A 153C satisfaction note must show how seized material impacts the assessee's income.

A 153C satisfaction note must show how seized material impacts the assessee’s income.

Issue

Is a proceeding initiated under Section 153C of the Income-tax Act, 1961, legally valid if the mandatory “satisfaction note” recorded by the assessee’s Jurisdictional Assessing Officer (JAO) fails to specify how the seized material has a “bearing on the determination of the total income” of the assessee for the relevant years?

Facts

Proceedings under Section 153C were initiated against the assessee. This section is used to assess a person (“any other person”) based on documents or assets that are found during a search conducted on a different person.
The assessee challenged the validity of these proceedings. The High Court examined the satisfaction note that was recorded by the assessee’s own Jurisdictional Assessing Officer (JAO) after receiving the documents from the AO of the searched person.
The High Court found two critical and fatal defects in this satisfaction note:
1. It did not refer to any specific incriminating material for the relevant assessment years.
2. More importantly, it completely failed to record any reasons explaining how the material that was received could “have a bearing on the determination of the total income” of the assessee. The note was non-speaking and showed no application of mind.
Based on this defective satisfaction note, the High Court quashed the entire proceeding. The revenue department then appealed this decision to the Supreme Court.

Decision

The Supreme Court ruled in favour of the assessee, dismissing the revenue department’s appeal.

The Supreme Court upheld the High Court’s order. This confirms the legal position that a properly recorded and reasoned satisfaction note is a non-negotiable jurisdictional prerequisite for initiating valid proceedings under Section 153C.
Since the satisfaction note in this case was fundamentally flawed and did not meet the mandatory requirements of the law, the proceedings initiated based on it were correctly held to be invalid.

Key Takeways

A Two-Step Satisfaction is Mandatory: The process under Section 153C requires satisfaction to be recorded by two different officers. The satisfaction recorded by the assessee’s own Assessing Officer is a crucial, independent step and not a mere formality.
The “Bearing on Income” Test is a Jurisdictional Requirement: The AO of the “other person” cannot simply receive the documents and start the assessment. They must independently apply their mind to the material and explicitly record in the satisfaction note how those documents are relevant and could potentially impact the assessee’s total income for the specific years under consideration.
A Non-Speaking Satisfaction Note is Invalid: A satisfaction note that merely repeats the words of the statute (e.g., “this material has a bearing on income”) without providing any specific link or reasoning is considered a non-speaking note. It does not demonstrate the required application of mind and cannot grant valid jurisdiction to the AO.
A Defective Foundation Voids the Entire Proceeding: A valid satisfaction note is the jurisdictional foundation for a Section 153C assessment. If this foundation is defective, the entire structure of the assessment that is built upon it is illegal from the start and is liable to be quashed.

SUPREME COURT OF INDIA

Assistant Commissioner of Income–tax

Kishore Kumar Sharma

J.B. PARDIWALA and MANMOHAN, JJ.

SLP (CIVIL) Diary No.24332 of 2025

SEPTEMBER 4, 2025

V.C. Bharathi, Ms. Arushi Singh, Yashraj Bundela, Ms. Mili Baxi, Susheel Tomar, Advs. and Raj Bahadur Yadav, AOR for the Petitioner.

ORDER

1. The learned counsel appearing for the petitioners – Revenue fairly submits that the similar Special Leave Petitions have already been dismissed by this Court.

2. In view of the above, the Special Leave Petitions are dismissed condoning the delay in filing the SLPs.

3. Pending applications, if any, also stand disposed of.

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 485/464 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.