Beyond Loose Sheets: “Redefining Satisfactory Evidence in Tax Proceedings u/s 153C of the Income Tax Act 1961”

The authors are Siddharth Singh, second year student at Dr. Ram Manohar Lohiya National Law University, Lucknow & Ruby Aggrawal, third year student at Rajiv Gandhi National university of Law

Abstract:

The piece explores the interpretation and evidentiary precision required under section 153 C of Income Tax Act, 1961. The recent order in Sri Prakash Bhajlandas Talreja reiterates that AO's cannot file for third party assessment proceedings under section 153C merely based on some loose sheets or uncorroborated evidence. It emphasizes the importance of concrete, persuasive and convincing evidence thus leading to the rigid and constructive interpretation of word 'satisfaction' used in section 153C by the courts and tribunals. The piece revolves around essentials needed to amount to such satisfaction as reiterated in different case laws. It also seeks to establish though this approach of courts to show a clear nexus between papers located and the third party protect taxpayers rights, preventing arbitrary assessments.They are also at the center of discussions about procedural delays and diminished AO discretion, which could make effective tax administration more difficult. It ends with a call for more precise rules that would strike a balance between justice, enforcement, and fairness in these kinds of cases.

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Introduction

The Income Tax Appellate Tribunal's (ITAT) Bengaluru bench recently re-addressed the evidence requirements mandated by Section 153C of the Income Tax Act, 1961. In the case of Sri Prakash Bhajandas Talreja vs. The Deputy Commissioner of Income Tax, the ITAT emphasized that Assessing Officers (AOs) cannot initiate proceedings against "other persons" solely based on loose sheets or uncorroborated statements from third parties.

According to the tribunal, there must be documented evidence of actual financial transactions involving money exchange between the parties rather than such documents serving as irrefutable proof of undeclared income. Additionally, the ITAT stressed that any increase in an assessee's income must be backed up by an independent investigation by the AO to determine the property's valuation rather than depending solely on unconfirmed records or claims from third parties.

This ruling brings up important issues about what qualifies as convincing and conclusive proof in order to initiate legal investigations under Section 153C. It also highlights the judiciary's cautious approach in defining the nature of documents as "dumb" or satisfactory for such proceedings. The court’s insistence on what constitutes "dumb" or sufficient documents for these kinds of procedures aims to avoid arbitrary assessments and guarantee that only well substantiated claims result in tax liabilities hence establishing more just norms in the field. The core of the present article is that corroborative evidences are necessarily required for the AO to establish the authenticity of such evidences.

The question that arises after this judgment is what is considered to be satisfactory and conclusive evidence to initiate proceedings under section 153C of Income Tax Act, 1961 and why the court has been so cautious in its approach of defining nature of documents as dumb or satisfactory for initiating proceedings under this section.

Diving Deep into Intricacies of 153C of Income Tax Act

On plain reading of Section 153C, we find that the AO while making the assessment has to “satisfy himself” that the searched documents or materials belong to some other person than the searched person. In this place the meaning of satisfaction holds prime importance. The section 153C of the Income Tax Act has been amended and curated through multiple judicial pronouncements which has regulated its scope and administration. Similarly, in  Vishnu Bhagwan Das matter before the Delhi Bench of Income Tax Appellate Tribunal Court while keeping in mind the recent amendment u/s 153C of the act by the Finance Act, 2017. The Tribunal held that The Tribunal held that the notice issued to the assessee under section 153C of the Act for the assessment year 2006-07, was without jurisdiction since the assessment year was beyond the purview of issuance of notice in terms of the provision under section 153C of the Act. The Delhi High Court in the case of K.V.V.S.N case led to construction of “belonging to” as “pertaining to” in a judgement whereby a registered sale deed seized from premises of the searched persons cannot be said to belong to the vendor. The court termed it to be the very mischief which the legislature intended to suppress, it arrived at such interpretation they also identified the issue as the precise mischief the legislature sought to address. Consequently, it adopted an interpretation aligned with the legislative intent. The court were also of the opinion that the approach of the tribunal in addressing the issues was in accordance with law and has come to a correct conclusion. The Supreme Court in the matter of Super Malls Private Limited defining scope of such satisfaction held that when the AO of the searched person and the other person(s) are the same, it is sufficient for the AO to record in the satisfaction note that on the basis of material documents, containing transactions or signatures showing nexus (pertaining) to other person, were found in the premises and seized from the searched person. The approach of the Supreme Court while giving this judgement can clearly be seen as to resolve the problem of the AO by not cross-checking both the material documents.

The same was held by the Delhi High Court in the case of Kulwant Rai which held that if the writer of the document is not known, there exists no signature of any agent of the assessee and the person in whose possession the said document was found was not questioned, then such document would be considered dumb document and no addition can be made on this basis. This can also be considered as the basic essence of all judgements around third-party evidences. the case of STC Developers Case the Delhi High Court held that procedures under Section 153C could not be started if the computer sheets taken from the “person searched” property did not include the name of the “other person”. This is because there is no indication that the computer sheets would belong to the “other person” and they have no nexus to them. Similarly it was held by ITAT Delhi bench in Jethmal Mehta held that the third party proceedings under section 153C is unsustainable in law as a perusal of satisfaction note reveals that the AO has not been able to establish that said seized documents belonged/ relate/ pertain to the assessee, did not specify the nature of transactions and did not mention assessee’s name in clear terms. It only mentions surname which cannot be completely attributed to him and he has no control over what third person records in his account books. Hence, they form dumb documents as there are no corroborative evidence to link such documents to the assessee.

The process under this section highlights that AO should be satisfied that some incriminating material has been found in the possession of person searched that has impact on determination of total income (assessed or assessable total income must be higher that what is already disclosed or assessed) of other persons qua specific assessment year within the six assessment years block period. Accordingly, the notice has to be issued specifically for those particular segregated assessment years only.

In absence of such proper satisfaction, the AO does not have a jurisdiction to issue notice under section 153C and such defect is not curable being the issue of jurisdiction under the provisions of section 292B. The additions made in the assessment performed under section 153C may therefore be removed if the AO is unable to provide any cogent evidence or material to support the claim and record proper satisfaction that (i) they were based on any incriminating documents or materials (ii) discovered during the persons search (iii) pertained to or have nexus with other persons (iv) having impact on the determination of total income of other persons (v) within the six-assessment year block period (vi) incriminating evidence should relate to the relevant assessment year which sought to be reopened.

Analyzing Reasons of Evidentiary Precision by the Court

The approach of the court while analyzing reasons of evidently precision by the court clearly stems out from upholding various rights of taxpayer and government and fundamental principles of substantive and due procedure of the law in intersection with the established evidentiary values and laws.  The core characteristic of the court's reasoning while analyzing reasons of evidentiary precision by the court while prominently enforcing clear boundaries of the burden of proof for what amounts to satisfaction of an AO under section 153C. Such concept ensures that AO cannot use vague or uncorroborated materials to justify an illegal assessment proceeding serving as a protective shield for taxpayers. The wide consensus on the rule of law for section 153C emphasizes the need for an AO to establish the document origin, author, or direct nexus. It also assesses the probative value of the document to define such satisfaction. Court considers doctrine of evidentiary value to be base for such satisfaction where such evidence must be reliable, substantial and relevant with clear, specific and meaningful (not generic neither incidental) nexus to the other person. It entrenches principle of presumption of innocence through section 292C which presumes such document to belong to searched persons unless rebutted underlying the assessee cannot be presumed to have concealed income solely on basis of documents found with another person.

The approach of this kind also underlines the need for shielding legislative intent and defining narrow scope of interpretation of the section that imposes liabilities on assesses to prevent arbitrary use, excessive taxation or infringement of rights of taxpayers. The law upholds different rights of the assessee such as rights to property by protecting him from undue claims without adequate satisfaction, right to fair judicial proceedings etc. The shift to “pertaining to” on opposite hand expanded the scope but court meticulously provided that only non-ambiguous cases where it could be proved or made to the satisfaction of the court that such documents in fact has nexus to the other persons would be considered shows an approach based on tangible and hard evidence which prevents overreach by authorities and applies the section judiciously.

Such standards for evidence in the proceedings under section 153C leads to a more objective, transparent and justifiable process placing doctrine of reasonableness and fairness as its apex. The court has held in various cases that mere existence of power of an AO under section 153C would not justify a sweeping or indiscriminate invocation of Section 153-C of the Act. The law requires that there exists a logical and rational basis (essentials specified above) initiating such third-party proceedings for the relevant assessment year u/s 153C.

Conclusion

The recent ruling in Sri Prakash Bhajandas Talreja emphasizes the stringent standard of proof required to initiate proceedings under Section 153C of the Income Tax Act. The law requires fulfilling specific prerequisites before a taxpayer’s right can be overridden. The judgment emphasises the necessity of concrete and satisfactory evidence, as opposes to reliance on mere loose sheets or isolated diary entries. The law also reinforces the principles of due process, legal adherence, and rational evaluation, promoting transparency and fairness in the system. Whilst the ruling seeks to strike a balance between protecting individual rights and upholding statutory provisions, it also tries to resolve certain systematic loopholes that warrant attention.

Such decisions have come under fire for a number of reasons, one of which is that they place a heavy burden on AOs to carry out thorough investigations, which may cause assessments to be delayed even in the face of strong circumstantial evidence. Additionally, since suggestive documentation loose sheets may now be ignored, tax evasion may rise. Additionally, the requirement may impede prompt action by restricting AO's discretion.  Finally, some academics contend that this could generally go against the section's legislative aim, which would curtail AO's ability to identify and handle unreported revenue. Therefore, the law is causing a rift between enforcement and fairness by increasing procedural complexity and possibly impeding efficient tax administration.

So, the Supreme Court should establish clear norms as to what would amount to satisfaction leading to conclusive evidence by an AO under this section including some limited discretion given to AO to counter delayed actions and clearly laying down the nature of evidence that has to be accepted with a consistent stance across all courts and ITAT’s.