Incriminating documents belonging to/containing information pertaining to assessee. Section 153C explained

Incriminating documents belonging to or containing information pertaining to assessee. The High Court explains the amendment made in section 153C

ABCAUS Case Law Citation:
ABCAUS 3122 (2019) (08) HC

Important case law relied upon by the parties:

Pepsi Foods Pvt. Ltd. v. Assistant Commissioner of Income Tax (2014) 367 ITR 112 (Del

CIT v. RRJ Securities Ltd. (2016) 380 ITR 612 (Del)

The instant appeal was filed by the Revenue against the order passed by the ITAT in deleting the addition made by the Assessing Officer (AO) on account of unexplained cash credit under Section 68 of the Income Tax Act, 1961 (Act).

The respondent assessee was a company engaged in the business of real estate development. It filed its return of income for the relevant Assessment Year, declaring NIL income.

The return was picked up for scrutiny and a notice under Section 143(2) was issued to the Assessee. In the assessment proceedings under Section 143(3) of the Act, the AO noticed that the Assessee had received credit entries from one limited company.

On account of failure on the part of the Assessee to establish the identity, creditworthiness and genuineness of the entry appearing in its books, the AO added the aforementioned sum to the income of the Assessee under Section 68 of the Act.

The Commissioner of Income Tax (Appeals) allowed the appeal of the assessee  on the reasoning that the said limited company was an existing Assessee having a PAN and that, therefore, its identity was not in doubt. The money had been received by cheque, amounts had been utilised for making payments to the municipal authorities and the Assessee had provided a confirmatory letter as well as a copy of the bank account of the company. Therefore, the transaction was genuine. Further according to the CIT(A) the Assessee was not answerable to prove the source of source. Accordingly, the addition made by the AO was deleted.    

While the appeal of the Revenue before ITAT against the order of the CIT(A) was pending, a search and seizure operation under Section 132 was carried out in the cases of a Group at its various premises. According to the Revenue, during the course of search, some documents belonging to the Assessee were found in the searched premises.

Accordingly, a notice under Section 153C of the Act was issued to the assessee. According to the AO, in addition to the said credit entry the Assessee had also received entry from six entities controlled and managed by one accommodation entry provider. According to the Revenue, the search revealed that the six companies/entities were paper companies only for providing accommodation entries. An assessment order was framed against the Assessee under Section 143(3) read with Section 153C of the Act adding both the amounts.

While the ITAT dismissed the Revenue‘s pending appeal upholding the deletion by the CIT(A) of the addition made by AO under Section 68 of the Act, the ITAT allowed the appeal of the Assessee holding that the assumption of jurisdiction under Section 153C of the Act by the AO was not proper.

The Hon’ble High Court observed that as per the satisfaction note of the AO in assuming jurisdiction u/s 153C, the AO had relied upon following three incriminating documents which were found and seized during the course of search:

(i) licence issued by the Director, Town and Country Planning (DTCP)

(ii) letter granting permission by the DTCP for transferring the licence

(iii) the statement of searched person.

The Hon’ble High Court opined that ITAT was correct in holding that the licence/letter issued by DTCP could not be said to be the documents that constituted incriminating evidence revealing any escapement of income. It was further noted that the ITAT had relied upon the decision of the Hon’ble High Court wherein it was held that an AO would not proceed to commence an enquiry under Section 153C of the Act if it was apparent that the documents in question had no bearing on the income of the Assessee for the relevant AYs.

The Hon’ble High Court noted that after its amendment with effect from 1st June, 2015 Section 153C (1) of the Act there has been a crucial change is the substitution of the words “books of account or documents, seized or requisitioned belongs to or belong to a person other than the person referred to in Section 153A” by two clauses i.e. a and b, where clause b is in the alternative and provides that “such books of account or documents, seized or requisitioned” could ‘pertain‘ to or contain information that ‘relates to’ a person other than a person referred to in Section 153A of the Act.

The Hon’ble High Court further observed that the trigger for the above change was a series of decisions under Section 153C, as it stood prior to the amendment, which categorically held that unless the documents or material seized “belonged‘ to the Assessee, the assumption of jurisdiction under Section 153C of the Act qua such Assessee would be impermissible.

Incriminating documents belonging to/containing information pertaining to assessee, Section 153C explained

The Hon’ble High Court noted that in an another case it had explained the legal position that before a notice under Section 153C can be issued two steps have to be taken. The first step is that the Assessing Officer of the person who is searched must arrive at a clear satisfaction that a document seized from him does not belong to him but to some other person. The second step is – after such satisfaction is arrived at – that the document is handed over to the Assessing Officer of the person to whom the said document “belongs”. The Court stated that section 132(4A)(i) clearly stipulates that when inter alia any document is found in the possession or control of any person in the course of a search it may be presumed that such document belongs to such person. It is similarly provided in Section 292C (1) (i). In other words, whenever a document is found from a person who is being searched the normal presumption is that the said document belongs to that person. It is for the Assessing Officer to rebut that presumption and come to a conclusion or “satisfaction” that the document in fact belongs to somebody else. There must be some cogent material available with the Assessing Officer before he/she arrives at the satisfaction that the seized document does not belong to the searched person but to somebody else. Surmise and conjecture cannot take the place of “satisfaction”.

In the instant case, the Hon’ble High Court noted the amended Section 153C(1) of the Act did not apply to the search in the instant case. Therefore, the onus was on the Revenue to show that the incriminating material/documents recovered at the time of search ‘belongs‘ to the Assessee. It is not enough for the Revenue to show that the documents either ‘pertain‘ to the Assessee or contains information that ‘relates to’ the Assessee.

As far as the third document, the Hon’ble High Court opined that being the statement of the searched person, it was not a document that ‘belonged‘ to the Assessee. It was a statement made during the course of the search and survey proceedings. While it contained information that ‘related‘ to the Assessee, by no stretch of imagination could it be said to a document that ‘belonged‘ to the Assessee. Therefore, the jurisdictional requirement of Section 153C of the Act, as it stood at the relevant time, was not met in the present case.  

Accordingly the appeal of the Revenue was dismissed.

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