2024 (12) TMI 240 - AT - Income Tax

AO lacked jurisdiction under Section 153C to issue notice without incriminating material, assessment orders declared null and void

ITAT Chennai held that AO lacked jurisdiction under Section 153C to issue notice to a third party not searched, as satisfaction note failed to meet legal ... Validity of the jurisdiction of AO to legally usurp the jurisdiction u/s. 153C against a third party who has not been searched as well as to test - whether AO satisfied the condition-precedent before issue of notice u/s. 153A read with Section 153C? - HELD THAT:- As relying in Sinhgad Technical Education Society's case [2015 (4) TMI 190 - BOMBAY HIGH COURT] we hold that the satisfaction note prepared by the AO does not satisfy the requirement of law as stipulated u/s. 153C of the Act, as the relevant seized material did not pertain to the appellant nor did it contain anything incriminating against the appellant. Accordingly, the notice issued under section 153C of the Act without satisfying the condition precedent as discussed is legally unsustainable, and therefore, the very assumption of jurisdiction u/s 153C of the Act, in these AYs 2014-15 & 2016-17 are held to be bad in law and hence the consequent impugned assessment orders are null in the eyes of law. Addition/s impugned in unabated AYs 2014-15 & 2016-17 were not based on any incriminating material found in the course of search and therefore has urged that the same be deleted - It is by now well settled position in law that, in unabated assessments u/s 153C of the Act, the AO is empowered to only make those additions which are based on incriminating material found/unearthed during search. In support of this proposition, we gainfully refer to the decision of the Hon'ble Supreme Court in the case of Abhisar Buildwell (P.) Ltd. [2023 (4) TMI 1056 - SUPREME COURT]. As noted that in the case of DCIT vs U.K. Paints (Overseas) Limited [2023 (5) TMI 373 - SC ORDER] has held that, in absence of any incriminating material which was found from the premise of the Searched party (i.e., searched person), no addition/s is permissible in an unabated assessment u/s 153C of the assessee (other person). Thus we hold that in the case of unabated assessments of an assessee, no addition is permissible in the order u/s 153C of the Act unless it is based on any incriminating material found during the course of search. Whether the addition/s made u/s 56(2)(vii)(b) in the orders impugned in this appeal was based on or made with reference to any incriminating document found in the course of search? - There was no incriminating material/statement found in the course of search on the basis of which additions u/s 56(2)(vii)(b) of the Act could have been legally made in the unabated AYs 2014-15 and AY 2016-17. We accordingly direct the AO to delete the impugned addition/s made u/s. 56(2)(vii)(b) of the Act in the unabated AYs 2014-15 & 2016-17. Issues Involved:1. Validity of jurisdiction under Section 153C of the Income Tax Act.2. Whether additions made under Section 56(2)(vii)(b) were based on incriminating material found during search.3. Legal sustainability of the assessment orders for the assessment years 2014-15 and 2016-17.Detailed Analysis:1. Validity of Jurisdiction under Section 153C:The primary issue was whether the Assessing Officer (AO) had the jurisdiction to initiate proceedings under Section 153C against the appellants. The AO's jurisdiction under Section 153C requires a valid satisfaction note indicating that the seized material pertains to a person other than the searched entity. In this case, the AO's satisfaction was based on cash ledgers found during a search at M/s Pothys Pvt. Ltd., which allegedly indicated unaccounted investments by the appellants in immovable properties. However, the appellants argued that these notings pertained to properties acquired by the partnership firm, M/s Pothys, and not to them individually. The Tribunal found that the AO's satisfaction was based on an incorrect assumption of facts, as the properties were acquired by the firm and held in partners' names due to the firm's non-juridical status. Furthermore, the unaccounted investments had already been disclosed and taxed in the hands of M/s Pothys/M/s Pothys Pvt. Ltd. before the Settlement Commission. Consequently, the Tribunal held that the AO's assumption of jurisdiction under Section 153C was invalid, as the seized material did not pertain to the appellants.2. Additions under Section 56(2)(vii)(b) and Incriminating Material:The Tribunal examined whether the additions made under Section 56(2)(vii)(b) were based on incriminating material found during the search. The AO had made additions based on the difference between the fair market value determined by the Departmental Valuation Officer (DVO) and the actual purchase consideration of the properties. However, the Tribunal noted that the valuation report was obtained during the assessment and not from the search itself. Moreover, the seized material did not contain any incriminating evidence against the appellants. The Tribunal emphasized that for unabated assessments, any addition must be based on incriminating material found during the search, as established by the Supreme Court in the case of Pr. CIT v. Abhisar Buildwell (P.) Ltd. Since no such material was found, the additions under Section 56(2)(vii)(b) were not sustainable.3. Legal Sustainability of Assessment Orders:Given the invalid jurisdiction under Section 153C and the absence of incriminating material, the Tribunal held that the assessment orders for the years 2014-15 and 2016-17 were legally unsustainable. The Tribunal directed the AO to delete the additions made under Section 56(2)(vii)(b) for these assessment years. The Tribunal's decision applied to all appellants, as the facts and circumstances were identical across the cases.Conclusion:The appeals were allowed, and the Tribunal ordered the deletion of the impugned additions for the assessment years 2014-15 and 2016-17, as the jurisdiction under Section 153C was not validly assumed, and the additions were not based on incriminating material found during the search.