s.153C proceedings quashed for lack of independent satisfaction; carbon copy note held invalid, assessee's appeal allowed

ITAT Delhi-AT allowed the assessee's appeal by holding that the initiation of proceedings under s.153C was invalid. The AO of the assessee had not recorded an independent, cogent satisfaction based on application of mind to the material received from the AO of the searched person, but had merely reproduced the latter's satisfaction note. Relying on binding HC precedent, the Tribunal held that such "carbon copy" satisfaction does not meet the statutory requirement under s.153C. Consequently, the initiation of proceedings under s.153C and the resultant assessment order were held to be bad in law and were quashed, thereby allowing the assessee's legal grounds.

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1. ISSUES PRESENTED AND CONSIDERED

1.1 Whether the jurisdictional pre-conditions for initiation of proceedings under section 153C of the Income-tax Act, 1961 were satisfied, specifically regarding independent and proper recording of "satisfaction" by the Assessing Officer having jurisdiction over the assessee for the assessment years 2018-19, 2019-20 and 2020-21.

2. ISSUE-WISE DETAILED ANALYSIS

2.1 Jurisdictional validity of proceedings under section 153C - recording of satisfaction by Assessing Officer of the assessee

(a) Legal framework as discussed

2.1.1 The Tribunal reproduced and referred to section 153C of the Act, emphasising that:

- The Assessing Officer of the searched person must be satisfied that seized money, bullion, jewellery, valuable article, books of account or documents belong to / pertain to / relate to a person other than the person searched.

- Such seized material is then to be handed over to the Assessing Officer having jurisdiction over the "other person".

- That Assessing Officer must, in turn, be satisfied that the books, documents or assets seized have a bearing on the determination of the total income of such other person for the relevant assessment years, and only thereafter proceed in accordance with section 153A.

2.1.2 The Tribunal relied on judicial precedents laying down that recording of satisfaction is a jurisdictional and mandatory requirement, and that the satisfaction must: (i) reflect independent application of mind by the Assessing Officer of the "other person"; (ii) identify that the seized material belongs to / pertains to such other person; and (iii) indicate how such material has a bearing on determination of total income, generally on a year-wise basis. The authorities referred to and applied included:

- Canyon Financial Services Ltd. v. ITO (Delhi High Court) - holding that where the satisfaction note of the Assessing Officer of the assessee is a "carbon copy" of the satisfaction of the Assessing Officer of the searched person, the jurisdictional requirement under section 153C is not met.

- Saksham Commodities Ltd. (Delhi High Court) - emphasising that section 153C is concerned with material that "has a bearing on the determination of the total income of such other person" and that the Assessing Officer must be satisfied that the material could potentially impact the determination of total income; mechanical reopening for all years is not justified.

- Rajiv Aggarwal v. ACIT (ITAT Delhi) - holding that where satisfaction notes of the Assessing Officer of the searched person and of the "other person" are identically worded, there is no independent application of mind; satisfaction must specify the seized material for each assessment year and its impact on income.

(b) Interpretation and reasoning

2.1.3 The assessee contended that no proper satisfaction was recorded by the Assessing Officer of the assessee; initially, no such satisfaction was found in the assessment folder and no copy was supplied. Subsequently, the Revenue produced a satisfaction note dated 22.08.2022, stated to have been recorded by the jurisdictional Assessing Officer (ITO, Ward-59(6), Delhi), and relied on this to justify initiation of proceedings under section 153C.

2.1.4 On examination of the satisfaction note of the Assessing Officer of the searched person and that of the Assessing Officer of the assessee, the Tribunal found that:

- Paragraphs 5 and 6 of the satisfaction note of the Assessing Officer of the searched person and paragraphs 1 and 2 of the satisfaction note of the Assessing Officer of the assessee were "verbatim copy".

- In the satisfaction note of the Assessing Officer of the assessee, there was no independent recording that the seized documents contained entries which had a direct bearing on the determination of the assessee's income on a year-to-year basis.

- The Assessing Officer of the assessee had merely reproduced the satisfaction note of the Assessing Officer of the searched person, without setting out his own reasons or an independent analysis of the material or its impact on the assessee's income.

2.1.5 The Tribunal noted that the satisfaction recorded by the Assessing Officer of the assessee mentioned unaccounted receipts and payments aggregating to a composite figure, but did not:

- Segregate or correlate the alleged income to individual assessment years; or

- Demonstrate how the seized documents had a bearing on the determination of total income of the assessee for each of the years sought to be assessed under section 153C.

2.1.6 Applying the ratio of Canyon Financial Services Ltd., the Tribunal held that where the satisfaction note of the Assessing Officer of the assessee is a "carbon copy" of that of the Assessing Officer of the searched person, the jurisdictional requirement of independent satisfaction under section 153C(1) is not fulfilled. The Tribunal also followed Saksham Commodities Ltd. to reiterate that the phrase "have a bearing on the determination of the total income of such other person" must be given primacy, and the absence of such specific satisfaction vitiates the proceedings.

2.1.7 The Tribunal further applied the reasoning of the co-ordinate bench in Rajiv Aggarwal that recording of satisfaction under section 153C is not a mere formality and must necessarily exhibit:

- Examination of seized material by the jurisdictional Assessing Officer of the "other person";

- Identification of material belonging to / pertaining to / relating to such other person; and

- The basis on which the Assessing Officer concluded that such material has a bearing on determination of total income for each year sought to be reopened.

2.1.8 On this analysis, the Tribunal concluded that the satisfaction note recorded by the Assessing Officer of the assessee was mechanical and lacked independent application of mind, rendering the assumption of jurisdiction under section 153C invalid.

(c) Conclusions

2.1.9 For assessment year 2018-19, the Tribunal held that:

- The Assessing Officer of the assessee had not recorded proper and independent satisfaction as mandated by section 153C.

- The satisfaction note was merely a verbatim reproduction of the satisfaction of the Assessing Officer of the searched person and did not state how the seized material had a bearing on determination of the assessee's income on a year-wise basis.

- Consequently, the initiation of proceedings under section 153C was held to be bad in law, and the consequent assessment order was quashed.

2.1.10 For assessment years 2019-20 and 2020-21, the Tribunal noted that:

- The facts and the basis for initiation of proceedings under section 153C were identical to assessment year 2018-19, including reliance on a common satisfaction note.

- Applying, mutatis mutandis, the reasoning and findings recorded for assessment year 2018-19, the Tribunal held that the initiation of proceedings under section 153C for these years was also invalid for want of proper satisfaction.

- Accordingly, for both years, the proceedings under section 153C were quashed and the legal grounds challenging jurisdiction (grounds 1 to 3) were allowed.

2.1.11 In view of the above jurisdictional defect under section 153C, the Tribunal allowed the assessee's appeals for all three assessment years and, by necessary implication, did not adjudicate the remaining grounds on merits (including additions/disallowances and other technical challenges), as the assessments themselves were held to be non est.

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