By TIOL News Service

NEW DELHI, JULY 26, 2018: THE ISSUE BEFORE THE BENCH IS - Whether if AO of the searched person and 'other person' are different, the pre amended provisions of Sec. 153C(1) still mandates the AO of the 'other person' to record its satisfaction before starting any proceedings for making assessment or reassessment. AND THE ANSWER IS YES.

Facts of the case:

A search and seizure u/s 132 was conducted in Dalmia Group of cases by the Investigation Wing including the premises of Sh. Parag Dalmia wherein, certain incriminating documents were seized which relate to M/s Dalmia Infrastructure Pvt. Ltd. Consequently, a proposal for initiation of assessment proceedings u/s 153C in the case of Dalmia Infrastrcuture Pvt. Ltd. was received from the DCIT alongwitha Satisfaction Note. Subsequently, notice u/s 153C r/w Sec. 153A was issued. Again a notice u/s 143(2) r/w Sec. 142(1) was issued. In reply, the assessee had filed return algonwith Tax Audit Report. In the ITR for AY 2008-09, the assessee had shown NIL income and in response to stated notices issued, the Counsel for the assessee attended the proceedings and furnished the requisite details. While verifying the balance sheet, the AO noted that during the relevant AY, the assessee had raised share capital and share premium from 13 entities. The AO further found that 4 entities that were group concerns of the assessee held 75% share holding without paying any share premium. However, the other share holder companies had only 25% share after paying a share premium. Vide summons u/s 131, the assessee was asked to ensure the personal deposition of the Directors of 09 companies. The AO noted that the assessee failed to ensure the personal deposition of the Directors of those companies. Thereafter, a SCN was issued by the AO however, the assessee failed to furnish any bonafide submission. Thus, the AO was of the view that the genuineness of the transactions entered with and creditworthiness of M/s Reets Plastics Pvt. Ltd., M/s Top-Tech Cables Pvt. Ltd., M/s Sears Exim Pvt. Ltd., M/s Raj K Mercantile Corporation Ltd., M/s MGI Glass Industries Ltd., M/s Canyon Financial Services Ltd. were not satisfactorily explained by the assessee as per Sec. 68. Therefore, the stated total amount credited in the assessee's books were disallowed u/s 68 and proceeded to make additions to the assessee's total income. On assessee's appeal, no relief was granted by the CIT(A).

The ITAT held that,

Whether if AO of the searched person and 'other person' are different, the pre amended provisions of Sec. 153C(1) mandates the AO of the 'other person' to record its satisfaction before starting any proceedings for making assessment or reassessment - YES: ITAT

Whether the AO is allowed to reopen an assessment by invoking his jurisdiction even if, the seized documents are not incriminating in nature and does not relate to the AY under consideration - NO: ITAT

++ the AO of person other than the searched person is different from the AO of the searched person. Upon careful examination of both the satisfaction notes, it has also been noted by us that there is a very subtle but important difference between the two. The satisfaction note recorded by the AO of the searched person mentions that during the course of search of Sh. Parag Dalmia, 113-114, Mohta Building, 4, Bhikaji Kama Place, New Delhi, certain documents were found and seized. The appraisal report of the group as well as the seized material has revealed that the certain companies subscribed for shares of M/s Dalmia Infrastructure Pvt. Ltd. However, thereafter the satisfaction note is completely silent on the names of the subscribing companies or the specific seized material which according to the AO was incriminating. The only difference between the 2 satisfaction notes is the reference to the subscription of share capital. As per the amended Sec. 153C(1), it is mandatory for the AO of the "other person" also to record satisfaction that the books of account or documents, have a bearing on the determination of the total income of such 'other person' before embarking upon the exercise of his assessment or reassessment. However, as per settled law, we find that even in the pre-substitution era of the relevant part of Sec. 153C(1) covering the period under consideration, recording of satisfaction by the AO was a sine qua non so as to enable the AO of the "other person" to start with the proceedings for making assessment or reassessment;

++ there has been a catena of decisions of various High Courts where it has been held that assumption of jurisdiction u/s 153C was invalid where the seized documents did not relate to the relevant AY and were not incriminating. This proposition of law has been upheld by the Delhi High Court in the cases of Index Securities Pvt. Ltd., RRJ Securities Ltd., ARN Infrastructure India Ltd. and by the Supreme Court in the case of Sinhgad Technical Education Society. If the requirement in law was restricted to recording of satisfaction by the AO of the searched person that the books of accounts or documents belong to person other than searched person and thereafter the AO of the "other person" was not required to record any satisfaction prior to 1-10-2014, before proceeding further u/s 153C there was no reason for the Courts to have settled the said proposition. Therefore, it has to be held that even in the pre substitution era of the relevant part of Sec. 153C(1) covering the period under consideration, recording of satisfaction by the AO of the "other person" was a sine qua non so as to enable the AO of the "other person" to start with the proceedings for making assessment or reassessment, in those cases where the AO of the searched person and "other person" were not same;

++ from catena of decisions of various High Courts, it is apparent that when the question regarding validity of assumption of jurisdiction is to be decided, the satisfaction note of the AO of "other person" would be relevant. This is also logical since application of mind must be of the AO who is assuming jurisdiction u/s 153C. The AO of "other person" cannot assume jurisdiction in a mechanical manner based on satisfaction recorded by the AO of the searched person, where both the AOs are different. Therefore, we are of the view that it is futile for the Counsel for the Revenue to argue that validity of assumption of jurisdiction has to be examined on the basis of satisfaction recorded by the AO of searched person. After perusing the Satisfaction Note recorded by the AO of "other person" as well as Note on the Satisfaction submitted by the assessee, we find that the seized documents do not relate to the AY under consideration i.e. AY 2008-09 and none of the documents referred to in the satisfaction note are incriminating. This is further validated by the fact that no addition on the basis of these documents has been made in the assessment order. The assessment order does not refer to any seized document;

++ in the present case, jurisdiction has been wrongly invoked and the assessment order was void-ab-initio since the essential jurisdictional requirement viz., that the seized documents must be incriminating and must relate to the AY's whose assessments are sought to be reopened has not been met. It was noted that none of the documents referred to in the satisfaction note of the AO of "other person" are incriminating and none of these documents relate to AY 2008-09. Therefore, this issue of jurisdictional requirement has already been settled by the Supreme Court in the case of CIT Vs. Sinhgad Technical Education Society. Accordingly, we cancel the assessment order as well as appellate order.

(See 2018-TIOL-1143-ITAT-DEL)