case of Commissioner of Income Tax- V vs. Radhika Creation ITA No. 692 of 2009 dated 30.4.2010 held that when all the purchases are accounted in the regular books of accounts, the source is explained and the provisions of section 69C are not applicable, as there was no unaccounted expenditure.The complete books of accounts were also produced before the AO and the same were examined and the AO has not pointed out any defect in the books of accounts produced by the assessee. Thus, the same stood accepted by the AO. The books of account maintained in the normal course of business are evidence under the ‘Evidence Act’ and ‘Income Tax Act’.

Respectfully following the order dated 30.4.2010 of the Hon’ble Jurisdictional High Court passed in ITA No. 692 of 2009 in the case of Commissioner of Income Tax-V vs. Radhika Creation, we uphold the order of the Ld. CIT(A), who has rightly deleted the addition in dispute involved in ground no. 1 and accordingly, decide the issue in dispute against the Revenue.

On the matter of disallowane of expenses & depreciation, we find that Ld. CIT(A) has observed that during the search proceedings no material has been found which justifies the disallowance of the expenses. Moreover, books of accounts were duly audited under the Companies Act. There is no negative observation in the auditor’s report. Books of accounts were produced before the AO and, the same were examined by him. No deficiency has been pointed out in the books of accounts. It is further submitted that the assessment of the assessee company for the A.Y. 2002-03 has already been completed, wherein no disallowance of expenses made. The AO after application of mind and detailed scrutiny of accounts had consciously allowed the expenses. Keeping in view of the above, facts and circumstances of the case, we find that Ld. CIT(A) has rightly allowed the ground in dispute by passing a well reason order, which does not need any interference on our part, hence, we uphold the same and decide the issue in dispute involved in ground no. 3 against the Revenue.

ASSESSEE’S CROSS OBJECTION

He stated that when no incriminating material are found relating to assessee in the course of search, then the proceedings initiated u/s. 153C is null and void and this issue has already been adjudicated and decided in favor of the assessee by the Hon’ble Jurisdictional High Court in the case of CIT vs. Kabul Chawla ITA No. 707, 709 and 713/2014 , which shall be followed in the present case of the assessee.

We find considerable cogency in the assessee’s counsel submission that if no incriminating material belonging to the assessee were found during search period, the assessment made is without jurisdiction

and proceedings initiated u/s. 153C is null and void. Respectfully, following the above precedent, we quash the assessment made u/s. 153C and decide the issue in dispute in favour of the assessee and accordingly, the cross objection is allowed on this ground.

Secondly, ld Counsel of the assessee stated that AO has not recorded the Satisfaction before issuing the notice u/s. 153C of the I.T. Act to the assessee and in the absence of recording the satisfaction before issuance of the notice u/s. 153C of the I.T. Act, there is non-compliance with legal requirement regarding recording of the satisfaction and this issue. We find considerable cogency in the contentions raised by the assessee’s counsel that AO has notrecorded the Satisfaction before issuing the notice u/s. 153C of the I.T. Act to the assessee and in the absence of recording the satisfaction before issuance of the notice u/s. 153C of the I.T. Act, there is non-compliance with legal requirement regarding recording of the satisfaction on this issue. To support this contention, we note that the Hon’ble Jurisdictional High Court in the case of Pr. Commissioner of Income Tax (Central-II) vs. Aakash Arogya Mandir Pvt. Ltd. & Anr. Dated 28.7.2015 decided in ITA No. 509/2015 & Others has dealt the similar and identical issue as involved in the present case.

We are of the considered view that the present issue in dispute raised in the cross objection is squarely covered by the decision of the Hon’ble Jurisdictional High Court in the case of Pr. Commissioner of Income Tax (Central-II) vs. Aakash Arogya Mandir Pvt. Ltd. & Anr. Dated 28.7.2015 decided in ITA No. 509/2015 & Others. Respectfully, following the above precedent, we also quash the assessment made u/s. 153C on this ground and decide the issue in dispute in favour of the assessee and accordingly, the

cross objection is allowed on this ground.

Accordingly appeal of the revenue dismissed and cross appeals of the assessee allowed.