THE issue before the Bench is - Whether it is necessary for the AO, at the stage of recording the satisfaction u/s 153C to conclude that seized assets which belong to another person represent any undisclosed income. NO is the answer.
Facts of the case
The assessee is a company dealing in securitites. Search and seizure operations were undertaken u/s 132 in the case of Sh. B.K. Dhingra, Smt. Poonam Dhingra and M/s Madhusudan Buildcon Pvt. Ltd. on 20th October, 2008. Certain documents belonging to assessee company and a computer hard disk containing soft copies of working papers, balance sheets and data for income tax filings, were seized during the search. The AO recorded a 'Satisfaction Note' on 8th September, 2010 to the effect that the documents seized and the data contained in the hard disk belonged to the Assessee and, hence, Section 153C was invokeable. On the aforesaid basis, proceedings were initiated u/s 153C and a notice dated 8th September, 2010 for the AYs 2003-04 to 2008-09 was issued to the Assessee, in compliance of which, assessee filed its returns of income under protest. Subsequently, notices u/s 142(1)/143(2) were also issued for the purpose of assessing the income of the Assessee with respect to AYs 2003- 04 to 2008-09. Assessee sent a letter to the AO requesting the AO to provide copies of the seized material; the Assessee contested the initiation of proceedings u/s 153C and also contended that the assessments were time barred. AO subsequently passed assessment orders u/s 143(3)/153C and observed that the Assessee had purchased and sold textile goods and it was called upon to provide evidence of purchases and was further directed to provide the details of payments (by cash or cheque). In its reply, the assessee claimed that all the purchases were made in cash. The Assessee claimed that it was dealing only in tax free goods and was not required to file sales tax returns. AO observed that the case of the Assessee was connected with 'Thapar Group' of cases in which it was declared that at least 15 concerns were operating from the address "113, Vasant Village, New Delhi". These concerns were alleged to be capital formation concerns with huge reserves and surpluses that were reflected as invested in stock of textiles. The AO also found that no operations were undertaken from the aforementioned premises. In view of the aforesaid, the AO concluded that the Assessee was unable to substantiate any purchase of stocks and, therefore, made addition of the amounts reflected as purchases u/s 69C. AO also disallowed 100% of the expenses claimed by the Assessee in its P&L Account concluding that they were unverifiable.
On appeal before CIT(A), assessee claimed that the initiation of proceedings for the AY 2003-04 and 2004-05 were time barred since the documents recovered pursuant to the search were deemed to be handed over to the AO of the Assessee on 8th September, 2010, being the date of recording of satisfaction and, therefore, six years which could be assessed under Section 153C were the preceding previous years from 1st April, 2004 to 31st March, 2010 being relevant to AYs 2005-06 to 2010-11. Further, the Assessee contended that the seized hard disk contained working papers, balance sheets and other material for income tax filings and as such was fully disclosed in its returns and, therefore, proceedings under Section 153C could not be initiated on the basis of the seized material. The Assessee submitted that Sh. B.K. Dhingra, a CA, was overlooking the Assessee's work relating to accounting, Income Tax, Company Law etc. The data contained in the hard disk in question included soft copies of the working papers stored for the preparation of the balance sheet and the computation of income which were disclosed to the Income Tax Department. It was also contended that the soft copies and the papers seized were the property of M/s Bhupesh K. Dhingra and Co. and did not belong to the Assessee. The Assessee submitted that Section 153C can only be invoked where the AO was satisfied that any money/documents etc. seized belonged to a person other than the one searched and such material was of incriminating nature indicating undisclosed income of such person. The Assessee further emphasized that proceedings u/s 153C could be initiated only in respect of such years in respect of which some incriminating material was seized and since there was no material pertaining to the assessment years in question, there was no justification for the invocation of proceedings u/s 153C. The Assessee also contended that the Satisfaction recorded u/s 153C was not communicated in the notices itself and, thus, the assessment was bad and illegal. In reply to asseessee's submissions, AO vide letter dated 25th October, 2011 submitted a remand report, inter alia, claiming that the assessee company had mis-interpreted the first proviso of Section 153C(1) and that the six previous years were to be calculated with reference to the date of the search and not from the date of recording of the satisfaction note.
CIT held that there is no legal requirement that initiation of proceedings should only be with respect to such years in respect of which there is some material. It had also observed that recording of satisfaction so as to show existence of undisclosed income was not a prerequisite under the provision of sec 153C which are distinguishable from the provisions of sec 158 BD which is also related to block assessments. The literal meaning of sec 153C that once documents are handed over to the AO of the other person, which incidentally is the same AO, the provision of sec 153A are made applicable and therefore even if such documents etc. are recorded or disclosed to the department by such other person, the assessment may have to be framed for all relevant assessment years. The requirement of the sec 153C with reference to satisfaction seems to be only the prima facie satisfaction and not a conclusive satisfaction. Thus the AO must be prima facie satisfied that the documents etc. belong to the other person than the person searched. In the present case such satisfaction has been stated to have been recorded and there is no doubt against the action of the AO in this respect as is being made out by assessee.
CIT(A) also held that the initiation of the proceedings for A.Y. 03-04 (and the other respective AY's as the case may be)which has been made on 08.09.2010 is barred by limitation, and therefore the assessment order passed u/s 153C is held as a nullity. This plea however is fundamentally flawed in view of the basis of the fact that in case of this appellant the AO who was to hand over the seized material is also the AO of the appellant who was to take over the seized material. Therefore, the issue of handing over and taking over the seized material is obviated. The plea taken regarding the date of, search and, subsequent date of handing over of seized material is also obviated as both the sides are manned by the same AO. Further The AO has provided the Copy of the 'satisfaction note' when asked by the appellant company. CIT(A) do not find any merit in the grounds of the appeals nor any infirmity in the notice issued or the order passed u/s 153A/153C in this case. These grounds were therefore dismissed. CIT(A), however, allowed the appeal of the Assessee with regard to the disallowance of purchases under Section 69C of the Act and observed that Section 69C of the Act applies only when there is some expenditure and the Assessee is unable to explain the source from which such expenditure has been incurred. The CIT(A) held that the Assessee had accounted for all the purchases made in cash in its books of accounts and, thus, the source of the expenditure could not be stated to be unexplained. The CIT(A) also deleted the addition made by the AO on account of 100% disallowance of expenditure. On further appeal, Tribunal upheld the view of CIT(A) that an addition under Section 69C was not sustainable and, accordingly rejected the appeals preferred by the Revenue. The Tribunal did not examined the challenge to initiation of proceedings u/s 153C by terming the same as 'academic'.Held that,
++ a Coordinate Bench of HC in SSP Aviation Ltd. v. DCIT, 2012-TIOL-305-HC-DEL-IT has held that in case of the searched person, the date with reference to which proceedings for assessment or reassessment of any assessment year within a period of six assessment years shall abate, is the date of initiation of search u/s 132 or requisition u/s 132A. However, in case of other person, such date will be the date of receiving the books of account or documents or assets seized or requisition by the AO having jurisdiction over such other person. In the case of other person, the question of pendency and abatement of proceedings of assessment or reassessment to the six AYs would have to be examined with reference to such date. The CIT(A) sought to distinguish the present case by observing that in the facts of the present case, the AO of the searched person who has to handover the documents and the AO of the Assessee was one and the same person. In our view, this distinction is not relevant in the scheme of Section 153C and the CIT(A) erred in proceeding on the basis that the period of six years was to be reckoned from the end of the financial year preceding the financial year in which the search was conducted;
++ the HC in CIT(Central)-III v. Kabul Chawla: ITA 707/2014, 2015-TIOL-2006-HC-DEL-IT has held that completed assessments could only be interfered with by the AO on the basis of any incriminating material unearthed during the course of the search or requisition of the documents. In absence of any incriminating material, the AO does not have any jurisdiction to interfere in concluded assessments. The aforesaid principles would be equally applicable to proceedings initiated u/s 153C as Section 153C(1) expressly provides that once the AO has received "money, bullion, jewellery or other valuable articles or thing or books of account or documents seized" from the AO of the searched person, he would proceed to assess or reassess the income of the person to whom such assets/books belong in accordance with Section 153A. In the present case, Assessee had claimed that the assessments for the concerned AYs were not pending on the date of recording of satisfaction by the AO and, therefore, would not abate by virtue of the second proviso to Section 153A. Further, the period of six years would also have to be reckoned with respect to the date of recording of satisfaction note - that is, 8th September, 2010 - and not the date of search. In this case, it would be the date of the recording of satisfaction u/s 153C, i.e., 8th September, 2010. In this view, the assessments made in respect of AY 2003-04 and 2004-05 would be beyond the period of six AYs as reckoned with reference to the date of recording of satisfaction by the AO of the searched person. It is contended by the Revenue that the relevant six AYs would be the AYs prior to the AY relevant to the previous year in which the search was conducted. If this interpretation as canvassed by the Revenue is accepted, it would mean that whereas in case of a person searched, assessments in relation to six previous years preceding the year in which the search takes place can be reopened but in case of any other person, who is not searched but his assets are seized from the searched person, the period for which the assessments could be reopened would be much beyond the period of six years. This is so because the date of handing over of assets/documents of a person, other than the searched person, to the AO would be subsequent to the date of the search. This, in our view, would be contrary to the scheme of Section 153C(1), which construes the date of receipt of assets and documents by the AO of the Assessee (other than one searched) as the date of the search on the Assessee. The rationale appears to be that whereas in the case of a searched person the AO of the searched person assumes possession of seized assets/documents on search of the Assessee; the seized assets/documents belonging to a person other than a searched person come into possession of the AO of that person only after the AO of the searched person is satisfied that the assets/documents do not belong to the searched person. Thus, the date on which the AO of the person other than the one searched assumes the possession of the seized assets would be the relevant date for applying the provisions of Section 153A. We, therefore, accept the contention that in any view of the matter, assessment for AY 2003-04 and AY 2004-05 were outside the scope of Section 153C and the AO had no jurisdiction to make an assessment of the Assessee's income for that year;
Reassessment on the basis of searched documents
++ HC in SSP Aviation Ltd. had observed that at the time when the AO having jurisdiction over the searched person reaches the satisfaction that the document belongs to a person other than the searched person, it is not necessary for him to also reach a firm opinion that the document shows undisclosed income belonging to such other person. That is a matter for enquiry, which is to be conducted in the manner prescribed by section 153C. The record slip belongs to the Assessee and, therefore, the action of the AO of the searched persons recording that the same belongs to the Assessee cannot be faulted. However, the question then arises is whether the AO of the Assessee was justified in taking further steps for reassessing the income of the Assessee in respect of the assessment years for which the assessments were concluded and in respect of which the seized document had no bearing. In our view, the same would be clearly impermissible as the seized material now available with the AO, admittedly, had no nexus with those assessments and was wholly irrelevant for the purpose of assessing the income of the Assessee for the years in question. Merely because a valuable article or document belonging to an Assessee is seized from the possession of a person searched under Section 132, does not mean that the concluded assessments of the Assessee are necessarily to be re-opened under Section 153C of the Act. In our view, the concluded assessments cannot be interfered with mechanically and solely for the reason that a document belonging to the Assessee, which has no bearing on the assessments of the Assessee for the years preceding the search, was seized from the possession of the searched persons. It is, thus, clear that it was not necessary for the AO, at the stage of recording the satisfaction u/s 153C to conclude that seized assets which belong to another person represent any undisclosed income. If the AO of a searched person is satisfied that an asset/documents seized belong to another person, he has a duty to forward the documents or the valuable assets seized to the AO of the person concerned; apart from doing so, the AO can do nothing more. AO of the person other than the one searched also, is not, at the stage of issuing notice under Section 153C/153A, required to conclude that the assets/documents handed over to him by the AO of the searched person represent or indicate any undisclosed income of the Assessee under his jurisdiction. As explained in SSP Aviation, Section 153C only enables the AO of a person other than the one searched, to investigate into the documents seized and/or the assets seized and ascertain that the same do not reflect any undisclosed income of the Assessee (i.e a person other than the one searched) for the relevant assessment years. If the seized money, bullion, jewellery or other valuable article or thing seized as handed over to the AO of the Assessee, are duly disclosed and reflected in the returns filed by the Assessee, no further interference would be called for. Similarly, if the books of accounts/documents seized do not reflect any undisclosed income, the assessments already made cannot be interfered with. Merely because valuable articles and/or documents belonging to the Assessee have been seized and handed over to the AO of the Assessee would not necessarily require the AO to reopen the concluded assessments and reassess the income of the Assessee;
++ the decision in SSP Aviation cannot be understood to mean that the AO has the jurisdiction to make a reassement in every case, where seized assets or documents are handed over to the AO. The question whether the documents/assets seized could possibly reflect any undisclosed income has to be considered by the AO after examining the seized assets/documents handed over to him. It is only in cases where the seized documents/assets could possibly reflect any undisclosed income of the Assessee for the relevant assessment years, that further enquiry would be warranted in respect of those years. Whilst, it is not necessary for the AO to be satisfied that the assets/documents seized during search of another person reflect undisclosed income of an Assessee before commencing an enquiry under Section 153C, it would be impermissible for him to commence such enquiry if it is apparent that the documents/assets in question have no bearing on the income of the Assessee for the relevant assessment years. As expressly indicated under Section 153C the assessment or reassessment of income of a person other than a searched person would proceed in accordance with the provisions of Section 153A. The concluded assessments cannot be interfered with under Section 153A unless the incriminating material belonging to the Assessee has been seized. As indicated above, in the present case, the documents seized had no relevance or bearing on the income of the Assessee for the relevant assessment years and could not possibly reflect any undisclosed income. This being the undisputed position, no investigation was necessary. Thus, the provisions of section 153C, which are to enable an investigation in respect of the seized asset, could not be resorted to; the AO had no jurisdiction to make the reassessment under Section 153C. In view of the above, the third question framed, whether the proceedings u/s 153C could be initiated against the Assessee, is answered in favour of the Assessee and against the Revenue. In view of the above, it is not necessary for us to examine the other questions. The appeals are, accordingly, dismissed. In the circumstances, the parties are left to bear their own costs.