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2025 (5) TMI 286 - HC - Income TaxAssessment u/s 153C - whether a notice u/s 153C can be issued in respect of an assessment year in respect of which no incriminating material is found? HELD THAT - AO does not have any jurisdiction to issue a notice under Section 153C of the Act if the search on which the said notice is premised has not yielded any incriminating material having a bearing on the assessment of income of the assessee. The jurisdiction of the AO to issue a notice u/s 153C of the Act is predicated on the search u/s 132 of the Act or a requisition under Section 132A of the Act yielding any incriminating material and the AO of the searched person being satisfied that the assets so unearthed documents books of accounts or other material found during the search conducted u/s 132 of the Act or pursuant to a requisition made u/s 132A of the Act belongs to or pertains to the assessee (other than the searched person) or contains any information relating to the assessee. Once this condition is satisfied the AO can assume jurisdiction subject to being satisfied that the material has a bearing on the income of the assessee. In the present case the said jurisdictional condition is not satisfied as the search has not yielded any incriminating material which could confer jurisdiction to the AO to issue a notice under Section 153C of the Act in respect of AY 2018-19. Since no incriminating material whatsoever was found in respect of Assessee s income for FY 2017-18 relevant to AY 2018-19 the impugned notice as well as the impugned assessment order are set aside.
The core legal questions considered in this judgment are:
Issue-wise Detailed Analysis: 1. Jurisdiction to Issue Notice under Section 153C in Absence of Incriminating Material Legal Framework and Precedents: Section 153C empowers the AO to initiate assessment or reassessment proceedings in respect of a person other than the searched person, if incriminating material is found during a search under Section 132 or requisition under Section 132A. The AO's jurisdiction is contingent upon the existence of such incriminating material that has a bearing on the income of the assessee for the relevant assessment year. Key precedents include the Division Bench decision in Commissioner of Income-tax v. Kabul Chawla, which clarified the necessity of incriminating material for the exercise of jurisdiction under Section 153A, a provision analogous to Section 153C. The Supreme Court in Commissioner of Income-tax v. Abhisar Buildwell (2024) affirmed that without incriminating material, the AO cannot reassess completed assessments under Section 153A. The Supreme Court in Commissioner of Income-tax v. Sinhgad Technical Education Society also held that the AO has no jurisdiction under Section 153C absent incriminating material. Court's Interpretation and Reasoning: The Court emphasized that the power under Section 153C is enabling and not mandatory. The AO must be satisfied that the seized material has a direct nexus or bearing on the income of the assessee for the assessment year in question. Mere possession of documents or statements without such nexus cannot confer jurisdiction. Application to Facts: The impugned notice dated 24.08.2021 was issued without possession of any incriminating material relevant to AY 2018-19. The only seized document was an excel sheet found during the search of the Rakesh Jain Group, which did not mention the assessee or show any direct connection to its income for AY 2018-19. Treatment of Competing Arguments: The Revenue argued that the statement of Mr. Rakesh Jain recorded under Section 132(4) linked the excel sheet to the assessee, as it mentioned that shops were sold through the assessee. However, the Court found that the statement indicated sales through the assessee but did not establish the assessee as an investor or having undisclosed income pertaining to AY 2018-19. Conclusion: The Court held that the AO lacked jurisdiction to issue the notice under Section 153C since no incriminating material relevant to AY 2018-19 was found. The impugned notice was therefore without jurisdiction and liable to be quashed. 2. Reliance on Statement Recorded under Section 132(4) to Treat Documents as Incriminating Material Legal Framework: Section 132(4) allows recording of statements during search proceedings. Such statements can be used to interpret or give context to seized documents. However, the question arises whether a statement alone can convert otherwise innocuous documents into incriminating material. Court's Reasoning: The Court acknowledged that the AO relied on Mr. Rakesh Jain's statement to treat the excel sheet as incriminating material. However, the statement itself clarified that the excel sheet was the latest balance sheet of CCPL as on 17.03.2017, relating to FY 2016-17 (AY 2017-18). Since the impugned notice concerned AY 2018-19, the excel sheet could not be considered incriminating material for that year. Application to Facts: The excel sheet did not mention the assessee and had no direct bearing on AY 2018-19. The statement linked the sheet to sales through the assessee but did not establish undisclosed income or investment by the assessee for the relevant year. Conclusion: Even considering the statement under Section 132(4), the AO did not have incriminating material relevant to AY 2018-19. Thus, reliance on the statement did not cure the jurisdictional defect in issuing the notice. 3. Requirement of Nexus Between Seized Material and Relevant Assessment Year Legal Framework: The Court referred to the recent decision in Saksham Commodities Ltd. v. Commissioner of Income-tax (2024), which emphasized the necessity of a nexus between incriminating material and the relevant assessment year for which proceedings are initiated under Section 153C. Court's Reasoning: The Court reiterated that the power to reassess under Section 153C is contingent on the incriminating material having a bearing on the income for the relevant assessment year. The existence of power does not mandate its exercise unless justified by the facts. Application to Facts: The excel sheet related to FY 2016-17 and was thus relevant to AY 2017-18, not AY 2018-19. The AO's assumption that the excel sheet pertained to AY 2018-19 was unfounded. Conclusion: The absence of a nexus between the seized material and AY 2018-19 meant the AO could not validly initiate proceedings under Section 153C for that year. 4. Impact of Absence of Incriminating Material on Validity of Assessment and Demand Legal Framework: The Court relied on the principles established in Kabul Chawla and Abhisar Buildwell, that in absence of incriminating material, assessments under Section 153A or 153C cannot be validly made or reopened. For completed assessments, reassessment under Sections 147/148 may be available if conditions are met, but not under Sections 153A/153C. Court's Reasoning: Since the impugned assessment order dated 27.12.2022 was based on the impugned notice lacking jurisdiction, the order and consequent demand notice under Section 156 were also invalid. Application to Facts: The addition of Rs. 43,85,50,300/- under Section 69A and demand of Rs. 61,90,78,037/- were premised on the excel sheet and statement of Mr. Rakesh Jain, which did not constitute incriminating material for AY 2018-19. Conclusion: The impugned assessment order and demand notice were set aside as they were founded on jurisdictionally invalid proceedings. Significant Holdings: "Although Section 153-A does not say that additions should be strictly made on the basis of evidence found in the course of the search, or other post-search material or information available with the AO which can be related to the evidence found, it does not mean that the assessment 'can be arbitrary or made without any relevance or nexus with the seized material. Obviously an assessment has to be made under this Section only on the basis of seized material." "In case no incriminating material is unearthed during the search, the AO cannot assess or reassess taking into consideration the other material in respect of completed assessments/unabated assessments. Meaning thereby, in respect of completed/unabated assessments, no addition can be made by the AO in absence of any incriminating material found during the course of search under Section 132 or requisition under Section 132-A of the 1961 Act." "The AO would have no jurisdiction to initiate proceedings under Section 153C of the Act absent any incriminating material found in case of a search conducted under Section 132 of the Act or requisition made under Section 132A of the Act." "Section 153C enables and empowers the jurisdictional Assessing Officer to assess or reassess the six assessment years or the 'relevant assessment year'. The Act thus sanctions and confers an authority upon the Assessing Officer to exercise the power placed in his hands for up to a maximum of ten assessment years. Despite the conferral of that power, the question which would remain is whether the facts and circumstances of a particular case warrant or justify the invocation of that power." "The words 'have a bearing on the determination of the total income of such other person' as appearing in section 153C would necessarily have to be conferred pre-eminence. Therefore, and unless the Assessing Officer is satisfied that the material gathered could potentially impact the determination of total income, it would be unjustified in mechanically reopening or assessing all over again all the ten assessment years that could possibly form part of the block of ten years." The Court conclusively determined that the impugned notice under Section 153C and the consequent assessment order for AY 2018-19 were without jurisdiction and unsustainable in law due to absence of any incriminating material bearing on the assessee's income for that year. The additions and demand raised thereon were therefore quashed. The judgment firmly reiterates the principle that the AO's jurisdiction under Sections 153A and 153C is strictly contingent upon the existence of incriminating material discovered during search or requisition, and that such material must have a direct nexus with the relevant assessment year(s) for which proceedings are initiated.
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