2025 (6) TMI 2043 - AT - Income Tax

Assessment u/s 153C - Assessment of income of any other person - period of limitation - satisfaction note - jurisdiction of the AO in initiating proceedings u/s.153C for the A.Y. 2008-09 in light of second proviso to section 153A(1) of the Act and proviso to section 153C(1) - non-application of mind while according sanction u/s.153D - absence of incriminating material to support the assessment u/s.153C of the Act lack of jurisdiction to pass the assessment order under the said provision and failure to properly record satisfaction as mandated u/s.153C - HELD THAT - In light of the foregoing discussion and with due respect to the binding precedent laid down by the Hon ble Supreme Court in CIT v. Jasjit Singh 2023 (10) TMI 572 - SUPREME COURT we are of the considered opinion that the AO has committed an error in issuing notice u/s 153C of the Act to the assessee for the Assessment Year 2008-09. This conclusion is drawn on the basis that the satisfaction note by the AO was recorded on 23.09.2014 which clearly falls outside the statutorily permissible period of six assessment years. Accordingly the notice issued u/s.153C and the consequential assessment order passed u/s.143(3) r.w.s.153C of the Act are barred by limitation and are therefore liable to be quashed. Consequently we hereby quash the assessment order dated 31.03.2015 passed by the AO u/s.143(3) r.w.s. 153C of the Act for AY 2008-09. Lack of proper recording of satisfaction - On perusal of the Section 153C of the Act provides for assessment of income of a person other than the person searched where certain seized or requisitioned material belonging to or relating to such other person is found during the course of a search u/s.132 or a requisition u/s.132A of the Act. However the invocation of Section 153C is not automatic. It is a jurisdictional provision and its valid invocation is subject to strict conditions precedent which have been repeatedly emphasized by the Hon ble Supreme Court and various High Courts. This provision requires the AO of the searched person to be satisfied that the seized material belongs to or pertains to or relates to the other person and further that such material is incriminating in nature leading to the conclusion of undisclosed income. We note that the reading of the satisfaction note reveals that it does not constitute a satisfaction note in the manner contemplated u/s.153C of the Act. Instead it merely records a procedural observation regarding the substitution of the legal representative of the deceased assessee and cannot be construed as a valid or reasoned satisfaction for the purpose of initiating proceedings u/s.153C of the Act. On perusal of the satisfaction recorded in the present case for the assessment years AY 2009-10 to AY 2012-13 there is a complete absence of proper and independent satisfaction as required u/s.153C of the Act for the following reasons a. There is no contemporaneous recording of satisfaction by the AO of the person searched linking the seized material to the assessee. b. There is no recording of satisfaction by the AO of the assessee (the other person ) independently examining and determining that the seized material belongs to or pertains to the assessee. c. The assessment orders are silent on the nature of seized documents or materials and do not demonstrate any live nexus between the seized material and the alleged undisclosed income of the assessee. d. The same satisfaction note appears to have been used in a mechanical and templated manner for multiple years which is contrary to the principles laid down by the Supreme Court. Hence in our view the jurisdictional power for initiating assessment u/s.153C is wholly absent in the present case for all the A.Ys. 2009-10 to 2012-13. In the present case on hand the satisfaction note is completely silent on whether the diary contains any incriminating entries.There is no mention of how the contents of the diary lead to the discovery of undisclosed income in the hands of Late Shri Dharmi Chand or his legal heir. The satisfaction note is based solely on post-search correspondence and statements not on independent analysis of the seized material. There is no evidence that the AO examined the diary to verify that it belonged to and incriminated the other person. This fails the standard of objective satisfaction based on material required under Calcutta Knitwears 2014 (4) TMI 33 - SUPREME COURT The satisfaction note is not provided any evidence as an incriminating material relating to the assessee and also does not contain any whisper of the undisclosed income to be assessed on the assessee. Therefore we are of the view that the jurisdiction u/s.153C cannot be invoked in the absence of incriminating material. Further the law requires a high threshold of satisfaction for the following reasons to issue notice u/s.153C of the Act to any other person To protect third parties from arbitrary assessments based on mere suspicion; To ensure that seized material has clear nexus with alleged undisclosed income of such person; To prevent roving and fishing inquiries in the guise of proceedings u/s.153C. Further in our considered view that it is a settled proposition of law that if the jurisdictional foundation is lacking the entire assessment collapses. As held in Calcutta Knitwears supra and reaffirmed in Jasjit Singh 2023 (10) TMI 572 - SUPREME COURT the absence of valid satisfaction strikes at the root of the jurisdiction u/s.153C of the Act. Consequently any order passed in such a scenario is non-est void ab initio and liable to be quashed. Assessee appeal allowed.

Summary

The core legal questions considered in this case relate primarily to the jurisdictional validity and procedural correctness of assessments framed under Section 153C of the Income Tax Act for the assessment years 2008-09 to 2012-13. Specifically, the issues include:

1. Whether the assessment for AY 2008-09 under Section 153C is barred by limitation, given the date of recording satisfaction by the Assessing Officer.

2. Whether the Assessing Officer validly recorded satisfaction as required under Section 153C before initiating proceedings against the assessee for AYs 2009-10 to 2012-13.

3. Whether the satisfaction note recorded by the AO meets the statutory requirements, including being based on incriminating seized material that belongs to or relates to the assessee.

4. Whether the assessment orders passed under Section 153C for AYs 2008-09 to 2012-13 are valid in the absence of proper jurisdictional foundation and adherence to procedural safeguards.

5. Ancillary issues regarding the evidentiary basis for additions made on account of unexplained investments and interest income purportedly arising from money lending activity, including the sufficiency and reliability of seized documents (notably a diary), and the absence of corroborative material such as promissory notes or mortgage deeds.

Issue-wise Detailed Analysis

1. Limitation Bar for AY 2008-09 Assessment under Section 153C

The legal framework governing limitation for assessments under Section 153C, as it stood prior to the Finance Act 2017 amendment, mandates that the Assessing Officer can initiate assessment or reassessment only for the six assessment years immediately preceding the year in which the satisfaction note is recorded. The satisfaction note in this case was recorded on 23.09.2014, corresponding to AY 2015-16. Therefore, the permissible block of years for assessment under Section 153C was AY 2009-10 to AY 2014-15.

The Court relied on authoritative Supreme Court precedents, notably CIT v. Calcutta Knitwears and CIT v. Jasjit Singh, which hold that the recording of satisfaction is a jurisdictional prerequisite and the limitation period runs from the date of such recording. Any assessment initiated beyond this six-year window is illegal and without jurisdiction.

Applying this legal principle, the assessment for AY 2008-09 falls outside the permissible six-year block and is thus barred by limitation. The Court concluded that the assessment order for AY 2008-09 is void ab initio and liable to be quashed on this ground alone.

2. Validity of Recording Satisfaction under Section 153C for AYs 2009-10 to 2012-13

Section 153C requires a two-step satisfaction process: first, the AO of the searched person must be satisfied that seized material belongs to or relates to another person; second, the AO of that other person must independently record satisfaction before initiating proceedings. This satisfaction must be clear, specific, and based on incriminating material that leads to the discovery of undisclosed income.

The Court examined the satisfaction note dated 23.09.2014 and found it deficient on multiple counts:

• It merely records statements by third parties that the seized diary belongs to the deceased assessee, without independent verification or analysis of the diary's contents.
• It does not establish that the diary contains incriminating entries or how such entries lead to the discovery of undisclosed income.
• There is no evidence of contemporaneous satisfaction recorded by the AO of the searched person or the AO of the other person, independently applying mind to the seized material.
• The satisfaction note appears mechanical and templated, used uniformly for multiple assessment years without year-wise specific satisfaction.

The Court relied on Supreme Court and High Court rulings (CIT v. Sinhgad Technical Education Society, Pepsi Foods Pvt. Ltd. v. ACIT, RRJ Securities Ltd. v. CIT) emphasizing that satisfaction must be based on specific incriminating material and cannot be vague or mechanical. The absence of such satisfaction strikes at the root of jurisdiction, rendering the assessments void ab initio.

3. Jurisdictional Foundation and Procedural Compliance under Section 153C

The Court underscored that the jurisdictional foundation for invoking Section 153C is strict and mandatory. The AO must record satisfaction that seized material belongs to or relates to the other person and that the material is incriminating. Only then can the material be handed over to the AO of the other person who must independently record satisfaction and issue notice.

In this case, the AO of the searched person and the AO of the other person were the same individual, but no separate or independent satisfaction was recorded. The assessment orders failed to demonstrate any nexus between the seized diary and the alleged undisclosed income. The satisfaction note was procedural and did not meet the statutory threshold.

Consequently, the Court held that the assessments for AYs 2009-10 to 2012-13 are without jurisdiction and liable to be quashed.

4. Evidentiary Basis for Additions on Money Lending Activity

The assessee challenged the additions on grounds that they were based solely on diary entries seized during the search, which were mere jottings lacking corroborative evidence such as promissory notes, mortgage deeds, or books of account. The assessee also contended that no inquiries were made with alleged borrowers and that the assessee lacked the resources to conduct large-scale money lending.

The Court noted these contentions but primarily focused on jurisdictional infirmities to quash the assessments. The evidentiary issues, while raised, were subsumed by the finding that the entire assessment was without jurisdiction due to defective satisfaction recording and limitation bar.

Treatment of Competing Arguments

The Revenue argued for confirmation of the assessments, asserting the validity of the satisfaction note and the assessment orders. However, the Court found the Revenue's reliance on the satisfaction note unconvincing due to its procedural nature and lack of independent analysis. The Court gave precedence to binding Supreme Court precedents mandating strict compliance with jurisdictional conditions.

Conclusions

The Court concluded that:

• The assessment for AY 2008-09 under Section 153C is barred by limitation and void ab initio.
• The assessments for AYs 2009-10 to 2012-13 suffer from jurisdictional infirmities due to the absence of valid, independent, and reasoned satisfaction as mandated under Section 153C.
• The satisfaction note relied upon is insufficient to confer jurisdiction as it lacks specific reference to incriminating material and does not demonstrate nexus with undisclosed income.
• Accordingly, all assessments under Section 153C for AYs 2008-09 to 2012-13 are quashed.

Significant Holdings

"The AO must be satisfied that the seized material pertains to such other person... The period of six years has to be reckoned backward from the assessment year in which such satisfaction is recorded."

"The absence of valid satisfaction strikes at the root of the jurisdiction u/s.153C of the Act. Consequently, any order passed in such a scenario is non-est, void ab initio, and liable to be quashed."

"Satisfaction must be clear, specific, and refer to seized material that belongs to and is incriminating against the other person."

"The jurisdictional power for initiating assessment u/s.153C is wholly absent in the present case for all the assessment years due to lack of proper and valid recording of satisfaction."

"Assessments framed beyond the statutory six-year period from the date of recording satisfaction are barred by limitation and cannot be sustained."