Assessment of a person other than the person searched [third party assessment] as per provisions of section 153C of the Income-tax Act, 1961

Section 153C is analogous to section 158BD with the only exception that the words ‘any Undisclosed Income’ is done away with in the new section 153C. The section provides that where the assessing officer is satisfied that any money, bullion, jewellery or other valuable article or thing or books of account or documents or assets seized or requisitioned belong or belongs to any person other than the person searched or requisitioned, then such money, bullion, etc. is to be handed over to the assessing officer having jurisdiction over such other person and that other assessing officer shall proceed against such other person and assess or reassess in accordance with the provisions laid down in section 153A.

Section 153C of the Act relates to assessment of income of any other person. Section 153C is a unique provision in itself in as much as it empowers the Income Tax authorities to conduct assessment proceedings even in case of a person who was not searched as if a search has been conducted in his case also. This happens when during search at a premise, some documents or valuables were found in respect of which there was apprehension that they may belong to some other person. In such a case section 153C may be invoked against that person by the Income Tax authorities after recording reasons for satisfaction and all the provisions of section 153A shall apply as they apply in case of a person searched.

For example, in course of a search operation made in the group of “X” some incriminating documents belonging to “A” are found. The notice under section 153C shall also be issued to “A”.

Text of section 153C

ASSESSMENT OF INCOME OF ANY OTHER PERSON

(1)[153C (1) Notwithstanding anything contained in section 139, section 147, section 148, section 149, section 151 and section 153, where the Assessing Officer is satisfied that,—

(a)  any money, bullion, jewellery or other valuable article or thing, seized or requisitioned, belongs to; or

(b)  any books of account or documents, seized or requisitioned, pertains or pertain to, or any information contained therein, relates to,

a person other than the person referred to in section 153A, then, the books of account or documents or assets, seized or requisitioned, shall be handed over to the Assessing Officer having jurisdiction over such other person (2)[and that Assessing Officer shall proceed against each such other person and issue notice and assess or reassess the income of the other person in accordance with the provisions of section 153A, if, that Assessing Officer is satisfied that the books of account or documents or assets, seized or requisitioned, have a bearing on the determination of the total income of such other person for (3)[for six assessment years immediately preceding the assessment year relevant to the previous year in which search is conducted or requisition is made and]for  the relevant assessment year or years referred to in sub-section (1) of section 153A]:]

(4)[Provided that in case of such other person, the reference to the date of initiation of the search under section 132 or making of requisition under section 132A in the second proviso to (5)[sub-section (1) of] section 153A shall be construed as reference to the date of receiving the books of account or documents or assets seized or requisitioned by the Assessing Officer having jurisdiction over such other person:]

   (6)[Provided further that the Central Government may by rules[7]  made by it and published in the Official Gazette, specify the class or classes of cases in respect of such other person, in which the Assessing Officer shall not be required to issue notice for assessing or reassessing the total income for six assessment years immediately preceding the assessment year relevant to the previous year in which search is conducted or requisition is made (8)[and for the relevant assessment year  or years  as referred to in sub-section (1) of section 153A] except in cases where any assessment or reassessment has abated.]

      (9)[(2) Where books of account or documents or assets seized or requisitioned as referred to in sub-section (1) has or have been received by the Assessing Officer having jurisdiction over such other person after the due date for furnishing the return of income for the assessment year relevant to the previous year in which search is conducted under section 132 or requisition is made under section 132A and in respect of such assessment year—

    (a)    no return of income has been furnished by such other person and no notice under sub-section (1) of section 142 has been issued to him, or

    (b)     a return of income has been furnished by such other person but no notice under sub-section (2) of section 143 has been served and limitation of serving the notice under sub-section (2) of section 143 has expired, or

    (c)    assessment or reassessment, if any, has been made,

            before the date of receiving the books of account or documents or assets seized or requisitioned by the Assessing Officer having jurisdiction over such other person, such Assessing Officer shall issue the notice and assess or reassess total income of such other person of such assessment year in the manner provided in section 153A.]

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KEY NOTE

1.    Inserted by the Finance Act, 2005, with retrospective effect  01.06.2003

2.   Substituted for “and that Assessing Officer shall proceed against each such other person and issue such other person notice and assess or reassess income of such other person in accordance with the provisions of section 153A” by the Finance (No. 2) Act, 2014, with effect from  01.10.2014.

3.  Inserted by the Finance Act, 2017, with retrospective effect  01.04.2017

4.  Inserted by the Finance Act, 2005, with effect from  01.06.2003

5.  Inserted by the Finance Act, 2008, with effect from  01.06.2003

6.  Inserted by the Finance Act, 2012, with effect from  01.07.2012

7.  See Rule 112F

8.  Inserted by the Finance Act, 2017, with retrospective effect  01.04.2017

9.  Inserted by the Finance Act, 2005, with effect from  01.06.2003

Assumption of jurisdiction under section 153C

Assumption of jurisdiction under section 153C of the Act is to be examined based on satisfaction recorded by the assessing officer of the "other person" or the assessing officer of the searched person.

Conditions for making assessment of other Persons under section 153C

The assessment of other persons who are not covered under section 153A but are related to persons covered under section 153A can also be made by assessing officer. There are certain conditions for making assessment on such persons as per provision of section 153C –

(1)    The Assessing Officer must be satisfied that any money, bullion, jewellery and other valuable article things or books of accounts or documents seized or requisitioned belong to such other persons. In this connection, it has been held in Singhed Technical Education Society v. ACIT (IT AN 114 to 117/PN/10) that for initiation of proceedings under section 153C the documents seized must belong to third person and should be incriminatory in nature.

(2)    Such books of accounts or documents or assets seized or requisitioned should be handed over to the Assessing Officer having jurisdiction over such persons.

(3)    Thereafter, Assessing Officer shall issue notice to such other persons as per provisions of section 153C and shall make the assessment.

The provisions of section 153C are analogous to section 158BD and therefore, the decisions rendered with reference to the provisions of section 158 BD would apply with reference to cases falling under section 153C unless the context requires otherwise. The apex court in the case of Manish Maheshwari (2007) 289 ITR 341, after considering the provisions of section 158BD, held that:

(i)   satisfaction must be recorded by the Assessing Officer that any undisclosed income belongs to any person, other than the person with respect to whom search was made under section 132 of the Act;

(ii)  the books of account or other documents or assets seized or requisitioned had been handed over to  the Assessing Officer having jurisdiction over such other person; and

(iii) the Assessing Officer has proceeded under section 158BC against such other person.”

The seized incriminating material have to pertain to the Assessment year in question and have co-relation, document-wise, with the Assessment year. This requirement under section 153C is essential and becomes a jurisdictional fact. It is an essential condition precedent that any money, bullion or jewellery or other valuable articles or thing or books of accounts or documents seized or requisitioned should belong to a person other than the person referred to in Section 153A. Kamleshbhai Dharamshibhai Patel 31 TM.com 50 (Guj) approved. SSP Aviation 20 TM.com 214 (Del) distinguished (i)    In these appeals, qua the aforesaid four Assessment Years, the assessment is quashed by the ITAT (which order is upheld by the High Court) on the sole ground that notice under Section 153C of the Act was legally unsustainable. The events recorded above further disclose that the issue pertaining to validity of notice under Section 153C of the Act was raised for the first time before the Tribunal and the Tribunal permitted the assessee to raise this additional ground and while dealing 12 with the same on merits, accepted the contention of the assessee.

(ii) First objection of the learned Solicitor General was that it was improper on the part of the ITAT to allow this ground to be raised, when the assessee had not objected to the jurisdiction under Section 153C of the Act before the Assessing Officer. Therefore, in the first instance, it needs to be determined as to whether ITAT was right in permitting the assessee to raise this ground for the first time before it, as an additional ground.

(iii) The ITAT permitted this additional ground by giving a reason that it was a jurisdictional issue taken up on the basis of facts already on the record and, therefore, could be raised. In this behalf, it was noted by the ITAT that as per the provisions of Section 153C of the Act, incriminating material which was seized had to pertain to the Assessment Years in question and it is an undisputed fact that the documents which were seized did not establish any co-relation, document-wise, with these four Assessment Years. Since this requirement under Section 153C of the Act is essential for assessment under that provision, it becomes a jurisdictional fact. We find this reasoning to be logical and valid, having regard to the provisions of Section 153C of the Act. Para 9 of the order of the ITAT reveals that the ITAT had scanned through the Satisfaction Note and the material which was disclosed therein was culled out and it showed that the same belongs to Assessment Year 2004-05 or 13 thereafter. After taking note of the material in para 9 of the order, the position that emerges therefrom is discussed in para 10. It was specifically recorded that the counsel for the Department could not point out to the contrary. It is for this reason the High Court has also given its imprimatur to the aforesaid approach of the Tribunal. That apart, learned senior counsel appearing for the respondent, argued that notice in respect of Assessment Years 2000-01 and 2001-02 was even time barred.

(iv) We, thus, find that the ITAT rightly permitted this additional ground to be raised and correctly dealt with the same ground on merits as well. Order of the High Court affirming this view of the Tribunal is, therefore, without any blemish. Before us, it was argued by the respondent that notice in respect of the Assessment Years 2000-01 and 2001-02 was time barred. However, in view of our aforementioned findings, it is not necessary to enter into this controversy.

(v) Insofar as the judgment of the Gujarat High Court in Kamleshbhai Dharamshibhai Patel v. Commissioner of Income Tax-III, (2013) 31 taxmann.com 50 (Gujarat) relied upon by the learned Solicitor General is concerned, we find that the High Court in that case has categorically held that it is an essential condition precedent that any money, bullion or jewellery or other valuable articles or thing or books of accounts or documents seized or requisitioned should belong to a person other than the person referred to in Section 153A of the Act. This proposition of law laid down by the High Court is correct, which is stated by the Bombay High Court in the impugned judgment as well. The judgment of the Gujarat High Court in the said case went in favour of the Revenue when it was found on facts that the documents seized, in fact, pertain to third party, i.e. the assessee, and, therefore, the said condition precedent for taking action under Section 153C of the Act had been satisfied.

(vi) Likewise, the Delhi High Court in SSP Aviation Limited v. Deputy Commissioner of Income Tax, (2012) 20 taxmann.com 214 (Delhi), also decided the case on altogether different facts which will have no bearing once the matter is examined in the aforesaid hue on the facts of this case. The Bombay High Court has rightly distinguished the said judgment as not applicable giving the following reasons:

”8. Reliance on the judgment of the Division Bench of the High Court of Delhi reported in case of SSP Aviation Ltd. v. DCIT (2012) 346 ITR 177 is misplaced. There, search was carried out in the case of “P” group of companies. It was found that the assessee before the Hon’ble Delhi High Court had acquired certain development rights from “P” group of companies. Based thereon, the satisfaction was recorded by the Assessing Officer and he issued notice in terms of Section 153C. Thereupon the proceedings were initiated under section 153A and the assessee was directed to file returns for the six assessment years commencing from 2003-04 onwards. The assessees filed returns for those years but disclosed Nil taxable income. These returns were accepted by the Assessing Officer, however, in respect of the assessment year 2007-08 there was a significant difference in the pattern of assessment for this year also, the return was filed for Nil 15 income but there were certain documents and which showed that there were transactions of sale of development rights and from which profits were generated and taxable for the assessment year 2007-08. Thus, the receipt of Rs. 44 crores as deposit in the previous year relevant to the assessment year 2008-09 and later on became subject matter of the writ petition before the Delhi High Court. That was challenging the validity of notice under section 153C read with section 153A. In dealing with such situation and the peculiar facts that the Delhi High Court upheld the satisfaction and the Delhi High Court found that the machinery provided under section 153C read with section 153A equally facilitates inquiry regarding existence of undisclosed income in the hands of a person other than searched person. The provisions have been referred to in details in dealing with a challenge to the legality and validity of the seizure and action founded thereon. We do not find anything in this judgment which would enable us to hold that the tribunal’s understanding of the said legal provision suffers from any error apparent on the face of the record. The Delhi High Court judgment, therefore, will not carry the case of the revenue any further.” We, thus, do not find any merit in these appeals. (Related Assessment years : 2002-03, 2003-04)

 [CIT v. Sinhgad Technical Education Society - Date of pronouncement : 29.08.2017 (SC)]

Notice issued under section 153C based on satisfaction recorded by Assessing Officer of searched person who also was Assessing Officer of assessee was valid

A search was conducted on BKD, PD and MBPL, associates of a group of companies - During search, certain documents belonging to assessee company were found and Assessing Officer of searched person recorded a satisfaction in that regard - Thereafter, notice under section 153C was issued to assessee to file his return of income. It was held that where satisfaction note was recorded by Assessing Officer of searched person who also happened to be Assessing Officer of assessee (other person) as well, issuance of notice under section 153C on basis of such note was justified. (Related Assessment years 2005-06 to 2008-09. - [PCIT v. Instronics Ltd. (2017) 82 taxmann.com 357 (Del)]

In the case of CIT v. RRJ Securities Ltd. 62 taxmann.com 391 (Del) where it has been held as under :-

"32. Section 153C of the Act merely requires the Assessing Officer of A searched person to handover the assets and documents seized, which belong to another person, to the Assessing Officer of that person. The Assessing Officer of a searched person is not required to examine whether such documents could provide a clue for discovery of undisclosed income of the person to whom the document so belongs. This Court in SSP Aviation Ltd.(supra) had observed as under:

"At the time when the Assessing Officer having jurisdiction over the searched person reaches the satisfaction that the document belongs to a person other than the searched person, it is not necessary for him to also reach a firm conclusion/opinion that the document shows undisclosed income belonging to such other person. That is a matter for enquiry, which is to be conducted in the manner prescribed by section 153C."

[CIT v. RRJ Securities Ltd. (2016) 380 ITR 612 : (2015) 62 taxmann.com 391 (Del)]

Assessment on basis of material received from another Assessing Officer and after Section 153C notice is valid in law

The assessee was a firm consisting of two partners, namely, 'S' and 'F', engaged in the business of running of hospital, building and educational institutions. A search was conducted at the business premises of 'S' as well as at various business premises of the assessees. The Assessing Officer recorded requisite satisfaction and handed over the books of account to the concerned Assessing Officer.

The Assessing Officer issued notice under section 153C. Later, the assessment orders were passed under section 153C/143(3).

On appeal, the Commissioner (Appeals) quashed the assessment orders. The Tribunal dismissed the revenue's appeal relying upon the judgment of the Apex Court in Manish Maheshwari  v. ACIT (2007)  289 ITR 341 : 159 Taxman 258  where the Assessing Officer of the person searched and the Assessing Officer of the other person were different. It was held that where after search at business premises of assessee-firm and its partner, books of account were handed over to concerned Assessing Officer, who after recording satisfaction issued notice under section 153C and completed assessment under section 153C/143(3), assessment was in accordance with law.

[CIT v. Classic Enterprises (2013) 358 ITR 465 : 219 Taxman 237 (2014) 268 CTR 364 (All)]

Whether section 153C would apply where seized material does not belong to third party but the transactions entered in the seized document belong to third party.

There is complete departure by the legislature in this regard in as much as under section 158BD, the Assessing Officer is required to record the satisfaction that undisclosed income belongs to the person other than the person searched while under section 153A, he is required to record the satisfaction that the seized assets/valuable articles/books of account/documents belong to the person other than the person searched. Therefore, if the books of account belong to the person searched but entry in such books reflect the undisclosed income of the third party then, in my view, the Assessing Officer can not assume jurisdiction under section 153C to assess such undisclosed income. The only course open to him would be to invoke the provisions of section 147. 

In the case of P. Shriniwas Naik, search was conducted at the premises of ‘R’ in the course of which certain books were seized. One of the books showed that assessee had advanced a loan to ‘R’. On that basis, section 153C was invoked and assessment was made in the hands of assessee. Held that section 153C could not be invoked as books seized did not belong to assessee. - [P. Shriniwas Naik v. ACIT (2008) 306 ITR 411 (ITAT Bangalore)]

Onus on the part of Department

If the third person, on whom the proceedings are initiated, submits necessary evidence to establish his bona fide transactions, then the onus is shifted to the Department to prove that the claim of the assessee is incorrect.

In ‘ACIT v. Goodview Trading (P) Limited’ – 2016 (2) TMI 624 – (ITAT Delhi) the assessee is engaged in the business of investments in capital market. A search was initiated on the Jackson group and its associates on 10.02.2010. Notice under Section 153C was issued on 02.06.2011, in response to which the assessee filed a return on 01.07.2011 declaring an income of ₹ 17,640/-. The Assessing Officer included an addition of ₹ 25 crores under Section 68 of the Act, vide order dated 29.12.2011. The Commissioner (Appeals) partly allowed the appeal and deleted the addition in dispute. The Commissioner (Appeals) held that the assessee had submitted necessary evidence to establish the bona fides of the transactions. Thereafter, the onus was shifted on the Revenue to prove that the claim of the assessee was factually incorrect. Though it was part of their duty to ensure that no tax which was legitimately due from the assessee remained unrecovered, at the same time they would not act in a manner as might indicate that scales were weighed against the assessee. On appeal the Tribunal upheld the order of Commissioner (Appeals).

Assessment under section 153C on non-recording of reasons and unsigned order sheet was invalid

Assessing Officer initiated proceedings under section 153C in assessee’s case. Assessee contended that there was non-recording of satisfaction by Assessing Officer of searched person for transfer of the material and to take action under section 153C before transfer of material to Assessing Officer of the assessee. In the instant case, there was no dispute that Assessing Officer of the searched person has not recorded the reasons and order sheet of  Assessing Officer of assessee though reasons were typed, it remained unsigned. The direction for issue of notice under section 153C was also unsigned. As already know, unsigned order sheet looses its relevance and it would be construed as non recording of reasons. The reasons typed also were very vague without any valid reason. Therefore, notice issued under section 153C and the assessment order passed by Assessing Officer did not comply with the statutory requirement for issue of notice under section 153C, hence, could not be held as valid. Accordingly, notice issued under section 153C was quashed. (Related Assessment Years : 2007-08, 2008-09) - [Sri Sesha Sai Township (P) Ltd. v. ACIT - Date of Judgement : 11.01.2019 - (ITAT Visakhapatnam)

Income of any other person – Recording of satisfaction is mandatory - Notice has to be issued by Assessing Officer to other person under Section 153A although such Assessing Officer gets jurisdiction under Section 153C- In the case of searched person there is no requirement of recording of satisfaction

In case of proceedings initiated on a person other than searched person, notice has to be issued by Assessing Officer to other person under section 153A although such Assessing Officer gets jurisdiction under section 153C. For issuing notice under section 153A in case of on other than searched person, Assessing officer issuing such notice has to record satisfaction that books of account or documents or assets seized have a bearing on determination of total income of such other person, but in case of searched person, there is no such requirement prescribed under section 153A . Accordingly the assessment is held to be valid. (Related Assessment Year :  2005 -06) - [Rajesh Kumar v. ACIT (2019) 175 ITD 734 (ITAT Bangalore)]

No incriminating material or evidence was found in the course of search/ survey – Addition merely based on the disclosure made by Co-owner – And statement of third person – Held no addition can be made

The assessee is an individual. A search under section 132(1) of the Act was conducted, in case of a third group. On the basis of the seized documents a survey under section 133A of the Act was carried out at the business premises of the assessee, on 05.01.2007. Consequent to the survey proceedings, the assessee was summoned under section 131 of the Act and a statement was recorded by him on 13-2-2007. During the recording of statement, when the assessee was called upon to explain the alleged discrepancies found on the basis of materials seized/impounded, he offered an amount of ₹ 75 lakh towards cash receipts on sale of shops in a project developed by him with another party viz., M/s. Guru Prerna Enterprises. In the return of income filed for the impugned assessment year in response to the notice issue under section 153C of the Act, the assessee also offered the amount of ₹ 75 lakh as undisclosed business income.

The Assessing Officer on the basis of the statement recorded from third party and also the fact that the co-developer has offered undisclosed income in the ratio of 60% in case of sale of shops and 40% in case of flats, the Assessing Officer proceeded to work out the undisclosed income derived by the assessee from sale of shops and flats at ₹ 2,80,25,655 and added back to the income of the assessee.

The learned CIT(A) also found that no incriminating material or evidence was found in the course of search/survey either from the premises of Guru Prerna Enterprises or the assessee regarding receipt of cash on sale of flats and shops. He also observed that the other witness also never stated that the assessee received any cash on sale of flats and shops. It is the assessee who had accepted receipt of some unaccounted cash on sale of shops and specifically denied of having received any cash on sale of flats. Further, out of 67 shops, assessee had already sold 65 shops through other brokers. He, therefore, held that by placing too much reliance on the statement of third party, no addition could have been made. More so, when no evidence of receipt of cash was found at the time of search/survey.

The CIT(A), however, proceeded to estimate the total cash receipt on sale of shops/flats at ₹ 1 crore, the assessee having already offered an amount of ₹ 75 lakh, the learned CIT(A) sustained the addition of further amount of ₹ 25 lakh.

The ITAT dismissed the department appeal and also allowed the cross appeal of the assessee on the basis of the fact that CIT(A) having found that there is no evidence to indicate that the assessee has received any cash over and above what has been declared by him, even the addition made of ₹ 25 lakh purely on estimate basis cannot be sustained. Therefore, the entire addition made by the Assessing Officer in the instant case was deleted. (Related Assessment year : 2007-08) - [DCIT v. Umesh H. Gandhi, ITA No. 2745/Mum/2016 & CO. No 289/Mum/2017, dated 28.02.2018 (ITAT Mumbai)]

Documents seized revealed total expenditure that assessee incurred in respect of both his children was not disclosed in the return of income , addition confirmed by the Tribunal is up held . As both brothers have signed the panchnama there was no necessity of issuing notice under section 153C of the Act

Dismissing the appeal the Court held that ,documents seized revealed total expenditure that assessee incurred in respect of both his children was not  disclosed in the return of income , accordingly the  addition confirmed by the Tribunal is up held .As both brothers have signed the panchnama there was no necessity  of issuing notice under section 153C of the Act  (Related Assessment Year : 2006-07) - [Vinod Kumar Gupta v. DCIT (2018) 305 CTR 288 : 165 DTR 409 (Del)]

No addition can be made in respect of an unabated assessment which has become final if no incriminating material is found during the search. Provisions cannot be invoked

The assessee was subjected to proceedings under section 153C pursuant to search & seizure operations under section 132 on 09.01.2013 in the group cases belonging to M/s. Enpar. The quantum assessment order at para-3 record a finding that the trial balances belonging to assessee for the period April 2010 to March 2011, April 12 to 09.01.2013 & April 2011 to March 2012 were seized. In response to notice under section 153C, the assessee offered the same return of income as filed under section 139(1) at ₹ 41,400/-. From perusal of financial statements, it was found that the assessee raised a sum of ₹ 12.70 crore by way of issue of share capital from five parties, the details of which have already been extracted at para 7 of the quantum assessment order. The Ld. Assessing Officer, not satisfied with creditworthiness of the share allottees, added the aforesaid amount to the income of the assessee as cash credit under section 68. Held that though the documents relied upon by the Assessing Officer for initiating the proceedings under section 153C for Assessment year 2007-08 to Assessment year 2012-13 pertain to period Assessment years 2010-11, 2011-12 and 2013-14, no additions have been made in those assessment years. The only assessment year in which additions have been made is the Assessment 2008-09. Even in that assessment year, the additions made were not based on the documents as relied upon by the Assessing Officer. This clearly shows that no incriminating documents relating to the appellant was seized for Assessment year 2008-09. Further the assessment for Assessment 2008-09 was completed under section 143(3) r.w.s. 147 of the Act, before the date of initiation of the search. Therefore, respectfully following the decision of the Hon’ble jurisdictional Bombay High Court in case of CIT-11, Thane v. Continental Warehousing Corporation (Nhava Sheva) Ltd., [(2015) 374 ITR 645] it was held that the Assessing Officer was not justified in making the addition. Accordingly, the addition of ₹ 12,70,00,000/- was deleted. - [DCIT v. Silver Sand Beach Inn Private Ltd., ITA No. 4907/Mum/2016, DOH: 08.08.2018 (ITAT Mumbai)

Search-Satisfaction note recorded by the Assessing Officer of assessee was not by the Assessing Officer of person in respect of whom search was conducted – Seized document not relevant to assessment year - Notice is void ab initio and vitiates entire assessment proceedings

On appeal before the Tribunal, it was held that that recording of satisfaction by the Ld. Assessing Officer of the person in respect of whom the search was conducted is a condition precedent for initi­ating action under section 153C. In the case of assessee, the satisfaction note had been recorded by the Ld. Assessing Officer of the assessee and not by the Ld. Assessing Officer of the companies in whose case search was conducted. Also, the seized documents were not relevant to the assessment year under consideration. Therefore, it was held that, since no satisfaction note as required by law was recorded in the case of the companies in respect of whom search was conducted, the assumption of jurisdiction by the Ld. Assessing Officer to issue notice under section 153C was void ab initio and bad in law and vitiated the entire assessment proceedings under section 153C. (Related Assessment Year : 2011-12) - [ACIT v. Surbhi Sen Jindal (2018) 68 ITR 12 (SN) (ITAT Patna)]

Reassessment – Income of any other person – Issue of notice under section 153C and did not continue with proceedings, again issuing a notice under section 148 is held to be bad in law Allowing the appeal of the assessee, the Tribunal held that when the Assessing Officer had issued a notice under section 153C to which the assessee had complied with. Thereafter the Assessing Officer did not continue with the proceedings under section 153C. Subsequently the Assessing Officer issued a notice under section 148, which was held to be bad in law. (Related Assessment Years : 2003-04, 2005-06) - [Rayoman Carriers (P) Ltd. v. ACIT - ITA No.3275/Mum/2015 & 3276/Mum/2015) (ITAT Mumbai)]

Block assessment-Income of any other person - Search and seizure-Finality of orders passed by Settlement Commission - Subsequent search and seizure operation conducted in premises of third person showing assessee suppressed material before Settlement Commission - Block assessment not permissible

When the assessee's premises were searched and notice under section 153A was issued, it approached the Settlement Commission. The Settlement Commission made its final orders determining the assessee's liability. The Assessing Officer, subsequent to this event, issued a notice under section 148 proposing reassessment proceedings. The High Court quashed the reassessment notice. In the meanwhile, consequent to the search in the premises of a third person, a satisfaction note was recorded by the Assessing Officer of that person for initiating proceedings under section 153C against the assessee for the assessment years 2004-05 to 2009-10. The Assessing Officer issued notices under section 153C seeking to reassess the assessee's income, inter alia, for the assessment years 2004-05 to 2009-10. Responding to the notice issued under section 153C the assessee objected to assessment/reassessment of income for the assessment years 2004-05 to 2006-07 under the provision since the assessments had already been concluded by the order of the Settlement Commission. On a writ petition : Held, allowing the petition, that the Settlement Commission was seized of proceedings for the assessment year 2006-07. The subsequent event of the search and seizure operation conducted in the premises of a third person had thrown light on the material that had been suppressed from the Settlement Commission. The Settlement Commission itself should be approached for a declaration that its order was a nullity. Allowing any other authority, even by way of a notice under section 153C, would be to permit multiple jurisdictions which can result in chaos. After all non-disclosure or suppression of information in respect of what is required to be revealed to the concerned authorities is akin to fraud and if it has a material bearing on the outcome of the assessment, it would most certainly be misrepresentation. The term "misrepresentation" would mean failure to disclose material or facts which are germane and relevant, or suppressing facts and materials which are germane and relevant or holding out a falsehood which gives the rise to an assumption that what is so stated or represented is true or correct. The facts of each case would throw light on whether the individual or person concerned was guilty of misrepresentation having regard to the totality of the circumstances, given the nature of duty cast on him or her. Thus, the notice issued to the assessee under section 153C could not be sustained ; the notice and all further proceedings were quashed. It was open to the Revenue to move the Settlement Commission for appropriate relief of declaration that its previous order under section 245D(6) was void, setting out the relevant facts and circumstances. In the event the Revenue approached the Settlement Commission with an application for such relief, it shall be decided on its merits in accordance with law. Once the Settlement Commission has completed proceedings, its order is considered conclusive as regards matters "stated therein" under section 245-I of the Income-tax Act, 1961, and reopening any proceeding in respect of matters covered in the order would be barred. (Related Assessment years 2004-05, 2005-06, 2006-07) - [Omaxe Ltd. v. DCIT (2014) 364 ITR 423 (Del)]

Assessing Officer has to satisfy that seized documents belongs to other person before issuing notice under section 153C

Before a notice under section 153C could be issued, Assessing Officer is required to arrive at a conclusive satisfaction that documents belongs to a person other than searched person. Mere use or mention of word 'satisfaction' or 'I am satisfied' in order or note, would not meet requirement of concept of satisfaction as used in section 153C. [Paras 11 & 12]

FACTS

The assessee-company was the sole supplier of concentrate of cold drinks to group 'J'. A search and seizure operation under section 132(1) was carried out at the various premises of 'J'. The Assessing Officer found that the documents which had been seized during the search operations related to the assessee. He issued notice under section 153C on the basis of a satisfaction note.

The assessee raised objection contending that the basic condition of section 153C had not been satisfied and, therefore, the notices were without jurisdiction and ought to be quashed. On Writ-

HELD

It is evident from the satisfaction note that apart from saying that the documents belonged to the petitioner and that the Assessing Officer is satisfied that it is a fit case for issuance of a notice under section 153C, there is nothing which would indicate as to how the presumptions which are to be normally raised as indicated above, have been rebutted by the Assessing Officer. Mere use or mention of the word 'satisfaction' or the word I am satisfied in the order or the note would not meet the requirement of the concept of the satisfaction as used in section 153C of the said Act. The satisfaction note itself must display the reasons or basis for the conclusion that the Assessing Officer of the searched person is satisfied that the seized documents belong to a person other than the searched person. Going through the contents of the satisfaction note, any 'satisfaction' of the kind required under section 153C of the said Act could not be discerned. [Para 11]

This being the position the very first step prior to the issuance of a notice under section 153C has not been fulfilled. Inasmuch as this condition precedent has not been met, the notices under section 153C are liable to be quashed. [Para 12] - (Related Assessment years : 2006-07 to 2011-12)

[Pepsi Foods (P) Ltd. v. ACIT (2015) 231 Taxman 58 : (2014) 52 taxmann.com 220 (Del)]

Whether Section 153C would apply where books seized do not belong to third party

This is a major controversy in respect of proceedings under section 153 C of the Income Tax Act. The word belonging is very important in section 153 C. The notice under section 153 C should not be issued unless the seized document belong to the person on whom such notice is being issued. The Assessing Officer cannot assume jurisdiction under section 153C where books of accounts seized during course of search does not belong to third party. This view is supported by the decision of Bangalore bench in the case of P Shriniwas Naik v. ACIT (2008) 306 ITR 411 : 114 TTJ 856 (ITAT Bangalore).

As per provisions of Section 153C, the other person is also required to be assessed or reassessed for earlier six years

As per provisions of Section 153C, the other person is also required to be assessed or reassessed for earlier six years even when evidences belonging to him seized during search are relating to only one year. In other words, as per provisions of Section 153C, in case a person is covered within the ambit of such provision, he is required to be assessed or reassessed in the same manner as the person searched in accordance with the provisions of Section 153A.

Notice under Section 153C

Notice under section 153C can be issued on those persons to whom the books, documents and other valuable found during search operation belongs and further such documents or books should be incriminating in nature.

For example, in course of a search operation made in the group of “X” some incriminating documents belonging to “A” are found. The notice under section 153C shall also be issued to “A”.

Income of any other person – No satisfaction recorded by Assessing Officer in respect of whom the search was conducted prior to issuing notice – Notice and assessment against the assessee was not valid

In the absence of satisfaction by the Assessing Officer of the person in respect of whom search was conducted, the Assessing Officer of the assessee would not get any jurisdiction to issue such notice. Accordingly, notice under section 153C issued by the Assessing Officer of the person in respect of whom search was conducted lacked jurisdiction and this was not curable by virtue of the provisions of section 292B.( Related Assessment years : 2003-04 to 2008-09) - [Parshwa Corporation and others v. DCIT (2016) 178 TTJ 394 : 46 ITR 266/ (ITAT Ahmedabad)]

Prior Approval of Joint/ Addl. Commissioner is required

For passing order under section 153 A and C, prior approval of Joint Commissioner or Addl. Commissioner is required .It should not be routine approval. The joint/addl. Commissioner should apply his mind before giving his approval. The assessing officer should mention in body of the order that permission of the joint/addl. commissioner has been obtained.

An order under section 153C passed without obtaining the approval of the JCIT under section 153D is without jurisdiction and void in view of Calcutta Knitwears 362 ITR 673 (SC) and CBDT Circular No. 24/15 dated 31.12.2015

The guidelines of the Hon’ble Supreme Court as referred to in para 2 above, with regard to recording of satisfaction note may be brought to the notice of all for strict compliance. It is further clarified that even if the Assessing Officer of the searched person and the “other person” is one and the same then also he is required to record his satisfaction as has been held by the Courts. In view of the above, filing of appeals on the issue of recording of satisfaction note should also be decided in the light of the above judgment. Accordingly, the Board hereby directs that pending litigation with regard to recording of satisfaction note under section 158BD/153C should be withdrawn/not pressed if it does not meet the guidelines laid down by the Apex Court.

[HiKlass Moving Picture (P) Ltd v. ACIT - Date of pronouncement : 30.09.2016  (ITAT Mumbai)]

No time limit prescribed for issuing notice under section 153C

There is no time limit prescribed under the Act for invoking provision of Section 153C. However, as per various judicial pronouncements, notice under section 153C should be issued before passing order in the case of person searched under section 153A or within reasonable time.

When notice cannot be issued?

In ‘CIT v. Anil Kumar Chaddha’ - 2015 (2) TMI 723 – (All),  three persons were going on a rickshaw to board the Praygraj Express for going to Delhi. They were detained by the police. A sum of ₹ 17 lakhs was recovered from their possession. On interrogation they replied that the money belonged to Anil Kumar Chaddha. The police referred to Income Tax department. The Department issued a notice under Section 158 BC to the assessee and added ₹ 17 lakhs and made assessment. The Commissioner (Appeals) has confirmed the same. The Tribunal has deleted the addition by observing that no search warrant was issued under Section 132 of the Act in the name of the assessee. Therefore no notice can be issued in the name of the assessee under Section 158BC of the Act. The High Court upheld the order of the Tribunal and held that there is no substantial question of law emerged from the impugned order.

Jurisdictional requirement for invoking the powers under Section 153C

In the absence of search material proceedings under Section 153C of the Act could not be initiated against a third person by the Assessing Officer. The fundamental jurisdictional requirement for invoking the powers under Section 153C was the seizure or requisitioning of books of account or documents or assets which belonged to a person other than the person referred to in Section 153A. Otherwise the Assessing Officer has no jurisdiction under Section 153C.

It was held that incriminating material must be found during search showing undisclosed income of third person. The Assessing Officer is to record his satisfaction for having jurisdiction over the third person in respect of search conducted that such money, asset or valuables belonged to third person. In the absence of incriminating search material the assessment of third person cannot be made. - [CIT v. Promy Kuriakose’ – 2016 (8) TMI 327 (Ker]

The assessee was assessed under Section 153C of the Act pursuant to a search conducted at SVP Group of industries. The Assessing Officer passed assessment orders assessing the amounts credited in the books of assessee as income under Section 68 of the Act. The Commissioner (Appeals) held that the assessee was carrying on business only on paper and its sole purpose was to benefit others and hence the addition must be made in the hands of the beneficiaries and not in the hands of the assessee. The Tribunal held that the documents found during the search and seizure operation conducted with reference to the SVP Group did not belong to the assessee and therefore the assumption of jurisdiction under Section 153C of the Act was unsustainable.

On appeal the High Court held that it was necessary for the Assessing Officer of the person in respect of whom search was conducted to record his satisfaction that the specified seized documents belonged to the assessee to initiate proceedings under Section 153C of the Act. The Department failed to confirm whether such note was prepared before the initiation of the proceedings under Section 153C of the Act and also failed to controvert the contention of the assessee that such note was not disclosed despite its request. Moreover the documents seized could not be considered to be belonging to the assessee. The High Court held that the initiation of the proceedings under Section 153 is without jurisdiction.

[PCIT v. Nikki Drugs and Chemicals Private Limited - 2015 (12) TMI 304 (Del)]

Invalid proceeding

It was held that the only document seized during the search was a cheque book pertaining the assessee which reflected the issue of cheques during the period from August 2008 to December 2008 relevant to the assessment year 2009 -10. Since there was no other evidence or undisclosed income, the proceedings under Section 153C were not valid. - [CIT v. Refam Management Services (P) Limited - 2015 (11) TMI 410 (Del)]

Recording satisfaction

Section 153C(1) stressed that the assessment on third person can be done only if the Assessing Officer is satisfied. Such satisfaction shall be recorded in writing.

Assessment under section 153C liable to be quashed if no satisfaction recorded by Assessing Officer

It is evident that recording of requisite satisfaction in the case of a searched party is a sine qua non for assuming jurisdiction for the issue of notice under section 153C even if the Assessing Officer of the searched person and the assessee are same. It is abundantly clear from the records in the case of the searched person that there is no requisite satisfaction granting the Assessing Officer jurisdiction for issuing notice to the assessee under section 153C of the Act. No satisfaction note whatsoever is found in the case of the searched person, namely, M/s Artefact Projects Ltd. In absence of any satisfaction note in the case of M/s Artefact Projects Ltd. that any seized material belonging to the assessee has been found which is incriminating in nature which is to be handed over to the Assessing Officer of the assessee, the jurisdiction assumed in this case is illegal and the same deserves to be quashed. Accordingly in the background of the aforesaid discussion and precedent, in our considered opinion, the assessee deserve to succeed on this account and the assessments are liable to be quashed on account of lack of validity of jurisdiction. Accordingly we set aside the orders of the learned CIT(Appeals) on this aspect of jurisdiction and quash the assessments by holding that requisite satisfaction was not recorded before issue of notice under ection 153C. (Related Assessment Years : 2008-09 & 2009-10) - [Zaidun Leeng Sdn Bhd Artefact Projects Ltd. (JV) v. DCIT - Date of judgement :22.03.2017 (ITAT Nagpur)]

It was held that one of the conditions precedent for invoking a block assessment pursuant to a search in respect of a third party under Section 158 BD of the Act, i.e., recording satisfaction, which was detected pursuant to a search had not been complied with. Though the documents belonging to the assessee were seized at the time of operation, there was no incriminating material found leading undisclosed income. Therefore the assessment of income of the assessee was unwarranted. - [CIT v. IBC Knowledge Park (P) Limited - 2016 (5) TMI 372 (Kar)]

It was held that Section 158 BD of the Act clearly indicates that where the Assessing Officer is satisfied that any undisclosed income belongs to any person other than the person with respect to whom search was made under Section 132 of the Act, the Assessing Officer shall proceed under Section 1589BC of the Act against such person since an entry was found in the books maintained by the firm where the search was conducted which even the petitioner admits in his writ petition, the satisfaction of the Assessing Officer and the issuance or to notice seems to be perfectly correct which requires no interference.

[Gyanendra Kumar Jain and Others v. ACIT and others - 2014 (12) TMI 840  (All)]

It was held that assessment of third person requires the satisfaction of the Assessing Officer of person searched that undisclosed income discovered during the search belonged to the third person. In this case the opinion was not formed in terms of Section 158 BB. The High Court held that the assessment is not valid. - [CIT v. Manoj Bansal and others - 2015 (1) TMI 617 (Del)]

It was held that in order to make a block assessment under Section 158 BC in relation to a third person whenever search has been conducted under Section 132 or the documents have been requisitioned under Section 132 A the Assessing Officer of the person in respect of whom search was conducted needs to record his satisfaction that undisclosed income belongs to the person other than the person with respect to whom search was carried out. In this case the High Court held that since the recording of reasons in the assessee’s case was absent, the notice under Section 158 BD was invalid. - [CIT v. Champakbhai Mohanbhai Patel - 2014 (2) TMI 1168 (Guj)]

It was held that the condition precedent for the assessment of third person is recording the satisfaction of the Assessing officer that seized material was belonged to third person. There is no indication in the satisfaction note that documents are belonged to third person. There is not disclaimer by person in respect of whom search was conducted that the documents did not belong to him. The High Court held that the notice issued under Section 153C is not valid. The satisfaction recorded by the Assessing Officer shall not be in general nature. - [Pepsico India Holdings Private Limited v. ACIT and another - 2014 (8) TMI 898 ( Del)]

It was held that the reasons assigned by the Assessing Officer in the satisfaction note were silent about the assessment year in which specific incriminating information or unaccounted or undisclosed hidden information was discovered or seized by the Revenue from the assessee. The general satisfaction as recorded in the note was not enough. There is no connection between the seized documents and third person. The High Court upheld the order of the Tribunal which held that assessment of third person is not valid. - [CIT v. Sinhgad Technical Education Society - 2015 (4) TMI 190 – (Bom)]

Mere using the words ‘satisfaction’ or ‘I am satisfied’ are not enough for the purpose of assessment of third person as held in ‘Pepsi Foods Private Limited v. ACIT - 2014 (8) TMI 425 - Delhi High Court In this case the High Court held that it was evident from the satisfaction note that apart from saying that the documents belonged to the assessee and that the Assessing Officer was satisfied that it was a fit case for issuance of a notice under Section 153C, there was nothing which would indicate how the presumptions which were to be normally raised had been rebutted by the Assessing Officer.

Mere use or mention of the word ‘satisfaction’ or the words ‘I am satisfied’ in the order or the note would not meet the requirement of the concept of the ‘satisfaction’ under Section 153C. The satisfaction note that must display the reasons or basis for conclusions that the Assessing Officer of the person in respect of whom the search is conducted is satisfied that the seized document belonged to another person. On going through the contents of the satisfaction note, no ‘satisfaction’ of the kind required under Section 153C could be discerned. Thus the very first step prior to the issuance of a notice under Section 153C had not been fulfilled. Inasmuch as this condition precedent had not been met the notices under Section 153C were liable to be quashed.

Limitation

It was held that the provisions of Section 158 BD (undisclosed income of any other person) and 158BC (Procedure for block assessment) are intertwined. The jurisdiction to issue notice under Section 158 BD to any person, other than the person with respect to whom search was made and the consequent time prescribed under Section 158BE (time limit for completion of block assessment) in respect of third parties would certainly be included with in the two year period given to the Assessing Officer for completion of the block assessment under Section 158BE (1). The High Court dismissed the appeal holding that the statute for completion of block assessment in respect of persons other than the person on whom search was made and therefore the notices issued under Section 158BD by Assessing Officer was not valid. - [CIT v. V. D. Muralidharan and others – 2014 (11) TMI 607 - (Mad)]

In ‘CIT v. Calcutta Knit wares’ – (2014) 362 ITR 673 (SC) the Supreme Court observed that Section 158BE(2)(b) of the Act, only provides for the period of limitation for completion of block assessment under Section 158BD in the case of person other than the person in respect of whom search was conducted, as two years from the end of the month in which the notice under Chapter XVI-B was served on such other person in respect of search carried on. Section 158BD neither provides for not impose any restrictions on the period or limitation for preparation of the satisfaction note under Section 158BD and consequent issues of notice to the other person.

It was held that the delay of 5 months in issuing of notice by the Assessing Officer was not unreasonable. The Notices issued under Section 158 BC read with Section 158BD were not barred by limitations. It is quite possible that if a search, conducted against one assessee, reflects some facts and figures referable to another assessee, proceedings can be initiated against the later also. That, however, would be possible if only the item of income that is noticed in the search or the one assessee is not reflected in the returns of the other assessee, who is sought to be preceded. Conversely or axiomatically, if the so called information that was discovered in the course of search has already been reflected in the returns or the assessment of the other assessee, the occasion to proceed against him does not arise at all. - [CIT v. Sudhir Dhingra and others’ – 2015 (5) TMI 319 (Cal)]

It was held that the Revenue has to be vigilant in issuing notice to third party under Section 158BD immediately after the completion of the assessment or the person in respect of whom search was conducted. The assessees were third parties who were issued with notices under Section 158 BD pursuant to search proceedings in respect of Manoj Agarwal group. In all these cases, the search proceedings were conducted on 30.08.2000. Thereafter the notices were issues to them for block assessment calling upon them to file the returns for the previous years in question. The assessment proceedings were completed on 28.09.2002. Thereafter notices were not issued in conformity with the requirements of Section158BD and were unduly delayed. In ‘CIT v. Apna Organics Private Limited’ – 2015 (8) TMI 506 – Bombay High Court the authorities conducted the search on 23.10.1998. But intimation to the assessee as third person under Section 158BD was given on 04.10.2005. The High Court held that the proceedings were initiated by enormous and unexplained delay. - [CIT v. Bharat Bhushan Jain - 2015 (1) TMI 705 (Del)]

Suppression

It was held that in this case no search was conducted against the respondent. The proceedings under Chapter XIV –B of the Act were initiated against him on the basis of the alleged discoveries in the course of search, conducted in the premises of M/s Mahaveer Group of companies. Firstly the finding that there was suppression of the sale of gift articles worth of ₹ 49.90 lakhs by M/s Mahaveer Group of companies itself is not well founded. In their books of account, the transaction was very much reflected. An inference was drawn to the effect that the transaction is fictitious, only on the ground that the sale was accommodative in nature. Secondly the respondent has shown the purchase of the gift articles not only in their books of account but also in the returns. The Assessing Officer has also accepted the same. Hence there did not exist any occasion or basis for the department to initiate block assessment proceedings against the respondent. The Tribunal has taken the correct view of the matter and there is no basis to interfere with the same. - [CIT v. Sunny Liquors Private Limited - 2015 (1) TMI 103 (AP)]

Evidence

In ‘CIT v. DPA Finvest Services Limited’ - 2015 (7) TMI 918 - Delhi High Court in the course of assessment proceedings M/s Friends Portfolio Private Limited (FPPL) it transpired that they were using the name and accounts of FPPL for the purposes of providing accommodation entries. One of such persons who benefited from such accommodation entry was found to be the assessee. It was shown to have received a sum of ₹ 61,993/- from FPPL on accommodation entry. On the basis of material a notice was issued to the assessee to explain each of credit entries in its bank account. The Assessing Officer concluded that entries in the accounting totaling ₹ 33.75 lakhs could not be explained by the assessee. They were treated as unexplained credit. Penalty proceedings were also initiated. The Commissioner (Appeals) held that the additions made were based on transactions which were not related to any evidence collected during the course of such proceedings in respect of the main person. The Tribunal dismissed the appeal of Revenue on the ground that addition could be made only for ₹ 61,993/-. The High Court dismissed the appeal filed by the Revenue by upholding the findings of Commissioner (Appeals) and confirmed by the Tribunal.

Assessing Officer cannot initiate proceedings under section 153A if incriminating material is found during search of other person. Proceedings should be initiated under section 153C and failure to do so renders the addition in the section 153A assessment void-ab-initio 

The Act has separate provisions for making assessment in case of material found in the course of search from premises of assessee (section 153A) as well as material found in course of search at premises of third party (Section 153C). Even if search happens in case of assessee, the Assessing Officer cannot initiate proceedings under section 153A if incriminating material is found during search of other person. Proceedings should be initiated under section 153C and failure to do so renders the addition in the section 153A assessment void-ab-initio (Vinod Kumar Gupta 165 DTR 409 (Del) distinguished)

In the case of Vinod Kumar Gupta the Hon’ble High Court held that as search and seizure was conducted through one authorization, there was no requirement of issuing separate notice under section 153C of the Act and following separate procedure under section 153C of the Act. But in the instant case, separate search warrant has been issued in the case of the assessee as well in the case of Sh. Ashok Chowdhary and the Assessing Officer has used the material found in the course of search at the premise of Sh. Ashok Chowdhary, which is not permitted in view of the express provision of the law. (Related Assessment year : 2009-10) - [Trilok Chand Chaudhary v. ACIT – Date of Judgement : 20.08.2019 (ITAT Delhi)]

A satisfaction note is sine qua non and must be prepared by the Assessing Officer before he transmits the records to the Assessing Officer who has jurisdiction over such other person- Not furnishing the reasons for satisfaction – Proceedings is held to be in valid .

Allowing the petition the Court held that, a satisfaction note is sine qua non and must be prepared by the Assessing Officer before he transmits the records to the Assessing Officer who has jurisdiction over such other person.  the note would disclose that it was only a note prepared for initiating proceedings under section 153C . It neither had any heading or title, to indicate that it was a satisfaction recorded nor did the contents suggest the satisfaction of the Assessing Officer. Hence, the note was incomplete. This aspect went to the root of the matter. Hence proceedings initiated under section 153C of the Act were without jurisdiction and were vitiated in law. (Related Assessment Year : 2008 -09) - [SVK Minerals. v. DCIT (2019) 411 ITR 709 (Karn), Shyamraj Singh v. DCIT (2019) 411 ITR 709 (Karn)]

Income of any other person - Search and seizure - Satisfaction note is not available - Assessment is held to be bad in law

The satisfaction of the Assessing Officer of the person in respect of whom the search was conducted to the effect that relates to a person other than person referred to in Section 153A, is a sine qua non. In this case, no satisfaction note by the Assessing Officer of the person in respect of whom the search was conducted was furnished by the Department despite categorical directions. Accordingly the order passed is held to be bad in law. (Related Assessment Year : 2008-09) - [Avalanche Reality (P) Ltd. v. ACIT (2018) 68 ITR 79 (SN) (ITAT Indore)]

Evidentiary value of documents found - Merely on the basis of chart found in the possession of third party addition was held to be not justified

The Assessee is a part of a group of companies which were subject to search proceedings. In the course of search, a chart was found in the possession of a director of the group containing names with specified amounts. This chart formed the basis of the Assessing Officer in assessing an amount as undisclosed income. On the basis of a remand report, the CIT (A) reduced the addition made by the Assessing Officer. The ITAT was of the opinion that the particulars and details of the cheques etc. reflected in the chart, which formed the sole basis for addition, could not be attributed to it and accordingly deleted the addition. Aggrieved, the revenue appealed to the High Court which held that as the ITAT had correctly observed that the evidentiary value of these charts, as far as the assessee was concerned, was not conclusive given the fact that the assessee was neither the searched party nor was a party receiving notice under Section 153C of the Act and therefore the deletion was upheld. (Related Assessment year 2009- 10) - [Section 69A : Unexplained money] - [PCIT v. Phonenix Datatech Services (P) Ltd. (2017) 245 Taxman 209 (Delhi)]

Asssessing Officer is required to arrive at a conclusive satisfaction that documents belongs to a person other than searched person

Allowing the petition of the assesse the Court held that; before issue of notice under section 153C the Assessing Officer is required to arrive at a conclusive satisfaction that documents belongs to a person other than searched person searched. Mere use of word “ satisfaction “ or “I am satisfied “ in order or note would not meet requirement of concept of satisfaction as used in Section 153C of the Act. Accordingly the notice under section 153C was quashed. (Related Assessment Years : 2006-07 to 2011-12 ) - [Pepsi Foods ( P) Ltd v. ACIT (2015) 231 Taxman 58 : 162 DTR 129 (Del)]

KEY NOTE

SLP of revenue was dismissed : ACIT v. Pepsi Foods (P) Ltd (2018) 252 Taxman 372 (SC)]

Assessement of third person - An admission of the assessee which is retracted cannot be the basis of addition - The addition cannot be sustained in the absence of material which would conclusively show that huge amounts revealed from the seized documents are transferred from one side to another - Notice was held to be not valid

Dismissing the appeal of the revenue, the Court held that; the addition cannot be sustained in the absence of material which would conclusively show that huge amounts revealed from the seized documents are transferred from one side to another and if the Revenue did not bring on record a single statement of the vendors of the land in different villages and if none of the sellers has been examined to substantiate the claim of the Revenue that extra cash has actually changed hands. (Related Assessment year 2009-10) - [Section 69C : Unexplained expenditure] – [CIT v. Lavanya Land (P) Ltd. (2017) 397 ITR 246 : 297 CTR 204 : 249 Taxman 275 : 154 DTR 244 (Bom)]

Assessment is without jurisdiction if documents seized not belongs to assessee

Ld. AR submitted that the assessee’s case was covered by the judgment of the Hon’ble Delhi High Court in the case of CIT-VII v. RRJ Securities Ltd. vide order dated 30.10.2015 in I.T.A. No. 164/2015 and 175/2015. It was submitted that the Hon’ble Delhi High Court has held that reference to the date of search under the second proviso under section 153A of the Act has to be construed as the date of handing over the assets/documents belonging to the assessee (being the person other than the one searched) to the Assessing Officer having jurisdiction to assess the said assessee. It was submitted that the Hon’ble Delhi High Court has held that further proceedings by virtue of section 153C(1) of the Act would have been in accordance with section 153A of the Act and the reference to the date of search would have to be construed as the reference to the date of recording of satisfaction which would mean that six assessment years for which assessments/ reassessments could be made under section 153C would have to be construed with reference to the date of handing over of the assets/documents to the Assessing Officer of the assessee. Ld. AR also submitted that as in the present appeal, in the case of RRJ Securities also, the Assessing Officer of the searched person as well as the other person were the same and, therefore, the assessee’s case is identical to the facts of the case in RRJ Securities. It was also submitted that the case of SSP Aviation Limited, relied upon by the department, has also been considered by Hon’ble Delhi High Court in the case of RRJ Securities wherein the Hon’ble Delhi High Court has held that the decision in SSP Aviation cannot be understood to mean that the Assessing Officer has jurisdiction to make a reassessment in every case where seized assets or documents are handed over to the Assessing Officer. The Ld. AR also referred to the satisfaction note and submitted that as per the satisfaction note, there is no clear finding that the documents seized belonged to the assessee and, as such, even on this count, the jurisdiction under section 153C could not be assumed. (Related Assessment Year : 2003- 04) - [ACIT v. Empire Casting (P) Ltd. - Date of Judgement : 21.11.2017 (ITAT Delhi)]

If the assessee stands amalgamated with another Co, it ceases to exists and all proceedings of search under section 132, notice and assessment under section 153C on the assessee are a nullity and void ab initio  

(i) The Assessee which was initially incorporated on 01.01.1999 merged with M/s B. S. Infratech Pvt. Ltd. with effect from 01.04.2008 by the order of the Court. A search took place on 20.10.2008 in the cases of Mr B. K. Dhingra, Smt. Poonam Dhingra and M/s Madhusudan Buildcon Pvt. Ltd. On the basis that in the course of search certain documents belonging to the Assessee company were found, notice was issued to the Assessee under Section 153C (1) on 10.09.2010. Therefore, not only on the date on which notice was issued but even on the date of the search, the Assessee had ceased to exist in the eyes of law.

(ii) In identical circumstances, in cases arising out of the same search, this Court has by its order dated 19.08.2015 in the Revenue’s appeals ITA Nos.582, 584, 431, 533, 432 & 433 of 2015 (PCIT (Central-II) v. Images Credit And Portfolio (P) Ltd.) and order dated 29.09.2015 in ITA Nos.745, 746,748, 749 and 750/2015 (PCIT (Central-2) v. M/s Mevron Projects (P) Ltd.) invalidated the assessment proceedings against the Assessee in those cases which, on account of having merged with another entity with effect from a date anterior to the search, also no longer existed on the date of search, on the date of the issue of notice and consequent assessment order passed under Section 153C of the Act is nullity and void ab initio. - [CIT v. Indu Surveyors & Loss Assessors (P) Ltd. - Date of pronouncement 15.10.2015 (Del)]

Proceedings under section 158BD not tenable where satisfaction note is not on record - Law on how & when “satisfaction” has to be recorded by Assessing Officer to attain jurisdiction over non-searched person explained

A search under section 132 was carried out in the premises of the Bhatia Group on 05.02.2003 and certain incriminating documents pertaining to the assessee firm were found. The assessment on the Bhatia group was completed on 30.03.2005. Thereafter, on 15.07.2005, the Assessing Officer recorded his “satisfaction” that the seized papers revealed the undisclosed income of the assessee and the said papers were passed on to the Assessing Officer of the assessee for making an assessment under section 158BC read with s. 158BD. The assessee argued that the proceedings initiated again him were invalid as the said “satisfaction note” was prepared after the proceedings in the case of the searched party were completed. The Assessing Officer and CIT(A) rejected the assessee’s claim though the Tribunal and the High Court upheld it. The Tribunal & High Court held that as the recording of satisfaction by the Assessing Officer as contemplated under section 158BD was on a date subsequent to the framing of assessment under section 158BC in case of the searched person, that is, beyond the period prescribed under section 158BE(1)(b), the notice issued under section 158BD was belated and consequently the assumption of jurisdiction by the Assessing Officer in the block assessment was invalid. On appeal by the department to the Supreme Court HELD by the Supreme Court allowing the appeal:

(i) While it is true that before initiating proceedings under section 158BD, the Assessing Officer who has initiated proceedings for completion of the assessments under section 158BC should be satisfied, on the basis of cogent and demonstrative material, that the seized documents belong to a person other than the searched person, the said satisfaction note could be prepared by the Assessing Officer either at the time of initiating proceedings for completion of assessment of a searched person u/s 158BC or during the stage of the assessment proceedings. It does not mean that after completion of the assessment, the Assessing Officer cannot prepare the satisfaction note to the effect that there exists income tax belonging to any person other than the searched person. The language of the provision is clear and unambiguous. The legislature has not imposed any embargo on the Assessing Officer in respect of the stage of proceedings during which the satisfaction is to be reached and recorded in respect of the person other than the searched person. Further, section 158BE(2)(b) only provides for the period of limitation for completion of block assessment under section 158BD in case of the person other than the searched person as two years from the end of the month in which the notice under this Chapter was served on such other person in respect of search carried on after 01.01.1997. The said section does neither provides for nor imposes any restrictions or conditions on the period of limitation for preparation the satisfaction note under section 158BD and consequent issuance of notice to the other person;

(ii) The result is that for the purpose of section 158BD a satisfaction note is sine qua non and must be prepared by the Assessing Officer before he transmits the records to the other Assessing Officer who has jurisdiction over such other person. The satisfaction note could be prepared at either of the following stages: (a) at the time of or along with the initiation of proceedings against the searched person under section 158BC of the Act; (b) along with the assessment proceedings under section 158BC of the Act; and (c) immediately after the assessment proceedings are completed under section 158BC of the Act of the searched person.

[CIT v. M/s. Calcutta Knitwears, Ludhiana (2014) 362 ITR 673 : TaxPub(DT) 1547 (SC)]

CBDT Circular on Recording of Satisfaction Note under section 158BD/153C of Income-tax Act

The CBDT has issued Circular No. 24/2015 dated 31.12.2015 in which it has explained the law relating to recording of satisfaction note by the Assessing Officer under sections 158BD/153C of the Income-tax Act. The CBDT has drawn attention to the verdict of the Supreme Court in CIT v. Calcutta Knitwears 362 ITR 673 (SC) in which the stages at which the satisfaction note has to be prepared have been set out. The CBDT has further clarified that even if the Assessing Officer of the searched person and the “other person” is one and the same, then also he is required to record his satisfaction as has been held by the Courts. The CBDT has also directed that pending litigation with regard to recording of satisfaction note under section 158BD /153C should be withdrawn/not pressed if it does not meet the guidelines laid down by the Apex Court.

Circular No. 24/2015 - F. No. 279/Misc./140 /2015/ITJ Dated : 31.12.2015

Subject: Recording of satisfaction note under section 158BD/153C of the Act – reg.-

The issue of recording of satisfaction for the purposes of section 158BD/153C has been subject matter of litigation.

2. The Hon’ble Supreme Court in the case of M/s Calcutta Knitwears in its detailed judgment in Civil Appeal No.3958 of 2014 dated 12.3.2014(available in NJRS at 2014-LL-0312-51) has laid down that for the purpose of Section 158BD of the Act, recording of a satisfaction note is a prerequisite and the satisfaction note must be prepared by the Assessing Officer before he transmits the record to the other Assessing Officer who has jurisdiction over such other person under section 158BD. The Hon’ble Court held that “the satisfaction note could be prepared at any of the following stages:

(a)   at the time of or along with the initiation of proceedings against the searched person under section 158BC of the Act; or

(b)  in the course of the assessment proceedings under section 158BC of the Act; or

(c)  immediately after the assessment proceedings are completed under section 158BC of the Act of the searched person.”

3. Several High Courts have held that the provisions of section 153C of the Act are substantially similar/pari-materia to the provisions of section 158BD of the Act and therefore, the above guidelines of the Hon’ble SC, apply to proceedings under section 153C of the Income Tax Act, for the purposes of assessment of income of other than the searched person. This view has been accepted by CBDT.

4. The guidelines of the Hon’ble Supreme Court as referred to in para 2 above, with regard to recording of satisfaction note, may be brought to the notice of all for strict compliance. It is further clarified that even if the Assessing Officer of the searched person and the “other person” is one and the same, then also he is required to record his satisfaction as has been held by the Courts.

5. In view of the above, filing of appeals on the issue of recording of satisfaction note should also be decided in the light of the above judgement. Accordingly, the Board hereby directs that pending litigation with regard to recording of satisfaction note under section 158BD /153C should be withdrawn/not pressed if it does not meet the guidelines laid down by the Apex Court.