2025 (6) TMI 558 - AT - Income Tax

Section 153C notices to third parties must be issued within six years from receipt of seized material, not search date

The ITO Ward-1 (4), Jaipur Versus Shri Pradeep Kumar Dusad And Shri Pradeep Kumar Dusad Versus The DCIT, Central Circle-2, Jaipur.

ITAT Jaipur held that notices under section 153C against third parties must be issued within six years from the date of receipt of seized material, not ... Issuance of notice u/s 153C - issue of notice beyond six year - issuance of notice under section 153C for the other person runs from the date of receipt of seized material - HELD THAT:- As in the case of other person action u/s 153C shall be considered on receipt of seized material from the AO the searched persons, if the same has found to have a bearing on the determination of the income of the other person. The Hon'ble Supreme Court has held that the date of receipt of seized material shall not be and cannot be considered as date of conducting of search. The Hon'ble Supreme Court has categorically stated that this sort of provision is not workable specifically in a case where seized material is handed over after a long period of 4 years or so to the AO of the other person. And if the AO is expected to take action in such cases in respect of earlier six years it will require the asseseee to keep the books of account for ten years which is not the intention of law and hence not workable. In view of this the Hon'ble Supreme Court in JASJIT SINGH [2023 (10) TMI 572 - SUPREME COURT] has held that the AO of the other person shall be competent only to take action in respect of earlier six year /ten years from the date of receipt of the seized material. In other words the date of receipt of seized material shall not be considered as date of conducting of search. To clarify further the AO of the other person shall take action against such other persons in respect of earlier six years from the date of receipt of seized material and the date of search shall be irrelevant. Part on money allowing the set of on money in purchase and sale and thereby sustained the balance amount only and thereby submit that the ld. CIT(A) should not have considered that plea of the assessee and should have confirmed the whole amount added by the ld. AO. The bench noted that since we have while dealing with the ground no. 3 to 9 of the assessee directed to delete the addition and therefore, on that ground we hold that ground no. 1 raised by the revenue has no merits and thereby required to be dismissed. Cost of acquisition of property - We note that the grievance of the revenue is that the ld. CIT(A) should not have indulged into the finding of giving effect to the fact that whether the gross on money is to be taxed or the net was not the dispute because the same is related in the case of the firm. The bench noted that we have already while dealing with the appeal of the assessee given the finding that the issue relates to the purchase and sale of land by the firm and the assessee being partner has acted as authorized person and therefore, before us also this issue is becomes premature as we do not have the appeal of the said firm before us and therefore, the issue raised by the revenue is academic at this stage while dealing with the case of the assessee. Issues Presented and Considered1. Whether the learned Commissioner of Income Tax (Appeals) erred in not considering the Supreme Court decision regarding the issuance of notice under section 153C of the Income Tax Act and the period for which such notice can be issued, thereby violating principles of judicial discipline.2. Whether the assessment framed without issuance of notice under section 153C for the relevant assessment year was valid.3. Whether the addition of undisclosed income based solely on statements recorded under sections 131 and 132(4) of the Income Tax Act, without corroborative documentary evidence, was justified.4. Whether the addition made on account of receipt and payment of 'on money' in land transactions, treated under section 68 of the Income Tax Act, was appropriate.5. Whether the cost of acquisition of the property for the assessment year 2016-17 could be determined in the assessment year 2017-18 appeal when the matter was pending adjudication.6. Whether the principles of natural justice were violated by not allowing cross-examination of key witnesses whose statements formed the basis of additions.7. Whether the transactions in question pertained to the individual assessee or to the partnership firm, and the consequent tax implications.8. Validity and sufficiency of the satisfaction note under section 153C for initiating proceedings in the case of the assessee.Issue-wise Detailed Analysis1. Validity of proceedings under section 153C and issuance of noticeThe legal framework under section 153C mandates that before initiating proceedings against a person other than the searched person, the Assessing Officer must be satisfied that the seized material has a bearing on the determination of income of such other person for the relevant assessment years, and a satisfaction note must be recorded year-wise. The Supreme Court in a recent decision clarified that the six-year period for issuance of notice under section 153C for the other person runs from the date of receipt of seized material from the AO of the searched person, not from the date of search itself.In the present case, the search was conducted on 28.07.2016, but the satisfaction note was drawn on 18.09.2018. The AO did not issue any notice under section 153C for the assessment year 2017-18, which was the relevant year for sale of land. The CIT(A) observed that the assessment was completed under section 143(2) and not under section 153C, which was an inadvertent mistake. The assessee contended that the assessment without issuance of section 153C notice was invalid and violated the Supreme Court ruling.The Court noted that the satisfaction note did not specify the seized material relating to assessment year 2016-17 and that the purchase deeds found were not incriminating. The sale transaction occurred in AY 2017-18, and the satisfaction note lacked year-specific satisfaction for AY 2016-17. Consequently, the AO was precluded from initiating proceedings under section 153C for AY 2016-17.The Court held that the assessment framed without proper notice under section 153C for the relevant year was unlawful and unjustified.2. Addition of undisclosed income based on statements without corroborative evidenceThe AO made additions on account of receipt of 'on money' (undisclosed cash/kind payments) in land transactions based primarily on statements recorded under sections 131 and 132(4) of the Income Tax Act, without any supporting documentary evidence seized during search. The AO added Rs. 1,43,40,000 as undisclosed income under section 68 and applied tax at 60% under section 115BBE.The CIT(A) reduced this addition to Rs. 42,21,115 after considering the purchase 'on money' paid by the assessee and the sale 'on money' received, allowing set-off of the former against the latter.The assessee challenged the addition on grounds that statements alone, especially those recorded under coercion or pressure, cannot form the basis of additions without corroborative evidence. The assessee also highlighted CBDT circulars advising against reliance on confessional statements obtained under coercion.The Court extensively referred to binding precedents from the Supreme Court and various High Courts holding that mere statements recorded during search or under coercion are not incriminating material and cannot sustain additions unless corroborated by tangible evidence. The Court also noted the absence of any seized material relating to the assessee's undisclosed income and the lack of documentary proof supporting the alleged 'on money' transactions.Accordingly, the Court found the additions based solely on statements to be unsustainable in law.3. Applicability of section 68 and treatment of 'on money' transactionsSection 68 applies when any sum is credited in the books of an assessee and the assessee fails to satisfactorily explain the nature and source of such sum. In this case, the AO invoked section 68 to treat the 'on money' received on sale of land as unexplained income.The assessee argued that no such credit entries existed in his books of account and that the transactions pertained to the partnership firm, not the individual. The Court noted that the AO did not point to any credit entry in the assessee's books and that the land purchase and sale were recorded in the books of the firm M/s Eminent Build Developers, where the assessee was a partner.The Court held that section 68 was inapplicable as the sums were not credited in the individual assessee's books and that the AO erred in applying section 68 to the assessee.4. Ownership of property and taxability in hands of assessee or partnership firmThe land transactions were executed in the name of the partnership firm M/s Eminent Build Developers, with the assessee acting as partner. The purchase deeds, bank accounts, and balance sheets of the firm reflected the transactions. The sale of land was also disclosed in the firm's return of income, with capital gains declared and tax paid.The AO and CIT(A) treated the firm as a conduit and attributed the 'on money' transactions to the individual assessee. The assessee contended that the transactions belonged to the firm and not to him individually, and thus the additions in his hands were unwarranted.The Court observed that the CIT(A) accepted the capital gain shown by the firm and allowed set-off of purchase and sale 'on money' amounts, thereby acknowledging the firm's ownership and transaction. The Court emphasized that the assessment should be in the hands of the firm, not the individual, and the additions in the individual's hands were misplaced.5. Determination of cost of acquisition for AY 2016-17 in appeal for AY 2017-18The Revenue challenged the CIT(A)'s adoption of Rs. 2.5 crores as the cost of acquisition for land purchased in AY 2016-17, contending that the matter was pending adjudication and the CIT(A) exceeded jurisdiction.The Court noted that the issue relates to the firm's assessment year 2016-17, which was pending, and the CIT(A) had taken a view based on the assessee's statement recorded under section 131. The Court held that the issue was premature in the appeal for AY 2017-18 and that the Revenue's objection was academic at this stage.6. Violation of principles of natural justice due to denial of cross-examinationThe assessee contended that the AO made additions based on statements of third parties (Shri Chandra Prakash Agarwal and Shri Chandra Mohan Badaya) without allowing cross-examination, violating principles of natural justice.The Court referred to binding precedents emphasizing that cross-examination is a fundamental aspect of fair hearing and that reliance on third-party statements without affording opportunity to cross-examine renders the assessment order vitiated.The Court found that the AO did not allow cross-examination despite specific requests, thereby violating natural justice and invalidating the additions.7. Sufficiency and relevance of satisfaction note under section 153CThe satisfaction note recorded by the AO was found to be vague, lacking year-wise specificity, and did not establish how the seized material related to the assessee's income for AY 2016-17. The purchase deeds seized were not incriminating, and the statements relied upon were not part of seized material.The Court held that the satisfaction note was defective and insufficient to initiate proceedings under section 153C for AY 2016-17 in the assessee's case.Significant Holdings'The Supreme Court in the case of Commissioner of Income Tax -14 versus Jasjit Singh has held that the AO of the other person shall issue notice of earlier six years excluding the year in which the information/material is received from the AO of the searched person.''The provisions of section 153C(1) very clearly stipulate that with effect from 01.10.2014 the learned AO of the other person is required to issue notice under section 153C only after satisfying that the seized material has a bearing on the determination of the income of such other person.''Mere statement u/s 132(4) or u/s 131 is not sufficient to make an addition. A statement made must be relatable to incriminating material found during the course of search or the statement must be made relatable to material by subsequent inquiry/investigation.''Statements recorded during search are not evidences found during search. Addition cannot be made on the basis of statement alone.''Section 68 of the Income Tax Act applies only when there is a credit entry in the books of account maintained by the assessee.''Cross-examination is sine qua non of the due process of taking evidence and no adverse inference can be drawn against a party unless that party is put on notice of the case made out against him.''The learned AO has not stipulated, in the satisfaction note, in what manner these sale deeds have a bearing on the determination of income of the assessee.''The assessment framed without issuance of notice under section 153C for the relevant assessment year is unlawful and unjustified.''Additions made solely on the basis of statements recorded under section 131 and 132(4) without corroborative documentary evidence are unsustainable.''The purchase and sale of land being in the name of the partnership firm, the taxability lies in the hands of the firm and not the individual partner.''Denial of opportunity to cross-examine witnesses whose statements form the basis of additions violates principles of natural justice and vitiates the assessment.''The satisfaction note under section 153C must be year-specific and must clearly indicate how the seized material relates to the income of the other person for that year.'