2025 (8) TMI 953 - AT - Income Tax

Reassessment under s.153C invalid for single consolidated satisfaction note across years; s.69 additions deleted without corroboration

ITAT Chennai held the reassessment proceedings under s.153C invalid because the AO recorded a consolidated, non-year-specific satisfaction note for ... Assessment u/s 153C - validity of the satisfaction recorded by the AO for reopening the assessment of the assessee based on the incriminating material found during the search - principles relevant to Section 292C and third-party material Cash payments allegedly to have been made to the assessee, based on the seized pen drive - AR stated that the proceedings-initiated u/s.153C of the Act in the assessee’s case are without jurisdiction and liable to be quashed for the foundational failure to record a valid and separate satisfaction note for each assessment year sought to be reassessed HELD THAT:- It is a settled proposition in law that the satisfaction of the AO, as required u/s.153C(1) of the Act, must not only be contemporaneous and in writing, but must also be specifically relatable to each of the six assessment years proposed to be reopened. This view is further fortified by Super Malls Pvt. Ltd. [2020 (3) TMI 361 - SUPREME COURT] wherein it was laid down that the satisfaction contemplated u/s.153C of the Act is a sine qua non for the assumption of jurisdiction and must be recorded distinctly for each year. A failure to do so, strikes at the root of the assessment. Hon’ble Delhi High Court in Pepsi Foods Pvt. Ltd. [2014 (8) TMI 425 - DELHI HIGH COURT] and Calcutta Knitwears[2014 (4) TMI 33 - SUPREME COURT] have emphasized that the AO must demonstrate a live and direct nexus between the seized material and the relevant assessment year in respect of the “other person,” which cannot be presumed in the absence of year-specific satisfaction. In the present case, we find that a consolidated or omnibus satisfaction note encompassing multiple years without individualized reference to incriminating material for each year, fails to meet the jurisdictional mandate. Satisfaction note recorded is for common and undifferentiated across assessment years. There is no indication of any year-wise evaluation of material, nor is there any year-specific linkage between the seized documents and the income allegedly escaping assessment for each of the six years. Therefore, we cannot consider such a blanket satisfaction which is contrary to statutory requirements and judicial interpretation as a valid jurisdiction u/s.153C of the Act and hence in our considered view the entire proceeding which is based on such satisfaction note recorded is legally unsustainable and void ab initio. Addition of income made by the AO is based on loose sheets found in the house of a third party - We find that in the facts of the present case, the pen drive was not seized from the assessee, the person from whom it was seized, has not stated that the entry pertains to the assessee and the assessee has categorically denied any such transaction or receipt. There is no other corroborating evidence, no bank entry, cash flow trail, asset creation, or confirmation from payer. We concur with the arguments of the ld.AR in respect of the facts and circumstances of this case, wherein the material seized from the third parties are not corroborated with any other evidence or statement to prove that the undisclosed income was related to the assessee. This view of ours is fortified by the courts by holding consistently that the presumptions must be exercised cautiously and only in the presence of corroborative evidence. Revenue has failed to establish or to prove actual receipt or possession of the impugned amount. It merely raises a rebuttable presumption, which stands discharged once the assessee denies the transaction and the Revenue fails to corroborate it. In the current facts of the case the pen drive was seized from Mr. Badri Narayana Choudhary, but not from the assessee. Further we find that the pen drive contained vague references like 'Krishnan Sir – IT', but no full name, PAN, address, or direct reference to the assessee. The author of the pen drive has not confirmed that the entry pertains to the assessee and the assessee has categorically denied receiving any cash or being connected to such a transaction. Thus, in our considered view and following the decision of the Hon’ble Delhi high court, it could be inferred that the pen drive fails the test of belonging, relevance, and incrimination as set forth in Pepsi Foods (supra). On perusal of the present facts, the pen drive qualifies as a “dumb document” for the following reasons: 1. It was not seized from the assessee; 2. It was not confirmed by the person from whose premises it was seized; 3. It has no corroborating trail of cash receipt, deposit, asset creation, or expenditure. 4. It has been denied by the assessee and not supported by any third-party confirmation. We are of the considered view that the AO and that of the Ld.CIT(A) have erred in arriving the conclusion to bring the impugned amounts to tax and hence we are inclined to delete the addition made u/s.69 of the Act, since the addition is based on solely on unverified electronic entries, which is arbitrary, without foundation. Thus, the impugned addition made by the AO and confirmed by the ld.CIT(A) is based solely on an uncorroborated and unauthenticated digital entry found in a pen drive seized from a third party dehors of any further material / evidence brought on record by the revenue to support the additions made. Hence, the seized pen drive alleged as incriminating material and relied by the department is not supported by any statement, admission, or independent evidence linking the same to the assessee, is wholly untenable both in law and on facts. Appeal of assessee allowed. 1. ISSUES PRESENTED and CONSIDERED 1. Whether the Assessing Officer (AO) validly exercised jurisdiction under Section 153C of the Income Tax Act, 1961, given the requirement of recording separate and specific satisfaction notes for each assessment year prior to issuing notices. 2. Whether the satisfaction note recorded by the AO met the statutory and judicially mandated criteria, including year-wise evaluation of incriminating material linking the seized documents to the assessee's income for each assessment year. 3. Whether the addition of unexplained income under Section 69 of the Act, based solely on entries in a pen drive seized from a third party, is legally sustainable without corroborative evidence linking the entries to the assessee. 4. Whether the presumption under Section 292C of the Act applies to the assessee when the incriminating material was seized from a third party and not from the assessee's possession. 5. Whether the entries in the seized pen drive qualify as admissible evidence or are 'dumb documents' lacking evidentiary value due to absence of authorship, confirmation, or corroboration. 6. Whether principles of natural justice were violated by the AO in issuing notices with insufficient time to respond and passing orders without adequate opportunity to the assessee. 7. Whether the reliance on third-party statements and unverified electronic records, without independent corroboration, justifies additions to the assessee's income. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 & 2: Validity and sufficiency of satisfaction note under Section 153C - Legal Framework and Precedents: Section 153C mandates that before issuing a notice to a person other than the searched person, the AO must record a written satisfaction note specifying that the seized material belongs to or relates to the other person and has a bearing on that person's income for the relevant assessment year(s). Judicial precedents emphasize that such satisfaction must be contemporaneous, specific, and year-wise: Supreme Court in Super Malls Pvt. Ltd. v. PCIT: Satisfaction must be recorded distinctly for each assessment year; failure to do so vitiates the assessment. Delhi High Court in Pepsi Foods Pvt. Ltd. v. ACIT and Supreme Court in Calcutta Knitwears: AO must demonstrate a live and direct nexus between seized material and income of the other person for each year. Karnataka High Court in Sunil Kumar Sharma v. DCIT: Consolidated satisfaction notes covering multiple years without individualized reference are invalid. - Court's Interpretation and Reasoning: The satisfaction note in the present case was omnibus, covering multiple assessment years without year-wise evaluation or specific linkage of incriminating material to each year. It lacked detailed description of seized documents, did not specify distinct satisfaction for each assessment year, and failed to demonstrate application of mind. The AO's note was vague and mechanical. - Conclusions: The Court held that such a blanket satisfaction note does not meet statutory requirements and judicial standards, rendering the jurisdiction under Section 153C invalid and the entire proceeding void ab initio. Issue 3 & 5: Admissibility and evidentiary value of pen drive entries as basis for addition under Section 69 - Legal Framework and Precedents: Section 69 requires the AO to establish possession of unexplained money by the assessee, absence of recording in books, and failure to offer satisfactory explanation. Section 292C creates a rebuttable presumption about documents found in possession of the person searched but does not extend to third parties. Supreme Court in Common Cause v. Union of India and CBI v. V.C. Shukla: Loose sheets or data files not maintained in the regular course of business and not confirmed by the author are 'dumb documents' and inadmissible as evidence. ITAT decisions in Layer Exports Pvt. Ltd. v. ACIT, B.S. Yediyurappa v. ACIT, Anand Jaikumar Jain v. ACIT, and Manoj Madanlal Chhajed v. ACIT: Entries in third-party electronic records without corroboration or confirmation cannot sustain additions. - Court's Interpretation and Reasoning: The pen drive entries were seized from a third party, lacked specific identification of the assessee, and were not confirmed by the custodian or author. The assessee denied receipt of any cash payments. There was no corroborative evidence such as bank transactions, asset creation, or third-party confirmation linking the entries to the assessee. The entries were vague, referring only to 'Krishnan Sir' without full name or address, and thus failed the test of belonging and incrimination. - Treatment of Competing Arguments: The Revenue relied on the statement of the custodian, which only acknowledged the assessee's professional consultancy role unrelated to cash payments. The Revenue's attempt to extrapolate this limited admission to support the pen drive entries was rejected as speculative and unsubstantiated. The Court emphasized the doctrine of whole truth, requiring that statements be considered in entirety rather than selectively. - Conclusions: The pen drive entries were held to be 'dumb documents' without evidentiary value. The addition under Section 69 based solely on such uncorroborated electronic entries was arbitrary and unsustainable. The presumption under Section 292C did not apply to the assessee, and the Revenue failed to discharge its burden of proof. Issue 4: Applicability of presumption under Section 292C to third-party seized material - Legal Framework and Precedents: Section 292C applies only to the person from whom the material is seized, creating a rebuttable presumption that the documents belong to that person and contents are true. No presumption arises against a third party absent independent evidence linking the material to them. - Court's Interpretation and Reasoning: The pen drive was seized from Mr. Badri Narayana Choudhary Kota, not from the assessee. The Revenue failed to produce independent material establishing nexus between the pen drive contents and the assessee. The Court noted that even if the presumption applied, it is rebuttable and stands discharged once the assessee denies the transaction and the Revenue fails to corroborate. - Conclusions: The presumption under Section 292C did not operate against the assessee, and the Revenue's reliance on it was misplaced. Issue 6: Compliance with principles of natural justice in issuing notices and passing orders - Legal Framework: Principles of natural justice require that a reasonable opportunity be given to the assessee to respond to notices and to present their case before adverse orders are passed. - Court's Interpretation and Reasoning: The AO issued a notice under Section 142(1) demanding information within one day and passed order shortly thereafter without affording adequate opportunity to the assessee to justify or prove his claims. Such action was held to be arbitrary and violative of natural justice. - Conclusions: The AO's and CIT(A)'s actions in this regard were improper and contributed to the invalidity of the assessment proceedings. Issue 7: Reliance on third-party statements and unverified electronic records for additions - Legal Framework and Precedents: Judicial decisions consistently hold that additions cannot be based solely on uncorroborated third-party documents or statements, especially when the assessee denies the transactions and there is no independent evidence. - Court's Interpretation and Reasoning: The statements of the custodian did not confirm the entries as relating to the assessee. The Revenue's reliance on such statements and the pen drive entries without further corroboration was rejected as speculative and insufficient. - Conclusions: Additions based solely on such material are unsustainable and liable to be deleted. 3. OVERALL CONCLUSIONS 1. The AO's satisfaction note under Section 153C was a consolidated and undifferentiated note lacking year-wise specific satisfaction, rendering the jurisdiction invalid and the proceedings void ab initio. 2. The pen drive entries seized from a third party were 'dumb documents' without authorship, confirmation, or corroboration, and thus inadmissible as evidence to sustain additions under Section 69. 3. The presumption under Section 292C applies only to the person from whom material is seized and does not extend to the assessee absent independent evidence. 4. The Revenue failed to prove possession or receipt of unexplained money by the assessee, and the additions made were arbitrary and without foundation. 5. The AO and CIT(A) violated principles of natural justice by issuing notices with unreasonable time and passing orders without adequate opportunity to the assessee. 6. The additions based solely on unverified third-party digital entries and uncorroborated statements are legally unsustainable and liable to be deleted in full. 7. The appeals are allowed, and the additions under Section 69 are deleted for all assessment years 2015-16 to 2019-20.