Satisfaction
note in search matters plays vital role in establishing that the search was in
accordance with the provisions of Income-tax Laws.
Why Satisfaction Note needed
The need to
prepare a “Satisfaction Note” arises in case where the validity of
authorization ofa search and seizure action is challenged in Court. In such
case the authority authorizing the action has to satisfy the Court that the
requisite satisfaction was derived in consequence of the information, that one
or more of the conditions mentioned in section 132(1) were fulfilled.
Tax. The
principles governing the quality of pre-search satisfaction required so as to
authorise an action of search and seizure in terms of section 132 or
requisition under section 132A of the Act may be summed up as under:
(1)
Credible Information and reason to believe
The authorizing authority must be in possession of the
credible information and must form an opinion that there is reason to believe
that certain article or property has not been or would not be disclosed. The
information must be relevant, reliable and adequate and must not be mere rumour
or gossip or hunch.
Bona
fide belief based on credible information and not on information which may be
imaginary
Petitioner stockist of B brand
tobacco - Same sold at premium price - Artificial Scarcity created by dealers -
Not possible to form bona fide belief on basis thereof - Authorisation of
search not valid
Held: It is not possible to say that
there was any reasonable information on whcih the Director of Inspection could
have any bona fide belief to issue the authorisation under section 132(1). it
may be stated that all that has been stated in the information is that
manufactures of "Baba" brand chewing tobacco, pan masala, etc., are
selling it at high premium which is the result of artificial scarcity created
by the dealers. It was given out by the Revenue that it is not possible to
produce the file so far as search of D and its allied sister concerns are
concerned. Therefore, after having gone through the file No. DBI (Inv)/Unit
I/MB-DLLH/1987-88/330-E, it is clear that the authorisation for search inthe
instant case under section 132(1) cannot be held to be valid or legal.
[Kusum
Lata v. CIT (1989) 180 ITR 365 : (1990) 48 Taxman 401 (Raj)]
Information needs to be
verified
Authencity of veracity of the information received has
to be verified before acting upon it. More particularly, in the case of
information given by the informants or by anonymous or pseudonymous petitions,
extreme care and caution is necessary before they are acted upon.
The expression “Reason to believe” comprises of two
words as under:
(i)
‘reason’ to mean justification; and
(ii)
‘belief’ means to accept as true
The law in relation to searches under section 132 of the
Act has been explained in a large number of decisions of the Supreme Court and
the High Courts. The jurisdictional facts that have to be established before a
search under section 132 (1) of the Act can be authorised are that:
(i) the authority issuing the authorisation is
in possession of some credible information, other than surmises and
conjectures;
(ii) that the authority has reason to believe
that the conditions stipulated in clauses (a), (b) and (c) of section 132
(1) qua the
person searched exist; and
(iii) the said information
has nexus to such belief.
Privacy is an important right to a person and fishing enquiry through a
search is invalid
In the
case of Dr. Nand Lal Tahiliani v. CIT, it was held:
“…………The vital question is as to what is the source of
information…….Estimate being made by an informer cannot tantamount to
“information” within the meaning of section 132(1) of the Act. If estimate
alone can constitute information, then why should one act upon the estimate of
an informer because that sort of estimate can be made by the Departmental
authorities themselves, looking to the standard of living, reputation of the
person in the society and the assets being ostensibly possessed by him.
“Information” within the meaning of section 132(1) should be as accurate as
possible having reference to the precise assets of a person and not of general
nature.”
[Dr. Nand Lal Tahiliani v. CIT (1988) 170 ITR 592 : 69 CTR 91 (All)]
(2) Satisfaction at Authorising authority level
In search and
seizure proceedings, the authorising authority has to derive satisfaction
against the person to be searched on two matters; viz –
(a) that he will not produce the
books or other documents etc. which will be useful or relevant for
determination of his correct income; or
(b) that the person possesses undisclosed cash,
money, valuables etc.
(3) Application of
mind
The authorizing authority must actively apply his mind to
the information in his possession to form opinion whether there is reason to believe
or not. The opinion has obiviously to be formed on the basis of the material
available at that time. The formation of opinion should have rational
connection and bearing to the reasons for such opinion. The formation of the
belief must be honest, bonafide and cogently supported.
Satisfaction
not in mechanical manner
Reason to believe - J and P were two partners of firm M/s JP
Finance. Sum of Rs. 4,50,000/- found at the time of search of the premises
of ‘P’, a partner of firm JP Finance ‐ ‘P’ explained that the amount belonged to the firm - Upon
recording the facts, Addl. Director of Income Tax (Investigation) issued
authorization for carrying out search at the residence of the petitioners who
are also partners of the firm JP Finance – Not justified - There was
nothing to show as to why he believed that incriminating documents
would be found at the residence of the petitioners - Moreover, it was open to
the respondent authorities to conduct survey at the premises belonging to
the firm as necessary order under section 133A had already been
passed - Condition precedent for having search under the provisions of
section 132(1) did not satisfied ‐ Simply because
a sum of Rs. 4,50,000/- was found at the residence
of ‘P’ and simply because he is one of the
partners of JP Finance, there was no justifiable reason to
issue authorization for search at the residence of the
petitioners. The said satisfaction have been arrived at in a mechanical
manner and without application of mind. – Quash and set aside the
authorization.
[Jignesh Farshubhai Kakkad v. Director of Income Tax (Inv.)
& Ors. (2003) 184 CTR 220 :176 Taxation 590 :
264 ITR 87(Guj)]
Not a blind or irrational belief
The formation of the belief under section 132(1) is an important step
and condition precedent to the authorization of search and seizure. It has been
observed that belief must not be blind or irrational, but one based on reasons
which are relevant and material. Materials which may only be remotely relevant
may not be sufficient to satisfy the test of relevance.
[B. P. Abdul Gafoor v. CIT (1983) 142 ITR 108 (Ker)]
Reasons
recorded before issuing warrant of authorisation need not be communicated to
person against whom warrant is issued at that stage. While exercising writ
jurisdiction High Court cannot go into sufficiency of reasons and acceptability
of information on which satisfaction was reached by authorities to issue
warrant of authorisation under section 132
On 08.06.2009 the Assistant
Director of Income-tax (Investigation), had prepared an elaborate note
containing several reasons as to why he had considered it reasonable to believe
that if summons or notice were issued to the respondent-assessee to produce the
necessary books of account and documents, the same would not be produced. The
Assistant Director also recorded detailed reasons to believe that the promoters
of the respondent-assessee company would be found to be in possession of money,
bullion, jewellery, etc. which represented partly or wholly income
which had not been disclosed for the purposes of the Act.
The said note was put up
for consideration before the Additional Director (Investigation) who on perusal
of the same, once again proceeded to record elaborate reasons for his belief
that the conditions precedent for issuing warrant of authorization under
section 132 did exist in the instant case.
Accordingly, the file was
put up before the Director of Income-tax (Investigation), for issuing of
warrant of authorization for search of the residential as well as business premises
of the assessee and its directors, if the Director of Income-tax
(Investigation) was so satisfied. The Director (Investigation) recorded his
satisfaction that this was a fit case for exercise of powers vested under
section 132.
Thereafter, the matter was
considered by the Director General (Investigation) who granted approval to take
action under section 132 against assessee.
On 11.06.2009 the matter
was considered by the Director General of Income Tax (Investigation) Pune who
recorded the following view and granted approval to take action under section 132 against assessee:
"I have gone through
the notes of ADIT (Inv), Nagpur and Addl. DIT (Inv.), Nagpur. The satisfaction
note of DIT (Inv.) Nagpur has also been perused. I find that DIT (Inv.) Nagpur
has got adequate information to arrive at his satisfaction that search and
seizure action is required to be undertaken in the case of M/s. Spacewood
Furnishers (P) Ltd. promoted by Shri Kirit Joshi and Vivek Deshpande.
Accordingly, the proposal of the DIT (Inv.) Nagpur to take action under section
132(1) of the Act is approved."
The assessee challenged
satisfaction notes leading to issuing of warrant of authorisation before the
High Court. By impugned order, the High Court held that the Director General
took the decision to issue the search warrant but the said decision was not on
the basis of its own satisfaction but on the basis of the satisfaction recorded
by the Director of Income-tax (Investigation) and, consequently, the
satisfaction mandated by section 132 was not that of the authority who had
issued the search warrant, thereby vitiating the authorization issued. The High
Court further held that each of the satisfaction notes was in loose sheets of
paper and not a part of a single file maintained in proper sequence and order
with due pagination. Therefore, according to the High Court, it was possible
that the file containing the satisfaction note(s) was manipulated and, thus,
was of doubtful credibility. The High Court also held that in the satisfaction notes
the essential details with regard to source of information; the persons who
were interrogated and with whom discreet enquiries were made were not
disclosed. For this, the High Court gave specific reasoning that when the
satisfaction recorded is justiciable, the documents pertaining to such
satisfaction may not be immune and if appropriate prayer is made, the
inspection of such documents may be required to be allowed.
On appeal to the Supreme
Court:
Having clarified the above issue
in the manner indicated, we may turn to the reasons assigned by the High Court
for its decision. The view expressed by the High Court with regard to the
satisfaction note(s); the alleged absence of a final decision to issue the
authorization at the level of the Additional Director and the Director; the
absence of any satisfaction of the Director General who, according to the High
Court took the decision to issue the authorization are all seriously flawed.
The different steps in the decision making process is lucidly laid down in the
instructions contained in the search and seizure manual published by the
department, relevant part of which has been extracted above. The steps
delineated have been scrupulously followed. Besides we may take note of the fact
that the Additional Director was not one of the competent authorities under
Section 132 on 8.6.2009 (date of his note) inasmuch as it is by the Finance
Act, 2009 effective from 19th August, 2009 that the Additional Director came to
be included amongst the authorized officials though with retrospective effect
from 1.10.1998. The reading of the relevant part of the satisfaction note of
the Director goes to show that on the basis of materials produced satisfaction
was duly recorded by him that authorization for search should be issued. The
file was put up before the Director General (Investigation) for accord of
administrative approval as required by Notification dated 7.3.2001. In fact,
the requirement to obtain administrative approval is prompted by the need to
provide an additional safeguard to the taxpayer. A careful reading of the order
of the Director General would go to show that all that he did was to record the
view that the satisfaction of the Director, Income Tax (Investigation) was
reasonable and therefore administrative approval should be accorded. The view
taken by the High Court, therefore, cannot be sustained.
The possibility of
manipulation of the records as found by the High Court also does not commend to
us for acceptance. There is no basis, whatsoever, for coming to any such
conclusion. Suspicion ought not to be the basis of any judicial order and this
is where the High Court seems to have erred.
The remaining findings of
the High Court with regard to the satisfaction recorded by the authorities
appear to be in the nature of an appellate exercise touching upon the
sufficiency and adequacy of the reasons and the authenticity and acceptability
of the information on which satisfaction had been reached by the authorities.
Such an exercise is alien to the jurisdiction under Article 226 of the
Constitution.
In view of the foregoing
discussions and for the reasons alluded to, the order of the High Court dated
9.12.2011 passed in Spacewood Furnishers (P) Ltd. v. DGIT
(Investigation) (2012) 340 ITR 393 : 204 Taxman 392 (Bom) is set
aside. The proceedings against the respondent-assessee will now commence from
the stage at which the same was interdicted by the High Court by its impugned
order. Consequently, the appeal filed by the Revenue is allowed.
Search and seizure (Warrant of
authorisation) - Whether though necessity of recording of reasons before
issuing warrant of authorisation, despite amendment of rule 112(2) with effect
from 01.10.1975, has been repeatedly stressed upon by Supreme Court so as to
ensure accountability and responsibility in decision making process, this, by
itself, would not confer in assessee a right of inspection of documents or to a
communication of reasons for belief at stage of issuing of authorization - Held,
yes - Whether it is only at stage of commencement of assessment proceedings
after completion of search and seizure, if any, that requisite material may
have to be disclosed to assessee - Held, yes [Para 22] [In favour of revenue]
Section 132
of the Income-tax Act, 1961 read with article 226 of the Constitution of India
- Search and seizure (Power of High Court to interfere) - Whether in exercise
of writ jurisdiction under article 226, High Court can go into sufficiency and
adequacy of reasons and authenticity and acceptability of information on which
satisfaction has been reached by authorities that warrant of authorisation is
to be issued - Held, no [Para 26] [In favour of revenue]
[Director General of Income-tax
(Investigation) v. Spacewood
Furnishers (P) Ltd. (2015) 374 ITR 595 : 277 CTR 322 : 232 Taxman 131 : 57
taxmann.com 292 (SC)
Search without satisfaction of ingradient of section 132(1) is illegal
and consequently notice under section 153A of the Act is also bad in law
The mode and manner in which all
these notes are prepared, show the absence of any relevant material with
authorities which would have enabled them to have “a reason to believe” that
action under Section 132(1) of the Act was essential. No new material as such
has been disclosed anywhere. No document or report of alleged discreet inquiry
forms part of these notes.
It is apparent that the entire exercise has been
undertaken only because of the high growth noted by the respondents. The
material like high growth, high profit margins, the contention in respect of or
doubt about international brand and details thereof is available with the
authorities. It is not their case that they had obtained any other information
which was suppressed by the petitioners from them. The effort, therefore, was
to find out some material to support the doubt entertained by the department.
Whether such doubt entertained can be said to be bonafide is itself a moot
question. The fact that authorities competent under Section 132(1) of the Act
have avoided to shoulder the responsibility of taking decision , have
unnecessarily placed the note before the higher authorities, clearly show that
the exercise has not been undertaken as required by Section 132(1) of the Act
in transparent mode. The satisfaction note contemplated therein must be based
upon contemporaneous material, information becoming available to the competent
authorities prescribed in that Section. Its availability and nature as also
time factor must also be ascertainable from relevant records containing such
satisfaction note. Loose satisfaction notes as produced before us, placed by
authorities before each other cannot meet these requirements & said
provision. The necessary live link and availability of relevant material for
considering it, has not been brought before this Court. We, therefore, find
substance in the contention of the petitioners that it was a roving exercise.
In view of this, the
authorisation issued under Section 132(1) of the Income Tax Act, 1961, is found
bad and unsustainable. Consequently, exercise of search undertaken in pursuance
thereof from 19.06.2009 to 21.07.2009 is illegal. Notice action under Section 153A of the Act, issued on 16.02.2010
is also, therefore, bad in law.
[Spacewood Furnishers (P) Ltd. v. DGIT
(Investigation) - Bombay – Writ
Petition No. 2150 of 2010 - Date of Judgement : 09.12.2011]
Recording of satisfaction by Assessing
Officer of “person searched” is a condition precedent for Assessing Officer of
“other person” to acquire jurisdiction
Recording
of satisfaction by assessing officer of “person searched” is a condition
precedent for assessing officer of “other person” to acquire jurisdiction and unless
jurisdictional condition is satisfied, there can be no question of making
assessment or reassessment in the case of such other person.
Settled position of law is that so far
as the assessing officer of the “searched person” is concerned, he has to only
record a satisfaction that documents seized “belong” or “belongs to” other
person. The assessing officer in his capacity as assessing officer of searched
person is not concerned with initiation of proceedings under section 153C of
the Act or for making assessment against the “other person” because that can be
done by assessing officer in his capacity as assessing officer of “other
person”. In the present as is evident from the language of “Satisfaction Note”
it has been recorded by assessing officer in his capacity as assessing officer
of the assessee i.e. the other person and not as the assessing officer of the
searched person. Thus the pre-requisite of recording satisfaction by the
assessing officer in his capacity as assessing officer of “searched person” has
not been fulfilled.
As evident from the language
of “Satisfaction Note” it had been recorded by assessing officer in his
capacity as assessing officer of the assessee, i.e., the other person and not
as assessing officer of the searched person. Thus the pre- requisite of
recording satisfaction by assessing officer in his capacity as assessing
officer of “searched person” had not been fulfilled and, therefore, proceeding
initiated under section 153C were quashed. (Related Assessment Years :
2009-10, 2010-11 & 2011-12)
[Adarsh Kumar v. DCIT - Date of Judgement : 15.11.2017 (ITAT Delhi)
Combined satisfaction recorded
can be said to be legally valid for initiating Search where several persons are
searched. - [M/s Jeet Construction
Company v. ACIT IT[SS] Appeal No. 26 of 2011 [2012-TIOL-11-ITAT-Del]
It was held that where the satisfaction note of the Assessing Officer
had used the words that documents seized “belonged to” assessee instead of
words “pertains or pertained to” assessee, the notice under section 153C could
not be declared invalid. - [PCIT v. Super
Malls (P) Ltd. (2017) 393 ITR 557 (Del)]
It was held that proceedings under section 153C cannot be
invalidated, merely because the Assessing Officer of the searched who was also that
of the Assessee, did not record a separate satisfaction note.
[PCIT v. Sheetal International (P) Ltd (2017-TIOL-1355-HC-DEL-
IT)]
It was held that where Assessing
Officer of search person recorded that document found during search was copy of
a ledger of books of account of assessee company which evidenced certain cheque
payments as well as cash payments to a company by assessee, there was prima
facie material to suggest that satisfaction as per section 153C was duly
recorded and thus, notice issued to file return to assessee was justified. - [Rajesh
Sunderdas Vaswani v. ACIT (2016) 76 com311 (Guj)]
Disclosure of material or
information to persons against whom action under section 132 is taken is not
mandatory and it is only where petitioner furnishes adequate and cogent
material in support of his denial of a valid information that Court can
justifiably call upon department to disclose information- Search action was
held to be valid
Petitioners challenged search and seizure operations initiated against them
by department under section 132 in consequence of a search warrant, which was
not issued in their names. They also challenged seizure and attachment of their
bank accounts and lockers based on aforesaid search on ground that no search
warrant was issued relating to their lockers. Dismissing the petition the Court
held that; since warrant of authorisation indicated premises where search and
seizure operation was to be conducted and said premises had not been
partitioned by metes and bounds, while searching said premises, search of
portions occupied by petitioners in said premises was valid and proper, even
though their names were not mentioned in authorisation of search and in such
case provisions of section 158BD would be attracted .When information received
on first date of search by itself caused a reasonable belief for issuance of
warrant of authorisation against petitioners for search of their lockers,
search and seizure of petitioners' lockers was perfectly valid.
[Harbhajan Singh Chadha v. DIT (2016)
380 ITR 100 : (2015) 231 Taxman 735 (All)]
Report of C & AG can be a basis of
satisfaction of the DIT (Inv.) for issuing warrant of authorisation under
section 132(1). There is no restriction regarding the source of information
received by the DIT.
[M. S.
Associates v. Union of India (2005) 147 Taxman 172 (Gau)]
Circular No. 24/2015 - F.No.279/Misc./140 /2015/ITJ
dated 31.12.2015
Subject: Recording of satisfaction note under
section 158BD/153C of the Act – reg.-
The issue of recording of satisfaction for the
purposes of section 158BD/153C has been subject matter of litigation.
2. The
Hon’ble Supreme Court in the case of M/s Calcutta Knitwears in its detailed
judgment in Civil Appeal No.3958 of 2014 dated 12.3.2014(available in NJRS at
2014-LL-0312-51) 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 AO before he transmits the record to the other AO
who has jurisdiction over such other person under section 158BD. The Hon’ble
Court held that “the 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
under section 158BC of the Act; or
(c) immediately after 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 Hon’ble Supreme Court, apply to proceedings under section 153C of the
Income Tax Act, for the purposes of assessment of income of other than the
searched person. This view has been accepted by CBDT.
4. The guidelines of the Hon’ble 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 AO 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 judgement. Accordingly, the Board hereby directs that pending
litigation with regard to recording of satisfaction note under section 158BD /153C
should be withdrawn/not pressed if it does not meet the guidelines laid down by
the Apex Court.
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