2025 (6) TMI 468 - AT - Income Tax

Validity of notice issued u/sec.153C - absence of proper satisfaction note - observation of the CIT(A) that the satisfaction recorded by the AO is improper and invalid HELD THAT - The law only specifies the satisfaction of the AO that the documents found during the course of search belonged to other person. In the present case the AO of the searched person and the assessee is one and the same and the AO of the assessee has recorded satisfaction in clear words and stated that the said document found during the course of search belongs to the assessee. Therefore in our considered view there is no lacuna in the satisfaction note recorded by the AO and therefore the observation of the CIT(A) that the satisfaction recorded by the AO is improper and invalid is incorrect. We therefore reject the arguments of Assessee in light of Judgment of Sinhgad Technical Education Society 2017 (8) TMI 1298 - SUPREME COURT and also other case law referred to by the Learned Counsel for the Assessee. CIT(A) is erred in quashing the assessment order passed by the AO u/sec.143(3) r.w.s.153C without considering the binding decision of Super Malls (P.) Ltd 2020 (3) TMI 361 - SUPREME COURT as explained the law and also the satisfaction note required to be recorded by the AO of the searched person and the other person. Therefore there is merit in the arguments of the Learned DR and thus we reverse the order passed by CIT(A) and upheld the order passed by the AO. Appeal of the Revenue is allowed for statistical purposes.

Summary

1. ISSUES PRESENTED and CONSIDERED

- Whether the notice issued under section 153C of the Income Tax Act, 1961 ("the Act") was validly issued in the absence of a proper satisfaction note recorded by the Assessing Officer (AO) in relation to documents seized during a search under section 132 of the Act.

- Whether the satisfaction note recorded by the AO was in accordance with the legal requirements, particularly when the AO of the searched person and the AO of the "other person" (assessee) are the same.

- Whether the assessment order passed under section 143(3) read with section 153C of the Act, based on the seized documents and the sale deed found during the search, was sustainable.

- Whether the issue regarding computation of capital gains on sale of property, as per the seized sale deed, was rightly considered by the AO and whether the addition made was justified.

- Whether the learned Commissioner of Income Tax (Appeals) [CIT(A)] was justified in quashing the assessment order on the ground of invalidity of the notice under section 153C.

2. ISSUE-WISE DETAILED ANALYSIS

Validity of Notice under Section 153C of the Act and Requirement of Satisfaction Note

Relevant Legal Framework and Precedents: Section 153C of the Act empowers the AO to assess or reassess the income of a person other than the searched person if, during a search under section 132, any money, bullion, jewellery or other valuable article or thing, or books of account or documents, seized or requisitioned, belong to or pertain to such other person. Prior to the amendment effective from 01.10.2014, the AO of the searched person was required to hand over such documents to the AO of the other person, who would then proceed with assessment. Post amendment, the AO of the other person must record satisfaction that the seized documents have a bearing on the income of the other person.

The Supreme Court in the case of Super Malls (P.) Ltd. vs. PCIT-8, New Delhi, clarified that when the AO of the searched person and the AO of the other person are the same, it is sufficient for the AO to record in the satisfaction note that the documents seized from the searched person belong to the other person. There is no requirement of physically transmitting the documents to oneself. The satisfaction note must reflect the AO's satisfaction that the seized documents pertain to the other person and have a bearing on the income of the other person.

Court's Interpretation and Reasoning: The Tribunal noted that the AO recorded satisfaction that the documents seized during the search related to the assessee (the other person) and issued notice under section 153C accordingly. The learned CIT(A) had quashed the assessment order on the ground that the satisfaction note was merely a statement that documents relating to the assessee were seized, without recording any incriminating material or satisfaction that the documents had a bearing on the income of the assessee.

The Tribunal, however, held that the satisfaction note recorded by the AO was in accordance with the provisions of section 153C as it clearly stated that the documents seized belonged to the assessee and had a bearing on the total income for the relevant assessment year. The Tribunal relied on the Supreme Court's ruling in Super Malls (P.) Ltd. and observed that the law does not prescribe the manner or form of recording satisfaction; it only requires the AO to be satisfied about the ownership and relevance of the documents.

Key Evidence and Findings: The documents seized during the search included a sale deed dated 25.07.2008 relating to sale of agricultural land by the assessee. The AO noted the discrepancy between the declared sale consideration (Rs. 10 lakhs) and the fair market value (Rs. 16.29 crores) and observed that the assessee had not disclosed capital gains arising from the transaction.

Application of Law to Facts: The AO recorded satisfaction that the seized documents belonged to the assessee and issued notice under section 153C. The Tribunal found the satisfaction note valid and the issuance of notice proper. The CIT(A)'s quashing of the assessment order on procedural grounds was therefore held to be erroneous.

Treatment of Competing Arguments: The assessee contended that the satisfaction note was invalid as it did not record proper satisfaction that the documents had a bearing on the income and that the transaction was not a sale but a re-assignment subject to pending litigation. The Revenue argued that the satisfaction note was valid and that the Supreme Court's decision in Super Malls (P.) Ltd. supported their position. The Tribunal sided with the Revenue, emphasizing the validity of the satisfaction note and the legal position regarding the AO being the same for both searched and other person.

Conclusion: The notice under section 153C was validly issued based on a proper satisfaction note recorded by the AO. The assessment order passed under section 143(3) read with section 153C was not liable to be quashed on the ground of invalid notice.

Merits of Capital Gains Computation and Addition Made by the AO

Relevant Legal Framework and Precedents: Capital gains tax is chargeable on the transfer of capital assets, computed as the difference between the sale consideration and the cost of acquisition, subject to adjustments. The burden lies on the assessee to disclose and compute capital gains correctly. The AO can recompute capital gains if the declared consideration is significantly understated compared to fair market value.

Court's Interpretation and Reasoning: The AO noted that the sale deed disclosed a consideration of Rs. 10 lakhs for land with a fair market value exceeding Rs. 16 crores. The assessee claimed the transaction was not a sale but a re-assignment with compensation for legal expenses and that the cases were pending before the Supreme Court. The AO rejected these submissions, holding that the assessee had extinguished rights over the land by executing the sale deed, and capital gains ought to be computed on the fair market value.

Key Evidence and Findings: The sale deed and valuation by the Registration Authority were key evidence. The assessee's explanation about re-assignment and pending litigation was not supported by conclusive evidence to negate the sale transaction.

Application of Law to Facts: The AO recomputed long-term capital gains based on the fair market value and made an addition of Rs. 16,25,16,630 to the total income. The CIT(A) did not decide on merits due to quashing the assessment on procedural grounds.

Treatment of Competing Arguments: The assessee argued the transaction was not a sale and thus no capital gains arose. The Revenue contended the sale deed was conclusive evidence of transfer and capital gains were rightly computed. The Tribunal did not decide this issue on merits but remanded the matter for fresh adjudication.

Conclusion: The merits of the capital gains computation remain undecided and are remitted to the CIT(A) for consideration in accordance with law.

Quashing of Assessment Order by CIT(A) and its Validity

Relevant Legal Framework and Precedents: The CIT(A) can quash an assessment order if the notice under which the assessment was initiated is invalid or if the procedure prescribed by law is not followed. However, quashing on purely procedural grounds without considering merits is generally discouraged.

Court's Interpretation and Reasoning: The CIT(A) quashed the assessment order solely on the ground that the satisfaction note was inadequate and the notice under section 153C was invalid. The Tribunal found this approach erroneous, holding that the satisfaction note was valid and the notice properly issued. The Tribunal emphasized the binding nature of the Supreme Court's ruling in Super Malls (P.) Ltd.

Key Evidence and Findings: The satisfaction note recorded by the AO explicitly stated that the documents seized belonged to the assessee and related to the relevant assessment year.

Application of Law to Facts: The Tribunal reversed the CIT(A)'s order quashing the assessment and restored the matter to the CIT(A) to decide the substantive issues on merits.

Treatment of Competing Arguments: The assessee urged that the satisfaction note was not proper and hence the assessment was invalid. The Revenue argued that the CIT(A) ignored binding precedent and failed to consider the merits. The Tribunal agreed with the Revenue.

Conclusion: The CIT(A)'s order quashing the assessment order on procedural grounds was reversed. The matter was remitted for fresh adjudication on merits.

3. SIGNIFICANT HOLDINGS

- "When Assessing Officer of the searched person and the other person is same, it is sufficient by the Assessing Officer to record in satisfaction note that documents seized from searched person belonged to other person, and there is no requirement of transmitting documents so seized from searched person to other person."

- "The law does not specify how to record a satisfaction and the manner in which such satisfaction note is to be recorded. The law only specifies the satisfaction of the Assessing Officer that the documents found during the course of search belonged to other person."

- The issuance of notice under section 153C is valid if the satisfaction note records that the seized documents pertain to the other person and have a bearing on the total income of the relevant assessment year.

- Quashing of assessment order on the ground of invalid notice under section 153C is not justified where the satisfaction note is in accordance with the provisions of the Act and relevant judicial precedents.

- The Tribunal reversed the CIT(A)'s order quashing the assessment order and restored the matter to the CIT(A) for deciding the issues on merits, providing the assessee adequate opportunity of being heard.