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SCN issued u/s 153C must necessarily be backed with satisfaction recorded by AO based on cogent evidence, rather than surmises and conjectures: HC

2019-TIOL-1701-HC-AHM-IT

IN THE HIGH COURT OF GUJARAT

AT AHMEDABAD

R/Tax Appeal No. 342 Of 2019

PRINCIPAL COMMISSIONER OF INCOME TAX-3

Vs

HIMANSHU CHANDULAL PATEL

J B Pardiwala & A C Rao, JJ

Dated: July 30, 2019

Appellant Rep by: Mrs Mauna M Bhatt(174)
Respondent Rep by: 
None

Income Tax – Section 153C

Keywords – Belongs to – Ownership – Satisfaction

The Revenue conducted search in the case of one M/s. Sheela Foam Private Limited and seized incriminating materials in respect of the assessee. The materials recovered indicated undisclosed capital gain on transfer of shares paid viua cheque and cash. The AO issued the notice u/s 153C and after considering the submissions of the assessee, brought the cash transactions to tax. The CIT(A) was of the view that the satisfaction recorded by the AO was not sufficient enough to issue notice u/s 153C. Hence, the notice and subsequent addition was quashed. The ITAT affirmed the CIT(A) order.

Having heard the parties, the High Court held that,

Whether for issuing notice u/s 153C, it is absolutely essential for the AO to record its satisfaction going by the cogent materials connecting the documents seized with the assessee rather than replacing the satisfaction with surmise and conjectures – YES: HC

++ before a notice u/s 153C can be issued two steps have to be taken. The first step is that the AO 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 AO of the person to whom the said document “belongs”. In the present case, it has been urged on behalf of the assessee that the first step itself has not been fulfilled;

++ 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 AO 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 AO 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”. Thus, since the satisfaction arrived at by the Assessing Officer without there being any cogent or tangible material, the appeal of Revenue fails.

Revenue’s appeal dismissed

Cases followed:

Pepsi Foods (P.) Ltd. Vs. Assistant Commissioner of Income Tax – 2014-TIOL-1688-HC-DEL-IT

Principal Commissioner of Income Tax (Central)-2 Vs. Index Securities (P.) Ltd. – 2017-TIOL-1813-HC-DEL-IT

JUDGEMENT

Per: J B Pardiwala:

1. This tax appeal under Section 260A of the Income Tax Act, 1961 [for short the Act, 1961] is at the instance of the revenue and is directed against the order passed by the Income Tax Appellate Tribunal, dated 31/12/2018 in the ITA No.1456/DEL/2015 for the Assessment Year 2010-11.

2. The revenue has proposed the following substantial question of law for the consideration of this Court:-

“Whether the Appellate Tribunal has erred in law and on facts in interpreting the term ‘belongs to’ as ‘ownership’ in Section 153C of the Act particularly when the intention of the legislature is always that section 153C is applicable when documents seized in a searched premise belongs to or its content thereof pertains to some other person in view of amendment by Finance Act, 2015?”

3. It appears from the materials on record that a search and seizure operation under Section 132 of the Act was undertaken at the business premises of M/s. Sheela Foam Private Limited on 28/11/2011. Few documents were recovered during the search operation and those were seized. The case of the assessee was centralized vide order under Section 127 of the Act dated 16/11/2012 passed by the CIT, Ahmedabad. The notice under Section 153C of the Act was issued on 29/08/2013. The return declaring income of Rs.13,86,47,670/- was filed by the assessee on 06/01/2014.

4. The notice under Section 143(2) was issued on 24/12/2013. The details/information furnished by the assessee during the course of the assessment proceedings, were examined by the Assessing Officer. The Assessing Officer recorded the following satisfaction:-

During course of search operation u/s.132 of the IT Act carried on 28/11/2011 at business premises of M/s. Sheela Foam Private Limited it was observed that the shares held by Pradhuman Patel group (P P Group) and other Patel Group in M/s. Sheela Foam Private Limited were acquired by company M/s. Serta India Private Limited (Rahul Gautam Group) during the Financial Year 2009-10.

During the search operation various incriminating evidences were found and seized from the office premises of M/s. Sheela Foams Pvt. Ltd. which established beyond doubt that for acquiring such shares by Rahul Gautam Group from the Pradhuman Patel Group and others Patel Group, substantial consideration was paid by the Rahul Gautam Group to the Pradhuman Patel Group and others in cash outside the books of account.

As per the evidences found and seized, it was revealed that the total sale consideration for the shares as held by the Pradhuman Group and other patel group in M/s. Sheela Foams Pvt. Ltd. was Rs.88.90 crores out of which Rs.52.78 crores was paid through cheques and the balance amount of Rs.36.10 (Rs.31.85 crores to Pradhuman Patel Group & 4.25 crore to other patel group) crores was paid in cash by the Rahul Gautam Group to the Pradhuman Patel Group and other patel group.

As per seized documents (Page no.41 to 85 of Annexure-A1, Page no.20, 21 of Annexure-7, Page no.12 of Annexure5, Page no.21 of Annexure-8), it is clearly evident that the group run by Sh. Rahul Gautam, MD of M/s. Sheela Foam Private Limited, has paid huge amount of cash as indicated on the seized documents to Sh. Pradhuman Patel and his group for purchase of shares. As per the statement of Shri Rahul Gautam (MD of M/s. Sheela Foam Private Limited) vide ques. No.44, the shares of M/s. Sheela Foam Private Limited were purchased by M/s. Serta India Private Limited from Patel Group.

Page no.41 of Annexure A1 as seized from the office premises is a sheet exhibiting detailed working in respect of the transfer of shares as held by Pradhuman Patel and his family members in M/s. Sheela Foams Pvt. Ltd to RG (Rahul Gautam) Group. This is the one document and will be correlative with the other seized documents from time to time establish its sanctity.

5. The seized documents contained the details of payments/receipts in respect of the transactions in shares by way of cheques and cash. The Assessing Officer observed that the assessee had disclosed the capital gain in respect of the transaction through cheques and the capital gain on the transactions made by way of cash, was not disclosed by him in his return of income. In such circumstances, the Assessing Officer made the addition of Rs.9,50,65,917/- on account of the undisclosed capital gain on the transfer of shares.

6. The assessee being aggrieved with the addition preferred an appeal before the CIT, Ahmedabad.

7. The CIT, Ahmedabad while allowing the appeal preferred by the assessee, held as under:-

(M/s. SHEELA FOAM PRIVATE LIMITED)

During the course of search and seizure operation conduced on 28.11.2011 at Premises No.37/2, Site-IV, Sahibabad Industrial Area, Ghaziabad, U.P., of Sheela Foam Private Limited, documents marked as Annexure A1 to A13 were found and seized.

It is seen that the above seized material contains following documents belong to Sh. Praduman Patel:-

1. Annexure A1, P41, photocopies of paper relating to the settlement statement for the transfer of shares from the Pradhuman Patel Group to Rahum Gautam Group.

P75 & 81 contains photocopies of paper relating to the settlement statement for the transfer of shares from the Pradhuman Patel Group To Rahul Gautam Group.

2. Annexure A2, Page 15 to 19 contains receipt dated 20/12/2009 of Rs.52476363/- issued to Rahul Gautam by Praduman Patel for sale 1052400 shares of M/s. Sheela Foam Pvt. Ltd.

Page19 receipt dated 20/12/2009 of Rs.55156365/- issued to Rahul Gautam by Pradhuman Patel for sale 678680 shares of M/s. Sheela Foam Pvt. Ltd.

Page-22 & 25 contains photocopies of cheque issued by M/s. Sheela Foam Private Limited, M/s. Serta India P. Ltd., Rahul Gautam to Pradhuman Patel.

Page-27, receipt dated 21/10/2009 of Rs.41334060/- issued to Rahul Gautam by Pradhuman Patel for sale shares of M/s. Sheela Foam Pvt. Ltd.

Page-29, receipt dated 20/12/2009 of Rs.35000/- issued to Rahul Gautam by Pradhuman Patel for sale shares of M/s. Polyflex Marketing P Ltd.

Page 28, receipt dated 21/10/2009 of Rs.34000/- issued to Rahul Gautam by Pradhuman Patel for sale shares of M/s. Starlite India Pvt. Ltd.,

Page 36, contain confirmation regarding no claim against M/s. Sheela Foam Private Limited.

Page 35 contain confirmation regarding current or contingent liabilities against the legal & beneficiary ownership of sale of shares.

Page 30 contain receipt dated 31/10/2009 for Rs.35000/issue to Sh. Rahul Gautam against sale 350 equity shares.

In view of the above, I am satisfied that documents seized belongs to a person other than the person under section 132 of the IT Act, 1961. Hence, the proceedings u/s 153C of the IT Act, 1961 is initiated in the case of Sh. Pradhuman Patel.

8. It appears that the CIT, Ahmedabad by relying on the Delhi High Court decision in the case of Pepsi Foods Private Limited took the view that the satisfaction recorded by the Assessing Officer was not sufficient enough to proceed against the assessee by issuing notice under Section 153C of the Act. The CIT, Ahmedabad relied on the presumption under Section 292C(1)(i) of the Act, which provides that the document which is recovered from a person who was searched, would be belonging to that person. The CIT, Ahmedabad took the view there must be cogent and tangible material available with the Assessing Officer before he arrives at a satisfaction that the seized document did not belong to the searched person, but to someone else and such satisfaction cannot be on the basis of surmises and conjectures.

9. The Revenue being dissatisfied with the order passed by the CIT, Ahmedabad preferred an appeal before the Appellate Tribunal.

10. The appellate tribunal concurred with the findings recorded by the CIT, Ahmedabad and ultimately, dismissed the appeal. While dismissing the appeal, the appellate tribunal observed as under:-

“23. The above decision of the Honourable Delhi High Court has also considered the decision of the Gujarat High Court and Honourable Delhi High Court relied upon by the learned CIT DR. The above decision has reiterated the same position that unless the document belongs to the assessee is shown by the learned AO in the satisfaction note it selt with a reason and the basis.

24. Even the Honourable Delhi High Court in case of Ganpati Fincap Private limited Vs. CIT [2017] 82 taxmann.com 408 (Delhi)/ [2017] 395 ITR 692 (Delhi)/ [2017] 298 CTR 174 (Delhi) = 2017-TIOL-1033-HC-DEL-IT in para number 41(ii) has held that Where proceedings are proposed to be initiated under Section 153C of the Act against the ‘other person’, it has to be preceded by a satisfaction note by the AO of the searched person. He will record in this satisfaction note that the seized document belongs to the other person. Depending on the nature and contents of the document he may be required to give some reasons for such conclusion. Therefore, it is apparent that if the satisfaction note, does not have any reasons for such conclusion, it is not in accordance with the law. For invoking jurisdiction under section 153C of the Income Tax Act. Such is the case before us, where there is no reason recorded by the learned assessing officer stating that why these documents belong to the assessee and not to the person from whom it is found.

25. However before parting we would also like to state that it cannot be a rule in its absoluteness that one document cannot be held to be belonging to more than one person. The striking example of the same is a joint bank account pass book of several persons together may be belonging to all those persons.

26. Therefore, respectfully following the above judicial precedents of the honourable Delhi High Court, we do not find any reason to interfere in the order of the learned CIT – A, wherein it has been held relying upon the decision of the honourable Delhi High Court in case of Pepsi Foods Private Limited (Supra) that there is no satisfaction recorded by the learned assessing officer that the impounded documents belong to the various assessee and therefore, the jurisdiction assumed by the learned assessing officer u/s.153C of the Income Tax Act is invalid.”

11. The Revenue being dissatisfied with the impugned order passed by the appellate tribunal is here before this Court with the present appeal.

12. Mrs. Bhatt, the learned senior standing counsel appearing for the Revenue submitted that the issuance of the notice under Section 153C is only a first step to the enquiry which is to follow. She submitted that once the Assessing Officer of the WP(C) 415/2014 & Ors. Page 5 of 15 searched person arrives at the satisfaction that a document found during the search operation related to a person other the searched person, then it could be said that the said document belonged to such other person and the Assessing Officer was then bound to forward the document to the Assessing Officer having jurisdiction over the other person (the person not searched), and, thereafter, it was for that Assessing Officer to follow the procedure prescribed under Section 153A in an attempt to ensure that the income reflected in the seized documents had been accounted for by the other person (the person not searched).

13. She further submitted that the decision of the Appellate Tribunal is erroneous. The Assessing Officer has clearly established that the seized documents belong to the assessees. The seized document contained the details of shares held by Patel Group (where the assessee is one of the shareholder), rate of transfer of shares, payment received through cheque, payment received in cash, balance payable in cash and cheques, receipts of payments for transfer of shares by the assessee and copy of cheques for payment received which clearly belonged to the assessee. The seized documents also bear the signature of the assessee. The assessee has accepted all the payments/ receipts through cheque mentioned in the seized documents at the same time has denied the cash component, though reflected in the seized document.

14. She further submitted that the assessee had accepted the part details mentioned in the seized document and denied the payments made through cash. Thus, considering the above facts, it is clearly established that the seized material found from the search premises belong to the assessee.

15. Before proceeding any further it would be necessary to set out the relevant provisions of the said Act as applicable to the assessment years under consideration:-

“153C. (1) Notwithstanding anything contained in section 139, section 147, section 148, section 149, section 151 and section 153, where the Assessing Officer is satisfied that any money, bullion, jewellery or other valuable article or thing or books of account or documents seized or requisitioned belongs or belong to a person other than the person referred to in section 153A, then the books of account or documents or assets seized or requisitioned shall be handed over to the Assessing Officer having jurisdiction over such other person and that Assessing Officer shall proceed against each such other person and issue such other person notice and assess or reassess WP(C) 415/2014 & Ors. Page 6 of 15 income of such other person in accordance with the provisions of section 153A:

Provided that in case of such other person, the reference to the date of initiation of the search under section 132 or making of requisition under section 132A in the second proviso to subsection (1) of section 153A shall be construed as reference to the date of receiving the books of account or documents or assets seized or requisitioned by the Assessing Officer having jurisdiction over such other person:

(2) Where books of account or documents or assets seized or requisitioned as referred to in subsection (1) has or have been received by the Assessing Officer having jurisdiction over such other person after the due date for furnishing the return of income for the assessment year relevant to the previous year in which search is conducted under section 132 or requisition is made under section 132A and in respect of such assessment year–

(a) no return of income has been furnished by such other person and no notice under subsection (1) of section 142 has been issued to him, or

(b) a return of income has been furnished by such other person but no notice under subsection (2) of section 143 has been served and limitation of serving the notice under subsection (2) of section 143 has expired, or

(c) assessment or reassessment, if any, has been made, before the date of receiving the books of account or documents or assets seized or requisitioned by the Assessing Officer having jurisdiction over such other person, such Assessing Officer shall issue the notice and assess or reassess total income of such other person of such assessment year in the manner provided in section 153A.”

“132. (1) xxxx xxxx xxxx

(4A) Where any books of account, other documents, money, bullion, jewellery or other valuable article or thing are or is found in the possession or control of any person in the course of a search, it may be presumed–

(i) That such books of account, other documents, money, bullion, jewellery or other valuable article or thing belong or belongs to such person;

xxx xxx xxx

“292C.(1) Where any books of account, other documents, money, bullion, jewellery or other valuable article or thing are or is found in the possession or control of any person in the course of a search under section 132 or survey under section 133A, it may, in any proceeding under this Act, be presumed–

(i) that such books of account, other documents, money, bullion, jewellery or other valuable article or thing belong or belongs to such person;

16. On a plain reading of Section 153C, it is evident that the Assessing Officer of the searched person must be “satisfied” that inter alia any document seized or requisitioned “belongs to” a person other than the searched person. It is only then that the Assessing Officer of the searched person can handover such document to the Assessing Officer having jurisdiction over such other person (other than the searched person). Furthermore, it is only after such handing over that the Assessing Officer of such other person can issue a notice to that person and assess or reassess his income in accordance with the provisions of Section 153A. Therefore, 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”. In the present cases it has been urged on behalf of the petitioner that the first step itself has not been fulfilled. For this purpose it would be necessary to examine the provisions of presumptions as indicated above. 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”. [See: Pepsi Foods (P.) Ltd. Vs. Assistant Commissioner of Income Tax; [2014] 52 taxmann.com 220 (Delhi)] = 2014-TIOL-1688-HC-DEL-IT.

17. We may refer to a decision of the Delhi High Court in the case of Principal Commissioner of Income Tax (Central)-2 Vs. Index Securities (P.) Ltd. reported in [2017] 86 taxmann.com 84 (Delhi) = 2017-TIOL-1813-HC-DEL-IT, wherein, the Court observed as under:-

28.4 The Supreme Court also agreed with the decision of the Gujarat High Court in Kamleshbhai Dharamshibhai Patel (supra) to the extent it held that “it is an essential condition precedent that any money, bullion or jewellery or other valuable articles or thing or books of accounts or documents seized or requisitioned should belong to a person other than the person referred to in Section 153A of the Act.” The Supreme Court observed: “This proposition of law laid down by the High Court is correct, which is stated by the Bombay High Court in the impugned judgment as well.”

28.5 The above categorical pronouncement of the Supreme Court cannot, by any stretch of imagination, be termed as obiter as has been suggested by Mr. Manchanda. Even the obiter dicta of the Supreme Court is binding on this Court.

29. The search in the case before the Supreme Court was prior to 1st June 2015. Apart from the fact that the Supreme Court approved the above decision of the Gujarat High Court holding that the seized documents should ‘belong’ to the other person, the legal position in this regard where the search has taken place prior to 1st June 2015 has been settled by the decision of this Court in Pepsico India Holdings (P.) Ltd. (supra). In Vinita Chaurasia (supra), this Court reiterated the above legal position after discussing the decisions in Super Malls (P.) Ltd (supra) and Nau Nidh Overseas (P.) Ltd. (supra). The essential jurisdictional requirement for assumption of jurisdiction under Section 153C of the Act (as it stood prior to its amendment with effect from 1st June 2015) qua the ‘other person’ (in this case the assessees) is that the seized documents forming the basis of the satisfaction note must not merely ‘pertain’ to the other person but must belong to the ‘other person’.

18. Having heard Mrs. Mauna Bhatt, the learned senior standing counsel appearing for the Revenue and having gone through the materials on record, we are of the view that there is no good reason for us to disturb the concurrent findings recorded by the two revenue authorities as regards the satisfaction arrived at by the Assessing Officer without there being any cogent or tangible material.

19. Having regard to the materials on record, if the CIT, Ahmedabad and the Appellate Tribunal relied upon the decision of the Delhi High Court in the case of Pepsi Foods Private Limited, then, in our opinion, no error much less an error of law could be said to have been committed in taking the view that there is no cogent material for arriving at the substantive satisfaction.

20. In the documents, which were seized during the course of search, there may be some reference of the assessee, but that itself would not be sufficient. It is necessary to show some nexus on the basis of some cogent materials between the documents seized and the assessee.

21. For the forgoing reasons, this appeal fails and is hereby dismissed.

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