2025 (11) TMI 221 - AT - Income Tax

Action under ss.153A r.w.s.153C set aside for vague satisfaction note; AO must verify and follow due process

ITAT (Del AT) set aside the AO's action under ss.153A r.w.s.153C, holding the satisfaction note vague and insufficient to assume jurisdiction. While ... Assessment u/s 153A r.w.s. 153C - Validity of satisfaction note recorded by the AO - material found during the search or not? - HELD THAT:- As relying on case of DMG Finance Investment Private Limited [2024 (12) TMI 423 - ITAT DELHI] we are inclined to come to a conclusion that satisfaction note recorded by the AO is vague and not as per the provisions of section 153C of the Act in order to assume the jurisdiction. DR relied on the decision of K. Krishnamurthy [2025 (2) TMI 583 - SUPREME COURT] and we observe that the Hon’ble Supreme Court observed that the material found during the search at any place, whether at the premises of the searched person or third person are all considered to be found in the course of search. This is only to indicate the material found during the search and how it has to be treated. It does not mean that the AO can treat the same as incriminating material without following the due process of law as indicated u/s 153A r.w.s.153C in the case of material found during the search. It is the duty of AO to verify the documents found during the search, if it is related to the searched person, he has to record satisfaction even it is found from third person. Similarly if any material found with the searched person relating to other person, he has to forward the same to the AO of other person. AO of other person also has to follow the due process of law to record his satisfaction before proceeding to initiate the proceedings. Therefore, the case law relied by the DR is distinguishable. Therefore, we are inclined to allow the additional grounds raised by the assessee. ISSUES PRESENTED AND CONSIDERED 1. Whether initiation of reassessment proceedings under section 153C read with section 153A was valid where the assessment year was an unabated assessment year and the satisfaction note relied on documents seized from third-party premises that, on their face, were recorded in the assessee's books prior to search. 2. Whether the documents seized from third-party premises constituted 'incriminating material' for the purpose of invoking section 153C/153A such that the Assessing Officer could treat those documents as a basis to reopen assessment without examining their contents for direct evidence of escapement of income. 3. The extent to which inference, circumstantial evidence or a 'belief' formed by the Assessing Officer (including reliance on third-party investigations) can convert statutory/board-room records, blank transfer forms, minutes, affidavits and ROC/financial filings into incriminating material for search-assessment purposes. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Validity of invoking section 153C/153A for an unabated assessment year Legal framework: Section 153C permits reassessment of a person other than the one searched where documents or things seized in the course of a search relate to that other person; section 153A prescribes procedure for search-based assessments. For an unabated assessment year, jurisdictional requirements must be satisfied before reopening/reassessment. Precedent treatment: The Tribunal treated prior decisions that require meaningful satisfaction and connection between seized material and the income alleged to have escaped as applicable; decisions recognizing that material found during search at any place (searched person or third parties) can be 'found in the course of search' were noted but held not to obviate the need for proper application of section 153C/153A safeguards. Interpretation and reasoning: The Court examined the satisfaction note and found it vague and conclusory - it recorded seizure of documents relating to share capital but did not demonstrate how those documents were incriminating or how they revealed escapement of income. The fact that documents were found at a group corporate office and that the assessee had recorded the transactions in its books before search weighed against a mechanical application of section 153C. The Court emphasized that receipt of seized material by AO and mere presence of documents in third-party premises does not dispense with the duty to verify contents and to record a reasoned satisfaction as to incriminating nature. Ratio vs. Obiter: Ratio - initiation under section 153C/153A must be founded on a reasoned satisfaction showing that seized material, by its content, establishes or directly points to escapement of income of the person to be assessed; a vague satisfaction is insufficient. Obiter - observations distinguishing the wide meaning of 'found in course of search' as recognized in higher court decisions and clarifying its limited effect. Conclusion: The satisfaction note was inadequate; initiation of proceedings under section 153C/153A in respect of the unabated assessment year was held to be invalid to the extent challenged, and the additional legal ground attacking initiation was allowed. Issue 2 - Whether seized documents amounted to 'incriminating material' Legal framework: For search-based reassessment, seized material must be 'incriminating' in the sense that its contents either directly establish facts demonstrating escapement of income or furnish direct evidence enabling immediate conclusion of undisclosed income, without relying solely on inferential reasoning. Precedent treatment (followed/distinguished): The Court followed coordinate Tribunal authority distinguishing mere possession/RO C/statutory records from incriminating documents; it also distinguished decisions that treat wide amplitude of seized material as mandating reassessment without requiring content-based satisfaction. The Court relied on authorities holding that balance sheets, audited accounts, blank transfer forms, affidavits lacking particulars and ROC records are ordinarily not incriminating by themselves. Interpretation and reasoning: The Court reviewed the assessment order and found no passage where the AO examined the contents to show admissions, trails of funds, or other direct evidence. The AO's approach reversed the proper sequence - testing investor veracity first and then calling documents incriminating - whereas the proper test is whether seized material itself contains incriminating content. The Tribunal rejected reliance on inferences drawn from group linkages, common shareholders, or third-party statements without demonstrating a direct nexus in the seized documents. The Court emphasized that implicating or inculpatory circumstances do not automatically convert otherwise statutory/company records into incriminating material for section 153A/153C purposes. Ratio vs. Obiter: Ratio - seized documents constitute incriminating material only if their own contents directly support the fact in issue (e.g., admissions, documentary trail of undisclosed funds); circumstantial inferences or a backward-looking inquiry into investor credentials cannot substitute for such direct content. Obiter - commentary on examples of documents that are generally non-incriminating (statutory records, blank share transfer forms, ROC filings) absent particularized content. Conclusion: The seized documents did not, on their face, amount to incriminating material; the AO's reliance on them to reopen the assessment was unsustainable. Issue 3 - Role of belief, circumstantial evidence and reliance on third-party investigations Legal framework: An assessing officer's belief must be founded on reasons and evidence; assessments completed on the basis of belief without articulable, document-based findings do not meet the standard required for search-assessments. Circumstantial evidence may be relevant but requires a complete chain of direct evidence to sustain inferences. Precedent treatment: The Court distinguished authorities that permit considering material 'found in the course of search' from cases that require content-based incrimination; it accepted that statements recorded under section 132(4) or third-party investigatory findings cannot, without more, constitute incriminating material. Coordinate bench decisions rejecting assessment based purely on circumstantial inferences were followed. Interpretation and reasoning: The AO's 'belief' was held to be mere surmise because it consisted of questions posed by the AO, borrowed findings from other investigations, and reliance on circumstantial factors (common shareholders, group linkages) without establishing the necessary chain of direct evidence. The Tribunal held that while circumstantial evidence may be admissible, it cannot replace the requirement that seized material itself disclose incriminating facts; otherwise the safeguards of sections 153A/153C would be defeated. Ratio vs. Obiter: Ratio - a belief predicated on inference, conjecture or borrowed conclusions without documented, direct incriminating content is insufficient to treat statutory/third-party documents as incriminating; circumstantial evidence must be buttressed by direct evidentiary links. Obiter - explanatory remarks on the limits of using third-party probe material and section 132(4) statements as standalone incriminating material. Conclusion: The AO's reliance on belief and circumstantial reasoning (including third-party investigations) was inadequate to render the seized material incriminating; such reliance could not sustain the reassessment under section 153C/153A. OVERALL CONCLUSION The Court allowed the additional legal ground challenging initiation under section 153C/153A and set aside the initiation to the extent challenged, holding that the satisfaction note was vague, the seized documents were not incriminating on their face, and the Assessing Officer relied impermissibly on inferences and third-party investigations without establishing a direct evidentiary nexus; other grounds were kept open for adjudication.