2014 (12) TMI 54 - AT - Income Tax

Assumption of jurisdiction by the AO before issuing notice u/s 153C - Validity of order passed u/s 153C/143(3) Search and seizure u/s 132 Held that - There was nothing wrong in the satisfaction note and the forwarding of the entire matter by the Income Tax Officer, Ward-Ill (2), Ahmedabad to the AO of the petitioner at Bareilly - all the requirements of Section 153(c) were complied with by the Income Tax Officer, Ward-Ill (2), Ahmedabad - a search u/s 132A was carried out and bullion was seized - assessee established that the seized silver belongs to M/s Sarvesh Jewellers, Bareilly - the ownership and consignment of the petitioner was also confirmed by the AO of the petitioner at Bareilly - The Income Tax Officer, Ward-Ill (2), Ahmedabad did not commit any error in law, in recording the satisfaction note requesting the petitioner s Assessing officer to proceed under Section 153(c) - the officer u/s 153C, where he find that seized articles belong to some other person, has to forward a satisfaction note to the AO on such person - The satisfaction in such case is in respect of the material and disclosures of the person with which the articles or assets are found and not in respect of the person who whom they belong. In DSL Properties Pvt. Ltd. Vs. DCIT 2013 (9) TMI 123 - ITAT DELHI it has been held that if the AO is assessing the person searched as well as other person whose assets, books of account or documents were found at the time of search, then also, first while making the assessment in the case of the person searched, he has to record the satisfaction that the money bullion, jewellery or other valuable article or thing or books of account or documents belonged to the person other than the person searched - Then the copy of this satisfaction note is to be placed in the file of such other person and the relevant document should also be transferred from the file of the person searched to the file of such other person - the documents referred to in section 153C which is found during the search u/s. 132, which are seized or requisitioned belongs to a person other than the person searched and there should be a clear finding to that effect based on which only satisfaction as envisaged u/s. 153C can be inferred there was no mention of any valuable articles or things or any books of account or documents have been referred even in the assessment order for framing assessment u/s 153C - the returns were originally filed and processed and no additional material is found pertaining to the assessee which it is held to be belonging to the assessee, the AO does not assume jurisdiction for framing assessment u/s. 153C read with section 153A - The AO lacks jurisdiction to initiate proceedings u/s. 153C against the assessee and the issuance of notice itself is null and void and is set aside Decided in favour of assessee.

Summary

Issues Involved:
1. Jurisdiction and Validity of Notice under Section 153C.
2. Legitimacy of Additions Made by the Assessing Officer (AO).

Issue-wise Detailed Analysis:

1. Jurisdiction and Validity of Notice under Section 153C:

The primary issue raised by the assessee was the legality of the notice issued under Section 153C of the Income Tax Act, 1961. The assessee argued that the notice and subsequent assessment were invalid as they did not satisfy the statutory preconditions. The search operation on Rajdarbar Group led to the seizure of documents allegedly belonging to the assessee, prompting the AO to issue a notice under Section 153C. However, the assessee contended that no incriminating material was found that belonged to them, and the satisfaction note recorded by the AO was inadequate.

The Tribunal referred to the case of Pepsi Foods (P) Ltd. Vs. Asstt CIT, where the Delhi High Court emphasized that for a notice under Section 153C to be valid, the AO of the searched person must be "satisfied" that the seized documents belong to someone other than the searched person. This satisfaction must be based on cogent material and not on surmise or conjecture. The Tribunal found that the AO's satisfaction note in this case did not meet these requirements, as it lacked specific reasons or basis for the conclusion that the seized documents belonged to the assessee. The Tribunal also noted that the AO issued similar satisfaction notes for multiple assessees on the same date, indicating a mechanical and arbitrary approach.

The Tribunal concluded that the AO did not properly assume jurisdiction under Section 153C, rendering the notice and subsequent assessment void. Consequently, the Tribunal quashed the notice and the assessment orders for all the assessment years in question.

2. Legitimacy of Additions Made by the Assessing Officer (AO):

Since the Tribunal quashed the notice under Section 153C, the other grounds related to the additions made by the AO became academic and were not adjudicated. However, for completeness, the Tribunal noted the various additions made by the AO, including disallowances of professional and legal charges, lease deed expenses, interest expenses, and deferred revenue expenditure.

The AO had disallowed professional and legal charges and lease deed expenses, arguing that these were not related to the business of the assessee and were capital in nature. Interest expenses were disallowed on the grounds that the loans were not utilized for business purposes but were advanced interest-free to sister concerns. Deferred revenue expenditure was also disallowed as the Income Tax Act does not recognize this concept.

The Tribunal did not delve into the merits of these additions, as the primary issue of jurisdiction was decided in favor of the assessee, rendering the assessments invalid.

Conclusion:

The Tribunal allowed the appeals filed by the assessee, quashing the notices issued under Section 153C and the subsequent assessment orders for the assessment years 2006-07 to 2009-10, based on the improper assumption of jurisdiction by the AO. The other grounds related to the additions made by the AO were not adjudicated due to the quashing of the notices.