2015 (8) TMI 714 - AT - Income Tax

Validity of assessment u/s 153C - Held that - On a reading of Section 153A and 153C the exercise that is required to be done by the AO has been spelt out by the Coordinate Bench of this Tribunal in the case of DSL Properties Pvt. Ltd. Vs. DCIT 2013 (9) TMI 123 - ITAT DELHI has held that if the Assessing Officer 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. Thereafter, in the capacity of the Assessing Officer of such other person, he has to issue the notice u/s 153A read with section 153C. The Assessing Officer of the searched person and such other person may be the same but these are two different assessees and therefore the Assessing Officer has to carry out the dual exercise first as the Assessing Officer of the person searched in which he has to record the satisfaction, during the course of assessment order proceedings of the person searched. We concur with the said view of the coordinate Bench and would like to add that this satisfaction must be an objective satisfaction based on an enquiry by the AO to establish that 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. Such a finding by the AO is required for attaining the said satisfaction and then it should be recorded in the file of the assessee which is a sine-qua-non to trigger the jurisdiction for the AO to proceed against such other person. In this case this exercise of recording the satisfaction during the assessment proceedings of the person searched has not been carried out and the satisfaction does not satisfy the requirement of Section 153C. We could not find any mention of any seized materials like valuable articles or things or any books of account or documents have been referred even in the impugned assessment orders. The AO lacks jurisdiction to initiate proceedings u/s. 153C against the assessee and therefore, the issuance of notice itself is null and void and therefore quashed. Consequently, the impugned assessment order passed u/s. 153C is also a nullity. - Decided in favour of assessee.

Summary

Issues Involved:
1. Legality of Notice and Assessment under Section 153C.
2. Validity of Additions Made by the Assessing Officer (AO).
3. Verification of Purchases and Sales.
4. Disallowance of Expenses.
5. Unexplained Cash Credit.
6. Procedural Compliance and Natural Justice.

Detailed Analysis:

1. Legality of Notice and Assessment under Section 153C:
The primary issue raised by the assessee was the lack of satisfaction recorded by the AO of the searched person before initiating proceedings under Section 153C. The tribunal emphasized that the recording of satisfaction by the AO of the person searched is a condition precedent for the AO of the 'other person' to acquire jurisdiction. The tribunal referred to various case laws, including the Hon'ble Delhi High Court's decision in Pepsico India Holiday (P) Ltd. vs. ACIT, which mandated that the AO of the searched person must record satisfaction that the seized documents do not belong to the searched person but to another person. The tribunal found that no such satisfaction was recorded in the present case, rendering the notice issued under Section 153C and the subsequent assessment void ab initio.

2. Validity of Additions Made by the AO:
The AO made several additions, including disallowance of purchases under Section 69C, disallowance of expenses, and treating certain credits as unexplained cash credits under Section 68. The assessee argued that these additions were unjust, unlawful, and arbitrary. The tribunal noted that the AO's findings were based on presumptions and lacked independent verification, especially concerning the purchases and sales.

3. Verification of Purchases and Sales:
The AO directed the assessee to prove its trading activities and produce sales tax records. The assessee claimed that it dealt with tax-free goods and thus did not file sales tax returns. The AO found no independent proof of sale/purchase of goods except for bank transactions. The tribunal observed that the AO's findings were based on the absence of physical verification of stock and premises, which were claimed to be unverifiable due to the lapse of time. The tribunal found the AO's approach to be flawed as it did not consider the assessee's explanations adequately.

4. Disallowance of Expenses:
The AO disallowed 100% of the expenses claimed by the assessee in the profit and loss account, amounting to Rs. 3,76,465/-, on the grounds that they were unverifiable. The tribunal found this disallowance to be arbitrary and based on mere presumptions without pointing out specific defects in the books of accounts or evidence produced by the assessee.

5. Unexplained Cash Credit:
The AO added Rs. 4,51,000/- as unexplained cash credit under Section 68, stating that the identity and genuineness of the shareholders were not proved. The assessee contended that this amount was on account of a bonus issue. The tribunal noted that the AO did not provide adequate opportunity to the assessee to explain the nature and source of the credits, thus violating principles of natural justice.

6. Procedural Compliance and Natural Justice:
The assessee argued that the assessment proceedings were conducted without complying with the procedures prescribed under Section 153C and that the AO ignored the submissions and explanations provided. The tribunal observed that the AO used statements of various persons without giving the assessee a copy or an opportunity to cross-examine, which was against the principles of natural justice. The tribunal emphasized that any exercise of power under Section 153C must be carried out with extreme care and caution, ensuring that the rights of the assessee are not violated.

Conclusion:
The tribunal quashed the notices issued under Section 153C and the subsequent assessments for all the assessment years in question, holding them to be void ab initio due to the lack of proper satisfaction recorded by the AO of the searched person. The tribunal also found the additions made by the AO to be arbitrary and based on presumptions, lacking independent verification and adequate procedural compliance. The appeals were allowed in favor of the assessee.