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Facts
A search operation was conducted, leading to a 'satisfaction note' by the AO of the searched person and subsequently by the AO of the assessee under Section 153C. This resulted in an addition of Rs. 88,00,000/- by the AO.
Held
The Tribunal held that the 'satisfaction note' recorded by the AO was vague and lacked specific details linking incriminating material to particular assessment years, rendering the assumption of jurisdiction under Section 153C invalid.
Key Issues
Whether the assumption of jurisdiction by the AO under Section 153C of the Income Tax Act was valid based on the recorded 'satisfaction note'.
Sections Cited
250, 139(1), 132, 153C, 143(3), 68, 132A
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Income Tax Appellate Tribunal, DELHI “G” BENCH: NEW DELHI
Before: SHRI VIKAS AWASTHY & SHRI PRADIP KUMAR KEDIA
The captioned appeal has been filed at the instance of the assessee seeking to assail the First Appellate order dated 23.10.2019 passed by Commissioner of Income Tax (A)-24, New Delhi [“CIT(A)”] under s. 250 of the Income Tax Act, 1961 [“the Act”] arising from the assessment order dated 31.12.2018 passed under s. 153C r.w.s 143(3) of the Act pertaining to assessment year 2014-15.
2. Briefly stated, the assessee filed return of income for AY 2014-15 on 25.11.2014 under s. 139(1) of the Act declaring total income of INR 1,69,520/-. A search and seizure operation under s. 132 of the Act was carried out on Vikas Gupta Group of cases on 28.12.2015. Consequently, a ‘satisfaction note’ was prepared by the AO of the searched person under s.153C of the Act. Based on the receipt of documents etc. from the AO of the searched person, the AO of the third person i.e. the assessee herein also proceeded to draw ‘satisfaction note’ dated 29.09.2017 alleging undisclosed income.
Pursuant to the ‘satisfaction note’ prepared under s. 153C of the Act, the proceedings under s. 153C were set in motion by issuance of notice dated 29.09.2017 under s. 153C. In consequence of s. 153C proceedings, an addition of INR 88,00,000/- were made towards unexplained cash credits under s. 68 of the Act.
Aggrieved by the additions made under s. 68 of the Act, the assessee preferred appeal before the CIT(A). The CIT(A) however, declined any relief on the additions made by the AO.
Further aggrieved, the assessee filed appeal before the Tribunal. 6. When the matter was called for hearing, the Ld. Counsel for the assessee adverted to grounds of appeal
and additional grounds of appeal and made wide ranging submissions on lack of jurisdiction assumed under s. 153C as well as arguments canvassed towards untenability of additions on merits.
7. Since the assessee has raised challenge to the very jurisdiction assumed under s. 153C of the Act by the AO, such preliminary issue requires to be dealt with at the threshold. The arguments raised on behalf of the assessee and the counter-arguments of the Revenue have been considered on the alleged lack of jurisdiction assumed under s. 153C of the Act.
8. The challenge to the assumption of jurisdiction under s. 153C of the Act hinges around legal infirmities in recording the ‘satisfaction note’ by the AO which is claimed to be foundation for assumption of jurisdiction under s. 153C of the Act.
9. The ‘satisfaction note’ recorded by the AO of the assessee being germane to the determination of challenge to the assumption of jurisdiction, is reproduced hereunder:- 29.09.2017- “The Assessing Officer of M/s. Superior Agro Private Limited has handed over certain documents related to M/s. Super Bazar Stores Private Limited currently being assessed with this office. The description of the documents handed over are as under:-
Sl.No. Seized from the Annexure Description premise 1. C-35/6, Hard Disk Named image Provisional Trading and Loss Industrial Area, [Inventorized as account of M/s. Super Bazaar Lawrence Road, Annexure-A-65 (Hard Stores Private Limited showing Delhi Disk2 Nos.)] an expense of Rs.6,98,93,276/- on account of Future Trading.
C-35/6, Hard Disk Named image Containing sales details, Industrial Area, [Inventorized as invoices, bank account Lawrence Road, Annexure-A-65 (Hard statement, and various cheques Delhi Disk2 Nos.)] issued and other trading details of M/s. Super Bazar Stores Private Limited 3. C-35/6, Hard Disk Named image Profit and Loss account for M/s. Industrial Area, [Inventorized as Super Bazaar Stores Private Lawrence Road, Annexure-A-65 (Hard Limited showing a net profit of Delhi Disk2 Nos.)] Rs.1,80,83,810/- 4. C-35/6, Hard Disk Named image Various invoices, client Industrial Area, [Inventorized as statements raised by M/s. Lawrence Road, Annexure-A-65 (Hard Super Bazaar Stoeres Private Delhi Disk2 Nos.)] Limited. Stock details. The above said documents contain the information of income/investment/expenditure made by the assessee M/s. Super Bazar Stores Private Limited. After examining the documents, I am satisfied within the meaning of Section 153C r.w.s. 153A of the Act that these documents have bearing on the determination of the total income of M/s. Super Bazar Stores Pvt.Ltd. for the A.Ys 2010-11 to 2015-16.”
Section 153C of the Act pertains to the assessment of income in the hands of person other than searched person, in cases where certain documents, assets or books of accounts etc. found to be pertained to or related to such third person (other than the person on whom search was conducted under s. 132 of the Act or requisitioned under s. 132A of the Act). This section allows the AO of other person to initiate proceedings against such other person/third person (not the searched person) if there are indications of undisclosed income. A key component of initiating search proceedings under s. 153C of the Act is the ‘satisfaction note’ to be recorded by the AO of the searched person as well as AO of the third person. The ‘satisfaction note’ is the first step and a foundational document to determine the validity of the assessment process against a third person whose documents or assets etc. are found in a search. ‘Satisfaction note’ is critical because it serves as a valuable safeguard against arbitrary proceedings and ensures that the powers under s. 153C of the Act are exercised judiciously. It is a formal statutory requirement without which the proceedings against ‘other Page | 3 person’ could be considered invalid. The ‘satisfaction note’ being so critical and powers under s. 153C of the Act being contingent upon such Note, the information contained therein need to be actionable. This being so, the ‘satisfaction note’ is expected to identify the relevant material found in search and that it pertains to or relates to such third person. Such material found should reliably indicate or suggest the bearing of such documents/assets etc. to the income in the hands of third person. The ‘satisfaction note’ should specify such material to provide accountability of the AO and to justify the initiation of proceedings against other person. In summary, such Note should set the narrative in an objective manner, as far as possible, to enable judicial scrutiny of such document, if so called for.
The assessee contends that ‘satisfaction note’ which is the first step for assumption of jurisdiction under s. 153C of the Act and provides foundation for conferment of jurisdiction is plagued with multiple legal infirmities. Viz:
[i] the ‘satisfaction note’ has been recorded by the AO of assessee collectively for the period AYs 2010-11 to AY 2015-16 without identifying the incriminating material in respect of any particular Assessment Year. Besides, the assessee company itself has come into existence by Certificate of incorporation dated 03.01.2013 and therefore, the company was not in existence in AY 2010-11 to AY 2012-13 covered in the ‘satisfaction note’; [ii] the AO has thrown upon whole basket of six months without giving reference to any concrete incriminating material of a particular Assessment Year and without taking note of commencement of activities of assessee; [iii] the act of the AO making sweeping averment in the ‘satisfaction note’ that documents in the form of hard disks have bearing on determination of total income of Super Bazar Stores Pvt. Ltd. for AYs 2010-11 to 2015-16, is without legal foundation and without application of mind, as the AO has even failed to name the alleged documents and further failed to mention as to how it is related/pertained to a given AY covered in the ‘satisfaction note’; [iv] the AO on receipt of material/documents from the AO of the searched person must necessarily apply his mind on the material received and ascertain precisely the specific year to which incriminating material relates. It is only when this determination/ascertainment is complete that the flood gates of an assessment would open qua those particular years. The issuance of notice cannot be an automated function unconnected to this exercise of analysis and ascertainment by the AO in the light of judgement rendered in the case of Agni Vishnu Feature Pvt.Ltd. vs DCIT [2023] 157 taxmann.com 242 (Madras). In the instant case, non-application of mind on material supplied to AO is obvious as the company itself was not in existence for sizable period covered in proceedings under s. 153C of the Act; [v] the ‘satisfaction note’ is clearly very generic and devoid of any basic detail of the transaction in question.
We find ostensible potency in the plea of assessee towards allegation of legal infirmities in the ‘satisfaction note’. The Hon’ble Delhi High Court in the case of Sakham Commodities Ltd. Vs ITO 161 taxmann.com 485 (Delhi) deftly expounded the imperatives of a ‘satisfaction note’, and observed that unearthing of incriminating material in respect of particular AY will not automatically confer jurisdiction to invoke section 153C of the Act in respect of all the AYs mentioned therein. The Hon’ble Delhi High Court further observed that discovery of material for a particular AY is not intended to trigger a chain reaction or have a water fall effect on all the AYs which can form part of the ‘relevant AYs’ under section 153C Of the Act. The Hon’ble Delhi High Court underscored well settled distinction which the law recognizes between the existence of power and the exercise thereof and thus, held that unless the AO is satisfied that the material gathered can potentially impact the determination of total income, it will be abrupt exercise of powers in mechanically re-opening or assessing all over again of the AYs covered in the block that could possibly form part of block of relevant AYs. For holding so, the Hon’ble Delhi High Court relied upon the judgement delivered by the Hon’ble Supreme Court in the case of Sinhgad Technical Education Society wherein the Hon’ble Supreme Court held that ‘the assessment under section 153C could be made only for the year to which material relates to and exercise of power under section 153C of the Act in respect of other AYs would not sustain’. The Hon’ble Delhi High Court also noted that the AO is bound to ascertain and identify the AY to which the material recovered relates and relevant AYs which can then be subject to action Page | 5 under section 153C of the Act will have to be necessarily those in respect of which the assessment is likely to be influenced or impacted by the material discovered. The Hon’ble Delhi High Court went one step further to hold that where material discovered in the course of search has the potential of constituting incriminating material for more than one AYs, even in such a situation, it will be incumbent upon the AO to duly record reasons that material is likely to be incriminating for more than one AY and thus, warranting the action under section 153C of the Act for years in addition to those to which material may be directly relatable. Thus, a nuanced application of mind and recording of reasons for drawing satisfaction as contemplated under section 153C of the Act qua different AYs is paramount. The Hon’ble Delhi High Court noticeably held that issuance of a notice under section 153C of the Act is clearly not intended to be an inevitable consequence to the receipt of material by the Jurisdictional AO and that the initiation of action under section 153C of the Act will have to be founded on a formation of opinion by the Jurisdictional AO that the material handed over and received pursuant to a search is likely to influence the determination of total income and would be relevant for the purposes of assessment/re-assessment in terms of section 153C of the Act.
The observation of the Hon’ble Delhi High Court noted above, clearly provides vehement support to the plea taken by the assessee on aspects of jurisdiction flowing from ‘satisfaction note’. The ‘satisfaction note’ under scrutiny defies most of the parameters expected of him while drawing satisfaction. While exercising the power under section 153C of the Act, neither has the AO related the material found in the course of search with a particular AY while making a consolidated ‘satisfaction note’ for several years nor provided any requisite details of transaction to enable an independent person to ascertain and form any independent opinion on facts stated in Note that invocation of section 153C of the Act is indeed warranted in the facts of the case. The AO has not even bothered to relate the so-called documents etc. with the AYs covered. The assessee company was non-existent in AY 2010-11; AY 2011-12; AY 2012- 13, which were also covered under s. 153C in a non-chalant manner. Mere drawing of a perfunctory satisfaction without meeting basic ingredients of providing some tangible & descript information and application of mind thereon has no standing in law and would not confer drastic jurisdiction of assessment u/s 153C of the Act on a person other than searched person. The jurisdiction assumed based on such lackadaisical ‘satisfaction note’ beset with vital infirmities cannot be countenanced in law. The objections raised on behalf of the assessee towards lack of jurisdiction based on a cryptic and non-descript satisfaction thus deserves to be sustained. While recording a consolidated ‘satisfaction note’ is not a bar in law per se as rightly contended on behalf of the revenue, but however, in the same vain, the documents/assets searched need to be specified against each year covered in the satisfaction note to depict application of mind and initiation of action under section 153C of the Act qua such assessment years. The AO has apparently failed to do so in the present case. As a corollary, the notice issued under section 153C of the Act and consequent assessment order passed under section 153C of the Act is vitiated in law and requires to be quashed.
In this view of the matter, the jurisdiction assumed under s. 153C based on vague and non-descript ‘satisfaction note’ is vitiated at the threshold. The consequence assessment order passed under s 153C thus has no force of law. The first appellate order passed on nonest assessment order is thus set aside and the AO is directed to restore the position claimed by the assessee and delete the additions made.