PRAKASH P. MALI,MUMBAI vs. ASST CIT (OSD-I) CR 7, MUMBAI

These appeals by the assessee are directed against the orders of the CIT(A)-40, Mumbai dated 26.09.2013 for assessment years 2005-06 and of the CIT(A)-52, Mumbai dated 24.11.2015 for A.Y. 2006-07. Both appeals, having certain common/connected issues, were heard together and are being disposed off by way of this common order for the sake of convenience. 2. In these appeals, the assessee has raised the following grounds:

2.1 for A.Y. 2005-06 “1. The learned CIT (Appeals) has erred in law and on the facts & in the circumstances of the case in holding notice issued under Sc. 153C of the act as valid and consequential erred in law in holding the assessment made under Sec.153C of the Act as valid. Without prejudice to the above,

2. Learned CIT (Appeals) has erred in law and on the facts & in the circumstances of the case in upholding the estimate on of 2 & 540/Mum/2013 Shri Prakash P. Mali unaccounted sale partly of Rs.43,06,287/- out of Rs.1,09,37,871/- estimated by AO.

3. Learned CIT (Appeals) has erred in law and on the facts & in the circumstances of the case in upholding the estimated addition of Rs.6,54,030/- towards Gross profit on the unaccounted sales.

4. The learned CIT (Appeals) has erred in confirming the levy of interest under section 234A, 234B, 234C and 234D of the Act.” 2.2 for A.Y. 2006-07 “1. The learned CIT (Appeals) has erred in law and on the facts & in the circumstances of the case in holding notice issued under Sc. 153C of the act as valid and consequential erred in law in holding the assessment made under Sec.153C of the Act as valid. Without prejudice to the above, 2. Learned CIT (Appeals) has erred in law and on the facts & in the circumstances of the case in adopting gross profit rate 15.74% on unaccounted sales of Rs.1,72,23,006/- and making addition of Rs.27,10,901/- instead of gross profit at 60% on such sales.

3. The learned CIT (Appeals) has erred in confirming the levy of interest under section 234A, 234B, 234C and 234D of the Act.”

3. Ground No. 1 (for both assessment years 2005-06 and 2006-07) – Validity of Assessing Officer’s assumption of jurisdiction under section 153A of the Act and consequent passing of orders of assessment under section 143(3) r.w.s 15C of the Act. 3.1.1 In this ground, for both assessment years 2005-06 and 2006-07, the assessee has challenged the validity of the Assessing Officer’s (AO) assumption of jurisdiction by issue of notice under section 153C of the Income Tax Act, 1961 (in short 'the Act') and consequent passing of orders of assessment for these years under section 143(3) r.w.s. 153C of the Act dated 29.12.2008. According to the learned A.R. of the assessee, it is evident from a perusal of the orders of assessment that the AO initiated proceedings in the case on hand on the basis that the assessee’s premises were searched under section 132 of the Act on 28.06.2006, whereas only a survey under section 133A of the Act was conducted on that day at the assessee’s business premises at M/s. Junction at 33, Ashish Industrial Estate, Gokhale Road (S), Dadar (W), Mumbai. It is further submitted that in the relevant assessment years under consideration, the entire basis for additions made are the documents evidencing unrecorded sales which 3 & 540/Mum/2013 Shri Prakash P. Mali were found from the assessee’s premises in the course of survey notice under section 133A of the Act on 28.06.2006 and contended that it is not the AO’s case that the additions were made based on incriminating books of accounts or documents seized under section 132 of the Act in the case of a person other than the assessee, i.e. from his brothers premises. 3.1.2 The learned A.R. further submits that the AO has not recorded his satisfaction to the effect that the he is relying on incriminating books of account or documents found and seized in the course of search at the premises of person other than that of the assessee and therefore the assumption of jurisdiction by the AO under section 153C of the Act is invalid and consequently the orders of assessment made under section 143(3) r.w.s. 153C of the Act for both assessment years 2005-06 and 2006-07 are bad in law and consequently required to be cancelled. In support of this proposition the learned A.R. of the assessee submitted that even after several opportunities afforded by the Bench, the learned D.R. for Revenue was unable to produce the relevant record to prove that the AO had recorded his satisfaction for initiating proceedings under section 153C of the Act in the case on hand. The learned A.R. of the assessee then drew the attention of the Bench to the AO’s letter dated 24.11.2016; wherein at para 2(ii) on page 1 thereof the AO acknowledges that only action under section 133A of the Act was conducted at the assessee’s premises where cash of `3,14,000/- was found; at para 2(4) on page 2 thereof it is mentioned that details of unaccounted sales expenses listed in Annexure A-1 to A-5 were found at the assessee’s premises in the course of survey under section 133A and finally to para 3(b) on page 3 where it is mentioned that after verification of the assessee’s case records for, inter alia, the assessment years in question, there is no record available that can be referred to as ‘satisfaction/reasons recorded by the transferor/ transferee AO for initiating proceedings under section 153C of the Act. In support of the proposition canvassed by the assessee that when there is nothing on record, in the order of assessment or case records, to show that the AO, even if he is the same one for the person searched, recorded his satisfaction that is sine qua non for initiation of proceedings under section 4 & 540/Mum/2013 Shri Prakash P. Mali 153C of the Act, the validity of assumption of jurisdiction by the AO for issue of notice under section 153C of the Act cannot be upheld and the consequent orders of assessment passed under section 143(#) r.w.s. 153 of the Act would therefore liable to be cancelled, the learned A.R. of the assessee placed reliance on, inter alia, the following judicial pronouncements: - (i) DIT vs. Ingram Micro (India) Exports (P.) Ltd. (2015) 60 taxmann.com 57 (Bombay (ii) Narsi Creations vs. DCIT (2016) 70 taxmann.com 156 (Delhi-Trib) 3.1.3 Reliance was also placed on the CBDT Circular No. 24/2015 (F.No. 279/Misc/140/2015/ITJ) dated 31.12.2015, wherein it has been clarified that recording of satisfaction note by the AO is a prerequisite for assumption of jurisdiction for issue of notice under section 153C of the Act and that even if the AO of searched person and the ‘other person’ is one and the same, then also he is required to record his satisfaction. It was contended by learned A.R. of the assessee that inspite of such clear directions by CBDT that pending litigation with regard to recording of satisfaction note under section 158BD/153C should be withdrawn/not pressed as they do not meet the guidelines laid down by the Hon'ble Apex Court in M/s. Calcutta Knitwares (2014) 43 taxmann.com 446(SC), neither have these appeals been withdrawn/not pressed. It is prayed that in view of the above factual and legal position of the case on hand, the orders of assessment for assessment years 2005-06 and 2006-07 be quashed since the validity of AO’s assumption of jurisdiction for issue of notices under section 153C of the Act, in the absence of recording satisfaction notes, for the same cannot be upheld. 3.2 Per contra, the learned D.R. for Revenue supported the orders of the learned CIT(A) upholding the validity of assumption of jurisdiction by the AO under section 153C of the Act. 3.3.1 We have heard the rival contentions and perused and carefully considered the material on record; including the judicial pronouncements cited. The issue for consideration and adjudication before us is the validity of AO’s assumption of jurisdiction for issue of notice under section 153C of 5 & 540/Mum/2013 Shri Prakash P. Mali the Act and consequent validity of orders of assessment under section 143(3) r.w.s. 153C of the Act dated 29.12.2008 for assessment years 2005- 06 and 2006-07. On an appreciation of the facts on record, it is seen that this legal issue was raised by the assessee before the concerned CIT(A) as a ground of appeal

in A.Y. 2006-07 and as an additional ground of appeal in the A.Y. 2005-06. In both these assessment years the arguments, facts put forward by the assessee were rejected by the concerned CIT(A) and the notices issued under section 153C of the Act were held to be valid and consequently the assessments passed under section 143(3) r.w.s. 153C of the Act for both these years were also held to be valid. 3.3.2 Briefly stated, the facts of the case as emanate from the record are that there was a search and seizure action under section 132 of the Act conducted in the Mali group on 28.06.2006. It is not in dispute that there was no search under section 132 of the Act on the assessee in the case on hand, but a survey under section 133A of the Act was conducted at his business premises at Junction,

33. Ashish Industrial Estate, Gokhale Road, Dadar (W), Mumbai on the same day. On a perusal of the orders of assessment for both assessment years 2005-06 and 2006-07 dated 29.12.2008, at para 5 thereof, it is stated that notices under section 153C of the Act were issued on 08.06.2007 calling for returns of income for the two years on the basis of seized material. However, from a perusal of these orders of assessment, it is seen that the additions in respect of undisclosed sales, etc. are made only on the basis of documents found and inventorised in the course of survey action under section 133A of the Act and not in respect of any incriminating document seized in course of search of the Mali group or else reference thereto and additions thereon should have been part of the orders of assessment for these two years. Revenue has not been able to controvert the above factual position before us. 3.3.3 The contention of the assessee was that the AO had not recorded satisfaction that he is relying on incriminating books of accounts/ documents belong to the assessee found/seized in the course of search under section 132 of the Act at the premises of persons other than that of the assessee and therefore the assumption of jurisdiction by the AO for 6 & 540/Mum/2013 Shri Prakash P. Mali issue of notices under section 153C of the Act was invalid and consequently the orders of assessment for both assessment years 2005-06 and 2006-07 are bad in law and required to be cancelled. In view of this contention of the assessee, the Bench on a number of occasions directed the learned D.R. for Revenue to place before it the relevant records of assessment/satisfaction notes recorded by the AOs for assumption of jurisdiction to issue the notices under section 153C of the Act. Despite these opportunities being afforded, Revenue has failed to produce satisfaction notes recorded by the AO for proper assumption of jurisdiction of issue of the notices under section 153C of the Act. All that has been filed by Revenue before the Bench is the AO’s letter dated 24.11.2016, which confirms at para 2(ii) thereof that there was no search under section 132 of the Act conducted on the assessee, but a survey under section 133A of the Act was conducted at his business premises on 28.06.2008 and at para 2(v) confirms that certain papers relating to undisclosed sales, purchases, expenses were found in survey proceedings. At para 3(b) of this letter, the AO admits that after verification of the case records page by page and order sheets, there is no record available to establish that satisfaction notes were recorded by the transferor and/or transferee officer for assumption of jurisdiction for issue of notices under section 153C of the Act for the concerned assessment years. In this factual matrix of the case before us, we are of the considered opinion and are constrained to draw the conclusion that the AOs concerned have not recorded any satisfaction, which is prerequisite for assumption of proper jurisdiction under section 153C of the Act. In the case of Narsi Creations (2016) 70 taxmann.com 156 (Delhi-Trib) the ITAT, Delhi Bench has held that while recording of satisfaction by the AO of the assessee is a requisite for assumption of jurisdiction to issue notice under section 153C of the Act, even if the AO of person searched and such other person is same, then also, first while making the assessment in the case of the person searched, the AO has to record such satisfaction note and then a copy of this satisfaction note and relevant incriminating documents seized are to be placed in the file of such other persons. It is only after this, in the capacity of the AO of such other 7 & 540/Mum/2013 Shri Prakash P. Mali person, can the AO properly assume jurisdiction to issue notice under section 153C of the Act. 3.3.4 In the case of DIT vs. Ingram Micro (India) Exports (P) Ltd. (2015) 60 taxmann.com 57 (Bom), on similar facts as in the case on hand, the Hon'ble Bombay High Court observed that where the assessee was not searched, in terms of section 153A and 153C of the Act, proceedings can only be validly initiated after the AO records his satisfaction that the seized material pertains to persons other than the searched person(s). It is only then that the persons other than the searched person can be proceeded against. Since there was nothing in the order of assessments and no records of assessment were produced by Revenue to establish that satisfaction was recorded by the AO, the Tribunal was justified in nullifying the proceedings. 3.3.5 The legal propositions upheld by the decisions of the Hon'ble Bombay High Court and the Delhi Bench of ITAT cited above, have also been echoed by the CBDT in its Circular No. 24/2015 (F.No. 279/Misc/140/2015/ITJ) dated 31.12.2015 wherein clarification has been issued to the effect that for the purpose of section 158BD and 153C of the Act, which provisions are pari-materia, recording of satisfaction note is a prerequisite and the same must be prepared by the AO before he transmits to the AO who has jurisdiction over such other person under section 158BD/153C of the Act. It is further clarified by this circular that even if the AO 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 this regard, we feel it would be relevant and therefore extract the CBDT Circular (supra) hereunder: - “CIRCULAR NO. 24/2015 [F.No.279/Misc./140 /2015/ITJ] SECTION 153C, RAD WITH SECTION 158BD, OF THE INCOME TAX ACT, 1961 – SEARCH AND SEIZURE – ASSESSMENT OF INCOME IN CASE OF OTHER PERSON – RECORDING OF SATISFACTION NOTE UNDER SECTION 158DB/153C OF SAID ACT CIRCULAR NO. 24/2015 [F.No.279/Misc./140 /2015/ITJ] DATED 31- 12-2015 The issue of recording of satisfaction for the purposes of section 158BD/1 53C has been subject matter of litigation.

8 & 540/Mum/2013 Shri Prakash P. Mali 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 12.3.20 1 4(available in NJRS at 2014-LL-0312-5 1) 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 AO before he transmits the record to the other AO who has jurisdiction over such other person u/s 158131). The Hon'ble Court held that it 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 in the course of the assessment proceedings under section (b) 158BC of the Act,. immediately after the assessment proceedings are completed (c) under section 158BC of the Act of the searched person."

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.” 3.3.6 In the factual and legal matrix of the case as discussed above it is evidently and admittedly clear that the AO has not recorded satisfaction notes for proper assumption of jurisdiction for issue of notice under section 153C of the Act in this case. We are therefore of the opinion that the assessee’s case is squarely covered by the decision of the Hon'ble Bombay High Court in the case of DIT vs. Ingram Micro (India) Exports (P) Ltd. (supra) and of the ITAT Delhi Bench in the case of Narsi Creations (supra). In coming to this decision, we also drew support from the clarifications issued by CBDT in its circular No. 25/2015 dated 9 & 540/Mum/2013 Shri Prakash P. Mali 31.12.2015 (supra) which is binding on Revenue to withdraw and not press such cases, as in the case on hand, where the AOs concerned, i.e. transferor and transferee have not recorded satisfaction note for proper assumption of jurisdiction for issue of notice under section 153C of the Act. In this view of the factual and legal matrix of this case, we hold that since the AOs concerned (i.e. transferor/transferee AOs) have not recorded any satisfaction notes for proper assumption of jurisdiction for issue of notices under section 153 of the Act, the said notices issued under section 153C of the Act on 08.06.2017 for both assessment years 2005-06 and 2006-07 are held to be invalid and consequently the resultant orders of assessment for these two assessment years passed under section 143(3) r.w.s. 153C dated 29.12.2008 are bad in law and are both cancelled. We hold and direct accordingly. Consequently, ground No. 1 of assessee’s appeal is allowed.