S.153C Income Tax Act | Gujarat High Court Quashes Assessment Proceedings Lodged 4-Years After Search Citing 'Inordinate Delay'

 The Gujarat High Court quashed a notice under Section 153C Income Tax Act issued to a person other than the searched person for assessment of income, noting that the proceedings were initiated nearly 4 years after search was conducted observing that there was an "inordinate delay" by the authorities in recording the satisfaction note. 

The court rejected the reasons for delay in issuing the notice attributed by the authority i.e., the Covid-19 pandemic and the initiation of the Faceless Scheme were an afterthought, emphasizing that there was no restriction on the Assessing Officer to record the satisfaction note earlier. 

The court was hearing two petitions challenging notices issued under Section 153C to the petitioner Parag Gathani for Assessment Year 2017–18. Section 153C empowers the tax authority to assess the income of any person whose documents or assets are found during a search or seizure operation on a different person.

The authority issued the Section 153C notice asking the petitioner to furnish return of income. Pursuant to the notice, the respondent authority supplied copies of the “satisfaction note” recorded on 14.07.2023 by the petitioner's Assessing Officer and another “satisfaction note” recorded on 06.06.2023 by the Assessing Officer of the “searched person”, for the purpose of invoking jurisdiction under Section 153C.

The section was invoked primarily on the ground that the petitioner allegedly made an “on-money” payment for the purchase of a property. As per the note a search was conducted in 2019 during which the residential premises of one Suresh Ranchhodbhai Thakkar (searched person) were also covered where certain WhatsApp chat images, were seized.

It was alleged that financial transactions mentioned in the chat images were carried out between Dharmesh Gathani, the petitioner, Rushisinh Thakor, and Randhirsinh Thakor. Thakkar had also stated that the land was sold by Rushisinh Thakor to the petitioner , and the consideration was paid in both cash and cheque.

The petitioner had challenged the notice under Section 153C arguing that the satisfaction note was recorded nearly four years after the search and almost two years after the assessment of the searched person had been completed. 

A division bench of Justice AS Supehia and Justice Pranav Trivedi observed that a  search action was carried out on the premises of the searched person on October 15, 2019, and the assessment with respect to him was framed in August 2021.

The satisfaction note was recorded on June 6, 2023 by the Assessing Officer of the searched person, which was forwarded to the Assessing Officer of the petitioner, who in turn recorded the satisfaction note on October 17, 2023 and thereafter the notice under Section 153C of the Act was issued to the petitioner on November 6, 2023.

"Thus, the proceedings under Section 153C of the Act have been initiated almost four years after the search and almost two years after framing of assessment of the searched person, i.e., Suresh R. Thakkar," the court said. 

The bench referred to Supreme Court's decision in Commissioner of Income-Tax-III vs. Calcutta Knitwears (2014) which held that for the purpose of Section 158BD a satisfaction note can be prepared by the Assessing Officer at either of the following stages: (a) at the time of or along with the initiation of proceedings against the searched person under Section 158BC, (b) along with the assessment proceedings under Section 158BC; and (c) immediately after the assessment proceedings are completed under Section 158BC of the searched person.

The bench noted that the Central Board of Direct Taxes had in view of the Supreme Court ruling issued a Circular in 2015 in light of the provisions of Section 153C clarifying the recording of the satisfaction note at three stages.

The 2015 Circular states, "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 SC, apply to proceedings u/s 153C of the IT Act, for the purposes of assessment of income of other than the searched person. This view has been accepted by CBDT". 

The bench noted that thus the recording of the satisfaction note in three stages apply to the proceedings under Section 153C of the Act. The bench thus noted that the AO had the opportunity to record the satisfaction note at two stages (stage (a) and (b)) as specified in the Circular, however the same was not done.

The next stage available was stage (c), on the immediate completion of proceedings of the searched person in August 2021, however, the satisfaction note with respect to petitioner was recorded only on June 6 2023, after a period of 22 months. 

"In the instant case, there has been a delay of 22 months in recording the satisfaction, which runs contrary to the decision in Calcutta Knitwears as well as provision '(c)' of Circular No.24/2015 dated 31.12.2015, which uses the expression  “immediately after the assessment procedure is completed”.  Twin reasons are assigned by the respondents in the affidavit in reply for delay in recording the satisfaction note, (a) COVID-19 pandemic; and, (b) adoption of Faceless Scheme. So far the reason of COVID-19 is concerned, the same runs contrary to the action of the respondents, since the assessment of the searched person was itself done during the pandemic, and in the affidavit-in-reply, the respondent has mentioned that the Omicron variant commenced in December 2021 and continued until February 2022. Thus, even after February, 2022, the satisfaction note has been recorded on 17.10.2023. The second reason of workload due to Faceless Scheme is also a lame excuse, since indubitably the exercise under sections 153A and 153C of the Act falls outside the purview of the said scheme. Hence, both the reasons assigned appear to be an afterthought, hence the same are rejected," the court said. 

"There was no restricting factor on the Assessing Officer to record the satisfaction earlier. The expression “immediate”, though is impossible to quantify in period, however, the same cannot be extended to such an extent which defeats the purpose of cost effective, efficient and expeditious completion of search assessments. The intention of using such term is to reduce and avoid long drawn proceedings and to bring certainty to the assessment," the bench added. 

The authority had contended that the assessment proceedings of the searched person were completed in August 2021, during the post-Delta phase of COVID pandemic wherein most Government offices were functioning with reduced strength.

Thereafter the third Covid wave commenced in December 2021 and continued until February 2022, with normal operations resuming only around May 2023.

It was also submitted that in this intervening period the Faceless Assessment Scheme, 2020 was notified on 13.08.2020. It was contended that though the present case falls outside the purview of the Faceless Scheme, the Department's functioning during this transitional phase was significantly affected by the concurrent operational demands of implementing the new system.

Rejecting the respondent's contention the court quashed the Section 153C notice and allowed the petitions. 

Case title: PARAG RAMESHBHAI GATHANI v/s  INCOME TAX OFFICER & ANR

R/SPECIAL CIVIL APPLICATION NO.3734 of 2025 and related petition. 

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Citation : 2025 LiveLaw (Guj) 190