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Before: Shri Bhavnesh Saini & Shri L.P. Sahu
ORDER Per L.P. Sahu, A.M.: This is an appeal filed by the assessee against the order of ld. CIT(A)-5, Delhi dated 08.12.2016 for the assessment year 2010-11 on the following grounds : “1. That under the facts and circumstances, the impugned A.Y. 2010- 2011 being an unabated Asstt. Year and the documents relating to assessee found in search of a 3rd party are not incriminating in nature, hence, the A.O. exceeded his jurisdiction to frame Asstt. u/s 153C and further exceeded his jurisdiction in examining the issue of receipt of Rs.90 lacs as share capital from M/s. Mridul Securities (P) Ltd. (Mridul). On this issue, the findings of the Ld. CIT(A) are also unsustainable in law as well as on merits.
2. That without prejudice, Ld. CIT(A) erred in law in not adjudicating on merits, the issue of addition ofRs.90 lacs received as share capital from Mridul.
3. That without prejudice under the facts and circumstances, both the lower authorities erred in law as well as on merits in making and sustaining addition of Rs.90 lacs u/s. 68 for share capital received from Mridul.”
2. The brief facts of the case are that a search and seizure operation was conducted on 19.10.2011 at the business premises of M/s. Jainco Group of cases comprising M/s. Jainco Promoters Pvt. Ltd. wherein some documents were seized. Amongst the seized documents, a trial balance sheet in the name of appellant alongwith documents relating to share allocation transactions between the appellant and M/s. Mridul Securities Pvt. Ltd. Based on the above documents seized, the Assessing Officer received a satisfaction note of DCIT, Central Circle Ghaziabad dated 21.02.2014. Consequent upon this satisfaction note, the Assessing Officer of the assessee also recorded a satisfaction note on 03.03.2014 and issued notice u/s. 153C of the Act to the assessee. In response, the assessee stated that the return filed originally may be treated to have been filed in response to the notice u/s. 153C of the Act. From the details of issued shares filed by the assessee, the Assessing Officer noticed that the assessee had received a sum of Rs.90,00,000/- as share capital from M/s. Mridul Securities Pvt. Ltd. against which 36000 shares were stated to have been issued by the assessee. On being asked, the assessee filed copy of its bank statement showing receipt of Rs.90,00,000/- on 12.03.2010 from M/s. Mridul Securities Pvt. Ltd. through two managers cheques issued by HDFC Ltd. and photocopy of confirmation by the share applicant, M/s. Mridul Securities Pvt. Ltd. The Assessing Officer observed that the assessee failed to submit the distinctive numbers of shares allotted to Mridul Security Pvt. Ltd. and no other corroborative evidences were furnished to justify the genuineness of the transactions; and that the share premium amount shown was more than the net worth of assessee company. The Assessing Officer also examined the financial results of the appellant. The Assessing Officer also examined the information received from the Assessing Officer of the person searched and also referred to the local enquiry made where the premises stated to be of M/s. Mridul Securities (P) Ltd. was found locked. On the basis of an enquiry made from RoC also, the Assessing Officer observed that no transaction was made by Mridul Securities with the appellant during the year under consideration. He, therefore, finding the explanations of the assessee as unsatisfactory, added a sum of Rs.90,00,000/- u/s. 68 of the Act vide order u/s. 153C of the Act, treating the same to be the bogus share capital received by the assessee in the garb of accommodation entry.
3. The assessee carried the matter in appeal before the ld. CIT(A), where he challenged the validity of assessment proceedings u/s. 153C as well as the addition on merits. The ld. CIT(A) while deciding the appeal of assessee, rejected the legal pleas raised on the validity of assessment proceedings, but did not decide the addition of Rs.90,00,000/- on merits thereof. Aggrieved by the impugned order, the assessee is in appeal before us, inter alia, on the grounds, mentioned hereinabove.
Reiterating the grounds of appeal, the ld. Counsel for the assessee submitted that the very foundation of proceedings u/s.153C in the instant case is the satisfaction note dated 21.02.2014 recorded by the A.O. of the searched person, followed by the satisfaction note dated 03.03.2014 recorded by the A.O. of the assessee; that on the basis of these satisfaction notes, no legally valid proceedings u/s.153C can be initiated. The ld. AR also invited our attention to the satisfaction note dated 21.02.2014 recorded by the Assessing Officer of the searched person, which reads as under : “Satisfaction for initiating proceedings u/s.153C of the I.T. Act, 1961 Date: 21.02.2014 A search & seizure operation u/s.132 was conducted on 19.10.2011 at the premises of Jainco Group of cases comprising M/s Jainco Promoters (P) Ltd. & others at G-10, Plot No.6, Aditya Commercial Complex, Preet Vihar, Delhi-92. The seized documents from the above premises contains document, Page No.127 to 148 of LP-2 which is trial balance in the name of M/s Lucky Fashions (P) Ltd. for F.Y.2009-10.
I have gone through the seized documents. I am satisfied that the document pertains to M/s Lucky Fashions (P) Ltd. Therefore, the assessee comes under the purview of section 153C of the Income Tax Act, 1961. Therefore, proceedings under section 153C are required to be initiated in this case.
The jurisdiction of the case lies with the Assessing Officer – i.e. ITO, Ward-4 (4) New Delhi. Therefore, photocopies of seized document/information are being passed to the concerned A.O., for necessary action as per provisions of the I.T. Act at his end. (L.S. Yadav) Dy. Commissioner of Income Tax (Central Circle), Ghaziabad”
4.1 It is next contended that in the above mentioned satisfaction note, the details of seized documents and the nature thereof has been given. The seized documents are “Pg. Nos.127 to 148 of LP-2”. The nature of these seized documents has been mentioned as “....trial balance in the name of M/s Lucky Fashions Pvt. Ltd. for F.Y.2009-10”. These documents were seized during search operation conducted on 19.10.2011 at the premises of Agarwal Associates and Jainco Group of cases at G-10, Plot No.6, Aditya Commercial Complex, Preet Vihar, Delhi-92. The said documents were handed over to the then Assessing Officer of the assessee vide letter dated 21.02.2014 (placed at page 27 of DR’s paper book).
4.2 Thereafter, the Ld. AR further referred to the satisfaction note dated 03.03.2014 recorded by the A.O. of the assessee, which reads as under : “M/s Lucky Fashions Private Limited (A.Y.2010-11) A satisfaction note dated 21/02/2014 has been received from the DCIT Central Circle, Ghaziabad vide letter F.No.DCIT / CC / GZB / Agarwal Associates Group/2013-2014/2855 dated 21/02/2014 in this case. Search has taken place on 19/10/2011 in the case of M/s Agarwal Associates Group of Cases. In view of the details of satisfaction note received I am satisfied that it is a fit case for issue of notice u/s.153C for the assessment year 2010-11. Sd/- 4.3 Referring to the satisfaction note dated 21.02.2014, the ld. AR pointed out that in the said satisfaction note the seized pages have been identified as “....trial balance in the name of M/s Lucky Fashions Pvt. Ltd. for F.Y.2009-10”. The copies of all seized pages have been filed by the Ld. AR as well as Ld. DR in their respective paper books. The Ld. AR pointed out that there is no trial balance at all in any of these seized pages, as noted by the Assessing Officer of the searched person in its satisfaction note. The said seized pages are the documents showing issue of 36000 equity shares of the assessee company to M/s Mridul Securities Pvt. Ltd. It is further submitted that the satisfaction note mentions the seized papers as the trial balance of assessee for F.Y.2009- 10, however there is no trial balance in the said seized papers. It has been further contended that the A.O. of the assessee also, in his satisfaction note dated 03.03.2014, adopted the findings of the satisfaction note dated 21.02.2014 which is evident from the said satisfaction note where A.O. of the assessee recorded as “In view of the details of satisfaction note received I am satisfied that it is a fit case for issue of notice u/s.153C for the assessment year 2010-11”. It has been stated that the foundation and the basis of initiation of proceedings u/s.153C is the satisfaction note, which mentions wrong and non-existent facts. It has been contended that on the basis of such wrong facts, no valid proceedings u/s.153C can be initiated. The Ld. AR further submitted that this shows the total non application of mind by both the satisfaction recording authorities. It is also a case of pure mechanical initiation of proceedings u/s.153C. The contention made is that such satisfaction notes do not provide legally valid jurisdiction for initiation of proceedings u/s.153C of the I.T. Act. The Ld. AR, again, by referring to both the satisfaction notes as stated above, contended that there is no finding in these satisfaction notes that the documents found are of incriminating nature. There is absolutely no whisper that either the said alleged trial balance or the documents seized are of incriminating nature. This lapse on the part of Assessing Officers of searched person as well as the Assessing Officer of the assessee goes to suggest that no valid jurisdiction u/s.153C can be assumed only on a finding that the documents found during the course of search, which relates to a party other than the party searched. In support, the Ld. AR relied upon CIT Vs. IBC Knowledge Park Pvt. Ltd. 385 ITR 346 (Kar.) for the proposition that the satisfaction note must record that incriminating material has been found which belonged to 3rd person. In view of this, the Ld. AR argued that the proceedings initiated u/s.153C on the basis of such satisfaction notes cannot survive. The Ld. AR further contended that, even otherwise, none of the documents found and seized during the course of search are of incriminating nature. It has been submitted that all these documents relates to issuance of 36000 shares to M/s Mridul Securities Pvt. Ltd. for Rs.90 lacs by assessee and this transaction of issuance of shares by assessee to M/s Mridul Securities Pvt. Ltd. stood recorded in the financial audited books of the assessee as well as of M/s Mridul Securities Pvt. Ltd., at the time when the said transaction took place in A.Y.2010-11 and much before the date of search on Jainco Group on 19.10.2011 (A.Y.2012- 13). It has been contended that when the said transaction has taken place in normal course, through banking channel and recorded in the books of both the parties, then the documents relating thereto cannot be held as of incriminating nature. It has been contended that certain documents, not fully filled up and that the documents being found with the searched party cannot put a tag of incriminating nature on those documents. The Ld. AR also explained the reasons and circumstances for the same. The Ld. AR relied upon on number of case laws for the preposition that discovery of incriminating material is a precondition for assuming the jurisdiction u/s.153C of the I.T. Act. The Ld. AR also addressed at length on the merits of the addition.
The Ld. D.R. apart from addressing oral arguments, also filed synopsis during the course of hearing, which is placed on record. The Ld. D.R. admitted that as per the satisfaction note dated 21.02.2014 recorded by the A.O. of the searched person, the nature of documents seized in search on M/s Jainco Promoters Pvt. Ltd. & Ors. at G-10, Plot No.6, Aditya Commercial Complex, Preet Vihar Delhi, have been identified as the trial balance in the name of Lucky Fashions Pvt. Ltd. for F.Y.2009-10. The Ld. D.R. also did not dispute that the A.O. of the assessee, as he was then, vide his satisfaction note recorded on 03.03.2014 absolutely took the findings of satisfaction note dated 21.02.2014 as the reasons for issuance of notice u/s.153C for the A.Y.2010-11. The Ld. D.R., also did not dispute that the seized pages namely Pg. No.127 to 148 of LP-2, did not contain any trial balance in the name of Lucky Fashions Pvt. Ltd. for F.Y.2009-10. However he contended that it can be probably a typographical error in the satisfaction note dated 21.02.2014 recorded by the A.O. of the searched person. It has been contended by the Ld. D.R. that although in satisfaction note dated 03.03.2014 recorded by A.O. of the assessee, the findings of satisfaction note dated 21.02.2014 are the basis for satisfaction of the A.O. to issue notice u/s.153C to the assessee, but this error in the satisfaction note cannot be fatal for initiating proceedings u/s.153C. It is also submitted that it is not the case of assessee that there is no satisfaction note being recorded and it is also not the contention of the assessee that the seized documents on the basis of which proceedings u/s.153C have been initiated do not relate to him. It has been argued that, under these facts, a typographical error in the satisfaction notes cannot invalidate the initiation of whole proceedings u/s.153C. The Ld. D.R. further contended that the law nowhere mandates that the documents found and seized in search of a party other than the assessee, should be incriminating in nature for initiating proceedings u/s.153C. The claim of the Ld. D.R. is that, the papers found and seized during search on a 3rd party, if relates to the assessee, this fact in itself is sufficient for providing the legally valid jurisdiction to the A.O. to initiate proceedings u/s.153C. It has been contended that it is not necessary that in the satisfaction note recorded by the A.O. of the assessee, the findings for the documents seized to be of incriminating nature must exists, nor is there any such mandate in the provisions of section 153C. The Ld. D.R. further submitted that the documents found during search relates to some transaction of issue of 36,000 shares of the assessee company to one M/s Mridul Securities Pvt. Ltd. for Rs.90,00,000/- during the financial year relevant to assessment year 2010-11, however the documents being found at the place of searched party proves the nature and character of these documents as incriminating one. The Ld. D.R. also submitted that the said documents, at places, are not fully filled up in all respects which also makes them incriminating in nature. In the synopsis filed by the Ld. D.R., the arguments have been taken mainly on the merits of the addition with an attempt to show that these documents were of incriminating nature and the share issue transaction for Rs.90 lacs by the assessee to M/s Mridul Securities Pvt. Ltd. cannot be held as being taken in the normal course of business. The Ld. D.R. referred to various authorities also in support of his contentions that the transaction of issue of shares, under consideration is not above the board, therefore should not be accepted and under these facts, the addition of Rs.90 lacs has been validly made by the A.O. and correctly confirmed by the Ld. CIT (A).
We have considered the rival submissions and have gone through the entire material available on record including the findings reached by both the authorities below. The assessee, has contested that under the facts and circumstances, initiation of proceedings u/s.153C is illegal and unsustainable in law, consequentially the impugned assessment order is also illegal. The assessee has contested the addition of Rs.90,00,000/- made by the A.O. u/s.68 of the I.T. Act on merits also. For the sake of convenience, we first proceed to examine the validity of initiation of proceedings U/s.153C of the Act w.r.t. the satisfaction note dated 21.02.2014 recorded by the A.O. of the searched person and the satisfaction note dated 03.03.2014 recorded by the A.O. of the assessee. Before we examine the issue in the above light, we think it proper to mention that the provisions of section 153C of the IT Act 1961 stipulate that where the AO is satisfied that any money, bullion, jewellery or other valuable article or thing or books of accounts or documents seized or requisitioned belongs to person other than the person referred to in section 153A, then the Assessing Officer shall proceed against each such other person and issue such other notice and assess or reassess income of such other person in accordance with the provisions of section 153A. From the above provisions of section 153C, it is sine qua non on the part of the Assessing Officer of searched party to record a valid satisfaction as to the documents seized on such search belonging to the assessee, i.e., the person other than the persons searched, so as to acquire jurisdiction u/s. 153C of the Act. In other words, the condition precedent for issuing notice u/s. 153C and assessing or re-assessing the income of such other person, is that the documents seized should belong to such other person. If such requirement is not satisfied, recourse cannot be had to the provisions of section 153C of the Act. In order to record valid satisfaction, the Assessing Officer of the searched person is also legally obliged to correctly record the documents seized in the search operation, which he thinks belonging to other person. In the case at hand, the satisfaction note, as reproduced above, unequivocally speaks of the documents seized as “trial balance” in the name of appellant for F.Y. 2009-10 and it is on the basis of this trial balance that the Assessing Officer of the searched person recorded the satisfaction that it pertains to the appellant. It is, however, admitted by the ld. DR that no such trial balance of assessee finds place in the documents seized on the impugned search nor any such trial balance was forwarded by the Assessing Officer of the searched person to the Assessing Officer of the assessee. On this premise only, we are of the opinion that the satisfaction note recorded by the searched party itself is defective. As already noted, it pertinent to note that for invocation of section 153C, valid satisfaction note of the Assessing Officer of searched party is essential condition to be satisfied. Such satisfaction note needs to be recorded by giving correct details of documents seized in the search before being satisfied that such documents belong to the person other than the person searched. Therefore, on this aspect of the case, we find substance in the contentions of the assessee that once the very foundation of proceedings, i.e., recording of valid satisfaction note, is defective, the Assessing Officer of the assessee would not acquire a legally valid jurisdiction to initiate proceedings u/s. 153C of the Act.
The Ld. D.R. contended that this appears to be a typographical error which should not be given any weightage at all for deciding the validity of initiation of proceedings u/s.153C w.r.t. satisfaction note. We do not find substance in the contention of the ld. DR that it was a sheer typographical mistake. Once, the Assessing Officer of the searched person made a mistake in mentioning the documents in the satisfaction note, and forwarded some other documents pertaining to share transactions to the Assessing Officer of assessee, the Assessing Officer of the appellant was also required to verify and examine those documents and then to record his own satisfaction for issuing notice u/s. 153C of the Act. However, he also did not refer recovery of any such documents in his own satisfaction note dated 03.03.2014, as reproduced above, but recorded his satisfaction absolutely relying on the satisfaction note of the Assessing Officer of searched party. Such a grave discrepancy which hits the acquisition of jurisdiction at the threshold of initiation of proceedings u/s. 153C, in our mind cannot be branded as a typographical mistake at the end of both the Assessing Officers of the person searched and of the appellant. Had it been a case of typographical error, then it could had been corrected at appropriate stage and also the same thing would not have been repeated by the A.O. of the assessee in his satisfaction note dated 23.03.2014 too. In fact, both the satisfaction notes have been recorded without application of mind, based on wrong and non- existent facts.
Adverting to other contention of the ld. AR that the satisfaction note should mention that the document found and seized are incriminating in nature. It was contended that if there is no such finding in the satisfaction note, such satisfaction note cannot provide valid jurisdiction to initiate proceedings u/s.153C. It was also contended that the law never intended to initiate proceedings u/s.153C in all such cases where the documents are found and seized relating to a 3rd party in a search carried on someone, irrespective of the nature of such documents i.e. whether of incriminating nature or not. The detailed arguments on this aspect have been advanced by both the parties, as mentioned above. On examination of both the satisfaction notes dated 21.02.2014 and 03.03.2014, we find that there is not even a whisper that the documents found and seized, which are the basis of initiation of proceedings u/s.153C are incriminating in nature. The satisfaction notes simply mentions the documents seized w.r.t. the Pg. Nos. and nature thereof as trial balance of assessee for F.Y.2009-10. The satisfaction notes even do not mentioned that the said trial balance mentioned in the satisfaction note or any other document found & seized is of incriminating nature. The question whether the satisfaction note should reflect the incriminating nature of documents seized for acquiring jurisdiction u/s. 153C, has been answered by Hon’ble Karnataka High Court in the case of CIT Vs. IBC Knowledge Park Pvt. Ltd. 385 ITR 346 (Kar.). On Pg.378, Para-56 of the said case, the Hon’ble High Court has held as under:- “We answer the substantial question of law no.2 by holding that the tribunal was not correct in holding that the assessment under section 153C was valid despite there being no satisfaction recorded to the effect that the document found during the search on 17th June 2008 were incriminating in nature and prima facie represented undisclosed income”
While holding as above, Hon’ble Karnataka High Court has taken support from plethora of other decisions as referred to in the said decision. Further, the legislature has never intended to provide a blanket license to the revenue for initiating proceedings u/s.153C in the cases of all such assessees of whom the documents are found and seized in search of a 3rd party. The documents found and seized should be prima facie of incriminating nature for providing the jurisdiction to initiate proceedings u/s.153C on such persons. In this case, following the ratio of IBC Knowledge Park Pvt. Ltd. (Supra) and for the other reasons as deliberated above, we hold that in the absence of a finding in the satisfaction notes for the documents found and seized are of incriminating nature, no legally valid proceedings u/s.153C can be initiated. In the present case, undisputedly, there is no such finding. In view of all the above discussion, we are, therefore, of the considered opinion that the initiation of proceedings u/s.153C cannot be validated on this count too. Accordingly, the proceedings u/s.153C and consequential assessment deserve to be quashed.
Once, the impugned assessment u/s. 153C of the Act has been quashed on legal aspect of the case, as discussed above, we need not to adjudicate upon extensive arguments made by both the parties on the merits of the addition made and sustained by the authorities below.