Assessment Officer lacks jurisdiction under Section 153C when satisfaction note recorded outside ten-year block period

Delhi HC upheld ITAT's decision that AO lacked jurisdiction under Section 153C for AY 2012-13. Following Ojjus Medicare precedent, the court held that the ten-year block period for reopening assessments under Section 153C must be calculated from the end of the assessment year when satisfaction note was recorded. Since AO recorded satisfaction note on 29.09.2021 (relevant to AY 2022-23), the ten-year period commenced from end of AY 2022-23, making AY 2012-13 fall outside the permissible block period. Revenue's appeal was dismissed.

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1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Court in this appeal relate primarily to the interpretation and application of Sections 153A and 153C of the Income Tax Act, 1961, specifically regarding the calculation of block periods for reopening assessments following search and seizure operations. The issues include:

(a) Whether the block period for assessment under Section 153C should be calculated from the date of receipt of seized books of accounts, documents, or assets by the jurisdictional Assessing Officer (AO) of the non-searched person, or from the date of initiation of the search.

(b) Whether the first proviso to Section 153C, which deals with abatement of proceedings, can be relied upon for determining the calculation of block periods under Section 153C.

(c) Whether the block period under Section 153C has the same meaning and calculation method as under Section 153A, particularly after the Finance Act, 2017 amendment, which clarifies that the block period is to be reckoned from the assessment year relevant to the previous year in which the search is conducted.

(d) Validity of the assumption of jurisdiction by the AO under Section 153C in the facts of the case.

(e) Legitimacy of the issuance and quashing of notices under Section 153C, and consequential proceedings.

(f) Legality of deletion of protective additions under Section 69A on unexplained money made by the ITAT.

(g) Whether the failure to allow cross-examination of a key witness (Sh. Rajeev Saxena) during assessment proceedings affected the validity of the assessment order.

(h) Whether there was sufficient material on record to establish a link between the assessee and certain entities named by the witness.

(i) Whether the assessment order under Section 153C is invalid if it does not explicitly refer to Section 153A, given the provisions are to be read conjointly.

(j) Whether the ITAT's order is perverse in law or fact in relation to the above issues.

2. ISSUE-WISE DETAILED ANALYSIS

Issues (a), (b), (c), (d), and (e): Calculation of Block Period and Validity of Jurisdiction under Section 153C

The legal framework centers on Sections 153A and 153C of the Income Tax Act, 1961. Section 153A empowers reopening of assessments for six assessment years preceding the year in which search is conducted. Section 153C applies to non-searched persons whose books or documents are found during searches on others, allowing reopening of assessments for the block period applicable to the searched person.

The Revenue contended that the block period under Section 153C should be calculated from the date of initiation of the search, relying on the first proviso to Section 153C, which deals with abatement of proceedings. The Revenue argued that the proviso does not address block period calculation and hence the ITAT erred in relying on it to hold otherwise.

The Court referred to a recent authoritative decision by this Court which clarified that the block period of ten years under Section 153C must be reckoned from the end of the assessment year relevant to the financial year in which the satisfaction note under Section 153C is recorded by the AO, rather than from the date of initiation of the search. In the present case, the AO recorded satisfaction on 29.09.2021, making AY 2022-23 the relevant year for reckoning the block period.

Applying this principle, the Court found that AY 2012-13 falls outside the permissible block period of ten years counted from AY 2022-23, rendering the reopening of assessment under Section 153C for AY 2012-13 invalid.

The Court rejected the Revenue's argument that the first proviso to Section 153C could not be used for calculating block periods, holding that the proviso's purpose is limited to abatement of proceedings and does not affect the calculation of block periods. The Court emphasized that the block period must be computed in line with the statutory scheme and legislative intent as clarified by the Finance Act, 2017 amendment and judicial precedents.

Regarding the assumption of jurisdiction under Section 153C, the Court held that since the block period was not correctly calculated and AY 2012-13 was beyond the permissible period, the AO's jurisdiction was invalid. Consequently, the notices issued under Section 153C and all consequential proceedings were quashed.

Issue (f): Deletion of Protective Addition under Section 69A

Section 69A deals with unexplained money, bullion, jewellery, or other valuable articles found during search and seizure. The AO had made a protective addition of Rs. 9,55,50,000/- on account of unexplained money. The ITAT deleted this addition.

The Court noted that since the reopening itself was held invalid, it was unnecessary to delve into the merits of the protective addition. The ITAT's deletion of the addition was therefore not challenged further.

Issue (g): Non-allowance of Cross-examination of Witness

The Revenue contended that the ITAT erred in deciding the issue in favor of the assessee on the ground that cross-examination of Sh. Rajeev Saxena was not allowed. The AO had made efforts to provide an opportunity for cross-examination during assessment proceedings, but it could not be conducted.

The Court observed that the assessment order was primarily based on seized material, and the witness's statement was only supporting evidence. The ITAT's approach to consider the lack of cross-examination as a factor in favor of the assessee was appropriate, ensuring fairness in the assessment process.

Issue (h): Link between Assessee and Entities Named by Witness

The Revenue argued that there was information on record showing the assessee's relations with certain entities named by the witness. The ITAT held there was no such link established.

The Court found no reason to interfere with the ITAT's finding that the record did not sufficiently establish a link between the assessee and the entities, reinforcing the principle that mere allegations or unsubstantiated statements are insufficient to uphold additions or assessments.

Issue (i): Validity of Assessment Order without Explicit Reference to Section 153A

The Revenue submitted that the assessment order under Section 153C without explicit reference to Section 153A is invalid, arguing that the provisions must be read conjointly and that failure to mention Section 153A is a hyper-technical error.

The Court agreed with the ITAT's view that such a hyper-technical interpretation is unwarranted and that no prejudice was caused to the assessee by the omission. The provisions of Sections 153A and 153C are to be read together, and the absence of explicit reference does not invalidate the assessment order.

Issue (j): Overall Perversity of ITAT's OrderThe Court found no perversity in the ITAT's order either in law or on facts. The ITAT correctly applied the legal principles and statutory provisions, and its findings were supported by the record.

3. SIGNIFICANT HOLDINGS

The Court upheld the ITAT's ruling that the block period for reopening assessments under Section 153C must be calculated from the end of the assessment year relevant to the financial year in which the satisfaction note is recorded by the AO, not from the date of initiation of the search. It stated:

"...the block of ten years for which assessments could be reopened is required to be construed from the end of the assessment year relevant to the financial year in which the satisfaction note under Section 153C of the Act was recorded by the AO."

Further, the Court held that the first proviso to Section 153C, which deals with abatement of proceedings, does not govern the calculation of block periods, rejecting the Revenue's contrary submission.

The Court conclusively determined that reopening the assessment for AY 2012-13 under Section 153C was invalid as it fell outside the permissible block period.

It also affirmed that failure to explicitly mention Section 153A in the assessment order under Section 153C does not invalidate the order, provided no prejudice is caused.

On procedural fairness, the Court endorsed the ITAT's approach that inability to cross-examine a witness whose statement is only supporting evidence can be a relevant factor favoring the assessee.

Overall, the Court dismissed the Revenue's appeal, finding no substantial question of law arose for consideration.

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