Where no satisfaction was recorded by AO at the time of search, revenue cannot attain jurisdiction over other person

Brief of the case:

In the case of ACIT Vs. Shivaansh Advertising & Publications Pvt. Ltd. Delhi Bench of ITAT observed the requirements of section 153C provides for taking recourse to assessment in respect of any other person and held the conditions precedent are :

(i) 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 s. 132;

(ii) The books of account or other documents or assets seized or requisitioned had been handed over to the AO having jurisdiction over such other person; and

(iii) The AO has proceeded under s. 153C against such other person.

The conditions precedent for invoking the provisions of s. 153C, thus, are required to be satisfied before the provisions of said section are applied in relation to any person other than the person whose premises had been searched or whose documents and other assets had been requisitioned under s. 132A.

Facts of the case:

• A search and seizure action u/s 132 was carried out in the cases of Shri B.K. Dhingra, Smt. Poonam Dhingra and M/s Madhusudan Buildcon Pvt. Ltd on 20.10.2008.
• During the course of search at their residential premises certain documents belonging to the assessee, who is an individual and proprietor of a concern were seized.
• On the basis of documents seized proceedings were initiated in the case of the assessee u/s 153C read with section 153A of the Act.
• In response to the notice u/s 153C, the assessee filed a return for assessment year 2003-04 on 06.09.2010 declaring ‘Nil’ income.
• AO found that the assessee company belonged to the Thapar Group of cases and one of the main allegations against the group was that several concerns had been floated by the group with dummy Directors and shareholders.
• Notice u/s 153C was issued to the assessee and satisfaction was recorded to initiate proceedings u/s 153C.
• During assessment proceedings u/s 153C AO found that the assessee had declared a closing stock of Rs.8,94,32,924/- as on 31.03.2002, which formed the opening stock for the previous year under consideration.
• Further AO found that the assessee had purchased textile goods of Rs.21,15,780/- and had made sales of Rs.26,54,875/-.
• AO asked assessee to prove its trading activities and to produce sale tax records and to give break up of cash or cheque purchases.
• AO further found that the director/shareholder was not a man of means and the premises were not commercial premises.
• It was reported by the investigation wing that no evidence of stock was found from any other premises of the Thapar Homes Group.
• The AO observed that in the case of assessee, all the purchases & sales were in cash. The items purchased & sold were textile & fabrics.
• AO observed that the assessee was not dealing in branded items and there was no name of any company in these products.
• AO found that in inventories of Fabric & Textile Goods shown in the balance sheet, the closing stock of last year stood at Rs.8,94,32,924/- and this year the figure was Rs.8,93,30,132/- which was almost the same.
• AO observed that the purchases & sales were only out of current year transactions which were held unverifiable and bogus.
• AO observed that the preponderance of probability suggested that the stocks were not genuine but since these were declared prior to 01.04.2002, no action was being taken for now.
• AO held that all cash purchases were held unverifiable and hence a sum of Rs.21,15,780/- was disallowed u/s 69C.
• AO further observed that the expenses claimed by the assessee company in P&L account were also unverifiable as such 100% of the expenses i.e. Rs.4,43,240/- were disallowed.
• Against the additions made, assessee preferred appeal before CIT (A) who allowed appeal in part. Both AO as well as assessee filed appeal before ITAT.
• AO against the deletion of additions and assessee came in CO with ground challenging assessment proceedings u/s 153C.

Contention of the revenue:

• All these concerns were basically capital formation concerns which had build up huge reserves and surpluses over the years and these reserves and surpluses were declared invested in stocks of textiles.
• When cash was required, the stocks were sold and the money was utilized for other purposes as per required.
• Except the declaration of the assessee i.e. for not filing sale tax returns, there was no independent proof of sale/purchase of the goods except the bank transactions.
• Proper satisfaction has been recorded by the AO before proceedings against the assessee u/s 153C.
• Since the AO of the persons searched and the assessee is same, it does not make any difference whether the satisfaction is recorded in the case of the persons searched or other person.

Contention of the assessee:

• Since assessee dealt with tax free goods only there was no necessity for it to file sales tax returns.
• Satisfaction of the AO of the searched person as envisaged u/s 153C has not been recorded, before initiating the proceedings against the assessee u/s 153C of the Act.
• It is held by Hon’ble Telangana & Andhra Pradesh High Court in Shetty Pharmaceuticals case that two separate notes are must u/s 153C i.e. one/first by raided party AO and other/second by non-raided party AO even if both are same, this recording of satisfaction is a sine-qua non for assumption of jurisdiction U/s 153C.
• Assessee also relied on order of the co-ordinate Bench in DCIT vs. Aakash Arogya Mindir P.Ltd. (ITA Nos. 5437 to 5442/Del/ 2013) wherein on similar facts it was held that

The assessee falls into the jurisdiction of Hon’ble Delhi High Court in view of the case law of Pepsi Foods (P) Ltd (2014) 50 Taxmann. Com 299 (Delhi), therefore, we held that recording of satisfaction by AO of searched persons is a necessary pre condition for initiation of proceedings u/s 153C which has not been done in the present appeals. Therefore, we quash the assessment proceedings being illegal.

Held by ITAT:

• The main issue that was raised by the assessee is that assumption of jurisdiction by the AO before issuing notice u/s 153C of the Act is not in accordance to law and so the impugned assessment U/s 153C read with 153A/143(3) of the Act is void-ab-initio and should be quashed being quarum-non-judice.
• A bare perusal of the provision indicates that before handing over such documents etc. to the AO of the ‘other person’, a ‘satisfaction’ has to be recorded by the AO of the person searched that money, bullion or jewellery, etc., found from the person searched belong to the ‘other person’.
• Only when such ‘satisfaction’ is recorded by the AO of the person searched and such documents or assets seized, etc., are handed over to the AO of the ‘other person’, that the later AO acquires jurisdiction to make assessment or reassessment of the ‘other person’.
• In the case of Anil Kumar & Ors. vs. UOI & Ors. Reported in 155 Taxman 659 (SC), the Hon’ble Apex Court observed that “A jurisdictional fact is a fact which must exist before a court, a tribunal or an authority assumes jurisdiction over a particular matter.”
• The recording of satisfaction by the AO having jurisdiction over the person searched is an essential and prerequisite condition for bestowing jurisdiction to the AO of the ‘other person.’
• The contents of the satisfaction note in assessee’s case, leave nothing to doubt that it was recorded by the AO of the assessee before taking up the assessment u/s 153C.
• On a conjoint reading of the Satisfaction note and replies given by the Department to the persons searched under the RTI Act, it clearly emerges that no satisfaction was recorded by the AO in the cases of the persons searched u/s 132(1) of the Act.
• Hence, it is clear that the AO lacks jurisdiction to initiate proceedings u/s. 153C against the assessee and therefore, the issuance of notice itself is null and void and therefore quashed. Consequently, the impugned assessment order passed u/s. 153C is also a nullity.