2025 (3) TMI 1473 - AT - Income Tax

Assessment framed u/s. 153A/143(3) - documents found from the possession of third party held to be incriminating documents found from the premises of the assessee or not? - HELD THAT - In the instant case no incriminating material was found from the assessee during the search and seizure proceedings and the material in form of statement of third person was relied based on some other search operation. Hence if at all such statement is sought to be relied upon against the assessee then logically the AOshould have proceeded on the assessee under section 153 C of the Act and not under section 153A of the Act. Hence the addition made in assessee hands under section 153 A of the Act is deleted. Decided in favour of assessee.

Summary

The core legal questions considered in this judgment include:

1. Whether the Assessing Officer (AO) had jurisdiction to frame assessment orders under Section 153A of the Income Tax Act, 1961, when the incriminating material relied upon emanated from a search conducted on a third party, and not from the assessee's own premises, thereby raising issues under Section 153C of the Act.

2. Whether the assessment proceedings and orders violated the principles of natural justice, particularly regarding the opportunity to confront and cross-examine statements relied upon by the AO.

3. Whether the additions made by the AO and sustained by the Commissioner of Income Tax (Appeals) [CIT(A)] were valid, considering the nature of evidence and the procedural compliance under the Income Tax Act.

4. The validity of approvals granted under Section 153D of the Act for framing the assessments.

5. Whether the AO applied mind to the material on record while passing the assessment orders.

6. The legal effect of initiating assessment proceedings under Section 153A without following the prescribed procedure under Section 153C when incriminating material relates to a person other than the searched person.

Issue-wise Detailed Analysis:

1. Jurisdiction under Sections 153A and 153C of the Income Tax Act:

The legal framework involves Sections 153A and 153C, introduced by the Finance Act, 2003, which govern assessments following search or requisition operations. Section 153A applies to the person searched, while Section 153C applies to other persons whose materials are found during such searches.

Precedents cited include decisions by various High Courts and Tribunals emphasizing that when incriminating material relating to a third party is found during a search on another person, the AO must follow the procedure under Section 153C, which requires recording satisfaction that the seized material pertains to the other person and then assuming jurisdiction to assess that other person under Section 153A read with Section 153C.

The Court interpreted that the AO in the present case wrongly proceeded under Section 153A based on material seized from a third party, without following the mandatory procedure under Section 153C. This procedural lapse rendered the assessment orders without jurisdiction and ultra vires the Act.

Key evidence included the fact that no incriminating material was found at the assessee's premises during the search; instead, the AO relied on statements and documents seized from a third party. The Court relied on judgments from the Punjab & Haryana High Court and Karnataka High Court, which held that the AO must invoke Section 153C when using third-party search material and cannot continue regular assessment proceedings under Section 143(3) or 153A in such cases.

The Court applied the law to the facts by concluding that the AO's failure to invoke Section 153C and to record satisfaction as required resulted in lack of jurisdiction. The assessment framed under Section 153A was therefore held to be invalid.

Competing arguments by the Revenue that the AO had jurisdiction because the warrants mentioned the assessee's name or address were rejected as the presence of the assessee's name on the search warrant does not validate the use of third-party material without following Section 153C procedure.

The conclusion was that assessments framed without following Section 153C when relying on third-party material are void ab initio.

2. Violation of Principles of Natural Justice:

The assessee contended that the additions were based solely on statements of a third party (Shri Pradeep Kumar Jindal) recorded under Section 132(4) without opportunity to cross-examine or confront the witness, violating natural justice.

Relevant legal precedents include rulings by Madras and Rajasthan High Courts and Supreme Court decisions emphasizing that statements recorded under Section 132(4) constitute evidence but cannot be the sole basis for additions without corroborative material. The assessee must be given an opportunity to challenge such evidence.

The Court found that the AO relied on untested and uncorroborated statements without affording the assessee a chance to cross-examine the third party. The Revenue's claim that opportunity was granted but not availed was not persuasive because the fundamental right to cross-examination must be meaningful and not illusory.

The Court applied these principles and held that reliance solely on such statements without corroboration and opportunity for cross-examination violates natural justice, rendering the additions unsustainable.

3. Validity of Additions and Application of Mind by AO and CIT(A):

The AO made additions of bogus long-term capital gains and unexplained expenditure based on third-party statements and documents. The CIT(A) sustained these additions without adequately considering the assessee's detailed submissions and evidence.

The Court noted that the AO and CIT(A) failed to apply their mind properly to the material on record and proceeded mechanically. The lack of incriminating material from the assessee's own search and the procedural irregularities further undermined the validity of the additions.

The Court concluded that the additions were based on invalid and perverse reasoning and were liable to be deleted.

4. Validity of Approval under Section 153D:

The assessee challenged the approval granted under Section 153D as invalid and mechanical. Section 153D requires prior approval before assessments under Sections 153A and 153C are framed.

The Court observed that since the assessments themselves were invalid due to jurisdictional and procedural defects, the approvals under Section 153D were also rendered ineffective. The Court held that mechanical or invalid approvals cannot cure jurisdictional defects.

5. Non-application of Mind:

The Court emphasized that both AO and CIT(A) must apply their mind to the materials and submissions before passing orders. The failure to do so results in orders being bad in law.

In the instant case, the Court found that the orders were passed without proper application of mind, further supporting the quashing of the assessments.

6. Procedural Compliance and Abatement of Proceedings:

The Court referred to the legislative scheme under Sections 153A to 153D, which prescribe special procedures for assessment following search or requisition. The abatement of pending proceedings under Section 153A upon receipt of seized material under Section 153C was highlighted.

The Court noted that the AO failed to abate the ongoing assessment proceedings and initiate fresh proceedings under Section 153C upon receipt of third-party seized material, violating the statutory scheme.

Precedents from various High Courts were relied upon to underscore that the special provisions override the general assessment provisions and must be strictly followed.

The Court concluded that the failure to follow these procedures invalidated the assessments.

Significant Holdings:

"The AO could not have taken cognizance of the seized documents and other material found and seized in the course of search conducted in the premises/case of Shri. Manoj Kumar Jain, while framing the order of assessment under section 143(3) of the Act in the case on hand."

"The jurisdictional pre-condition laid down by the Legislature of recording of satisfaction for taking action under section 153C of the Act cannot be sidestepped/ brushed aside and additions be made in proceedings pending under section 143(3) of the Act as the scope of assessments framed under sections 143(3) and 153C of the Act are quite different."

"Statements recorded under Section 132(4) of the Act constitute evidence, but such statements alone, without any other material discovered during the search which would corroborate said statements, do not grant the AO the authority to make an assessment."

"The provisions of Section 153A to 153D have prevalence over the regular provisions for assessment or reassessment under Sections 139, 147, 148, 149, 151 & 153."

"The special procedure prescribed under Section 153A to 153D for assessment in cases of search and requisition shall prevail over the general provisions."

Core principles established include:

• The AO must strictly follow the procedural requirements under Sections 153A and 153C when framing assessments based on search and seizure material, especially when the material pertains to a third party.
• The absence of incriminating material from the assessee's own premises during search precludes initiation of proceedings under Section 153A without invoking Section 153C.
• Reliance solely on uncorroborated third-party statements recorded under Section 132(4) without opportunity for cross-examination violates natural justice.
• Approvals under Section 153D must be valid and cannot cure jurisdictional defects arising from non-compliance with Sections 153A and 153C.
• Failure to apply mind by AO and CIT(A) renders the assessment orders bad in law.

Final determinations on each issue were that the assessments framed under Section 153A without following Section 153C procedure were void; the additions based solely on uncorroborated third-party statements were unsustainable; the approvals under Section 153D were invalid; and the orders passed without application of mind and violating natural justice principles were quashed. Consequently, all appeals filed by the assessees were allowed.