2025 (6) TMI 1798 - AT - Income Tax

AO lacks valid jurisdiction under section 153C without proper nexus between seized documents and assessee

Shri Kumar Saurav, C/o Shanker Mehta, Naya Gaon. Versus DCIT, Central Circle, Noida.

The ITAT held that the AO lacked valid jurisdiction under section 153C of the Income Tax Act to assess the assessee. The AO failed to record adequate ... Assumption of jurisdiction u/s 153C - allegation of suppression of income - incriminating material - Satisfaction note recorded or not? - whether seized documents is related to the assessee and what is the incriminating effect? - HELD THAT:- CIT(A) certainly, apart from mentioning that the seized documents related to the assessee, there is not a word as to how and what material content related to the assessee so as to allege that there was suppression of income. The satisfaction note is certainly not worded in accordance with the law requiring the AO assuming jurisdiction u/s 153C of the Act to show that the seized document pertained to the assessee and it should be further reflected as to how the income was not disclosed. The fact that in the reasons the AO mentions that the cases of group are interconnected and required deep investigation to arrive at a logical conclusion, certainly establishes non-application of mind and not having sufficient material to have recourse to section 153C of the Act. The appeal of the assessee is allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether the Assessing Officer validly assumed jurisdiction under section 153C of the Income Tax Act by issuing notice and making assessments on the basis of documents seized from third parties. 2. Whether the reasons recorded for assuming jurisdiction under section 153C satisfy the statutory and judicially established requirements - specifically, whether the reasons identify (a) that the seized documents pertain to the assessee, and (b) how those documents disclose material indicating undisclosed income or suppression. 3. Whether a broad assertion that group cases are 'interconnected' and require 'deep investigation' can substitute for the requisite application of mind and specific material connecting seized documents to the assessee for purposes of section 153C. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Validity of assumption of jurisdiction under section 153C Legal framework: Section 153C authorizes an AO to assess a person if, during search/seizure in respect of any other person, documents or things are seized which, in the opinion of the AO, pertain to the person to be assessed; the AO must record reasons of his satisfaction prior to assuming jurisdiction. Precedent treatment: The Court applied established principles from higher and coordinate authority decisions which require a clear nexus between seized material and the person on whom jurisdiction is to be exercised and insist on a reasoned satisfaction note. Relevant authorities were cited and followed as guiding precedent on the standard of satisfaction required. Interpretation and reasoning: The reasons recorded reproduced in the appellate order merely mention that seized documents (EW-4, Annexure-1) 'related to the assessee' without explaining the factual or documentary basis for that conclusion or how those documents demonstrate undisclosed income. The assessing authority's note did not identify the specific contents of the seized documents linking them to the assessee's taxable transactions, nor did it explain the incriminating effect or the manner in which the documents disclosed suppression of income. Ratio vs. Obiter: Ratio - section 153C requires particularized reasons linking seized papers to the assessee and material showing undisclosed income; a bare, conclusory recital that documents 'relate' to the assessee is insufficient. Obiter - none beyond reinforcing that statutory safeguards must be respected. Conclusion: The assumption of jurisdiction under section 153C was invalid for want of adequate reasons. The Tribunal set aside the impugned assessment actions predicated on that jurisdictional assumption. Issue 2 - Adequacy and form of the satisfaction note recording reasons for invoking section 153C Legal framework: Judicial precedents require that the satisfaction recorded by the officer must disclose (i) the seized documents/things that pertain to the person sought to be assessed, (ii) the specific basis for treating those documents as pertaining to that person (nexus), and (iii) how the documents indicate undisclosed income or suppression, such that the officer's satisfaction is not a mere ipse dixit. Precedent treatment: The Tribunal relied on and followed well-established case law holding that non-specific or conclusory satisfaction notes do not survive scrutiny; the judgment applied those authorities to test the reasons reproduced in the record. Interpretation and reasoning: The reproduced reasons were deficient in particulars; they failed to show how the contents of EW-4/Annexure-1 connected to the assessee's transactions or disclosure position. The note's generic observation about interconnection of group cases and requirement for 'deep investigation' demonstrated non-application of mind and absence of sufficient material to validly exercise the section 153C power. Ratio vs. Obiter: Ratio - a satisfaction note must reflect application of mind and factual nexus; generalized statements about group interconnection or investigative need do not substitute for particularized reasons. Obiter - emphasis that the statutory requirement safeguards assessee's rights against arbitrary extension of search-derived jurisdiction. Conclusion: The satisfaction note did not meet statutory and judicially prescribed standards; therefore the jurisdictional premise for proceedings under section 153C failed. Issue 3 - Acceptability of 'group interconnectedness' and investigative necessity as substitute for specific reasons Legal framework: Administrative satisfaction must be based on facts and documentary nexus; speculative or generalized assertions are inadequate. Statements asserting group linkage require supporting factual detail showing how seized items pertain to the assessee. Precedent treatment: The Tribunal treated prior authorities as holding that blanket assertions of interconnection or investigative complexity cannot validate assumption of jurisdiction; those authorities were followed in assessing the record. Interpretation and reasoning: The AO's reliance on the notion that group entities are interconnected and require deeper probe was held to reflect non-application of mind and to be legally insufficient. The Court emphasized that the mere existence of business or familial linkages does not automatically convert third-party seized documents into documents 'pertaining to' an assessed person under section 153C unless the seized material itself establishes that link. Ratio vs. Obiter: Ratio - assertions of group interconnectedness without documentary linkage are legally insufficient; the AO must point to specific entries/contents in seized material that pertain to the assessee. Obiter - the decision reiterates that investigative difficulty cannot be invoked to bypass statutory prerequisites. Conclusion: The invocation of section 153C on the basis of general group interconnectedness and investigative necessity was impermissible; such reasoning does not cure the absence of specific, recorded nexus between seized documents and the assessee. Overall Disposition and Consequence Because the reasons recorded did not identify how the seized documents pertained to the assessee or how they evidenced undisclosed income, and because generalized claims of group interconnection evidenced non-application of mind, the assumption of jurisdiction under section 153C was invalid. The assessment actions founded on that assumption were set aside and the appeal allowed.