2015 (8) TMI 711 - AT - Income Tax

Validity of assessment u/s 153C - Held that - On a reading of Section 153A and 153C the exercise that is required to be done by the AO has been spelt out by the Coordinate Bench of this Tribunal in the case of DSL Properties Pvt. Ltd. Vs. DCIT 2013 (9) TMI 123 - ITAT DELHI has held that if the Assessing Officer is assessing the person searched as well as other person whose assets, books of account or documents were found at the time of search, then also, first while making the assessment in the case of the person searched, he has to record the satisfaction that the money bullion, jewellery or other valuable article or thing or books of account or documents belonged to the person other than the person searched. Then the copy of this satisfaction note is to be placed in the file of such other person and the relevant document should also be transferred from the file of the person searched to the file of such other person. Thereafter, in the capacity of the Assessing Officer of such other person, he has to issue the notice u/s 153A read with section 153C. The Assessing Officer of the searched person and such other person may be the same but these are two different assessees and therefore the Assessing Officer has to carry out the dual exercise first as the Assessing Officer of the person searched in which he has to record the satisfaction, during the course of assessment order proceedings of the person searched. We concur with the said view of the coordinate Bench and would like to add that this satisfaction must be an objective satisfaction based on an enquiry by the AO to establish that the documents referred to in section 153C which is found during the search u/s. 132, which are seized or requisitioned belongs to a person other than the person searched; and there should be a clear finding to that effect based on which only satisfaction as envisaged u/s. 153C can be inferred. Such a finding by the AO is required for attaining the said satisfaction and then it should be recorded in the file of the assessee which is a sine-qua-non to trigger the jurisdiction for the AO to proceed against such other person. In this case this exercise of recording the satisfaction during the assessment proceedings of the person searched has not been carried out and the satisfaction does not satisfy the requirement of Section 153C. We could not find any mention of any seized materials like valuable articles or things or any books of account or documents have been referred even in the impugned assessment orders. The AO lacks jurisdiction to initiate proceedings u/s. 153C against the assessee and therefore, the issuance of notice itself is null and void and therefore quashed. Consequently, the impugned assessment order passed u/s. 153C is also a nullity. - Decided in favour of assessee.

Issues Involved:
1. Legality of the notice and assessment order under Section 153C.
2. Deletion of additions by the Commissioner of Income Tax (Appeals) [CIT(A)].
3. Jurisdiction and procedural compliance under Section 153C.
4. Verification of trading activities and transactions.
5. Validity of expenses and purchases claimed by the assessee.
6. Interest charged under Sections 234A and 234B.

Detailed Analysis:

1. Legality of the Notice and Assessment Order under Section 153C:
The primary issue raised by the assessee was the legality of the notice issued under Section 153C and the subsequent assessment order. The assessee argued that the Assessing Officer (AO) did not record the required satisfaction before initiating proceedings under Section 153C, thereby vitiating the entire assessment process. The Tribunal emphasized that for the AO to acquire jurisdiction under Section 153C, it is mandatory that the AO of the person searched must record satisfaction that documents or assets seized belong to a person other than the person searched. This satisfaction must be recorded before the documents are handed over to the AO of the other person. In this case, the Tribunal found that no such satisfaction was recorded by the AO of the persons searched, making the initiation of proceedings under Section 153C void ab initio.

2. Deletion of Additions by the CIT(A):
The revenue challenged the CIT(A)'s decision to delete the additions of Rs. 4,43,240 on account of disallowance of 100% expenditure and Rs. 21,15,780 on account of unexplained purchases under Section 69C of the Act. The Tribunal upheld the CIT(A)'s decision, noting that the AO's findings were based on unverifiable and bogus transactions. The CIT(A) had rightly concluded that the purchases and sales were not genuine and had allowed the appeal of the assessee partly.

3. Jurisdiction and Procedural Compliance under Section 153C:
The Tribunal examined whether the AO had complied with the procedural requirements under Section 153C. The Tribunal referred to several case laws, including the judgments of the Hon'ble Delhi High Court and the Supreme Court, which mandate that the AO of the person searched must record satisfaction that the seized documents belong to another person. The Tribunal found that the AO failed to record such satisfaction, rendering the assessment proceedings void. The Tribunal emphasized that the jurisdictional fact of recording satisfaction is a sine qua non for the AO to proceed under Section 153C.

4. Verification of Trading Activities and Transactions:
The AO had directed the assessee to prove its trading activities and produce sales tax records. The assessee claimed that it dealt with tax-free goods and therefore did not file sales tax returns. The AO found no independent proof of sale/purchase of goods except bank transactions and held the transactions as unverifiable and bogus. The Tribunal noted that the AO's findings were based on assumptions and conjectures without concrete evidence, and the CIT(A) had rightly deleted the additions.

5. Validity of Expenses and Purchases Claimed by the Assessee:
The AO disallowed 100% of the expenses claimed by the assessee, amounting to Rs. 4,43,240, on the grounds that they were unverifiable. The Tribunal upheld the CIT(A)'s decision to delete this addition, noting that the AO's disallowance was based on assumptions without proper verification. The Tribunal also noted that the AO had failed to provide sufficient evidence to support the disallowance of expenses and purchases.

6. Interest Charged under Sections 234A and 234B:
The assessee contended that the interest charged under Sections 234A and 234B was wrongly and illegally charged and was highly excessive. The Tribunal did not specifically address this issue in detail, as the primary grounds for quashing the assessment under Section 153C were upheld, rendering the other grounds academic.

Conclusion:
The Tribunal quashed the notice issued under Section 153C and the subsequent assessment orders for the assessment years 2003-04 to 2008-09, holding them as void ab initio due to the lack of proper satisfaction recorded by the AO of the person searched. The Tribunal upheld the CIT(A)'s decision to delete the additions made by the AO, emphasizing the need for proper verification and evidence in making such additions. The Tribunal's decision was based on the principles of natural justice and adherence to procedural requirements under the Income Tax Act.

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