2021 (11) TMI 1007 - AT - Income Tax

Validity of Assessment u/s 153A /153C - Mandation of recording satisfaction note for the purposes of initiating the proceedings u/s.153C - as contended by the ld. DR that the satisfaction was not only recorded in the file of the searched person but also in the file of the other person, namely, assessee before us - Deemed dividend addition u/s 2(22) - HELD THAT - The procedure to be adopted for initiating proceedings under section 153A against a person who has not been searched, has been prescribed in the provisions of section 153C wherein a situation, the Assessing Officer having the jurisdiction over the other person is different from the Assessing Officer having jurisdiction over the person in respect of whom the search has been conducted. Before notice can be issued under section 153C, the Assessing Officer has to be satisfied that undisclosed income found during search operations belongs to the third person. A clear and plain reading of section 153C leaves no doubt that recording of satisfaction by the Assessing Officer of the person searched is mandatory and it has to precede the initiation of proceedings against the other person (not searched). If we look into the satisfaction note in the file of the searched person namely, Model Construction Pvt. Ltd. It is abundantly clear that there is no recording of satisfaction by the Assessing Officer that the document seized during the search at the premises of Model Construction Pvt. Ltd. Belongs to the assessee and were incriminating in nature. In our view, unless there is a recovery of the document belonging to the other person, section 153C of the Act cannot trigger. In the present case there is neither the recording of satisfaction by the AO of the searched person that the documents belong to the other person nor there is any finding that the documents so found were incriminating in nature. In our view a detailed scheme has been provided for initiation of Section 153C i.e. first there would be a satisfaction in the file of the AO of the searched person and thereafter transmission of the file along with the incriminating document to the AO of the other person and thereafter recording of satisfaction by the AO of the other person and issuance of notice u/s.153C of the Act and completion of proceedings. In the absence of the fundamental and foundational fact of recording satisfaction by the AO of the searched person no proceeding u/s.153C of the Act can be initiated by the other person. In the present case, there is no satisfaction in the file of AO of the searched person and accordingly, the issuance of proceedings u/s.153C of the Act were without of any basis. Assuming the proceeding can be initiated without there being any satisfaction in the file of the AO whether the satisfaction on record in the file of the assessee reproduced hereinabove can be said to be satisfaction in the eyes of law. It is fundamental that in the satisfaction note, it is not only essential to mention the PAN No. of the assessee, his address and other details by the Assessing Officer and invariably the satisfaction note should not be forming part of the order sheet and it should be separately recorded as is satisfaction note showing the application of mind by the Assessing Officer of the assessee before us. Admittedly, the application of mind is conspicuously missing in the order sheet (satisfaction) as neither the description of the document were mentioned nor how those document leads to evasion or concealment of non-disclosure of income by the assessee in all these years. None of the document belongs to the assessee before us, and, therefore, it cannot be said to be relevant or incriminating in nature. We may also like to point out that as confirmed by the ld. CIT-DR that none of the additions were made by the AO on the basis of the seized document and were only made u/s.2(22)(e) of the Act as is clear, from the grounds of appeal raised by the revenue before the ITAT, which were not pertaining to the seized document. In terms of the directions of the Hon ble High Court in SAVESH KUMAR AGARWAL 2013 (7) TMI 805 - ALLAHABAD HIGH COURT we hereby decide the verification of the jurisdictional parameter for initiation of proceedings u/s.153C of the Act in favour of the assessee and against the revenue.

Summary

Issues Involved:
1. Deletion of addition made on account of deemed dividend under section 2(22)(e) of the I.T. Act.
2. Acceptance of fresh evidence by CIT(A) without giving opportunity to the Assessing Officer as per Rule 46A(3) of IT Rules, 1962.
3. Validity of proceedings initiated under section 153C of the Act.
4. Assessment of the amount advanced by Models Construction Pvt. Ltd. to M/s Models Real Estate Developers as deemed dividend.
5. Jurisdictional parameters for initiating action under section 153C of the Act.
6. Levy of interest under sections 234A, 234B, and 234C of the Act.

Detailed Analysis:

1. Deletion of Addition Made on Account of Deemed Dividend:
The Tribunal examined whether the CIT(A) erred in deleting the addition made on account of deemed dividend under section 2(22)(e) of the I.T. Act. The Assessing Officer had treated the loans given by Models Construction Pvt. Ltd. to the firm M/s Models Real Estate Developers as deemed dividends in the hands of the partners, who held substantial interest in both entities. However, the CIT(A) held that these amounts could not be treated as deemed dividends. The Tribunal upheld the CIT(A)'s decision, noting that the amounts reflected in the firm's books could not be considered as deemed dividends under section 2(22)(e) of the Act.

2. Acceptance of Fresh Evidence:
The Tribunal considered whether the CIT(A) had erred in accepting fresh evidence without giving the Assessing Officer an opportunity to examine it, as required by Rule 46A(3) of the IT Rules, 1962. The Tribunal found that the CIT(A) had indeed accepted fresh evidence but had not given the Assessing Officer the opportunity to rebut this evidence. However, this procedural lapse did not affect the Tribunal's decision on the substantive issue of deemed dividend.

3. Validity of Proceedings Initiated Under Section 153C:
The Tribunal scrutinized the validity of the proceedings initiated under section 153C of the Act. The key issue was whether the Assessing Officer of the searched person had recorded the mandatory satisfaction that the seized documents belonged to a person other than the searched person. The Tribunal found that no such satisfaction was recorded in the case file of the searched person, Models Construction Pvt. Ltd., which is a sine qua non for initiating proceedings under section 153C. The Tribunal concluded that the initiation of proceedings under section 153C was void ab initio.

4. Assessment of Amount Advanced as Deemed Dividend:
The Tribunal examined the Assessing Officer's decision to treat the amount of ?81,51,723 advanced by Models Construction Pvt. Ltd. to M/s Models Real Estate Developers as deemed dividend. The Tribunal upheld the CIT(A)'s ruling that the amount could not be treated as deemed dividend under section 2(22)(e) of the Act, as the conditions for such treatment were not met.

5. Jurisdictional Parameters for Initiating Action Under Section 153C:
The Tribunal analyzed whether the jurisdictional parameters necessary for initiating action under section 153C were met. The Tribunal found that the Assessing Officer of the searched person had not recorded the required satisfaction, and the seized documents did not belong to the assessee. Additionally, the Tribunal noted that the seized documents were not incriminating in nature and did not pertain to the relevant assessment years. Consequently, the Tribunal held that the jurisdictional parameters for initiating action under section 153C were not met.

6. Levy of Interest Under Sections 234A, 234B, and 234C:
The Tribunal also addressed the assessee's contention regarding the levy of interest under sections 234A, 234B, and 234C of the Act. The Tribunal found that the levy of interest was not justified as the additions made by the Assessing Officer were not based on any incriminating documents seized during the search.

Conclusion:
The Tribunal dismissed the revenue's appeals and allowed the assessee's cross objections. The Tribunal held that the proceedings initiated under section 153C were void ab initio due to the lack of mandatory satisfaction recorded by the Assessing Officer of the searched person. The Tribunal also upheld the CIT(A)'s decision to delete the addition made on account of deemed dividend under section 2(22)(e) of the Act. The Tribunal found that the seized documents were not incriminating and did not pertain to the relevant assessment years, and therefore, the jurisdictional parameters for initiating action under section 153C were not met.