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In a recent judgment, Delhi High Court has ruled that proceedings u/s 153C of the Income tax Act, 1961 regarding assessment of income of any other person on the basis of seized material can not be commenced if it is apparent that the documents/assets seized have no bearing on the income of the assessee for the relevant assessment years.

Case Details:
ITA 164, 175, 176 and 177 of 2015 AY : 200-04 to 2008-09
Commissioner of Income Tax  vs RRJ Securities Ltd.
Date of Order : 30-10-2015
Coram: Justice Vibhu Bakhru and Justice S. Muralidhar

Facts of the Case(s):
During search and seizure operations u/s 132 undertaken on 20-10-2008 in the case of B.K. Dhingra (Chartered Accountant), Smt. Poonam Dhingra and M/s Madhusudan Buildcon Pvt. Ltd. ( ‘searched persons’). Certain documents belonging to RRJ Securities Ltd. (Assessee Company) and a computer hard disk containing soft copies of working papers, balance sheets and data for income tax filings, were seized during the search. The Assessing Officer (AO) of the searched persons recorded a ‘Satisfaction Note’ on 08-09-2010 to the effect that the documents seized and the data contained in the hard disk belonged to the Assessee Company  and, hence, Section 153C was invokeable. On the aforesaid basis, proceedings were initiated against the assessee company under Section 153C. the Assessee Company contested the initiation of proceedings under Section 153C of the Act and also contended that the assessments were time barred. Assessee contended that the seized hard disk contained working papers, balance sheets and other material for income tax filings and as such was fully disclosed in its returns and, therefore, proceedings under Section 153C of the Act could not be initiated on the basis of the seized material.

The Assessee Company submitted that Sh. B.K. Dhingra, a Chartered Accountant, was overlooking the Assessee’s work relating to accounting, Income Tax, Company Law etc. The data contained in the hard disk in question included soft copies of the working papers stored for the preparation of the balance sheet and the computation of income which were disclosed to the Income Tax Department. It was also contended that the soft copies and the papers seized were the property of M/s Bhupesh K. Dhingra and Co. and did not belong to the Assessee. The Assessee submitted that Section 153C of the Act can only be invoked where the AO is satisfied that any money/documents etc. seized belonged to a person other than the one searched and such material is of incriminating nature indicating undisclosed income of such person. The Assessee further emphasized that proceedings under Section 153C could be initiated only in respect of such years in respect of which some incriminating material was seized and since there was no material pertaining to the assessment years in question except record slip of a cheque book could not be considered as the material on the basis of which proceedings under Section 153C of the Act could be initiated and hence there was no justification for the invocation of proceedings under Section 153C of the Act. The Assessee also contended that the Satisfaction recorded under Section 153C was not communicated in the notices itself and, thus, the assessment was bad and illegal.

Excerpts from the Judgment:
In Pepsi Foods Pvt. Ltd. v. Assistant Commissioner of Income Tax: (2014) 367 ITR 112 (Del), this Court had explained that on a plain reading of Section 153C of the Act, a notice under that section could be issued only after two preceding conditions had been met. First of all, the AO of the searched person would have to arrive at a satisfaction that document or asset seized does not belong to the person searched but to some other person and secondly, the seized documents/assets are handed over to the AO having jurisdiction over that person, that is, the person other than the one searched and to whom the seized documents/assets are said to belong.

It, plainly, follows that the recording of a satisfaction that the assets/documents seized belong to a person other than the person searched is necessarily the first step towards initiation of proceedings under Section 153C of the Act. In the case where the AO of the searched person as well as the other person is one and the same, the date on which such satisfaction is recorded would be the date on which the AO assumes possession of the seized assets/documents in his capacity as an AO of the person other than the one searched..... The Allahabad High Court in the case of Commissioner of income Tax v. Gopi Apartments: (2014) 360 ITR 411 has expressed a similar view.

Mention may also be made to the decision of the Madhya Pradesh High Court in Commissioner of Income Tax v. Mechmen: (2015) 60 taxmann.com 484 (Madhya Pradesh). In that case, the Court had explained that the fact that incidentally the AO is common at both stages would not extricate him from recording satisfaction at the respective stages. It was explained that since the satisfaction of the AO of a searched person that assets/documents seized belong to some other person is sine qua non to commencing proceedings under Section 153C of the Act in respect of such other person, the AO could not assume jurisdiction and transmit the items to another file concerning the person (other than the one searched) pending before him, before being satisfied that the seized assets/documents belonged to the other person.

This Court in Commissioner of Income Tax (Central)-III v. Kabul Chawla: ITA 707/2014, decided on 28th August, 2015 has held that completed assessments could only be interfered with by the AO on the basis of any incriminating material unearthed during the course of the search or requisition of the documents. In absence of any incriminating material, the AO does not have any jurisdiction to interfere in concluded assessments

In the present case, the Assessee had claimed that the assessments for the concerned assessment years were not pending on the date of recording of satisfaction by the AO and, therefore, would not abate by virtue of the second proviso to Section 153A of the Act. Further, the period of six years would also have to be reckoned with respect to the date of recording of satisfaction note – that is, 8th September, 2010 – and not the date of search

Thus, the date on which the AO of the person other than the one searched assumes the possession of the seized assets would be the relevant date for applying the provisions of Section 153A of the Act. We, therefore, accept the contention that in any view of the matter, assessment for AY 2003-04 and AY 2004-05 were outside the scope of Section 153C of the Act and the AO had no jurisdiction to make an assessment of the Assessee’s income for that year.

Sh. B.K. Dhingra, explaining the contents of the seized material........ He affirmed that the transactions as per the cheque book were entered in the regular books of accounts maintained in the normal course of business. Insofar as the hard disc seized from the office at 801, Padma Tower-II, Rajinder Nagar, New Delhi, is concerned, he affirmed that the hard disc contained the soft copies of “working papers for preparing Balance Sheet and the Income Tax Computation and details of Income Tax Filing”. He further affirmed that the Balance Sheet which had been prepared on the basis of the working papers etc. had already been filed with the Income Tax Department and, therefore, the same was fully disclosed and the transactions as contained in the soft copies were fully recorded. In addition, he confirmed that the soft copies of papers were the property of M/s Bhupesh K. Dhingra & Co. – a sole proprietorship concern of B.K. Dhingra

It was contended on behalf of the Revenue that the hard disk contained data pertaining to the Assessee and, therefore, it was rightly held that the hard disc belong to the Assessee. Concededly, this contention would not be sustainable in view of the principles laid down by this Court

in Pepsico India Holdings Pvt. Ltd. (supra) with regard to the interpretation of the words “belongs to” in Section 153C of the Act. The hard disk was recovered from the computer belonging to M/s B.K. Dhingra & Co. which contained soft copies of working papers and balance sheet pertaining to the Assessee for its income tax filing. It has been contended that B.K. Dhingra is a Chartered Accountant and had the data pertaining to the Assessee in his professional capacity. Merely because such data pertained to the Assessee (who claims to be a client of M/s B.K. Dhingra and Co.) the hard disk could not be stated to belong to the Assessee.

Merely because a valuable article or document belonging to an Assessee is seized from the possession of a person searched under Section 132 of the Act, does not mean that the concluded assessments of the Assessee are necessarily to be re-opened under Section 153C of the Act. In our view, the concluded assessments cannot be interfered with mechanically and solely for the reason that a document belonging to the Assessee, which has no bearing on the assessments of the Assessee for the years preceding the search, was seized from the possession of the searched persons.

If the seized money, bullion, jewellery or other valuable article or thing seized as handed over to the AO of the Assessee, are duly disclosed and reflected in the returns filed by the Assessee, no further interference would be called for. Similarly, if the books of accounts/documents seized do not reflect any undisclosed income, the assessments already made cannot be interfered with. Merely because valuable articles and/or documents belonging to the Assessee have been seized and handed over to the AO of the Assessee would not necessarily require the AO to reopen the concluded assessments and reassess the income of the Assessee.

The question whether the documents/assets seized could possibly reflect any undisclosed income has to be considered by the AO after examining the seized assets/documents handed over to him. It is only in cases where the seized documents/assets could possibly reflect any undisclosed income of the Assessee for the relevant assessment years, that further enquiry would be warranted in respect of those years. Whilst, it is not necessary for the AO to be satisfied that the assets/documents seized during search of another person reflect undisclosed income of an Assessee before commencing an enquiry under Section 153C of the Act, it would be impermissible for him to commence such enquiry if it is apparent that the documents/assets in question have no bearing on the income of the Assessee for the relevant assessment years.

Download Full Judgment Click Here >>

Delhi HC- Assessment Proceedings u/s 153C can not be commenced merely on the basis of Hard Disk, Working Papers Seized from Chartered Accountant | 31-10-2015 |

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