2025 (1) TMI 183 - AT - Income Tax

AO's mechanical satisfaction note invalidates Section 153C assessment without proper examination of seized documents

Rajiv Agarwal Versus ACIT, Central Circle-20, New Delhi. And (Vice-Versa)

ITAT Delhi held that assessment under section 153C was invalid due to mechanical recording of satisfaction without proper application of mind. The AO's ... Assessment u/s 153C - incriminating material which was seized had to pertain to the Assessment Years in question - mandation of recording of satisfaction - HELD THAT:- Satisfaction note recorded by the AO of the searched person u/s 153C of the Act when read along with the satisfaction note recorded by the AO of the appellant u/s 153C he two are similar in content. The narration of facts of search and seizure operation, details of documents allegedly pertaining to the assessee are mirror images except for the fact that in the satisfaction note recorded by the AO of searched person, the said AO uses the words that the allegedly the seized documents ‘pertain’ to a person other than the person searched and the AO of the assessee before us record the satisfaction that the documents pertain to an information contained in the said documents ‘related’ to Shri Rajiv Agarwal, i.e., a person other than the person searched u/s 132 of the Income-tax Act, 1961. It is very apparent from the two satisfaction notes before us that none of the alleged incriminating documents has been examined or the contents of these documents analysed in a manner to show that how these alleged documents have any bearing on the determination of total income of the assessee for a particular year for which the reassessment was initiated by issuance of notice u/s 153C r.w.s. 153A of the Act. In the case of Canyon Financial Services Ltd. Vs. ITO [2017 (7) TMI 539 - DELHI HIGH COURT] has held that where satisfaction notes recorded by Assessing Officer of assessee and Assessing Officer of searched person were identically verdict carbon copy proceeding could not be initiated against assessee u/s 153C. When the satisfaction notes are compared with the notice u/s 142(1) of the Act along with the annexure having analysis of the seized material, it appears that at the time of assumption of jurisdiction by way of recording the satisfaction, the AO of the assessee before us had not applied his mind while issuing the notic. CIT(A) has erred in law by not appreciating that the impugned assessment orders in both the years were based on illegal assumption of jurisdiction on the basis of satisfaction note which was recorded without application of mind and quite in a mechanical manner. The reasons do not demonstrate how the nature of seized material has bearing on the total income of the assessee and to which assessment year particularly. The satisfaction note does not reflect any rational connection with or relevant bearing on the alleged seized material and the alleged undisclosed income of the assessee for a particular year sought to be assessed. Decided in favour of assessee. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered in this judgment are:Whether the satisfaction note recorded under Section 153C of the Income Tax Act, 1961, was valid and complied with the statutory requirements.Whether the assessment proceedings initiated under Section 153C were based on valid jurisdictional grounds.Whether the seized documents had a bearing on the determination of the total income of the assessee for the relevant assessment years.Whether the additions made under Section 69A of the Act were justified based on the evidence presented.2. ISSUE-WISE DETAILED ANALYSISIssue 1: Validity of the Satisfaction Note under Section 153CRelevant legal framework and precedents: Section 153C of the Income Tax Act mandates the recording of satisfaction by the Assessing Officer (AO) of the searched person that the seized documents or assets belong to or pertain to a person other than the searched person. Key precedents include decisions from the Delhi High Court and the Supreme Court, such as Radhey Shyam Bansal and CIT Vs. Singhad Technical Education Society, which emphasize the need for a clear and rational satisfaction note.Court's interpretation and reasoning: The court found that the satisfaction note lacked specificity and failed to demonstrate how the seized documents pertained to the assessee or impacted the determination of income for each assessment year.Key evidence and findings: The satisfaction note was found to be a mechanical reproduction of the note prepared by the AO of the searched person, lacking independent analysis or application of mind.Application of law to facts: The court applied the legal requirement that the satisfaction note must reflect a rational connection between the seized material and the undisclosed income of the assessee, which was not met in this case.Treatment of competing arguments: The court considered the arguments of both the assessee and the revenue, ultimately siding with the assessee's contention that the satisfaction note was inadequate.Conclusions: The court concluded that the satisfaction note did not meet the statutory requirements, rendering the proceedings under Section 153C invalid.Issue 2: Jurisdictional Grounds for Assessment under Section 153CRelevant legal framework and precedents: Jurisdiction under Section 153C requires that the AO of the other person (i.e., the assessee) must be satisfied that the seized documents have a bearing on the determination of the total income for the relevant assessment years.Court's interpretation and reasoning: The court found that the AO of the assessee did not independently verify or analyze the seized documents to establish their relevance to the assessee's income.Key evidence and findings: The satisfaction note was identical to the one prepared by the AO of the searched person, indicating a lack of independent assessment by the AO of the assessee.Application of law to facts: The court determined that the jurisdictional requirements were not met due to the lack of specific and relevant incriminating material linked to the assessee's income.Treatment of competing arguments: The court dismissed the revenue's reliance on the satisfaction note, emphasizing the need for a substantive and specific connection to the assessee's income.Conclusions: The court held that the jurisdictional grounds for initiating proceedings under Section 153C were not satisfied.Issue 3: Justification of Additions under Section 69ARelevant legal framework and precedents: Section 69A deals with unexplained money, requiring the AO to prove that the assessee possesses unexplained money or assets.Court's interpretation and reasoning: The court examined the evidence supporting the additions made by the AO and found inconsistencies and lack of corroborative material.Key evidence and findings: The court noted that some additions were deleted by the CIT(A) due to lack of evidence, while others were upheld without sufficient justification.Application of law to facts: The court applied the standard of proof required under Section 69A, finding that the AO failed to substantiate the additions with credible evidence.Treatment of competing arguments: The court considered the assessee's arguments regarding the lack of evidence and the revenue's reliance on seized documents, ultimately favoring the assessee.Conclusions: The court concluded that the additions under Section 69A were not justified due to insufficient evidence.3. SIGNIFICANT HOLDINGSPreserve verbatim quotes of crucial legal reasoning: 'The satisfaction note must reflect an application of mind by the jurisdictional Assessing officer of the other person that he has examined the seized material that belongs to/pertains to/relates to the other person and also state the reasons on the basis of which he reached to a conclusion that the seized material belonging to/pertaining to/relating to the other person, has a bearing on the determination of the total income of such other person.'Core principles established: The court reinforced the principle that satisfaction notes under Section 153C must be specific, rational, and demonstrate a clear connection between the seized material and the assessee's income.Final determinations on each issue: The court quashed the proceedings under Section 153C due to the invalid satisfaction note and inadequate jurisdictional grounds, and dismissed the additions under Section 69A for lack of evidence.The judgment underscores the necessity for precise and reasoned satisfaction notes and the importance of substantiating additions with credible evidence, aligning with established legal standards and precedents.