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2022 (6) TMI 482 - AT - Income TaxValidity of Assessment u/s 153C - proof of incrementing material found in search or not? - objective satisfaction of documents belong to the assessee or not? - HELD THAT - Section 153C of the Act shall come into play only, when the A.O. of the searched person comes to an objective satisfaction that the documents found during the course of search do not belong to the searched person. In that case, he would not be considering those documents for making any addition in the hands of the searched person. AO of the searched person has to record his satisfaction that the documents do not belong to the searched person and then transfer those documents to the A.O. having jurisdiction over the other person to whom the said document belong/pertain to. In the instant case, we noticed that there is merit in the contention of Ld A.R that the A.O. of the searched person Shri Somashekhar Reddy has not come to an objective satisfaction that the impugned documents belong to the assessee herein. This is evident from the fact that the AO of Shri Somashekara Reddy has assessed the investments found in those documents in the hands of Shri Somashekara Reddy. The addition should be made in the hands of other person to whom the documents belong/pertain to and this is the whole concept of sec.153C of the Act. Once these documents have been accepted to belong to the searched person and further the AO has assessed the investments found in the said documents in the hands of the searched person, the question of considering the same as belonging/pertaining to some other person will not arise. Hence the so called satisfaction recorded by the AO of the searched person can only said to be a mechanical satisfaction and not objective satisfaction as contemplated in sec.153C of the Act. It is a case of mechanical transfer of the impugned documents to the assessing officer of the assessee herein. We also noticed earlier that the AO of the assessee herein has not made any addition on the basis of the above said documents, which are said to belong to the assessee herein . This factfurther reinforces our view that, in the facts and circumstances of the case discussed above, there was no objective satisfaction as contemplated u/s 153C of the Act. Accordingly, we find merit in the contentions of the assessee that the very initiation of proceedings u/s 153C of the Act in the hands of the assessee for assessment year 2007-08 is not in accordance with the law and hence the assessment order is liable to be quashed. Addition of unproved trade liability - assessee could not effectively furnish the details to prove the trading liabilities - It is well settled proposition of law that the apprehension, howsoever strong, cannot substitute material evidences. In so far as the trading liabilities are concerned, it could be assessed only u/s 41(1) of the Act, when it ceases to exist. In our considered view, the inference drawn by the AO was that the suppliers of services are not having enough means to provide credit to the assessee. However, the AO himself was not aware of the details about the suppliers of the services. Without those details, we are unable to understand as to how the AO could have entertained such kind of views. We also notice that the A.O. has not established that the liability has ceased to exist, which would warrant invoking of provisions of section 41(1) of the Act. Accordingly, in our view, the A.O. was not justified in treating part of liabilities,as unproved on presumptions, surmises and conjectures. There are lacunae on the part of the assessee also, i.e., the assessee also could not furnish books of accounts and other details, since they have been seized by other statutory authorities. Hence, the action of the A.O. making addition could not found fault with altogether. The only point is that the quantum of addition determined by the AO is not supported by any evidence and it has been made on presumptions only. In view of the deficiency on the part of the assessee, in our view, some addition is called for in order to take care of deficiencies, if any. Since the assessee could not furnish information and explanations relating to trading liabilities outstanding as on 31.3.2008 before the A.O., we are of the view that this issue could be resolved by making addition on estimated basis in order to take care of revenue leakage if any. As noticed that the assessee has surrendered a sum of Rs.1.00 crore in order to take care of deficiencies in the maintenance of books of accounts and the assessee has already offered the same. Accordingly, we are of the view that this issue would meet ends of justice, if the addition made by the A.O. is restricted to Rs.50 lakhs and the same, in our view, would take care of further deficiencies, revenue leakages, if any, in the maintenance of books of accounts.
Issues Involved:
1. Validity of proceedings initiated under Section 153C of the Income-tax Act, 1961. 2. Sufficiency of the satisfaction note recorded by the Assessing Officer (AO) for initiating proceedings under Section 153C. 3. Legality of additions made on the basis of seized documents. 4. Validity of trading liabilities and their treatment as unproved liabilities. Issue-wise Detailed Analysis: 1. Validity of Proceedings Initiated Under Section 153C: The appeals pertain to the assessment years 2007-08 and 2008-09, where the AO initiated proceedings under Section 153C based on documents seized during a search on Shri Soma Sekhar Reddy. The High Court of Karnataka remanded the case to the ITAT to examine the jurisdictional aspects and merits of the matter. The Tribunal noted that the AO of the searched person (Shri Soma Sekhar Reddy) treated the seized documents as belonging to Shri Soma Sekhar Reddy and assessed the investments found in those documents in his hands. The Tribunal concluded that the AO did not have an objective satisfaction that the documents belonged to the assessee (Smt. G. Vijaya), thus invalidating the initiation of proceedings under Section 153C for the assessment year 2007-08. 2. Sufficiency of the Satisfaction Note: The Tribunal emphasized that for invoking Section 153C, the AO of the searched person must record an objective satisfaction that the seized documents belong to a person other than the searched person. The Tribunal found that the satisfaction note did not indicate that the documents did not belong to Shri Soma Sekhar Reddy. The AO's action of assessing the investments in the hands of Shri Soma Sekhar Reddy contradicted the requirement of Section 153C, which necessitates that the documents should belong to a person other than the searched person. The Tribunal cited several judicial precedents, including the Delhi High Court's decision in Pepsico India Holdings and the Gujarat High Court's decision in Vijaybhai N. Chandrani, to support its conclusion that the satisfaction note was insufficient. 3. Legality of Additions Made on the Basis of Seized Documents: For the assessment year 2007-08, the Tribunal quashed the assessment order as the proceedings under Section 153C were initiated without proper satisfaction. Consequently, the additions made by the AO on merits did not require adjudication. For the assessment year 2008-09, the Tribunal noted that the AO passed the assessment order under Section 143(3) and not under Section 153C. Therefore, the grounds relating to the validity of proceedings under Section 153C were dismissed for this year. 4. Validity of Trading Liabilities and Their Treatment as Unproved Liabilities: For the assessment year 2008-09, the AO made additions of Rs. 6,26,74,760/- as unproved trading liabilities. The Tribunal observed that the AO made these additions based on presumptions and without examining the books of accounts, which were seized by various authorities. The Tribunal noted that the liabilities were shown in the balance sheet and arose out of trading activities. The Tribunal held that the AO's apprehensions were not supported by material evidence and that the liabilities could only be assessed under Section 41(1) if they ceased to exist. However, due to the lack of details provided by the assessee, the Tribunal deemed it appropriate to make an estimated addition of Rs. 50 lakhs to account for potential deficiencies and revenue leakage. Conclusion: The appeal for the assessment year 2007-08 was allowed, quashing the assessment order due to the invalid initiation of proceedings under Section 153C. For the assessment year 2008-09, the Tribunal partly allowed the appeal, directing the AO to restrict the addition to Rs. 50 lakhs instead of Rs. 6,26,74,760/-. The order was pronounced on 28th April 2022.
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