2025 (6) TMI 881 - AT - Income Tax

Assessments u/s 153C - period of limitation - six years period determination - as argued Satisfaction Note was drawn on 25.09.2018 and therefore the year in which the satisfaction note was drawn stand substituted for the date of search for the purpose of limitation period contemplated u/s 153C HELD THAT - As relevant assessment year qua the satisfaction note is A.Y. 2018-19 and therefore six years preceding such Assessment Year to which documents or assets seized requisitioned ends in A.Y. 2012-13. This being so the A.Y. 2011-12 2012-13 in question falls outside the limitation period of 6 years and thus is barred by limitation and hence cannot be subjected to proceedings under section 153C of the Act. As in consonance with the view expressed in DCIT vs Manglam Multiplex Pvt. Ltd. 2024 (10) TMI 253 - ITAT DELHI the legal objection for the assessment being barred by limitation and thus illegal void ab-initio is endorsed insofar as AY 2011-12 AY 2012-13 are concerned. Recording the satisfaction note by the AO which is claimed to be foundation for assumption of jurisdiction u/s 153C - A nuanced application of mind and recording of reasons for drawing satisfaction as contemplated under section 153C of the Act qua different AYs is paramount. As in Sakham Commodities Ltd. 2024 (4) TMI 461 - DELHI HIGH COURT noticeably held that issuance of a notice u/s 153C of the Act is clearly not intended to be an inevitable consequence to the receipt of material by the Jurisdictional AO and that the initiation of action u/s 153C of the Act will have to be founded on a formation of opinion by the Jurisdictional AO that the material handed over and received pursuant to a search is likely to influence the determination of total income and would be relevant for the purposes of assessment/re-assessment in terms of section 153C of the Act. The satisfaction note under scrutiny defies most of the parameters expected of him while drawing satisfaction. While exercising the power u/s 153C of the Act neither has the AO related the material found in the course of search with a particular AY while making a consolidated satisfaction note for several years nor provided any requisite details of transaction to enable an independent person to ascertain and form any independent opinion on facts stated in Note that invocation of section 153C of the Act is indeed warranted in the facts of the case. The AO has not even bothered to relate the so-called documents etc. with the AYs covered for the purposes of s. 153C of the Act. Mere drawing of a perfunctory satisfaction without meeting basic ingredients of providing some tangible descript information and application of mind thereon has no standing in law and would not confer drastic jurisdiction of assessment u/s 153C of the Act on a person other than searched person. The objections raised on behalf of the assessee towards lack of jurisdiction based on a cryptic and non-descript satisfaction thus deserves to be sustained. While recording a consolidated satisfaction note is not a bar in law per se as rightly contended on behalf of the revenue but however in the same vain the documents/assets searched need to be specified against each year covered in the satisfaction note to depict application of mind and initiation of action u/s 153C of the Act qua such assessment years. The AO has apparently failed to do so in the present case. As a corollary the notice issued u/s 153C of the Act and consequent assessment order passed u/s 153C of the Act is vitiated in law and requires to be quashed. In this view of the matter the jurisdiction assumed u/s 153C based on vague and non-descript satisfaction note is vitiated at the threshold. Assessee appeal allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

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

(a) Whether the assessments framed under section 153C of the Income Tax Act, 1961 for Assessment Years (AY) 2011-12 and 2012-13 are barred by limitation, given the date of the search and the date of recording of the 'satisfaction note' under section 153C;

(b) Whether the Assessing Officer (AO) had jurisdiction to initiate proceedings under section 153C of the Act against the assessee for AYs 2011-12 to 2015-16 and 2017-18, particularly focusing on the validity and sufficiency of the 'satisfaction note' recorded by the AO;

(c) Whether the 'satisfaction note' recorded by the AO meets the statutory requirements, including identification of incriminating material linked to specific assessment years and application of mind, as mandated by judicial precedents;

(d) Whether the additions made by the AO on an estimated basis (10% of total debits and credits) are justified;

(e) Ancillary issues relating to the applicability of amendments to section 153C and the procedural correctness of the notices issued under section 153C read with section 153A of the Act.

2. ISSUE-WISE DETAILED ANALYSIS

(a) Limitation Bar for AY 2011-12 and 2012-13 Assessments under Section 153C

Relevant Legal Framework and Precedents: Section 153C of the Income Tax Act permits the AO of a person other than the searched person to initiate assessment proceedings based on documents or assets found during search or requisition under section 132 or 132A. The limitation period for such assessments is six years preceding the relevant assessment year. The amendment to section 153C effective from 01.04.2017 (AY 2018-19 onwards) clarified that the limitation period is to be counted from the date of the satisfaction note, not the date of search.

In this case, the search was conducted on 21.07.2016, prior to the amendment, but the satisfaction note was recorded on 25.09.2018. The assessee contended that the limitation period should be counted from the date of the satisfaction note, making AY 2018-19 the relevant year, thus excluding AYs 2011-12 and 2012-13 from the six-year limitation period.

The Tribunal relied on coordinate bench decisions in M/s. Marconi Infratech (P.) Ltd. and DCIT vs Manglam Multiplex Pvt. Ltd., which held that the limitation period under section 153C must be counted from the date of requisition or receipt of documents by the AO of the third person (i.e., the satisfaction note date), not the date of search. Consequently, assessments for AYs 2011-12 and 2012-13 were barred by limitation.

Court's Interpretation and Reasoning: The Tribunal endorsed the view that the assessments for AY 2011-12 and 2012-13 under section 153C are barred by limitation as the satisfaction note was recorded in AY 2018-19, and the six-year limitation period excludes these years. The Tribunal held that the assessment orders for these years are nullities in law and must be quashed.

Application of Law to Facts: Since the satisfaction note was recorded on 25.09.2018, the limitation period for invoking section 153C extends only to AY 2012-13 onwards. AY 2011-12 and 2012-13 fall outside this period and thus cannot be reopened under section 153C.

Conclusion: The appeals for AY 2011-12 and 2012-13 were allowed on the limitation ground, and the assessments under section 153C for these years were quashed.

(b) Jurisdiction under Section 153C and Validity of the 'Satisfaction Note'

Relevant Legal Framework and Precedents: Section 153C requires the AO of the searched person to record a 'satisfaction note' indicating that documents or assets seized pertain to another person (third person), and that such material has a bearing on determination of total income of the third person. The 'satisfaction note' is a mandatory prerequisite and foundational document for initiating proceedings under section 153C against the third person.

Judicial precedents, notably the Delhi High Court decision in Sakham Commodities Ltd. vs ITO and the Supreme Court ruling in Sinhgad Technical Education Society, emphasize that the satisfaction note must identify the incriminating material with reference to specific assessment years and demonstrate that the material is likely to influence the determination of income for those years. The AO must apply mind and record reasons for initiating proceedings under section 153C for each relevant year. A generic or vague satisfaction note devoid of particulars and application of mind is legally infirm and cannot confer jurisdiction.

Court's Interpretation and Reasoning: The Tribunal examined the satisfaction note dated 25.09.2018, which covered AYs 2011-12 to 2017-18 collectively without identifying any specific incriminating material linked to particular years. The note merely stated that documents seized from the premises of the searched person "have bearing on the determination of total income" of the assessee for the said years, without naming the documents or explaining their relevance to specific years.

The Tribunal held that such a satisfaction note is "very generic and devoid of any basic details of the transactions in question." It does not meet the statutory requirements or judicial standards for recording satisfaction under section 153C. The AO failed to apply mind or relate the seized material to particular assessment years, thereby rendering the jurisdiction assumed under section 153C invalid.

Key Evidence and Findings: The satisfaction note was reproduced verbatim, showing lack of specificity and absence of application of mind. The Tribunal noted that the AO did not specify the incriminating documents or transactions, nor did he record reasons for extending proceedings to all the years mentioned. The Tribunal relied heavily on the authoritative judicial pronouncements cited by the assessee to support this conclusion.

Application of Law to Facts: The Tribunal applied the principles from the cited decisions to the facts, concluding that the AO's failure to identify material linked to specific years and record reasons for initiating proceedings under section 153C vitiates the jurisdiction. The issuance of notices and consequent assessments under section 153C based on such a defective satisfaction note are invalid.

Treatment of Competing Arguments: The Revenue contended that a consolidated satisfaction note for multiple years is permissible and that the AO's satisfaction is implicit. The Tribunal acknowledged that recording a consolidated satisfaction note is not per se barred but emphasized that even in such cases, the AO must specify the documents or assets related to each year and apply mind accordingly. The Revenue's argument was rejected due to the absence of such particulars in the present case.

Conclusion: The Tribunal held that the jurisdiction assumed under section 153C based on the vague and non-descript satisfaction note is vitiated at the threshold. The notices and assessments passed under section 153C for AYs 2011-12 to 2015-16 and 2017-18 are without force of law and are quashed.

(c) Additions Made on Estimated Basis

Relevant Legal Framework: The AO made additions on an estimated basis by applying a 10% rate on total debits and credits in the assessee's bank statements, alleging undisclosed income from commission. The CIT(A) reduced this addition to 1% of the total amount.

Court's Interpretation and Reasoning: Since the Tribunal quashed the assessments under section 153C for lack of jurisdiction, it did not find it necessary to address the merits of the additions or the estimation method used by the AO. The deletion of additions followed from the invalidity of the assessment proceedings themselves.

Conclusion: The Tribunal did not adjudicate on the merits of the additions due to the foundational jurisdictional infirmity.

3. SIGNIFICANT HOLDINGS

"The 'satisfaction note' is critical because it serves as a valuable safeguard against arbitrary proceedings and ensures that the powers under section 153C of the Act are exercised judiciously. It is a formal statutory requirement without which the proceedings against 'other person' could be considered invalid."

"The information contained therein need to be actionable. This being so, the 'satisfaction note' is expected to identify the relevant material found in search and that it pertains to or relates to such third person. Such material found should reliably indicate or suggest the bearing of such documents/assets etc. to the income in the hands of third person."

"The discovery of material for a particular AY is not intended to trigger a chain reaction or have a waterfall effect on all the AYs which can form part of the 'relevant AYs' under section 153C of the Act."

"The AO is bound to ascertain and identify the AY to which the material recovered relates and relevant AYs which can then be subject to action under section 153C of the Act will have to be necessarily those in respect of which the assessment is likely to be influenced or impacted by the material discovered."

"Mere drawing of a perfunctory satisfaction without meeting basic ingredients of providing some tangible & descript information and application of mind thereon has no standing in law and would not confer drastic jurisdiction of assessment under section 153C of the Act on a person other than searched person."

"The jurisdiction assumed based on such lackadaisical 'satisfaction note' beset with vital infirmities cannot be countenanced in law."

"The assessment order passed under section 153C of the Act being barred by limitation and thus a non-est order and nullity in the eyes of law."

Core principles established include:

- The limitation period for assessments under section 153C is to be counted from the date of the satisfaction note, not the date of search, especially post amendment effective from AY 2018-19.

- The satisfaction note must be specific, identifying incriminating material linked to particular assessment years and demonstrating application of mind by the AO.

- A generic or omnibus satisfaction note covering multiple years without particulars or reasons is legally invalid and vitiates jurisdiction.

- Assessments under section 153C framed beyond the prescribed limitation period are null and void.

- The initiation of proceedings under section 153C is not automatic upon receipt of documents from the searched person's AO; it requires formation of opinion based on tangible material likely to influence the income determination.

Final determinations on each issue:

(i) Assessments under section 153C for AY 2011-12 and 2012-13 are barred by limitation and are quashed.

(ii) The satisfaction note recorded by the AO is legally infirm for lack of specificity and application of mind, rendering the jurisdiction under section 153C invalid for AYs 2011-12 to 2015-16 and 2017-18.

(iii) Consequently, the notices and assessments issued under section 153C for these years are quashed.

(iv) Additions made on estimated basis were not adjudicated due to the jurisdictional infirmity of the assessments.