Facts

A search and seizure operation was conducted on 08-04-2010 at the residential  and business premises of two individuals namely, Shri Tejwant Singh and Shri Ved Prakash Bharti along with their group of companies at Karnal, Panipat  and Delhi. A survey under section 133A of the Act was also carried out at the business premises of the assessee at Karnal and Delhi. During the course of the search at the residential premises of Shri Ved Prakash (a director of the assessee company), a pen drive was found and seized from a vehicle parked in front of      the building. After printing the contents of the pen drive, various documents were seized which contained details of cash receipts on sale of shops and offices of the assessee at Karnal.

As a consequence of the search and seizure a notice under section 153C of the     Act was issued to the assessee by the assessing officer (‘AO’). The AO of the assessee and the AO of the searched persons (i.e. Shri Tejwant Singh and Shri Ved Prakash Bharti) was the same. The assessment for AY  2008-09 was finalised by    the AO after making various additions and the assessee challenged the assessment order mainly on the ground that the satisfaction note recorded under section 153C of the Act was invalid as there was no satisfaction note by the AO of the searched person. The CIT(A) dismissed the appeal of the assessee but the tribunal allowed the assessee’s appeal without going into the merits of the case by holding that the satisfaction note recorded under section 153C of the Act  in  respect of the assessee (being a third party) was invalid. The Revenue filed an appeal to the High Court (HC) and the HC allowed the appeal by holding that compliance under section 153C of the Act existed. Further, the HC observed that the AO was justified in recording his satisfaction that the documents seized belonged to the assessee and set aside the order passed by the tribunal.

Issue

Whether the satisfaction note recorded by the AO complies with the provisions     of section 153C of the Act and whether all the conditions required to be fulfilled have been satisfied before initiating the proceedings under section 153C of the  Act. Further, where the AO of the searched person and the other person are the same, whether there is a need for two separate satisfaction notes recorded by the AO?

Views

The decision of CIT v.  Calcutta Knitwears (2014) 362 ITR 673 (SC) held that      for the purpose of section 158BD of the Act a satisfaction note was sine qua non and must be prepared by the AO before he  transmits the  records to the  other AO who has jurisdiction over such other person. Further,  even CBDT Circular No. 24 of 2015 dt. 31-12-2015 (2015) 380 ITR 32 (St) explained the requirement     of ‘recording of satisfaction’ by the AO before issuing a notice under section 158BD/153C of the Act. Thus, it is observed that when proceedings are proposed   to be initiated under section 153C of the Act against the “other person”, it must     be preceded by a satisfaction note by the Assessing Officer of the “searched person”. It is further observed that the AO of “searched person” will record satisfaction that the seized documents belong/relates to “other person”.

However, in the decision of Ganpati Fincap Services (P.) Ltd. v. CIT (2017) 395 ITR 692(Delhi) (HC), the satisfaction note clearly recorded that the documents listed belong to the other person. The satisfaction note of the AO was of the “searched person” who also happened to be the AO of the “other person” and merely because the note did not categorically state that the documentsdid   not belong to the “searched person” would not invalidate the assumption of jurisdiction under section 153C of the Act in thehands of the “other person”.

Held

The honourable Supreme Court observed that where the AO of the searched person and the other person are different and when the AO of the searched person is satisfied that the document seized belongs to a  person other than  the searched person, then the AO of the searched person after recording his satisfaction may transmit the records/documents/papers to the AO having jurisdiction over such other person. The AO shall forward his satisfaction note to the AO of the other person and is also required to make a note in the file of the searched person of doing so. The AO having jurisdiction over such other person, may after receiving the satisfaction note and upon examining the documents, proceed to issue a notice under section 158BD of the Act for the purpose of completing the assessment.

However,  where the AO  of the searched person and the other person is the same,  it is sufficient that the AO records in the satisfaction note that the documents seized from the searched person belonged to the other person and the requirement   of section 153C of the Act would be fulfilled. Thus, there can be one satisfaction note prepared by the AO and there would be no requirement to transmit the documents so seized from the searched person.

The satisfaction note of the AO recorded that the documents containing the details   of cash receipts on sale of shops/offices at M/s Super Malls, Karnal belonged to    the assessee (i.e. the other person). The AO is also satisfied that the documents     on a pen drive are seized from the searched person which belong to the assessee. Thus, the mandatory requirements of section 153C of the Act have been complied with and the satisfaction note by the AO clearly states that the documents seized belong to the assessee and not the searched person. Thus, the Supreme Court held that the High Court was justified in holding that the requirements of section 153C    of the Act were fulfilled by the AO before initiating proceedings under section  153C of the Act. (AY. 2008-09) (CA Nos. 2006 to 2013 of 2020 dt.5-4-2020)

Editorial: Order in PCIT v. Super Malls (P.) Ltd. (2017) 393 ITR 557 (Delhi)  (HC) affirmed. In the case of assessment of ‘other person’ under section 153C of   the Act, the satisfaction is of supreme importance. Two separate satisfactions are required where the AO of the searched person and the AO of the other person are different. However, a single satisfaction note will be sufficient compliance where the AO of ‘searched person’ and ‘other person’ is same.

“You may never know what results come of your actions, but if you do nothing, there  will be no results.”

– Mahatma Gandhi