Supreme Court Upholds Section 153C Compliance in Income Tax Search Cases: Super Malls Pvt. Ltd. vs. PCIT (2020)

Date of the Judgment: March 5, 2020

Citation: 2020 INSC 227

Judges: Ashok Bhushan, J., M.R. Shah, J.

Can an income tax assessment against a third party be valid if the Assessing Officer doesn’t properly record their satisfaction that seized documents belong to that third party? The Supreme Court of India addressed this critical question in a case involving M/s Super Malls Private Limited. The court examined whether the Assessing Officer had followed the correct procedure under Section 153C of the Income Tax Act, 1961, which deals with assessments of individuals or entities other than those initially searched. The bench was composed of Justices Ashok Bhushan and M.R. Shah, with the judgment authored by Justice M.R. Shah.

Case Background

The case originated from a search and seizure operation conducted on April 8-9, 2010, at the premises of Shri Tejwant Singh and Shri Ved Prakash Bharti, along with a survey at M/s Super Mall (P) Limited. During the search at Shri Ved Prakash Bharti’s residence, a pen drive was seized from his vehicle. This pen drive contained documents detailing cash receipts from the sale of shops/offices at M/s Super Mall, Karnal. Subsequently, a notice was issued to M/s Super Mall (P) Limited under Section 153C of the Income Tax Act, 1961, as the Assessing Officer believed the seized documents belonged to them.

The Assessing Officer for both the searched individuals and M/s Super Mall (P) Limited was the same person. The assessment for the year 2008-09 was completed with additions. M/s Super Mall (P) Limited challenged this assessment, arguing that the satisfaction note recorded under Section 153C was invalid.

Timeline

Course of Proceedings

The Commissioner of Income Tax (Appeals) dismissed the appeal filed by M/s Super Mall (P) Limited. However, the Income Tax Appellate Tribunal (ITAT) allowed the appeal, holding that the satisfaction note under Section 153C was invalid. The High Court reversed the ITAT’s decision, stating that there was compliance with Section 153C, and remanded the matter back to the ITAT to hear the appeal on merits. The High Court observed that the Assessing Officer was justified in recording the satisfaction that the documents seized “belonged” to the assessee.

Legal Framework

The core of this case revolves around Section 153C of the Income Tax Act, 1961. This section deals with the assessment of income of a person other than the one who was initially searched under Section 132 of the Act.

Section 153C states that if the Assessing Officer is satisfied that any money, bullion, jewellery, or other valuable article or thing, or any books of account or documents seized or requisitioned, belong to a person other than the person referred to in Section 153A, then the books of accounts or documents or assets so seized or requisitioned shall be handed over to the Assessing Officer having jurisdiction over such other person.

The Supreme Court highlighted that the satisfaction of the Assessing Officer that the seized documents belong to a third party is a mandatory requirement before issuing a notice under Section 153C of the Act.

Arguments

Submissions on behalf of the Assessee (M/s Super Malls Private Limited):

• The High Court erred in holding that the Assessing Officer complied with Section 153C of the Act.
• There was no satisfaction note by the Assessing Officer of the searched party.
• As per Section 153C, the Assessing Officer of the searched person (the Directors) must first be satisfied that the seized documents belong to the assessee company.
• Only after such satisfaction can the documents be transferred to the Assessing Officer having jurisdiction over the assessee company.
• This requirement is mandatory, as held by the Supreme Court in Commissioner of Income Tax v. Calcutta Knitwears [(2014) 6 SCC 444] and other High Court decisions.
• The Central Board of Direct Taxes (CBDT) also issued a circular explaining these requirements, which was considered by the Delhi High Court in Ganpati Fincap Service Pvt. Ltd. v. Commissioner of Income Tax [2017 (395) ITR 692 (Delhi)].
• Since there was no satisfaction note by the Assessing Officer of the searched person, there was non-compliance with Section 153C and the CBDT circular.

Submissions on behalf of the Revenue (Principal Commissioner of Income Tax):

• The High Court correctly held that there was sufficient compliance with Section 153C, considering the satisfaction note recorded by the Assessing Officer.
• The Assessing Officer of the assessee and the searched person was the same individual.
• Therefore, the satisfaction note recorded by the Assessing Officer served the purpose of both the searched person and the assessee.
• There was no need to transmit the documents to another Assessing Officer since the same person was handling both cases.
• The Delhi High Court in Ganpati Fincap (supra) also observed that if the Assessing Officer is the same for both the searched person and the other person, there is no need for two separate satisfaction notes.

Issues Framed by the Supreme Court

The primary issue before the Supreme Court was:

1. Whether there was compliance with the provisions of Section 153C of the Income Tax Act, 1961 by the Assessing Officer, and whether all the conditions required to be fulfilled before initiating proceedings under Section 153C of the Act had been satisfied.

Treatment of the Issue by the Court

Authorities

Cases Relied Upon by the Court:

• Commissioner of Income Tax v. Calcutta Knitwears [(2014) 6 SCC 444] – Supreme Court of India. This case was cited to emphasize the mandatory nature of the requirements under Section 153C of the Act.
• Pepsi Food Pvt. Ltd. v. Assistant Commissioner of Income Tax [2014 (367) ITR 112 (Delhi)] – Delhi High Court. This case was referred to for understanding the scheme of Section 153C and the conditions precedent for issuing a notice under this section.
• Commissioner of Income Tax v. Bipinchandra Chimanlal Doshi [2017 (395) ITR 632 (Gujarat)] – Gujarat High Court. This case was cited to emphasize the mandatory nature of the requirements under Section 153C of the Act.
• Ganpati Fincap Service Pvt. Ltd. v. Commissioner of Income Tax [2017 (395) ITR 692 (Delhi)] – Delhi High Court. This case was used to clarify the procedure when the Assessing Officer of the searched person and the other person is the same.

Legal Provisions Considered by the Court:

• Section 132(1) of the Income Tax Act, 1961 – This section deals with the search and seizure operations conducted by the Income Tax Department.
• Section 133A of the Income Tax Act, 1961 – This section deals with the survey operations conducted by the Income Tax Department.
• Section 153A of the Income Tax Act, 1961 – This section deals with assessment in case of search or requisition.
• Section 153C of the Income Tax Act, 1961 – This section deals with assessment of income of a person other than the person referred to in Section 153A.
• Section 158BD of the Income Tax Act, 1961 – This section deals with assessment of undisclosed income as a result of search.

Judgment

How each authority was viewed by the Court?

• The Supreme Court in Commissioner of Income Tax v. Calcutta Knitwears [(2014) 6 SCC 444]* was followed to emphasize the mandatory nature of the requirements under Section 153C of the Act.
• The Delhi High Court in Pepsi Food Pvt. Ltd. v. Assistant Commissioner of Income Tax [2014 (367) ITR 112 (Delhi)]* was referred to for understanding the scheme of Section 153C and the conditions precedent for issuing a notice under this section.
• The Gujarat High Court in Commissioner of Income Tax v. Bipinchandra Chimanlal Doshi [2017 (395) ITR 632 (Gujarat)]* was cited to emphasize the mandatory nature of the requirements under Section 153C of the Act.
• The Delhi High Court in Ganpati Fincap Service Pvt. Ltd. v. Commissioner of Income Tax [2017 (395) ITR 692 (Delhi)]* was used to clarify the procedure when the Assessing Officer of the searched person and the other person is the same.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the fact that the Assessing Officer was the same for both the searched person and the assessee. The Court noted that the satisfaction note recorded by the Assessing Officer clearly stated that the seized documents belonged to the assessee, thus fulfilling the requirements of Section 153C. The Court emphasized that the procedural requirements of Section 153C are to be mandatorily complied with.

Logical Reasoning:

The Court considered the argument that the Assessing Officer of the searched person and the assessee being the same, there was no need for a separate satisfaction note and transmission of documents. It rejected the argument that there was non-compliance with the provisions of Section 153C of the Act and held that the satisfaction note by the Assessing Officer clearly stated that the documents seized belonged to the assessee.

The Court observed that the High Court was correct in its finding that the requirement of Section 153C of the Act had been fulfilled by the Assessing Officer before initiating the proceedings under Section 153C of the Act.

The court quoted the following from the satisfaction note:

“In view of the above and as per the provisions of sub-section 91 of Section 153C of the Act, I am satisfied that the document seized from the residence of Sh. Ved Parkash Bharti belongs to a person i.e. Super Mall (P) Ltd., other than the person referred in section 153A. Accordingly, it is directed to issue such person (M/s Super Mall (P) Ltd.) notice and assess and reassess income in accordance with the provision of section 153A of the Act.”

“From the aforesaid satisfaction note, it emerges that the Assessing Officer is satisfied that the documents containing the details of the cash receipts on sale of shop/offices at M/s Super Mall, Karnal belonged to the other person – assessee – M/s Super Mall.”

“He is also satisfied that the documents/pen drive are seized from the searched person. He is also satisfied that the documents so seized from the residence of the searched person/Ved Prakash Bharti belonged to the assessee – the other person.”

Key Takeaways

• When the Assessing Officer for the searched person and the third party is the same, a single satisfaction note is sufficient, provided it clearly states that the seized documents belong to the third party.
• The satisfaction of the Assessing Officer that the seized documents belong to a third party is a mandatory requirement under Section 153C of the Income Tax Act, 1961.
• The procedural requirements of Section 153C must be strictly followed to ensure the validity of assessment proceedings against a third party.
• The decision clarifies the procedure to be followed when the Assessing Officer is the same for both the searched person and the third party.

Directions

The Supreme Court directed the ITAT to decide and dispose of the appeals afresh on merits, in accordance with law, as observed by the High Court.

Development of Law

The ratio decidendi of this case is that when the Assessing Officer of the searched person and the third party is the same, a single satisfaction note is sufficient if it clearly states that the seized documents belong to the third party. This clarifies the procedural requirements under Section 153C of the Income Tax Act, 1961. There is no change in the previous position of law, but it provides clarity on the procedural aspects when the Assessing Officer is the same for both the searched person and the third party.

Conclusion

The Supreme Court dismissed the appeals, affirming the High Court’s decision that the Assessing Officer had sufficiently complied with Section 153C of the Income Tax Act, 1961. The Court held that a single satisfaction note was sufficient in cases where the Assessing Officer was the same for both the searched person and the third party, provided the note clearly stated that the seized documents belonged to the third party.