2014 (8) TMI 425 - HC - Income Tax

Court Invalidates Income Tax Notices under Section 153C for Lack of Evidence

Pepsi Foods Pvt. Ltd. Versus. Assistant Commissioner of Income Tax

The court quashed the notices issued under Section 153C of the Income Tax Act, 1961, for the assessment years 2006-07 to 2011-12. It held that the ... Validity of Notice u/s 153C - issuance of a notice by an AO of a person who has not been searched, on the basis of a satisfaction note prepared by the AO of a searched person - Basic ingredient - satisfaction – Held that:- Assessee rightly contended that whenever a document is found from a person who is being searched the normal presumption is that the document belongs to that person - It is for the AO to rebut that presumption and come to a conclusion or “satisfaction” that the document in fact belongs to somebody else - There must be some cogent material available with the AO before he/she arrives at the satisfaction that the seized document does not belong to the searched person but to somebody else - apart from saying that the documents belonged to the assessee and that the AO is satisfied that it is a fit case for issuance of a notice u/s 153C, there is nothing which would indicate as to how the presumptions which are to be normally raised have been rebutted by the AO - Mere use or mention of the word “satisfaction” or the words “I am satisfied” in the order or the note would not meet the requirement of the concept of satisfaction as used in Section 153C of the Act - The satisfaction note itself must display the reasons or basis for the conclusion that the AO of the searched person is satisfied that the seized documents belong to a person other than the searched person – thus, the very first step prior to the issuance of a notice u/s 153C has not been fulfilled – the condition precedent has not been met, the notices u/s 153C are liable to be quashed – Decided in favour of Assessee. Issues Involved:1. Validity of notices issued under Section 153C of the Income Tax Act, 1961.2. Satisfaction requirement under Section 153C.3. Presumptions under Sections 132(4A) and 292C of the Income Tax Act, 1961.4. Relevance and applicability of judicial precedents.Issue-wise Detailed Analysis:1. Validity of Notices Issued Under Section 153C:The petitioner challenged the notices issued under Section 153C of the Income Tax Act, 1961, dated 02.08.2013, for the assessment years 2006-07 to 2011-12. The petitioner argued that the basic ingredient of Section 153C was not satisfied, rendering the notices without jurisdiction and subject to quashing. The core contention was that the Assessing Officer (AO) of the searched person must arrive at a positive satisfaction that the documents belong to the person not searched before issuing a notice under Section 153C.2. Satisfaction Requirement Under Section 153C:The petitioner emphasized that the AO of the searched person must rebut the presumption that documents found during a search belong to the searched person, as per Sections 132(4A)(i) and 292C of the said Act. The petitioner contended that the satisfaction note did not clearly indicate the basis on which the AO concluded that the documents belonged to the petitioner. The court noted that Section 153C requires the AO to be 'satisfied' that documents seized belong to a person other than the searched person. This satisfaction must be based on cogent material and cannot be based on surmise and conjecture.3. Presumptions Under Sections 132(4A) and 292C:Section 132(4A)(i) presumes that documents found during a search belong to the searched person. Similarly, Section 292C(1)(i) provides a similar presumption. The court highlighted that the AO must rebut this presumption with cogent material before arriving at the satisfaction that the documents belong to someone else. The satisfaction note must display reasons or the basis for the conclusion that the documents belong to a person other than the searched person.4. Relevance and Applicability of Judicial Precedents:The Revenue relied on several judicial decisions to support their contention. However, the court found these precedents distinguishable or not applicable. The court disagreed with the Allahabad High Court's observation in Classic Enterprises that satisfaction under Section 153C need not be firm or conclusive at the initial stage. The court emphasized that Section 153C requires a conclusive satisfaction that the document belongs to a person other than the searched person, unlike Section 158BD, which deals with 'undisclosed income.'Conclusion:The court examined the satisfaction note dated 02.08.2013 and found it lacking in reasons or basis for the AO's conclusion that the seized documents belonged to the petitioner. The mere mention of the word 'satisfaction' or the phrase 'I am satisfied' was deemed insufficient. The court concluded that the first step prior to issuing a notice under Section 153C was not fulfilled, leading to the quashing of the notices. The writ petitions were allowed, with no order as to costs.