2018 (7) TMI 2021 - AT - Income Tax

Validity of assessment proceedings u/s. 153C - absence of a finding in the satisfaction notes for the documents found and seized are of incriminating nature - HELD THAT - The legislature has never intended to provide a blanket license to the revenue for initiating proceedings u/s.153C in the cases of all such assessees of whom the documents are found and seized in search of a 3rd party. The documents found and seized should be prima facie of incriminating nature for providing the jurisdiction to initiate proceedings u/s.153C on such persons. In this case, following the ratio of IBC Knowledge Park Pvt. Ltd. 2016 (5) TMI 372 - KARNATAKA HIGH COURT and for the other reasons as deliberated above, we hold that in the absence of a finding in the satisfaction notes for the documents found and seized are of incriminating nature, no legally valid proceedings u/s.153C can be initiated. In the present case, undisputedly, there is no such finding. In view of all the above discussion, we are, therefore, of the considered opinion that the initiation of proceedings u/s.153C cannot be validated on this count too. Accordingly, the proceedings u/s.153C and consequential assessment deserve to be quashed. Once, the impugned assessment u/s. 153C of the Act has been quashed on legal aspect of the case, as discussed above, we need not to adjudicate upon extensive arguments made by both the parties on the merits of the addition made and sustained by the authorities below. - Decided in favour of assessee.

Summary

Issues Involved:
1. Validity of proceedings under Section 153C of the Income Tax Act.
2. Addition of ?90,00,000/- as share capital under Section 68 of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Validity of Proceedings under Section 153C of the Income Tax Act:

The appellant challenged the initiation of proceedings under Section 153C, arguing that the documents found during the search on a third party were not incriminating in nature. The satisfaction note dated 21.02.2014 recorded by the Assessing Officer (A.O.) of the searched person and the satisfaction note dated 03.03.2014 recorded by the A.O. of the assessee were scrutinized. The appellant contended that the satisfaction notes were based on incorrect and non-existent facts, specifically mentioning a "trial balance" that was not found among the seized documents.

The tribunal observed that the satisfaction note must correctly identify the seized documents and be based on accurate facts. The tribunal found that the satisfaction note recorded by the A.O. of the searched person mentioned a trial balance that did not exist in the seized documents, rendering the satisfaction note defective. This defect was carried forward by the A.O. of the assessee, who relied on the incorrect satisfaction note without independent verification.

The tribunal held that a valid satisfaction note is a prerequisite for initiating proceedings under Section 153C. The satisfaction note must reflect the incriminating nature of the seized documents, which was absent in this case. Citing the Karnataka High Court's decision in CIT Vs. IBC Knowledge Park Pvt. Ltd., the tribunal emphasized that the satisfaction note must indicate that the documents are incriminating and represent undisclosed income.

The tribunal concluded that the initiation of proceedings under Section 153C was invalid due to the defective satisfaction note and the absence of incriminating evidence. Consequently, the assessment proceedings under Section 153C were quashed.

2. Addition of ?90,00,000/- as Share Capital under Section 68 of the Income Tax Act:

The appellant also contested the addition of ?90,00,000/- received as share capital from M/s. Mridul Securities Pvt. Ltd. under Section 68. The A.O. had added this amount, treating it as bogus share capital received in the guise of accommodation entry, based on the lack of corroborative evidence and the financial standing of the appellant.

However, since the tribunal quashed the proceedings under Section 153C on legal grounds, it did not delve into the merits of the addition under Section 68. The tribunal's decision to invalidate the proceedings under Section 153C rendered the examination of the addition unnecessary.

Conclusion:

The tribunal allowed the appeal of the assessee, quashing the assessment proceedings under Section 153C due to the defective satisfaction note and the absence of incriminating evidence. The tribunal did not address the merits of the addition under Section 68, as the invalidation of the proceedings under Section 153C was sufficient to dispose of the appeal. The order was pronounced in the open court on 18th July 2018.