2014 (5) TMI 158 - HC - Income Tax

Notice under Section 153C invalid without satisfaction note as required by Section 158BD, appeal dismissed against Revenue

The HC held that under Section 158BD, the assessing officer must record a satisfaction note before issuing a notice to another person regarding ... Block Assessment - Requirement to record the satisfaction - Proceeding u/s 153A & 153C versus 158BC, 158BD - Notice to be issued u/s 158BD of the Act - Notice for undisclosed income of any other person - At what stage of the proceedings under Chapter XIV-B does the assessing authority require to record his satisfaction for issuing a notice u/s 158BD of the Act – Held that:- Following Commissioner of Income Tax-III Vs. M/s Calcutta Knitwears, Ludhiana [2014 (4) TMI 33 - SUPREME COURT] - For the purpose of Section 158BD of the Act a satisfaction note is sine qua non and must be prepared by the assessing officer before he transmits the records to the other assessing officer who has jurisdiction over such other person - the assessing officer had not recorded the satisfaction note as required u/s 158BD of the Act - The provisions of Section 158BD are pari materia with the provisions of Section 153C. Bothe the CIT(A) and the ITAT rightly noted that there is no material showing the recording of satisfaction by the AO of the 'searched person' prior to issuance of notice u/s 153C to the assessee, i.e. 'the other person' - though the AO (of the other person) in the assessment order had stated that satisfaction for issuing notice u/s 153C was recorded on examination, it was seen that recording of satisfaction alleged to be recorded by the AO was not available thus, there was no substantial question of law arises in the appeal for interference with the judgment u/s 260-A of the Act – Decided against Revenue. ISSUES: Whether recording of satisfaction by the Assessing Officer of the 'searched person' prior to issuance of notice under Section 153C of the Income Tax Act, 1961 is mandatory for initiating proceedings against the 'other person'.Whether the Assessing Officer of the 'searched person' and the 'other person' being the same exempts the requirement of handing over seized documents and recording of satisfaction under Section 153C.Whether non-recording of prior satisfaction under Section 153C vitiates the assessment proceedings initiated against the 'other person'.Whether the provisions of Section 153C are procedural in nature such that non-compliance with satisfaction recording can be cured subsequently.Whether the ratio of judgments interpreting Section 158BD of the Income Tax Act applies pari materia to Section 153C proceedings. RULINGS / HOLDINGS: The recording of satisfaction by the Assessing Officer of the 'searched person' is a mandatory precondition ('sine qua non') for initiating proceedings against the 'other person' under Section 153C, and such satisfaction must precede issuance of notice under Section 153C.Even if the Assessing Officer of both the 'searched person' and the 'other person' is the same, the requirement of recording satisfaction cannot be dispensed with; the handing over of seized documents may not be necessary but recording satisfaction remains mandatory.Non-recording of prior satisfaction renders the proceedings under Section 153C without jurisdiction and invalid, warranting annulment of the assessment framed under Section 153C.The provisions of Section 153C are not merely procedural; compliance with the mandatory condition of recording satisfaction cannot be cured by subsequent recording in the assessment order.The legal principles and ratio decidendi established by the Supreme Court in interpreting Section 158BD apply pari materia to Section 153C, mandating satisfaction to be recorded in writing before initiating proceedings against the 'other person'. RATIONALE: The Court applied the statutory framework of Sections 153A and 153C of the Income Tax Act, 1961, which provide for assessment proceedings following search and seizure operations under Section 132.The Court relied heavily on the Supreme Court judgment interpreting Section 158BD, which is pari materia to Section 153C, holding that recording of satisfaction is mandatory and may be done at any stage before issuance of notice to the 'other person'.The Court emphasized that the 'satisfaction' refers to a tangible, written conclusion by the Assessing Officer of the 'searched person' that seized assets/documents belong to a person other than the searched person, forming the foundation for jurisdiction under Section 153C.The Court distinguished the Division Bench judgment relied upon by the appellant, noting that in that case satisfaction had been recorded, whereas in the instant case no such recording was found on record.The Court rejected the contention that Section 153C is procedural and that non-recording of satisfaction could be cured later, citing the Supreme Court's interpretation that satisfaction is a mandatory condition precedent to jurisdiction.No substantial question of law arose warranting interference under Section 260-A of the Income Tax Act, 1961, leading to dismissal of the appeal.