2023 (9) TMI 890 - HC - Income Tax

Assessment u/s 153C - Assessment based on search on third party - recording of satisfaction by AO that the books of accounts/documents/assets, seized or requisitioned have a bearing on the determination of total income of the other person, he is mandated to issue a notice for the entirety of the block of 6 assessment years and there is no discretion that has accorded to him in this regard. HELD THAT - Section 153A provides for assessment in the case of the searched/requisitioned entity, whereas 153C deals with the assessment of income of any other person in respect of whom valuable assets were found in the course of the search. Both the provisions commence with a non-obstante clause, notwithstanding the provisions of Sections 139, 147, 148, 149, 151 and 153 and relate to a period of 6 assessment years immediately preceding the assessment year relevant to the previous year in which the search was conducted or requisition made and operates simultaneously with both Sections 153A and 153C. In addition, in the case of such other person, since satisfaction has to be recorded by two Assessing Officers (of the searched entity as well as third party) and there may be some elapse in time for the transfer of records from the first officer to the second, Section 153C(2) provides for the framing of the assessment for an additional year, ie., the year of search as well, in certain demarcated situations. Since that situation does not arise in the present case, I desist from elaborating further in this regard. With the amendment of the provisions in 2017 by Finance Act, 2017, with effect from 01.04.2017, the Department was also entitled to extend the block period for a further period of 4 years in addition to the 6 years originally provided, though for the 4 years brought within the ambit of the block period, an additional condition has been imposed, being the availability of material revealing that income that has escaped assessment exceeds 50 lakhs or more. The scheme of a block assessment includes both assessment as well as reassessment and is a scheme different and distinct from all the other modes of assessment as well as re-assessment already available under the Act including reassessment under Section 147. The premise of this scheme of assessment is a search/requisition, although the scope of assessment extends to total income . This view finds support from the recent judgment of the Hon ble Supreme Court in Principal Commissioner of Income Tax, Central -3 V.Abhisar Buildwell P. Ltd. 2023 (4) TMI 1056 - SUPREME COURT confirming the decision in Commissioner of Income Tax V. Kabul Chawla 2015 (9) TMI 80 - DELHI HIGH COURT Assessments made either under Section 153A or 153C can be sustained only if those assessments are based upon incriminating materials found in the course of search indicating concealed assets/taxable income that have escaped assessment. The scheme of assessment under Sections 153 A and 153C is available to the Department in addition to all other methods of assessment, revision and reassessment and each scheme has its distinct set of conditions and stipulations, that must be strictly adhered to. Department has argued that the issuance of notice for all 6 years preceding the previous year, relevant to the assessment year in which the search takes place is mandatory, irrespective of whether the satisfaction note reveals the seizure of any incriminating material in the case of the assessee concerned - There is a vital distinction between the object, intention as well as the express language of Sections 153A and 153C. Section 153A addresses the searched entity and the procedure set out is evidently a notch higher for this reason. There is no discretion or condition precedent under Section 153A to the issuance of notice save the conduct of a search under Section 132 or making of a requisition under Section 132A. Upon the occurrence of one of the aforesaid events, it is incumbent upon the officer to issue notice under Section 153A to the searched entity in line with the procedure stipulated. Notice under Section 153C would have to be issued only upon the concurrent satisfaction of both conditions as aforesaid. To this extent, there is, in my considered opinion, a clear and marked distinction between the provisions of Section 153A and 153C. The contention of the revenue that a mandate is cast upon the Assessing Officer of the third party to issue notice under Section 153C for all the years comprising the block, mechanically and automatically, is thus rejected. To clarify, it is only where the satisfaction note recorded by the receiving Assessing Officer, i.e., the Assessing Officer of the third party reflects a clear finding that the incriminating material received has a bearing on determination of total income of the third party for 6 assessment years immediately preceding the assessment year relevant to the previous year in which search is conducted or requisition is made, that such notice would have to be issued for all the years. It thus flows from the provision that the receiving assessing officer must apply his mind to the materials received and ascertain precisely the specific year to which the incriminating material relates. It is only when this determination/ascertainment is complete that the flood gates of an assessment would open qua those particular years. The issuance of a notice cannot be an automated function unconnected to this exercise of analysis and ascertainment by an assessing officer. The construction of Section 153 A and 153 C is consciously different and is seen to apply different yardsticks to an entity searched and a third party, such yardstick being more exacting in the case of the former. The process of assessment is demanding and an assessee, once in receipt of a notice, is bound by the stringent procedure under the Act, till finalisation of the process. As on date, when the matters are being heard, the assessments have been allowed to be proceeded with till completion of assessment, which gives the Court the benefit of not just the satisfaction note but the show cause notices as well as the orders of assessment. These records reveal the variation between the satisfaction note and the assessment order in terms of the records seized, making it evident that there has been an omission on the part of the officer who has recorded satisfaction to refer to the small note books in relation to AYs 2016-17 and 2017-18. The legal issue is hence decided in favour of the petitioners, and would have to be applied to determine the validity or otherwise of each of the orders of assessment passed in the case of each of the petitioners. This Court is not in possession of all satisfaction notes. In some cases, the assessing authority has recorded satisfaction by way of a consolidated note, whereas in some others, this Court is given to understand that the satisfaction notes are individual relating to a specific year.

Summary

Issues Involved:
1. Procedural irregularities in the examination of electronic records.
2. Delay in handing over seized materials.
3. Validity of the satisfaction note and its contents.
4. Protective nature of assessments.
5. Specificity and credibility of the satisfaction note.
6. Principles of natural justice and opportunity for cross-examination.
7. Validity of assessments under Sections 153A and 153C of the Income Tax Act.
8. Impact of seized materials on assessments for different years.
9. Jurisdictional and procedural compliance by assessing authorities.

Summary:

I. Procedural Irregularities and Delay in Handing Over Seized Materials:
The petitioners challenged the orders of assessment dated 25.09.2021, passed under Section 153C read with Section 143(3) of the Income Tax Act, 1961, for assessment years 2013-14 to 2018-19. They contended that the procedure established under Rule 112(13) of the Income Tax Rules, 1962, for the examination of electronic records was not followed. Additionally, there was a delay in handing over the seized materials beyond the statutory period. The respondents maintained that the assessments were made in accordance with proper procedure and by officers vested with due authorization and jurisdiction. The court found no procedural irregularities or delays in the transfer of seized materials.

II. Validity and Contents of the Satisfaction Note:
The petitioners argued that the satisfaction notes were not initially supplied and that the contents of the satisfaction note were based on certain loose sheets and tax consultation advice, which were not credible. The satisfaction note referred to entities incorporated in foreign jurisdictions and alleged tax evasion through overseas remittances. The court noted that the satisfaction note was detailed and complied with statutory requirements. However, the petitioner was given sufficient opportunity prior to the completion of the proceedings, and the assessments were protective in nature.

III. Specificity and Credibility of the Satisfaction Note:
The petitioners contended that the satisfaction notes were concocted and lacked a basis in reality. They pointed out inconsistencies in the documents and argued that the satisfaction notes did not specify the years to which the incriminating materials related. The court held that the satisfaction note must be specific and credible, and the assessments must be based on seized material. The court emphasized that the satisfaction note should reflect a clear finding that the incriminating material has a bearing on the determination of total income for specific years.

IV. Principles of Natural Justice and Opportunity for Cross-Examination:
The petitioners argued that they were not given an opportunity to cross-examine individuals whose statements were relied upon in the assessment orders. The court reiterated that the principles of natural justice require that an assessee be given a copy of sworn statements and an opportunity to cross-examine the persons concerned if requested. The court directed that the appellate authority ensure an effective opportunity for cross-examination before finalizing the appeal proceedings.

V. Validity of Assessments under Sections 153A and 153C:
The court examined the provisions of Sections 153A and 153C, noting the distinction between the two. Section 153A addresses the searched entity and mandates the issuance of notice upon the occurrence of a search or requisition. Section 153C, however, requires the satisfaction of two conditions: the recording of satisfaction by the Assessing Officer of the searched entity and the third party. The court held that the issuance of notice under Section 153C must be based on the satisfaction that the seized material has a bearing on the determination of total income for specific years.

VI. Impact of Seized Materials on Assessments for Different Years:
The court found that the satisfaction notes in some cases did not contain references to specific years, leading to the quashing of assessments for those years. The court directed the jurisdictional assessing officer to collate the satisfaction notes relating to each year and apply the court's conclusions to determine the validity of the assessments.

VII. Jurisdictional and Procedural Compliance by Assessing Authorities:
The court emphasized the importance of jurisdictional and procedural compliance by assessing authorities. It directed that orders be passed giving effect to the court's conclusions, and assessments for years without incriminating material noted by the assessing authority be quashed.

VIII. Specific Cases:
In the cases of Sri Balaji Charitable and Educational Trust and Fourth Force Surveillance Indo Pvt. Ltd., the court noted that there was no seized material for certain assessment years, leading to the quashing of assessments for those years. In the case of Rajan Narasimulu Jayaprakash, the court found that the satisfaction note was detailed and complied with statutory requirements. However, the petitioner was denied an opportunity for cross-examination, and the court directed the appellate authority to ensure an effective opportunity for cross-examination.

Conclusion:
The court disposed of the writ petitions, directing the assessing authorities to comply with the conclusions and provide an opportunity for cross-examination where requested. The petitioners were granted liberty to challenge the remaining assessment orders by way of statutory appeals.