2025 (7) TMI 1050 - AT - Income Tax

Assessment u/s 153C - approval granted u/s 158D - AO jurisdiction over the searched person can record a satisfaction as regards some search material pertaining to / belonging to / relating to some other person - HELD THAT - AO has passed a combined satisfaction note for various assessment years. We find the in the case of DCIT v. Sunil Kumar Sharma 2024 (10) TMI 1160 - SC ORDER has held that satisfaction note is required to be recorded u/s 153C of the IT Act 1961 for each assessment year and hence a consolidated satisfaction note recorded for different assessment years would vitiate the entire assessment proceedings. What type of coordinated investigation was conducted by the Assessing Officer is not understood. It is also an admitted fact that certain cheque payments have been considered as on-money cash payments for which the additions have been made. This shows that the JCIT / Addl.CIT in a mechanical manner has given the approval u/s 153D of the Act. It has been held in various decisions that the approval given u/s 153D in a mechanical manner vitiates the assessment proceedings for which the assessments have been held to be not in accordance with law and have been quashed. When the approval u/s 153D has been given in a mechanical manner by the Addl. CIT / JCIT such approval is not in accordance with law for which the assessments have been quashed. Since in the instant case also it is held that such approval u/s 153D has been given in a mechanical manner therefore such approval not being in accordance with law the assessment orders are liable to be quashed. Assessee appeal allowed.

Summary

The core legal questions considered in this batch of appeals revolve around the validity and legality of assessment proceedings initiated under section 153C of the Income Tax Act, 1961 ("the Act") following a search and seizure operation under section 132. Specifically, the issues include:

1. Whether the Assessing Officer (AO) had valid jurisdiction to initiate proceedings under section 153C against the assessee based on incriminating material found during search of another person's premises.

2. Whether the satisfaction note under section 153C was validly recorded, particularly concerning the use of a consolidated satisfaction note covering multiple assessment years.

3. Whether the approval granted under section 153D of the Act by the Additional Commissioner of Income Tax (Addl. CIT) was valid or was a mechanical approval without application of mind.

4. Whether the jurisdiction of the AO was ousted or suspended due to the Dhamale Group's pending settlement application before the Income Tax Settlement Commission (ITSC) under section 245F of the Act.

5. Whether the additions made on account of alleged unexplained cash payments ("on-money") for purchase of flats were justified, particularly when some payments were made by cheque and whether there was any violation of natural justice by not allowing cross-examination of third parties.

6. Whether procedural safeguards under section 153C and related provisions, including proper transfer of seized material and jurisdictional assignments under section 127, were complied with.

Issue-wise detailed analysis:

1. Jurisdiction of AO under section 153C and validity of satisfaction note

The legal framework under section 153C mandates that where incriminating material seized in search of one person relates to another person, the AO having jurisdiction over the other person may initiate assessment proceedings after recording satisfaction that such material relates to that other person. The satisfaction must be recorded for each assessment year separately.

The AO recorded two satisfaction notes dated 11.11.2020 and 21.04.2021, but both were consolidated notes covering multiple assessment years (2012-13 to 2018-19). The AO relied on seized excel sheets from the premises of key persons in the Dhamale Group showing the assessee's name, flat details, and amounts paid including cash ("on-money"). Statements under section 132(4) confirmed authenticity of these documents.

The assessee challenged the validity of the satisfaction notes on the ground that consolidated satisfaction for multiple years is contrary to law. The Tribunal referred to the Karnataka High Court decision in DCIT v. Sunil Kumar Sharma, which held that satisfaction under section 153C must be recorded year-wise and consolidated notes vitiate proceedings. This view was upheld by the Supreme Court dismissing the Revenue's special leave petition against that decision. The Tribunal also relied on a coordinate bench decision quashing assessments where consolidated satisfaction notes were recorded.

The Revenue cited a Delhi High Court decision supporting combined satisfaction notes, but the Tribunal applied the principle of benefit of doubt to the assessee, as there was no binding decision of the jurisdictional High Court. The Supreme Court's dismissal of the SLP in Sunil Kumar Sharma was decisive in favor of the assessee.

Accordingly, the Tribunal concluded that the consolidated satisfaction note was not in accordance with law and vitiated the entire assessment proceedings under section 153C.

2. Validity of approval under section 153D

Section 153D requires prior approval of the Joint Commissioner or Additional Commissioner before passing assessment orders under section 153A, 153B, or 153C. The approval must be given with an independent application of mind for each assessment year and each assessee separately.

The assessee contended that the approval was granted mechanically without application of mind, as the Addl. CIT approved draft assessment orders for 43 cases on the same day, without perusing the records or applying mind to the facts of each case. The Tribunal relied on several High Court and Supreme Court decisions (including PCIT vs. Shiv Kumar Nayyar and PCIT vs. Anuj Bansal) which held that mechanical or rubber-stamp approvals under section 153D are invalid and vitiate the assessment.

In the instant case, the approval letter failed to mention any perusal or independent consideration of the draft orders. The approval covered multiple assessment years in one letter, further indicating lack of application of mind. The Tribunal held that such mechanical approval was not in accordance with law and quashed the assessments on this ground as well.

3. Jurisdictional challenge based on pending settlement application before ITSC

The assessee argued that since the Dhamale Group had filed a settlement application before the ITSC, which had been admitted and concluded, the AO's jurisdiction was suspended under section 245F(2) during the pendency of the settlement proceedings. Therefore, the satisfaction note recorded by the AO of the Dhamale Group on 11.11.2020 was invalid as the AO no longer had jurisdiction to initiate proceedings under section 153C against the assessee.

The Tribunal examined relevant case law including decisions of the Delhi High Court and Supreme Court which held that the ITSC has exclusive jurisdiction over cases admitted before it and the AO's powers are suspended during such pendency. The Tribunal also noted that the Dhamale Group's settlement was concluded on 07.01.2021, prior to the satisfaction note dated 21.04.2021.

The Revenue contended that the AO's powers to issue notice under section 153C are distinct from the settlement proceedings and that the settlement commission's jurisdiction is limited to the parties who filed the application. However, the Tribunal found the legal position and precedents favor the assessee's contention that the AO lacked jurisdiction to record satisfaction and initiate proceedings during the pendency of the settlement application.

4. Procedural compliance under section 153C and section 127

The assessee contended that the incriminating material was not transferred timely and properly from the AO of the searched person (Dhamale Group) to the AO having jurisdiction over the assessee, as required under section 153C and section 127. The AO of the searched person delayed transfer and the AO of the assessee awaited jurisdictional assignment before proceeding, creating a circular loop contrary to statutory safeguards.

The Tribunal referred to a recent decision of the Delhi High Court in Carol Infrastructure Pvt Ltd v. ACIT which held that section 153C does not contemplate any hiatus or gap between transfer and receipt of incriminating material. The Tribunal found that the delay and procedural irregularity in transferring seized material violated the statutory scheme.

5. Merits of addition on account of unexplained cash payment ("on-money")

The AO made additions of Rs. 25 lakh for AY 2016-17 and Rs. 20 lakh for AY 2017-18 treating the cash payments shown in seized documents as unexplained investment under section 69. The seized excel sheets and statements of key persons in the Dhamale Group corroborated the existence of such cash payments.

The assessee challenged the additions on grounds that some payments recorded as cash were actually made by cheque, which was part of registered agreements and housing loans. The assessee also contended there was double addition of Rs. 10 lakh and that no opportunity was given to cross-examine third parties whose statements were relied upon.

The Tribunal observed that since the assessments were quashed on jurisdictional and procedural grounds, the merits of additions became academic and were not adjudicated further.

6. Natural justice and cross-examination

The assessee argued that the AO and CIT(A) erred in confirming additions without providing opportunity to cross-examine third parties (key persons of Dhamale Group). The Tribunal did not delve deeply into this issue as the assessments were quashed on other grounds.

Significant holdings and core principles established:

1. The satisfaction note under section 153C must be recorded separately for each assessment year. A consolidated satisfaction note covering multiple years is not in accordance with law and vitiates the assessment proceedings. The Tribunal held:

"Since in the instant case a consolidated satisfaction note has been prepared for assessment years 2012-13 to 2018-19, therefore, such consolidated satisfaction note being not in accordance with law, the entire assessment proceedings are liable to be quashed."

2. Approval under section 153D of the Act must be granted with independent application of mind for each assessment year and each assessee. Mechanical or rubber-stamp approvals without perusal of draft assessment orders or records are invalid and vitiate the assessment. The Tribunal cited:

"The approval under Section 153D of the Act cannot be a mere formality and, in any case, cannot be a mechanical exercise of power."

3. When a settlement application under section 245F is admitted by the ITSC, the jurisdiction of the AO is suspended for the relevant assessment years during the pendency of the settlement proceedings. Any satisfaction note recorded or proceedings initiated by the AO during this period are invalid.

4. The statutory scheme under section 153C and section 127 requires prompt transfer of incriminating material from the AO of the searched person to the AO of the other person. Any undue delay or hiatus violates the statutory provisions and vitiates the assessment proceedings.

5. Procedural safeguards and principles of natural justice, including opportunity to cross-examine third parties whose statements are relied upon, are essential but were not adjudicated in detail due to quashing on jurisdictional grounds.

6. On the merits of additions made on account of unexplained cash payments, the Tribunal refrained from adjudication due to quashing of assessments on legal grounds.

In conclusion, the Tribunal allowed the appeals of the assessee on the grounds that the consolidated satisfaction notes under section 153C were invalid, the approval under section 153D was mechanical and without application of mind, and the AO lacked jurisdiction due to pending settlement proceedings before the ITSC. Consequently, the entire assessment proceedings and additions were quashed. Identical grounds raised in other appeals were also accepted following the same reasoning.