By TIOL News Service:

BANGALORE, MAY 12, 2016: THE ISSUE IS - Whether issuance of notice u/s 153C for purpose of initiating block assessment in respect of undisclosed income of a third party, mandates satisfaction of the AO having jurisdiction over the searched persons and communication of the same to the AO having jurisdiction over such third party, to be recorded in writing along with the incriminating materials. YES is the answer.

Facts of the case:

The assessee is engaged in the business of development of properties, construction and engineering activities and such other activities in relation to development of properties. During the concerned period, one Mr.Yunus Zia, Mr.Ziaulla Sheriff and M/s.India Builders Corporation were subjected to a search operation u/s 132. The assessee i.e., M/s. IBC Knowledge Park Pvt. Ltd., has its registered office at the very same premises where the search was conducted. During search operation, certain documents and books of accounts belonging to the assessee were seized from the premises searched, and the same were transferred by the AO who searched the premises, to the Dy CIT of the assessee. The AO thereafter issued notice u/s 153C and proceeded to pass assessment orders u/s 143(3) r/w/s 153C for the A.Ys 2004-05 to 2008-09 making several disallowances of deductions claimed as well as additions to the income of the assessee. The disallowance made by the AO for the relevant A.Ys were in respect of i) Depreciation on Elevators, DG Set and other such items (for all A.Ys), ii) Professional charges (for A.Y 2004-05), iii) Interest expenses (for A.Y 2004-05) and iv) Disallowance of interest capitalized (for A.Ys 2004-05 and 2006-07). On appeal, the CIT(A) rejected the challenge made by the assessee with regard to initiation of proceedings u/s 153C, while granting relief against disallowances made by AO by following the earlier order of the Tribunal for the A.Y 2004-05.

After hearing the parties, the High Court had held that:

++ on a perusal of the material on record, it is noted that during the course of search in the premises of M/s.India Builders Corporation, certain documents of the assessee company were found and seized by the concerned officer. Subsequently, proceedings u/s 153C were initiated by the AO of the assessee. Assessee’s contention that the proceedings were not initiated in accordance with law, was not accepted by the CIT(A), who dismissed the appeals. Before the Tribunal, it was contended that the assessee also carried out its functions from the very premises which was searched. The Tribunal while considering the aforesaid contentions held that the assessee shared common business premises with the person searched. But the fact that it ipso facto could not face proceedings u/s 153C, unless there was undisclosed income on the part of the assessee detected in the search operation, was not correct. On a conjoint reading of provisions of Section 132, 153A, 153B, 153C & 158BD, it becomes clear that a search can take place only when a concerned officer has information and reason to believe that any person is in possession of any valuable assets, which has not been or would not be disclosed under the Act. Following the search, if any books of account, other documents, any valuable assets is or are found in the possession or control of any person in the course of a search, then the books of account or other documents or valuable assets could be seized. Under Section 153A, the satisfaction regarding an inference of liability must be recorded. The AO has to issue notice to the assessee i.e., the person searched for the purpose of assessment or re-assessment of the total income of six assessment years immediately preceding the assessment year relevant to the previous year in which such search is conducted. Section 153C as already noted, deals with assessment of income of any other person, when the AO is satisfied that the books of account or documents or valuable assets seized or requisitioned have a bearing on the determination of the total income of such other person for the relevant assessment year or years referred to u/s 153A(1). In such a case, the AO has to issue notice to assess or re-assess income of other person u/s 153A. Thus, the fact that search has been conducted would not justify issuance of notice u/s 153A;

++ when particulars of income declared in the return is already available with the AO, such income cannot form part of undisclosed income even if such return is filed beyond the time limit, but before search, as long as they relate to any year covered in the block. Thus, a block assessment is justified only on the basis of evidence found during search and the materials or information relatable thereto. Section 153C is in pari materia with Section 158BD conferring jurisdiction over third parties to a search providing certain conditions before the AO having jurisdiction over a third party can assume jurisdiction. Materials such as books of accounts, documents or valuable assets found during a search should belong to a third party which would lead to an inference of undisclosed income of such third party. Such an inference should be recorded by the AO having jurisdiction over the searched persons and communicated to the AO having jurisdiction over such third party along with the seized documents and other incriminating materials on the basis of which the AO having jurisdiction over such third party would issue notice u/s 153C. Thus, where no material belonging to a third party is found during a search, but only an inference of an undisclosed income is drawn during the course of enquiry, during search or during post-search enquiry, Section 153C would have no application;

++ on a consideration of the relevant sections as well as judicial precedent, what emerges is that, Section 158BD deals with undisclosed income of a third party. However, insofar as the incriminating material of the searched person or other person detected during the course of search is concerned, the same can be considered during the course of assessment. Further, such incriminating material must relate to undisclosed income which would empower the AO to upset or disturb a concluded assessment of the other person. A reference may be made to the decision of Apex Court in case of M/s.Calcutta Knitwear and based on the said decision, the CBDT has also issued circular dated 31.12.2015 vide No.24/2015. As per the aforesaid circular, at the time of or along with initiation of the proceedings, against the searched person or third party u/s 153C or in the course of assessment proceedings u/s 153C or immediately after the assessment proceedings are completed u/s 153C, recording of satisfaction is required. If the observations made by the Tribunal are considered in this regard, it is noted by the Tribunal that it is not necessary that satisfaction should be recorded that documents or valuable assets found in the course of search showed undisclosed income. In view of the aforesaid discussion, we do not think that such can be the correct position of law. In the instant case, though documents belonging to the assessee were seized at the time of search operation, there was no incriminating material found leading to undisclosed income. Therefore, assessment of income of the assessee was unwarranted. Consequently, no satisfaction was recorded in the case of the assessee. Therefore, the Tribunal was not correct in holding that the assessment u/s 153C was valid despite there being no satisfaction recorded to the effect that the documents found during the search were incriminating in nature and prima facie represented undisclosed income. In the instant case, one of the conditions precedent for invoking a block assessment pursuant to a search in respect of a third party u/s 158BD i.e., recording satisfaction that undisclosed income belongs to the third party, which was detected pursuant to a search u/s 133, has not been complied with. Therefore, the reassessment as such made u/s 158BD in respect of the assessee is not in accordance with law.

(See 2016-TIOL-921-HC-KAR-IT)