2025 (4) TMI 1130 - AT - Income Tax

Validity of jurisdiction assumed u/s 153C - scope of satisfaction note recorded by the AO - HELD THAT - Mere drawing of a perfunctory satisfaction without meeting basic ingredients of providing some tangible descript information and application of mind thereon has no standing in law and would not confer drastic jurisdiction of assessment u/s 153C of the Act on a person other than searched person. The jurisdiction assumed based on such lackadaisical satisfaction note beset with vital infirmities cannot be countenanced in law. The objections raised on behalf of the assessee towards lack of jurisdiction based on a cryptic and non-descript satisfaction thus deserves to be sustained. While recording a consolidated satisfaction note is not a bar in law per se as rightly contended on behalf of the revenue but however in the same vain the documents/assets searched need to be specified against each year covered in the satisfaction note to depict application of mind and initiation of action u/s 153C of the Act qua such assessment years. AO has apparently failed to do so in the present case. As a corollary the notice issued u/s 153C and consequent assessment order passed u/s 153C is vitiated in law and requires to be quashed. The jurisdiction assumed u/s 153C based on vague and non-descript satisfaction note is vitiated at the threshold. The consequence assessment order passed u/s 153C thus has no force of law. Appeal of the assessee is allowed.

Summary

The core legal questions considered in this appeal revolve around the validity and legality of the assumption of jurisdiction under section 153C of the Income Tax Act, 1961 ("the Act") in relation to the assessment of undisclosed income of a third person (the assessee) following a search and seizure operation conducted on another person (the searched person). Specifically, the issues include:

1. Whether the Assessing Officer (AO) validly recorded the 'satisfaction note' under section 153C of the Act, which is a prerequisite for initiating proceedings against a third person whose documents/assets were found during the search of the searched person.

2. Whether the 'satisfaction note' adequately identifies the incriminating material and relates it to specific assessment years, particularly given that the assessee company was not in existence for some of the years covered by the satisfaction note.

3. Whether the jurisdiction assumed under section 153C of the Act can be sustained when the satisfaction note is vague, generic, and lacks application of mind by the AO.

4. Whether the additions made under section 68 of the Act towards unexplained cash credits in the assessment order passed under section 153C can be upheld in the absence of valid jurisdiction.

Issue-wise detailed analysis:

1. Validity of the 'Satisfaction Note' under Section 153C of the Act

The legal framework governing the initiation of proceedings under section 153C mandates that the AO of the searched person must record a 'satisfaction note' upon receipt of documents or assets relating to a third person. This note is foundational and serves as a statutory safeguard against arbitrary proceedings. The note must identify the relevant material found during the search and demonstrate how it pertains to the third person's income for specific assessment years.

Precedents emphasize that the satisfaction note is not a mere formality but a substantive document that must disclose the basis of the AO's satisfaction to enable judicial scrutiny. The Court referred to the authoritative pronouncement of the Delhi High Court in Sakham Commodities Ltd. v. ITO, which clarified that the discovery of incriminating material for one assessment year does not automatically confer jurisdiction to assess all years mentioned in the note. The Court further relied on the Supreme Court ruling in Sinhgad Technical Education Society, which underscored that assessments under section 153C must be confined to years to which the incriminating material relates.

In the present case, the AO's satisfaction note was recorded collectively for six assessment years (2010-11 to 2015-16) without specifying the incriminating material for each year. The note broadly referenced documents such as hard disks containing trading accounts, invoices, bank statements, and profit and loss accounts, but failed to link these documents to particular years or explain their relevance to the assessee's income. Crucially, the assessee company was incorporated only in January 2013, rendering the inclusion of earlier years factually incorrect.

The Court found that the AO did not apply his mind to the material received, nor did he identify the specific years to which the documents related. The satisfaction note was generic, lacked detail, and failed to provide the necessary factual foundation for the exercise of jurisdiction under section 153C. This failure amounted to a legal infirmity, rendering the assumption of jurisdiction invalid.

2. Adequacy of Identification of Incriminating Material and Relation to Assessment Years

The Court emphasized that the AO must ascertain and specify the particular assessment years to which the incriminating material pertains. This requirement ensures that the scope of the assessment is confined and justified. The satisfaction note must not be a broad-brush or blanket statement covering multiple years without basis.

Here, the AO's satisfaction note failed to identify the documents or transactions corresponding to each year, nor did it justify the inclusion of years prior to the company's incorporation. This omission violated the principle that the AO must exercise independent judgment and provide reasons for including each year in the proceedings under section 153C.

The Court held that the absence of such specification and reasoning amounted to non-application of mind and vitiated the jurisdictional foundation.

3. Jurisdictional Validity of Proceedings under Section 153C

The Court reiterated that the issuance of a notice under section 153C is not an automatic consequence of receipt of material from the AO of the searched person. Rather, it must be founded on the AO's formation of opinion that the material is likely to influence the determination of the third person's total income.

The satisfaction note must therefore be objective, detailed, and demonstrate that the AO has applied his mind to the material. In the instant case, the satisfaction note was cryptic and non-descript, lacking any tangible or descriptive information about the transactions or documents. The AO's failure to meet these basic requirements rendered the jurisdiction assumed under section 153C void ab initio.

The Court further observed that while a consolidated satisfaction note covering multiple years is not impermissible per se, it must specify the documents or assets against each year to reflect application of mind. The AO's failure to do so in this case was fatal to jurisdiction.

4. Validity of Additions under Section 68 in the Absence of Jurisdiction

Since the jurisdiction under section 153C was found to be invalid due to the defective satisfaction note, the consequential assessment order and additions made under section 68 of the Act for unexplained cash credits were also invalid. The Court held that the assessment order passed without valid jurisdiction has no force of law and must be quashed.

The first appellate order upholding the additions was set aside, and the AO was directed to delete the additions and restore the position claimed by the assessee.

Significant holdings include the following verbatim excerpts and core principles:

"The 'satisfaction note' being so critical and powers under s. 153C of the Act being contingent upon such Note, the information contained therein need to be actionable."

"The issuance of a notice under section 153C of the Act is clearly not intended to be an inevitable consequence to the receipt of material by the Jurisdictional AO and that the initiation of action under section 153C of the Act will have to be founded on a formation of opinion by the Jurisdictional AO that the material handed over and received pursuant to a search is likely to influence the determination of total income and would be relevant for the purposes of assessment/re-assessment in terms of section 153C of the Act."

"Mere drawing of a perfunctory satisfaction without meeting basic ingredients of providing some tangible & descript information and application of mind thereon has no standing in law and would not confer drastic jurisdiction of assessment u/s 153C of the Act on a person other than searched person."

"The jurisdiction assumed based on such lackadaisical 'satisfaction note' beset with vital infirmities cannot be countenanced in law."

"The notice issued under section 153C of the Act and consequent assessment order passed under section 153C of the Act is vitiated in law and requires to be quashed."

In conclusion, the Court determined that the 'satisfaction note' recorded by the AO was legally infirm due to its vagueness, failure to specify incriminating material year-wise, and non-application of mind. Consequently, the jurisdiction under section 153C was invalid, rendering the assessment order and additions made under section 68 void. The appeal was allowed, setting aside the assessment and directing deletion of the additions.