2018 (4) TMI 1005 - HC - Income Tax

Assessment u/s 153C r.w.s.143(3) or only under Section 143(3) - function served by a satisfaction note under Section 153C - Held that - The failure of the AO to record a specific satisfaction as to how the recovered material belonged to the assessee in the note that preceded the notice issued under it, vitiates the assessments. As far as the pending assessment year is concerned, the return was filed on 29.09.2009. No notice in terms of Section 143 (2) had been issued to the assessee, and the time provided by law had expired by the time its AO received the papers from the searched party. Notice issued, necessarily, in terms of Section 153C (2) had to be in the light of the satisfaction that the books of account or materials seized - fulfillment of the preconditions, clearly, the option provided by Section 153C (2) to proceed against pending or assessments cannot be made recourse to The nonobstante provisions in both Sections 153A and 153C are identical; they override Sections 136, 147, 148, 149, 151 and 153. However, they do not override the mandatory provisions of Sections 142 (2) or 143 (2). This legislative design is taken further by Section 153 (2) (a) to (c) which are relatable to the satisfaction under Section 153C (1) notice, i.e. that if notice for pending assessments have not been issued, to take further proceedings, and the time has lapsed, the only condition when they can be taken forward, is if the satisfaction with respect materials seized are relatable to the assessee is through application of mind and not a mechanical one - Decided against revenue

Issues Involved:
1. Validity of proceedings under Section 153C of the Income Tax Act, 1961.
2. Requirement of a satisfaction note for initiating proceedings under Section 153C.
3. Nature and adequacy of the satisfaction note recorded by the Assessing Officer (AO).
4. The necessity of separate satisfaction notes when the AO for the searched person and the other person is the same.
5. Relevance of seized materials to the assessment years in question.
6. The impact of non-issuance of notice under Section 143(2) within the prescribed time.

Issue-wise Detailed Analysis:

1. Validity of Proceedings under Section 153C:
The central issue was whether the proceedings initiated under Section 153C were valid. The ITAT quashed the assessment on the grounds that the satisfaction note was defective and did not provide the reasoning employed by the AO to conclude that the seized material belonged to the assessee. The court upheld the ITAT's decision, emphasizing that the satisfaction note did not meet the necessary legal standards.

2. Requirement of a Satisfaction Note:
The court highlighted the necessity of a satisfaction note for initiating proceedings under Section 153C. The satisfaction note must reflect the AO's reasoning and application of mind to the specific facts of the case. The court referred to previous judgments, including CIT v. RRJ Securities Limited and Pepsi Foods Pvt. Ltd. v. ACIT, which underscored the importance of a detailed satisfaction note.

3. Nature and Adequacy of the Satisfaction Note:
The satisfaction note in this case was found to be inadequate. The court noted that the note was prepared in a standard mechanical format and lacked details about the books of accounts allegedly belonging to the assessee. The AO did not explain the steps taken to determine that the seized material belonged to the assessee firm. The court concurred with the ITAT's finding that the satisfaction note was not based on correct legal foundations and lacked necessary details.

4. Necessity of Separate Satisfaction Notes:
The court affirmed the requirement of separate satisfaction notes, even if the AO for the searched person and the other person is the same. This was supported by the decision in Principal Commissioner of Income Tax v. Nikki Drugs & Chemicals Pvt. Ltd., which held that separate satisfaction notes must be recorded to establish a clear nexus between the seized materials and the assessee. The court emphasized that the AO must record specific reasons why the material seized from the other person has a nexus to the assessee.

5. Relevance of Seized Materials to Assessment Years:
The court examined whether the seized materials were relevant to the assessment years in question. It was noted that the satisfaction note and the notice under Section 142(1) were issued on the same day, making it difficult to sever them from each other. The court found that the seized materials were not adequately linked to the assessment year 2009-10, and the proceedings were not justified based on the materials available.

6. Impact of Non-Issuance of Notice under Section 143(2):
The court addressed the issue of non-issuance of notice under Section 143(2) within the prescribed time. It was noted that no notice under Section 143(2) had been issued to the assessee, and the time provided by law had expired by the time the AO received the papers from the searched party. The court held that the assessment for the pending assessment year was invalid due to the failure to issue the necessary notice within the stipulated time.

Conclusion:
The court concluded that the proceedings under Section 153C were invalid due to the inadequate satisfaction note and the failure to issue a notice under Section 143(2) within the prescribed time. The appeal by the revenue was dismissed, and the ITAT's decision to quash the assessment was upheld. The court emphasized the necessity of a detailed and specific satisfaction note and the requirement of separate satisfaction notes, even if the AO for the searched person and the other person is the same.

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