K.P. CONSTRUCTION,CHENNAI vs. ACIT, CHENNAI

आदेश / O R D E R PER V. DURGA RAO, JM: This appeal filed by the assessee is directed against the order of the

Commissioner of Income Tax (Appeals)-18, Chennai, dated 31.08.2021,

and pertains to assessment year 2016-17.

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appeal:

2.1. The order of assessment passed by the AO is illegal and void as the same has been initiated without recording proper satisfaction as mandated by the Act.

2.2. The AO having failed to record satisfaction as per section 153C of the Act, the order of assessment is illegal, without jurisdiction and the CIT(A) erred in upholding the same.

3.1. The addition of Rs.53,20,320/- upheld by the CIT(A) is unsustainable in law as the same has been made in the absence of incriminating material. Therefore, the CIT(A) erred in upholding the addition Rs.53,20,320/-.

4.1. The order of assessment u/s.153C r.w.s. 143(3) of the Act is illegal and the CIT(A) ought to have annulled the same as no proper approval was obtained by the AO as mandated u/s.153D of the Act.

4.2. The CIT(A) erred in failing to properly adjudicate the ground raised by the appellant regarding the approval.

5.1. The CIT(A) erred in upholding the addition of Rs.53,20,320/- stated to be the undisclosed income of the appellant by the AO.

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5.2. The addition having been made contrary to the facts of the case and law and without provision of proper opportunity, the CIT(A) ought to have deleted the same in full.

5.3. The CIT(A) ought to have deleted the addition in full as the register on the basis of which the addition was made, does not relate to the appellant at all.

5.4. The appellant having submitted that the register was maintained by one of the deceased partners in his individual capacity, the CIT(A) erred in stating that the appellant had defaulted in discharging the burden of proof.

5.5. The CIT(A)'s expectation for the appellant to prove the negative is impossible to perform and thus the addition is bad in law.

5.6. The impugned addition of Rs.53,20,320/- having been made in the absence of any evidence and verification / examination, the CIT(A) ought to have deleted the same in full.

5.7. The AO having neither assigned any reason nor section for the impugned addition, the CIT(A) erred in failing to delete the same.

assessee filed a return of income on 02.10.2018 by declaring the same

income of Rs.8,39,395/- as per the original return of income filed earlier

on 25.03.2017. The AO issued notice u/s.143(2) of the Act, and

u/s.142(1) of the Act, were sent to the assessee on 01.11.2018 seeking

the assessee to provide details of the claims made in the return of income

along with other details as required in the questionnaire based on the

seized materials. The assessee filed reply on 12.12.2018. The AO also

obtained a statement which has been recorded u/s.131(1A) of the Act,

from Smt.J.Shanti, a partner of the assessee’s firm.

material evidences on record, the AO completed the assessment by

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making an addition of Rs.36,51,000/- by disallowing the sundry creditors

for want of confirmations from the corresponding persons.

M/s.K.P.Construction vide Annexure-Ann/RB/KPC/B&D/S/10 in which

number of transaction entries made with one Shri D.Siva amounting to

Rs.53,20,320/- during the FY 2015-16, made an addition to the returned

income as undisclosed income u/s.115BBE of the Act. The AO also stated

that specific question was asked for notice u/s.142(1) of the Act, dated

01.11.2018 to clarify the transactions and furnish the details of payment

made along with TDS details thereon for an amount of Rs.53,20,320/-.

The AO stated that, in response to notice, the assessee has stated that

the note book was maintained by Shri P. Narasimhan, partner of the firm,

wherein, he has recorded the details of weekly labour/other payments in

respect of works undertaken/supervised by him regarding his consultation

and the details noted in the above seized documents has no relation with

the firm, is not acceptable. Hence, the AO has considered that the register

containing payment entries relating to labour/works executed which the

assessee himself admitting in the reply, were seized from the business

premise of M/s.KP Construction, which clearly establishes that these

payments for having incurred by the firm and hence, the expenditure of

Rs.53,20,320/- added to the income of the assessee for want of evidence.

expenditure in the incriminating material found during the course of

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search at the premise of M/s.K.P. Constructions, the Ld.CIT(A) has

confirmed the additions made by the AO by holding that the assessee

claims that the documents found during the course of search relates to

Shri P.Narasimhan, but could not substantiate its claim with necessary

details. The assessee clearly defaulted in not discharging the burden of

proof and thus, opined that there is no error in the reasons given by the

AO to make additions towards unrecorded satisfaction as per seized

documents during the course of search. Aggrieved by the order of the

Ld.CIT(A), the assessee is in appeal before us.

filed by the assessee submitted that notice issued u/s.153C of the Act, is

invalid, because, the AO has not recorded satisfaction as required under

law with reference to seized materials found during the course of search

in respect of additions made on the basis of Annexture

No.ANN/RB/KPC/B&D/S/10, because, in the satisfaction note recorded by

the AO, there is no reference to said seized material and thus, from the

above, it is undisputedly clear that there is no live link between

incriminating material and satisfaction recorded by the AO. The

Ld.Counsel for the assessee further referring to the decision of the

Hon’ble Karnataka High Court in the case of CIT v. IBC Knowledge Part

(P) Ltd., reported in [2016] 385 ITR 346 (Karnataka) submitted that as

provisions of Sec.153C of the Act, is para materia to Sec.158 conferring

jurisdiction to a search providing certain conditions before the AO having

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jurisdiction of a third party can assume jurisdiction materials, books of

accounts, documents and other valuable assets found during search, who

belong to a third party, which would lead to inference of undisclosed

income of such third party, such inference should be recorded by the AO

having jurisdiction over the searched persons. In the present case, if you

go through the satisfaction note recorded by the AO of a searched person,

there is no reference to materials, on which, the AO has based his

findings to make additions towards unrecorded expenditure. Therefore,

he submitted that notice issued u/s.153C of the Act and consequent

assessment proceedings on the basis of invalid or incorrect satisfaction, is

illegal ab initio and liable to be quashed.

the satisfaction note recorded by the AO of the searched person

submitted that the law does not state that there should be a material for

each addition in a particular assessment, but what is to be seen, is there

any incriminating material found during the course of search pertains to a

particular assessee and on the basis of said material, the AO has recorded

satisfaction that the materials found during the course of search relates or

belongs to a third person having bearing on the determination of the total

income of searched person. In the present case, the AO has recorded

satisfaction based on materials found during the course of search and as

per satisfaction during the course of search in the case of M/s.KP

Constructions, incriminating material was found which is having a bearing

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determination of total income of the assessee. Therefore, the Ld.DR

submitted that there is no merit on legal ground taken by the assessee

and same should be rejected.

record and gone through the orders of the authorities below. The

assessee has filed additional grounds challenging validity of assessment

proceedings initiated u/s.153C of the Act and claimed that said grounds

are purely a legal ground which can be taken at any stage of proceedings

including pending proceedings before the Tribunal. As held by the Hon’ble

Supreme Court in the case of CIT v. National Thermal Power Co. Ltd.,

reported in [1998] 229 ITR 383 (SC), wherein, it has been clearly held

that the powers of appellate authorities are not limited only to adjudicate

the grounds raised by the assessee before the AO and also it can be

adjudicated along with any other legal issues that may be raised by a

party during pending proceedings. Therefore, by following the decision of

the Hon’ble Supreme Court in the case of CIT v. National Thermal Power

Co. Ltd., (supra), we admit additional grounds filed by the assessee for

adjudication. As per provisions of Sec.153C of the Act, any money,

bullion, jewellery or other valuable article or thing seized or requisitioned

belongs to or relates to a person other than the person searched to in

Sec.153A of the Act, then the books of accounts or documents, etc., shall

be handed over to the AO having jurisdiction over such other person and

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that the AO shall proceed against each such other person and issue notice

and assess or re-assess income of the other persons in accordance with

the provisions of Sec.153A of the Act. The AO of the searched person

before handing over books of accounts or other documents to the AO of

the other person has recorded satisfaction as required u/s.153C of the

Act, with reference to seized books of accounts or other documents and

satisfied that seized materials is bearing on the determination of total

income of other person for the relevant assessment year. In other words,

the satisfaction recorded by the AO of the searched person should

specifically referred to the incriminating material found during the course

of search of said satisfaction note and also explain how such material

having a bearing on the total income of the other persons, unless the AO

of searched persons brings out the reasons for his satisfaction with

reference to seized materials, then, it can be said that the satisfaction

note recorded by the AO of searched person not in accordance with law or

incorrect satisfaction and thus, on the basis of said satisfaction, the

proceedings u/s.153C of the Act, cannot be initiated. This legal position is

supported by the decision of the Hon’ble Karnataka High Court in the case

of CIT v. IBC Knowledge Part (P) Ltd., reported in [2016] 385 ITR 346

(Karnataka), wherein, the Hon’ble Karnataka High Court categorically held

that where no material belonging to a third party is found during the

course of search but only an inference of an undisclosed income is drawn

during the course of search or based on such enquiry u/s.153C of the Act,

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would have no application. In the present case, on perusal of satisfaction

note recorded by the AO of a searched person, we find that there is no

reference to the seized materials considered by the AO to frame

assessment and make additions for relevant AY 2016-17 which is clearly

evident from the seized materials referred to by the AO in Page No.4 of

the order where he referred Annexure No.ANN/RB/ISPC/B&D/10, but said

material did not find mention by the AO in the satisfaction note. From the

above, it is undisputedly clear that there is no live link between the

satisfaction arrived at by the AO and incriminating material found during

the course of search and thus, in our considered view, the satisfaction

note recorded by the AO as required under provisions of Sec.153C of the

Act, is not in accordance with law and further, notice issued by the AO on

the basis of said incorrect satisfaction is illegal ab initio and liable to be

quashed. The assessee has relied upon the decision of the Hon’ble

Karnataka High Court in the case of CIT v. IBC Knowledge Part (P)

Ltd.(supra). The Hon’ble Karnataka High Court under identical set of

facts held as under:

“………Section 153C is in pari materia with Section 158BD conferring jurisdiction over third parties to a search providing certain conditions before the Assessing Officer having jurisdiction over a third party can assume jurisdiction. Materials such as books of accounts, documents or valuable assets found during a search should belong to a third party which would lead to an inference of undisclosed income of such third party. Such an inference should be recorded by the Assessing Officer having jurisdiction over the searched persons and communicated to the Assessing Officer having jurisdiction over such third party along with the seized documents and other incriminating materials on the basis of which the Assessing Officer having jurisdiction over such third party would issue notice under Section 153C. On receipt of the aforesaid material, the Assessing Officer having jurisdiction over such third party would proceed against the said third party. Thus, where no material belonging to a third party is found during a search, but only an inference of an undisclosed income is drawn during the course of enquiry, during search or during post search enquiry, Section 153C would have no application. Thus, the detection of incriminating material leading to an

ITA No.437/Chny/2021 :: 10 :: inference of undisclosed income is a sine qua non for invocation of Section 153 of the Act….”. 11. In this view of the matter and by respectfully following the decision

of the Hon’ble Karnataka High Court in the case of CIT v. IBC Knowledge

Part (P) Ltd. (supra), we are of the considered view that proceedings

initiated by the AO u/s.153C of the Act on the basis of invalid satisfaction

is illegal ab initio and liable to be quashed and thus, we quashed

assessment order passed by the AO u/s.143(3) r.w.s.153C of the Act.

is allowed.

Order pronounced on the 05th day of April, 2024, in Chennai. Sd/- Sd/- (मंजूनाथा.जी) (वी. दुगा� राव) (MANJUNATHA.G) (V. DURGA RAO) लेखा सद�/ACCOUNTANT MEMBER �ाियक सद�/JUDICIAL MEMBER

चे�ई/Chennai, �दनांक/Dated: 05th April, 2024. TLN आदेश क� �ितिलिप अ�ेिषत/Copy to: 1. अपीलाथ!/Appellant 2. "#थ!/Respondent 3. आयकरआयु%/CIT 4.िवभागीय"ितिनिध/DR 5. गाड�फाईल/GF