SATISFACTION NOTE IN INCOME TAX SEARCH CASES

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.