Recording of satisfaction mandatory prior to issuing notice u/s 153C & it should not be vague

Brief of the case:

ITAT Ahmedabad in the case of M/s. Parshwa Corporation Vs. DCIT observed the basic necessities & condition for issuing notice u/s 153 C and it was held that it is mandatory to follow the procedure prescribed under the section i.e.

(1) Satisfaction is to be recorded by the Assessing Officer of the persons searched;

(2) After recording the satisfaction, Assessing Officer of person searched should handover the seized material to the Assessing Officer of such other person;

(3) Thereafter, the Assessing Officer of such other person should issue notice u/s 153C.

Facts of the case:

• A search action u/s 132 was conducted in the case of Shri Rameshbhai Babulal Shah. During search a laptop was found in which Mr. Shah maintained books of account in tally in respect of 65 companies including assessee.
• AO issued notice u/s 153C r.w.s. 153A of the Income-tax Act to the assessee for all the six Assessment Years.

Contention of the Assessee:

• Assessee referred to the copy of the notice issued u/s 153C and it is was contested:

(i) No satisfaction was recorded by the Assessing Officer of person searched,

(ii) No satisfaction was recorded by the Assessing Officer of the assessee before the issuance of the notice u/s 153C and

(iii) In the notice u/s 153C the AO mentioned about his satisfaction. From which it is clear that it is totally vague and has not specified whether any money, bullion, jewellery or other valuable article/thing or books of account/documents belonging to the assessee was seized from Shri Rameshbhai B. Shah.

• Such a vague satisfaction is no satisfaction in the eye of law.
• Section 153C would be applicable if any money, bullion, jewellery or other valuable article/thing or books of account/documents seized from the person searched belongs to the assessee.
• The laptop was belonging to Shri Rameshbhai B. Shah. Therefore, any data recorded in such laptop also belongs to Shri Rameshbhai B. Shah and not to the assessee.
• Such data may be relating to different persons, but it cannot be said to belonging to various different persons.
• Shri Rameshbhai B. Shah has offered Rs. 6.5 Cr for voluntarily addition and in his affidavit it is clear that he offered such amount in his own name not in the name of assessee or 65 entities.
• The basic condition for issuance of notice u/s 153C was not satisfied as no valuable article/thing or books of accounts/documents belonging to the assessee was found from the person searched.
• Hon’ble Kerala High Court in the case of Dr. T.M. Kuriachan, [2012] 23 taxmann.com 28 (Kerala) after relying upon the decision of Hon’ble Apex Court in the case of Manish Maheshwari vs. ACIT and another, (2007) 289 ITR 341 (SC), and held that in the absence of satisfaction recorded u/s 158BD, the issuance of notice u/s 158BC is invalid.
• DR relied upon the decision of ITAT Ahmedabad in the case of Bharat Ginning & Pressing Factory vs. ITO, [2013] 32 taxmann.com 322 (Ahmedabad –Trib.) which mainly followed the decision of Hon’ble Kerala High Court in the case of Panchajanyam Management Agencies and Services ([2011] 333 ITR 281) which is subsequently not accepted by Kerala High Court itself in the case of Dr. T.M. Kuriachan, [2012] 23 taxmann.com 28 (Kerala)

Contention of the revenue:

• The satisfaction has duly been recorded by the Assessing Officer in the notice issued u/s 153C. As the language of notice is;

“I am satisfied that money/bullion/jewellery/other valuable articles or things / books of accounts / documents seized belong(s) to you. Therefore, your income of six assessment years immediately preceding the assessment year relevant to previous year in which the aforesaid search was conducted was made i.e. from A.Ys. 2003-04 to 2008-09 is required to be assessed / re-assessed, in accordance with the provisions of section 153A r.w.s. 153C of the Act.”

• even if there are some procedural irregularities, the same is curable, in view of the provision of Section 292B the Act.
• There is no requirement of recording of any formal satisfaction by the Assessing Officer of the person searched.
• AO in the case of person searched and in the case of assessee is same and hence, there was no necessity of recording of the satisfaction and handing over of the seized material.
• When the Assessing Officer in the case of person searched and the assessee in whose case the notice u/s 158BD was issued is the same, there is no requirement of recording of any satisfaction. Contention of revenue was supported by the decision of Hon’ble Jurisdictional High Court in the case of DCIT vs. Lalitkumar M. Patel, [2013] 36 taxmann.com 554 (Gujarat).

Held by ITAT:

• Recording of satisfaction by the Assessing Officer of the person searched that any money, bullion, jewellery or other valuable article/thing or books of account/documents seized belong to the person other than the person searched is a sine qua non for initiating action under Section 153C.
• The above observation is supported by by the decision of Hon’ble Apex Court in the case of Manish Maheshwari Vs. ACIT (2007) 289 ITR 341 (SC) wherein their Lordships held as under:

The conditions precedent for invoking the provisions of section 158BD, thus, are required to be satisfied before the provisions of the said Chapter are applied in relation to any person other than the person whose premises had been searched or whose documents and other assets had been requisitioned under section 132A of the Act.”

• The above decision of Hon’ble Apex Court is with regard to issuance of notice u/s 158BD; however, the language of Section 153C and 158BD is similar; therefore, the above decision of Hon’ble Apex Court would be squarely applicable while considering the validity of issuance of notice u/s 153C.
• Hon’ble Gujarat High Court, in the case of CIT Vs. Meghmani Organics Limited vide Tax Appeal No.2077 of 2009, compared the language of Section 153C and Section 158BD and held that

“Section 153C which is similarly worded to section 158BD of the Act, provides that where the Assessing Officer is satisfied that any money, bullion, jewellery or other valuable article or thing or books of account or documents seized or requisitioned belongs or belong to a person other than the person referred to in Section 153-A he shall proceed against each such other person and issue such other person notice and assess or reassess income of such other person.”

• After comparing language of Sections 153C and 158BD, ITAT held that the condition for recording satisfaction by the Assessing Officer of the person searched is present in both the cases.
• It is clear no satisfaction is recorded by AO of person searched. AO of assessee did not record any satisfaction prior to issue of notice u/s 153C.
• Notice u/s 153C issued by the Assessing Officer of the person searched lacks jurisdiction which is not curable by virtue of provision of Section 292B.
• Notices issued u/s 153C were invalid; accordingly the same are quashed.

NF