ITAT Delhi Sets Aside Section 153C Assessment Orders for Lack of Incriminating Material in DCIT Vs Udai Shanker Awasthi

Introduction

The Income Tax Appellate Tribunal (ITAT), Delhi Bench has delivered a significant ruling concerning the jurisdictional validity of assessment proceedings initiated under Section 153C of the Income Tax Act, 1961. In the case of DCIT Vs Udai Shanker Awasthi, the Tribunal dismissed the Revenue's appeals challenging the deletion of additions made under Section 153C read with Section 143(3). The crux of the matter revolved around alleged undisclosed commission income purportedly routed through offshore entities, with the Tribunal holding that the very assumption of jurisdiction was invalid due to the absence of incriminating material belonging to, pertaining to, or relating to the assessee.

Factual Matrix of the Case

Background of Search Operations

The case originated from search and seizure operations conducted under Section 132 of the Income Tax Act on 30th June 2019 at the premises of Shri Rajeev Saxena and Shri Sanjay Jain. Following these search operations, the Assessing Officer (AO) of the searched persons transmitted certain materials and information to the AO of the assessee, Shri Udai Shanker Awasthi.

Subsequently, on 29th September 2021, the AO of the assessee recorded a satisfaction note under Section 153C of the Act, based on a satisfaction note dated 25th September 2021 received from the AO of Shri Rajeev Saxena. Notices under Section 153C read with Section 153A were issued to the assessee on the same date for ten assessment years spanning from 2011-12 to 2020-21.

Nature of Allegations

The Revenue's case was predicated on allegations that the assessee, being the Managing Director of IFFCO (Indian Farmers Fertiliser Cooperative Limited)—a prominent fertilizer manufacturing organization—held a dominant position enabling him to influence pricing and supply arrangements for raw materials procured by Indian entities from foreign producers.

Specifically, the allegations centered on transactions involving the supply of Muriate of Potash (MOP) from Uralkali, Russia. The Department alleged that the assessee manipulated these supplies and pricing mechanisms to obtain undisclosed consideration in the form of commission payments. These alleged payments were purportedly routed through intermediaries, notably Shri Rajeev Saxena—a Non-Resident Indian (NRI) Chartered Accountant practicing in Dubai—and subsequently channeled to companies controlled by Mr. Amol Awasthi, the assessee's son, who is also a Dubai-based NRI.

Evidence Relied Upon by Revenue

The primary evidence relied upon by the Revenue included:

1. Statements of Third Parties: Primarily the statement of Shri Rajeev Saxena recorded under Section 132(4) of the Act on 2nd July 2019, wherein he mentioned in response to Question No. 13 that funds transferred to Amol Awasthi and another individual related to payments from Uralkali, noting that Amol Awasthi was the son of U.S. Awasthi (the assessee), who held a key decision-making position in IFFCO.

2. Excel Sheet: An excel sheet prepared by the staff of Shri Rajeev Saxena, which allegedly detailed various transactions. However, this document did not contain the assessee's name, and several entries were marked as "to be identified."

3. Statement of Shri A.D. Singh: Initially, Shri A.D. Singh, a partner of Shri Sanjay Jain and an agent of Uralkali for the Indian market, made certain statements after viewing Shri Rajeev Saxena's statement. However, he subsequently retracted these statements through an affidavit dated 29th July 2019 and during cross-examination on 10th January 2025.

Block Period Computation Issue

Assessment Years 2011-12 and 2012-13

Both parties mutually agreed that the assessments framed for Assessment Years 2011-12 and 2012-13 fell outside the permissible block period of ten years. The Tribunal applied the ratio decidendi of the Hon'ble Delhi High Court in PCIT vs Ojjus Medicare Pvt Ltd reported in 161 taxmann.com 160 (Delhi HC).

The search and seizure operation occurred on 30th June 2019 concerning Shri Rajeev Saxena and Shri Sanjay Jain. However, the satisfaction note under Section 153C for the assessee was recorded on 29th September 2021, falling in Assessment Year 2022-23. Consequently, the ten-year block period would commence from AY 2022-23 and go back to AY 2013-14.

The Tribunal computed the block period as follows:

Therefore, assessments for AYs 2011-12 and 2012-13 were outside the statutory block period and were rightly quashed by the Commissioner of Income Tax (Appeals) [CIT(A)]. The Tribunal found no infirmity in this conclusion and dismissed the Revenue's grounds for these two assessment years.

Common Grounds Raised by Revenue

For the remaining assessment years (AY 2013-14 to AY 2018-19), the Revenue raised the following common grounds:

• The CIT(A) erred in quashing assessment orders without properly appreciating the validity of the satisfaction note recorded and statutory compliances undertaken.

• The CIT(A) wrongly concluded that no incriminating material was found, ignoring material evidence establishing undisclosed commission income routed through third-party entities.

• The CIT(A) ignored further corroboration provided through witness statements and opportunities for cross-examination.

• The CIT(A) relied uncritically on a letter from PJSC Uralkali without noting that it was unauthenticated and self-serving in nature.

• The CIT(A) placed undue reliance on the absence of direct admission by the assessee, without considering the chain of circumstantial evidence allegedly showing the assessee as the ultimate beneficiary.

• The CIT(A) failed to appreciate that additions of unexplained credits were based on cogent evidence from seized material, not mere conjecture.

• The CIT(A) erred in deleting additions made under Section 68 for unexplained credits.

• The CIT(A) did not properly appreciate the remand report and accepted the assessee's contentions without thorough review.

Contentions Before the Tribunal

Revenue's Submissions

The learned Departmental Representative (DR) presented the following arguments:

1. Discovery of Incriminating Material: During the search operations on Shri Rajeev Saxena and Shri Sanjay Jain, numerous incriminating documents and information were discovered, justifying the recording of satisfaction under Section 153C.

2. Position of Assessee: The assessee held the position of Managing Director of IFFCO for over three decades, placing him in a dominant position to control pricing and supply of raw materials from foreign producers to the Indian market.

3. Statements of Shri Rajeev Saxena: His statement recorded under Section 132(4) on 2nd July 2019 specifically mentioned that Amol Awasthi was the son of U.S. Awasthi (the assessee), who held a key decision-making position in IFFCO, and that funds were transferred for the ultimate beneficial use of Amol Awasthi.

4. Statement of Shri A.D. Singh: After viewing Shri Rajeev Saxena's statement, Shri A.D. Singh acknowledged on 3rd July 2019 that considerations were paid overseas for the benefit of the assessee through his son. Though the DR acknowledged that this statement was later retracted, she argued that the initial admission carried evidentiary value.

5. Foreign Enquiries: The Department made 37 references through the Foreign Tax & Tax Research (FT & TR) Division of CBDT to obtain information from various countries, demonstrating the seriousness and thoroughness of the investigation.

6. Substantive vs. Protective Additions: Since Shri Amol Awasthi is a non-resident and his overseas income could not be assessed in India, the Department presumed that overseas collections were made by Amol Awasthi at the behest of the assessee. Being a resident, the assessee was liable for tax on such amounts in India. Consequently, substantive additions were made in the assessee's hands and protective additions in Amol Awasthi's case.

Assessee's Submissions

The learned Authorized Representative (AR) for the assessee presented comprehensive counter-arguments:

1. Invalid Assumption of Jurisdiction

The AR vehemently contended that the assumption of jurisdiction under Section 153C was fundamentally flawed. He argued:

• Absence of Incriminating Material: There was absolutely no incriminating material, information, or document found during the search that belonged to, pertained to, or related to the assessee.

• Assessee's Name Not Mentioned: The materials received by the AO from the AO of the searched person did not mention the assessee's name as a beneficiary of any amount.

• Legal Precedents: The AR relied on the decision of the Hon'ble Delhi High Court in Saksham Commodities vs ITO reported in 101 taxmann.com 485 (Delhi HC), wherein the Special Leave Petition (SLP) filed by the Revenue was dismissed by the Hon'ble Supreme Court as reported in 170 taxmann.com 87 (SC).

• Supreme Court Ruling: He also cited the Hon'ble Supreme Court's decision in DCIT Vs. U K Paints (Overseas) Ltd reported in 150 taxmann.com 108 (SC), which established that in the absence of any incriminating material pertaining to the assessee found in any search, no action under Section 153C is permissible.

2. No Satisfaction Recorded for Search on Shri Sanjay Jain

The AR pointed out that no satisfaction under Section 153C was recorded by the AO of Shri Sanjay Jain in the assessee's case, even though the assessment orders commenced by referring to the search on both Shri Sanjay Jain and Shri Rajeev Saxena. He argued that material from the search of Shri Sanjay Jain could not be used since the satisfaction note dated 29th September 2021 recorded by the AO of the assessee only referred to the search on Shri Rajeev Saxena. Since both were separate assessees not searched under joint warrants, materials from one search could not be clubbed with another.

3. Proceedings Based on Statements Without Cross-Examination

The AR highlighted that during assessment proceedings, the AO did not provide any opportunity for cross-examination of Shri Rajeev Saxena. This opportunity was only provided at the appellate stage on 25th February 2025 at the behest of the CIT(A). During cross-examination, critical questions were posed:

Question 21: "I appreciate. It can be taken my suggestion is that you did not make any such statement that the money was given because Mr Awasthi is in a key position of IFFCO."

Answer: "I am not in a position to come to any such conclusion."

Question 22: "My next question. In none of your statements, you ever said that Mr Amol Awasthi was ever engaged in any commission agency business, particularly when his accounts and audit assignments were being handled by you and when the amounts were remitted by you to companies under his control. It is because you did not have any such factual information with you. Yes or no."

Answer: "I have no information on what business Mr Amol Awasthi was doing. My transactions with him were limited to giving him some advice on how to structure for inheritance purposes in all his companies and also make payments to his companies on the instructions of Mr Pankaj Jain."

Question 23: "In Question 13 of your statement u/s 132(4) on 02/07/2019, there is mention that your one statement was recorded on 23/06/2019 u/s 131(1A) and also in answer 65 that another statement was also recorded by Income Tax Authority earlier on 05/05/2019. Thus, the revenue officers were recording your statements in the case of Awasthi before the said date. Yes or no."

Answer: "This was the first investigation which were doing in February, in relationship with the Augusta Westland and all these statements were taken from me for Augusta Westland case."

These responses demonstrated that Shri Rajeev Saxena had no direct knowledge of the assessee's involvement and his statements were made in connection with a different investigation altogether.

4. Excel Sheet Was a Created Document, Not Seized Material

The AR drew attention to the statement of Shri Rajeev Saxena recorded by the Enforcement Directorate on 5th June 2021, wherein he was shown documents page numbered 1 to 131 extracted from digital devices/data provided by him under Section 50 of the Prevention of Money Laundering Act (PMLA).

Question No. 6: "You are being shown documents page numbered 1 to 131 which were taken out from digital device / data given by you u/s 50 of PMLA in another case being investigated by Enforcement Directorate. It is requested to go through them and explain in the same."

Answer: "Page 121 to 131 is a working paper created by my staff to give the details to Enforcement Directorate during the FEMA investigation as stated in my answer no. 1."

The AR emphasized the word "CREATED" used by Shri Rajeev Saxena, arguing that creation implies bringing something into existence for the first time, something that did not exist earlier. Therefore, these pages (121-131) constituting the excel sheet were not seized documents but were prepared subsequently for the investigation.

5. Judicial Recognition of Created Nature of Excel Sheet

The AR relied on the order of the Hon'ble Delhi High Court in Sanjay Jain Vs. Enforcement Directorate in Bail Application No. 3807/2022 dated 7th March 2024, wherein paragraphs 78 and 79 specifically dealt with this excel sheet:

"78. It is the case of the prosecution that the proceeds of crime after being in the hands of Rajeev Saxena have flowed to Rayon Trading, however, the ED has not placed on record a single bank statement to show the flow of money from Rajeev Saxena's entities to Rayon Trading. The only document relied upon by the ED is the plain paper entry/excel sheet, the genesis of which has been explained by Rajeev Saxena in his statement dated 05.06.2021, wherein it has been clarified that the said document has been created by his staff to answer the questions by the ED. The relevant part of the statement dated 05.06.2021 reads as under: 'Page 121 to 131 is a working paper created by my staff to give the details to Enforcement Directorate during the FEMA investigation as stated in my answer no.1.'"