AO exceeded jurisdiction under section 153C by assessing years outside statutory 10-year block period

ITAT Delhi held that AO exceeded jurisdiction under section 153C by initiating proceedings for assessment years 2011-12 and 2012-13, which fell outside the statutory 10-year block. The court determined that for non-searched persons, the 10-year block should be calculated from the date AO received seized material and recorded satisfaction (29.09.2021), making the valid block assessment years 2013-14 to 2022-23. Assessment orders for years 2011-12 and 2012-13 were quashed as void. Additionally, additions under section 69A were struck down for violating natural justice principles, as the assessee was denied cross-examination of a key witness whose statement formed the basis of assessment. The court noted that even the Enforcement Directorate had declared this witness unreliable. Furthermore, since AO himself found the assessee to be merely a pass-through entity with real beneficiaries elsewhere, no addition could be sustained. The assumption of jurisdiction under section 153C was declared invalid as proceedings cannot be initiated solely for protective additions.

---

---

ISSUES:

• Whether assessment proceedings initiated and completed under Section 153C of the Income Tax Act, 1961 for assessment years beyond the permissible block of 10 years are valid.
• Whether an assessment order can be validly passed under Section 153C read with Section 143(3) of the Act, or must be passed under Section 153A read with Section 153C.
• Whether additions under Section 69A of the Act are permissible in the absence of undisclosed movable assets physically found during search.
• Whether satisfaction notes recorded under Section 153C can be based on identical incriminating material for two different persons.
• Whether assessment proceedings under Section 153C can be initiated without incriminating material seized during a search specifically relating to the assessee.
• Whether additions based solely on statements of third parties without opportunity of cross-examination violate principles of natural justice.
• Whether income alleged to be received overseas by a non-resident can be assessed in India contrary to treaty provisions.

RULINGS / HOLDINGS:

1. The initiation of proceedings and completion of assessment under Section 153C for assessment years prior to the block of 10 years preceding the relevant assessment year (here, AY 2013-14 to AY 2022-23) is void ab initio. The assessments for AY 2011-12 and AY 2012-13 are quashed.
2. Assessment orders passed under Section 153C read with Section 143(3) are void ab initio as Section 153C is a machinery provision to initiate proceedings, and assessments must be completed under Section 153A read with Section 153C. The AO has no jurisdiction to assess under Section 143(3) in such cases.
3. Additions under Section 69A are impermissible where no undisclosed movable asset was physically found during search; book entries or information alone do not attract Section 69A.
4. Recording of identical satisfaction notes under Section 153C based on the same seized material for two different persons is impermissible; the material must relate to a specific person only. The satisfaction notes here were mechanical and ambiguous, stating the material "may have a bearing" on income, which is insufficient.
5. Proceedings under Section 153C must be initiated only on the basis of incriminating material seized during search specifically relating to the assessee; here, no such material was found against the assessee, and the additions are based on hearsay and tampered information.
6. Utilization of statements of third parties without granting the assessee opportunity for cross-examination violates principles of natural justice and renders additions unsustainable.
7. Income alleged to be received overseas by a non-resident cannot be assessed in India in absence of business connection or services rendered in India and contrary to DTAA provisions; such income is not taxable in India.

RATIONALE:

• The court applied the statutory framework of Sections 153A, 153C, 153D, 143(3), and 69A of the Income Tax Act, 1961, emphasizing the non-obstante clauses and legislative intent to restrict assessment powers in search-related cases to specific provisions.
• Reliance was placed on judicial precedents including the jurisdictional High Court decision in PCIT vs Ojjus Medicare Pvt. Ltd. (2024), Hon'ble Supreme Court rulings in Vikram Sujitkumar Bhatia (2023), Calcutta Knitwear (2014), and others which clarified the scope and procedural requirements of Sections 153A and 153C.
• The court underscored the mandatory nature of the 10-year block period for initiating proceedings under Section 153C in respect of non-searched persons, reckoned from the date the AO receives seized material, not the date of search on the searched person.
• The principle that assessment jurisdiction is a function of the legislature was reiterated, requiring strict adherence to the statutory scheme and prohibiting assessments under provisions not expressly empowered for search-related cases.
• The requirement of specific incriminating material seized during search to initiate Section 153C proceedings was emphasized, rejecting assessments based on tampered or post-search information not seized during the operation.
• The court highlighted the violation of natural justice principles due to denial of cross-examination of key witnesses whose statements formed the basis of additions.
• The court noted that Section 69A applies only to undisclosed movable assets physically found during search, and not to book entries or information about income.
• The court did not address treaty-related contentions in detail, deeming them academic in light of other findings.

---