2025 (4) TMI 1723 - AT - Income Tax

Third member finds initiation under section 153C(1)(b) unlawful where assessing officer did not record mandatory satisfaction for two years

ITAT (Pune) - AT: The Third Member, nominated after a split bench and reference to the President, held that the mandatory satisfaction under clause (b) of ... Assessment u/s 153C - Mandation of recording satisfaction as required to be recorded by the AO of the searched person - Appeals were heard by this Tribunal and a draft order was prepared by the Hon’ble Judicial Member but the Hon’ble Accountant Member did not agree with the view taken by the Hon’ble Judicial Member and he passed a dissenting order and Consequent to the difference of opinion among the Hon’ble Members, the matter was referred before the Hon’ble President and the Hon’ble President vide order 30.08.2024 has nominated the Hon’ble Third Member to adjudicate the dispute HELD THAT:- Hon’ble Third Member held that the requisite satisfaction which was mandatorily required to be recorded by the AO of the searched person was not recorded in terms of clause (b) of section 153C(1) the Act, for initiation of the proceedings u/s.153C of the Act in the case of the assessee for the impugned two assessment years is not in accordance with law and is void ab-initio. In consequence of the same and in view of the majority opinion, both the appeals of the assessee are allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether the Assessing Officer (AO) had validly recorded the twin satisfactions required under section 153C(1)(a) and (b) to initiate assessments under section 153C in respect of a person other than the searched person. 2. Whether the satisfaction recorded by the AO of the searched person was legally sufficient to set in motion section 153C proceedings against the other person where the AO of the searched person and the AO of the other person are the same. 3. Whether the satisfaction recorded by the AO of the other person (common AO) was legally sufficient to assume jurisdiction and complete assessment under section 153C. ISSUE-WISE DETAILED ANALYSIS - Issue 1: Validity of twin satisfactions under s.153C(1)(a) & (b) Legal framework: Section 153C(1) requires (a) that any money, bullion, jewellery or other valuable article or thing seized or requisitioned 'belongs to' a person other than the searched person and/or (b) any books of account or documents seized or requisitioned 'pertain to' or any information contained therein 'relate to' such other person. A satisfaction note by the AO of the searched person to this effect is mandatory before proceedings under s.153C can be initiated against the other person. Precedent Treatment: The Tribunal relies on apex and High Court guidance (as summarized in Super Malls and related authorities) that the satisfaction by the AO of the searched person is a condition precedent and must state, with required specificity, that seized items belong/pertain/relate to the other person; where AOs are different, transmission and forwarding of the satisfaction note are mandatory; where same AO, a clear statement in the satisfaction note suffices. Interpretation and reasoning: The Court examined the satisfaction note recorded by the AO of the searched person and found it bald and generic - it described nature of documents seized from the searched person but contained no specific finding that any books, documents or information therein belonged to or related to the other person. The statutory mandate requires that the satisfaction be expressly recorded in terms of clause (b) when the incriminating material is books/documents/information. The mere existence of documents at the searched person's premises, without a clear linkage to the other person, does not satisfy the condition precedent. Ratio vs. Obiter: Ratio - the mandatory nature of the satisfaction note in terms of s.153C(1)(b) where incriminating documents are seized; the requirement remains even when the same AO handles both files, but in that case the satisfaction note must expressly state that the seized documents belong/pertain/relate to the other person. Obiter - observations on administrative conveniences (e.g., file notations) cited from authorities, which do not alter the mandatory statutory requirement. Conclusion: The satisfaction recorded by the AO of the searched person was legally inadequate to trigger s.153C; therefore initiation of proceedings under s.153C against the other person was invalid. ISSUE-WISE DETAILED ANALYSIS - Issue 2: Sufficiency of satisfaction where AO of searched person and AO of other person is the same Legal framework: The statutory scheme contemplates two facets - (i) satisfaction by the AO of the searched person that specified seized material belongs/pertains/relates to another person and (ii) a satisfaction by the AO of the other person that the material has a bearing on determination of that person's income. When the same AO handles both matters, a single satisfaction note will suffice only if it explicitly records the requisite satisfaction qua the other person; physical transmission of documents is unnecessary. Precedent Treatment: The Court follows the Supreme Court's exposition (as summarized in Super Malls and related rulings) that a common AO may prepare one satisfaction note, but he must be 'conscious and satisfied' that the seized materials belonged to the other person and must record that satisfaction explicitly. Interpretation and reasoning: Although the AO was common to both the searched person and the other person, the satisfaction note recorded in the searched person's file merely described the bundles as belonging to the searched person and made no explicit link to the other person. The subsequent satisfaction recorded in the other person's file contradicted the earlier note by asserting that those same bundles belonged to the other person. The contradiction undermines the required clear, contemporaneous satisfaction that the seized material pertained to the other person. Ratio vs. Obiter: Ratio - clarity and internal consistency of the satisfaction note are mandatory even where the AO is common; a later inconsistent note cannot cure absence of an initial explicit satisfaction in the searched person's file. Obiter - remarks on administrative practice (e.g., file notes or transmission formalities) that do not substitute for statutory compliance. Conclusion: The common AO failed to record the statutorily required explicit satisfaction in the searched person's file; the requirement is not excused by identity of officers and the resulting s.153C proceedings are invalid. ISSUE-WISE DETAILED ANALYSIS - Issue 3: Sufficiency of the satisfaction recorded by the AO of the other person (jurisdictional issue) Legal framework: After receipt of the satisfaction note from the AO of the searched person, the AO having jurisdiction over the other person must be satisfied that the seized material has a bearing on the determination of that person's total income before issuing notices/assessing under s.153C. The satisfaction must be in the terms mandated by the statute. Precedent Treatment: Courts have held that jurisdiction under s.153C cannot be assumed in the absence of the two-tiered satisfactions; both satisfactions are jurisdictional and mandatory. Circular guidance (CBDT) reiterates strict compliance. Interpretation and reasoning: The AO's satisfaction in the other person's file simply states that the AO of the searched person had been satisfied that the documents belong to the other person; however, the AO of the searched person's own note did not so state and in fact characterized the bundles as belonging to the searched person. The record therefore shows no independent or corroborative satisfaction that the documents pertained to the other person or that information therein related to the other person's income. Moreover, the Tribunal found that the alleged documents mainly reflected the searched person's money-lending transactions; no documents belonging to the other person were found. The AO's assertion that certain pages/bundles belonged to the other person is unsupported and contradicted by the searched-person satisfaction note and the contents themselves. Ratio vs. Obiter: Ratio - the AO of the other person cannot assume jurisdiction on the basis of a mere assertion if the underlying satisfaction from the searched person's file is absent or contradicts such assertion; independent satisfaction (or clear, explicit satisfaction in the searched person's note) is required. Obiter - rejection of reliance on section 292B as a cure for jurisdictional deficiency when deciding the jurisdictional question. Conclusion: The satisfaction recorded by the AO in the other person's file was not legally sufficient to assume jurisdiction under s.153C; assessment proceedings founded on that satisfaction are void ab initio. ADDITIONAL LEGAL PRINCIPLES APPLIED 1. Mandatory nature of statutory prerequisites: Where statutory language is clear and unambiguous, its requirements (here, specific satisfactions under s.153C(1)) must be followed strictly; plain meaning and strict interpretation principles govern tax statutes. 2. Consistency and specificity in satisfaction notes: Satisfaction notes must identify seized items and explicitly state how they belong/pertain/relate to the other person; bald or generic assertions are inadequate. 3. Contradictory findings vitiate jurisdiction: Internal contradictions between satisfaction notes (or between content of seized materials and the satisfaction claimed) render the initiation of s.153C proceedings invalid. FINAL CONCLUSION Because the AO of the searched person failed to record the mandatory, specific satisfaction under section 153C(1)(b) that the seized books/documents pertained to the other person, and because the subsequent satisfaction recorded in the other person's file was contradictory and unsupported, the initiation and completion of assessments under section 153C in respect of the other person were void ab initio. The Tribunal accordingly quashed the s.153C proceedings and allowed the appeals.