[Madras HC] Proceedings Under Section 153C Declared Void Ab Initio for Lack of Separate Satisfaction Note

Introduction

In Commissioner of Income-tax Central-I v. SRM Systems and Software (P.), Ltd.[i], the Income-tax Department (‘Revenue’) challenged the order passed by the Income Tax Appellate Tribunal (‘ITAT’), which had quashed the assessment orders passed under s. 153C of the Income-tax Act, 1961 (‘Act’). The said assessments related to the financial years (FYs) 1999–2000, 2000–01, and 2001–02. While adjudicating the matter, the Hon’ble Madras High Court underscored the importance of adhering to procedural mandates in tax assessments, particularly the necessity of recording a valid satisfaction note (‘Note’), to ensure that assessments are not arbitrary but grounded in concrete evidence.

Brief facts

• The premises of the chairman of SRM Systems were searched by the Revenue under s. 132 of the Act. Subsequently, SRM System and Software (Assessee-company/Respondent),  a company engaged in the business of providing software services, was also served with notice under s. 153C of the Act for the block period 1999-2000 to 2004-2005 and the search year 2005-2006.

• Pursuant to the issuance of the notice under s. 153C of the Act, the Assessee filed its return, on the basis of which, the Assessing Officer (‘AO’) completed the assessment for all 7 years and made certain additions. Aggrieved by the same, the Assessee filed an appeal before the  Commissioner of Income Tax (Appeals) (‘CIT(A)’).

• While the Revenue appealed against one addition in each of the seven cases to the ITAT, the remaining matters were remitted back to the AO.

• The Revenue filed a tax case (appeals) against the ITAT’s decision, and the AO reconfirmed the previous assessment on 30.12.2010. The Assessee appealed again to the CIT(A), who subsequently ruled in favour of the Assessee, while citing the absence of a Note under s. 153C of the Act.

• The Revenue appealed against this decision to the ITAT, which issued a common order in favour of the Assessee. Some appeals were withdrawn due to low tax effect, and rectification applications were dismissed by the ITAT. Aggrieved by such disposal, the Revenue filed the present appeals before the High Court.

Observations

The High Court, identifying the central issue as the absence of a separate Note prior to initiating proceedings under s. 153C of the Act against the assessee, made the following observations:

• Relying on the judgments of the Hon’ble Supreme Court in Manish Maheshwari v. Assistant Commissioner of Income-tax[ii], the Court held that the conditions for invoking s. 158BD of the Act must be satisfied before applying ch. XIV-B to any person other than the one searched under s. 132 or whose documents/assets were requisitioned. Applying this principle, the High Court invalidated the proceedings against the Assessee.

• The Court further emphasized that taxing statutes must be strictly construed, reaffirming the principle laid down in Sneh Enterprises v. Commissioner of Customs[iii], wherein the absence of a Note and failure to transmit seized documents/assets to the appropriate AO rendered the proceedings vitiated.

• It was observed that none of the decisions cited by the Revenue supported their case. Notably, Manish Maheshwari (supra) in fact supported the Assessee’s position. In the present case, the Note recorded by the AO pertained only to the searched person, with no reference to the assessee-company (the ‘other person’). No separate Note was prepared, and identical language was used across multiple assessment years.

• The law, as settled by the Supreme Court and various High Courts, mandates the recording of a Note before initiating proceedings under s. 153C. CBDT Circular No. 24/2015 explicitly affirms this requirement, even in cases where the same AO handles both the searched person and the ‘other person’.

• Therefore, the High Court held that the orders of the CIT (A) and ITAT were consistent with settled legal principles and devoid of any infirmity. All appeals were dismissed, and the substantial questions of law were answered in favour of the Assessee and against the Revenue.

Our Analysis

This ruling reinforces the critical importance of maintaining procedural integrity in assessment proceedings under s. 153C of the Act. The absence of a duly recorded satisfaction note can render the entire proceeding void ab initio. It sets a clear precedent that assessments, particularly those based on third-party searches, must be grounded in law and supported by documented satisfaction.

For tax professionals, this decision serves as a reminder that procedural compliance is not a mere formality; it is foundational to jurisdiction. It also sends a strong message to revenue authorities regarding the legal consequences of procedural lapses. Ensuring meticulous documentation, particularly in third-party assessment cases, is no longer optional; it is a jurisdictional imperative.

End Notes

[i] [2025] 171 taxmann.com 764 (Madras) [29-01-2025].

[ii] 159 Taxman 258/289 ITR 341 (SC).

[iii] (2006) 7 SCC 714.

Authored by Aishwarya Pawar, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinions.