2026 (1) TMI 417 - HC - Income Tax

Third-party search seizures and reassessment notices: satisfaction note u/s153C required; reopening u/ss147/148 quashed without it

Where reassessment notices under ss.147/148 are founded on incriminating material seized in a search under ss.132/132A relating to a third party, the ... Validity of reopening of assessment provisions of Sections 147/148 based on material obtained during a search conducted u/s 132/132A without resorting to proceedings u/s 153A or 153C - principle of statutory interpretation - search u/s 132 was conducted on the entities, i.e. the searched persons u/s 153A and the information/material was derived/collected from such searches and forwarded to the jurisdictional Assessing Officers of the respective petitioners, i.e. the other persons under Section 153C, however, instead of recording satisfaction, the jurisdictional Assessing Officers proceeded to issue the impugned notices under Section 148 of the Act for reopening the assessments as submitted that Sections 153A and 153C are special provisions having non-obstante clauses for assessment or reassessment of income based on material seized during search proceedings u/s 132 and have an overriding effect on Sections 147/148 of the Act - whether it is mandatory in all such cases to invoke Section 153C? Recording of satisfaction u/s 153C and its impact on section 147/148 - HELD THAT:- The use of the expression “the Assessing Officer is satisfied” in Section 153C mandates the recording of satisfaction on the incriminating material sent to him/her by the Assessing Officer of the searched person. The law relating to the recording of satisfaction by the Assessing Officer of the searched person and its transmission to the jurisdictional Assessing Officer is no longer res integra. The Supreme Court in the case of Manish Maheshwari with Indore Construction (Pvt.) Limited [2007 (2) TMI 148 - SUPREME COURT] on a similar issue arising of non-recording of satisfaction note in the old provision of section 158BD(153C) as held that the AO has not recorded its satisfaction, which is mandatory; nor has it transferred the case to the AO having jurisdiction over the matter, we are of the opinion that the impugned judgments of the High Court cannot be sustained, which are set aside accordingly. The appeals are allowed. Unequivocally, the law mandates the recording of satisfaction by the Assessing Officer of the ‘searched person’ (u/s 153A of the Act) at the stage of transmission of seized material to the jurisdictional Assessing Officer of the ‘other person’ before assuming jurisdiction u/s 153C. The absence of satisfaction recorded by the AO of the searched person does not vest jurisdiction in the AO of the third person to directly invoke the provisions of Sections 147/148 of the Act on the incriminating material found during search, more particularly when the provisions of Section 153C of the Act are not followed. Such satisfaction is a statutory requirement and a jurisdictional pre-condition, and not a mere procedural formality. This position stands fortified by binding judicial precedents and the clarificatory Circular issued by the CBDT, which is binding on the Department. Scope of proceedings u/s 147/148, 153A, AND 153C r.w.s. 132 - HELD THAT:-We answer the issues by summarizing the observations as under: A) It is mandatory for the Assessing Officer of a “searched person” (Section 153A of the Act) to record satisfaction on the incriminating material found during the search under Sections 132/132A of the Act and communicate the same to the jurisdictional Assessing Officer of the “other/third person”. B) In the absence of any satisfaction note recorded by the Assessing Officer of the searched person, the jurisdictional Assessing Officer of the other person cannot assume jurisdiction u/s153C of the Act solely on the basis of material sent to him by the Assessing Officer of the searched person. In other words, the “other person” cannot be subjected to assessment/ reassessment under Section 153C of the Act on the material received by him sans a satisfaction note; hence, such an approach would be illegal, without jurisdiction, and liable to be quashed. C) The jurisdictional Assessing Officer of the “other/searched person” (Section 153C) can invoke the provisions of Sections 147/148 of the Act only on the basis of material available to him from other sources, other than the incriminating material sent to him. In case a satisfaction note is recorded on the incriminating material and transmitted to him/her, then the only recourse available to the jurisdictional AO is to proceed under Section 153C of the Act and not under Sections 147/148 of the Act. D) In the case of assessees who are subjected to reassessment under the provisions of Section 153A of the Act, the Assessing Officer cannot switch over or invoke the provisions of Sections 147/148 of the Act on the basis of incriminating material found during the search and seizure conducted under Sections 132 or 132A of the Act. However, the Revenue cannot be restricted, barred, or left remediless from invoking the provisions of Sections 147/148 of the Act, subject to fulfillment of the conditions mentioned therein, and the assessment can be reopened on the basis of material collected post-search from any other independent source. 1. ISSUES PRESENTED AND CONSIDERED (i) Whether, where incriminating material pertaining to an 'other person' is found in a search/requisition and forwarded to the jurisdictional Assessing Officer, reassessment can be initiated under Sections 147/148 on the basis of that search material without following Section 153C and without a satisfaction note recorded by the Assessing Officer of the searched person. (ii) Whether, for an assessee who is the 'searched person', the Assessing Officer can bypass the special search-assessment procedure and reopen under Sections 147/148 on the basis of incriminating material found in the search, absent independent post-search material. (iii) Whether reassessment under Sections 147/148 is sustainable where the trigger material is independent post-search information (and not merely seized documents), even if the initial lead originated from a search. 2. ISSUE-WISE DETAILED ANALYSIS Issue (i): 'Other person' - permissibility of Sections 147/148 on search material without satisfaction and without Section 153C Legal framework (as discussed by the Court): The Court treated Sections 153A and 153C as a special search-assessment code introduced for search/requisition cases, both containing non-obstante clauses overriding, inter alia, Sections 147/148. Section 153C was held to operate when seized/requisitioned money/valuables/documents 'belong to' or 'pertain to' an 'other person', and the statutory trigger requires the Assessing Officer of the searched person to be 'satisfied' and to hand over the material to the jurisdictional Assessing Officer of the other person. Interpretation and reasoning: The Court held that the expression 'the Assessing Officer is satisfied' in Section 153C mandates recording of satisfaction on the incriminating material by the Assessing Officer of the searched person at the time of transmission. This satisfaction is not a mere procedural step but a jurisdictional pre-condition. Where incriminating material concerning an 'other person' is found during search and transmitted, the statute does not permit the jurisdictional Assessing Officer of the other person to assume jurisdiction on that material without the foundational satisfaction of the searched person's Assessing Officer. The Court further held that the absence of such satisfaction does not enable a 'second route' by directly invoking Sections 147/148 on the very same search material; such a bypass would defeat the special mechanism and safeguards of the search code. Conclusions: Reassessment notices/orders under Sections 147/148, insofar as they are founded solely on incriminating search material forwarded from the searched person, are without jurisdiction if Section 153C is not followed and the searched person's Assessing Officer has not recorded the requisite satisfaction. Such reopening is liable to be quashed. Issue (ii): 'Searched person' - ability to reopen under Sections 147/148 based on search incriminating material Legal framework (as discussed by the Court): The Court applied the scheme that for the searched person, search-based assessment/reassessment is governed by Section 153A (with overriding effect), while Sections 147/148 remain available only in limited circumstances recognized in the Court's analysis, particularly where the reopening is based on material from an independent source and not on the incriminating material unearthed in the search. Interpretation and reasoning: The Court held that when an assessee is itself subjected to search, the statute mandates following the procedure under Section 153A on the basis of incriminating material found during the search. The Assessing Officer cannot 'switch over' from Section 153A to Section 148 on the same search material, because that would circumvent the special code governing search assessments. However, the Court also clarified that the Revenue is not rendered remediless: if, apart from search material, there is material collected post-search from an independent source giving 'reason to believe' escapement of income (subject to statutory conditions), reopening under Sections 147/148 may still be available. Conclusions: For the searched person, reopening under Sections 147/148 on the basis of incriminating search material (without independent post-search material) is impermissible and without jurisdiction; reassessment can proceed under Sections 147/148 only where it is founded on independent information/material and statutory conditions are satisfied. Issue (iii): Validity of Sections 147/148 where reassessment is based on independent post-search information Legal framework (as discussed by the Court): The Court recognized a distinction between (a) reopening founded on incriminating material seized during search (attracting the special search code), and (b) reopening founded on information/material obtained later from other sources, which can support Sections 147/148 if statutory preconditions are fulfilled. Interpretation and reasoning: On the facts of one set of petitions, although a seized digital record existed, the Court found that the identifying details and linkage to the assessees, including the factum of cash transactions, emerged subsequently through a post-search development (admissions and reconciled purchaser data provided in settlement-related proceedings), and the assessees' names were not revealed from the seized material during the search itself. In these circumstances, there was no occasion for the searched person's Assessing Officer to record satisfaction identifying the 'other persons' for Section 153C on the search material. The Court treated such post-search admissions/reconciled purchaser information as an independent source sufficient to trigger Sections 147/148. Conclusions: Where reassessment is founded on post-search information that is independent of the transmitted seized material (even if it originated from a search context), initiation under Sections 147/148 is sustainable, subject to fulfillment of the statutory conditions applicable to reassessment. Disposition applied to the categories of cases examined by the Court (a) Where reopening of 'other persons' was based solely on transmitted search material without any satisfaction note and without independent post-search material, the impugned reopening under Sections 147/148 was quashed with liberty to proceed in accordance with law under appropriate provisions subject to statutory conditions. (b) Where reopening was upheld because the trigger was independent post-search information identifying the assessees and transactions (and not merely the seized material), the writ challenges were dismissed and reassessment was permitted to proceed in accordance with law. (c) Where assessees were themselves searched and reopening under Section 148 was sought on the basis of incriminating search material, the action was held illegal for bypassing Section 153A, again preserving Revenue's liberty to invoke Sections 147/148 only if independent material and statutory conditions exist.