2025 (7) TMI 1426 - AT - Income Tax

Assessment u/s 153C - relevance of seized material in search - Combined satisfaction note for various assessment years - AO in the instant case on the basis of information obtained that certain documents / loose papers pertaining to or information contained in papers / documents related to the assessee were found during the course of search in the case of Yuvraj Dhamale group of cases issued notice u/s 153C of the Act on the basis of satisfaction note dated 30.04.2021. HELD THAT - AO in the instant case on the basis of information obtained that certain documents / loose papers pertaining to or information contained in papers / documents related to the assessee Subhash Jivraj Jain were found during the course of search on 26.09.2017 in the case of Yuvraj Dhamale group of cases issued notice u/s 153C of the Act on the basis of satisfaction note dated 30.04.2021. We find the AO completed the assessment determining the total income of Rs. 201, 38, 624/- by making addition of Rs. 2, 11, 00, 000/- the details of which are already given in the preceding paragraphs. CIT(A) deleted the addition. It is the submission of the Ld. Counsel for the assessee that 153C proceedings are not valid on account of combined satisfaction note issued for different assessment years and therefore the CO filed by the assessee should be allowed. Combined satisfaction note - AO has passed a combined satisfaction note for various assessment years. We find in the case of Sunil Kumar Sharma 2024 (2) TMI 116 - KARNATAKA HIGH COURT 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. Assessee appeal allowed.

Summary

ISSUES:

Whether additions made on the basis of seized documents found during search in the premises of a third party under section 153C of the Income Tax Act, 1961, without direct evidence or participation of the assessee, are justified.Whether the Assessing Officer's reliance on statements recorded under section 132(4) and documents seized from third parties to make additions in the hands of the assessee is valid.Whether the Income Tax Settlement Commission's acceptance of cash interest expenses incurred by the third party group validates additions made in the assessee's hands.Whether the principle laid down by the Supreme Court in Sumati Dayal v. CIT regarding ascertaining the true nature of transactions in light of surrounding circumstances applies to the assessment.Whether a consolidated satisfaction note covering multiple assessment years complies with the requirements of section 153C of the Income Tax Act, 1961.Whether issuance of notice and assessment proceedings under section 153C based on a consolidated satisfaction note for multiple assessment years are valid or vitiate the proceedings.Whether conflicting judicial decisions on the validity of consolidated satisfaction notes should be reconciled or the view favorable to the assessee should be adopted in absence of binding jurisdictional authority.

RULINGS / HOLDINGS:

The additions made solely on the basis of seized loose papers found at the residence of a third party and statements recorded in third-party proceedings, without direct involvement or participation of the assessee, are not "tangible material" and thus not justified; the additions were deleted by the appellate authority relying on binding Tribunal precedent.The Assessing Officer erred in making additions based on documents seized from third parties without any corroborative evidence or satisfactory explanation from the assessee, violating principles of natural justice.The acceptance by the Income Tax Settlement Commission of cash interest expenses claimed by the third party group does not validate additions in the assessee's hands in absence of direct evidence linking the assessee to such transactions.The principle in Sumati Dayal v. CIT that "the true nature of transaction have to be ascertained in the light of surrounding circumstances" was not properly applied by the Assessing Officer and the appellate authority rightly considered this in deleting the additions.A consolidated satisfaction note covering multiple assessment years is not in accordance with the statutory requirement under section 153C of the Income Tax Act, 1961, which mandates satisfaction to be recorded year-wise.The issuance of notice and framing of assessment under section 153C based on a consolidated satisfaction note for multiple assessment years vitiates the entire assessment proceedings and warrants quashing of the assessment orders.In presence of conflicting judicial decisions on the issue of consolidated satisfaction notes, the view favorable to the assessee is to be adopted, especially when the jurisdictional High Court has not ruled otherwise; further, the Supreme Court's dismissal of SLP against the High Court decision upholding year-wise satisfaction reinforces this position.

RATIONALE:

The legal framework under section 153C mandates that income escaping assessment in the case of a searched person can be assessed in the hands of another person if incriminating material relating to that other person is found during search. However, the material must be "tangible" and directly linkable to the assessee. Reliance on third-party statements or documents seized from other premises without direct evidence or opportunity to the assessee undermines principles of natural justice and evidentiary requirements.The Tribunal relied on precedent decisions holding that seized loose papers from third parties cannot be treated as conclusive evidence without further enquiry, and additions based solely on such material fail the test of justification.The Income Tax Settlement Commission's order was examined and found that the cash expenses claimed were on estimation basis without supporting evidence, weakening the Assessing Officer's reliance on such acceptance to justify additions in the assessee's hands.The Supreme Court's principle in Sumati Dayal v. CIT requires that the true nature of transactions be ascertained considering all surrounding circumstances, which was not adhered to by the Assessing Officer but was considered by the appellate authority.Section 153C requires that satisfaction for initiating proceedings must be recorded for each assessment year separately. The Karnataka High Court's decision held that a consolidated satisfaction note for multiple years is invalid, a position upheld by the Supreme Court in dismissing SLP against it, thereby establishing binding precedent.The Tribunal followed the coordinate bench and High Court decisions to quash the assessment proceedings due to the invalidity of the consolidated satisfaction note, emphasizing the statutory requirement of year-wise satisfaction.In light of conflicting decisions, the Tribunal applied the principle of beneficiary interpretation favoring the assessee, supported by Supreme Court authority, and reconciled conflicting rulings by following the decision most factually aligned and binding in the jurisdiction.