Section 153C Proceedings Quashed Due to Defective Satisfaction

Section 153C Proceedings Quashed Due to Defective Satisfaction Note Lacking Reference to Incriminating Material

A valid satisfaction note is the jurisdictional bedrock for a Section 153C assessment; without it, the entire proceeding collapses.

Issue

The central issue is whether proceedings under section $153C$ of the Income-tax Act, 1961, can be legally sustained if the satisfaction note recorded by the assessee’s Jurisdictional Assessing Officer (JAO) fails to:

Refer to any specific incriminating material for the relevant assessment years.
Provide reasons explaining how the seized material has a bearing on the determination of the assessee’s total income.

Brief Facts

Proceedings under section $153C$ were initiated against the assessee for the assessment years 2014-15 to 2020-21 based on material allegedly found during a search of a third party. To assume jurisdiction, the assessee’s JAO recorded the mandatory satisfaction note.

However, the assessee challenged the validity of this note, pointing out two fundamental defects:

The note was silent and made no reference to any specific incriminating material that was found for the years under consideration.
The JAO completely failed to articulate any reason or establish a rational link explaining how the material mentioned by the searched person’s AO could possibly impact the assessee’s total income.

Decision

The court ruled decisively in favor of the assessee.

It was held that the satisfaction note was legally invalid and failed to meet the mandatory requirements of section $153C$ . The court concluded that:

The fact that the satisfaction note did not refer to any incriminating material for the relevant years was clear evidence that no such material had been found.
The JAO’s failure to record reasons explaining how the material would “have a bearing on the determination of the total income” of the assessee was a fatal flaw. This demonstrated a complete lack of application of mind.

Since a valid satisfaction note is the jurisdictional foundation for any action under section $153C$ , its absence rendered the entire process void ab initio. Consequently, the court quashed and set aside the notice and all related proceedings.

Key Takeaways

Satisfaction Note is Non-Negotiable: A satisfaction note is not a mere formality but a jurisdictional prerequisite for a valid proceeding under section $153C$ .
Two Pillars of a Valid Note: A valid satisfaction note must satisfy two conditions: (1) it must be based on specific incriminating material, and (2) it must clearly articulate the reason why this material is relevant to the assessee’s income.
Application of Mind is a Must: The JAO cannot simply reproduce the findings of the AO of the searched person. They must independently apply their mind and record a clear finding on the relevance of the seized documents.
No Material, No Jurisdiction: If no incriminating material is found or referred to for a particular assessment year, the department has no jurisdiction to initiate proceedings for that year under section $153C$ .

HIGH COURT OF DELHI

Kishore Kumar Sharma

Assistant Commissioner of Income-tax

Yashwant Varma and PURUSHAINDRA KUMAR KAURAV, JJ.

W.P.(C) 16348 to 16354 OF 2023
CM APPL. 65777 & 65779 of 2023 and others

MAY 15, 2024

Ms. Ragini Handa, Adv. for the Petitioner. Abhishek Maratha, SSC, Ms. Nupur Sharma, Gaurav Singh, Bhanu Karan Singh Jodha, Advs., Ms. Parth Semwal and Apoorv Agarwal, JSCs for the Respondent.

ORDER

1. These writ petitions have been preferred against the impugned notices dated 30.06.2022 issued under Section 153C of the Income Tax Act, 1961 [” Act”] for Assessment Years’ [“AYs”] 2014-15 [W.P.(C) 16350/2023], 2015-16 [W.P.(C) 16351/2023], 2016-17 [W.P.(C) 16352/2023], 2017-18 [W.P.(C) 16354/2023], 2018-19 [W.P.(C) 16353/2023], 2019-20 [W.P.(C) 16349/2023], 2020-21 [W.P.(C) 16348/2023] and all consequential proceedings.

2. Bearing in mind the undisputed fact that the Satisfaction Note dated 30 June 2022 issued by the jurisdictional Assessing Officer [” AO”] of the petitioner does not refer to incriminating material for any of the aforenoted AYs’, it is ex facie evident that no incriminating material has been found for the said AYs’. A bare perusal of the record also ex facie indicates that only the AO of the searched person in his Satisfaction Note dated 21 June 2022 referred to incriminating material for one of the AYs’, i.e., of AY 2016-17. However, the same was not recorded by the jurisdictional AO and the jurisdictional AO also completely failed to record any reasons which may have indicated how the said material could “have a bearing on the determination of the total income of such other person” for the years in question.

3. Undisputedly, the issue now stands answered and covered in favour of the writ petitioner bearing in mind the principles that we had enunciated in Saksham Commodities Ltd. v. ITO ITR 1 (Delhi))/2024 SCC OnLine Del 2551. The relevant paragraphs of the said decision read as follows:-

“63. On an overall consideration of the structure of Sections 153A and 153C, we thus find that a reopening or abatement would be triggered only upon the discovery of material which is likely to “have a bearing on the determination of the total income” and would have to be examined bearing in mind the AYs’ which are likely to be impacted. It would thus be incorrect to either interpret or construe Section 153C as envisaging incriminating material pertaining to a particular AY having a cascading effect and which would warrant a mechanical and inevitable assessment or reassessment for the entire block of the ” relevant assessment year”.

64. In our considered view, abatement of the six AYs’ or the ” relevant assessment year” under Section 153C would follow the formation of opinion and satisfaction being reached that the material received is likely to impact the computation of income for a particular AY or AYs’ that may form part of the block of ten AYs’. Abatement would be triggered by the formation of that opinion rather than the other way around. This, in light of the discernibly distinguishable statutory regime underlying Sections 153A and 153C as explained above. While in the case of the former, a notice would inevitably be issued the moment a search is undertaken or documents requisitioned, whereas in the case of the latter, the proceedings would be liable to be commenced only upon the AO having formed the opinion that the material gathered is likely to inculpate the assessee. While in the case of a Section 153A assessment, the issue of whether additions are liable to be made based upon the material recovered is an aspect which would merit consideration in the course of the assessment proceedings, under Section 153C, the AO would have to be prima facie satisfied that the documents, data or asset recovered is likely to “have a bearing on the determination of the total income”. It is only once an opinion in that regard is formed that the AO would be legally justified in issuing a notice under that provision and which in turn would culminate in the abatement of pending assessments or reassessments as the case may be.

65. We would thus recognize the flow of events contemplated under Section 153C being firstly the receipt of books, accounts, documents or assets by the jurisdictional AO, an evaluation and examination of their contents and an assessment of the potential impact that they may have on the total income for the six AYs’ immediately preceding the AY pertaining to the year of search and the “relevant assessment year”. It is only once the AO of the non-searched entity is satisfied that the material coming into its possession is likely to “have a bearing on the determination of the total income” that a notice under Section 153C would be issued. Abatement would thus be a necessary corollary of that notice. However, both the issuance of notice as well as abatement would have to necessarily be preceded by the satisfaction spoken of above being reached by the jurisdictional AO of the non-searched entity.

66. Therefore, and in our opinion, abatement of the six AYs’ or the “relevant assessment year” would follow the formation of that opinion and satisfaction in that respect being reached.

67. On an overall consideration of the aforesaid, we come to the firm conclusion that the “incriminating material” which is spoken of would have to be identified with respect to the AY to which it relates or may be likely to impact before the initiation of proceedings under Section 153C of the Act. A material, document or asset recovered in the course of a search or on the basis of a requisition made would justify abatement of only those pending assessments or reopening of such concluded assessments to which alone it relates or is likely to have a bearing on the estimation of income. The mere existence of a power to assess or reassess the six AYs’ immediately preceding the AY corresponding to the year of search or the “relevant assessment year” would not justify a sweeping or indiscriminate invocation of Section 153C.

68. The jurisdictional AO would have to firstly be satisfied that the material received is likely to have a bearing on or impact the total income of years or years which may form part of the block of six or ten AYs’ and thereafter proceed to place the assessee on notice under Section 153C. The power to undertake such an assessment would stand confined to those years to which the material may relate or is likely to influence. Absent any material that may either cast a doubt on the estimation of total income for a particular year or years, the AO would not be justified in invoking its powers conferred by Section 153C. It would only be consequent to such satisfaction being reached that a notice would be liable to be issued and thus resulting in the abatement of pending proceedings and reopening of concluded assessments.”

4. Accordingly, and for reasons assigned in our decision in Saksham Commodities Ltd., we allow the instant writ petitions and quash the impugned notices dated 30 June 2022 issued under Section 153C of the Act and all consequential proceedings arising therefrom.