2025 (6) TMI 623 - AT - Income Tax

AO failed to record satisfaction under section 153C, assessment order silent on evidence from search proceedings

Siyad Edathil Abdulla Versus Asst. Commissioner of Income Tax Central Circle - 2, Kozhikode

ITAT Cochin allowed the appeal for statistical purposes, remanding the matter to CIT(A) for fresh adjudication. The assessment under section 153C read ... Assessment made u/s 153C r.w.s. 143(3) - non recording satisfaction by the AO of the searched person - HELD THAT:-CIT(A), without referring to the satisfaction note recorded by the AOs of both the searched party as well as the appellant, merely recorded this finding. It must be made clear that the assessment order also is totally silent with regard to recording of satisfaction by the AO as well as the AO of the searched person. What evidence was gathered during the course of search and seizure proceedings in the case of Malabar group of concerns indicate payment of interest on investment made by the appellant, was not made available to the appellant. From reading of the assessment order, it is not clear whether the name of the appellant figured in the seized material. Thus, the CIT(A) also, without adverting to the seized material and discussing the evidence gathered by the AO, merely confirmed the addition. The matter requires remand to the file of the CIT(A) for fresh adjudication - Appeal filed by the assessees stands allowed for statistical purposes. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered in this appeal are:(a) Whether the assessment made under section 153C read with section 143(3) of the Income Tax Act, 1961 (the Act) was valid in the absence of recorded satisfaction by the Assessing Officer (AO) of both the searched person and the appellant.(b) Whether the addition of undisclosed income of Rs. 12,90,000/- on account of interest/dividend payments from the Malabar Group of Companies (MGC) to the appellant was justified based on the seized material found during search and seizure proceedings under section 132 of the Act.(c) Whether the appellant's contention that the income was offered on receipt basis and no income can be taxed merely on entries found in the books of a third party without direct evidence was tenable.(d) Whether the appellant's challenge to the quantum of addition made by the AO, as excessive and not in accordance with the appellant's own calculations, was sustainable.(e) Whether the CIT(A) properly adjudicated the appeal by considering the grounds raised by the appellant and the evidence on record, including the satisfaction notes and seized material.2. ISSUE-WISE DETAILED ANALYSISIssue (a): Validity of Assessment under Section 153C read with Section 143(3) without Recorded SatisfactionRelevant legal framework and precedents: Section 153C of the Income Tax Act empowers the AO to assess income of a person other than the searched person if such income is found during search and seizure operations conducted on the searched person. However, this power can be exercised only after the AO records satisfaction that the income belongs to the other person. The satisfaction must be recorded before issuing notice under section 153C.Court's interpretation and reasoning: The Tribunal noted that neither the assessment order nor the CIT(A)'s order referred to the recording of satisfaction by the AO of the searched person or the AO of the appellant. The absence of such recorded satisfaction renders the issuance of notice under section 153C and consequent assessment invalid. The CIT(A) had failed to consider this procedural requirement and dismissed the appeal without addressing this fundamental issue.Key evidence and findings: The assessment order was silent on the satisfaction note. The CIT(A) also did not discuss or examine the existence or absence of the satisfaction note. The appellant had specifically challenged the validity of the assessment on this ground.Application of law to facts: Since the mandatory condition precedent for invoking section 153C was not fulfilled, the assessment order passed under this section is liable to be set aside or remanded for fresh adjudication after proper satisfaction recording.Treatment of competing arguments: The Department did not seriously contest this procedural lapse. The Tribunal found merit in the appellant's contention.Conclusion: The assessment under section 153C was not validly made due to non-recording of satisfaction by the AO, necessitating remand.Issue (b): Justification for Addition of Undisclosed Income Based on Seized MaterialRelevant legal framework and precedents: The Income Tax Act permits addition of undisclosed income found during search and seizure proceedings if corroborated by seized evidence. However, the addition must be supported by credible and admissible evidence linking the income to the assessee. Entries in third-party books can be considered but require corroboration.Court's interpretation and reasoning: The CIT(A) upheld the AO's addition by relying on the seized material from MGC's premises, which indicated undisclosed dividend/interest payments to the appellant. The Tribunal observed that the CIT(A) merely accepted the AO's findings without critically examining the seized documents or providing detailed reasoning. The appellant's challenge that the seized entries were not conclusive and that no direct evidence of payment was produced was not adequately addressed.Key evidence and findings: The AO relied on entries found in a second set of books maintained by employees of MGC on digital devices. The appellant denied receipt of the alleged amount and contended that no supporting documents existed. The AO provided copies of seized material to the appellant during assessment proceedings but the appellant did not utilize the opportunity to explain or refute the material.Application of law to facts: While entries in third-party books can form the basis for addition, the absence of direct evidence of payment or receipt weakens the case for addition. The appellant's status as a shareholder and the admission of similar undisclosed income by other shareholders were considered by the CIT(A) to support the addition. However, the lack of detailed discussion on the seized material and absence of clarity on whether the appellant's name appeared in the seized documents raised doubts.Treatment of competing arguments: The appellant argued that income was offered on receipt basis and that entries in third-party books without corroboration cannot be the basis for addition. The Department contended that the undisclosed payments were made outside books and hence no formal receipts would exist. The Tribunal found that the CIT(A) did not adequately weigh these competing arguments.Conclusion: The addition was upheld by the CIT(A) but without sufficient discussion of evidence. The Tribunal found the matter required reconsideration on remand.Issue (c): Taxability of Income Based on Entries in Third-Party Books without Direct EvidenceRelevant legal framework and precedents: Taxation based on indirect evidence such as entries in third-party books is permissible if the evidence is reliable and corroborated. Mere entries without supporting documentation or direct proof of receipt may not justify addition.Court's interpretation and reasoning: The CIT(A) rejected the appellant's contention that no income can be taxed based solely on third-party entries, reasoning that the payments were made outside the books and hence no receipts would be available. The Tribunal noted that the CIT(A) did not analyze whether the entries themselves were sufficient evidence or whether corroboration existed.Key evidence and findings: The seized material included entries indicating payments to the appellant. Other shareholders had admitted similar undisclosed income. No direct evidence such as bank statements or receipts was produced.Application of law to facts: The Tribunal recognized that while entries in third-party books can be considered, the absence of direct evidence or corroboration weakens the case for addition. The appellant's denial and lack of acknowledgment of receipt were relevant but not decisive.Treatment of competing arguments: The appellant's argument about receipt basis and lack of direct evidence was not adequately addressed by the CIT(A). The Department's reliance on the nature of undisclosed payments was accepted without critical scrutiny.Conclusion: The question of taxability based on third-party entries requires fresh examination.Issue (d): Challenge to Quantum of AdditionRelevant legal framework and precedents: The quantum of addition must be fair and based on credible evidence. The assessee is entitled to have the addition computed correctly and not arbitrarily.Court's interpretation and reasoning: The appellant submitted a lower figure than the AO's addition and contended that the lesser amount should be accepted. The CIT(A) rejected this contention on the ground that the appellant did not utilize opportunities during assessment proceedings to explain or object to the seized material.Key evidence and findings: Copies of seized material were provided to the appellant during assessment proceedings. The appellant raised the quantum issue late in appellate proceedings without prior explanation.Application of law to facts: The Tribunal noted that the appellant's failure to utilize opportunities during assessment proceedings weakened his claim but did not preclude fresh consideration on remand, especially in light of procedural lapses.Treatment of competing arguments: The Department insisted on the AO's figure. The appellant sought reduction. The Tribunal did not finally decide but left the issue open for reconsideration.Conclusion: The quantum issue requires reconsideration on remand.Issue (e): Adequacy of CIT(A)'s Adjudication and Need for RemandRelevant legal framework and precedents: The appellate authority must consider all grounds of appeal, examine evidence, and provide reasoned findings. Failure to do so warrants remand.Court's interpretation and reasoning: The Tribunal observed that the CIT(A) dismissed the appeal without addressing the appellant's key contentions regarding validity of assessment, satisfaction note, and detailed examination of seized material. The CIT(A) did not refer to the satisfaction notes or discuss the evidence in detail.Key evidence and findings: The CIT(A)'s order contained general observations but lacked detailed analysis on critical legal and factual issues.Application of law to facts: The Tribunal held that the matter should be remanded to the CIT(A) for fresh adjudication in accordance with law after affording the appellant a reasonable opportunity of hearing.Treatment of competing arguments: The Department did not oppose remand. The appellant sought remand for proper consideration.Conclusion: Remand was necessary for fresh adjudication.3. SIGNIFICANT HOLDINGS'The assessment order also is totally silent with regard to recording of satisfaction by the AO as well as the AO of the searched person.''The CIT(A), without referring to the satisfaction note recorded by the AOs of both the searched party as well as the appellant, merely recorded this finding.''Considering the above facts, the above argument of the appellant is not acceptable.' (Regarding denial of receipt of undisclosed payments)'MGC at no point of time has questioned the genuineness/validity of the material seized from its premises. That being the case, the appellant who himself is a shareholder of MGC cannot take a stand that the payments, as reflected in the seized material was ever made.''The matter requires remand to the file of the CIT(A) for fresh adjudication in accordance with law after affording reasonable opportunity of hearing to the appellant.'Core principles established include:- Validity of assessment under section 153C requires prior recording of satisfaction by the AO of the searched person and the AO of the other person.- Additions based on seized material from third-party books require careful scrutiny and corroboration before confirming undisclosed income.- The appellate authority must consider all grounds raised by the assessee and provide reasoned findings; failure to do so justifies remand.- The absence of direct evidence of receipt of income weakens the case for addition but does not preclude it if corroborated by reliable indirect evidence.Final determinations:The appeal is allowed for statistical purposes and the matter is remanded to the CIT(A) for fresh adjudication after affording the appellant reasonable opportunity of hearing. All contentions of the appellant are kept open for fresh consideration.