[Calcutta HC] Assessment Proceedings Lack Jurisdiction Without Required Satisfaction Note by AO of Searched Entity

Introduction

In the case of Principal Commissioner of Income-tax v. Milia Tracon (P.) Ltd.[i], the Calcutta High Court addressed a significant issue regarding the jurisdictional validity of proceedings under s. 158BD of the Income-tax Act, 1961 (‘Act’). The case revolved around initiating such proceedings by the assessing officer (‘AO’) of the Assessee based on documents seized during a search at the premises of the UIC Group. The High Court held that the AO of the Assessee acted beyond jurisdictional bounds as the satisfaction note required for initiating proceedings was not issued by the AO of the searched person, UIC Group, nor were the necessary documents properly handed over. Consequently, the Court upheld the Income Tax Appellant’s Tribunal’s (‘ITAT’) ruling that the assessment was invalid due to non-compliance with statutory requirements, thus confirming the proceedings under s. 158BD were unauthorised.

Brief Facts

• The Income Tax Department conducted a search at the UIC Group's premises. During this search, certain share certificates were issued in the names of various companies, including Milia Tracon (P.) Ltd. (‘Assessee’), were found and seized.

• Based on these documents, the AO of the Assessee recorded a satisfaction note and initiated proceedings under s. 158BD of the Act. This action was based on the suspicion that undisclosed income had been channelled through these transactions. The AO issued a notice requiring the Assessee to file a tax return, including any undisclosed income, for the block period from 01.04.1996 to 07.05.2002.

• The Assessee responded to the notice by submitting a letter asserting that it had no undisclosed income. Therefore, the initiation of proceedings under s. 158BD was improper and should be dismissed.

• Despite the Assessee’s representations, the AO proceeded to pass an assessment order under s. 158BD/144 of the Act.

• The Assessee filed an appeal before the Commissioner of Income Tax (Appeals) [‘CIT(A)’], challenging the initiation of proceedings under s. 158BD. The CIT(A) dismissed the appeal on the issue of initiation but allowed the appeal on other grounds, particularly concerning an addition made by the AO.

• Dissatisfied with the CIT(A)’s decision, the Assessee took the matter to the ITAT. The ITAT ruled in favour of the Assessee, concluding that the initiation of proceedings under s. 158BD was invalid. The ITAT’s decision was based on the fact that there was no satisfaction note recorded by the AO of the searched person (UIC Group), a prerequisite under the law.

• The Revenue challenged the ITAT’s decision in the Calcutta High Court. The key issue raised was whether the satisfaction note was required to initiate proceedings under s. 158BD was properly recorded by the AO of the UIC Group.

Held

• The High Court observed that under s. 158BD of the Act, the satisfaction note must be recorded by the AO of the searched person. In this case, the satisfaction note was instead recorded by the AO of the Assessee, which is not compliant with the law.

• The Court found that the AO of the Assessee attempted to mislead by presenting a satisfaction note that appeared as if it was recorded by the AO of the searched person.

• The High Court affirmed the findings of the ITAT, which correctly identified that the satisfaction note should have been recorded by the AO of the searched person. Additionally, the Court found that the procedure of handing over documents from the AO of the searched person to the AO of the Assessee, as required under s. 158BD was not followed.

• The High Court held that due to the failure to follow the statutory requirements, the initiation of proceedings under s. 158BD by the AO of the Assessee was without jurisdiction and unauthorised, rendering the assessment invalid.

• The Court supported its decision by referencing the Supreme Court case Manish Maheshwari v. Assistant Commissioner of Income-tax[ii], which supports the principle that satisfaction must be recorded by the AO of the searched person.

• The High Court dismissed the Revenue’s appeal, confirming that there was no error in the ITAT’s decision, which favoured the Assessee and ruled the initiation of proceedings under s. 158BD unauthorised.

Conclusion

The High Court, without delving into the merits of the matter, held that the initiation of proceedings under s. 158BD of the Act was invalid due to failing to adhere to the required procedural steps. This decision reiterates the principle that the procedure must be meticulously followed, as deviations in proceedings may result in assessments being deemed unauthorised and without jurisdiction. The Court’s observation reinforces that, in the case of a search, the statutory provisions mandate that the satisfaction note be recorded by the AO of the searched person, and any deviation from this requirement invalidates the proceedings.

End Notes

[i] [2024] 165 taxmann.com 150 (Calcutta) dated 03.07.2024.

[ii] [2007] 289 ITR 341 (SC).

Authored by Nitish Solanki, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinions.