The Delhi Bench of the Income Tax Appellate Tribunal (ITAT) has quashed a search assessment framed under Section 153C of the Income Tax Act after holding that the department had wrongly made identical additions on a substantive basis in the hands of both the searched person and another assessee.
The bench of Vimal Kumar (Judicial Member) and M. Balaganesh (Accountant Member) ruled that the approach fundamentally vitiated the jurisdiction assumed under Section 153C, rendering the entire assessment invalid.
The appellant/assessee is a partnership firm that came into existence on October 25, 2015, following the conversion of the proprietorship concern of Shri Purushottam Lal Soni into a partnership firm. During a search conducted under Section 132 on December 16, 2016, at the business and residential premises of the Purushottam Lal Soni group, certain documents allegedly relating to the partnership firm were seized.
Based on these documents, the Assessing Officer recorded a satisfaction note on December 22, 2018, and initiated proceedings against the firm under Section 153C. Subsequently, the assessment for Assessment Year (AY) 2016-17 was completed by making several additions, including alleged unexplained cash payments, unexplained cash receipts, bogus unsecured loans, commission expenditure on accommodation entries, and bogus purchases.
The Tribunal noted a crucial defect in the department’s action. It found that the very same additions relating to unexplained cash payments, cash receipts, bogus unsecured loans, and commission expenditure had already been made on a substantive basis in the assessment of the searched person, Shri Purushottam Lal Soni, under Section 153A.
However, the Revenue again made those identical additions on a substantive basis in the assessment of M/s Soni Traders under Section 153C.
According to the Tribunal, this demonstrated that the very foundation of the satisfaction recorded for invoking Section 153C was flawed. Since the Revenue itself treated the same income substantively in the hands of two different assessees, the jurisdiction assumed under Section 153C could not be sustained.
The Tribunal also examined the addition of ₹46.71 lakh towards alleged bogus purchases.
It observed that this addition was not based on documents seized during the search on the Purushottam Lal Soni group. Instead, the Assessing Officer relied upon documents allegedly found during search or survey proceedings conducted on another person, Shri Puneet Kulthia.
The Bench held that such material could not legally be used in the Section 153C proceedings against the assessee without complying with the statutory requirements applicable to separate search proceedings. If the material originated from another person’s search, the Revenue was required to independently initiate proceedings under Section 153C after recording the necessary satisfaction and transferring the seized material in accordance with law.
As no such procedure had been followed, the addition relating to bogus purchases was held to be legally unsustainable.
The Tribunal further observed that although the satisfaction note referred to a seized document described as “Party PSR Annexure A-1”, the assessment order itself did not discuss or rely upon that document while making any addition.
This indicated that the seized material referred to in the satisfaction note did not actually have any bearing on determining the assessee’s total income.
Relying upon the Delhi High Court’s decision in Saksham Commodities Ltd. v. ITO, the Tribunal held that where the seized material forming the basis of Section 153C proceedings has no nexus with the assessment ultimately framed, the assumption of jurisdiction itself becomes invalid.
The ITAT concluded that the assumption of jurisdiction under Section 153C for AY 2016-17 was fundamentally defective.
Consequently, it quashed the entire assessment framed under Section 153C. Since the assessment itself was set aside, the Tribunal did not consider it necessary to adjudicate the remaining legal and factual grounds raised by the assessee.
For Assessment Year 2017-18, the Tribunal dealt with another jurisdictional issue.
It observed that although proceedings under Section 153C had been initiated after recording satisfaction in December 2018, the Revenue framed the assessment under Section 143(3) instead of Section 153C.
Referring to the Supreme Court’s decision in CIT v. Jasjit Singh, the Tribunal held that for a person covered under Section 153C, the relevant search year has to be reckoned from the date on which the seized material is handed over after recording satisfaction, and not from the original search conducted on another person.
Accordingly, the Tribunal held that AY 2017-18 fell within the block period for assessment under Section 153C. Therefore, the Revenue could not legally frame a regular assessment under Section 143(3). The assessment order was declared illegal, void ab initio, and liable to be quashed.
The Delhi ITAT partly allowed both appeals filed by the assessee. It quashed the assessment for AY 2016-17 on the ground that the assumption of jurisdiction under Section 153C was invalid and declared the assessment for AY 2017-18 void because it had been framed under the wrong statutory provision.
The Tribunal left all other legal and factual issues open after setting aside the assessments on jurisdictional grounds.
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