2025 (1) TMI 1588 - AT - Income Tax

Proceedings u/s 153C - incriminating material found during search or not? - Mandation to record satisfaction - HELD THAT - Pre-requisite of passing any order u/s 153C is to make reference to the incriminating documents found ( relating to; the Assessee) during the course of a search on some other party. In this case a search u/s 132 was conducted on Kewal Krishan Chhabra Group. Since the satisfaction note is not available on record of the A.O. therefore it is not clear what incriminating documents were found about the Assessee on which notice was issued u/s 143(3) of the Act and the assessment was completed. In fact both the AO and the ld. CIT(A) have mentioned that incriminating documents were found about the Assessee during the search conducted but none have mentioned or referred to any incriminating document either in the assessment order passed by the A.O. or in the Appellate order by the CIT(A). Even the addition which was made by the AO and confirmed by the ld. CIT(A) is relating to valuation of a property that the Assessee had sold (land) of M/s Periwal Enterprises Pvt Ltd. for a sum of Rs. 16 Crores. This has been made basis of information that was already available in the income Tax return filed by the Assessee in the normal course. So there is no reference of any incriminating document found relating to the Assessee on this issue either in the assessment order or in the appellate order. Keeping in view various case laws cited by the Counsel of the Assessee above particularly the case law of Abishar Buildwell P Ltd 2023 (4) TMI 1056 - SUPREME COURT and U. K. Paints Overseas Ltd 2023 (5) TMI 373 - SC ORDER the assessment made by the A.O. u/s 153C and the appellate order passed by the ld. CIT(A) thereon cannot be sustained. Accordingly Assessee s appeal on this technical / legal ground is allowed. Since the issue has been decided on technical / legal issue in favour of the Assessee as above we are not inclined to decide the case on other issues. Appeal of the Assessee is allowed

Summary

ISSUES:

Validity of initiation of proceedings under section 153C of the Income Tax Act in absence of incriminating material found during search.Whether the assessment framed under section 153C without a satisfaction note and without specific incriminating documents is sustainable.Appropriate method for determining cost of acquisition for calculation of long-term capital gains, specifically whether to adopt circle rate or fair market value as on 01.04.2001.Whether the appellate authority erred in sustaining additions based on indexed cost of acquisition calculated using circle rates instead of fair market value.Whether the appellate authority erred in not following jurisdictional ITAT bench decisions regarding cost of acquisition for long-term capital gains.

RULINGS / HOLDINGS:

The initiation of proceedings under section 153C is invalid and "void ab initio" where no incriminating evidence or document relating to the assessee was found during the search, and the Assessing Officer failed to specify any such document in the assessment order.The absence of a satisfaction note on record and lack of reference to any incriminating document renders the assessment framed under section 153C unsustainable.The addition made by the Assessing Officer and sustained by the CIT(A) on the basis of valuation difference of land disclosed in the return, without any incriminating material, cannot be upheld.The appellate order sustaining addition based on circle rate as on 01.04.2001 and indexing cost of acquisition is set aside, as the cost of acquisition should be based on "fair market value" as per the provisions of the Income Tax Act and relevant ITAT precedents.The appeal of the assessee is allowed on the technical/legal ground of invalid initiation of proceedings under section 153C, and accordingly, the cross-appeal filed by the Revenue is dismissed.

RATIONALE:

The Court applied the statutory framework under section 153C of the Income Tax Act, which mandates that proceedings can only be initiated if incriminating material relating to the assessee is found during search on another person, accompanied by a satisfaction note by the Assessing Officer.The absence of a satisfaction note and failure to specify incriminating documents in both the assessment and appellate orders was fatal to the validity of the proceedings under section 153C.Reliance was placed on Supreme Court and High Court precedents emphasizing the necessity of incriminating material and satisfaction note for valid reopening under section 153C.The Court recognized the settled principle that cost of acquisition for long-term capital gains must be determined based on "fair market value" as on 01.04.2001, citing jurisdictional ITAT bench decisions and statutory provisions under section 55(2)(b)(i) of the Income Tax Act.The Court declined to decide other substantive issues since the case was disposed on the foundational legal defect in initiating proceedings under section 153C.