2025 (8) TMI 915 - AT - Income Tax

Proceedings under ss.153A/153C quashed for cryptic satisfaction note; s.69 additions deleted, builder payment explained, escaped income threshold unmet

Sharad Kumar Bhandari, Juhi Bhandari Versus The DCIT, Circle (Intl Tax), Jaipur.

Sharad Kumar Bhandari, Juhi Bhandari Versus The DCIT, Circle (Intl Tax), Jaipur. - TMI 1. ISSUES PRESENTED and CONSIDERED 1. Whether jurisdiction under Section 153C of the Income Tax Act, 1961 was validly assumed by the Assessing Officer (AO) based on proper satisfaction note and incriminating material specifically relating to the assessee for the relevant assessment year (AY) 2015-2016. 2. Whether issuance of a single satisfaction note covering multiple AYs (2015-16 to 2021-22) without year-wise specification of incriminating material is legally sustainable. 3. Whether the proceedings initiated under Section 153C for AY 2015-2016 are barred by limitation, considering the date of recording satisfaction note and the threshold of escaped income required for extended limitation. 4. Whether additions under Section 69 of the Act for alleged 'on-money' paid in cash for purchase of flat in AY 2015-2016 and other years are justified based on incriminating material found during search and subsequent assessment proceedings. 5. Whether the Dispute Resolution Panel (DRP) was justified in enhancing income by Rs. 1,20,10,610/- under Section 69 for payments made through banking channels, in absence of incriminating material and despite evidence furnished by the assessee. 6. Whether the application of percentage completion method for spreading additions over multiple AYs by AO and DRP was appropriate in the facts of the case. 7. Whether the assessee was denied principles of natural justice, including adequate opportunity to cross-examine third-party witnesses and sufficient time to respond to DRP's enhancement notice. 8. Whether the documents and digital data relied upon (loose sheets, WhatsApp chats, images) constitute valid incriminating material to justify additions in the hands of the assessee. 9. Whether additions can be made beyond the scope of incriminating material found during search under Sections 153A/153C. 10. Whether the assessment order passed under Section 153C read with Section 144C(13) is barred by limitation considering the time taken during DRP proceedings and statutory time limits. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 & 2: Validity of Jurisdiction under Section 153C and Single Satisfaction Note for Multiple AYs - Legal Framework and Precedents: Section 153C empowers the AO to initiate assessment proceedings against a person other than the searched person only after recording satisfaction that the seized books, documents or assets have bearing on the determination of total income of such other person for relevant AYs. The satisfaction note must specify the incriminating material and the AYs to which it relates. Judicial precedents emphasize that mere receipt of material does not automatically confer jurisdiction; the AO must be satisfied that the material is likely to impact the income assessment for specific AYs. Supreme Court and High Court decisions have held that issuance of a single satisfaction note covering multiple AYs without year-wise application of mind and specification of incriminating material is illegal and vitiates the proceedings. - Court's Interpretation and Reasoning: The Court observed that the AO recorded a single satisfaction note dated 27.03.2023 covering AYs 2015-16 to 2021-22 without specifying incriminating material year-wise or explaining how the material relates to each AY. This reflects lack of application of mind and absence of jurisdiction for AY 2015-16. Reliance was placed on authoritative judgments holding that satisfaction must be recorded for each AY separately and the material must have a bearing on the income of the assessee for that year. - Key Evidence and Findings: The satisfaction note and related documents did not specify incriminating material for AY 2015-16 distinctly. The AO's assumption of jurisdiction appeared mechanical and without proper satisfaction. - Application of Law to Facts: The Court held that the jurisdiction assumed under Section 153C for AY 2015-16 is illegal and void ab initio due to defective satisfaction note. The issuance of a single satisfaction note for multiple AYs without year-wise reasons is impermissible. - Treatment of Competing Arguments: The Revenue's contention that the AO had jurisdiction over all years in the block was rejected based on settled law and judicial precedents. - Conclusion: The proceedings under Section 153C for AY 2015-16 are quashed for want of jurisdiction due to defective satisfaction note. Issue 3: Limitation Bar on Proceedings for AY 2015-16 - Legal Framework and Precedents: Section 153C read with Section 153A and Explanation 1 thereto prescribes limitation periods for assessment proceedings triggered by search. The relevant assessment year for the 'other person' is the year in which the incriminating material is received and satisfaction recorded, not the year of search on the searched person. Extended limitation beyond six years applies only if escaped income exceeds Rs. 50 lakhs. Supreme Court decisions clarify that the search year for the other person is the year of receipt of material and satisfaction note, and limitation must be computed accordingly. - Court's Interpretation and Reasoning: The Court noted that the satisfaction note was recorded on 27.03.2023 (AY 2023-24), and notices were issued the same day. The search at the premises of the searched person was in AY 2021-22, but for the 'other person', the relevant year is AY 2023-24. Since the alleged escaped income for AY 2015-16 was below Rs. 50 lakhs, extended limitation beyond six years could not be invoked. - Key Evidence and Findings: The escaped income alleged for AY 2015-16 was Rs. 27.50 lakhs as per satisfaction note, below the Rs. 50 lakh threshold. - Application of Law to Facts: Proceedings initiated for AY 2015-16 are barred by limitation and hence void. - Treatment of Competing Arguments: The Revenue's presumption that limitation should be computed from year of search was rejected following binding judicial precedents. - Conclusion: Assessment proceedings for AY 2015-16 are barred by limitation and are quashed. Issue 4 & 8: Validity of Additions for 'On-Money' Based on Incriminating Material (Loose Documents, WhatsApp Chats, etc.) - Legal Framework and Precedents: Additions under Section 69 require credible evidence of unexplained cash payments. Incriminating material must be tangible and corroborated. Loose sheets, images, WhatsApp chats, and third-party statements without corroboration are considered 'dumb documents' lacking evidentiary value. Judicial precedents hold that assessment cannot be based solely on third-party statements without opportunity for cross-examination and without corroborative evidence. - Court's Interpretation and Reasoning: The Court found that the AO and DRP relied heavily on an image found on a mobile phone, WhatsApp chats, and statements of third parties without providing opportunity for cross-examination or verifying the authenticity and relevance of such material. The documents were loose, not part of regular books of account, and lacked direct connection to the assessee's payments. - Key Evidence and Findings: The assessee furnished bank statements, agreement to sale, and other documents to prove payment through banking channels. No direct incriminating evidence was found linking the assessee to cash payments. - Application of Law to Facts: The Court held that additions based on such 'dumb documents' and third-party statements without cross-examination are unsustainable. - Treatment of Competing Arguments: The Revenue's reliance on digital data and third-party statements was rejected for lack of proper evidentiary foundation. - Conclusion: Additions based on alleged 'on-money' paid in cash without credible incriminating material are deleted. Issue 5 & 6: DRP's Enhancement of Income for Payments Made Through Banking Channels and Application of Percentage Completion Method - Legal Framework and Precedents: Enhancement of income by DRP under Section 144C(8) must be within the scope of incriminating material found during search. Additions cannot be made on post-search material or assumptions without evidence. Percentage completion method is generally applicable for revenue recognition in real estate but must be applied correctly and with reference to the facts. - Court's Interpretation and Reasoning: The DRP enhanced income by Rs. 1,20,10,610/- for payments made through banking channels, alleging non-explanation of source, despite assessee furnishing bank statements and registered sale deed evidencing source from Capital Gains Account Scheme. The DRP also directed spreading of additions across AYs based on percentage completion method, which the Court found inappropriate as payment dates were ascertainable and payments were completed by March 2015. - Key Evidence and Findings: The assessee's payments through banking channels were documented and source explained. The DRP gave only one day to respond to enhancement notice, which was inadequate. - Application of Law to Facts: The Court held that DRP's enhancement beyond incriminating material is illegal. The percentage completion method was misapplied, and additions should be confined to AY 2015-16, the year of payment completion. - Treatment of Competing Arguments: The Revenue's justification on non-submission of source was rejected due to evidence on record and procedural unfairness. - Conclusion: Enhancement of income for banking channel payments is quashed; additions to be restricted to AY 2015-16 without spreading over multiple years. Issue 7 & 9: Violation of Principles of Natural Justice and Scope of Additions Beyond Incriminating Material - Legal Framework and Precedents: Principles of natural justice require opportunity to cross-examine witnesses whose statements form basis of additions. DRP must provide reasonable time for submissions. Additions under Sections 153A/153C must be based solely on incriminating material found during search. Supreme Court rulings emphasize that no additions can be made on mere suspicion or post-search material without incriminating documents. - Court's Interpretation and Reasoning: The Court found that the assessee was given only one day to respond to DRP's enhancement notice, which is manifestly inadequate, especially for a non-resident Indian. Repeated requests for adjournment and submissions were ignored. No opportunity for cross-examination of third-party witnesses was granted. Additions made beyond incriminating material found during search are impermissible. - Key Evidence and Findings: Assessee submitted detailed bank statements, sale deed, and other documents. DRP ignored these and proceeded to enhance income arbitrarily. - Application of Law to Facts: The Court held that DRP's actions violated natural justice and exceeded its jurisdiction. - Treatment of Competing Arguments: Revenue's reliance on procedural compliance was rejected in view of lack of fair opportunity and statutory limitations. - Conclusion: Additions made beyond incriminating material and without fair hearing are quashed. Issue 10: Limitation on Assessment Order Passed Under Section 153C Read with Section 144C(13) - Legal Framework and Precedents: Section 153B of the Act prescribes time limits for completion of assessments. Sections 144C(4) and 144C(13) prescribe time limits for passing assessment orders after draft order acceptance or DRP directions respectively, but do not provide exclusion of time during DRP proceedings. Tribunal decisions hold that assessment orders passed beyond prescribed time limits without valid extension or exclusion are barred by limitation. - Court's Interpretation and Reasoning: The Court observed that the assessment order dated 24.01.2025 was passed beyond the statutory time limits considering the time taken for DRP proceedings and absence of any statutory exclusion. - Key Evidence and Findings: Timeline of notices, draft orders, DRP directions, and final assessment order showed delay beyond permissible period. - Application of Law to Facts: The Court held the assessment order is barred by limitation and therefore void. - Treatment of Competing Arguments: The Revenue did not file written submissions to counter limitation argument. - Conclusion: Assessment order under Section 153C read with Section 144C(13) is barred by limitation and quashed.