2019 (6) TMI 1393 - AT - Income Tax

Validity of assessment order passed u/s 143(3) r.w.s. 153C - AO of the searched person did not record satisfaction as required u/s 153C - HELD THAT - From the conjoint reading of the provisions of section 153C, the decision in the case of CIT vs M/s Calcutta Knitwears 2014 (4) TMI 33 - SUPREME COURT and CBDT Circular No.24/2015, it is very clear that even if the AO of the searched person and the other person is one and the same, then also he is required to record separate satisfaction as required u/s 153C of the Act. In this case, on perusal of satisfaction note furnished by the Ld. DR, we find that the said satisfaction note was taken from assessment record of the assessee, which is evident from the copy of the note filed by the Ld. DR that it is an order sheet entry in the name of M/s Karnataka Strips Ltd. and the heading states that reasons recorded prior to issue of notices u/s 153C of the Act. The said satisfaction note was recorded by the AO having jurisdiction over other person i.e. in this case, the assessee, before issue of notice u/s 153C - satisfaction as required u/s 153C before transmitting books of accounts or other assets belongs to or relates to other than the searched person was not recorded by the AO of searched person as required u/s 153C consequently, the whole proceedings including assessment order passed u/s 143(3) r.w.s. 153C of the Act, is bad in law and liable to be quashed. Hence, we quashed the assessment order passed by the AO u/s 143(3) r.w.s. 153C for AY 2003-04 to 2006-07. AY 2007-08 - As per the provisions of section 153A r.w.s 153C of the Act, AY 2007-08, ought to have been completed u/s 153C of the Act. This also means that the AO of the person searched ought to have record satisfaction as required u/s 153C that any money or bullion, jewellery or other valuable articles or thing are seized or requisitioned belongs to or any books of accounts or documents seized or requisitioned pertains or pertains to any person other than the person referred to in section 153A. Since the AO of the searched person has not recorded satisfaction as required u/s 153C before handing over books of accounts or assets of other person, the whole proceedings including assessment order passed u/s 143(3) r.w.s. 153C for AY 2007-08 bad in law and liable to be quashed. Hence, we quashed assessment order passed u/s 143(3) r.w.s. 153C of the Act for 2007-08

Summary

Issues Involved:
1. Legality of assessment completed under Section 143(3) read with Section 153C of the Income Tax Act.
2. Validity of notice issued under Section 153C.
3. Disallowance of depreciation on fixed assets.
4. Disallowance of share issue expenses.
5. Initiation of penalty proceedings under Section 271(1)(c).

Detailed Analysis:

1. Legality of Assessment Completed Under Section 143(3) Read with Section 153C:
The primary issue was the legality of the assessment completed under Section 143(3) read with Section 153C of the Income Tax Act. The assessee contended that the notice issued under Section 153C was invalid as the Assessing Officer (AO) of the searched person did not record the required satisfaction. The Tribunal referred to the Supreme Court's decision in CIT vs M/s Calcutta Knitwears, which mandates that the AO must record satisfaction before proceeding under Section 153C. The Tribunal found that the AO did not record such satisfaction, rendering the assessment proceedings invalid. Consequently, the assessment orders for AY 2003-04 to 2006-07 and AY 2007-08 were quashed.

2. Validity of Notice Issued Under Section 153C:
The assessee argued that the notice issued under Section 153C was bad in law as the AO did not record satisfaction as required. The Tribunal noted that the AO of the searched person and the 'other person' (the assessee) was the same, but still, separate satisfaction was required. The Tribunal found that the satisfaction note was recorded in the assessee's file and not by the AO of the searched person. This procedural lapse made the notice and subsequent proceedings invalid.

3. Disallowance of Depreciation on Fixed Assets:
The AO had disallowed depreciation on certain fixed assets, claiming the purchases were not genuine. The assessee argued that the purchases were supported by admissible evidence and verified by a Chartered Engineer. However, since the Tribunal quashed the assessment orders on legal grounds, it did not specifically adjudicate on the merits of this issue.

4. Disallowance of Share Issue Expenses:
The AO disallowed share issue expenses under Section 35D of the Act. The assessee contested this, but again, the Tribunal did not delve into the merits due to the quashing of the assessment orders on legal grounds.

5. Initiation of Penalty Proceedings Under Section 271(1)(c):
The assessee challenged the initiation of penalty proceedings, which the CIT(A) had held to be premature. The Tribunal did not address this issue separately as the primary assessment orders were quashed, making the penalty proceedings moot.

Conclusion:
The Tribunal quashed the assessment orders for AY 2003-04 to 2006-07 and AY 2007-08 due to the AO's failure to record the required satisfaction under Section 153C, as mandated by the Supreme Court's decision in CIT vs M/s Calcutta Knitwears. Consequently, the issues regarding disallowance of depreciation, share issue expenses, and penalty proceedings became academic and were not specifically adjudicated. The appeals filed by the assessee for all assessment years were allowed.