2011 (5) TMI 416 - HC - Income Tax

Court emphasizes clear satisfaction required under Section 158BD for assessments. Appeals dismissed without costs.

The court dismissed the appeals as the satisfaction required under Section 158BD of the Income Tax Act was not adequately recorded by the Assessing ... Search and seizure - Block assessment - Undisclosed income - The conditions precedent for invoking the provisions of s.158BD, thus, are required to be satisfied before the provisions of the said chapter 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 of the Act - whether any such satisfaction of the assessing officer of Manoj Aggarwal is perceivable from the record - it is vivid that for the purpose of initiation of block assessment proceeding against a third person in respect of whom search has not been conducted certain conditions precedents are to be followed and they are mandatory - the said finding of the tribunal has been given the stamp of approval by the High Court. - The appeals are dismissed - Decided in favor of assessee and against the revenue. Issues Involved:1. Whether the Assessing Officer is bound to record satisfaction within the meaning of Section 158BD of the Income Tax Act, 1961, during the process of assessment of the person searched under Section 158BC of the Act.2. Whether satisfaction as contemplated in Section 158BD of the Act has been duly recorded, considering the letter dated 15.7.2003 or the assessment order, and whether the Income Tax Appellate Tribunal's negation of such satisfaction is erroneous and perverse.Detailed Analysis:Issue 1: Requirement of Recording Satisfaction under Section 158BDThe primary issue is whether the Assessing Officer (AO) must record satisfaction within the meaning of Section 158BD during the assessment process of the person searched under Section 158BC. The court noted that the recording of satisfaction by the AO of the searched person is a condition precedent, as established in the Supreme Court's decision in Manish Maheshwari v. Assistant Commissioner of Income Tax. The satisfaction must be recorded by the AO that any undisclosed income belongs to a person other than the person searched. This is a mandatory requirement before the AO of the third person can proceed under Section 158BC. The court emphasized that the satisfaction must be in writing and can be gathered from the assessment order or any other order, note, or record maintained by the AO of the person searched.Issue 2: Validity of Recorded SatisfactionThe court examined whether the satisfaction was duly recorded in the case at hand. The facts reveal that a search was conducted on Manoj Aggarwal's premises, and a block assessment was completed. Subsequently, a letter dated 15.7.2003 was sent by the AO of Manoj Aggarwal to the AO of the respondent-assessee, indicating that the assessee was acting as a mediator in transactions involving substantial tax evasion. The respondent was issued a notice under Section 158BD, and the AO determined undisclosed income for the respondent.The respondent challenged the assessment, arguing that the notice under Section 158BD was barred by limitation, no satisfaction was recorded by the AO assessing Manoj Aggarwal, and principles of natural justice were violated. The CIT(A) upheld the assessment, noting that the communication dated 15.7.2003 amounted to the required satisfaction. However, the tribunal found that no satisfaction had been recorded by the AO assessing Manoj Aggarwal, as there was no reflection of satisfaction in the assessment order, and the notice under Section 158BD did not refer to any satisfaction by the AO of Manoj Aggarwal.The court scrutinized the assessment order and the letter dated 15.7.2003, concluding that the letter did not convey the required satisfaction. The letter merely communicated that the respondent acted as a mediator and provided accommodation book entries, but did not indicate any undisclosed income belonging to the respondent. The court also referred to a note dated 29.8.2002, purportedly written by the AO of Manoj Aggarwal, which was not relied upon before the tribunal or CIT(A). The court held that the note could not be considered as additional evidence without an application under Order 41 Rule 27 of the Code of Civil Procedure, 1908.The court highlighted the importance of the term 'satisfaction' in Section 158BD, stating that it must be a clear conclusion based on material available, reflecting a rational connection between the material and the undisclosed income of the third person. The court found that the satisfaction in the present case was not adequately recorded, as required by law.Conclusion:The court dismissed the appeals, holding that the recording of satisfaction by the AO of Manoj Aggarwal was not adequately demonstrated. The tribunal's conclusion that the forming of an opinion must be along with the framing of assessment was kept open for future consideration. The appeals were dismissed without any order as to costs.