Delhi High Court Invalidates Proceedings under Section 153C (of Income Tax Act, 1961) for Lack of Incriminating Material

Case Name:

Principal Commissioner of Income Tax (Central) - 2 v. M/S Victory Apartments Pvt. Ltd. and others

Key Takeaways:

1. The High Court of Delhi declared the proceedings under Section 153C (of Income Tax Act, 1961) invalid due to the lack of incriminating material found during the search.
2. The court held that the jurisdiction assumed by the Assessing Officer without recording satisfaction in the case of the searched person was not valid.
3. The Tribunal’s decision on the first issue was not sustained by the court, as it contradicted the Supreme Court’s judgment in Super Malls Pvt. Ltd. v. Principal Commissioner of Income Tax 8, New Delhi.
4. The court agreed with the Tribunal’s finding that the proceedings were not valid in the absence of incriminating material.
5. This decision emphasizes the importance of having incriminating material to initiate proceedings under Section 153C (of Income Tax Act, 1961).

Case Synopsis:

This is a decision delivered by the High Court of Delhi on November 1, 2023, in a case involving the Principal Commissioner of Income Tax (Central) - 2 as the appellant and M/S Victory Apartments Pvt. Ltd., M/S Victory Township Pvt. Ltd., and M/S Victory Dwellings Pvt. Ltd. as the respondents. The case concerns the Assessment Year 2009-10.

The order being challenged in this case is the order dated March 24, 2017, passed by the Income Tax Appellate Tribunal (Tribunal). The Tribunal’s order disposed of the cross-appeals filed by the appellant/revenue and the respondents/assessees.

The main issue in this case was whether the proceedings initiated against the assessees under Section 153C (of Income Tax Act, 1961) were valid. The Tribunal held that the proceedings were not valid because no incriminating material was found during the search conducted on the directors of the assessee companies.

The Tribunal considered two legal issues:

What would be the impact if the Assessing Officer (AO) of the searched person did not record his satisfaction?

In the absence of incriminating material, whether the proceedings were valid?

Regarding the first issue, the Tribunal concluded that the jurisdiction assumed by the AO without recording satisfaction in the case of the searched person was not valid. The Tribunal relied on Circular No. 24/2015, which states that even if the AO of the searched person and the other person is the same, the AO is required to record satisfaction in the case of the searched person.

Regarding the second issue, the Tribunal found that no incriminating material was found during the search, and the addition to the assessment was made based on documents that were already in the knowledge of the department. Therefore, the Tribunal held that the proceedings were not valid.

The High Court of Delhi, in this decision, agreed with the Tribunal’s finding on the second issue but disagreed with the Tribunal’s finding on the first issue. The Court held that the Tribunal’s decision on the first issue cannot be sustained in view of the Supreme Court’s judgment in Super Malls Pvt. Ltd. v. Principal Commissioner of Income Tax 8, New Delhi, (2020) 4 SCC 581.

Therefore, the Court answered the question of law framed in the appeals against the appellant/revenue and in favor of the respondents/assessees, based on the finding returned by the Tribunal on the second issue.

FAQ:

Q1: What was the main issue in the case?

A1: The main issue was whether the proceedings initiated under Section 153C (of Income Tax Act, 1961) were valid due to the absence of incriminating material.

Q2: What did the High Court of Delhi rule?

A2: The court ruled that the proceedings were invalid because no incriminating material was found during the search.

Q3: What was the impact of the court’s decision?

A3: The court’s decision declared the proceedings under Section 153C (of Income Tax Act, 1961) invalid, highlighting the requirement for incriminating material to initiate such proceedings.

1. The above-captioned appeals concern three (3) assessees. The Assessment Year (AY) in issue in all six appeals is AY 2009-10. The order impugned in the above-captioned appeals preferred by the appellant/revenue is the order dated 24.03.2017 passed by the Income Tax Appellate Tribunal [in short, “Tribunal”]. This order is assailed in the six appeals filed by the appellant/revenue.

2. Via the impugned order, the Tribunal has thus disposed of the cross appeals filed by the appellant/revenue and the respondents/assessees.

3. The record shows that on 13.08.2018, the above-captioned appeals were admitted and a common question of law was framed which reads as follows:

“Whether the Income Tax Appellate Tribunal was right in allowing the appeal preferred by the respondent/assessee as initiation of proceedings under 153 C of the Income Tax Act, 1961 was bad and contrary to law?”

4. It is common ground that the Tribunal held the proceedings initiated against the assessees under Section 153C (of Income Tax Act, 1961) [in short, “Act”] as bad in law as no incriminating material was found during the search conducted on Mr Pramod Goel, Ms Savita Goel and Mr Ashish Goel [hereafter referred to as “Goels”], the directors of the assessee companies.

5. Although, the Commissioner of Income Tax (Appeals) [in short, “CIT(A)”] ruled in favour of the assessees qua the aspect concerning the untenability proceedings in law in the absence of incriminating material, on merits, he decided in favour of the appellant/revenue.

5.1 This is how cross-appeals were filed by both sides before the Tribunal.

6. A perusal of the impugned order passed by the Tribunal shows that it did not return any ruling on merits and in that sense left the order of the CIT(A) untouched. However, on the two legal issues which arose before the Tribunal, the decision taken was in favour of the assessees. The legal issues which the Tribunal dealt with were the following:

6.1 First, what would be the impact of the Assessing Officer (AO) of the searched person not recording his satisfaction?

6.2 Second, in the absence of incriminating material, whether the proceedings were valid?

7. The Tribunal with respect to the first issue came to the following conclusion:

On perusal of the aforesaid satisfaction note, it is crystal clear that the said satisfaction was recorded by the AO in the proceedings relating to the assessee i.e. M/s Victory Dwellings Pvt. Ltd. and not in the case of Sh. Pramod Goel in whose case search and seizure operation u/s 132 (of Income Tax Act, 1961) was undertaken on 14.09.2010. Therefore, the jurisdiction assumed by the AO without recording the satisfaction in the case of the searched person was not valid.

17. From the plain reading of the aforesaid Circular No. 24/2015 dated even if the AO of the searched person, and of the other person is one and the same then he is required to record his satisfaction in the case of searched person. In the present case, it is an admitted fact that the AO of the searched person has not recorded any satisfaction rather the satisfaction is recorded by the AO of the other person i.e. the assessee which is evident from the satisfaction note, copy of which is placed at page no. 21 of the assessee's paper book. Therefore, the assessment framed in the hands of the assessee was not valid. …”

[Emphasis is ours.]

8. As regards the second issue, the following observations were made, which are also part of paragraph 17:

Moreover, from the observation of the AO in the satisfaction note also it is crystal clear that no incriminating material was found, the addition was made only on the basis of the copy of balance sheet, profit and loss account and schedule of advances against supplies pertaining to the assessee, those documents were already in the knowledge of the department as the same were furnished along with the· regular return of income. Therefore, those documents by no stretch of the imagination can be said to be incriminating as those were made out of the regular books of accounts of the assessee, and the return of income was filed on the basis of those documents only.” [ Emphasis is ours.]

9. Mr Ved Jain, counsel who appears on behalf of the respondents/assessees, fairly concedes that insofar as the first aspect is concerned, the Tribunal’s decision cannot be sustained in view of the judgment rendered by the Supreme Court in Super Malls Pvt. Ltd. v. Principal Commissioner of Income Tax 8, New Delhi, (2020) 4 SCC 581.

However, Mr Sanjeev Menon, learned standing counsel, who appears on behalf of the appellant/revenue, cannot but accept the fact that as far as the decision of the Tribunal on the second issue is concerned, i.e., because no incriminating material was found, the proceedings taken out against the assessees under Section 153C (of Income Tax Act, 1961) were not valid in the eyes of law, was the correct view.

9.1 We may note that the Tribunal in this behalf relied upon the judgment rendered by the coordinate bench of this court in PCIT v. Kabul Chawla, [2016] 380 ITR 573 (Delhi). The said judgment has been affirmed by the Supreme Court in Principal Commissioner of Income Tax vs. Abhisar Buildwell Pvt. Ltd., [2023] 454 ITR 212 (SC).

10. Thus, having regard to the aforesaid position, according to us, the question of law as framed in the above-captioned appeals will have to be answered against the appellant/revenue and in favour of the respondents/ assesses having regard to the finding returned by the Tribunal on the second issue.

11. The appeals are disposed of, in the aforesaid terms.

12. Parties will act based on the digitally signed copy of the order.

RAJIV SHAKDHER, J

GIRISH KATHPALIA, J

NOVEMBER 1, 2023