2025 (6) TMI 1798 - AT - Income Tax

Assumption of jurisdiction u/s 153C - allegation of suppression of income - incriminating material - Satisfaction note recorded or not? - whether seized documents is related to the assessee and what is the incriminating effect? - HELD THAT - CIT(A) certainly apart from mentioning that the seized documents related to the assessee there is not a word as to how and what material content related to the assessee so as to allege that there was suppression of income. The satisfaction note is certainly not worded in accordance with the law requiring the AO assuming jurisdiction u/s 153C of the Act to show that the seized document pertained to the assessee and it should be further reflected as to how the income was not disclosed. The fact that in the reasons the AO mentions that the cases of group are interconnected and required deep investigation to arrive at a logical conclusion certainly establishes non-application of mind and not having sufficient material to have recourse to section 153C of the Act. The appeal of the assessee is allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

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

• Whether the Assessing Officer (AO) rightly assumed jurisdiction under section 153C of the Income Tax Act, 1961, in initiating assessment proceedings against the assessee based on documents seized during a search conducted on a related party.
• Whether the reasons recorded by the AO for invoking section 153C satisfy the legal requirements, specifically whether the seized documents were shown to be related to the assessee and whether there was adequate material to demonstrate suppression of income by the assessee.
• The validity and sufficiency of the satisfaction note recorded by the AO in relation to the assumption of jurisdiction under section 153C.
• The correctness of additions made by the AO on account of disallowance of exempt income under section 10(38), unexplained unsecured loans/credits, unexplained gifts under section 68, and additions on account of transfer/sale of shares.

2. ISSUE-WISE DETAILED ANALYSIS

Issue: Validity of Assumption of Jurisdiction under Section 153C of the Income Tax Act

Relevant Legal Framework and Precedents:

Section 153C empowers the AO to assess income of a person other than the searched person if incriminating material relating to such other person is found during a search under section 132. The jurisdiction under section 153C is contingent upon the existence of incriminating material seized during search relating to the assessee, and the AO must record reasons demonstrating the connection of seized documents to the assessee and the suppression of income.

Several precedents were relied upon by the assessee's counsel to contest the jurisdictional assumption, including:

• CIT vs. Singhad Technical Education Society, which emphasizes the necessity of clear reasons linking seized documents to the assessee.
• Saksham Commodities Ltd. vs. ITO, which reiterates that the satisfaction note must show how the seized material relates to the assessee.
• DCIT vs. UK Paints (Overseas) Ltd., and Pr. CIT vs. Abhisar Buildwell (P.) Ltd., Supreme Court rulings that underscore the requirement of specific and relevant incriminating material for invoking section 153C.
• Pavitra Realcon (P) Ltd. vs. ACIT, an ITAT Delhi decision emphasizing the need for proper application of mind and adequate material in the satisfaction note.

Court's Interpretation and Reasoning:

The Tribunal examined the reasons recorded by the AO and reproduced by the First Appellate Authority (FAA). It was noted that the reasons merely mentioned the seizure of documents marked as EW-4 and Annexure-1 relating to the assessee but failed to articulate how these documents were connected to the assessee or how they evidenced suppression of income. The satisfaction note lacked the requisite clarity and detail mandated by law.

The AO's reference to the interconnectedness of group companies and the need for deeper investigation was found to be insufficient and indicative of non-application of mind. The Tribunal held that such generalized statements do not satisfy the statutory requirement that the AO must have tangible material linking the seized documents to the assessee's undisclosed income before assuming jurisdiction under section 153C.

Key Evidence and Findings:

The only material cited by the AO was the seized documents EW-4 and Annexure-1, without any elaboration on their content or relevance to the assessee. The Tribunal found no evidence on record demonstrating the incriminating nature of these documents vis-`a-vis the assessee's income or transactions.

Application of Law to Facts:

Applying the legal principles, the Tribunal concluded that the AO failed to satisfy the mandatory conditions for invoking section 153C. The absence of a reasoned satisfaction note showing the nexus between the seized documents and the assessee's undisclosed income rendered the assumption of jurisdiction invalid.

Treatment of Competing Arguments:

The Revenue's argument that incriminating documents were seized and mentioned in the reasons was rejected due to the lack of specific explanation of how these documents related to the assessee. The Tribunal gave precedence to the binding judicial precedents requiring clear and cogent reasons for jurisdictional assumption under section 153C.

Conclusion:

The Tribunal allowed the ground challenging the jurisdiction under section 153C and set aside the impugned order, holding that the AO did not have sufficient material or properly recorded reasons to assume jurisdiction against the assessee.

Issue: Additions Made on Merits Relating to Exempt Income, Unexplained Loans, Gifts, and Share Transactions

Relevant Legal Framework:

The additions under section 10(38) relate to exempt income from capital gains; section 68 deals with unexplained cash credits including gifts; and unexplained unsecured loans/credits are subject to scrutiny under the Act's provisions for income determination.

Court's Interpretation and Reasoning:

Although the assessee raised grounds on the merits challenging these additions, the Tribunal's order primarily focused on the jurisdictional issue under section 153C. Since the jurisdiction itself was quashed, the additions made on merits could not be sustained in the absence of valid proceedings.

Key Evidence and Findings:

The record indicated that additions were made based on the seized documents and related investigations, but as the jurisdictional foundation was invalidated, these findings lost their basis.

Application of Law to Facts:

The invalid assumption of jurisdiction under section 153C meant that the assessment proceedings themselves were not validly initiated; hence, the additions made therein could not stand.

Treatment of Competing Arguments:

The Revenue's reliance on the merits of additions was subordinate to the primary issue of jurisdiction, which the Tribunal found lacking.

Conclusion:

The Tribunal allowed the appeal on the jurisdictional ground and consequently set aside the additions made in the assessment order.

3. SIGNIFICANT HOLDINGS

The Tribunal held:

"The satisfaction note is certainly not worded in accordance with the law requiring the AO assuming jurisdiction u/s 153C of the Act to show that the seized document pertained to the assessee and it should be further reflected as to how the income was not disclosed."

"The fact that in the reasons the ld. AO mentions that the cases of group are interconnected and required deep investigation to arrive at a logical conclusion, certainly establishes non-application of