2025 (1) TMI 1578 - AT - Income Tax

Validity of assessment framed u/s 143(3) OR u/s 153C - assessments framed on the third person - HELD THAT - As decided in Raja Varshney 2024 (9) TMI 1625 - ITAT DELHI submission made by Ld AR is tenable that the assessment year relevant for previous year in which search was conducted in the case of the assessee will be AY 2023-24 and six years immediately preceding the assessment year relevant for u/s 153C of the Act will be AY 2018-19 to 2022-23. The assessment for AY 2021-22 should have been carried out by issuing notice u/s 153C of the Act and not u/s 143(2) of the Act. Therefore the assessment order dated 29-12-22 passed u/s 143(3) of the Act is bad in law and liable to be quashed. As decided in Mukul Rani Thakur 2024 (11) TMI 1031 - ITAT DELHI regular assessment passed by issuance of notice u/s 143(2) of the Act without aid of section 153C of the Act despite satisfaction note from AO of searched person thus is not supportable in law. The impugned assessment framed under section 143(3) of the Act thus is void ab-initio as rightly pleaded on behalf of the assessee. We quash the assessment framed under section 143(3) of the Act for the Assessment Year 2021-22 as it ought to have been framed under section 153C. Assessee appeal allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal in this appeal are:

• Whether the assessment for the assessment year 2021-22 was correctly framed under section 143(3) of the Income-tax Act, 1961, or whether it should have been framed under section 153C of the Act, given the circumstances of a search and seizure operation conducted on a third party.
• Determination of the correct date of search for the assessee in light of the handing over of seized documents by the Assessing Officer (AO) of the searched person to the AO of the assessee, and the consequent applicability of the limitation period and procedural provisions under section 153C.
• Whether the assessment framed under section 143(3) without following the procedure mandated under section 153C is valid or void ab initio.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Correct Section for Framing Assessment - Section 143(3) vs Section 153C

Relevant Legal Framework and Precedents: Section 153C of the Income-tax Act applies when a search or seizure is conducted on a person (the "searched person") and incriminating documents relating to another person (the "third person" or "assessee") are found during such search. The section mandates that the AO of the searched person must record a satisfaction note and hand over the seized documents to the AO of the third person. The AO of the third person then initiates assessment proceedings under section 153C. The Supreme Court in CIT vs Jasjit Singh (458 ITR 437) clarified that the date of handing over of seized documents is to be treated as the date of search for the third person, thereby fixing the relevant assessment years and limitation period accordingly.

Court's Interpretation and Reasoning: The Tribunal observed that the AO of the searched person recorded a satisfaction note on 23-08-2022 and handed over the seized documents to the AO of the assessee. Subsequently, the AO of the assessee recorded a satisfaction note on 25-11-2022 and initiated proceedings under section 153C read with section 153A for assessment years including 2021-22. However, the AO had framed the assessment for AY 2021-22 under section 143(3), relying on the original search date of 06-01-2021 (pertaining to the searched person), rather than the date of handing over of documents (25-11-2022).

Key Evidence and Findings: The seized mobile phone of a third party contained incriminating documents (an agreement to sell property) relating to the assessee. The AO of the searched person and the AO of the assessee were the same individual, who recorded satisfaction notes on two different dates. The assessee's return disclosed a lower sale consideration than that indicated by the seized documents, forming the basis for the assessment.

Application of Law to Facts: Applying the Supreme Court's ruling, the Tribunal held that the date of search for the assessee is the date of handing over the seized documents, i.e., 25-11-2022. Consequently, the assessment year 2021-22 falls within the block period for assessments under section 153C, and the assessment must be framed accordingly. Framing assessment under section 143(3) based on the original search date was thus erroneous.

Treatment of Competing Arguments: The Revenue argued for the validity of the assessment under section 143(3), relying on the original search date. The assessee contended that the assessment was void for non-compliance with section 153C procedural requirements. The Tribunal found the assessee's argument persuasive, supported by authoritative precedents.

Conclusions: The assessment for AY 2021-22 framed under section 143(3) was invalid as the correct procedure under section 153C was not followed. The assessment was liable to be quashed.

Issue 2: Date of Search for Third Person and Limitation Period

Relevant Legal Framework and Precedents: The Supreme Court's decision in CIT vs Jasjit Singh established that the date of handing over seized documents by the AO of the searched person to the AO of the third person is the deemed date of search for the third person. This date governs the limitation period and the block of assessment years that can be reopened under section 153C.

Court's Interpretation and Reasoning: The Tribunal applied this principle to the facts, holding that the date of search for the assessee is 25-11-2022, the date on which the AO of the searched person handed over the seized documents and recorded satisfaction. This date is critical because it determines the block of assessment years that can be reopened and the validity of notices issued under section 153C.

Key Evidence and Findings: The satisfaction notes dated 23-08-2022 and 25-11-2022, and the timing of the search and seizure operation (06-01-2021) were examined. The Tribunal noted that the documents were handed over in the previous year relevant to AY 2023-24, making AY 2021-22 fall within the block period under section 153C.

Application of Law to Facts: The Tribunal concluded that since the date of search for the assessee is 25-11-2022, the assessment years from AY 2018-19 to AY 2022-23 fall within the block period for reassessment under section 153C. Therefore, assessments for AY 2021-22 must be framed under section 153C and not under section 143(3).

Treatment of Competing Arguments: The Revenue's reliance on the original search date was rejected as inconsistent with the Supreme Court's ruling. The assessee's contention that the limitation and procedural requirements under section 153C apply was accepted.

Conclusions: The date of search for the assessee is the date of handing over of seized documents, and assessments must be framed under section 153C within the prescribed block period.

Issue 3: Validity of Assessment Framed Under Section 143(3) Without Following Section 153C Procedure

Relevant Legal Framework and Precedents: Assessments framed without adhering to the mandatory procedural requirements of section 153C are liable to be declared void ab initio. The Tribunal relied on coordinate bench decisions in similar cases arising from the same search, which held that assessments framed under section 143(3) instead of section 153C were invalid.

Court's Interpretation and Reasoning: The Tribunal referred to two recent decisions by coordinate benches where assessments framed under section 143(3) for AY 2021-22 in similar circumstances were quashed. These decisions emphasized that the AO must issue notices and frame assessments under section 153C, failing which the assessment is void ab initio.

Key Evidence and Findings: The Tribunal noted that the AO had recorded satisfaction notes and initiated proceedings under section 153C but proceeded to frame assessment under section 143(3) instead. This procedural lapse rendered the assessment legally untenable.

Application of Law to Facts: Applying the ratio of the coordinate bench decisions, the Tribunal held that the assessment framed under section 143(3) was void ab initio and liable to be quashed.

Treatment of Competing Arguments: The Revenue's stand on the validity of the assessment under section 143(3) was rejected in light of binding precedents. The assessee's plea for quashing the assessment was upheld.

Conclusions: The assessment framed under section 143(3) without issuance of notice and framing under section 153C is void ab initio and must be quashed.

3. SIGNIFICANT HOLDINGS

The Tribunal held:

"The law as laid down by the Hon'ble Supreme Court in the case of CIT vs Jasjit Singh reported in 458 ITR 437 (SC) is very clear that the date of handing over of the seized document by the AO of the searched person to the AO of the third party (i.e assessee herein) shall become the date of search qua the third person."

"The assessment for AY 2021-22 should have been carried out by issuing notice u/s 153C of the Act and not u/s 143(2) of the Act. Therefore the assessment order dated 29-12-22 passed u/s 143(3) of the Act is bad in law and liable to be quashed and quashed accordingly."

"The regular assessment passed by issuance of notice u/s 143(2) of the Act without aid of section 153C of the Act despite 'satisfaction note' from AO of searched person thus, is not supportable in law. The impugned assessment framed under section 143(3) of the Act thus, is void ab-initio."

Core principles established include:

• The date of handing over of seized documents determines the deemed date of search for the third person and governs the limitation and assessment period under section 153C.
• Assessments for block years falling within the scope of section 153C must be framed under that section, following its procedural safeguards.
• Framing assessment under section 143(3) without complying with section 153C when incriminating documents are seized from a third party renders the assessment void ab initio.

Final determination on the primary issue was that the assessment for AY 2021-22 framed under section 143(3) was invalid and was quashed. Other grounds raised by the assessee were not adjudicated as the quashing of the assessment rendered them academic.