2025 (1) TMI 1588 - AT - Income Tax

Assessment under section 153C invalid where no satisfaction note or seized incriminating documents identified against assessee

Rawalpindi Co-op Cinema Society Ltd., Versus The DCIT, Central Circle-2, Ludhiana

Rawalpindi Co-op Cinema Society Ltd., Versus The DCIT, Central Circle-2, Ludhiana - [2025] 125 ITR (Trib) 185 ISSUES: Validity of initiation of proceedings under section 153C of the Income Tax Act in absence of incriminating material found during search.Whether the assessment framed under section 153C without a satisfaction note and without specific incriminating documents is sustainable.Appropriate method for determining cost of acquisition for calculation of long-term capital gains, specifically whether to adopt circle rate or fair market value as on 01.04.2001.Whether the appellate authority erred in sustaining additions based on indexed cost of acquisition calculated using circle rates instead of fair market value.Whether the appellate authority erred in not following jurisdictional ITAT bench decisions regarding cost of acquisition for long-term capital gains. RULINGS / HOLDINGS: The initiation of proceedings under section 153C is invalid and 'void ab initio' where no incriminating evidence or document relating to the assessee was found during the search, and the Assessing Officer failed to specify any such document in the assessment order.The absence of a satisfaction note on record and lack of reference to any incriminating document renders the assessment framed under section 153C unsustainable.The addition made by the Assessing Officer and sustained by the CIT(A) on the basis of valuation difference of land disclosed in the return, without any incriminating material, cannot be upheld.The appellate order sustaining addition based on circle rate as on 01.04.2001 and indexing cost of acquisition is set aside, as the cost of acquisition should be based on 'fair market value' as per the provisions of the Income Tax Act and relevant ITAT precedents.The appeal of the assessee is allowed on the technical/legal ground of invalid initiation of proceedings under section 153C, and accordingly, the cross-appeal filed by the Revenue is dismissed. RATIONALE: The Court applied the statutory framework under section 153C of the Income Tax Act, which mandates that proceedings can only be initiated if incriminating material relating to the assessee is found during search on another person, accompanied by a satisfaction note by the Assessing Officer.The absence of a satisfaction note and failure to specify incriminating documents in both the assessment and appellate orders was fatal to the validity of the proceedings under section 153C.Reliance was placed on Supreme Court and High Court precedents emphasizing the necessity of incriminating material and satisfaction note for valid reopening under section 153C.The Court recognized the settled principle that cost of acquisition for long-term capital gains must be determined based on 'fair market value' as on 01.04.2001, citing jurisdictional ITAT bench decisions and statutory provisions under section 55(2)(b)(i) of the Income Tax Act.The Court declined to decide other substantive issues since the case was disposed on the foundational legal defect in initiating proceedings under section 153C.