2025 (11) TMI 1318 - HC - Income Tax

Delayed satisfaction note invalidates Section 153C notices; assessments quashed for breaching Calcutta Knitwears timing requirement

HC quashed the notices issued u/s 153C for the relevant assessment years. It held that the AO of the searched person recorded the satisfaction note about ... Issuance of a notice u/s 153C - Mandation of recording of the satisfaction note - delay of 22 months in recording the satisfaction - HELD THAT:- AO of the searched person prepared the satisfaction note on 6th June, 2023, after completion of the assessment in August 2021, i.e., almost after a period of 22 months. We may, at this stage, refer to the decision of Jitendra H. Modi [2018 (2) TMI 673 - GUJARAT HIGH COURT] wherein this Court, by placing reliance on the decision of the Supreme Court in the case of Calcutta Knitwears [2014 (4) TMI 33 - SUPREME COURT] has held that satisfaction recorded after 09 months could not be said to be immediate action and hence, the Coordinate Bench of this Court set aside the notices issued under Section 158BD of the Act In the instant case, there has been a delay of 22 months in recording the satisfaction, which runs contrary to the decision in Calcutta Knitwears [2014 (4) TMI 33 - SUPREME COURT] as well as provision ‘(c)’ of Circular No. 24/2015 dated 31.12.2015, which uses the expression “immediately after the assessment procedure is completed”. Twin reasons are assigned by the respondents in the affidavit in reply for delay in recording the satisfaction note, (a) COVID-19 pandemic; and, (b) adoption of Faceless Scheme. So far the reason of COVID-19 is concerned, the same runs contrary to the action of the respondents, since the assessment of the searched person was itself done during the pandemic, and in the affidavit-in-reply, the respondent has mentioned that the Omicron variant commenced in December 2021 and continued until February 2022. Thus, even after February, 2022, the satisfaction note has been recorded on 17.10.2023. The second reason of workload due to Faceless Scheme is also a lame excuse, since indubitably the exercise under sections 153A and 153C of the Act falls outside the purview of the said scheme. Hence, both the reasons assigned appear to be an afterthought, hence the same are rejected. Impugned notices issued u/s 153C of the Act for the respective assessment years are hereby quashed and set aside. ISSUES PRESENTED AND CONSIDERED 1. Whether notice issued under Section 153C of the Income Tax Act, 1961 is vitiated by inordinate delay in recording the satisfaction note by the Assessing Officer. 2. Whether the principles enunciated by the Supreme Court regarding the requirement and timing of recording a satisfaction note (as clarified by the Departmental Circular) apply to proceedings under Section 153C and, if so, whether non-compliance invalidates subsequent action. 3. Whether administrative/operational explanations (COVID-19 pandemic, introduction of Faceless Assessment Scheme and re-distribution of jurisdiction) can justify a substantial delay in recording the satisfaction note and transmitting seized records under Section 153C. 4. Whether precedent decisions relied upon by the Department or other High Courts (validating delayed satisfaction notes) are distinguishable or applicable on the facts. ISSUE-WISE DETAILED ANALYSIS Issue 1: Validity of notice under Section 153C where there is delay in recording satisfaction note Legal framework: Section 153C permits assessment of a person other than the searched person if the Assessing Officer, having regard to documents or things seized or requisitioned in a search, records satisfaction that they 'pertain to or relate to' such other person; a satisfaction note is a pre-requisite before transmitting records or initiating proceedings in respect of the other person. Precedent Treatment: The Supreme Court has held that a satisfaction note is sine qua non and must be prepared either at initiation of proceedings against the searched person, during assessment proceedings of the searched person, or immediately after completion of such assessment. The CBDT issued a Circular extending those guidelines to Section 153C. Interpretation and reasoning: The Court examined the chronology: search (Oct 2019); assessment of searched person completed (Aug 2021); satisfaction recorded by AO of searched person (June 2023); satisfaction recorded by AO of other person (Oct 2023); notice issued under Section 153C thereafter. The satisfaction note in the searched person's file was recorded 22 months after completion of assessment. The Court held that the statutory and judicial prescription of preparedness to record satisfaction 'immediately after' assessment was not met; the substantial delay defeats the purpose of the requirement which is to ensure expedition, contemporaneity and certainty in search-related assessments. Ratio vs. Obiter: Ratio - where recording of satisfaction required by precedent/CBDT Circular is delayed for an extended period (here 22 months), the subsequent notice under Section 153C is vitiated. Obiter - observations on the qualitative purpose of 'immediate' (expediency, avoiding protracted proceedings) serve as contextual guidance. Conclusion: The impugned notice under Section 153C is invalidated by the inordinate delay in recording the satisfaction note; the delay is contrary to the requirement of immediacy and therefore the notice is quashed on this ground. Issue 2: Applicability of Supreme Court pronouncement and Departmental Circular to Section 153C proceedings Legal framework: The Supreme Court's interpretation of Section 158BD (now reflected in Section 153A/153C jurisprudence) requires a satisfaction note as a condition precedent; CBDT Circular clarified that the same three-stage timing applies to Section 153C. Precedent Treatment: Multiple High Courts have treated the provisions as pari materia and applied the Supreme Court guidelines to Section 153C; the CBDT explicitly directed compliance and withdrawal of inconsistent litigation. Interpretation and reasoning: The Court accepted that the Circular and the Supreme Court ratio apply to Section 153C and that the AO had opportunities to record satisfaction at earlier permissible stages (initiation, during assessment, or immediately after completion). The AO did not record satisfaction at the earlier stages available, and instead recorded it after a protracted interval, contrary to the Circular's stage (c). Ratio vs. Obiter: Ratio - the Supreme Court/CBDT guidelines mandatorily apply to Section 153C and non-compliance with the timing requirement can invalidate subsequent proceedings. Obiter - emphasis on the three available stages may guide administrative practice but the core requirement is contemporaneity. Conclusion: The Circular and Supreme Court precedent apply; failure to comply with the prescribed timing in recording satisfaction undermines the validity of Section 153C proceedings. Issue 3: Acceptability of administrative reasons (pandemic, Faceless Scheme) for delay in recording satisfaction Legal framework: Administrative difficulties may, in some circumstances, explain delay, but any justification must be consistent with statutory purpose and actual events; the burden of demonstrating valid constraints rests with the Department. Precedent Treatment: Courts have considered exceptional circumstances where delay was unavoidable; however, such reasons must be credible and contemporaneous with the period of delay. Interpretation and reasoning: The Department relied on two reasons - COVID-19 disruptions (including Omicron wave) and workload/redistribution due to the Faceless Assessment Scheme. The Court rejected both: assessment in the searched person's case was framed during the pandemic (contradicting the claim that pandemic prevented contemporaneous action), and Sections 153A/153C were specifically outside the ambit of the Faceless Scheme, undermining the contention that scheme implementation justified the delay. The Court treated these explanations as afterthoughts unsupported by chronology or statutory contours. Ratio vs. Obiter: Ratio - general administrative disruption does not automatically validate prolonged delay where the assessment and recording of satisfaction could and were in fact completed during the same operational period; Obiter - administrative reforms require internal redistribution but cannot contravene statutory timelines or judicially mandated standards of immediacy. Conclusion: The proffered administrative explanations do not justify the 22-month delay; they are rejected as insufficient to cure the statutory/non-compliance. Issue 4: Applicability/distinguishability of contrary decisions validating delayed satisfaction notes Legal framework: Conflicting High Court decisions must be examined on facts; reliance on other decisions does not displace the requirement of demonstrating contemporaneity and necessity for delay in the specific case. Precedent Treatment: The Department relied on a High Court decision that upheld delayed satisfaction; that decision was noted to have been tested by Special Leave but the factual matrix and length of delay differed. Interpretation and reasoning: The Court distinguished such authority on facts - where the delay was shorter or where credible contemporaneous constraints existed, those decisions may stand. In the present case, the Court found no such factual justification and a materially larger delay (22 months), hence the other decision was not a precedent to validate action here. Ratio vs. Obiter: Ratio - precedents validating delay are fact-sensitive and do not constitute a blanket rule permitting protracted lapses; Obiter - courts should scrutinize factual justification for delay rather than mechanically uphold administrative action. Conclusion: The contrary decisions relied upon do not assist the Department on the facts of the present case and are distinguishable. Final Disposition (linking conclusions) Cross-reference: Issues 1-4 interlink - the mandatory nature of the satisfaction note (Issue 2) and the purpose of immediacy (Issue 1) render administrative explanations (Issue 3) and reliance on factually dissimilar precedents (Issue 4) inadequate to validate the impugned notice. The combined analysis leads to quashing of the notice issued under Section 153C due to inordinate and unjustified delay in recording mandatory satisfaction.