2025 (10) TMI 1097 - AT - Income Tax

Assessee's s.153C jurisdiction void where AO misattributed seized WhatsApp, used consolidated satisfaction note and third-party data

ITAT held the AO's assumption of jurisdiction under s.153C void. The satisfaction note forwarded by the AO of the searched person misattributed seized ... Assessment order passed u/s 153C r.w.s. 153A - WhatsApp chats relied upon - satisfaction note recorded by the AO of the assessee herein or not? - AO of the assessee herein had recorded consolidated satisfaction note for the Assessment Years 2015-16 to 2021-22 HELD THAT:- It is pertinent to note that the assessing officer of the searched person while recording the satisfaction note for forwarding of seized material to the assessing officer of the assessee, had mentioned that the seized documents pertain to Gulshan Homes and Infrastructure Private Limited (assessee herein) which was found from the mobile of Shri Parveen Kumar Jain. Similarly, in the proforma for recording of satisfaction about seized assets belonging to the person other than the person searched, the AO of Shri Parveen Kumar Jain had categorically stated that from the iPhone seized from Shri Parveen Kumar Jain, the contents written thereon pertain to Gulshan Homes and Infrastructure Private Limited reflecting unaccounted receipts on sale of property / advance and unexplained interest expenses as cash advance. In the said proforma, the AO of the searched person had also observed that Shri Parveen Kumar Jain had helped many persons including renowned builders in getting cash loans, purchase of property partly in cash and partly through cheque which was evident from the WhatsApp chat and images found in his mobile. It is pertinent to note that the AO of the searched person had recorded the satisfaction by making factual observations because only Gulshan Ji was mentioned in the WhatsApp chat and Gulshan Homes and Infrastructure Private Limited (assessee herein) name does not figure anywhere in the seized documents from iPhone mobile of Shri Parveen Kumar Jain. Accordingly, it could be seen that the AO of the searched person had indeed recorded factually incorrect satisfaction note while forwarding the same to the Learned AO of the assessee herein. This wrong satisfaction note was taken note by the Learned AO of the assessee herein by stating that he had verified and examined the same with the documents allegedly relatable to the assessee herein and had assumed jurisdiction under section 153C of the Act. Whether recording of consolidated satisfaction note for various assessment years would prove fatal to the assumption of jurisdiction of the Learned AO and consequential framing of assessments under section 153C of the Act was subject matter of consideration by the Hon’ble Karnataka High Court in the case of DCIT vs Sunil Kumar Sharma [2024 (2) TMI 116 - KARNATAKA HIGH COURT] held satisfaction note is required to be recorded under section 153C of the IT Act for each Assessment Year and in the impugned proceedings, a consolidated satisfaction note has been recorded for different Assessment Years, which also vitiates the entire assessment proceedings. AO of the assessee was only required to be satisfied vis-a vis the seized material handed over by the AO of the searched person without any reference to any other information or document even if in his possession received from any source. The satisfaction note based upon the appraisal report, data on Insight Portal regarding TDS of third parties, statements of Shri Gulshan Nagpal etc and therefore, is legally untenable and void ab initio. Moreover, this is not a satisfaction note to initiate any proceedings under section 153C of the Act but conclusions regarding undisclosed income drawn in a firm language. AO had invalidly assumed jurisdiction under section 153C of the Act for more than one reason. ISSUES PRESENTED AND CONSIDERED 1. Whether the Assessing Officer (AO) validly assumed jurisdiction under section 153C r.w.s. 153A of the Income-tax Act on the basis of seized material recovered from premises of a third person where the seized material did not, on its face, mention the assessee and merely contained references (e.g., 'Gulshan') without identifying the assessee. 2. Whether WhatsApp chats and handwritten sheets seized from the searched person's mobile, absent direct reference to the assessee, constitute adequate incriminating material to initiate proceedings under section 153C. 3. Whether the satisfaction required under section 153C may be based on post-seizure enquiries, appraisal reports or other external material (including data from investigation units, Insight portal/TDS checks and statements) beyond the seized material as found at the searched person's premises. 4. Whether a consolidated/combined satisfaction note recording a single satisfaction for multiple assessment years (2015-16 to 2021-22) vitiates the jurisdictional satisfaction under section 153C. 5. Whether the AO of the searched person may, in the satisfaction note, go beyond identifying that the document/asset belongs to another person and record factual conclusions/opinions (including borrowed satisfactions) that pre-empt the AO of the non-searched person. 6. Whether failure to permit cross-examination of persons from whom seized material was taken (or whose recorded statements were relied upon) voids the assessment framed under section 153C. 7. Ancillary: validity of invoking sections 69A/69C/115BBE on the basis of the seized material (treated as academic after quashing jurisdiction in this judgment). ISSUE-WISE DETAILED ANALYSIS Issue 1 - Validity of assumption of jurisdiction under section 153C where seized material does not name the assessee Legal framework: Section 153C empowers the AO of a person other than the searched person to assess where books/accounts/documents/assets seized from the searched person 'belong to' or 'pertain to' that other person; satisfaction must be reached that the seized material is likely to have a bearing on determination of total income of the other person. Precedent treatment: The Tribunal relied on High Court and Supreme Court pronouncements (e.g., Saksham Commodities/ITO and RRJ Securities principles reproduced) holding that the AO of the searched person is required only to be satisfied that the documents pertain to another person and must forward documents; the jurisdictional AO of the non-searched person must thereafter form his own satisfaction regarding bearing on income for specific AY(s). The Tribunal also relied on the principle in SS Aviation Ltd that the AO of the searched person cannot go beyond forwarding material. Interpretation and reasoning: The seized WhatsApp chats and handwritten interest sheet did not mention the assessee's name; references to 'Gulshan' do not conclusively identify the assessee. The searched person, when confronted, did not state that the entries related to the assessee. The AO of the searched person recorded factual findings beyond mere identification, and the AO of the non-searched person relied on the forwarded material plus external enquiries to assume jurisdiction. The Tribunal emphasised that presumption under section 132(4A) read with section 292C applies to the searched person and must be addressed by him first; the AO of the searched person should have exhausted the process of confronting the searched person and securing cogent evidence before forwarding a finding that material belongs to another person. Ratio vs. Obiter: Ratio - jurisdiction under section 153C cannot be assumed where seized material fails to establish, on its face, that it belongs/pertains to the other person and where the forwarding AO has not confined himself to permissible identification; AO of searched person must not record extended factual conclusions which preclude objective consideration by AO of the non-searched person. Obiter - ancillary commentary on evidentiary weight of particular entries. Conclusion: The AO's assumption of jurisdiction under section 153C was invalid as the seized material did not, by itself, establish that it pertained to the assessee; satisfaction was therefore void ab initio and assessments under section 153C were quashed. Issue 2 - Reliance on WhatsApp chats and handwritten sheets as sufficient incriminating material Legal framework: Evidence seized under section 132 must, for the purpose of invoking section 153C, be such that it is likely to have a bearing on determination of total income; secondary or ambiguous references are insufficient. Precedent treatment: Courts have recognised electronic communications (e.g., WhatsApp) as admissible evidence, but admissibility does not equate to sufficiency for jurisdictional satisfaction under section 153C; prior decisions require identification and nexus to specific AY(s). Interpretation and reasoning: The WhatsApp chats referenced only a personal name ('Gulshan ji') and did not clarify the nature, amount, mode (cash/bank) or recipient entity; the searched person's statement was equivocal. The handwritten 'Interest Account' listed names overlapping with lenders in the assessee's books but did not identify the assessee as recipient of cash. Correlation relied upon by the AO involved inference and external checks rather than a direct nexus arising from the seized material alone. Ratio vs. Obiter: Ratio - ambiguous electronic chats and generalized handwritten entries, lacking direct attribution, cannot by themselves sustain jurisdiction under section 153C. Obiter - observations on how corroboration by third-party TDS data was used in the factual matrix. Conclusion: WhatsApp chats and the handwritten sheet, without direct mention of the assessee or clear nexus, did not constitute adequate incriminating material to validly initiate proceedings under section 153C. Issue 3 - Permissibility of basing section 153C satisfaction on post-seizure enquiries, appraisal reports and external material Legal framework: The AO of the searched person is entitled to forward seized material; he is not empowered to undertake broader enquiries or base satisfaction on borrowed opinions. The AO of the non-searched person must form his own satisfaction based on the seized material in his possession, but satisfaction must relate to specific AY(s) likely affected. Precedent treatment: The Tribunal followed High Court rulings which prohibit 'borrowed satisfactions' and require that the AO of the non-searched person exercise independent judgment; authorities (including upholding by Supreme Court in related contexts) require linkage between material and specific AY(s). Interpretation and reasoning: The satisfaction note of the AO of the non-searched person explicitly copied and relied upon the appraisal report, Insight/TDS checks and investigation wing material; initiation of proceedings was therefore based on material beyond what was seized and forwarded. The Tribunal held that the statutory scheme confines the genesis of section 153C proceedings to the seized material 'as it was detected' and forbids issuance of notice and abatement based on extended enquiry or pre-judged conclusions. Ratio vs. Obiter: Ratio - satisfaction under section 153C must be grounded in the seized material as found; reliance on appraisal reports and post-seizure enquiries as the basis for initiation is impermissible and renders satisfaction void. Obiter - discussion on the sequence of events contemplated by section 153C. Conclusion: The satisfaction recorded based on post-seizure enquiries and appraisal reports constituted a borrowed satisfaction and was legally untenable; proceedings initiated thereon were void. Issue 4 - Validity of consolidated satisfaction note for multiple assessment years Legal framework: Section 153C contemplates that satisfaction relate to specific assessment years likely to be impacted; satisfaction must identify the AYs to which the material may relate. Precedent treatment: The Tribunal relied on Karnataka High Court authority (DCIT v. Sunil Kumar Sharma) and the subsequent dismissal of SLP by Supreme Court which held consolidated satisfaction notes for different AYs vitiate proceedings; principle affirmed that satisfaction must be recorded year-wise. Interpretation and reasoning: The AO recorded a single consolidated satisfaction for AYs 2015-16 to 2021-22 without year-wise identification of how the seized material bore on each year. This approach contravened the requirement to identify the years the seized material was likely to affect and thus mechanically expanded jurisdiction across multiple years. Ratio vs. Obiter: Ratio - consolidated satisfaction note for multiple AYs vitiates the jurisdictional satisfaction under section 153C. Obiter - linkage to the statutory concept of 'relevant assessment year' and abatement mechanics. Conclusion: Consolidated satisfaction for multiple AYs was invalid; recording of such satisfaction vitiated the assumption of jurisdiction under section 153C. Issue 5 - Impermissibility of factual conclusions and prejudgment by AO of searched person; effect of borrowed satisfaction Legal framework: AO of searched person must forward seized documents/assets; he should not record extended factual findings or opinions that preempt the AO of the non-searched person. Borrowed satisfaction is impermissible. Precedent treatment: Jurisprudence cited (including SS Aviation, Saksham) condemns use of appraisal/investigation reports as basis for satisfaction and rejects pre-emptive conclusions in forwarding notes. Interpretation and reasoning: The AO of the searched person recorded statements asserting that seized material pertained to the assessee and articulated observations about undisclosed receipts and cash advances, thereby prejudging the matter and creating a 'borrowed' satisfaction. The Tribunal found that such conduct blocked objective assessment by the AO of the non-searched person and exceeded statutory mandate. Ratio vs. Obiter: Ratio - forwarding AO must restrain from factual conclusions beyond identification; any such prejudgment constitutes borrowed satisfaction and is bad in law. Obiter - procedural consequences when forwarding AO includes investigative findings. Conclusion: The forwarded satisfaction was factually incorrect and prejudicial; the AO's overreach contributed to invalid assumption of jurisdiction. Issue 6 - Failure to allow cross-examination of deponents whose statements/seized material were relied upon Legal framework: Principles of fair procedure require that an assessee be afforded opportunity to test adverse material and to cross-examine witnesses in appropriate circumstances; however, procedural relief depends on whether jurisdictional defect is established. Precedent treatment: Tribunal noted the assessee's request for cross-examination and the non-attendance of summoned witnesses; but considered that once jurisdiction under section 153C was held invalid, the merits including cross-examination became academic. Interpretation and reasoning: The Tribunal did not adjudicate this ground on merits because the primary jurisdictional defects rendered the assessment void ab initio; accordingly, issues on cross-examination and on the substantive additions were left open and not decided. Ratio vs. Obiter: Obiter in this judgment - failure to allow cross-examination noted but not decided on merits due to quashing of assessment for jurisdictional reasons. Conclusion: Ground concerning denial of cross-examination not adjudicated as assessments were quashed on jurisdictional grounds; matter left open without opinion. Final Disposition and Consequence The Court held that the combined legal defects - absence of direct nexus in the seized material to the assessee, reliance on WhatsApp chats and handwritten sheets that did not identify the assessee, use of post-seizure enquiries and appraisal reports (borrowed satisfaction), and recording of a consolidated satisfaction for multiple AYs - rendered the satisfaction and consequent assessments under section 153C void ab initio. Grounds challenging jurisdictional validity (including grounds 1,2,3,4,5,8 & 9) were allowed; since the assessment was quashed, other grounds on merits (including additions under sections 69A/69C) were held to be academic and left undecided.