IQ City Foundation Vs ACIT (ITAT Kolkata)
We find that Assessing Officer has passed the re-assessment order u/s. 153A/ 153C / 143(3) dated 31.12.2018 without providing the copy of the statement of Shri Chandra Kant Ladia and we find that Assessing Officer by solely relying on the uncorroborated statement of Shri Chandra Kant Ladia recorded u/s. 131 of the Act on 23.09.2016 [ (taken in the course of the survey conducted u/s. 133A at the office premises of M/s. Pratibha Holdings (M/s. PHPL) on 23-09-2016) ] and without giving an opportunity to assessee to cross examine Shri Ladia, the AO has framed the reassessment u/s. 153A read with section 153C/143(3) of the Act which is per- se bad in law inter alia for violation of Natural Justice.
According to us, the Assessing Officer before framing the reassessment order dated 31.12.2018 was bound to give a copy of the statement of Shri Ladia, which was recorded during survey and which was admittedly recorded behind the assessee’s back. The Assessing Officer ought not to have kept the assessee in the dark by not furnishing the statement of Shri Ladia and should have been fair enough to give an opportunity to assessee to meet the allegation if any against the assessee which according to AO, have been discovered during survey. And further, the AO should have provided an opportunity to assessee to cross examine Shri Ladia to test the veracity of the statement of Shri Ladia, which was not done by AO before framing the reassessment order dated 31.12.2018. Therefore, there is per-se violation of Natural Justice and so the non furnishing of statement of Shri Ladia to the assessee before framing of reassessment order dated 31.12.2018 and not giving an opportunity to assessee to cross examine Shri Ladia vitiates the action of Assessing Officer to rely upon the statement of Shri Ladia to draw adverse inference against the assessee in respect of donation of Rs. 50 lakhs. For this finding of ours, we rely on the ratio of the decision of the Hon’ble Supreme Court in Andaman Timber Industries vs. CCE (2015) 62 taxmann.com 3/52 GST 355(SC), wherein that case the addition was made against the assessee (Andaman Timber Industries) by the AO by relying on the statement of two witnesses namely Sri Sreeram Tekriwal and Sri Laxmidas Panchmati.
Even though the assessee pleaded for cross-examination of these two witnesses, the AO did not give opportunity to the assessee and when the action of the AO was confirmed by the appellate authorities, the Hon’ble Supreme Court examined the omission on the part of the AO not providing opportunity to assessee to cross examine of two witnesses and held that it was a serious flaw and since the statements of those witnesses were made the basis of the impugned order this omission on the part of AO makes the order nullity inasmuch as it amounted to violation of Principles of natural justice.
FULL TEXT OF THE ITAT JUDGEMENT
Both these appeals filed by the assessee against the separate orders of Ld. CIT(A)-21, Kolkata dated 15.11.2019 for A Ys. 2014-15 and 2016-17. Both these appeals are time barred by two days and condonation petitions have been filed. After perusing the same, we condone the delay and admit the appeals for hearing.
2. First we take up IT(SS)A No. 31/Kol/2020. At the outset, the Ld. AR of the assessee Shri S. K. Tulsiyan does not press ground no. 9 of the appeal, so it is dismissed. Ground Nos. 10 and 11 are general in nature and do not require any adjudication.
3. Ground Nos. 1 to 8 raised by the assessee are as under:
“1. That the Impugned assessment Order passed by the Ld. A.O. u/s.153 of the Income Tax Act, 1961 for the concerned assessment year is bereft of jurisdiction for not being based on any such incriminating material found during the course of the search conducted at the premises of the “searched person” i.e., Mani Group on 22.06.2016.
2. That the Ld. A.O. has erred in making and the Ld. CIT(A) has erred in upholding the impugned additions when no such incriminating material qua the concerned assessment year has been found during the course of the search conducted at the premises of the “searched person” i.e., Mani Group on 22.06.2016 to warrant any such addition u/s 153C of the Income Tax Act, 1961.
3. That the Impugned Order passed u/s. 143(3)/153C of the Income Tax Act, 1961 is void ab initio and against the settled law decided by Hon’ble Supreme Court in the case of Sinhgad Technical Education Society(2017) 397 ITR 344 (SC).
4. That, without prejudice to the above grounds, the Ld. A.O. and the Ld. C.I.T.(A) have erred in sustaining the impugned addition of Rs.50,00,000/-as a bogus donation incomplete ignorance of the documents evidencing the valid donation of Rs.50,00,000/- received from Parthiba Holding Pvt. Ltd. after observing all legal norms as incriminating in nature when the said donation was duly recorded in the audited books of accounts.
5. That, the Ld. A.O. has erred in making and the Ld. C.I.T.(A) have erred in sustaining the impugned addition of Rs.50,00,000/- on the allegation that the same is a bogus donation received from M/s Parthiba Holdings Pvt. Ltd. by placing reliance only on the uncorroborated third party statement of C.K. Ladia u/s 131 dt. 23.09.2016 that was recorded behind the back of the appellant during the course of a third party survey conducted at the business premises of M/s Parthiba Holdings on 23.06.2016.
6. That, the Ld. A.O. has erred in making and the Ld. C.I.T.(A) has erred in sustaining the impugned addition of Rs.50 lakhs on the allegation that the same is a bogus donation when in fact, the donor has confirmed such donation by account payee cheque, against which appropriate receipts were issued and which have been duly recorded for in the books of the Appellant and where no cogent evidence, except the alleged third party statement of C. K. Ladia U/S 131 dt.23.09.2016 exits to support the allegation that cash was returned back against the donation made.
8. That, the Ld. C.I.T.(A) has further erred in having linked the amount disclosed under the Income Disclosure Scheme, 2016 surrendered by M/s Parthiba Holding Pvt. Ltd. with the donation of Rs.50,00,000/- received by the Appellant from M.s Parthiba Holdings Pvt. Ltd. purely on suspicion and surmises, where no such logical linkage can be established to show that Mr. C.K. Ladia has disclosed the alleged sum of Rs.50,00,000/- in his IDS.”
4. From a perusal of the ground nos. 1 to 3 it reveals that the assessee has raised legal issue of jurisdiction of AO to assess the assessee u/s. 153C of the Act. The legal challenge is against the action of the AO inter-alia to validly usurp jurisdiction u/s. 153C of the Income-tax Act, 1961 (hereinafter referred to as the “Act”) without satisfying the mandatory condition precedent prescribed by Section 153C of the Act i.e. the AO has not recorded a valid satisfaction note before assumption of jurisdiction u/s 153 C of the Act. In other words, the AO has issued notice u/s. 153C of the Act against the assessee foundation which was not subjected to search u/s. 132 of the Act, by invoking special provision of assessment u/s. 153C of the Act without satisfying the requirement of law as stipulated u/s. 153C of the Act, so according to assessee the action of AO is ab-initio void. Without prejudice to the above legal challenge, the second challenge (ground nos. 4 to 6) are against the action of the AO to have made the addition of Rs.50 lakhs without any incriminating material seized from the third party premises where search was conducted on 22.06.2016 and for having erroneously relied upon the statement of Shri C. K. Ladia recorded u/s. 131 of the Act. which was admittedly recorded behind the back of the assessee during survey dated 23.09.2016 u/s. 133A of the Act and that too without furnishing a copy of the statement to the assessee before framing of reassessment and relying upon the same for making the addition without affording opportunity to the assessee to cross examine Shri Ladia. The third challenge (ground no. 8, there is no ground no 7, wrongly numbered) is against the action of Ld. CIT(A) to have erroneously assumed that M/s. Parthiba Holding Pvt. Ltd. (donor of donation of Rs. 50 lacs) has disclosed the amount donated to assessee (Rs.50 lakhs) under the Income Disclosure Scheme 2016 (IDS Scheme 2016). Thus, from the aforesaid discussion, we note that the assessee foundation by preferring the aforesaid grounds of appeal has challenged the action of addition of Rs.50 lakhs on merit as well as on legal grounds. So, we are inclined to first adjudicate the legal issue because if it is valid then it goes to the root of the appeal [since it challenges the jurisdiction of Assessing Officer to invoke jurisdiction and issue notice u/s 153C of the Act against the assessee foundation]. It has to be kept in mind that the special provision for proceedings u/s. 153C of the Act is an off-shoot of section 153A of the Act which gets triggered only when search u/s. 132 of the Act is carried out by the department against an assessee. So, in order to adjudicate the legal issue let us examine both the provisions (Section 153A & 153C), as it stood on the date of search on Mani Group i.e. 22.06.2016. It is to be taken note that even though we are considering the appeal for A.Y. 2014-15, since the search happened at Mani Group premises on 22.06.2016, the amendment made by Parliament as per Finance Act 2015 w.e.f. 01.06.2016 needs to be also considered. The relevant provisions of section 153A and 153C of the Act are reproduced below:
I. Assessment in case of search or requisition.
153A. [(1)] Notwithstanding anything contained in section 139, section 147, section 148, section 149, section 151 and section 153, in the case of a person where a search is initiated under section 132 or books of account, other documents or any assets are requisitioned under section 132A after the 31st day of May, 2003, the Assessing Officer shall—
(a) issue notice to such person requiring him to furnish within such period, as may be specified in the notice, the return of income in respect of each assessment year falling within six assessment years [and for the relevant assessment year or years] referred to in clause (b), in the prescribed form and verified in the prescribed manner and setting forth such other particulars as may be prescribed and the provisions of this Act shall, so far as may be, apply accordingly as if such return were a return required to be furnished under section 139;
(b) assess or reassess the total income of six assessment years immediately preceding the assessment year relevant to the previous year in which such search is conducted or requisition is made [and for the relevant assessment year or years] .•
Provided that the Assessing Officer shall assess or reassess the total income in respect of each assessment year falling within such six assessment years [and for the relevant assessment year or years] .•
Provided further that assessment or reassessment, if any, relating to any assessment year falling within the period of six assessment years [and for the relevant assessment year or years] referred to in this [sub-section] pending on the date of initiation of the search under section 132 or making of requisition under section 132A, as the case may be, shall abate .•
II. Assessment in case of any other persons
153C. (1) Notwithstanding anything contained in section 139, section 147, section 148, section 149, section 151 and section 153, where the Assessing Officer is satisfied that,—
(a) any money, bullion, jewellery or other valuable article or thing, seized or requisitioned, belongs to; or
(b) any books of account or documents, seized or requisitioned, pertains or pertain to, or any information contained therein, relates to,
a person other than the person referred to in section 153A, then, the books of account or documents or assets, seized or requisitioned shall be handed over to the Assessing Officer having jurisdiction over such other person and that Assessing Officer shall proceed against each such other person and issue notice and assess or reassess the income of the other person in accordance with the provisions of section 153A, if, that Assessing Officer is satisfied that the books of account or documents or assets seized or requisitioned have a bearing on the determination of the total income of such other person for six assessment years immediately preceding the assessment year relevant to the previous year in which search is conducted or requisition is made and for the relevant assessment year or years referred to in sub-section (1) of section 153A.•
Provided that in case of such other person, the reference to the date of initiation of the search under section 132 or making of requisition under section 132A in the second proviso to sub-section (1) of section 153A shall be construed as reference to the date of receiving the books of account or documents or assets seized or requisitioned by the Assessing Officer having jurisdiction over such other person .•
Provided further that the Central Government may by rules made by it and published in the Official Gazette, specify the class or classes of cases in respect of such other person, in which the Assessing Officer shall not be required to issue notice for assessing or reassessing the total income for six assessment years immediately preceding the assessment year relevant to the previous year in which search is conducted or requisition is made and for the relevant assessment year or years as referred to in sub-section (1) of section 153A except in cases where any assessment or reassessment has abated.
(2) Where books of account or documents or assets seized or requisitioned as referred to in sub-section (1) has or have been received by the Assessing Officer having jurisdiction over such other person after the due date for furnishing the return of income for the assessment year relevant to the previous year in which search is conducted under section 132 or requisition is made under section 132A and in respect of such assessment year—
(a) no return of income has been furnished by such other person and no notice under subsection (1) of section 142 has been issued to him, or
(b) a return of income has been furnished by such other person but no notice under subsection (2) of section 143 has been served and limitation of serving the notice under sub-section (2) of section 143 has expired, or
(c) assessment or reassessment, if any, has been made, before the date of receiving the books of account or documents or assets seized or requisitioned by the Assessing Officer having jurisdiction over such other person, such Assessing Officer shall issue the notice and assess or reassess total income of such other person of such assessment year in the manner provided in section 153A.
5. We note that Section 153A/153C of the Act was introduced by Finance Act, 2003 w.e.f. 1.6.2003. It replaced the provisions relating to block assessment contained in Chapter XIVB and introduced the new procedure for making assessment u/s. 153 of the Act, which is now a part of Chapter XIV of the Act, “Procedure for Assessment” and contains provisions from section 139 – 158A of the Act. The sub-heading of Section 153A of the Act is “Assessment in case of Search or requisition” which is a special provision for assessment in case of an assessee against whom search u/s. 132 or requisition under section 132A of the Act is carried out by the department; Section 153B of the Act prescribes the time limit for completion of assessment under section 153A and 153C of the Act; Section 153C of the Act bears the heading “Assessment of income of any other person” is a special provision in respect of assessment of income of “any other person” (third party) against whom no search u/s. 132 or requisition u/s. 132A of the Act was carried out provided certain condition precedents are satisfied as envisaged under section 153C of the Act; and section 153D of the Act is the provision regarding approvals if necessary for assessment in case of search or requisition. As earlier noted, section 153A of the Act is a special provision for assessment of an assessee in case of search or requisition in accordance to section 132 or 132A of the Act after the 31st day of May, 2003; and section 153C of the Act is a special provision for assessment of income of ‘any other person‘ means a third party who is not searched by the department will be assessed u/s. 153A of the Act, provided the AO is satisfied that –
a) any money, bullion, jewellery or other valuable article or thing, seized or requisitioned, belongs to; or
b) any books of account or documents, seized or requisitioned, pertains or pertain to, or any information contained therein, relates to a person other than the person referred to in section 153A.
6. So, from a reading of section 153A of the Act we note that where a search u/s. 132 of the Act or requisition under section 132A of the Act is made after the 31st day of May, 2003, the jurisdictional AO of the searched person gets power to issue notice to the searched person requiring him to furnish within such period as may be specified in the notice, return of income in respect of each assessment order falling within six assessment years immediately preceding the assessment year relevant to the previous year in which search is conducted or requisition is made. However, during the search u/s. 132 or requisition under section 132A of the Act if it is found that any third party’s money, bullion, jewellery or other valuable articles or things seized or requisitioned belongs to or any books of account or documents seized or requisitioned pertains to or any information contained therein relates to “other than the person” searched u/s. 153A of the Act, [i.e a third party in this case the ‘assessee’ foundation], then the AO of the searched person has to record his satisfaction that the money, bullion, jewellery or other valuable articles or things seized or requisitioned belongs to the other person (third party, the assessee foundation in this case) or any books of account or documents seized or requisitioned pertains to the other persons (third party, the assessee in this case) or any information contained therein relates to the other person (third party, the assessee in this case), then the AO of the searched person has to prepare a satisfaction note that during the search u/s. 132 of the Act of a person (Mani Group in this case), the search team has found/un-earthed money, bullion, jewellery or valuable articles or things, which were seized and the AO has found that among the such seized material, certain specific valuable article or thing belongs to a third party (other person as referred in section 153C of the Act who was not searched and in this case, the assessee) or books of account or documents seized contained information, pertained or relates to that of the other person (third party in this case the assessee), and for recording such a satisfaction note the AO of the searched person has to segregate the seized material of the other person (third party in this case the assessee) from that of the searched person (Mani Group); and then the AO of the searched person should examine the seized material and should be able to satisfy himself that the segregated seized assets belong to the third party (in this case that of the assessee) or books/documents/information, pertains or relates to the third party (in this case the assessee who was not covered by the search u/s. 132 of the Act) and thereafter prepare the “Satisfaction Note” and then he has to hand over the seized materials, which belongs/pertains/relates to the third party to the AO having jurisdiction over such other person (third party assessee in this case), then only the AO of such other person (third party, the assessee in this case) gets jurisdiction u/s. 153C of the Act to assess the income of other person (third party) as per section 153A of the Act. The rationale behind this exercise discussed (supra) will be explained (infra). And since it is a special provision against an assessee who has not been searched by the department, the safe-guard stipulated by the provisions contained in section 153A & 153C has to be scrupulously followed.
7. According to us, the aforesaid exercise which has been discussed has to be carried out by the AO of the searched person and the condition precedent as discussed are sine qua non before the AO of the other person (third party) gets jurisdiction u/s. 153C of the Act to issue notice u/s. 153C of the Act to the third party. However, it has to be taken note that an additional requirement/satisfaction of AO has been brought in Finance Act, 2014 w.e.f. 01.10.2014 which is an additional conditional precedent inserted by the Parliament which also need to be complied before the AO of the other persons (third party, the assessee in this case) before he issues notice to assess or reassess income of such “other persons”. By this amendment in section 153C of the Act, the following part of the earlier provision/section has been substituted (pre-amendment) which reads “and that Assessing Office shall proceed against each such other person and issue such other person notice and assess or reassess income of such other person in accordance with the provisions of section 153A”. And this part of Section 153C was substituted by insertion by the Finance (No.2) Act, 2014 with the following amendment w.e.f 01.10.2014 which reads “and that assessing officer shall proceed against each such other person and issue notice and assess or reassess the income of the other person in accordance with the provisions of section 153A, if, that Assessing officer is satisfied that the books of account or documents or assets seized or requisitioned have a bearing on the determination of the total income of such other person”. [Emphasis given by us].
8. Thus, we note that by the aforesaid amendment brought in section 153C of the Act, the Parliament has stipulated another condition-precedent before the Assessing Officer of the third party, (i.e, the assessee in this case) can resort to issue notice u/s 153C read with 153A of the Act only when he (AO) is satisfied from a perusal of the books of account or documents or assets seized or requisitioned have a bearing in the determination of the total income of the such other person (third party, the assessee in this case) then he should proceed as per sec. 153C(2) of the Act and assess or reassess the total income of such other person, (the assessee in this case) in the manner provided in section 153A of the Act. So in this case before us, since the AO of the searched person as well as that of the other/third party/assessee foundation are the same, he/AO of assessee can issue notice u/s 153C of the Act only after satisfaction of this condition precedent also in addition to the requirement of Satisfaction of searched person of AO as discussed supra. [Emphasis given by us]
9. The rationale behind the exercise to be carried out by the AO as discussed in Para 6 (supra) is because, the special provision for persons who are subjected to search u/s. 132 of the Act, would be triggered only against the searched party u/s. 153A of the Act and if any valuables of a third party is found in the searched premises which belongs or books/documents pertain/relate to a third party is found, then third party’s assessment for six years would be subject to assessment/re-assessment as per section 153C of the Act, so the safeguards prescribed by the statute has to be scrupulously followed. Therefore, it has to be kept in mind that satisfaction of AO before proceeding against a person like assessee foundation which has not been searched cannot be done in a casual manner. The satisfaction of Assessing Officer should be based upon cogent material. The reason for it is that section 132(4A)(i) of the Act clearly stipulates that when inter alia any document is found in the possession or control of any person in the course of a search, it may be presumed that such document belongs to such person (the searched person). The presumption as to asset, books of accounts, etc. is governed by section 292C(1)(i) of the Act belong or belongs to the person from whom said assets/documents were found during the course of search u/s. 132 or survey u/s. 133A of the Act. In other words, whenever an asset/ document is found from a person who is being searched, the normal presumption is that the said asset/document belongs to that person. It is for the Assessing Officer to rebut that presumption and come to a conclusion or ‘satisfaction’ that the asset/document in fact belongs/pertains/relates to somebody else (third party like assessee in this case). There must be some cogent material available which was unearthed during search with the Assessing Officer before he/she arrives at the satisfaction that the seized asset/document does not belong to the searched person but to somebody else. Surmise and conjecture cannot take the place of ‘satisfaction’ and the same interpretation has been given by various courts. [refer 55 [2019] taxmann.com 202 (Gujarat) PCIT v. Himanshu Chandulal Patel (Para 20, 21)].
10. It is noted from the scheme of the Act u/s. 153A of the Act, the Assessing Officer gets jurisdiction to assess six assessment years prior to the previous year on which search is conducted. The assessment under section 153A of the Act can be broadly divided in two categories, one is in respect of “completed assessment” on the date of search by the AO already made under section 143(3)/147/153A/153C and will also cover those years which period of notice u/s. 143(2) of the Act has expired and only processing of return u/s. 143(1) of the Act has been made. The second category “Pending Assessment” is related to the years for which the assessments are pending before the AO on the date of search meaning notices have been issued by the AO u/s. 143(2)/ 148 have been issued. For determining the abated/unabated assessment the date of search is significant since as per second proviso to Section 153A of the Act, if any, assessment year falling within the period of six assessment years of an assessee who has been subjected to search are pending before the AO on the date of search, then the assessment for those years need to be treated as abated and the AO is at liberty to frame assessment or reassessment. In other words, it is open to the AO to complete the assessment by verifying the contents of the original return as well as the income unearthed out of the incriminating material/documents seized from search conducted on the assessee. However, on the date of search, assessment years are not pending before the AO [i.e. in case where the searched assessee’s assessments are completed u/s. 143(3) or 148 or 153A/153C of the Act or if the mandatory scrutiny assessment notices u/s. 143(2) of the Act has become time barred], then those assessment years to be treated as un-abated assessment and by virtue of second proviso to section 153A(1) of the Act, assessment u/s. 153A or 153C has to be essentially based on the documents unearthed during the course of search and seizure operations. Then, the assessment under section 153A and under section 153C of the Act can be made only by considering the incriminating material found/unearthed during search. For this proposition we rely on the judgment of Hon’ble Delhi High Court in the case of CIT vs. Kabul Chawla in ITA 707/2014 dated 28.08.2015 wherein it has held as under:
“Summary of the legal position
37. On a conspectus of Section 153A(1) of the Act, read with the provisos thereto, and in the light of the law explained in the aforementioned decisions, the legal position that emerges is as under:
i. Once a search takes place under Section 132 of the Act, notice under Section 153 A (1) will have to be mandatorily issued to the person searched requiring him to file returns for six AYs immediately preceding the previous year relevant to the AY in which the search takes place.
ii. Assessments and reassessments pending on the date of the search shall abate. The total income for such AYs will have to be computed by the AOs as a fresh exercise.
iii. The AO will exercise normal assessment powers in respect of the six years previous to the relevant AY in which the search takes place. The AO has the power to assess and reassess the ‘total income’ of the aforementioned six years in separate assessment orders for each of the six years. In other words there will be only one assessment order in respect of each of the six AYs “in which both the disclosed and the undisclosed income would be brought to tax”.
iv. Although Section 153 A does not say that additions should be strictly made on the basis of evidence found in the course of the search, or other post-search material or information available with the AO which can be related to the evidence found, it does not mean that the assessment “can be arbitrary or made without any relevance or nexus with the seized material. Obviously an assessment has to be made under this Section only on the basis of seized material.”
v. In absence of any incriminating material, the completed assessment can be reiterated and the abated assessment or reassessment can be made. The word ‘assess’ in Section 153 A is relatable to abated proceedings (i.e. those pending on the date of search) and the word ‘reassess’ to completed assessment proceedings.
vi. Insofar as pending assessments are concerned, the jurisdiction to make the original assessment and the assessment under Section 153A merges into one. Only one assessment shall be made separately for each AY on the basis of the findings of the search and any other material existing or brought on the record of the AO.
vii. Completed assessments can be interfered with by the AO while making the assessment under Section 153 A only on the basis of some incriminating material unearthed during the course of search or requisition of documents or undisclosed income or property discovered in the course of search which were not produced or not already disclosed or made known in the course of original assessment.”
11. And it is noted that the department preferred an S.L.P against the aforesaid order, which has been dismissed by the Hon’ble Supreme Court. However, when it comes to assessment of third party u/s. 153C of the Act [like assessee in this case], the concept of unabated /abated assessment are mutatis mutandis. However, only difference is when the assessment/reassessment has to be made invoking section 153C of the Act, then even though assessment /reassessment has to be carried out u/s. 153A of the Act, however, by virtue of the first proviso to section 153C by operation of law reference to the date of initiation of the search u/s. 132 of the Act or making of requisition u/s. 132A of the Act in the second proviso to sub-section (1) of section 153A shall be considered as reference to the date of receiving the books of account or documents or assets seized or requisitioned by the AO having jurisdiction over such other person. For this, we rely on the decision of the Hon’ble Delhi High Court in the case of CIT Vs. RRJ Securities Ltd. (2015) 62 taxmann. Com 391 (Delhi), wherein the Hon’ble Delhi High Court held as under:
“1. As discussed hereinbefore, once the AO of the searched person is satisfied that the seized assets/documents belong to another person and the said assets/documents have been transferred to the AO of such other person, the proceedings for assessment/reassessment of income of the other person has to proceed in accordance with provisions of Section 153A of the Act. Section 153A requires that where a search has been initiated under Section 132 of the Act, the AO is required to issue notice requiring the noticee to furnish returns of income in respect of six assessment years relevant to the six previous years preceding the previous year in which the search is conducted. As discussed hereinbefore, by virtue of second proviso to Section 153A, the assessment/reassessment pending on the date of initiation of search abate. In the context of proceedings under Section 153C of the Act, the reference to the date of initiation of the search in the second proviso to Section 153A has to be construed as the date on which the AO receives the documents or assets from the AO of the searched person. Thus, by virtue of second proviso to Section 153A of the Act as it applies to proceedings under Section 153C of the Act, the assessment/reassessment pending on the date on which the assets/documents are received by the AO would abate. In respect of such assessments which have abated, the AO would have the jurisdiction to proceed and make an assessment. However, in respect of concluded assessments, the AO would assume jurisdiction to reassess provided that the assets/documents received by the AO represent or indicate any undisclosed income or possibility of any income that may have remained undisclosed in the relevant assessment years. This Court in CIT v. Kabul Chawla [2015] 61 taxmann.com 412 (Delhi) has held that completed assessments could only be interfered with by the AO on the basis of any incriminating material unearthed during the course of the search or requisition of the documents. In absence of any incriminating material, the AO does not have any jurisdiction to interfere in concluded assessments. This Court had summarized the legal position in respect of Section 153A of the Act as under:—
’37. On a conspectus of Section 153A(1) of the Act, read with the provisos thereto, and in the light of the law explained in the aforementioned decisions, the legal position that emerges is as under:
i. Once a search takes place under Section 132 of the Act, notice under Section 153 A (1) will have to be mandatorily issued to the person searched requiring him to file returns for six AYs immediately preceding the previous year relevant to the AY in which the search takes place.
ii. Assessments and reassessments pending on the date of the search shall abate. The total income for such AYs will have to be computed by the AOs as a fresh exercise.
iii. The AO will exercise normal assessment powers in respect of the six years previous to the relevant AY in which the search takes place. The AO has the power to assess and reassess the ‘total income’ of the aforementioned six years in separate assessment orders for each of the six years. In other words there will be only one assessment order in respect of each of the six AYs “in which both the disclosed and the undisclosed income would be brought to tax”.
iv Although Section 153 A does not say that additions should be strictly made on the basis of evidence found in the course of the search, or other post-search material or information available with the AO which can be related to the evidence found, it does not mean that the assessment “can be arbitrary or made without any relevance or nexus with the seized material. Obviously an assessment has to be made under this Section only on the basis of seized material.”
v. In absence of any incriminating material, the completed assessment can be reiterated and the abated assessment or reassessment can be made. The word ‘assess’ in Section 153 A is relatable to abated proceedings (i.e. those pending on the date of search) and the word ‘reassess’ to completed assessment proceedings.
vi. Insofar as pending assessments are concerned, the jurisdiction to make the original assessment and the assessment under Section 153A merges into one. Only one assessment shall be made separately for each AY on the basis of the findings of the search and any other material existing or brought on the record of the AO.
vii. Completed assessments can be interfered with by the AO while making the assessment under Section 153 A only on the basis of some incriminating material unearthed during the course of search or requisition of documents or undisclosed income or property discovered in the course of search which were not produced or not already disclosed or made known in the course of original assessment.’
22. The aforesaid principles would be equally applicable to proceedings initiated under Section 153C of the Act as Section 153C(1) of the Act expressly provides that once the AO has received “money, bullion, jewellery or other valuable articles or thing or books of account or documents seized” from the AO of the searched person, he would proceed to assess or reassess the income of the person to whom such assets/books belong in accordance with Section 153A of the Ac
23. In the present case, the Assessee had claimed that the assessments for the concerned assessment years were not pending on the date of recording of satisfaction by the AO and, therefore, would not abate by virtue of the second proviso to Section 153A of the Act. Further, the period of six years would also have to be reckoned with respect to the date of recording of satisfaction note – that is, 8th September, 2010 – and not the date of search. (Emphasis supplied).”
12. So as noted in this case before us, the date of ‘satisfaction note’ prepared by the AO u/s 153C of the Act is 03.09.2018, and even though the search has been conducted in respect of Mani Group (searched person) on 22.06.2016 (AY 2017-18) by virtue of first proviso to section 153C of the Act, the satisfaction note the AO has recorded for satisfying himself that “the other persons” (third party i.e. the assessee in this case) assets/documents belongs/pertains to the other persons (third party) was made on 03.09.2018 (AY 2019-20) and this date has to be reckoned for the purpose of assessment u/s. 153A for determining the total income for six assessment years preceding the AY 2019-10. In this assessment year i.e. AY 2014-15, we note that scrutiny assessment of this assessee was completed for AY 2014-15 on 31.12.2016 under section 143(3) of the Act and so the assessment for AY 201415 is a completed assessment and not pending before the AO on the date when the satisfaction note was prepared by the Assessing Officer i.e. 03.09.2018 as per the first proviso of section 153C of the Act . In this factual background, as per the settled principle of law when the assessment for the assessment year is not pending before the AO on the date of Satisfaction Note i.e. 03.09.2018, then the assessment year i.e. AY 2014-15 needs to be treated as non-abated / non-pending assessment and then any addition/disallowance u/s. 153C read with sec. 153A/143(3) of the Act can be made only on the basis of incriminating material unearthed during search qua the assessee (third party) qua the assessment year as held by the Hon’ble Jurisdictional High Court in the case of CIT Vs. Veeraprabhu Marketing ltd. (2016) 73 taxman.com (Cal) as under:
“1. The subject matter of challenge is a judgment and order dated December 28, 2007 by which the learned Income Tax Appellate Tribunal, “E” Bench, Kolkata, in CIT v. Veerprabhu Marketing Ltd. ITA Nos. 2172 and 2174/Kol/2006, pertaining to the assessment years 1998-99 and 1999-2000, and I.T.(SS) A. Nos.61-63/Kol/2007, pertaining to the assessment years 2001-02, 2002-03 and 2003-04, allowed the appeals preferred by the assessee.
The aggrieved revenue has come up in appeal.
……….
2. Mr. Jain, learned Advocate appearing for the assessee, submitted as follows:
(a) The assessment under section 153C read with section 153A read with section 144 of the Income Tax Act was altogether without jurisdiction because such assessment was made for all the five years on the basis of survey conducted under section 133A of the Income Tax Act. He submitted that the power under section 153C read with section 153A cannot be exercised on the basis of any discovery made during survey under section 133A.
(b) His next submission was that in any event, during the survey, no incriminating material was found which may have led the revenue to exercise power under section 153C read with section 153A.
4. He contended that even when assessment is made on the basis of a search under section 132 or a requisition made under section 132A, the power can only be resorted to provided any incriminating material is found. Existence of incriminating material is necessary before exercising power under the aforesaid sections. He, in support of his submission, relied upon the words “have a bearing on the determination of the total income of such other person”. If the search or requisition did not unearth any incriminating material, the search or requisition was futile and can have no bearing on the determination of the total income of such other person. There shall thus be no occasion for exercise of power under section 153C.He, however, added that the portion which he relied upon from section 153C is of a recent origin which was not there in the statute at the relevant point of time and has been introduced with effect from 1st June, 2015. He however contended that Karnataka High Court is of the opinion that even without these expressions ‘incriminating material’ was the sine qua non for exercise of power under section 153C read with section 153A.
5. He relied upon the following views expressed in paragraph 50 of the judgment in the case of CIT v. IBC Knowledge Park (P.) Ltd. [2016] 69 taxmann.com 108 (Kar.):-
“Materials such as books of account, documents or valuable assets found during a search should belong to a third party which would lead to an inference of undisclosed income of such third party. Such an inference should be recorded by the Assessing Officer having jurisdiction over the searched persons and communicated to the Assessing Officer having jurisdiction over such third party along with the seized documents and other incriminating materials on the basis of which the Assessing Officer having jurisdiction over such third party would issue notice under Section 153C. On receipt of the aforesaid material, the Assessing Officer having jurisdiction over such third party would proceed against the said third party. Thus, where no material belonging to a third party is found during a search, but only an inference of an undisclosed income is drawn during the course of enquiry, during search or during post-search enquiry, Section 153C would have no application. Thus, the detection of incriminating material leading to an inference of undisclosed income is a sine qua non for invocation of Section 153C of the Act.”
………
7. With respect to the second submission advanced by Mr. Jain, we called upon Mr. Nizamuddin in vain to show us the incriminating material, if any, found either during the search or during the requisition or even during the survey which is or may be relatable to the assessee. Mr.Nizamuddin as unable to show that any such incriminating material was unearthed at any of the three stages pertaining to the assessee.
8. We are in agreement with the views expressed by the Karnataka High Court that incriminating material is a pre-requisite before power could have been exercised under section 153C read with section 153A.
9. In the case before us, the assessing officer has made disallowances of the expenditure, which were already disclosed, for one reason or the other. But such disallowances were not contemplated by the provisions contained under section 153C read with section 153A. The disallowances made by the assessing officer were upheld by the CIT(A) but the learned Tribunal deleted those disallowances.
10. We find no infirmity in the aforesaid act of the learned Tribunal. The appeal is, therefore, dismissed.”(emphasis supplied)
13. In the light of the aforesaid discussion and case laws let us examine the legal issue raised before us. In order to test the validity of the jurisdiction of AO to legally usurp the jurisdiction u/s. 153C against a third party who has not been searched as well as to test whether Assessing Officer satisfied the condition-precedent before issue of notice u/s. 153A read with Section 153C of the Act, we need to examine the ‘satisfaction note’. We have to examine the ‘Satisfaction Note’ recorded by the AO dated 03.09.2018 which is reproduced as under:
“A search and seizure operation was conducted at the business premises of “Mani Group” of assessee as well as residence of director’s at Kolkata on 22.06.2016 and subsequent date. During search and seizure operation, incriminating documents in pg. No. 1 to 50 of a bunch of loose sheets with ID Mark MSL/3. Page No. 51 to 56 & 62 to 63 of a bunch of loose sheets with ID Mark MSL/4 Page No. 01,04,17 to 36 of a bunch of loose sheets with ID Mark MSL/5 were found and seized from office premises of Mani Square, 9th Floor, IT Chamber, EM Bye Pass, 164/1, Maniktala Main Road, Kolkata-700 054 as on 22.06.2016 and subsequent dates. The abovementioned pages of seized documents are pertaining to M/s. IQ City Foundation.
I am satisfied that this a fit case for initiating proceedings u/s. 153C/153A of the IT Act, 1961. Accordingly, proceedings u/s. 153C/153A of the IT Act, 1961 is hereby initiated by issuance of notice u/s. 153C/153A of the IT Act, 1961,[Emphasis given by us]
14. It has to be kept in mind that when the challenge is to the validity of the satisfaction note which the AO has recorded to assume jurisdiction, we have to examine the satisfaction recorded as it is. There are case laws which throws light in the context of examining the legal validity of Satisfaction recorded by the AO while re-opening the assessment u/s. 147 of the Act. It is settled law that reasons as recorded for reopening the reassessment are to be examined on a ‘stand-alone’ basis. Neither any thing can be added to the reasons so recorded nor any thing can be deleted from the reasons so recorded. The Hon’ble Bombay High Court in the case of Hindustan Lever Ltd. (2004) 268 ITR 332 wherein their Lordships have, inter alia, held “it is needless to mention that the reasons are required to be read as they were recorded by the AO. No substitution or deletion is permissible. No addition can be made to those reasons. No inference can be allowed to be drawn on the basis of reasons not recorded by him. He has to speak through the reasons.” Their Lordships added that “ the reason recorded should be self explanatory and should not keep the assessee guessing for reasons. Reasons provided the link between the conclusion and the evidence…..”. Therefore, reasons are to be examined only on the basis of reasons as recorded by the AO. This analogy/ratio decidendi of the Hon’ble High court is applicable to the ‘Satisfaction-Note’ prepared by the AO when he recorded his satisfaction note in respect of a third person (assessee in this case) against whom he/AO proposed to invoke the special provision and issue notice under section 153C of the Act. For that the AO of the searched person (Mani Group in this case) is duty bound to record his satisfaction that during search conducted on those persons, the third party (assessee’s) assets which belongs to it (assessee) or documents pertained/relates to the third party/ other person/assessee as envisaged in section 153C of the Act was seized and therefore need to be proceeded against the said party(assessee in this case). The Satisfaction Note spelling out these facts are sine qua non for usurping the jurisdiction u/s. 153C of the Act and an additional condition precedent is required to be satisfied by the AO of the assessee w.e.f. 01.10.2014 which has been discussed (supra) by virtue of Finance Act, 2014, (refer para 8 supra) which is required to be satisfied before the AO of the assessee issue notice u/s. 153C of the Act i.e. these assets/documents seized from the searched person have a bearing on the determination of the total income of the assessee (third party, the assessee in this case) . [Emphasis given by us] To sum up the facts as we noted in this case, even though the search was carried out on the Mani Group on 22.06.2016, the AO has recorded his satisfaction note to proceed against the other person (third party) i.e. the assessee on 03.09.2018 when he prepared the satisfaction note and concluded that it is a fit case to proceed against the assessee by issuing notice u/s. 153C of the Act. As discussed (supra) by virtue of the first proviso to section 153C of the Act AY 2014-15 which is under consideration of ours, we have already noted that on 30.12.2016 the assessment in respect of AY 2014-15 should be treated as completed and so is not pending before the AO and, therefore, it is non-abated assessment and therefore without the aid of incriminating material qua the assessee qua the AY 2014-15, no addition/disallowance can be made by the AO. So we have to examine the materials pointed out by the AO in his satisfaction note dated 03.09.2018 (supra) which are discussed below with the help of chart, which will give clarity as to whether there was any incriminating material seized during search in Mani Group against the assessee foundation qua the AY 2014-15. We will discuss each document seized during search which according to AO is incriminating against the Assessee qua AY 2014-15 and qua AY 2016-17. And against each such document, we will give our finding of fact whether these documents can be termed as incriminating material against the Assessee qua AY 2014-15 and qua AY 2016-17.
