2017 (11) TMI 909 - AT - Income Tax

Notice issued under section 153C - satisfaction note has not been recorded by the AO in his capacity as AO of the searched person - whether there is no satisfaction that documents belonging to the assessee were found? - Held that - Assessing Officer in the capacity of the searched person only examines the records seized and come to the conclusion as to which of the such money, bullion jewellery or documents belongs to the searched person and to the others. The legislature has provided for recording of such satisfaction by the Assessing Officer of the person searched and thus the Assessing Officer cannot be allowed to record satisfaction in the capacity of Assessing Officer of other person. In our opinion no assessment or other proceeding can be lawfully taken up and completed unless the concerned authority has jurisdiction to do so and the lack of jurisdiction goes to the foundation of the matter and if the foundation is missing, the entire building collapse. Thus, the contentions advanced by the Revenue are rejected. We further find that the Central Board of Direct Taxes (CBDT), who is the Apex Body controlling the Administration of the Income Tax Department, in the aforesaid Circular has clearly directed the officers of the Department either not to file appeals or to withdraw the appeals where satisfaction note is not recorded by the Assessing Officer in the capacity of searched person. In such circumstances, advancing of above arguments are futile and wastage of resources of the Income Tax Department. There is no satisfaction recorded that any document belonging to the assessee was found during the search, it is seen that in the satisfaction note, the assessing officer has not recorded any satisfaction that documents belonging to the assessee was found during search. There is amendment in the Income Tax Act with effect from 1st June 2015 whereby the seized documents even if they pertains to or relates to other person and does not belong to other person can be the basis for initiation of proceedings u/s 153C of the Act. We quash the proceeding initiated under section 153C of the Act on the ground that satisfaction note was not recorded by the Assessing Officer in the capacity of Assessing Officer of searched person and in any case since there is no satisfaction recorded of any seized documents being belonging to the assessee, hence, the other grounds on merits challenging the additions have become academic, which do not require adjudication. As a result, the appeal of the assessee stands allowed.

Issues Involved:
1. Legality and jurisdiction of the notice under section 153C.
2. Addition of ?26,91,041 on account of unexplained cash salary.
3. Confirmation of the addition by the Commissioner of Income Tax (Appeal).

Detailed Analysis:

1. Legality and Jurisdiction of the Notice Under Section 153C:
The primary issue was whether the notice issued under section 153C was valid and within jurisdiction. The assessee argued that the notice was illegal as the "satisfaction note" was not recorded by the AO in his capacity as the AO of the "searched person." The assessee also contended that there was no satisfaction that documents "belonging to" the assessee were found.

The Tribunal examined the provisions of section 153C, which require the AO of the searched person to record satisfaction that documents found during the search belong to a person other than the searched person. The Tribunal referred to the Supreme Court's judgment in the case of CIT Vs. Calcutta Knitwears, which mandates that the satisfaction note must be prepared by the AO before transferring records to the AO of the other person. It was noted that even if the AO of the searched person and the other person are the same, the satisfaction must be recorded in the capacity of the AO of the searched person.

The Tribunal found that the satisfaction note in this case was recorded by the AO in his capacity as the AO of the assessee (the other person) and not as the AO of the searched person. Thus, the pre-requisite of recording satisfaction by the AO of the searched person was not fulfilled, making the notice under section 153C invalid.

2. Addition of ?26,91,041 on Account of Unexplained Cash Salary:
The AO made an addition of ?26,91,041 on account of unexplained cash salary based on documents seized during the search. The assessee argued that no documents belonging to the assessee were found and that there was no satisfaction recorded that any document belonging to the assessee was found during the search.

The Tribunal noted that the satisfaction note did not record any satisfaction that documents "belonging to" the assessee were found during the search. It was highlighted that prior to the amendment in June 2015, the seized documents had to be shown to "belong" to the other person and not merely pertain to or relate to them. Since this requirement was not met, the addition was deemed invalid.

3. Confirmation of the Addition by the Commissioner of Income Tax (Appeal):
The CIT(A) had dismissed the assessee's appeal, upholding the AO's order. The Tribunal, however, found that the proceedings under section 153C were initiated without proper jurisdiction due to the lack of a valid satisfaction note. Consequently, the confirmation of the addition by the CIT(A) was also invalid.

Conclusion:
The Tribunal quashed the proceedings initiated under section 153C due to the lack of proper jurisdiction, as the satisfaction note was not recorded by the AO in his capacity as the AO of the searched person. Consequently, the additions made on account of unexplained cash salary were also invalid. The Tribunal allowed the appeals for all the assessment years 2009-10, 2010-11, and 2011-12.

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