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Pr. Commissioner Of Income Tax Delhi-18 Vs. M/s. N.S. Software (Firm)
May, 02nd 2018
*      IN THE HIGH COURT OF DELHI AT NEW DELHI

                                                Reserved on: 05.02.2018
                                              Pronounced on: 18.04.2018
+      ITA 791/2017

       PR. COMMISSIONER OF INCOME TAX DELHI-18..... Appellant
                Through : Sh. Zoheb Hossain, Sr. Standing Counsel, for
                Revenue.

                   versus

       M/S. N.S. SOFTWARE (FIRM)                      ..... Respondent
                  Through : Sh. Sudesh Garg, Advocate.

       CORAM:
       HON'BLE MR. JUSTICE S. RAVINDRA BHAT
       HON'BLE MR. JUSTICE A.K. CHAWLA

MR. JUSTICE S. RAVINDRA BHAT

%

I.   FACTS
1.     This appeal has been filed under Section 260A of the Income Tax Act,
1961 ("the Act") for the Assessment Year (AY) 2009-10 against order dated
28.02.2017 of the Income Tax Appellate Tribunal (,,ITAT hereafter). The
question of law framed for this appeal is as follows:
       " Did the Income Tax Appellate Tribunal (ITAT) fall into error
       in quashing the assessment on the ground that it was not based
       upon a notice under Section 153C of the Income Tax Act,
       1961?"




ITA 791/2017                                                      Page 1 of 23
2.     The relevant facts of the case are that on 15.03.2004, the assessee
Firm was established through a partnership deed between Sharada Erectors
Private Limited and Mr. Rakesh Kumar Garg and his company. A search and
seizure operation was carried out under Section 132 on 31.07.2008 in the
Rajdurbar group of cases. During this operation, a hard disk containing
books of accounts of the assessee were seized. After the assessee declared its
total income to be NIL on 29.09.2009, a notice under Section 142(1) read
with Section 153C was issued to the assessee on 23.07.2010. When it filed a
reply on 27.08.2010 once again declaring its income to be NIL, further
notices under Section 142(2) and 142(1) were issued. The Assessing Officer
(AO, hereafter) by his order dated 28.12.2010 held the total taxable income
for AY 2009-10 to be ` 1,56,99,738/-, and disallowed deductions claimed
under Section 80IA. The reasons for disallowance recorded, inter alia, were
as follows:
       "11. The above details clearly suggest that the during the F.Y.
       2008-09 corresponding to the A.Y. 2009-10, only three units
       were located in the Industrial park which is in contravention to
       the condition No. 5(i) of the approval letter dated 12.4.2005
       issued by Ministry of Commerce and Industry. Furthermore, the
       tenant namely M/s Price water house Coopers (P) Ltd is
       occupying an area of 34186 square feet which is more than the
       50 % of the total area of the industrial Park admeasuring
       56560 Square feet. Thus the assessee has not fulfilled the
       conditions mentioned in Para 6 (f) and Para 9 (2) of the
       Industrial Park Scheme 2002. Furthermore, as no notification
       has been issued by the Central board of Direct Taxes notifying
       the said Industrial Park, therefore, conditions as mentioned in
       Rule 18 C (4) of the Income Tax Rules have also not been
       fulfilled by the assessee. In view of these facts it is held that the
       assessee is not eligible for benefits under section 801A (4) (iii)




ITA 791/2017                                                             Page 2 of 23
       of the Act. Hence the deduction of Rs. 1,56,99,738/- as claimed
       by the assessee is disallowed."

3.     The assessee appealed to the Commissioner of Income Tax (Appeals),
(hereafter called "CIT (A)"). By order dated 09.04.2014, the CIT (A) held
that the proceedings under Section 143(3) for AY 2009-10 were valid, and
enhanced the taxable income to `1,91,49,006. The CIT (A), inter alia, held:
               Whether the seized documents were incriminating in nature
               could not be determined before conducting proceedings under
               Section 153C because the Ld. AO had never conducted any
               scrutiny assessments of the Assessee Firm.
               The initiation of proceedings under Section 153C was proper,
               and there was no obligation upon the Ld. AO to exhaustively
               list all the documents or reasons for his satisfaction in the note.
               For AY 2009-10, proceedings under Section 143(3) had been
               completed, and no notice under Section 153C was issued.
               The Assessee Firm participated in the proceedings under
               Section 153C without raising an objection before the Ld. AO.
4.     The CIT (A)s order was challenged before the ITAT by both parties.
By the impugned order, the ITAT held that proceedings under Section 153C
were void ab initio and quashed them. For so concluding, it inter alia held:
               The satisfaction note under Section 153C was defective
               because it did not provide the reasoning employed by the Ld.
               AO to conclude that the seized material belonged to the
               Assessee Firm.
               Moreover, the AO for Sh. Narendra Kumar Aggarwal did not
               record a separate satisfaction note as required by law. Courts



ITA 791/2017                                                             Page 3 of 23
               have consistently held that recording two separate satisfaction
               notes is necessary even if the Assessing Officer for the person
               from whose premises the material was seized is also the
               Assessing Officer for the person to whom the material belongs
               to. The revenue is aggrieved by the above decision of the
               ITAT.
Submissions of Parties

5.     Mr. Zoheb Hossain, learned counsel for the Revenue argued that the
ITAT failed to appreciate that the notice for AY 2009-10 was issued under
Section 142(1), and not under Section 153C. Therefore, a satisfaction note
was not mandatory in the present case. In any event, the CIT (A) found that
the AO could have reasonably determined that the seized material belonged
to the assessee based on circumstances surrounding the search and seizure.
Counsel relied upon the observations of the CIT (A), to the following effect:
       "4.2.1 It is noted that the books of accounts of the assessee firm
       were found in a computer found at the residence cum office
       premises of Mr. Narendra Kumar Aggarwal S/o Late Sh. R.C.
       Agarwal who was neither employee of the company nor a
       partner. Office Address of the assessee was different from the
       place where the books of accounts of the assessee's firm in the
       computer were located. The hard disk of the computer has been
       seized as Annexure A-26. In the statement recorded U/S 132(4)
       on 31.07.2008, Mr. Aggarwal has stated that he was an
       employee of V.K. Financial Services Pvt. Ltd. and drew salary
       of Rs. 20,000 per month. This there is no dispute that the
       documents belonging to the appellant' were found and seized
       during action U/S 132 of the Act. Whether these documents
       were incriminating or not could not have been decided before
       taking up proceedings U/S 153C, as for none of the A.Ys. in
       question, AO had not done any scrutiny assessments of the
       appellant in the past. There is also the search finding that the



ITA 791/2017                                                          Page 4 of 23
       appellant group had not cooperated in supplying the documents
       and books of accounts of various companies and individuals
       and other members of the Rajdurbar Group. Thus, the AO had
       to verify the correctness of the declared income from the seized
       books of A/c found in the hard disk. In view of this it has to be
       held that the proceedings u/s 153C have been rightly initiated."

6.     Learned counsel also relied on the satisfaction note of the AO, while
issuing notice under Section 153C to the assessee. He also relied on the
Indore Bench (of ITAT) in Deputy Commissioner of Income Tax v. Sushil
Kumar Jain (2010 127 ITD 264). It was also urged that the ITAT should not
have permitted the assessee to argue new aspects and points that were not
urged and, therefore, not considered by the lower revenue authorities,
including the CIT (A).
7.     Learned counsel for the assessee, Mr. Sudesh Garg defended the
impugned order and urged three broad submissions. He urged, firstly that the
AOs decision did not outline any details of the documents which were
seized on 31.07.2008. These documents were never shown to the assessee,
and, therefore, it was unable to rebut any assumptions, for lack of
opportunity. Counsel argued that the initiation of proceedings was
unjustified because the seized material did not incriminate the assessee. The
additions made by the AO are based on returns filed under Section 139, and
they have no relation to the seized material. It was lastly urged that the AO
failed to record a specific finding that the material seized belonged to the
assessee. The satisfaction note was prepared in a mechanical manner without
any application of mind by the AO to the specific facts of this case. Learned
counsel relied on CIT v. RRJ Securities Limited (2015) 62 Taxmann.com 391
(Delhi); Pepsi Foods Pvt. Ltd. v ACIT [2014] 52 taxmann.com 220 (Delhi)




ITA 791/2017                                                         Page 5 of 23
and Pepsico India Holdings Pvt. Ltd v ACIT [2015] 371 ITR 295 (Delhi) in
support of his submission that the ITATs conclusions were justified.
Analysis and Conclusions
8.     The satisfaction note of the AO, while issuing notice under Section
153C in this case, was as follows:
       "A search operation was conducted on Raj Darbar Group of
       cases on 31.07.2008. During the course of Search operation at
       the premises of
       i)    Party A-20, Residence Cum Office of Narender Kumar
       Aggarwal, 1st and 2nd Floor, 7, Western Avenue, Maharani
       Bagh ­New Delhi.
       Various papers were found and seized belonging to M/s N S.
       Softwares Pvt. Ltd.

       The annexures are marked as under:

       PartyA-20
       Annexure 26, Hard Disc containing Books of Accounts of M/s
       NS. Softwares Pvt. Ltd.
       Thus the proceedings u/s 153C r/w. section 153A of the Income
       Tax Act 1961 are being initiated in the above case."






9.     The ITAT, in Sushil Kumar Jain (supra) held that issuing a notice
under Section 153C for the previous search year is not mandatory, and the
AO can issue a normal notice under Section 142(1) instead. The relevant
extracts from the case are as follows:
       "However, in our view, there cannot be a mandatory
       jurisdiction for six back years, even for those entities, which
       were not in existence in all such six years and which is also so
       because of the fact that jurisdiction under s. 153A is for
       assessment or reassessment of total income of each year falling
       in such period. Thus, scope of s. 153A, if viewed in this manner,
       cannot be interpreted to mean that assessment in respect of
       previous year in which search was conducted or requisition



ITA 791/2017                                                         Page 6 of 23
       was made, cannot be made in accordance with provisions of s.
       153A r/w s. 153B or 153C as contended by the assessee. It is
       further noteworthy that concept of broken period in the year of
       search applicable for block assessment is not present under the
       new scheme, hence, the AO has to wait to exercise the
       assessment powers after the relevant financial year during
       which search took place and such procedure, in fact, provides
       an opportunity to assessee to disclose unexplained
       assets/income in such return and avoid penalty. It is also
       pertinent to mention here that notice under s. 153A requiring
       the assessee to file return for such is, generally, not to be issued
       for the previous year of search or requisition precisely for the
       reason that the assessee is required to file return for such
       previous year of search in normal course and, in case of failure
       of the assessee to do so, the AO can issue notice under s. 142(1)
       of the Act to file the return under s. 139(4). Thus, absence of
       requirement of issue of notice under s. 153A for the year of
       search, in our opinion, does not result into an inference that
       assessment of previous year of search is to be made as per the
       normal provisions of the Act, specially when state of provisions
       of s. 153A is not different from scope of provisions of s. 143 for
       making assessment of total income of such year. We may
       further add that, in case, any notice under s. 153A is issued in
       case of such previous year, the same should be construed as
       issued under s. 142(1) as the scope object of these two
       provisions on the aspect of requiring the assessee to file the
       return is same. Even otherwise, under the new scheme, total
       income has to be computed as per the normal provisions of the
       Act and tax, interest and penalty also is to be levied as per the
       general provisions of the Act applicable to such assessment
       year, hence, there cannot be any prejudice to the assessee
       merely because an AO proceeds to make an assessment in case
       of year of search as per the provisions of s. 153A r/w s. 153B,
       particularly when time-limit of service of notice under s.
       143(2), subject to provisions of s. 153B, would also be
       applicable (reasons on this aspect are given later in this
       order)."




ITA 791/2017                                                            Page 7 of 23
10.    In the same case, the Ld. ITAT went on to observe that the AO has to
comply with Section 153A even if the assessment is with respect to the
previous year in which the search was conducted and even if the due date for
furnishing returns for that assessment year has not passed.

       "Further, the provisions of s. 153C(2) also provide for
       completion of assessment in respect of the person other than the
       person referred to in s. 153A in the manner provided in s.153A.
       No doubt, the provisions of s. 153C(2) provide for specific
       situations wherein the assessment in respect of the assessment
       year relating to the previous year in which search is conducted
       under s. 132 or requisition is made under s. 132A has to be
       made in the manner provided in s. 153A. However, in our
       opinion, where AO having jurisdiction over such other person
       receives the books of account or documents, etc. before the due
       date of furnishing the return of income for such assessment
       year, then also, the assessment would be completed in the
       manner provided under s. 153A of the Act because in that case,
       the AO can assess/reassess under s. 153C(1) in routine course.
       We are, accordingly, of the view that if under specific
       circumstances as provided under s. 153C(2) assessment of a
       person covered under s. 153C has to be completed in the
       manner provided in s. 153A of the Act, then, there should not be
       any doubt that the assessment in case of a searched person for
       the year of search has to be completed under s. 153A r/w s.
       153B of the Act."
11.    The assessee relied on the decisions in RRJ Securities Limited (supra);
Pepsi Foods Pvt. Ltd. v ACIT [2014] 52 taxmann.com 220 (Delhi) and
Pepsico India Holdings Pvt. Ltd v ACIT [2015] 371 ITR 295 (Delhi). In RRJ
Securities Limited (supra), clearly held that recording of a satisfaction note is
the most important step in initiation of proceedings under Section 153C. The
relevant extract from the case is as follows:




ITA 791/2017                                                           Page 8 of 23
       "13. The first and foremost step for initiation of proceedings
       under Section 153C of the Act is for the AO of the searched
       person to be satisfied that the assets or documents seized
       belong to the Assessee (being a person other than the searched
       person). The AO of the Assessee, on receiving the documents
       and the assets seized, would have jurisdiction to commence
       proceedings under Section 153C of the Act. The AO of the
       searched person is not required to examine whether the assets
       or documents seized reflect undisclosed income. All that is
       required for him is to satisfy himself that the assets or
       documents do not belong to the searched person but to another
       person. Thereafter, the AO has to transfer the seized
       assets/documents to the AO having jurisdiction of the Assessee
       to whom such assets/documents belong. Section 153C(1) of the
       Act clearly postulates that once the AO of a person, other than
       the one searched, has received the assets or the documents, he
       is to issue a notice to assess/re-assess the income of such
       person - that is, the Assessee other than the person searched -
       in accordance with provisions of Section 153A of the Act.
       **************
            ****************
       21. As discussed hereinbefore, once the AO of the searched
       person is satisfied that the seized assets/documents belong to
       another person and the said assets/documents have been
       transferred to the AO of such other person, the proceedings for
       assessment/reassessment of income of the other person has to
       proceed in accordance with provisions of Section 153A of the
       Act. Section 153A requires that where a search has been
       initiated under Section 132 of the Act, the AO is required to
       issue notice requiring the noticee to furnish returns of income
       in respect of six assessment years relevant to the six previous
       years preceding the previous year in which the search is
       conducted. As discussed hereinbefore, by virtue of second
       proviso to Section 153A, the assessment/reassessment pending
       on the date of initiation of search abate. In the context of
       proceedings under Section 153C of the Act, the reference to the
       date of initiation of the search in the second proviso to Section




ITA 791/2017                                                         Page 9 of 23
       153A has to be construed as the date on which the AO receives
       the documents or assets from the AO of the searched person.
       Thus, by virtue of second proviso to Section 153A of the Act as
       it applies to proceedings under Section 153C of the Act, the
       assessment/reassessment pending on the date on which the
       assets/documents are received by the AO would abate. In
       respect of such assessments which have abated, the AO would
       have the jurisdiction to proceed and make an assessment.
       However, in respect of concluded assessments, the AO would
       assume jurisdiction to reassess provided that the
       assets/documents received by the AO represent or indicate any
       undisclosed income or possibility of any income that may have
       remained undisclosed in the relevant assessment years. This
       Court in CIT v. Kabul Chawla [2015] 61 taxmann.com 412
       (Delhi) 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."
12.    In Pepsi Foods Pvt. Ltd., the Court has clarified that the Income Tax
Act, 1961 creates a general presumption that documents found in the control
and possession of a person belong to him or her. Therefore, to rebut this
presumption, the AO should provide clear and cogent reasons which explain
why the seized material belongs to somebody else. The relevant extract from
the case is as follows:

       "6. 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




ITA 791/2017                                                       Page 10 of 23
       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".
       ********************
            *************
       11. It is evident from the above satisfaction note that apart
       from saying that the documents belonged to the petitioner and
       that the Assessing Officer is satisfied that it is a fit case for
       issuance of a notice under Section 153C, there is nothing which
       would indicate as to how the presumptions which are to be
       normally raised as indicated above, have been rebutted by the
       Assessing Officer. Mere use or mention of the word
       "satisfaction" or the words "I am satisfied" in the order or the
       note would not meet the requirement of the concept of
       satisfaction as used in Section 153C of the said Act. The
       satisfaction note itself must display the reasons or basis for the
       conclusion that the Assessing Officer of the searched person is
       satisfied that the seized documents belong to a person other
       than the searched person. We are afraid, that going through the
       contents of the satisfaction note, we are unable to discern any
       "satisfaction" of the kind required under Section 153C of the
       said Act."
13.    In Pepsico India Holdings Pvt. Ltd the meaning and scope of the term
"belong" in Section 153C was explained as follows:

       "14. In view of this phrase, it is necessary that before the
       provisions of Section 153C of the said Act can be invoked, the
       Assessing Officer of the searched person must be satisfied that
       the seized material (which includes documents) does not belong
       to the person referred to in Section 153A (i.e., the searched
       person). In the Satisfaction Note, which is the subject matter of
       these writ petitions, there is nothing therein to indicate that the
       seized documents do not belong to the Jaipuria Group. This is




ITA 791/2017                                                          Page 11 of 23
       even apart from the fact that, as we have noted above, there is
       no disclaimer on the part of the Jaipuria Group insofar as these
       documents are concerned.
       15. Secondly, we may also observe that the finding of
       photocopies in the possession of a searched person does not
       necessarily mean and imply that they "belong" to the person
       who holds the originals. Possession of documents and
       possession of photocopies of documents are two separate
       things. While the Jaipuria Group may be the owner of the
       photocopies of the documents it is quite possible that the
       originals may be owned by some other person. Unless it is
       established that the documents in question, whether they be
       photocopies or originals, do not belong to the searched person,
       the question of invoking Section 153C of the said Act does not
       arise.
       16. Thirdly, we would also like to make it clear that the
       assessing officers should not confuse the expression "belongs
       to" with the expressions "relates to" or "refers to". A registered
       sale deed, for example, "belongs to" the purchaser of the
       property although it obviously "relates to" or "refers to" the
       vendor. In this example if the purchasers premises are searched
       and the registered sale deed is seized, it cannot be said that it
       "belongs to" the vendor just because his name is mentioned in
       the document. In the converse case if the vendor s premises are
       searched and a copy of the sale deed is seized, it cannot be said
       that the said copy "belongs to" the purchaser just because it
       refers to him and he (the purchaser) holds the original sale
       deed. In this light, it is obvious that none of the three sets of
       documents - copies of preference shares, unsigned leaves of
       cheque books and the copy of the supply and loan agreement -
       can be said to "belong to" the petitioner."
15.    Principal Commissioner of Income Tax v Nikki Drugs & Chemicals
Pvt. Ltd. [2015] 64 taxmann.com 309 (Delhi), was a case where Court held
that separate satisfaction notes must be recorded even if the Assessing
Officer of the person from whose premises the document is seized is the




ITA 791/2017                                                         Page 12 of 23
same as the Assessing Officer of the person to whom the document belongs.
The Court explained its reasoning as follows:

       "17. In the present case, the ITAT specifically recorded that,
       admittedly, a satisfaction note had not been recorded by the
       assessing officer of the searched person. It was contended by
       the Revenue before the ITAT that the assessing officer of the
       searched i.e. SVP Group was not required to record such
       satisfaction as both the Assessee and the SVP Group were
       being assessed by the same officer. This contention was
       rejected by the ITAT by following the decision of this Court in
       Pepsi Foods Pvt. Ltd v. Asstt Commissioner of Income Tax :
       (2014) 367 ITR 112 (Del).
       18. This Court has also expressed a similar view in
       Commissioner of Income Tax-7 v. RRJ Securities Ltd.: (2015)
       62 taxmann.com 391 (Delhi). Thus, the controversy whether it
       is necessary for the assessing officer of the searched person to
       record his satisfaction that the assets/documents seized belong
       to the assessee other than the searched person is no longer res
       integra. It is settled that recording of such satisfaction is sine
       qua non for commencing any proceedings under Section 153C
       of the Act. Thus, the decision of the ITAT in this regard cannot
       be faulted."
16.    ARN Infrastructure India Ltd. v ACIT, New Delhi [2017] 81
taxmann.com 260 (Delhi), too affirmed the holding in RRJ Securities (supra)
and held that seized material cannot be used for reopening concluded
assessments under Section 153C unless the material was incriminating in
nature. The Court applied this principle to the facts of that case and held as
follows:

       "17. As regards the other document seized, and mentioned in
       the Satisfaction Note viz., the extract of the ledger account
       maintained by the Petitioner concerning the payments of
       commission made by it to RGEPL, even if it is held to 'belong'




ITA 791/2017                                                         Page 13 of 23
       to the Petitioner, it could hardly be said to be an 'incriminating'
       document. This was a document relevant only for the AY 2010-
       11. It could not have been used for re-opening the assessments
       of the earlier years i.e. AYs 2007-08 to AY 2009-10, 2011-12
       and 2012-13. This position again stands settled by the decision
       in RRJ Securities Ltd (supra). The fact that the Revenue's SLP
       against the said decision is pending in the Supreme Court does
       not make a difference sine the operation of the said decision
       has not been stayed.
       18. While the ledger account extract may be relevant for AY
       2010-11, it cannot be said to be incriminating material
       warranting re-opening of the assessment. The return originally
       filed by the Petitioner for the said AY 2010-11 was picked up
       for scrutiny and finalised by an assessment order under Section
       143 (3) of the Act. The payments of commission to RGEPL to
       the tune of Rs. 4.95 crores as reflected in the ledger account
       was already disclosed in the Petitioner's accounts which were
       examined while finalising the regular assessment. Therefore,
       the ledger account could not have led the AO to be satisfied
       that any income had escaped assessment for the AY 2010-11.
       19. The net result is that neither of the documents mentioned in
       the Satisfaction Note could have formed a valid basis for the
       AO to initiate proceedings against the Petitioner under Section
       153 C of the Act for AY 2010-11 or any of the other years as
       proposed."


Analysis and Conclusions
17.    In this appeal, the scope of controversy between the revenue and the
assessee has been narrowed down to a single question of law. At this stage,
we are only concerned with whether the proceedings against the Assessee
Firm for AY 2009-10 were conducted under Section 153C read with Section
143(3) or only under Section 143(3). The AO Order for AY 2009-10
explicitly states that it has been passed under Section 153C read with Section




ITA 791/2017                                                          Page 14 of 23
143(3). However, the CIT Order states that for AY 2009-10, the assessment
was done under Section 143(3). It is worth noting that for all other
assessment years from 2005 to 2009, the Ld. CIT recorded that the
assessment was under Section 153C read with Section 143(3). It is just for
AY 2009-10 that the Ld. CIT found the assessment to be done under Section
143(3) only.
18.    The reliance by the revenue on Sushil Kumar Jain (supra) to say that
issuing a notice under Section 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
under Section 153A, and not Section 153C. A normal notice issued under
Section 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, as follows:

       "Under Section 158BD the Assessing Officer's satis faction is
       with regard to ,,undisclosed income belonging to a person
       other than the searched person. It is obvious that such
       satisfaction under Section 158BD by its very nature has to be
       prima facie and tentative. The same methodology cannot be
       imported into Section 153C where, in our view, the Assessing
       Officer is required to arrive at a conclusive satisfaction that the
       document belongs to a person other than the searched person
       because such Assessing Officer has to rebut the normal
       presumptions which are suggested by the statute under Sections
       132(4A)(i) and 292C(1)(i) of the said Act."




ITA 791/2017                                                          Page 15 of 23
19.    Therefore, that decision does not aid the revenue in this case. Further,
the AO Order explicitly states that the assessment for AY 2009-10 was
carried out pursuant to Section 143(3) read with Section 153C, and the
Income Tax Department has failed to provide an explanation for this
discrepancy. Finally, the timeline of events indicates that notices under
Section 142(1) and Section 153A were issued on the same day that the
satisfaction note was prepared i.e. 23.07.2010. Even for assessment years
2005 to 2009 for which the Assessee Firm had already filed returns, the
revenue did not initiate any proceedings till the Assessee Firm filed its return
for AY 2009-10 as NIL. If the Ld. AO had initiated proceedings for
reassessment of returns filed for assessment years 2005 to 2009 under
Section 153C before the filing of returns for AY 2009-10, it would have
been plausible that the satisfaction note was only relevant for assessment
years 2005 to 2009 and that the proceedings for AY 2009-10 were solely
carried out under Section 142 and 143. However, in the present case, since
the notice under Section 142(1) was issued on the same day as the
satisfaction note, it is very difficult to sever them from each other.

20. After holding that the assessment for AY 2009-10 was conducted
pursuant to Section 143(3) read with Section 153C, it is now necessary to
determine whether the satisfaction note in the present case is valid. The
satisfaction note recorded by the Ld. AO reads as follows:

       "23.07.2010
       A search and operation was conducted on Raj Darbar Group of
       cases on 31.07.2008. During the course of Search and
       operation at the premises of




ITA 791/2017                                                             Page 16 of 23
       i) Party A-20, Residence Cum office of Narendra Kumar
       Aggarwal, 1st & 2nd Floor, 7, Western Avenue, Maharani Bagh,
       New Delhi.
       Various papers were found and seized belonging to M/s. N S
       Software Pvt. Ltd. the annexure are marked as under:
       Party A-20
       Annexure A-26, Hard Disk containing Books of Accounts of M/s
       N. S. Software Pvt. Ltd.
       Thus the Proceedings u/s 153C r.w.s. 153A of the Income Tax
       Act 1961 are being initiated in the above case."

21.    The CIT Order upheld the validity of the satisfaction note by
providing the following reasoning:
       "4.2.2 I have also examined the hard disk seized from the
       premises of Mr. Agarwal. Apart from containing documents
       and books of accounts of various companies and individuals
       and other members of the Rajdurbar Group. Thus, the AO had
       to verify the correctness of the declared income from the seized
       books of A/c found in the hard disk. In view of this it has to be
       held that the proceedings u/s 153C have been rightly initiated. I
       have also examined the hard disk seized from the premises of
       Mr Agarwal. Apart from containing the books of accounts of
       the appellant firm, there is also a soft copy of partnership
       deed dated 01104/2007 (placed as Annexure-X to this
       order). It is not ascertainable as, to whether the said deed
       was executed. In this partnership deed it has been
       mentioned that M/s Narsi Properties Pvt. Ltd., one of the
       partners, vide Board resolution dated 25th of February
       2007, have decided to retire from the partnership with
       effect from 31/03/2007. The said company belongs to
       Rajdurbar group. It is however seen that no such change' in
       the partnership has been reflected in the return of income
       of the appellant filed for A.Y.2008-09. The return of income
       for the said A.Y. has been filed subsequent to the date of
       search and there is no change in the constitution of the
       firm. It is noted that there is a specific mention of Board








ITA 791/2017                                                        Page 17 of 23
       Resolution dated 25/02/2007 in the said deed.

       4.23 From the contents of the partnership deed, I going to
       hellot is also evident that the share of Mr Rakesh Kumar Garg
       had in the partnership increased from 8% to 50% at the cost of
       M/s Narsi Properties Private Ltd. The firm is owner of a huge
       and valuable property in the heart of Mumbai, which fetches
       rentals of more than Rs. 5 crore per annum. The property has
       been let out to Price Waterhouse group on a eleven-years-nine-
       months Leave & License agreement. In the said partnership
       deed, there is no mention of anyone paying towards goodwill
       etc. to the retiring partner in spite of the appellant owning such
       valuable property which earns huge income. The retiring
       partner M/s Tarsi Properties Private Ltd has surrendered its
       share in the firm without any consideration to a 'Related Party'
       i.e. its own main shareholder/Director/member of the
       'Rajdurbar Group'. The transaction is between the related
       parties and one of them is shown to be retiring without any
       consideration. The retiring party is the person who had in fact
       brought/borrowed the initial amount used for making payments
       to the hitherto actual owners of the property. Under the Income
       Tax Act, partnership deed is an important document that
       determines the expenses like salary and interest payable to the
       partners. Further there are restrictions on the interest and
       remuneration payable to partners. The appellant has charged
       interest on borrowed funds to its P&L account. There is, thus, a
       clear case of a transaction reflected in the document belonging
       to the appellant which had a tax angle. This transaction is not
       reflected in the books. However, due to search action, it is
       possible that, the appellant and the partners have decided not
       to give effect to this partnership deed which in all probability
       must have been executed as on the date of search (and not
       found by the search party) as is evident from the date of Board
       resolution (25/02/2007) of the retiring company and the date of
       the partnership deed itself (01/04/2007).

       4.2.4  Further Mr Rakesh Kumar Garg along with other
       members of Rajdurbar group have been found to have indulged




ITA 791/2017                                                         Page 18 of 23
       in several measures that have resulted in alleged suppression of
       income and tax evasion. The group has surrendered nearly Rs.
       100 crore as 'Undisclosed income' an ago included the same in
       their returns of income of various members of the group. One of
       the methods followed by the group is to borrow funds in the
       hands of the company earning rental income and pay interest
       on such borrowed funds. However these funds are subsequently
       transferred to the group concerns interest free. Thus, the group
       has indulged in reducing tax liability on the rental income of
       the properties through this method.(example is that of Narendra
       Impex Pvt. A.Y.2009-10). In the appellant's case also the
       borrowed funds have been transferred to the group concerns or
       to the partners without charging interest.

       4.2.5 Therefore, the circumstances show that the books of
       accounts. and other documents like Reconstitution of
       partnership found in possession of a person other than the
       employee or partner and at a place not belonging to the
       appellant firm coupled with other factors as explained above,
       makes it evident that the AO had to initiate proceedings u/s
       153C of the Act in order to at least ensure that the appellant
       has declared income and filed the returns of income as per the
       books of A/c found in the computer kept at a place other than
       the appellant's business address... There is no requirement
       under the law that the AO should mention or give an exhaustive
       list of all the documents or reasons in the satisfaction note
       before initiating proceedings u/s 153C. To the extent that, the
       documents, belonging to the firm were recovered from the
       premises, where search u/s 132 was carried out, there appears
       to be no impropriety in initiation of proceedings u/s 153C."

22.    The ITAT Order reversed the CIT Order and found the satisfaction
note under Section 153C to be inadequate based on the following grounds:

       "3.4.2 The perusal of the satisfaction note clearly indicates that
       the action under Section 153C of the Act was not based on the
       correct legal foundations. The following may kindly be noted:-




ITA 791/2017                                                         Page 19 of 23
       i. Ld. AO didn't even indicate how vaguely referred documents
       in the satisfaction note were found to be belonging to the
       assessee within the meaning of section 153C of the Act.
       ii. No mention of any documents belonging to the appellant in
       the assessment order ultimately passed under section 153C lead
       to the conclusion that these documents had no relevance or
       belongingness to the assessee.
       iii. Ld. AO doesn't even for record's sake record satisfaction for
       initiating valid proceedings under section 153C except in the
       heading.
       iv. There is no recording/ reference about the contents of these
       documents allegedly pertaining to the appellant. Even in the
       assessment order, no such mention has been made. This
       indicates how irrelevant those assumed documents were to the
       assessment of the appellant.
       v. No satisfaction note has been recorded by the assessing
       officer of Sh. Narendra Kumar Aggarwal from whose premises
       the documents etc. allegedly belonging to the appellant were
       seized which was apparently the basis for the satisfaction of
       assessing officer of Sh. Narendra Kumar Aggarwal that the
       documents belonged to the appellant. It is necessary that the
       assessing officer of the entity in whose hands the
       documents/asset was/were seized records a satisfaction that the
       document/asset belonged to some other entity. This has been
       repeatedly held to be necessary for invoking jurisdiction u/s
       153C by higher judicial authorities including the jurisdictional
       High Court.
       vi. Even the name of appellant has been mentioned incorrectly
       as N.S. Software Pvt. Ltd. In place of N.S. Software vii. The AO
       has mentioned in the satisfaction note that books of account of
       M/s N.S. Softwares Pvt. Ltd. were found and seizes. There is no
       such entity called M/s N.S. Softwares Pvt. Ltd. This indicates
       gross non application / mechanical application of mind by the
       assessing officer."

23.    This court concurs with the impugned order. In the present case, the
Ld. AO has not explained steps taken by him to determine that the seized




ITA 791/2017                                                         Page 20 of 23
material belonged to the Assessee Firm. 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 Firm.
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 Assessing Officer for the person from
whose premises the documents are seized is the same as the Assessing
Officer for the person to whom the document belongs, separate satisfaction
notes must be recorded. Here the AOs 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. Whilst an AO of the searched
party and that of the individual under Section 153C may be the same,
nevertheless at the stage of sending notice under Section 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 Commissioner of Income Tax v Kabul Chawla 380 ITR 573
(Del), i.e., that in the absence of any incriminating materials, the previous
years assessments cannot be disturbed, applies.

24.    In the present case, therefore, 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 assessment year is concerned, the return was filed on
29.09.2009. No notice in terms of Section 143 (2) had been issued to the




ITA 791/2017                                                          Page 21 of 23
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 Section 153C (2) had to be in the light of the satisfaction that the
books of account or materials seized are relevant (i.e. "..that Assessing
Officer shall proceed against each such other person and issue notice and
assess or reassess the income of the other person in accordance with the
provisions of section 153A, if, that Assessing Officer 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 assessment year or years referred to in sub-section (1) of
section 153A". As held by previous decisions, without that nexus, and
fulfillment of the preconditions, clearly, the option provided by Section
153C (2) to proceed against pending or assessments cannot be made
recourse to. Since the satisfaction in terms of Section 153C (1) was clearly
inadequate (assuming that the original satisfaction, transmitting the papers
to the assessees 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 Sections 153A and 153C are identical; they
override Sections 136, 147, 148, 149, 151 and 153. However, they do not
override the mandatory provisions of Sections 142 (2) or 143 (2). This
legislative design is taken further by Section 153 (2) (a) to (c) which are
relatable to the satisfaction under Section 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




ITA 791/2017                                                       Page 22 of 23
relatable to the assessee is through application of mind and not a
mechanical one, as insisted by RRJ Securities (supra), Pepsico Holdings
India Ltd (supra), Nikki Drugs (supra) etc.

25.    For the above reasons, the question of law is answered against the
revenue; its appeal fails. The Appeal is, therefore, dismissed without costs.



                                                      S. RAVINDRA BHAT
                                                                (JUDGE)



                                                             A.K. CHAWLA
                                                                   (JUDGE)
APRIL 18, 2018




ITA 791/2017                                                         Page 23 of 23

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