Issuance of notice u/s 153C without recording any satisfaction is bad in law

Brief of the case:

In this case court observed that satisfaction was not recorded by the AO before issuing notice u/s 153C which is a fact decided by ITAT. No paper or document was seized against the assessee in the search operation. No addition or observance was made by AO in connection to any material found during search. Hon’ble court held that no action u/s 153C was justified for the above reasons.

Facts of the case:

• Assessee is a partnership firm carrying on the business of Hi. Tech Heavy Steel Fabricators and manufacturer for last more than 25 years.
• A search was conducted against the partners of assessee firm under Section 132(1). A survey u/s 133A was conducted at the business premises of the assessee firm and no papers were impounded during the course of that survey.
• AO issued notice under section 153C in response to which assessee filed returns pertaining to AYs 2000-01 to 2005-06. The respondent also filed return for the Assessment Year 2006-07 under Section 139(1). Besides, a response was also filed to the notice under Section 142 (1).
• The AO passed orders u/s 153C/143(3) of the IT Act, made identical additions towards disallowances of purchase amounts and fabrication charges for all the assessment years and by making further addition towards excess stock in the Assessment Year 2006-07.

Contention of the revenue:

• Manifest error has been committed in assuming that the procedure specified in Section 153C is identical or pari materia with the procedure prescribed in Section 158BD.
• In the matter of search carried out with reference to the provisions under Chapter XIV the Assessing Officer is not required to record satisfaction that any money, bullion, jewellery or other valuable article or thing or books of account or documents seized or requisitioned during search belongs or belong to a person other than the person referred to in Section 153A.
• The firm belonged to the same partners and group and there was common AO for the partners.

Contention of the assessee:

• The principle underlying the mandate of Section 158BD would apply on all fours to the procedure specified 14 in Section 153C of the I.T. Act.
• No satisfaction was recorded by AO before issuing notice u/s 153C and hence notice was liable to be quashed. This facts was decided by CIT (A) which was confirmed by ITAT.
• No material was referred by AO against the assessee as a result of search.
• The assessee submits that the AO who seized or requisitioned the material during the search of a person referred to in Section 153A as also the AO having jurisdiction over the respondent have acted without jurisdiction.
• Reliance was placed on the decisions of Manish Maheshwari Vs. ACIT (2007) 289 ITR 341 (SC) and in the case of CIT Vs. Calcutta Knitwears (2014) 362 ITR 673 (SC) where decisions was rendered in context to the section 158BD having similar nature to the section 153C and held that:

Satisfaction must be recorded by the AO that any undisclosed income belongs to any person, other than the person with respect to whom search was made under Section 132 of the Act.

Held by CIT (A):

• CIT (A) relied upon the decision of another CIT (A) in case of Hotel Sonam and Smart Bar, Sagar in appeal No.J/CIT (A)-1/ACIT/SAGAR/116 to 122/06-07 which held as under:

“The minimum requirement to justify the invoking of sec. 153C is that at least it should be possible to gather a satisfaction-there should be some seized record pertaining to the assessee which had been found in a search action. Further the same should have also been confronted to the assessee. But during the assessment proceedings no seized record pertaining to the assessee was confronted to him. What were confronted were the documents impounded during the survey action conducted at its office.”

• No satisfaction has been recorded by the Assessing Officer before issuance of notice under Section 153C. On these findings CIT (A) concluded that the action of the Assessing Officer was illegal and invalid, and quashed the same for the concerned assessment years.

Held by the ITAT:

• The Tribunal, in turn, relied on its decision in the case of M/s Chirchind Hydro Power Limited – IT (SS) A No.171. 172 and 174/Ind/2008 and also M/s Gwalior Tanks & Vessels Limited – IT(SS) A No.175 to 181/Ind/2008 where is was observed that notice issued u/s 153C was unjustified without recording satisfaction.
• ITAT confirmed the decision of CIT (A) and dismissed all the filed by the department.

Held by the court:

• The purpose underlying both provisions under section 158BD & 153C is similar, even though Section 153C does not specifically refer to the expression “undisclosed” income. Decisions of the Hon’ble SC (supra) is squarely applicable to the present case.
• The AO is not justified in initiating proceedings u/s 153C without recording satisfaction that any money, bullion, jewellery or other valuable article or thing or books of account or documents, seized or requisitioned belongs or belong to a person other than the person referred to in section 153A.