ITAT Quashes Section 153C Assessment as Satisfaction Note Lacked Mandatory Finding

Deepak Builders and Engineers India Ltd. Vs DCIT (ITAT Delhi)

The cross appeals before the Income Tax Appellate Tribunal (ITAT), Delhi, arose from the order of the Commissioner of Income Tax (Appeals)-30 dated 20 December 2024 for the assessment year 2020-21, relating to proceedings initiated under Section 153C read with Section 143(3) of the Income-tax Act. The Tribunal first addressed the legal issue concerning the validity of the proceedings initiated under Section 153C and the assessment framed on 26 March 2023. It considered whether the proceedings were supported by a legally valid satisfaction note recorded by the Assessing Officer.

The satisfaction note recorded by the Assessing Officer stated that a search under Section 132 had been conducted on Sanjay Jain, an alleged entry operator, on 28 October 2020. According to the note, the search revealed a network involving bogus billing, cash transactions, shell entities, digital records, WhatsApp chats, and bank accounts allegedly used for providing accommodation entries. It also referred to seizure of approximately ₹62 crore in cash from the premises of beneficiaries during search proceedings and stated that Sanjay Jain was involved in arranging cash against RTGS transactions in addition to issuing bogus bills.

The satisfaction note further recorded that two sets of Tally books were seized during the search, including one containing details of cash receipts and expenditure. Based on the seized data, a list of beneficiaries was prepared. The assessee was included in that list with alleged transactions of ₹9,79,66,801 for the financial year 2019-20. The note also referred to statements recorded from Sanjay Jain under Sections 132(4) and 131, in which he allegedly accepted the quantum of entries reflected in the list.

On the basis of these facts, the Assessing Officer recorded satisfaction that the assessee was involved in transactions of unaccounted receipts and payments amounting to ₹9,79,66,801, the nature, source, and genuineness of which required verification. The note further stated that the seized material contained details of suspicious transactions and that their nature, sources of funds, treatment in the books of account, and tax implications required examination. Accordingly, the Assessing Officer concluded that notice under Section 153C should be issued to the assessee.

Before the Tribunal, the Revenue defended the validity of the satisfaction note. It contended that the note had been properly recorded on the basis of incriminating material seized during the search and that the material belonged to, pertained to, or related to the assessee. According to the Revenue, the satisfaction note should be read as a whole and not from a hyper-technical perspective.

The Tribunal, however, specifically drew the Revenue’s attention to the requirement contained in Section 153C(1) that the seized material must have a “bearing on the determination of the total income of such other person.” It observed that the satisfaction note did not expressly record this statutory requirement. Although the Revenue argued that such satisfaction could be inferred from the note when read in its entirety, the Tribunal did not accept this contention.

The Tribunal noted that there was no dispute between the parties that the Assessing Officer had failed to expressly record in the satisfaction note that the seized material had any bearing on the determination of the total income of the assessee. The Tribunal relied upon the decision of the Delhi High Court in Saksham Commodities Ltd. v. ITO (2024) 464 ITR 1, which held that recording satisfaction under Section 153C is not a mere mechanical exercise and must satisfy the statutory requirements.

Applying the ratio of the Delhi High Court judgment, the Tribunal concluded that the Assessing Officer had erred both in law and on facts by recording an improper satisfaction before initiating proceedings under Section 153C. Since the mandatory statutory requirement had not been fulfilled, the initiation of proceedings under Section 153C was held to be invalid. Consequently, the assessment framed pursuant to those proceedings was held to be vitiated.

Having decided the legal issue in favour of the assessee, the Tribunal held that all remaining grounds raised by both parties had become academic and therefore did not require adjudication.

Accordingly, the Tribunal allowed the assessee’s appeal, dismissed the Revenue’s cross appeal, and held that the assessment initiated under Section 153C was invalid due to the absence of a legally sufficient satisfaction recording the statutory requirement under Section 153C(1).

FULL TEXT OF THE ORDER OF ITAT DELHI

These assessee’s and Revenue’s cross appeals ITA No. 875/Del/2025 and 2100/Del/2025 for assessment year 2020-21, arises against the Commissioner of Income Tax (Appeals)-30 [in short, the “CIT(A)”], Delhi’s order dated 20.12.2024 passed in case no. 30/10740/2019-20, involving proceedings under section 153C r.w.s. 143(3) of the Income-tax Act, 1961 (hereinafter referred to as ‘the Act’).

Heard both the parties. Case files perused.

2. It emerges during the course of hearing that there arises the first and foremost legal issue of validity of the impugned section 153C proceedings/assessments framed on 26t^h March, 2023 itself between the parties; for want of a valid satisfaction recorded by the learned lower authorities. There is hardly any dispute that the learned Assessing Officer of the assessee (who happens to be a person other than the searched party) had set into the motion section 153C proceedings herein reading as under:

“Satisfaction Note for initiating proceedings under section 153C read with  section 153Aof the Income Tax Act, 1961 in the ease of M/s. DEEPAK BULDERS & ENGINEERS INDIA PVT. LTD.

A search n/s 132 of Income Tax Act was conducted on an Entry operator Sanjay Jain along with his facilitators and some of his beneficiaries who were found to be generating cash against bogus billing of cement and other such items on 28.10.2020. Proposal for centralization of the group cases was made vide letter No. PDIT(Inv.)-1/Delhi/Centralization/SJAM/2030-31/854 dated 08.03.2021. The Group is centralized with the DCIT Central Circle-30, New Delhi under the charge of Pr. UIT (Central)-3, New Delhi by the order of Chief Commissioner of Income Tax (Central), circulated vide file no. F. No. COIT(C)/Del/CD-305/2020-21/1181 dated 18.03.2021.

1. The entire web of transaction mounted through a maze of bank accounts Initiated by the receipt of willing beneficiaries and the trail right up-to the withdrawal of the cash for the beneficiary is seen. Digital records, whatsapp chats were liberally used by the racketeers for inward communication and quick access. Sharing of a unique ID of pictures bank note serial numbers were utilized by the entry operators and the band of cash handlers and the recipients of the entries to mask the fraudulent transactions.

2. The beneficiaries have been found to have made huge investments in real estate properties in prime cities to the tune of crores of rupees. The personal staff/employees/associates of entry operators had been made dummy directors/partners of these shell entities and all bank accounts were managed and controlled by these entry operators. Statements of such entry operators, their dummy partners/employees, the cash handlers as well as the covered beneficiaries have also been recorded clearly validating the entire modus operandi.

3. Search and seizure operation u/s 133 of the Income Tax Act, 1961 dated 26.10.2020 by Unit-5, Delhi lead to seizure of approx. Rs 62 Crores of cash from the premises of beneficiaries who have benefitted from entry operator.

4. Apart from issuance of bogus billing, Sanjay Jain is also involved in arranging cash against RTGS. These transactions would be different than previously discussed bogus transactions in following ways:-

• • • No invoice would be raised by Sanjay Jain against these transactions
    • There would be no GST ITC received by the beneficiary in such transactions
    • Commission charged by Sanjay Jain on these transactions would be less than
    • what he would charge for with-bill transactions
    • Sanjay Jain would use his firms who do not get audited
    • Beneficiaries taking this facility would normally take billis from some other entity and bank entries will be provided by Sanjay Jain
    • M/L. DEEPAK BUILDERS & ENGINEERS INDIA PVT. LTD. (AAGCD34790)
    • Beneficiaries nught tise this to clear the outstanding bogus purchases/loans/liabilities by issuing RTGS and receiving cash back
    • Such entries in the books of the beneficiaries is carried out through settling the outstanding creditors and debtors across different financials years

Sanjay Jaln would not necessarily withdraw cash from his own accounts, He had many sources in the market that used to arrange the same for him, viz, Rajeav Jain, Kumar Pankaj and Deepak Gupta. At times, Sanjay Jain would forward the RTGS entries to Rajeev Jain, Kumar Pankaj, etc. and they will withdraw the money and send it back to Snajay Jain and Sanjay Jain would forward that cash to the end beneficiary. Before, introduction of TDS on cash withdrawal, Sanjay Jain used to withdraw cash through variona benami firma of his associates.

However, since the applicability of TDS of 0.1% u/s 1947, the charges for arranging such cash increased from 30 paisa to 100 paisa. The difference between billing amount and the bank credit entries is on account of such RTGS to cash entries.

5. During the course of search dated 26.10.2030 on the entry operator, Mr. Sanjay Jain, 2 sets of books of tally were found and seized from the office premise of Sh. Sanjay Jain i.a. 87, First Floor, Dharamvir Mann Marg, Sabri Market, Hari Nagar Ashram, New Delhi, which were annexurized as Annexure-A31. The set of tally data which contains the receipt and expenditure in cash. This data is compiled as List of beneficiary and named as R-1.

List of beneficiaries who have received benefits out of Rs 1590,94,68,436 in total, as bogus purchases from Sanjay Jain is appended to this report as Annexure-R1, for necessary action/ intimation.

The said list is derived in the following format: –

The list of all the beneficiaries (including entities in the above list) identified were confronted to Sanjay Jain in his statement dated 25/12/2020 1/3 132(4) of IT Act as well as on statement dated 11/06/2021 u/s 131 of IT act, 1961, in which he agreed to the quantum of entries as discussed.

6. Satisfaction: The above facts/information states that the assessee M/s. DEEPAK BUILDERS & ENGINEERS INDIA PVT. LTD. is involved in the above transactions of unaccounted receipts and payments with respect to of Rs. 9,79,66,801/-, which has escaped assessment, which nature and source of fund, genuineness are required to be verified.

7. The above seized documents/material give details of transactions in suspicious nature (as appear) undertaken by the assessee, which are recorded below as satisfaction & seized documents as discussed above at Para 5 of such transactions.

8. Genuineness of those transactions indicating their nature, sources of fund, their treatment in books of accounts and their effect with respect to taxability on the assessee are required to be examined in this case.

9. In view of the above, I have reasons to believe that the assessee may he issued notice u/s 153C of the IT Act 1961.”

3. That being the case, learned CIT(DR) strongly supports the above satisfaction note inter alia that the same had been properly recorded in light of the relevant incriminating material found/seized during the course of search dated 26^th October, 2020 which led the Assessing Officer of the said searched party to satisfy himself that the same belonged or pertained or related to the assessee; as the case may be, leading to the Assessing Officer’s satisfaction note finally culminating in the impugned assessment framed in its hands.

4. Faced with this situation, the tribunal invited the Revenue’s attention to the clinching fact that the learned Assessing Officer’s above extracted satisfaction note has nowhere made it explicitly clear as to whether the relevant seized material had a “bearing on the determination of the total income of such other person”. Learned CIT(DR) seeks to buttress the point herein that such a satisfaction note has to be read in totality than after adopting a hyper technical approach.

5. We find no reason to accept the Revenue’s stand. We make it clear that there is no quarrel between the parties about the learned Assessing Officer of the assessee/third person not having clarified as to whether the relevant seized material had any “bearing………………… ” as stipulated in section 153C(1) of the Act. Hon’ble jurisdictional high court’s recent landmark decision in Saksham Commodities Ltd. Vs. ITO (2024) 464 ITR 1 (Delhi)(HC) has settled the law in the assessee’s favour and against the department that such recording of section 153C satisfaction is not a mere mechanical exercise. We thus draw strong support therefrom to conclude that the learned assessing authority in the assessee’s case had erred in law and on facts in recording an improper satisfaction before initiating section 153C proceedings which vitiates the assessment itself in above terms. Ordered accordingly.

All other remaining pleadings between the parties stand rendered academic.

6. This assessee’s appeal ITA No.875/Del/2025 is allowed and the Revenue’s cross appeal ITA No. 2100/Del/2025 is dismissed in above terms. A copy of this common order be placed in the respective case files.

Order pronounced in the open court on 1^st December, 2025