2025 (9) TMI 1626 - AT - Income Tax

Proceedings under Section 153C invalid where AO's recorded satisfaction in searched person's file not placed; assessment under s.143(3) quashed

ITAT held that initiation of proceedings under s.153C was invalid because the AO's recorded satisfaction in the searched person's case-a precondition for ... Initiation of proceedings in the name of the assessee u/s 153C - documents found and seized from the possession of the 3rd party in whose case searched action was carried out - satisfaction of the AO of such person is the pre-condition for initiating the proceedings in the hands of the assessee u/s 153C - HELD THAT:- Sole basis for the initiating of proceedings in the name of the assessee u/s 153C was based on the documents found and seized from the possession of the 3rd party in whose case searched action was carried out, therefore, the satisfaction of the AO of such person is the pre-condition for initiating the proceedings in the hands of the assessee u/s 153C of the Act. Since, this process has not been followed in the case of the assessee as the assessee has demonstrated that Revenue has failed to bring on record the satisfaction note of the AO of the person searched despite of repeated requests, therefore, in our considered view, the proceedings initiated u/s 153C of the Act in the case of the assessee are invalid and, thus, consequent order passed is quashed. This view is supported by the above referred Circular of the CBDT wherein CBDT observed that all the pending litigation with regard to recording of satisfaction note under section 158BD/153C should be withdrawn/not pressed if it does not meet the guideline laid down in the case of M/s Culcutta Knitwears [2014 (4) TMI 33 - SUPREME COURT] in our considered opinion initiation of proceedings u/s 153C in the case of the assessee is invalid and accordingly the consequent order passed u/s 153C r.w.s. 143(3) of the Act is hereby quashed. Assessee appeal allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether the Tribunal should condone a 64-day delay in filing appeals where the appellant relied on a bona fide belief that no final order had been passed by the lower authority and had actively participated in appellate proceedings. 2. Whether initiation of assessment proceedings under section 153C (provisions pari materia to section 158BD) is valid in the absence of a satisfaction note recorded by the Assessing Officer of the searched person confirming that the documents seized belonged to the other person. 3. Whether a satisfaction note, relied upon to initiate proceedings under section 153C, may lawfully include documents that were not seized during the search of the searched person (e.g., documents seized earlier during a survey of a different person), and whether inclusion of such documents vitiates the initiation of proceedings under section 153C. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Condonation of delay in filing appeals Legal framework: Proceedings under the Income-tax Act permit filing appeals within prescribed periods; tribunals exercise discretion to condone delay upon furnishing sufficient cause and demonstrating bona fides. Precedent treatment: The Tribunal considered the facts of active participation in appellate proceedings, representation by counsel, and a plausible explanation that the appellant was under the bona fide impression that no final order had been passed. Interpretation and reasoning: The Tribunal examined the affidavit and record showing counsel's submissions before the lower authority on two dates and the appellant's subsequent discovery on the e-filing portal that an order had been uploaded. The Tribunal found no mala fide intention, continuous engagement with the appellate process, and a plausible reliance on the administrative conduct of the lower authority as sufficient cause. Ratio vs. Obiter: Ratio - where the delay arises from a bona fide and demonstrable administrative misconception coupled with active participation in proceedings, the Tribunal may condone delay in the interest of justice. This is an applied exercise of discretion rather than a broad precedent. Conclusion: Delay of 64 days was condoned; appeals admitted for adjudication on merits. Issue 2 - Requirement of satisfaction note for valid initiation of proceedings under section 153C Legal framework: Section 153C permits assessment of a person other than the searched person on documents found during search of a third party, but initiation is conditional on recording the satisfaction that the seized papers belong to that other person. The Tribunal treated provisions of section 153C as substantially similar/pari materia to section 158BD and applied the Supreme Court's guidance on recording satisfaction. Precedent treatment (followed): The Tribunal followed the Supreme Court's decision (referred to as M/s Calcutta Knitwears) which held that recording of a satisfaction note is a prerequisite and must be prepared by the AO of the searched person before transmission of records to the AO having jurisdiction over the other person. The Tribunal also relied on CBDT Circular No.24/2015 which reiterates and directs strict compliance with that judgment and treats section 153C as governed by the same guidelines. Interpretation and reasoning: The Tribunal examined the assessment record and noted the absence of any satisfaction note recorded by the AO of the searched person on the file produced to the assessee, despite repeated requests. The Tribunal emphasized the sequential and pre-condition nature of the satisfaction recording: (a) satisfaction must be recorded by the AO of the searched person that documents belong to the other person, (b) documents are then transferred, and (c) the receiving AO must then record satisfaction before initiating proceedings under section 153C. The Tribunal held that in the absence of the searched-person AO's satisfaction being on record, the statutory pre-condition was not complied with. Ratio vs. Obiter: Ratio - initiation of proceedings under section 153C without the prescribed satisfaction note of the AO of the searched person is invalid; compliance with the Supreme Court's prescription and CBDT circular is mandatory. This forms the operative ratio for quashing assessments founded solely on documents from a search of a third party where no such satisfaction is recorded. Conclusion: Proceedings initiated under section 153C were invalid and the assessment order passed thereunder was quashed; ground challenging validity (ground No.1) was allowed. Issue 3 - Inclusion of documents not seized during the search of the searched person (use of survey/other papers) in the satisfaction note and its effect on section 153C proceedings Legal framework: The scope of section 153C proceedings is tied to documents found and seized from the searched person; satisfaction must be in respect of papers actually found in the possession of the searched person and shown to belong to the other person. Precedent treatment (followed/distinguished): The Tribunal applied the Calcutta Knitwears framework and CBDT circular to the factual matrix. It treated as impermissible any extension of the satisfaction note to include papers not found during the search of the searched person. Interpretation and reasoning: The Tribunal noted that the satisfaction note relied upon in this case referred to a loose paper (page no.181 of Annexure LP) which was impounded earlier during a survey of a different person and was not part of the seized papers from the searched person. The Tribunal found that the assessing officer's satisfaction purportedly extended to documents seized on an earlier date from another person, thereby enlarging the scope of the satisfaction beyond what the statute contemplates. The Tribunal observed that such practice violates the procedural strictures and the rationale of the Supreme Court and CBDT guidance, and undermines the prerequisite nature of the satisfaction requirement. Ratio vs. Obiter: Ratio - inclusion of documents not seized in the searched person's search (e.g., survey documents seized earlier from another person) in the satisfaction note vitiates the statutory prerequisite and renders initiation under section 153C invalid. This is an applied legal principle based on mandatory procedural compliance. Conclusion: Where the satisfaction note extends to papers not seized during the search of the searched person, the initiation of proceedings under section 153C is invalid; the assessment based on such a note is quashed. Issue 4 - Consequences for other grounds when primary legal defect succeeds Legal framework: If the primary legal defect (invalid initiation of proceedings) disposes of the entire assessment, subsidiary challenges to additions, evidentiary issues and procedural complaints become academic. Interpretation and reasoning: Having quashed the assessment on the foundational ground of invalid initiation under section 153C, the Tribunal declined to adjudicate the remaining grounds (relating to section 69A additions, reliance on co-accused statements, denial of cross-examination, confrontation of documents, and alleged presumptions) as academic. Ratio vs. Obiter: Ratio - where the foundational jurisdictional defect nullifies the assessment, secondary issues need not be adjudicated; they are rendered academic pending any lawful reassessment founded on proper procedure. Conclusion: Other grounds were not adjudicated as they became academic following quashal of the assessment for failure to comply with section 153C prerequisites. Overall Disposition On the Tribunal's application of Supreme Court guidance and CBDT directions, proceedings initiated under section 153C that lack the required satisfaction note by the AO of the searched person, or that rely on documents not seized from that searched person, are invalid; the assessment orders founded on such proceedings are quashed. The Tribunal condoned the appeal filing delay on bona fide grounds and applied the same reasoning mutatis mutandis to identical assessment years.