Satisfaction Note u/s 153C should contain Specific Reasons to conclude that Seized Material belonged to a person other than the Searched Party: Delhi HC [Read Judgment]

Recently, the Delhi High Court in the case of Pr. Commissioner of Income Tax vs. M/s. Software (FIRM), held that specific reasons should be contained in Satisfaction Note to conclude that seized material belonged to person other than the searched party and to initiate proceedings under Section 153C (2) of the Income Tax Act.

The assessee is a firm established under a partnership deed between Sharada Erectors Private Limited and one Mr. Rakesh Kumar Garg and his company. A search and seizure operation was carried out under Section 132 on 31^st July 2008 in the Rajdurbar group of cases. During this operation, a hard disk containing books of accounts of the assessee were seized. After the assessee declared its total income to be NIL on 29^th September 2009, a notice under Section 142(1) read with Section 153C was issued to the assessee. When it filed a reply once again declaring its income to be NIL, further notices under Section 142(2) and 142(1) were issued. The Assessing Officer (A.O.) by his order held the total taxable income for AY 2009-10 to be Rs.1.57 Crores and disallowed deductions claimed under Section 80IA.

The assessee appealed to the Commissioner of Tax (Appeals) (CIT(A) who confirmed the findings of the A.O. and enhanced the taxable income to Rs.1.91 Crores. Appeal was made to ITAT which held that the proceedings under Section 153C were void ab initio and quashed them. The revenue appealed before High Court.

The Counsel for the Revenue argued that the ITAT failed to appreciate that the notice for AY 2009-10 was issued under Section 142(1), and not under Section 153C and that a satisfaction note was not mandatory in the present case.

The Counsel for the assessee argued that that the AO failed to record a specific finding that the material seized belonged to the assessee and that the satisfaction note was prepared in a mechanical manner without any application of mind by the AO to the specific facts of the case. He further submitted that the initiation of proceedings was unjustified because the seized material did not incriminate the assessee. The assesse relied on the decisions in CIT vs. RRJ Securities Limited wherein in it was held that recording of a satisfaction note is the most important step in the initiation of proceedings under Section 153C.

The Bench comprising of Justice S. Ravindra Bhat and Justice A.K. Chawla observed “the failure of the AO to record a specific satisfaction as to how the recovered material belonged to the assessee in the note that preceded the notice issued under it, vitiates the assessments. without that nexus, and fulfillment of the preconditions, clearly, the option provided by Section 153C (2) to proceed against pending or assessments cannot be made recourse to. Since the satisfaction in terms of Section 153C (1) was clearly inadequate”.