2025 (6) TMI 1379 - AT - Income Tax

Assessment under Section 153C invalid due to delayed recording of satisfaction by Assessing Officer

The Income Tax Officer Ward -2, Surendranagar Versus Shri Pranav Prafulchandra Vora

ITAT Ahmedabad held that assessment under section 153C was invalid due to delayed recording of satisfaction by the AO of the searched person. The tribunal ... Assessment u/s 153C - mandation to record satisfaction - Appeal before the Tribunal to raise new grounds - as argued satisfaction recorded by the AO of the searched person was beyond limitation HELD THAT:- Hon’ble Apex Court in the case of Hukum Chand Mills Ltd. [1966 (9) TMI 38 - SUPREME COURT] held that even assuming that Rule 27 of the ITAT Rules, is not strictly applicable, the Tribunal had inherent powers u/s. 254(2) to entertain arguments of the respondent subject to the condition that no new facts are required to be brought on record. Thus the grounds raised by the assessee, challenging the validity of jurisdiction assumed u/s. 153C of the Act is maintainable. Assumption of jurisdiction to frame assessment u/s 153C - In the light of guidelines/timelines for recording of satisfaction by the AO of searched person for a valid initiation of proceedings u/s 153C of the Act laid down in the case of Calcutta Knitwears [2014 (4) TMI 33 - SUPREME COURT] adopted by the CBDT and considering the decision of Anilkumar Gopikishan Agrawal [2019 (6) TMI 746 - GUJARAT HIGH COURT] the satisfaction recorded in the present case cannot be said to be within the reasonable time limit so prescribed i.e latest immediately after conclusion of proceedings on the person searched. The jurisdiction, therefore, assumed by the AO of the assessee to frame assessment u/s 153C of the Act, basis this satisfaction note of the AO of the searched person, is clearly invalid and the assessment framed as a consequence u/s.153C of the Act in the present case is, therefore, held not sustainable in law. 1. ISSUES PRESENTED and CONSIDERED- Whether the Assessing Officer (AO) validly assumed jurisdiction under section 153C of the Income Tax Act, 1961 ('the Act') based on satisfaction recorded by the AO of the searched person within a reasonable time as mandated by judicial precedents and CBDT Circulars.- Whether the addition of Rs. 2,20,35,000/- made on account of alleged undisclosed income under section 69 of the Act was justified on the facts and law.- Whether the deletion of the addition by the Commissioner of Income Tax (Appeals) ('CIT(A)') was legally sustainable.- Whether the appellant (Revenue) was entitled to have the order of CIT(A) set aside and the assessment order restored.2. ISSUE-WISE DETAILED ANALYSISIssue 1: Validity of jurisdiction assumed under section 153C of the ActRelevant legal framework and precedents: Section 153C permits the AO of a person other than the searched person to assume jurisdiction and frame assessment if incriminating material relating to such other person is found during search conducted under section 132. For such jurisdiction to be valid, the AO of the searched person must record satisfaction that such material relates to the other person and transfer the material accordingly. The Supreme Court in Commissioner of Income Tax-III v Calcutta Knitwears (2014) laid down that the satisfaction note is a sine qua non and must be recorded either (a) at or along with initiation of proceedings against the searched person under section 158BC (corresponding to 153A), (b) during assessment proceedings under section 158BC, or (c) immediately after completion of assessment under section 158BC.The CBDT Circular No. 24/2015 reiterated that these guidelines apply mutatis mutandis to section 153C proceedings and directed strict compliance. The jurisdictional High Court in Anilkumar Gopikishan Agrawal v ACIT (2019) applied these principles and held that satisfaction recorded after a delay of over eight months post-assessment was not valid.Court's interpretation and reasoning: The Tribunal noted that in the present case, the search on the group was conducted on 04-12-2014, the assessment of the searched person was completed on 31-03-2017, but the satisfaction note by the AO of the searched person was recorded only on 16-03-2018, almost a year after assessment completion. This was clearly beyond the reasonable time prescribed by the Supreme Court and CBDT guidelines.Key evidence and findings: The dates of search, assessment completion, and satisfaction note recording were undisputed. The CBDT Circular and judicial precedents were placed on record. The AO of the searched person failed to record satisfaction within the permissible timeframe.Application of law to facts: Applying the binding Supreme Court ruling and CBDT Circular, the Tribunal held that the satisfaction note was recorded belatedly and hence the jurisdiction assumed by the AO under section 153C was invalid. Consequently, the assessment framed under section 153C was not sustainable.Treatment of competing arguments: The Revenue contended that the Act does not prescribe any time limit for recording satisfaction and that the satisfaction was recorded within reasonable time. The Tribunal rejected this, relying on binding apex court precedent and CBDT instructions. The assessee invoked Rule 27 of the ITAT Rules to raise this jurisdictional ground, which was accepted as maintainable following judicial precedents permitting respondents to raise new grounds in defense of the order appealed against.Conclusion: The Tribunal concluded that the jurisdiction assumed under section 153C was invalid due to delayed recording of satisfaction note, and thus the assessment framed was unsustainable and liable to be set aside.Issue 2: Legitimacy of addition of Rs. 2,20,35,000/- as unexplained investment under section 69Relevant legal framework and precedents: Section 69 deals with unexplained investments and additions to income where the assessee fails to satisfactorily explain the nature and source of investments. The AO relied on Excel sheets seized during search, decoded abbreviations, and matched entries with bank and books of the searched entity and the assessee, concluding that the assessee made on-money payments for investments which were not recorded in books.Court's interpretation and reasoning: The CIT(A) found the jurisdiction invalid and further held that the addition was based on loose papers not recovered from the assessee's premises and was made on presumptions without proper opportunity to cross-examine the builder or authorized representatives. The CIT(A) deleted the addition on merits.Key evidence and findings: The Excel sheets were seized from the searched entity and its directors, not from the assessee. The assessee denied the transactions. The AO decoded the sheets and made additions based on this material. The CIT(A) found the material insufficient and the procedure violative of natural justice.Application of law to facts: Since the jurisdiction under section 153C was invalid, the entire assessment was vitiated. The Tribunal did not find it necessary to delve into the merits of the addition, as the assessment itself was set aside on jurisdictional grounds.Treatment of competing arguments: The Revenue urged restoration of the addition, relying on the incriminating material and the principle that seized documents under section 153C may pertain to the assessee. The assessee countered on jurisdictional and procedural grounds. The Tribunal, having found jurisdiction invalid, dismissed the Revenue's appeal as infructuous without adjudicating the addition.Conclusion: The Tribunal did not uphold the addition due to invalid jurisdiction and procedural defects. The deletion by CIT(A) was left undisturbed by virtue of setting aside the assessment.Issue 3: Maintainability of new ground raised by the assessee under Rule 27 of the ITAT RulesRelevant legal framework and precedents: Rule 27 permits a respondent, even without filing an appeal or cross-objection, to support the order appealed against on any ground decided against him. Judicial precedents including ITAT Delhi Bench in ITO v Gurinder Kaur and Supreme Court rulings in Hukum Chand Mills Ltd. v CIT and others, have held that the Tribunal has inherent powers under section 254(1) of the Act to entertain new legal grounds raised by respondents, provided no new facts are introduced and opportunity is given to the other side.Court's interpretation and reasoning: The Tribunal observed that the jurisdictional ground on delayed satisfaction note was not raised before CIT(A) and hence not decided against the assessee, which would ordinarily disallow raising it under Rule 27. However, relying on the above precedents, the Tribunal held that it could entertain the ground in defense of the CIT(A) order, as it was a pure question of law not requiring fresh evidence.Key evidence and findings: The assessee's counsel cited relevant judicial decisions and CBDT Circulars. The Revenue objected but the Tribunal overruled the objection.Application of law to facts: The Tribunal applied the principle that new legal grounds can be raised by respondents to uphold the CIT(A) order, especially on jurisdictional issues affecting the validity of assessment.Treatment of competing arguments: The Revenue argued non-maintainability of the new ground, while the assessee relied on Rule 27 and judicial precedents. The Tribunal accepted the assessee's position.Conclusion: The Tribunal admitted and adjudicated the new ground raised by the assessee under Rule 27.3. SIGNIFICANT HOLDINGS'For the purpose of Section 158BD of the Act a satisfaction note is sine qua non and must be prepared by the assessing officer before he transmits the records to the other assessing officer who has jurisdiction over such other person... The satisfaction note could be prepared at either of the following stages: (a) at the time of or along with the initiation of proceedings against the searched person under Section 158BC of the Act; (b) along with the assessment proceedings under Section 158BC of the Act; and (c) immediately after the assessment proceedings are completed under Section 158BC of the Act of the searched person.''The Board hereby directs that pending litigation with regard to recording of satisfaction note under section 158BD/153C should be withdrawn/not pressed if it does not meet the guidelines laid down by the Apex Court.''Rules 12 and 27 are not exhaustive and the powers of the Appellate Tribunal. The rules are merely procedural in character and do not, in any way, circumscribe or control the power of the Tribunal under Section 33(4) of the Act.''Even de hors Rule 27 of the Appellate Tribunal Rules, it is open to the respondent in an appeal before the Tribunal to raise a new ground in defence of the order appealed against.'Core principles established:The satisfaction note by the AO of the searched person under section 153C must be recorded within a reasonable time, specifically at or before initiation of proceedings, during assessment proceedings, or immediately after completion of assessment of the searched person.Delayed recording of satisfaction note beyond these timelines invalidates the jurisdiction assumed under section 153C, rendering assessments framed thereunder unsustainable.The ITAT has inherent powers to admit new legal grounds raised by respondents in support of the order appealed against, even if not raised before the lower appellate authority, provided no new facts are introduced.Seized material under search proceedings may pertain to other persons, but procedural safeguards and jurisdictional requirements must be strictly complied with.Final determinations:The jurisdiction assumed by the AO under section 153C was invalid due to delayed satisfaction note recorded almost a year after assessment completion.The assessment framed on the basis of such jurisdiction was unsustainable and was set aside by the Tribunal.The addition of Rs. 2,20,35,000/- was not restored by the Tribunal as the assessment itself was quashed on jurisdictional grounds.The new ground raised by the assessee challenging jurisdiction was admitted and decided in its favor.The Revenue's appeal was dismissed as infructuous.