2021 (3) TMI 732 - AT - Income Tax

Validity of proceedings initiated u/s 153C - satisfaction recorded by the AO should mention that the incriminating material found during the course of search showed undisclosed income of another assessee - CIT-A cancelled the proceedings initiated against assessee - HELD THAT - Admittedly, no specific observation has been made in the satisfaction recorded by the Assessing Officer that the incriminating material shows availability of any undisclosed income. Hence the decision rendered by Hon ble Karnataka High Court in the assessee s own case 2016 (5) TMI 372 - KARNATAKA HIGH COURT shall squarely apply to both the years under consideration. In view of the foregoing discussions and further, since the Ld CIT(A) has followed the binding decision rendered by Hon ble jurisdictional Karnataka High Court, we do not find any reason in interfering with the order passed by Ld CIT(A) cancelling the initiation of proceedings u/s 153C of the Act. Accordingly, we uphold the order passed by the learned CIT(A) in both the years under consideration. - Decided against revenue.

Issues Involved:
1. Validity of proceedings initiated under Section 153C of the Income Tax Act.
2. Non-disposal of issues on merits by the learned CIT(A).

Issue-wise Detailed Analysis:

1. Validity of Proceedings Initiated Under Section 153C:

The primary issue in both appeals and cross objections pertains to the validity of proceedings initiated under Section 153C of the Income Tax Act. The Revenue challenged the decision of the learned CIT(A) who held that such proceedings were not valid. The assessee contested the validity of these proceedings by relying on a prior decision by the Hon’ble High Court of Karnataka in its own case, which stated that for proceedings under Section 153C to be valid, the satisfaction recorded by the Assessing Officer (AO) must explicitly mention that the incriminating material found during the search indicated undisclosed income of another assessee. The High Court had previously ruled that in the absence of such specific observations in the satisfaction note, the proceedings were not valid.

The Tribunal noted that the learned CIT(A) had followed the High Court's decision, which relied on the Supreme Court's ruling in the case of CIT vs M/s Calcutta Knitwears (2014) and a subsequent CBDT circular. The High Court had emphasized that the satisfaction note must be prepared at specific stages and must indicate that the documents found are incriminating and represent undisclosed income. The Tribunal found that the satisfaction recorded by the AO in the current case did not meet these requirements, as it lacked specific observations about undisclosed income. Consequently, the Tribunal upheld the CIT(A)'s decision, affirming that the initiation of proceedings under Section 153C was invalid for the assessment years 2007-2008 and 2008-2009.

2. Non-disposal of Issues on Merits by the Learned CIT(A):

In its cross objections, the assessee was aggrieved by the CIT(A)'s decision not to dispose of the issues on merits. The CIT(A) had quashed the entire assessment proceedings for both years under consideration, deeming the grounds urged on merits as academic in nature. The Tribunal agreed with this approach, stating that since the legal issue regarding the validity of the proceedings was upheld, the CIT(A) was justified in not adjudicating the grounds on merits. The Tribunal also declined to adjudicate the grounds urged in the cross objections for the same reason.

Conclusion:

The Tribunal dismissed both the appeals filed by the Revenue and the cross objections filed by the assessee, upholding the CIT(A)'s decision that the proceedings initiated under Section 153C were invalid due to the absence of specific observations about undisclosed income in the satisfaction note. The Tribunal also agreed with the CIT(A)'s decision not to adjudicate the issues on merits, as they were rendered academic in nature. The order was pronounced on March 18, 2021.

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