2024 (9) TMI 1772 - AT - Income Tax

Validity of the proceedings initiated u/s 153A and 153C - block of 10 years for which the AO could have assumed jurisdiction u/s 153C - information was received from the AO of another searched person relating to incriminating material pertaining to assessee - additions made u/s 69A - HELD THAT - Admittedly in the facts of the present appeals the search and seizure operation was carried out on a date posterior to the amendment brought to section 153A read with section 153C of the Act by virtue of Finance Act 2017. Therefore the amended provisions of section 153C read with section 153A would be applicable. Hence the relevant assessment year would constitute a block of 10 assessment years comprising of the assessment year wherein the search and seizure operation has taken place and preceding 9 assessment years. However in case of a person other than the searched person the date of search would be reckoned to be the date on which the Assessing Officer received seized material and recorded satisfaction in terms with section 153C of the Act. Since the assessee is not the searched person but the other person the date of search would be reckoned to be the date on which the Assessing Officer of the assessee received the seized material and recorded satisfaction. Undisputedly the materials placed on record clearly demonstrate that the Assessing Officer of the assessee has recorded the satisfaction note under section 153C of the Act on 29.09.2021 falling in Financial Year 2021-22 corresponding to assessment year 2022-23. Therefore the relevant assessment year for the purpose of computing 10 year block has to be reckoned from assessment year 2022-23 till assessment year 2013-14. In other words the block of 10 assessment years for the purpose of section 153C would be assessment years 2013-14 to 2022-23. Hence the Assessing Officer could have assumed jurisdiction under section 153C of the Act for the aforesaid block of 10 assessment years and not beyond that. Whereas in the facts of the present appeals the Assessing Officer has gone beyond the block of 10 assessment years and instituted proceedings under section 153C of the Act in respect of assessment years 2011-12 and 2012-13 as well. This in our view is against the statutory mandate. Since assessment years 2011-12 and 2012-13 fall outside the net of relevant assessment year being the block of 10 years the assumption of jurisdiction under section 153C of the Act is unsustainable. Hence the assessment orders passed in consequence thereof have to be declared as void. That being the legal position we hold that the assessment orders passed under section 153C of the Act for assessment years 2011-12 and 2012-13 are legally unsustainable hence quashed. Addition u/s 69A - AO has made assessment primarily relying upon the statement recorded from Sh. Rajiv Saxena and the materials furnished by him at the time of search or during post search proceeding - At this stage it will be material to note that the said search and seizure operation was carried out at a hotel room where Sh. Rajiv Saxena was staying after his extradition to India. It is relevant to observe though assessment has been made primarily relying upon the statement recorded from Sh. Rajeev Saxena however no opportunity of cross-examination was given to the assessee. In fact repeated request by the assessee for permitting him to cross-examine Sh. Rajeev Saxena has fallen into deaf ears and ultimately rejected. Cross-examination of Sh. Rajeev Saxena was of paramount importance considering his misleading statements unreliability and fraudulent activities which has been exposed by Enforcement Directorate (ED) in the form of an affidavit before the Hon ble Courts. The ED has clearly stated that due to his prevaricating stand and unreliability the statements recorded from Sh. Rajiv Saxena cannot be relied upon. Thus in our view utilization of statement of Sh. Rajiv Saxena and evidences furnished by him adversely against the assessee without permitting him to cross-examine Sh. Rajiv Saxena whose statement was strongly relied upon by the Assessing Officer to make the assessment is in gross violation of Rules of Natural Justice hence cannot be countenanced. Therefore as per the ratio laid down by Hon ble Supreme Court in case of Andaman Timber Industries 2015 (10) TMI 442 - SUPREME COURT addition made without following the Principles of Natural Justice is unsustainable. Even otherwise also at more than one place in the assessment order the Assessing Officer has specifically and categorically stated that the assessee is merely a pass-through entity and the real beneficiary is someone else in India. The Assessing Officer has also observed that the commission income has ultimately been transferred to the real beneficiary in India. That being the factual finding of the Assessing Officer himself in our view no addition under section 69A could have been made at the hands of the assessee even on protective basis. To put it simply the Assessing Officer has recorded a finding of fact that the assessee is not the real owner of the income and only a pass-through entity. Thus when the Assessing Officer was himself not sure as to whether the information/seized document reveal any of undisclosed income of the assessee and when he himself has expressed the view that the assessee is merely a pass-through entity he could not have assumed jurisdiction under section 153C of the Act at all. Inasmuch as proceedings under section 153C of the Act could not have been initiated for merely making protective additions. Completion of assessment u/s 153C read with section 143(3) - AO assuming jurisdiction under section 153C of the Act in case of a non-searched person though has power to initiate proceedings under section 153C of the Act upon receipt of incriminating material from the Assessing Officer of the searched person however he has to complete the assessment under section 153C read with section 153A of the Act. An assessment order passed in any other manner in our view may not muster judicial scrutiny. Thus on overall consideration of facts and materials on record and keeping in view the principles laid down in the judicial precedents cited before us by both the parties we hold that not only the additions are unsustainable but the assumption of jurisdiction under section 153C of the Act itself is invalid. We order accordingly.

Summary

ISSUES:

• Whether assessment proceedings initiated and completed under Section 153C of the Income Tax Act, 1961 for assessment years beyond the permissible block of 10 years are valid.
• Whether an assessment order can be validly passed under Section 153C read with Section 143(3) of the Act, or must be passed under Section 153A read with Section 153C.
• Whether additions under Section 69A of the Act are permissible in the absence of undisclosed movable assets physically found during search.
• Whether satisfaction notes recorded under Section 153C can be based on identical incriminating material for two different persons.
• Whether assessment proceedings under Section 153C can be initiated without incriminating material seized during a search specifically relating to the assessee.
• Whether additions based solely on statements of third parties without opportunity of cross-examination violate principles of natural justice.
• Whether income alleged to be received overseas by a non-resident can be assessed in India contrary to treaty provisions.

RULINGS / HOLDINGS:

1. The initiation of proceedings and completion of assessment under Section 153C for assessment years prior to the block of 10 years preceding the relevant assessment year (here, AY 2013-14 to AY 2022-23) is void ab initio. The assessments for AY 2011-12 and AY 2012-13 are quashed.
2. Assessment orders passed under Section 153C read with Section 143(3) are void ab initio as Section 153C is a machinery provision to initiate proceedings, and assessments must be completed under Section 153A read with Section 153C. The AO has no jurisdiction to assess under Section 143(3) in such cases.
3. Additions under Section 69A are impermissible where no undisclosed movable asset was physically found during search; book entries or information alone do not attract Section 69A.
4. Recording of identical satisfaction notes under Section 153C based on the same seized material for two different persons is impermissible; the material must relate to a specific person only. The satisfaction notes here were mechanical and ambiguous, stating the material "may have a bearing" on income, which is insufficient.
5. Proceedings under Section 153C must be initiated only on the basis of incriminating material seized during search specifically relating to the assessee; here, no such material was found against the assessee, and the additions are based on hearsay and tampered information.
6. Utilization of statements of third parties without granting the assessee opportunity for cross-examination violates principles of natural justice and renders additions unsustainable.
7. Income alleged to be received overseas by a non-resident cannot be assessed in India in absence of business connection or services rendered in India and contrary to DTAA provisions; such income is not taxable in India.

RATIONALE:

• The court applied the statutory framework of Sections 153A, 153C, 153D, 143(3), and 69A of the Income Tax Act, 1961, emphasizing the non-obstante clauses and legislative intent to restrict assessment powers in search-related cases to specific provisions.
• Reliance was placed on judicial precedents including the jurisdictional High Court decision in PCIT vs Ojjus Medicare Pvt. Ltd. (2024), Hon'ble Supreme Court rulings in Vikram Sujitkumar Bhatia (2023), Calcutta Knitwear (2014), and others which clarified the scope and procedural requirements of Sections 153A and 153C.
• The court underscored the mandatory nature of the 10-year block period for initiating proceedings under Section 153C in respect of non-searched persons, reckoned from the date the AO receives seized material, not the date of search on the searched person.
• The principle that assessment jurisdiction is a function of the legislature was reiterated, requiring strict adherence to the statutory scheme and prohibiting assessments under provisions not expressly empowered for search-related cases.
• The requirement of specific incriminating material seized during search to initiate Section 153C proceedings was emphasized, rejecting assessments based on tampered or post-search information not seized during the operation.
• The court highlighted the violation of natural justice principles due to denial of cross-examination of key witnesses whose statements formed the basis of additions.
• The court noted that Section 69A applies only to undisclosed movable assets physically found during search, and not to book entries or information about income.
• The court did not address treaty-related contentions in detail, deeming them academic in light of other findings.