By TIOL News Service

NEW DELHI, APRIL 19, 2018: THE ISSUE BEFORE THE BENCH WAS - Whether the non-obstante provisions of Ss 153A & 153C also tend to override mandatory provisions of Sections 142(2) & (143(2). NO IS THE VERDICT.

Facts of the case

The assessee is a partnership firm established between Sharada Erectors Private Limited and Mr. Rakesh Kumar Garg and his Company. The assessee had filed return for the relevant AY declaring NIL income. A search and seizure operation was carried out u/s 132 wherein, a hard disk containing the assessee's books of accounts was seized. Accordingly, a notice u/s 142(1) r/w Sec. 153C was issued to the assessee. When it filed a reply once again declaring its income to be NIL, further notices under Ss 142(2) and 142(1) were issued. The AO held that the total taxable income for AY 2009-10 to be Rs. 1,56,99,738/- and disallowed deductions claimed u/s 80IA. On appeal, the CIT(A) held that the proceedings u/s 143(3) for AY 2009-10 were valid, and enhanced the taxable income. On further appeal, the Tribunal held that proceedings u/s 153C were void-ab-initio and quashed them.

On appeal, the High Court held that,

++ the AO's order for AY 2009-10 explicitly states that it has been passed u/s 153C r/w Sec. 143(3). However, the CIT's order states that for AY 2009-10, the assessment was done u/s 143(3). It is worth noting that for all other AYs from 2005 to 2009, the CIT recorded that the assessment was u/s 153C r/w Sec. 143(3). It is just for AY 2009-10 that the CIT found the assessment to be done u/s 143(3) only;

++ the reliance by the Revenue on Sushil Kumar Jain's case to say that issuing a notice u/s 153C was not necessary for AY 2009-10 because the year immediately preceding it was the search year i.e. 2008 is not apt, because that case was only concerned with non-issuance of notice u/s 153A, and not Sec. 153C. A normal notice issued u/s 142 can serve as a substitute for a notice under Section 153A because both these provisions serve the same purpose of directing the assessee to file returns. However, the function served by a satisfaction note under Section 153C is completely different. The special nature of Section 153C was noted in Pepsi Foods Pvt. Ltd;

++ the AO's order explicitly states that the assessment for AY 2009-10 was carried out pursuant to Sec. 143(3) r/w Sec. 153C, and the Department has failed to provide an explanation for this discrepancy. Finally, the timeline of events indicates that notices under Ss 142(1) and 153A were issued on the same day that the satisfaction note was prepared i.e. 23.07.2010. Even for AYs 2005 to 2009 for which the assessee had already filed returns, the Revenue did not initiate any proceedings till the assessee filed its return for AY 2009-10 as NIL. If the AO had initiated proceedings for re-assessment of returns filed for AYs 2005 to 2009 u/s 153C before the filing of returns for AY 2009-10, it would have been plausible that the satisfaction note was only relevant for AYs 2005 to 2009 and that the proceedings for AY 2009-10 were solely carried out u/s 142 and 143. However, in the present case, since the notice u/s 142(1) was issued on the same day as the satisfaction note, it is very difficult to sever them from each other;

++ in the present case, the AO has not explained steps taken by him to determine that the seized material belonged to the assessee. The satisfaction note has been prepared in a standard mechanical format and it does not provide any details about the books of accounts which allegedly belong to the assessee. Most importantly, a satisfaction note was not recorded by the AO of Sh. Narendra Kumar from whose premises the documents were seized. In light of the decision in Nikki Drugs and Chemicals Pvt. Ltd., it is now a settled proposition of law that even if the AO for the person from whose premises the documents are seized is the same as the AO for the person to whom the document belongs, separate satisfaction notes must be recorded. Here the AO's note nowhere reflects whether any document seized, on application of his mind, disclosed that it belonged to the assessee, and if so, its prima facie nature. While an AO of the searched party and that of the individual u/s 153C may be the same, nevertheless at the stage of sending notice u/s 153C, the AO has to record a specific reason or reasons, why the material seized from the other person has a nexus to the assesse, to whom the notice under that provision is addressed. In this case, this never happened. Thus, for the previous years, the rule in CIT v Kabul Chawla, i.e., that in the absence of any incriminating materials, the previous years' assessments cannot be disturbed, applies;

++ the failure of the AO to record a specific satisfaction as to how the recovered material belonged to the assessee in the note that preceded the notice issued under it, vitiates the assessments. As far as the pending AY is concerned, the return was filed on 29.09.2009. No notice in terms of Sec. 143 (2) had been issued to the assessee, and the time provided by law had expired by the time its AO received the papers from the searched party. Notice issued, necessarily, in terms of Sec. 153C (2) had to be in the light of the satisfaction that the books of account or materials seized are relevant (i.e. "..that AO shall proceed against each such other person and issue notice and assess or re-assess the income of the other person in accordance with the provisions of Sec. 153A, if, that AO is satisfied that the books of account or documents or assets seized or requisitioned have a bearing on the determination of the total income of such other person for the relevant AY or AYs referred to in sub-section (1) of section 153A";

++ as held by previous decisions, without that nexus, and fulfillment of the pre conditions, clearly, the option provided by Sec. 153C(2) to proceed against pending or assessments cannot be made recourse to. Since the satisfaction in terms of Sec. 153C(1) was clearly inadequate (assuming that the original satisfaction, transmitting the papers to the assessee's AO was valid), the assessment completed for these years was also invalid. The Court also notices in this regard, that the non-obstante provisions in both Ss 153A and 153C are identical; they override Ss 136, 147, 148, 149, 151 and 153. However, they do not override the mandatory provisions of Ss 142 (2) or 143 (2). This legislative design is taken further by Sec. 153(2)(a) to (c) which are relatable to the satisfaction u/s 153C(1) notice, i.e. that if notice for pending assessments have not been issued, to take further proceedings, and the time has lapsed, the only condition when they can be taken forward, is if the satisfaction with respect materials seized are relatable to the assessee is through application of mind and not a mechanical one, as insisted by RRJ Securities, Pepsico Holdings India Ltd, Nikki Drugs.

(See 2018-TIOL-737-HC-DEL-IT)