2025 (7) TMI 302 - AT - Income Tax

Assessment u/s 153C w/o approval u/s 153D - jurisdictional requirements to assess any other person u/s 153C - HELD THAT -Despite no search action has taken place in the case of the assessee and only a survey u/s 133A of the Act had taken place the Assessing Officer not only issued notice u/s 153A but has also mentioned in paragraph 1 of the assessment order of each of the above assessment years that the case of the assessee was covered under search action. Therefore it is not understood as to how the Assessing Officer has passed the order with the prior approval of the Joint Commissioner of Income Tax Central Range Nashik who vide his letter has given his approval u/s 153D of the Act for such order. This shows that the same was approved u/s 153D without application of mind. As per the provisions of section 153C of the Act the Assessing Officer should satisfy himself and record a satisfaction note before issuing notice u/s 153C of the Act to the person other than the searched person. In other words one satisfaction is to be recorded by the Assessing Officer of the searched person that the material found belongs to other person and the second satisfaction is of the Assessing officer of that other person to the effect that the material belongs to him. There is also a requirement that the relevant material should be handed over to the AO having jurisdiction over such other person . However when the Assessing officer of the searched person and other person is the same in such a situation a single satisfaction note may be recorded incorporating both the subject matters and a dual satisfaction note may not be required. However the fact that the material does belong to such other person is required to be recorded in the satisfaction note. Jurisdictional requirements to assess any other person u/s 153C of the Act based on material or documents seized during the search of a third party - We find the provisions of section 153C of the Act were amended vide the Finance Act 2015. Prior to the said amendment where search was conducted on a person and undisclosed assets/documents indicating undisclosed income are found as belonging to the other person other than searched person then in that case proceedings u/s 153C would be undertaken against the other person . The Finance Act 2015 made certain amendments by widening the scope of the section by replacing the word pertain to instead of belongs to . The said amendment was applicable from 01.06.2015 i.e. with prospective effect. The Hon ble Supreme Court in the case of ITO Vs. Vikram Sujitkumar Bhati 2023 (4) TMI 296 - SUPREME COURT has held that the amended provisions of 153C of the Act would apply where both the satisfaction note and assumption of jurisdiction were after 01.06.2015 even though the search was conducted prior to the amendment. Since in the instant case the search was conducted on 17.09.2012 the order sheet copy containing the satisfaction note is dated 17.09.2012 and the notice u/s 153A was also issued on 17.09.2012 therefore the amendment to provisions of section 153C in our opinion is not applicable to the facts of the present case and therefore the recording of satisfaction note u/s 153C by the AO in the instant case on the basis of the seized work order which does not belong to the assessee but may pertain to the assessee or any information contained therein relates to the assessee is not in accordance with law. Since it is held that the seized document i.e. copy of the work order which is the basis for recording the satisfaction u/s 153C does not belong to the assessee although it may pertain to the assessee or any information contained therein relates to the assessee and since the search as well as recording of the satisfaction note and notices issued u/s 153C are all prior to 01.06.2015 therefore the issue of notice u/s 153C in our opinion is not in accordance with law since such an amendment is not applicable to the assessee for the impugned assessment years. We therefore quash the assessment proceedings for all the 4 years being not in accordance with law for want of jurisdiction.

Summary

1. ISSUES PRESENTED and CONSIDERED

- Whether the assessment proceedings initiated under section 153C of the Income Tax Act, 1961 (the Act) against the appellant (assessee) were valid, given that no search was conducted on the appellant's premises under section 132 of the Act.

- Whether the notice issued under section 153A of the Act was valid or was a typographical error substituting for section 153C.

- Whether the satisfaction note required under section 153C was properly recorded, including the necessity of dual satisfaction when the Assessing Officer (AO) of the searched person and the other person is the same.

- Whether the seized documents (work orders) found during the search of a third party (Ashoka Buildcon Ltd.) belonged to the appellant within the meaning of section 153C of the Act, or merely related to or referred to the appellant.

- Whether the amendment to section 153C of the Act by the Finance Act, 2015, substituting "pertain to" for "belong to," applies to the appellant's case.

- Whether the seized material had any bearing on the income of the appellant and whether the assessment years under consideration were unabated.

- Legitimacy of additions made by the AO under sections 69C and 68 of the Act on account of unexplained expenditure and share application money, respectively, including the quantum of additions and the allowance of telescoping benefits.

- Validity of the assessment orders passed under section 144 read with section 153C of the Act in absence of mandatory notice under section 143(2) of the Act.

- Whether the appellant was involved in providing accommodation entries to other entities and the correctness of the addition of income on that basis.

2. ISSUE-WISE DETAILED ANALYSIS

Validity of Assessment Proceedings under Sections 153A and 153C of the Act

Legal Framework and Precedents: Section 153C permits the AO to initiate assessment proceedings against a person other than the searched person if documents or assets seized during a search under section 132 relate to that other person. Section 153A requires a search or requisition under section 132 or 132A to be conducted on the person against whom proceedings are initiated. The AO must record satisfaction before issuing notice under section 153C. The amendment by Finance Act, 2015, widened the scope by replacing "belongs to" with "pertain to," effective 1 June 2015. The Supreme Court in Vikram Sujitkumar Bhati held that the amended provisions apply only if satisfaction and jurisdiction assumption occur post-amendment.

Court's Interpretation and Reasoning: The Court noted that no search under section 132 was conducted on the appellant; only a survey under section 133A occurred. The AO issued notices under section 153A, but the CIT(A) found this to be a typographical error, the intended section being 153C. The AO recorded satisfaction on 17.09.2012 prior to issuing notice, which was before the 2015 amendment. The Court held that the satisfaction note and notice issuance predate the amendment; thus, the earlier narrower scope (requiring seized documents to "belong to" the other person) applies.

Key Evidence and Findings: The satisfaction note recorded by the AO stated that work orders were seized from Ashoka Buildcon Ltd.'s premises, awarding contracts to the appellant. The appellant contended these documents did not belong to it but were maintained by Ashoka Buildcon Ltd. The Court relied on the statutory presumption under section 132(4A) that seized material belongs to the searched person (Ashoka Buildcon Ltd.). The appellant failed to establish that the documents belonged to it exclusively. The Court referenced authoritative decisions including Pepsi Food Pvt Ltd and Arpit Land Pvt Ltd, emphasizing that "belongs to" is an exclusive attribute and mere relation or reference is insufficient.

Application of Law to Facts: Since the search was on Ashoka Buildcon Ltd., and the documents were found in its possession and maintained by it, the documents were presumed to belong to Ashoka Buildcon Ltd. The appellant's claim that the documents only related to it was insufficient to confer jurisdiction under section 153C. The Court held that the satisfaction recorded was not valid as the documents did not belong to the appellant, rendering the assessment proceedings under section 153C invalid.

Treatment of Competing Arguments: The appellant argued that the notice under section 153A was invalid without a search and that the documents did not belong to it. The Revenue contended that the mention of section 153A was a typographical error and that the satisfaction was recorded properly. The Court agreed with the appellant on the invalidity of the assessment due to lack of jurisdiction but accepted the Revenue's submission that the section 153A reference was a typographical error.

Conclusion: The Court quashed the assessment proceedings for all years for want of jurisdiction due to invalid satisfaction under section 153C and the absence of documents belonging to the appellant. The amendment to section 153C was held inapplicable as the satisfaction and notice predated it.

Requirement and Validity of Satisfaction Note under Section 153C

Legal Framework: Section 153C requires the AO of the searched person to record satisfaction that seized material belongs to another person and the AO of that other person to record satisfaction that the material belongs to him. When the AO for both searched and other person is the same, a single satisfaction note suffices.

Court's Reasoning: The Court accepted that the AO for Ashoka Buildcon Ltd. and the appellant was the same, so a single satisfaction note was sufficient. However, since the seized documents did not belong to the appellant, the satisfaction was invalid.

Conclusion: No dual satisfaction was required, but the satisfaction recorded was invalid due to the "belongingness" issue.

Validity of Seized Documents Belonging to the Appellant

Legal Framework and Precedents: The Court relied on the decisions in Pepsi Food Pvt Ltd, Arpit Land Pvt Ltd, and Meghmani Organics Ltd, which distinguish "belongs to" from "relates to" or "refers to." The statutory presumption under section 132(4A) favors the searched person as owner of seized documents.

Findings: The work orders were maintained by Ashoka Buildcon Ltd. and belonged to it. The appellant was a party to the contracts but did not have exclusive ownership of the documents. The appellant failed to prove the documents belonged to it exclusively.

Conclusion: The documents did not belong to the appellant within the meaning of section 153C; therefore, the assessment proceedings initiated on their basis lacked jurisdiction.

Application of Amendment to Section 153C

Legal Framework: The amendment replacing "belongs to" with "pertain to" applies prospectively from 1 June 2015. The Supreme Court in Vikram Sujitkumar Bhati clarified applicability based on timing of satisfaction and notice.

Application: Since the search, satisfaction, and notice issuance occurred before 1 June 2015, the amendment was held inapplicable.

Validity of Additions under Sections 69C and 68

Legal Framework: Section 69C deals with unexplained expenditure; section 68 deals with unexplained share application money.

Findings: The AO found that the appellant was involved in providing accommodation entries, with receipts from Ashoka Buildcon Ltd., Indi Infra & Elements Pvt. Ltd. (IIEPL), and Sunil Hi-tech Engineering Ltd. The appellant's Managing Director admitted in statements that payments received were returned in cash, indicating bogus transactions.

The AO added the entire closing balances of receivables as unexplained expenditure under section 69C and disallowed transportation charges. The CIT(A) reduced the addition to 1.133% commission on total receipts, based on a Memorandum of Understanding (MoU) found during survey, which indicated a commission rate for accommodation entries.

The CIT(A) deleted the transportation charges addition, holding that it was already covered in the commission calculation. The addition on share application money was partly upheld, with some relief granted as telescoping benefit.

Application of Law to Facts: The Court accepted the CIT(A)'s approach that the appellant was an accommodation entry provider, not the final beneficiary, and thus only the commission income was taxable. The entire receipts and corresponding bogus expenses cannot be taxed as income of the appellant.

Treatment of Competing Arguments: The Revenue sought enhancement of additions to full amounts rather than commission. The appellant challenged the additions as unjustified and unsubstantiated. The Court noted that the Tribunal lacks power to enhance assessments beyond AO's additions and upheld the CIT(A)'s approach.

Conclusion: The additions were sustained to the extent of commission income at 1.133% of total receipts, transportation charges disallowed by AO were deleted, and part of share application money addition was upheld with telescoping relief.

Validity of Assessment in Absence of Notice under Section 143(2)

Legal Framework: Section 143(2) requires issuance of notice for scrutiny assessment.

Findings: The appellant argued invalidity due to no notice under section 143(2). The Court held that since the appellant did not file return after notice under section 153C/142(1), no notice under 143(2) was required. For AY 2011-12, notice under 143(2) was issued and not denied by appellant.

Conclusion: The assessment was valid despite absence of notice under section 143(2) for certain years.

Whether Seized Material Had Bearing on Income and Abated Assessment Years

Findings: The appellant contended that the seized work orders were draft estimates and did not have bearing on income. The Court held that since the assessments for relevant years were unabated, and the appellant was involved in accommodation entries, the seized material was relevant. However, since the assessments were quashed on jurisdictional grounds, this issue was not adjudicated.

3. SIGNIFICANT HOLDINGS

"The provisions of section 153C of the Act were amended vide the Finance Act, 2015. Prior to the said amendment, where search was conducted on a person and undisclosed assets/documents indicating undisclosed income are found as belonging to the "other person" other than, searched person", then in that case, proceedings u/s 153C would be undertaken against the "other person". The Finance Act, 2015 made certain amendments by widening the scope of the section by replacing the word "pertain to" instead of "belongs to". The said amendment was applicable from 01.06.2015 i.e. with prospective effect."

"Since in the instant case the search was conducted on 17.09.2012, the order sheet copy containing the satisfaction note is dated 17.09.2012 and the notice u/s 153A was also issued on 17.09.2012, therefore, the amendment to provisions of section 153C in our opinion is not applicable to the facts of the present case and therefore, the recording of satisfaction note u/s 153C by the Assessing Officer in the instant case on the basis of the seized work order, which does not belong to the assessee but may pertain to the assessee or any information contained therein relates to the assessee is not in accordance with law."

"The work orders were maintained by Ashoka Buildcon Ltd. and belonged to it. The appellant was a party to the contracts but did not have exclusive ownership of the documents. The appellant cannot claim that these documents do not belong to Ashoka Buildcon Ltd. Only because the documents were found in the possession of Ashoka Buildcon Ltd., does not make the document exclusive to Ashoka Buildcon Ltd. as if the appellant was not a party to the agreement or either Ashoka Buildcon Ltd or the appellant has claimed that no such agreement was signed between them. The fact remains that the work orders exist and appellant is a party to it."

"The Assessing Officer gets the jurisdiction u/s 153C but thereafter, the notice as well as the assessment/reassessment of income of the other person is to be done in accordance with the provisions of section 153A of the Act. However, to distinguish the same, in such cases, generally AO makes reference of both sections in the notice. The omission, if any, is covered within the provision of section 292B of the Act."

"The appellant was not the final beneficiary, but it was only involved in providing accommodation entries. The receipts as well as expenses for these transactions are to be considered as bogus for the accommodation entries for the entry provider and the whole amount can be added only in the hands of the beneficiary. Therefore, since the appellant was not the final beneficiary, the entire receipt cannot be taxed in the appellant's hand. The commission on these entries provided by it was the real income accruing to it."

"The Tribunal does not possess the power to enhance the assessment. The benefit granted by the AO cannot be taken back by the Tribunal."

"The assessment was completed u/s 144 read with section 153C of the Act. Since the appellant had not filed return of income in response to notice issued u/s 153C/142(1), there was no question of issuing notice u/s 143(2) of the Act."

"The requirement of recording twin satisfaction is not mandatory where the AO of the searched person and the other person is the same. A single satisfaction note may be recorded incorporating both the subject matters."

"The finding of photocopies in the possession of a searched person does not necessarily mean and imply that they 'belong' to the person who holds the originals. Possession of documents and possession of photocopies of documents are two separate things."

"Non satisfaction of the condition precedent viz, the seized document must belong to the respondent assessee is a jurisdictional issue and non satisfaction thereof would make the entire proceedings taken thereunder null and void."