2026 (2) TMI 641 - AT - Income Tax

Reassessment based on third party seized documents and borrowed satisfaction invalidated, with consequential penalty deleted for the assessee

Reopening an assessment under section 148 read with section 147 based solely on entries in documents seized from a third party, without an independent ... Reopening of assessment - reasons to believe OR reasons to suspect - entries found noted in the loose paper /documents - Borrowed satisfaction or independent application of mind - sole basis for initiating the proceedings is alleged entries found noted in some loose papers impounded during the course of survey in the case of third party - HELD THAT:- Hon’ble Jurisdictional Delhi High Court in the case of PCIT vs Meenakshi Overseas [2017 (5) TMI 1428 - DELHI HIGH COURT] has held that proceedings u/s 148 is bad in law since the AO has quashed the reassessment proceedings initiated on the basis of borrowed satisfaction. Hon’ble Jurisdictional Delhi High Court in the case of CIT vs Anil Khandelwal [2015 (5) TMI 86 - DELHI HIGH COURT] has held that the presumption u/s 132(4A) & 292C of the Act is available only in the case of the person from whose possession and control, the documents are found and it is not available in respect of the third party. Hon’ble Supreme Court in the case of CBI vs V.C.Shukla [1998 (3) TMI 675 - SUPREME COURT] has held that the documents were found from the possession of the third person at the best could be held as corroborative evidence and not the substantive evidence. Thus, we find that the AO has recorded the satisfaction before re-opening the assessment on the basis of material supplied by Investigation Wing impounded from the control and possession of third person in whose case, survey was carried out and further the ld. PCIT has taken contrary view and at one place alleged the said entries related to some other person and in the case of assessee alleged as pertained to him. Thus by respectfully following the order of the coordinate bench in the case of Ranjan Rajesh Kumar [2024 (2) TMI 541 - ITAT DELHI] in whose case, under identical circumstances, the hon’ble court has held the reopening as invalid, we hold that the re- of the assessment in the case of the assessee is bad in law and thus, the notice issued u/s 148 is invalid and consequent reassessment order passed u/s 147 of the Act is hereby, quashed. Assessee appeal allowed. Issues: (i) Whether the reassessment proceedings initiated under section 148 read with section 147 of the Income-tax Act, 1961 were valid where the reasons recorded relied on entries in loose papers seized from a third party and alleged borrowed satisfaction/contradictory approvals; (ii) Whether the penalty imposed under section 271(1)(c) of the Income-tax Act, 1961 is sustainable where the reassessment on which it is based is held invalid.Issue (i): Validity of reassessment initiated under section 148/147 based on seized third party documents and alleged borrowed satisfaction.Analysis: The Tribunal examined the material on record, including the impounded loose papers (LP 184 & LP 186), the recorded reasons for reopening, the approval under section 151, statements and reports filed before the Settlement Commission, and relevant judicial precedents addressing borrowed satisfaction and presumption under section 132(4A). The Court noted contradictions in positions taken by the Principal CIT, absence of independent application of mind by the Assessing Officer, and that the presumption under section 132(4A) applies only to the person from whose possession documents were seized. The Tribunal relied on authoritative decisions holding that entries in third party seized papers cannot alone sustain reopening and that mechanical or contradictory approvals amount to borrowed satisfaction.Conclusion: The reassessment proceedings under section 148/147 were invalid. The notice issued under section 148 and the consequent assessment order under section 147 are quashed.Issue (ii): Sustainability of penalty under section 271(1)(c) founded on the quashed reassessment.Analysis: The Tribunal considered that the penalty under section 271(1)(c) was imposed consequential to the reassessment additions which the Tribunal has set aside as invalid. Where the foundational reassessment is void, the consequent penalty lacks a valid basis.Conclusion: The penalty imposed under section 271(1)(c) is deleted as it is consequential upon the invalid reassessment.Final Conclusion: The appeals are allowed: the reassessment notices and orders under section 148/147 are quashed and the consequential penalty under section 271(1)(c) is deleted, resulting in overall relief to the assessee.Ratio Decidendi: Reopening of assessment under section 148/147 based solely on entries in documents seized from a third party, without independent application of mind and where approval under section 151 is mechanical or contradictory, constitutes borrowed satisfaction and renders the reassessment and any consequential penalty invalid.