Deeming fiction for searched persons does not authorize reassessment absent recorded satisfaction and prior approval.

Reassessment notices under section 148 cannot validly be based on material seized from a third person unless the Assessing Officer records a satisfaction that the seized books/documents belong to or relate to the assessee and obtains prior approval as required by Explanation 2 clauses and the forwarding requirement under section 151; absent those mandatory procedural steps the deeming fiction for a searched person is limited and a jurisdictional defect arises, rendering the notice and consequent assessment invalid. The Tribunal quashed reassessment orders where the AO relied on third party seizure material without the required recorded satisfaction and prior approval.

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Issues: (i) Whether the notice issued under section 148 of the Income-tax Act, 1961 and consequent reassessment framed under section 147 are valid where the Assessing Officer relied on materials seized from a third person (employee) without recording the requisite satisfaction and obtaining prior approval under Explanation 2 clauses (iii)/(iv) and section 151.

Analysis: The Tribunal examined Explanation 2 to section 148 and the proviso to section 148 of the Income-tax Act, 1961, noting that the deeming fiction in favor of a searched person is limited. Where additions are based on materials seized from any other person, clauses (iii) or (iv) of Explanation 2 require the AO to be satisfied, with prior approval of the Principal Commissioner/Commissioner, that the seized books/documents belong to or relate to the assessee, and that such satisfaction be forwarded to the specified authority under section 151. The Tribunal found that separate search proceedings and distinct panchanamas existed for the assessee and for the third person (senior accounts manager), and that the AO quantified undisclosed income relying on material seized from the third person without recording the mandatory satisfaction or obtaining prior approval. The Tribunal applied the statutory text, the proviso limiting the deeming fiction, and relevant precedents emphasising that procedural safeguards are mandatory and that failure to comply results in jurisdictional defect. The Tribunal concluded that mere conduct of a search does not automatically permit issuance of notice under section 148 unless the AO demonstrates, in the reasons recorded and with required approvals, that the seized material shows escapement of income for the relevant assessment year.

Conclusion: The notice under section 148 and the consequential assessment under section 147 are invalid because the Assessing Officer relied on material seized from another person without recording the requisite satisfaction and obtaining prior approval as required by Explanation 2 clauses (iii)/(iv) and section 151; consequently the reassessment orders for the assessment years 2020-21 and 2021-22 are quashed and the appeals are allowed in favour of the assessee.

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