2015 (8) TMI 714 - AT - Income Tax

Tribunal voids assessments under Section 153C due to lack of proper satisfaction by AO, emphasizing procedural fairness

M/s. Satkar Fincap Ltd Versus ACIT, Central Circle 21, New Delhi.

M/s. Satkar Fincap Ltd Versus ACIT, Central Circle 21, New Delhi. - TMI Issues Involved:1. Legality of Notice and Assessment under Section 153C.2. Validity of Additions Made by the Assessing Officer (AO).3. Verification of Purchases and Sales.4. Disallowance of Expenses.5. Unexplained Cash Credit.6. Procedural Compliance and Natural Justice.Detailed Analysis:1. Legality of Notice and Assessment under Section 153C:The primary issue raised by the assessee was the lack of satisfaction recorded by the AO of the searched person before initiating proceedings under Section 153C. The tribunal emphasized that the recording of satisfaction by the AO of the person searched is a condition precedent for the AO of the 'other person' to acquire jurisdiction. The tribunal referred to various case laws, including the Hon'ble Delhi High Court's decision in Pepsico India Holiday (P) Ltd. vs. ACIT, which mandated that the AO of the searched person must record satisfaction that the seized documents do not belong to the searched person but to another person. The tribunal found that no such satisfaction was recorded in the present case, rendering the notice issued under Section 153C and the subsequent assessment void ab initio.2. Validity of Additions Made by the AO:The AO made several additions, including disallowance of purchases under Section 69C, disallowance of expenses, and treating certain credits as unexplained cash credits under Section 68. The assessee argued that these additions were unjust, unlawful, and arbitrary. The tribunal noted that the AO's findings were based on presumptions and lacked independent verification, especially concerning the purchases and sales.3. Verification of Purchases and Sales:The AO directed the assessee to prove its trading activities and produce sales tax records. The assessee claimed that it dealt with tax-free goods and thus did not file sales tax returns. The AO found no independent proof of sale/purchase of goods except for bank transactions. The tribunal observed that the AO's findings were based on the absence of physical verification of stock and premises, which were claimed to be unverifiable due to the lapse of time. The tribunal found the AO's approach to be flawed as it did not consider the assessee's explanations adequately.4. Disallowance of Expenses:The AO disallowed 100% of the expenses claimed by the assessee in the profit and loss account, amounting to Rs. 3,76,465/-, on the grounds that they were unverifiable. The tribunal found this disallowance to be arbitrary and based on mere presumptions without pointing out specific defects in the books of accounts or evidence produced by the assessee.5. Unexplained Cash Credit:The AO added Rs. 4,51,000/- as unexplained cash credit under Section 68, stating that the identity and genuineness of the shareholders were not proved. The assessee contended that this amount was on account of a bonus issue. The tribunal noted that the AO did not provide adequate opportunity to the assessee to explain the nature and source of the credits, thus violating principles of natural justice.6. Procedural Compliance and Natural Justice:The assessee argued that the assessment proceedings were conducted without complying with the procedures prescribed under Section 153C and that the AO ignored the submissions and explanations provided. The tribunal observed that the AO used statements of various persons without giving the assessee a copy or an opportunity to cross-examine, which was against the principles of natural justice. The tribunal emphasized that any exercise of power under Section 153C must be carried out with extreme care and caution, ensuring that the rights of the assessee are not violated.Conclusion:The tribunal quashed the notices issued under Section 153C and the subsequent assessments for all the assessment years in question, holding them to be void ab initio due to the lack of proper satisfaction recorded by the AO of the searched person. The tribunal also found the additions made by the AO to be arbitrary and based on presumptions, lacking independent verification and adequate procedural compliance. The appeals were allowed in favor of the assessee.