2017 (3) TMI 1536 - AT - Income Tax

Invalidity of Section 153C Assessment Proceedings: Procedural Lapses & Absence of Incriminating Material

The Tribunal found the assessment proceedings initiated under Section 153C of the Income Tax Act to be invalid due to procedural lapses in recording ... Assessment u/s 153C - addition u/s 68 - jurisdiction in the case of persons other than searched person - Held that:- The satisfaction of the AO of the searched person is must for assuming the jurisdiction u/s 153C of the Act in case of a person other than the searched person. In the present case, the ld. CIT(A) categorically stated in the impugned order that the AO did not record any satisfaction during the assessment proceedings u/s 153A of the Act in the case of the searched person i.e. Sh. Pramod Goel. On the contrary, the AO recorded the satisfaction note in the file of the other person i.e. the assessee company. The said satisfaction was recorded by the AO in the proceedings relating to the assessee i.e. M/s Victory Dwellings Pvt. Ltd. and not in the case of Sh. Pramod Goel in whose case search and seizure operation u/s 132 of the Act was undertaken on 14.09.2010. Therefore, the jurisdiction assumed by the AO without recording the satisfaction in the case of the searched person was not valid. Thus additions made by the AO in the absence of incriminating material while framing the assessment u/s 153A of the Act was not valid and also in the absence of the satisfaction recorded by the AO of the searched person, the assumption of jurisdiction u/s 153C of the Act in the case of persons other than searched person was also not valid. - Decided in favour of assessee. Issues Involved:1. Validity of notice and jurisdiction under Section 153C of the Income Tax Act.2. Addition of Rs. 3,20,00,000/- on account of share application money under Section 68 of the Income Tax Act.3. Compliance with principles of natural justice.4. Recording of satisfaction note by the Assessing Officer (AO).Detailed Analysis:1. Validity of Notice and Jurisdiction under Section 153C:The primary issue was whether the AO correctly assumed jurisdiction under Section 153C of the Income Tax Act. The assessee argued that the notice issued under Section 153C was invalid because the AO did not record the necessary satisfaction in the case of the searched person, as required by law. The CIT(A) held that the AO did not record the satisfaction note in the file of the searched person (Sh. Pramod Goel) but instead recorded it in the file of the assessee company, which was contrary to the provisions of Section 153C. The Tribunal upheld this view, stating that the AO must first record the satisfaction note in the file of the person searched and then proceed against the other person. The Tribunal also referred to CBDT Circular No. 24/2015, which clarified that even if the AO of the searched person and the other person is the same, the satisfaction must be recorded in the case of the searched person.2. Addition of Rs. 3,20,00,000/- on Account of Share Application Money:The assessee contested the addition of Rs. 3,20,00,000/- made by the AO under Section 68 of the Act, arguing that the addition was made without pointing out any defects in the evidences provided. The CIT(A) sustained the addition of Rs. 2,50,00,000/- related to share capital from seven companies but deleted the addition of Rs. 70,00,000/- from M/s Bhavani Vanijya P. Ltd. due to lack of independent inquiry. The Tribunal noted that the AO made the addition based on documents that were already part of the regular books of accounts and were not incriminating. The Tribunal ruled that in the absence of incriminating material found during the search, no addition could be made under Section 153C.3. Compliance with Principles of Natural Justice:The assessee argued that the addition was made based on statements and materials collected at the back of the assessee without giving an opportunity to rebut or cross-examine, violating the principles of natural justice. The Tribunal agreed with the assessee, emphasizing that the AO did not provide a fair opportunity for the assessee to contest the evidence used against it, thus breaching natural justice principles.4. Recording of Satisfaction Note by the AO:The Tribunal scrutinized the satisfaction note recorded by the AO and found it was not recorded in the case of the searched person (Sh. Pramod Goel) but in the file of the assessee. This procedural lapse rendered the jurisdiction assumed under Section 153C invalid. The Tribunal cited several case laws and the CBDT Circular No. 24/2015 to support its conclusion that the satisfaction must be recorded in the file of the searched person before proceeding against another person.Conclusion:The Tribunal concluded that the assessment proceedings initiated under Section 153C were invalid due to the lack of proper satisfaction recording and absence of incriminating material. Consequently, the appeals filed by the department were dismissed, and the appeals by the assessee were allowed. The Tribunal's decision emphasized the importance of following legal procedures and principles of natural justice in tax assessments.