Whether if no materials are found during Search, AO is duty bound to go by original assessment and cannot made any additions u/s 153A - YES: ITAT

THE issues before the Bench are - Whether if no materials are found during the Search, the AO is duty bound to reiterate the original assessment and cannot made any additions u/s 153A and Whether the statement recorded at the time of search which was retracted by the assessee and documents which are already the part of books of account can be considered as incriminating documents for making assessment under section 153A. And the verdict goes against the Revenue.

Facts of the case

Assessee company is engaged in the business of warehousing, clearing &forwarding and transportation. It also started the business of running of a club. From members of club one time membership entrance fee is charged. Assessment was made u/s 143(3) on a total loss of Rs. 50.99 lacs which was allowed to be carried forward. AO accepted the claim of assessee that one time membership entrance fee is a capital receipt following the decision of Hon'ble Jurisdictional High Court in CIT v/s Diners Business Services Pvt. Ltd.

A search and seizure action was carried out. During the course of search and seizure action, a statement on oath was recorded of the Managing Director on the issue of membership fee in which he stated that in the original assessment it was considered as capital receipt. However, the factual position is reviewed and it is advised that exemption claimed is legally not correct. The membership fees received are generally for a period of 25 years. Hence, the 1/25th portion thereof is chargeable to tax in every year. Hence, the said amount is offered.

After search, assessee retracted from his statement and withdrew his offer for taxation of one time membership entrance fee on the ground that the assessee’s claim was based on the decision of the Hon'ble Jurisdictional High Court in Diners Business Services Pvt. Ltd. and he has been duly advised that such a judgment is applicable in assessee’s case also.

AO brought the said amount of membership fee under tax by holding the same as revenue receipt observing that in the case of Diners Club the membership fees was a 'ONE TIME PAYMENT' however in the present case it is to be paid every 'Twenty five year'. Thus, it was limited to a specific period. Members do not get rights in the properties of the club but only use the services provided by the club. Thus, it is in the nature of revenue and has to be taxable in entirety during the year of its receipt and not a portion of it. Moreover once a statement is given u/s 132(4) it is to be abided by as the same is given under oath and the section per se states that statement recorded under the said section shall be used in evidence in any proceedings under the Indian Income tax Act.

In appellate proceeding, assessee took an additional ground that as no incriminating material whatsoever was found during the course of search, no addition can be made. AO had solely relied upon the statement recorded on oath u/s 132(4), which cannot be said to be incriminating material because the assessee has first clarified that its claim was based on the decision of the Hon'ble Jurisdictional High Court. The assessee had retracted this statement immediately after the search and seizure action.

Revenue contended that during the course of search, statement of the Managing Director was recorded, who has clearly admitted that the membership fee collected can be taxed as revenue receipt though on deferred basis. This itself is an incriminating material. Besides this, a document was found wherein it was mentioned about the type of membership, duration for which membership was offered and the price of membership subscription. This means that there were some material found relating to membership fee.

After hearing both the parties, the ITAT held that,

++ from a plain reading of the provisions of section 153A, it is evident that if a search has been initiated u/s 132(1) or requisition has been made u/s 132A, then AO is obliged to issue notice u/s 153A, requiring such person to furnish return of income of six years in the prescribed form for the immediately preceding the year of search. The AO is legally required to assess or re-assess the total income of six assessment years immediately preceding to the year of search. The second proviso to section 153A provides that if the assessment or re-assessment of any of the assessment year, falling within the period of six years is pending on the date of search, then the same shall get abated. In the present case, for the years under appeal, the assessments were not pending and had attained finality, therefore, the assessments completed in the impugned assessment years will not get abated. Once that is so, the legal position as of now is that the additions over and above the assessed income cannot be made de hors the incriminating material found at the time of search while completing the assessment u/s 153A. This, inter-alia, means that if there is no incriminating material, then the original assessment made can be reiterated and no further addition is called for;

++ in the statement recorded on oath, the assessee has clearly stated that it has claimed the membership fee as capital receipt based on the decision of the Hon'ble Jurisdictional High Court and such a claim has also been accepted by the Assessing Officer in scrutiny proceedings. After having said that the assessee stated that membership is for 25 years, then 1/25th portion thereof can be charged to tax in every year. Neither in the question nor in the answer thereto, there is any reference to any document or seized material, much less any incriminating material to show that the assessee’s claim which was allowed by the Department has been negated. Otherwise also, this claim is purely based on legal principle as upheld by the Hon'ble Jurisdictional High Court. Thus, the statement as such cannot be said to be incriminating material so as to infer that any addition is warranted on this issue while completing the assessment under section 153A, when the earlier assessments have attained finality at the time of search. The list of category of the membership and the fee charged is already part of the record and the books of account which, has been subject matter of scrutiny u/s 143(3) earlier. Moreover, this document does not show that the assessee’s claim for capital receipts will automatically be inferred as revenue receipt. Thus, the additions made by AO are cancelled.