$~50-64
* IN THE HIGH COURT OF DELHI AT NEW DELHI
+ W.P.(C) 525/2015
GANPATI FINCAP SERVICES PVT. LTD. ..... Petitioner
Versus
COMMISSIONER OF INCOME TAX ..... Respondent
+ W.P.(C) 527/201547
GANPATI FINCAP SERVICES PVT. LTD. ..... Petitioner
Versus
COMMISSIONER OF INCOME TAX ..... Respondent
+ W.P.(C) 529/2015
SHUSHRE SECURITIES PVT. LTD. ..... Petitioner
Versus
COMMISSIONER OF INCOME TAX ..... Respondent
+ W.P.(C) 2220/2015
SHUSHRE SECURITIES PVT. LTD. ..... Petitioner
Versus
COMMISSIONER OF INCOME TAX ..... Respondent
+ W.P.(C) 2221/2015
SHUSHRE SECURITIES PVT. LTD. ..... Petitioner
Versus
COMMISSIONER OF INCOME TAX ..... Respondent
+ W.P.(C) 2224/2015
SHREY INFRADEVELOPERS PVT. LTD. ..... Petitioner
Versus
COMMISSIONER OF INCOME TAX ..... Respondent
W.P.(C) No. 525 of 2015 & connected matters Page 1 of 30
+ W.P.(C) 2225/2015
SHREY INFRADEVELOPERS PVT. LTD. ..... Petitioner
Versus
COMMISSIONER OF INCOME TAX ..... Respondent
+ W.P.(C) 2226/2015
SHREY INFRADEVELOPERS PVT. LTD. ..... Petitioner
Versus
COMMISSIONER OF INCOME TAX ..... Respondent
+ W.P.(C) 2227/2015
GANPATI FINCAP SERVICES PVT. LTD. ..... Petitioner
Versus
COMMISSIONER OF INCOME TAX ..... Respondent
+ W.P.(C) 2228/2015
GANPATI FINCAP SERVICES PVT. LTD. ..... Petitioner
Versus
COMMISSIONER OF INCOME TAX ..... Respondent
+ W.P.(C) 2229/2015
GANPATI FINCAP SERVICES PVT. LTD. ..... Petitioner
Versus
COMMISSIONER OF INCOME TAX ..... Respondent
+ W.P.(C) 2245/2015
SHUSHRE SECURITIES PVT. LTD. ..... Petitioner
Versus
COMMISSIONER OF INCOME TAX ..... Respondent
+ W.P.(C) 2246/2015
GANPATI FINCAP SERVICES PVT. LTD. ..... Petitioner
W.P.(C) No. 525 of 2015 & connected matters Page 2 of 30
Versus
COMMISSIONER OF INCOME TAX ..... Respondent
+ W.P.(C) 2247/2015
SHUSHRE SECURITIES PVT. LTD. ..... Petitioner
Versus
COMMISSIONER OF INCOME TAX ..... Respondent
+ W.P.(C) 2248/2015
SHUSHRE SECURITIES PVT. LTD. ..... Petitioner
Versus
COMMISSIONER OF INCOME TAX ..... Respondent
Through: Mr. Sanjeev Sabharwal, Senior Advocate with Mr. V. Raja
Kumar, Advocate for the Petitioners.
Mr. Rahul Chaudhary, Senior Standing Counsel for the Revenue.
CORAM: JUSTICE S. MURALIDHAR
JUSTICE CHANDER SHEKHAR
ORDER
% 25.05.2017
Dr. S. Muralidhar, J.:
1. These fifteen writ petitions arise out of a similar set of facts concerning
the notices issued to each of the Petitioners under Section 153C of the
Income Tax Act, 1961 (,,Act).
2. Six of the writ petitions viz., W.P. (C) Nos. 2227, 2228, 525, 2229, 2246
and 527 of 2015 by Ganpati Fincap Services Pvt. Ltd. (hereafter 'Ganpati')
and six writ petitions viz., W.P. (C) Nos. 2247, 2221, 2248, 529, 2245 and
2220 of 2015 by Shushre Securities Pvt. Ltd. (hereafter 'Shushre') concern
W.P.(C) No. 525 of 2015 & connected matters Page 3 of 30
Assessment Years (AYs) 2004-05, 2005-06, 2006-07, 2007-08, 2008-09 and
2009-10 respectively. Three writ petitions viz., W.P. (C) Nos. 2224, 2225,
2226 by Shrey Infradevelopers Pvt. Ltd. (hereafter 'Shrey') concern AYs
2007-08, 2008-09 and 2009-10 respectively.
Background facts in the Ganpati cases
3. The background facts in each set of petitions are more or less similar. On
26th March, 2010 a search and seizure operation under Section 132 of the
Act along with a survey operation under Section 133A of the Act were
undertaken at various residential and business premises of Aseem Kumar
Gupta and his associated Group including Raj Kumar Chawla and Anju
Chawla. There were two search parties. Several documents and account
books were seized from the premises of Aseem Kumar Gupta, Raj Kumar
Chawla and Anju Chawla.
4. The case of Ganpati was with the Assessing Officer (AO) of Ward 12(1).
On 25th November 2010 jurisdiction was transferred to the AO of Central
Circle (CC)-16 who first issued a notice to Ganpati under Section 153C of
the Act on 9th December 2010. The notice was received by Ganpati on 27th
December 2010. At this stage no satisfaction note had been prepared.
5. On 21st January 2011, Ganpati requested that the return originally filed
for AYs 2004-05 to 2009-10 under Section 139(1) be treated as the return
filed pursuant to the notice under Section 153C for the said AYs.
W.P.(C) No. 525 of 2015 & connected matters Page 4 of 30
The Satisfaction Note
6. On 23rd June 2011, the jurisdiction in respect of Ganpati was again
transferred from CC-16 to CC-9 under the orders of the CIT (C)-II.
Thereafter on 14th October 2011, the following satisfaction note in the case
of Ganpati was recorded by the AO:
"Satisfaction recorded u/s 153 C in the case of M/s. Ganpati
Fincap Services Pvt. Ltd.
A search & seizure operation u/s 132 of the Act was conducted
on 26.03.2010 at various premises of Aseem Kumar Gupta, his
associates & other beneficiaries. During the search & seizure
operations various documents, books of account, hard disks etc.
were seized. On perusal of the seized documents, it was noticed
that some of these documents belong to the assessee which
inter alia include the following:
Page 13 and 14 of Annexure A-I seized by party ABR-2, are
schedules attached to and forming part of the balance sheet and
profit & loss account of the assessee as on 31-03-2008 and as
on 31-03-2007.
Page 15 and 16, Annexure A-I seized by party ABR-2, are the
profit & loss account and balance sheet of the assesse as on 31-
03-2008 and as on 31-03-2007.
Page 17 to 20, of Annexure A-I seized by party ABR-2, are the
balance sheet and profit & loss account (and schedules attached
thereto) of the assessee as on 31-03-2009 and as on 31-03-2008.
Page 21 to 25, of Annexure A-I seized by party ABR-2, are the
unsigned Indemnity bond to be signed by outgoing director of
the assessee company for transferring the shares of the assessee
company.
Page 26, of Annexure A-I seized by party ABR-2, is the
unsigned memorandum of understanding between outgoing
W.P.(C) No. 525 of 2015 & connected matters Page 5 of 30
directors of the assessee company, Shri Aseem Kumar Gupta
and Sri Raj Kumar Chawla for transferring the assessee
company.
In view of the above, and considering the fact that documents
and books of accounts seized during the search belong to the
assessee, I am satisfied that the assessee's case is a fit case for
initiating proceedings u/s 153 C of the Income Tax Act, 1961.
Accordingly, action u/s 153 C of the Act is initiated for the
Assessment Year 2004-05 to 2010-11.
Issue notice u/s 153 C of the Act for the Assessment Year
2004-05 to 2010-11."
Assessment orders
7. Separate assessment orders were passed by the AO on 26 th December,
2011 for the AYs 2004-05 to 2009-10 creating demands by making
additions to the returned income of Ganpati in the cases of each of the
Petitioners. The return originally filled by Ganpati had been processed under
Section 143(1) of the Act. Now it was under Section 143(3) read with
Section 153C of the Act.
8. The assessment orders noted that on 23rd December, 2011 a show cause
notice (,,SCN) was issued to Ganpati stating that there was no real business
activity and there was no supporting infrastructure such as fixed assets. In
those circumstances, Ganpati was asked to explain why the company should
not be treated as a fictitious entity existing only on paper and as to why the
corporate veil should not be pierced. Ganpati was asked to show cause as to
why the expenses debited (barring statutory and obligatory expenses) should
not be disallowed since it had failed to provide justification to establish the
W.P.(C) No. 525 of 2015 & connected matters Page 6 of 30
business purposes of the expenses debited in the P&L Account and also did
not give any evidence to establish these expenses.
9. With Ganpati not filing any reply, the AO proceeded to add the
unexplained expenses to its income. The AO held that Ganpati was just a
conduit used by Aseem Kumar Gupta for providing accommodation entries
which does not require elaborate infrastructure and such amounts of
expenditure to be incurred. Since Ganpati has failed to furnish the necessary
evidence in support of its claim of expenditure, addition of the equivalent
amount was directed to be made to its taxable income. Thereafter, in
response to a request made by Ganpati on 16th January, 2012 for inspection
of the assessment records, the AO provided Ganpati a copy of the
satisfaction note.
Revision petition under Section 264
10. Aggrieved by the above assessment orders, Ganpati preferred separate
revision applications under Section 264 of the Act before the Commissioner
of Income Tax (CIT) Central-2, one for each AY. Inter alia it was contended
by Ganpati that the assumption of jurisdiction by the AO under Section
153C of the Act was illegal and therefore the entire proceedings were void
ab initio. In their revision application the Petitioners inter alia pointed out
that "on the inspection of assessment record of Aseem Kumar Gupta it is
also found that no satisfaction in case of Aseem Kumar Gupta is recorded by
assessing officer that those documents relates to the assessee company
which is the precondition for requisition of the information in case of
assessee company for initiation of proceedings under Section 153C of the IT
W.P.(C) No. 525 of 2015 & connected matters Page 7 of 30
Act." Therefore, the proceedings initiated under Section 153C of the Act "is
bad in law and order was passed in violation of the provisions of Section
153C should be annulled." Ganpati relied on the decision in Manish
Maheshwari v. ACIT [2007] 289 ITR 341(SC).
Order of the CIT
11. By the impugned order dated 24th March, 2014 the CIT disposed of the
petitions of Ganpati holding as under:
(i) Not only the Balance Sheet and the P&L Account, but the other
documents also reflected the transfer of shares. The corrected draft MOU for
transferring Ganpati between Aseem Kumar Gupta and Raj Kumar Chawla
was one such document. Further, Aseem Kumar Gupta admitted in his
statement that he had been providing accommodation entries through a
number of entities. Ganpati was one such entity which was used in abetment
of tax evasion by providing accommodation entries to beneficiaries.
Accordingly, there was an intricate connection between Ganpati and Aseem
Kumar Gupta.
(ii) With reference to the satisfaction note, a reference was made to the
decision in CIT v. Panchajanyam Management Agencies & Services
(2011) 333 ITR 281 (Ker.). It was held that "where the Assessing Officer of
the person searched and the person against whom proceedings under Section
153C are initiated are one and the same there is no need to record
satisfaction." Reliance was also placed on the decision of the Allahabad
High Court in TVS Securities & Finance Pvt. Ltd v. CIT (C) (order dated
W.P.(C) No. 525 of 2015 & connected matters Page 8 of 30
23rd August, 2013 in ITA No. 165 of 2008) to the effect that the satisfaction
of the AO was not mandatory where the AO initiating the proceedings and
the AO who made the earlier assessment are the same person. Thus it was
concluded that there was no mandatory requirement of recording of
satisfaction by the AO while initiating proceedings under Section 153C of
the Act and "specifically when the AO of the person searched and the person
against whom proceedings under Section 153C were initiated are one and
the same."
(iii) Since in the present case the AO recorded his satisfaction regarding the
documents seized before initiating the proceedings under Section 153C of
the Act there was no infirmity.
12. As regards the other grounds, the CIT held that the AO had violated the
principles of natural justice by finalising the assessment before the expiry of
time limit for compliance given in the final SCN. Accordingly, the matter
was restored to the AO by setting aside the assessment orders for AYs 2004-
05 to 2009-10. The AO was asked to dispose of the matters in accordance
with law after making inquiries, investigation and verification, as well as
affording an opportunity to Ganpati which was also directed to comply with
the notices issued by the AO and furnish all details/documents/information
in support of the claims made.
13. This Court has heard the submissions of Mr. Sanjeev Sabharwal, learned
Senior counsel appearing for the Petitioner and Mr. Rahul Chaudhary,
learned Senior Standing Counsel appearing for the Revenue.
Submissions on behalf of Ganpati
W.P.(C) No. 525 of 2015 & connected matters Page 9 of 30
14. The main plank of the submission of Mr. Sabharwal was a decision of
this Court in Principal Commissioner of Income Tax v. Nikki Drugs &
Chemicals P. Ltd. [2016] 386 ITR 680 (Del) and the decision of the
Karnataka High Court in Arihant Aluminium Corporation v. Assistant
Commissioner of Income-Tax [2016] 388 ITR 450. According to Mr.
Sabharwal, the aforementioned decisions made it clear that there were at
least two satisfaction notes that were mandatory. One by the AO of the
person searched, other by the AO of the ,,other person in relation to whom
the incriminating documents belonging to such other person were found
during the course of the search.
15. With specific reference to the observations of this Court in Pepsi Foods
(P). Ltd. v. Assistant Commissioner of Income-tax [2015] 376 ITR 87
(Del), Mr Sabharwal submitted that the first step for the AO of the person
who searched was to arrive at a clear satisfaction that the documents seized
from the searched person does not belong to the searched person but the
other person. It is only thereafter that, even if the AO of the searched person
and the other person is the same, that the same AO, in his capacity as the
AO of the other person will prepare a separate satisfaction note in regard to
the other person. According to him, these were two separate processes and if
the first step was overlooked or missed then the entire proceedings under
Section 153C would be vitiated.
16. Mr Sabharwal referred to the decisions of this Court in Pepsico India
Holdings (P.) Ltd. v. Assistant Commissioner of Income-tax [2015] 370
ITR 295 (Del), Commissioner of Income-tax-7 v. RRJ Securities Ltd.
W.P.(C) No. 525 of 2015 & connected matters Page 10 of 30
[2016] 380 ITR 612 (Del), Commissioner of Income-tax (Central) v. Gopi
Apartment [2014] 365 ITR 411 (All) and Commissioner of Income-tax v.
Mechmen 11-C [2016] 380 ITR 591 (MP). He also referred to the decisions
of this Court in Pr. Commissioner of Income Tax (Central-II) v. Aakash
Arogya Mandir Pvt. Ltd. (order dated 28th July, 2015 in ITA No. 509/2015)
and ARN Infrastructure India Ltd. v. Assistant Commissioner of Income-
Tax, Central Circle-28, New Delhi (order dated 25th April, 2017 in W.P. (C)
No. 2768/2016).
Submissions on behalf of the Revenue
17. Mr. Rahul Chaudhary, learned Senior standing counsel for the Revenue
submitted that there was no requirement under Section 153C for there to be
a satisfaction note for the searched person. The satisfaction note in respect of
the searched person was at the stage of Section 132 of the Act. After that
once the search concluded, notice to the searched person under Section
153A of the Act was issued as a matter of course. It is only for the 'other'
person; that Section 153C mandates a satisfaction note. One by the AO of
the searched person and the other by the AO of the 'other' person. Both
would be to the effect that the documents in question that were seized during
the search belong to the other person. Even where the AO for the searched
person and the other person was the same the AO of the searched person had
to perforce record the satisfaction note.
18. Mr. Chaudhary sought to distinguish the decisions of this Court in
Principal Commissioner of Income Tax v. Nikki Drugs & Chemicals P.
Ltd (supra) and the other decision cited by Mr Sabharwal. He referred to the
W.P.(C) No. 525 of 2015 & connected matters Page 11 of 30
CBDT Circular No. 24 of 2015 dated 31st December, 2015 which clarified
the legal position. There was therefore no room for ambiguity. He pointed
out that in the facts of the present case, there was a satisfaction note
recorded by the AO of the searched person in respect of the documents
belonging to Ganpati and the requirement of Section 153C was fulfilled. He
drew attention to the presumption under sub-section (4A) of Section 132 and
referred to the notes about its introduction which explained that the said
provision was meant to assist the Revenue.
Analysis of Section 153C
19. In order to appreciate the above submissions it is necessary first to
examine in some detail the relevant provision i.e. Section 153C(1) of the Act
which reads as under (this is as it stood prior to 1st June 2015):
"153C Assessment of income of any other person.-
(1) Notwithstanding anything contained in section 139, section
147, section 148, section 149, section 151 and section 153,
where the Assessing Officer is satisfied that any money,
bullion, jewellery or other valuable article or thing or books
of account or documents seized or requisitioned, belongs or
belong to a person other than the person referred to in
Section 153A, then, the books of account or documents or
assets seized or requisitioned shall be handed over to the
Assessing Officer having jurisdiction over such other
person and that Assessing Officer shall proceed against each
such other person and issue such other person notice and
assess or reassess income of such other person in
accordance with the provisions of Section 153A, if, that
Assessing Officer is satisfied that the books of
determination of the total income of such other person for
the relevant assessment year or years referred to in sub-
section (1) of Section 153A:
W.P.(C) No. 525 of 2015 & connected matters Page 12 of 30
Provided that in case of such other person, the reference to the
date of initiation of the search under section 132 or making of
requisition under section 132A in the second proviso to sub-
section (1) of section 153A shall be construed as reference to
the date of receiving the books of account or documents or
assets seized or requisitioned by the Assessing Officer having
jurisdiction over such other person:
Provided further that the Central Government may by rules
made by it and published in the Official Gazette, specify the
class or classes of cases in respect of such other person, in
which the Assessing Officer shall not be required to issue
notice for assessing or reassessing the total income for six
assessment years immediately preceding the assessment year
relevant to the previous year in which search is conducted or
requisition is made except in cases where any assessment or
reassessment has abated."
20. It must be noted that Section 153C has undergone a change with effect
from 1st June 2015. That change is prospective. But in the present cases,
with the search having taken place on 26th March 2010 it is Section 153C as
it stood prior to 1st June 2015 which would apply.
21. In order to understand how the provision works a simple illustration may
be taken up. Imagine that the searched person is ,,A. The search
authorisation is issued under Section 132(1) of the Act in A's name after the
authorised officer records a satisfaction note in the file of A that he has
reason to believe that A is in possession of money, bullion, jewellery or
other valuable thing which he has not disclosed in the returns of income
filed by him and which, without a search, is not likely to be disclosed or
unearthed.
W.P.(C) No. 525 of 2015 & connected matters Page 13 of 30
22. Thereafter a search takes place in not only the premises of ,,A but any
premises where the undisclosed income is believed to have been kept and 10
documents are seized. It is found that of the 10 documents seized, 2 belong
to ,,B, ,,B then becomes the ,,other person i.e. a person other than the
searched person.
23. It may so happen that ,,A and ,,B are group companies . The search may
simultaneously takes place in the premises of ,,A and ,,B. Even where A
and B are under the jurisdictions of different AOs at the time of search, after
the search for administrative convenience the cases of A and B are
transferred to the same circle to be dealt with by the same AO.
24. In this illustration after having seized the above 10 documents, 2 of
which belong to B and 8 belong to A (the searched person) what should the
AO do in order to comply with Section 153C of the Act? The AO in his
capacity as the AO of the searched person, that is, ,,A does not have to, in
order to continue the assessment proceedings against ,,A record any
satisfaction note as such. As far as ,,A is concerned, he is the searched
person and notice to him under Section 153A automatically follows. In those
assessment proceedings, the AO will have to examine if the eight seized
documents constitute incriminating material that would justify revisiting of
an assessment which has abated or whether it would result in additions in a
pending assessment. For the purposes of the present case we need not further
examine the requirement of Section 153A because what we are concerned is
with Section 153C that is the provision in relation to the ,,other person.
W.P.(C) No. 525 of 2015 & connected matters Page 14 of 30
25. As regards 2 other documents which the AO is satisfied ,,belong to the
other person ,,B, he will prepare a satisfaction note to that effect. The
question that is posed is, whether the AO has to prepare two satisfaction
notes in relation to these 2 documents: one in which he states that these 2
documents in the opinion of the AO do not belong to ,,A and the second
note which states that he is satisfied that these 2 documents belong to ,,B?
26. The Court is of the view that a plain reading of Section 153C does not
require the AO of the searched person (A) to prepare two satisfaction notes.
Only as far as the ,,other person' B is concerned the AO is expected to
prepare a satisfaction note stating that the 2 documents belong to B. The
failure by the AO to add in the said satisfaction note that the 2 documents do
not belong to A will not vitiate the entire proceedings against B under
Section 153C of the Act for the simple reason that there is no such
requirement.
27. What the settled legal position as explained in several cases, which will
be discussed shortly, is that the recording by the AO of the searched person
that some documents seized during the search 'belong to' the other person is
mandatory in order to assume jurisdiction qua the other person under
Section 153C of the Act. This is mandatory even where the AO of the
searched person and the other person is the same. This is also what the
CBDT Circular now clarifies. In a particular case, given the nature of the
document, it may become necessary for the AO to indicate the basis of his
satisfaction that the document belongs only to B and not to A. But then that
is dictated by the nature of the document. What he has to be sure about, and
W.P.(C) No. 525 of 2015 & connected matters Page 15 of 30
the note should reflect this, is that it does belong to B. Once the note says
that then the requirement of Section 153C is fulfilled.
28. Therefore, the Court does not agree with Mr Sabharwal that there have
to be two separate satisfaction notes prepared by the AO of the searched
person even where he is also the AO of the other person. In such event, the
AO need make only one satisfaction note. That satisfaction note is qua the
other person. Further it is sufficient that such satisfaction note is placed in
the file of the other person by the AO in his capacity as the AO of such other
person.
29. Where the AO of the searched person is different from the AO of the
other person the AO will, simultaneous with transmitting the documents
along with his satisfaction note to the AO of the other person, make a note in
the file of the searched person that he has done so. But this is for
administrative convenience. The failure by the AO of the searched person,
after preparing and despatching the satisfaction note and documents to the
AO of the other person, to make a noting in the file of the searched person
will not vitiate the entire proceedings under Section 153C against the other
person.
Understanding the illustration in Pepsico India Holdings
30. The example given by this Court in Pepsico India Holdings (P.) Ltd. is
examined next. It may so happen that a particular document like the copy of
a sale deed which has the names of both the vendor (,,X) the vendee (Y) and
perhaps some other person say ,,Z who may have signed as a witness or ,,D
who may be a broker is found during search in the premises of say X. Since
W.P.(C) No. 525 of 2015 & connected matters Page 16 of 30
all their names figure in that document it might become necessary for the
AO of the searched person (X) to form an opinion about whom that
document could be said to 'belong to'. The satisfaction note in such a case
will require the AO to record his reasons for his conclusion that the
document belongs to say Y. In that process, in his satisfaction note, he may
in the first portion explain why he thinks that the said document does not
belong to ,,X, ,,Z or ,,D but belongs to ,,Y.
31. This does not mean that in each and every case, even when the document
is such as to leave no doubt as to whom it belongs to the AO has to
necessarily record that it does not belong to the searched person. As long as
he records that in his opinion it belongs to the other person, that will satisfy
the requirement of the law. Further Section 153C does not state that the
failure by the AO in such case to record in his satisfaction note that such a
document does not belong to the searched person would vitiate the entire
proceedings under Section 153C against the other person notwithstanding
the AO having recorded that it does belong to the other person.
32. Mr. Sabharwal was unable to show whether after the decision in Pepsico
Holdings(supra) a Court had invalidated the proceedings under Section
153C only because the satisfaction note recorded by the AO to the effect that
the documents seized belonged to the other person ,,B did not also state that
the document does not belong to the searched person ,,A. The Court now
proceeds to discuss the decisions cited by him.
The decision in Nikki Drugs
33.1 The facts in Principal Commissioner of Income Tax v. Nikki Drugs &
W.P.(C) No. 525 of 2015 & connected matters Page 17 of 30
Chemicals P. Ltd (supra) were that search and seizure operation under
Section 132 of the Act were commenced on 14th October, 2008 in respect of
the SVP Group of Industries. In addition to the four companies forming the
core of the SVP Group, warrants of search and seizure were also issued in
respect of 20 other companies. It was found that the four companies forming
core of the SVP Group had received share capital from 106 companies
during the year 2003-04 to 2009-12. The case of the Revenue was that the
aforementioned four companies have been charging 'on money' on sale of
accounts.
33.2 The AO categorised the 106 companies which had invested in the share
capital of the SVP Group during the AYs 2003-04 to 2009-10 into three
groups. These were Tables I, II and III. Table II comprised of 12 companies,
including the Respondent Nikki Drugs and Chemicals Pvt. Ltd. ('Nikki)
against whom proceedings were initiated under Section 153C of the Act.
There too Nikki challenged the assumption of jurisdiction of the AO under
Section 153C of the Act. It was contended that the AO of the searched
person (SVP Group) had not recorded his satisfaction that any money or any
other valuable article belonged to the other person (Nikki). On merits it was
submitted that the amount received by Nikki was duly recorded in its books
of accounts and did not warrant assessment under Section 68 of the Act.
33.3 The CIT (A) in the appeal filed by Nikki called for a remand report.
The AO submitted the remand report enclosing the satisfaction note
recorded by the AO which inter alia mentioned that some of the documents
seized belonged to M/s. SVP Builders India Ltd. but recorded satisfaction
W.P.(C) No. 525 of 2015 & connected matters Page 18 of 30
about certain other documents belonged to Nikki and the satisfaction that
proceedings under Section 153C read with Section 153A of the Act were
required to be initiated against Nikki. The CIT (A) did not agree that the
assumption of jurisdiction under Section 153C was erroneous. However, on
merits, the CIT (A) deleted that additions made by the AO with the
directions to add the loss in the hands of the beneficiary.
33.4 Nikki and the Revenue then went before the ITAT. Nikki was
aggrieved by the decision of the CIT (A) rejecting its contention that the
proceedings under Section 153C were without any jurisdiction. The
Revenue, on the other hand, challenged the deletions of the additions made
by the AO. The ITAT found that a satisfaction note had not been recorded
by the AO of the searched person and, therefore, initiation of proceedings
under Section 153C was invalid. The ITAT found that the sources of money
received by the Assessee were duly explained and thereby deleted the
additions under Section 68 of the Act. Nikki's appeals were allowed and the
Revenues appeal were dismissed.
33.5 Aggrieved by the order of the ITAT, the Revenue preferred the above
appeal before this Court. The Court in Principal Commissioner of Income
Tax v. Nikki Drugs & Chemicals P. Ltd (supra) specifically noted that:
"17. In the present case, the ITAT specifically recorded
that, admittedly, a satisfaction note had not been recorded
by the assessing officer of the searched person."
18......It was sought to be contended before us that the
assessing officer of the searched persons had, in fact,
W.P.(C) No. 525 of 2015 & connected matters Page 19 of 30
recorded the necessary satisfaction note. However, the
learned counsel for the Revenue could not confirm
whether such note was prepared prior to the initiation of
the proceedings under section 153C of the Act. The
Assessees contention that despite its request such note
had not been disclosed during the assessment
proceedings has also not been controverted. In the
circumstances, the categorical finding of the ITAT that it
was an admitted fact that the assessing officer of the
searched persons had not recorded a satisfaction note,
cannot be interfered with."
33.6 Therefore, what weighed with this Court was that the AO of the
searched person had not recorded a satisfaction note prior to the
assumption of jurisdiction qua the other person. This therefore turned
on facts.
The CBDT Circular
34. The CBDT within a few days after the above decision in Principal
Commissioner of Income Tax v. Nikki Drugs & Chemicals P. Ltd (supra)
issued Circular No. 24 of 2015 on 31st December 2015, the relevant portions
of which read as under:
"The issue of recording of satisfaction for the purposes of
section 158BD/153C has been subject matter of litigation.
2. The Honble Supreme Court in the case of M/s Calcutta
Knitwears in its detailed judgment in Civil Appeal No. 3958 of
2014, dated March 12, 2014 has laid down that for the purpose
of section 158BD of the Act, recording of a satisfaction note is
a prerequisite and the satisfaction note must be prepared by the
Assessing Officer before he transmits the record to the other
Assessing Officer who has jurisdiction over such other person
under Section 158BD. The Honble Court held that "the
W.P.(C) No. 525 of 2015 & connected matters Page 20 of 30
satisfaction note could be prepared at any of the following
stages:
(a) at the time of or along with the initiation of proceedings
against the searched person under section 158BC of the Act; or
(b) in the course of the assessment proceedings are completed
under section 158BC of the Act of the searched person."
3. Several High Courts have held that the provisions of Section
153C of the Act are substantially similar/ pari materia to the
provisions of Section 158BD of the Act and therefore, the
above guidelines of the Honble Supreme Court, apply to
proceedings under Section 153C of the IT Act, for the purposes
of assessment of income of other than the searched person. This
view has been accepted by the CBDT..
4. The guidelines of the Honble Supreme Court as referred to
in para 2 above, with regard to recording of satisfaction note,
may be brought to the notice of all for strict compliance. It is
further clarified that even if the Assessing Officer of the
searched person and the ,,other person is one and the same,
then also he is required to record his satisfaction as has been
held by the courts.
5. In view of the above, filing of appeals on the issue of
recording of satisfaction, note should also be decided in the
light of the above judgment. Accordingly, the Board hereby
directs that pending litigation with regard to recording of
satisfaction note under Section 158 BD/153 C should be
withdrawn/not pressed if it does not meet the guidelines laid
down by the apex court."
Other decisions
35.1 Subsequently in Arihant Aluminium Corporation v. Assistant
Commissioner of Income-Tax (supra), a Division Bench of the Karnataka
High Court dealt with same issue. After noticing the CBDT Circular, the
W.P.(C) No. 525 of 2015 & connected matters Page 21 of 30
Karnataka High Court concluded as under:
"The resultant effect would be that, the requirements of recording of
satisfaction note for exercise of power under Section 153C is a
mandatory requirement and cannot be given a go-bye, either at the
stage of initiation or during the course of assessment or at the
conclusion of the assessment."
35.2 The matter was sent back to the ITAT for examining "whether there
was compliance of the requirement of satisfaction recording before final
conclusion was drawn and as to whether the assessment made under Section
153C is in accordance with the provisions of the Act or bad in law or liable
to be quashed or not."
36. The Madhya Pradesh High Court in CIT v. Mechmen 11-C
(supra) reiterated that the recording of satisfaction by the AO of the
searched person that the documents belong to the other person is a
sine qua non for commencing the proceedings against the other person
under Section 153C of the Act. This is more or less what the CBDT
Circular now acknowledges. There is no requirement in terms thereof
for the AO of the searched person, while recording that the documents
belong to the other person, to also record that they do not belong to
the searched person.
37. In Commissioner of Income-tax-7 v. RRJ Securities Ltd.(supra), the
Court came to a conclusion on the facts of that case that the documents
which were in the hard disc and contained working papers for the
preparation of the Assessees balance sheet, income tax computation and
W.P.(C) No. 525 of 2015 & connected matters Page 22 of 30
details of income tax filing did not in fact constitute incriminating material.
In fact the clear finding was that the hard disc did not belong to the
Assessee. It is evident from para 30 which reads as under:
"30. It is not disputed that the said hard disk also did not
contain any incriminating as the data on the hard disc only
supported the return filed by the Assessee. This apart, as the
hard disc did not belong to the Assessee, in our view,
proceedings under Section 153C of the Act could not be
initiated on the basis of the said disk."
38. The said decision too therefore did not hold that the failure by the AO of
the searched person to record that the documents belonging to the other
person do not belong to the searched person would vitiate the proceedings
under Section 153C against the other person.
39. The Madhya Pradesh High Court in Commissioner of Income-tax v.
Mechmen(supra) reiterated the settled position that it is mandatory for the
AO of the searched person to record a satisfaction note in respect of the
other person. That preposition is in fact too well settled. The CBDT Circular
now puts it beyond the pale of doubt. It categorically states that even where
the AO of the searched person and the other person is same, such AO is not
relieved of its statutory obligation to record a satisfaction note in respect of
the other person.
40. In Pr. Commissioner of Income Tax (Central-II) v. Aakash Arogya
Mandir Pvt. Ltd.(supra), there were factual findings that the AO of the
searched person had not recorded the satisfaction note in respect of the other
person. Likewise, in ARN Infrastructure India Ltd. v. Assistant
W.P.(C) No. 525 of 2015 & connected matters Page 23 of 30
Commissioner of Income-Tax(supra), the Court was satisfied that the
documents seized were not incriminating.
Legal position summarised
41. To summarise the legal position:
(i) No search under Section 132(1) of the Act can be initiated without a
satisfaction note being recorded by the AO of such searched person. This is
followed by issuance of a notice to such searched person under Section
153A of the Act. At that stage the AO does not have to record another
satisfaction note qua the searched person.
(ii) Where proceedings are proposed to be initiated under Section 153C of
the Act against the 'other person', it has to be preceded by a satisfaction note
by the AO of the searched person. He will record in this satisfaction note
that the seized document belongs to the other person. Depending on the
nature and contents of the document he may be required to give some
reasons for such conclusion.
(iii) Where the AO of the searched person is different from the AO of the
other person, the AO will simultaneous with transmitting the documents
along with his satisfaction note to the AO of the other person, make a note in
the file of the searched person that he has done so. But this is for
administrative convenience. The failure by the AO of the searched person,
after preparing and despatching the satisfaction note and documents to the
AO of the other person, to make a noting to that effect in the file of the
searched person will not vitiate the proceedings under Section 153C against
W.P.(C) No. 525 of 2015 & connected matters Page 24 of 30
the other person.
(iv) Where the AO of the searched person and the other person is the same,
such a satisfaction note qua the other person has to be recorded by the AO of
the searched person prior to the initiation of the proceedings against the
other person. This is a sine qua non for triggering the proceedings against
the other person under Section 153C of the Act.
(v) There do not have to be two separate satisfaction notes prepared by the
AO of the searched person even where he is also the AO of the other person.
In such event, the AO need make only one satisfaction note. That
satisfaction note is qua the other person. Further it is sufficient that such
satisfaction note is placed in the file of the other person by the AO in his
capacity as the AO of such other person.
(vi) It is only in certain cases, where the document is such that it may belong
to more than one person (including the searched person) that the AO will
have to indicate in the satisfaction note the reasons why he is of the opinion
that the document belongs to the other person and not the searched person.
(vii) Where the AO of the searched person records that the seized document
in question belongs to the other person, and where necessary, gives the
reasons therefor, the requirement of Section 153C stands satisfied. The
failure by the AO in such case to record in the satisfaction note that such
document does not belong to the searched person will not vitiate the
proceedings under Section 153C against the other person.
W.P.(C) No. 525 of 2015 & connected matters Page 25 of 30
Conclusion in the Ganpati cases
42. In the Ganpati cases, the satisfaction note clearly records the view that
the documents listed therein belong to the other person. The satisfaction note
is of the AO of the searched person who also happens to be the AO of the
other person i.e. Ganpati. Merely because the note also does not
categorically state that the documents mentioned therein do not belong to the
searched person (Aseem Kumar Gupta Group) will not invalidate the
assumption of jurisdiction under Section 153C qua Ganpati.
43. The view taken by the CIT in the impugned order does not call for
interference. The remand to the AO for giving Ganpati a further opportunity
regarding the nature of the documents and the validity of the additions made
as a result thereof also calls for no interference. The writ petitions by
Ganpati fail and are hereby dismissed.
Facts in Shushre and Shrey
44. As far as Shushre is concerned, arising from the same search and seizure
and survey operation undertaken on 26th March 2010, a satisfaction note
was recorded by the AO CC-9 on 8th November 2011 as under:
"Satisfaction recorded u/s 153C in the case of M/s. Shushre
Securities Pvt. Ltd.
A search & seizure operation u/s 132 of the Act was conducted on
26.03.2010 at various premises of Aseem Kumar Gupta, his associates
& Other Beneficiaries. During the search & seizure operations various
documents, books of account, hard disks etc. were seized. On perusal
of the seized documents, it was noticed that some of these documents
belong to the assessee which inter alia include the following:
W.P.(C) No. 525 of 2015 & connected matters Page 26 of 30
Page no 17 of Annexure A2 seized by party RG 9 is a letter from
Parsvnath Developers Ltd. in respect of payments outstanding related
to Unit No B1-1205 A in Parsvnath Palacia Greater NOIDA
An un-numbered page, of Annexure A2 seized by party RG 9,
annexed between page 16 and page 17 is the copy of account of
ledger of the assessee in the books of Parsvnath Developers Ltd.
Pages 48 and 49 of Annexure A-17 seized by party SG-6, are the
financial statements of the assessee company as on 31-03-2005.
In view of the above, and considering the fact that documents and
books of accounts seized during the search belong to the assessee, I
am satisfied that the assessee's case is a fit case for initiating
proceedings u/s 153C of the Income Tax Act, 1961. Accordingly,
action u/s 153 C of the Act is initiated for the Assessment Year 2004-
05 to 2010-11.
Issue notice u/s 153C of the Act for the Assessment Year 2004-05 to
2010-11."
45. As far as Shrey is concerned the Satisfaction Note dated 8th November
2011 read as under:
"Satisfaction recorded u/s 153C in the case of M/s. Shrey
Infradevelopers Pvt. Ltd.
A search & seizure operation U/S 132 of the Act was conducted on
26.03.2010 at various premises of Aseem Kumar Gupta, his associates
& Other Beneficiaries. During the search & seizure operations various
documents, books of account, hard disk etc. were seized. On perusal
of the seized documents, it was noticed that some of these documents
belong to the assessee which inter alia include the following:
Page 38 of Annexure A2 seized by party RG 9 is a receipt from tdi in
respect of payment of Rs. 7,50,000 made by M/s. Shrey
Infradevelopers Pvt. Ltd.
W.P.(C) No. 525 of 2015 & connected matters Page 27 of 30
Page 19 of Annexure A2 seized by party RG 9 is a cheque drawn in
favour of M/s Shrey Infradevelopers Pvt. Ltd.
Page 43-50 of Annexure A-12 seized by party SG6 are bank
statement of the assessee company reflecting unusually high number
of withdrawals and deposits of almost equal amounts.
Page 43-50 of Annexure A-12 seized by party SG6 are bills raised
by the assessee company to various parties.
In view of the above, and considering the fact that documents and
books of accounts seized during the search belong to the assessee, I
am satisfied that the assessee's case is a fit case for initiating
proceedings u/s 153C of the Income Tax Act, 1961. Accordingly,
action u/s 153C of the Act is initiated for the Assessment Year 2004-
05 to 2010-11.
Issue notice u/s 153C of the Act for the Assessment Year 2004- 05
to 2010-11."
46. The AO passed assessment orders in the cases of Shushre and Shrey on
22nd and 23rd December 2011 respectively, making additions to the taxable
income. These were challenged by Shushre and Shrey by filing applications
under Section 264 of the Act on 16th April and 13th April 2012
respectively. The CIT by orders dated 21st March and 20th April 2014
respectively rejected both applications. Unlike the case of Ganpati, the CIT
declined to remand the cases to the AO for determining if the additions
made could be sustained.
47. Mr Sabharwal sought to contend that in the cases of both Shushre and
Shrey the documents said to belong to each of them were not incriminating
so as to warrant any additions during the reassessment. According to him,
W.P.(C) No. 525 of 2015 & connected matters Page 28 of 30
documents like financial statements can hardly be said to be incriminating.
He took the Court through some of the documents.
48. The Court notes that in the impugned orders dismissing the revision
petitions of Shushre and Shrey, the CIT has noted that despite several
opportunities being granted to the ARs of the Assessees, they did not appear
and "no submissions on merits of the case" were made by the two Assessees
during present proceedings. In the circumstances, no fault can be found with
the CIT for declining to interfere on merits with the additions made by the
AO.
49. Even otherwise, in these writ proceedings, it is difficult for the Court to
examine the documents seized and determine if in fact they could be said to
be incriminating qua each of the said Assessees. There could be instances
where the very nature of the document for e.g., a balance sheet or P&L
account of the Assessee, which already stood disclosed during the original
assessment proceedings, can be said to be non-incriminating. That again will
depend on the facts and circumstances.
50. However, the documents listed out in both the above satisfaction notes
qua Shushre and Shrey are not such that can be said to be non-incriminating
on a bare perusal. There was sufficient opportunity for both Assessees to
demonstrate how they were not. But they did not avail of the opportunity. In
the writ jurisdiction, this Court has to be satisfied that the CIT's impugned
orders are not unfair, unjust or irrational and are consistent with the basic
procedural requirements. On none of these counts do the impugned orders of
the CIT in the present case warrant interference. Consequently, the petitions
W.P.(C) No. 525 of 2015 & connected matters Page 29 of 30
of Shushre and Shrey also are held to be without merit.
51. The impugned orders of the CIT are accordingly upheld and all the writ
petitions are dismissed, with no order as to costs.
S. MURALIDHAR, J
CHANDER SHEKHAR, J
MAY 25, 2017
dn
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