2025 (2) TMI 167 - HC - Income Tax

Assessment u/s 153C - non verifying the Satisfaction Note recorded by the AO - HELD THAT - Recording of satisfaction report is a sine qua non before initiating action under Section 153C of the Act. Based on the law settled by the Hon ble Apex Court in Manish Maheshwari 2007 (2) TMI 148 - SUPREME COURT the CBDT itself issued a Circular where they have made very clear by way of clarification that even if the Assessing Officer of the searched person and other person is one and the same then also he is required to record his satisfaction as has been held by the Courts. It has further been stated in the CBDT Circular at para 5 that the pending litigation with regard to recording of satisfaction note under Section 158BD/153C should be withdrawn / not pressed if it does not meet the guidelines laid down by the Apex Court. Therefore as per the CBDT Circular dated 31.12.2015 of Circular No.24/2015 in fact all these appeals should have been withdrawn by the Revenue as the circular issued by CBDT binding the Revenue. At no stretch of imagination it can be stated that even without a separate satisfaction note pertains to the other person by the Assessing Officer of the searched person such a proceedings under Section 153C can be invoked and completed. Hence the view taken initially by CIT (Appeals) confirmed and concurred with the same by the ITAT in the order impugned are all in consonance with the settled legal proposition. Therefore no hesitation to hold that absolutely there has been no infirmity attached with the orders passed by the ITAT which is impugned herein. Decided in favour of assessee.

ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment were:

1. Whether the Appellate Tribunal was correct in quashing the assessment orders made under Section 153C of the Income Tax Act without verifying the Satisfaction Note recorded by the Assessing Officer.

2. Whether the Tribunal was correct in holding that the Assessing Officer did not record the reasons before initiating proceedings under Section 153C.

3. Whether the Tribunal was justified in granting relief for the Assessment Year 2005-06 on the ground that no satisfaction note was recorded under Section 153C, when Section 153C is not applicable to the impugned year.

4. Whether the Income Tax Appellate Tribunal was right in deleting the addition made by the Assessing Officer under Section 69C regarding unexplained expenditure on salary payments to employees.

5. Whether the loan applications of the employees to the banks constituted prima facie evidence for the actual salary payments and if the burden of proof to show that such expenditure was not incurred was on the assessee.

ISSUE-WISE DETAILED ANALYSIS

1. Satisfaction Note Requirement under Section 153C

The legal framework requires that a satisfaction note be recorded by the Assessing Officer of the searched person before initiating proceedings under Section 153C against another person. This requirement is supported by precedents such as Manish Maheshwari v. Assistant Commissioner of Income-tax and Commissioner of Income-tax-III v. Calcutta Knitwears. The Court found that the Assessing Officer failed to record such a note, rendering the proceedings void.

The Court emphasized that the requirement for a satisfaction note is a sine qua non for invoking Section 153C, as clarified by the Supreme Court and reiterated in CBDT Circular No. 24/2015. The Tribunal's decision to quash the assessment orders was based on the absence of a satisfaction note, which the Court upheld.

2. Applicability of Section 153C for Assessment Year 2005-06

The Tribunal found that Section 153C was not applicable to the Assessment Year 2005-06 due to the lack of a satisfaction note. The Court agreed, noting that the absence of a recorded satisfaction note invalidated the proceedings for that year.

3. Unexplained Expenditure under Section 69C

The Tribunal deleted the addition made by the Assessing Officer under Section 69C regarding unexplained expenditure on salary payments. The Court found that the Tribunal correctly assessed the evidence, noting that the loan applications did not constitute prima facie evidence of actual salary payments.

The burden of proof was on the Revenue to establish the unexplained expenditure, which it failed to do. The Court upheld the Tribunal's finding that the loan applications did not adequately demonstrate the actual incurrence of salary expenses.

SIGNIFICANT HOLDINGS

The Court's significant holdings include the affirmation of the necessity for a satisfaction note under Section 153C, as established in Manish Maheshwari and Calcutta Knitwears. The Court emphasized the importance of strict compliance with procedural requirements in tax assessments, particularly when invoking provisions with significant consequences for taxpayers.

The Court concluded that the Tribunal's decisions were consistent with established legal principles and supported by substantial evidence. The appeals were dismissed, with the questions of law answered in favor of the assessee and against the Revenue.

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