4. Summary of the Judgment

The Division Bench (Hon’ble Mr. Justice A.S. Supehia and Hon’ble Mr. Justice Pranav Trivedi) allowed both writ petitions and:

• Quashed and set aside the notices issued under Section 153C for the relevant assessment years (including A.Y. 2017‑18);
• Held that:
  • CIT v. Calcutta Knitwears and CBDT Circular No. 24/2015 apply fully to Section 153C proceedings;
  • The satisfaction note must be recorded at one of the three specified stages, and if recorded after completion of assessment, it must be recorded “immediately” thereafter;
  • Recording satisfaction 22 months after completion of the searched person’s assessment is contrary to the Supreme Court’s mandate and CBDT Circular, and cannot be considered “immediate”;
  • The departmental explanations based on COVID‑19 and the Faceless Assessment Scheme are untenable and rejected;
  • The Punjab & Haryana High Court decision in Bhupinder Singh Kapur (upholding a 9‑month delay) does not assist the revenue in the face of such a prolonged delay of 22 months and the facts of this case.
• Consequently, the initiation of Section 153C proceedings itself was held to be without jurisdiction.

5. Precedents and Statutory Framework

5.1 Statutory Scheme: Sections 132, 153A, 153C and 158BD

The judgment operates within the following statutory framework:

• Section 132 – empowers the Income Tax Department to conduct search and seizure operations in specified circumstances.
• Section 153A – provides for assessment / reassessment of income of a “searched person” where a search under Section 132 has been conducted.
• Section 153C – extends the search‑based assessment mechanism to a person other than the searched person if material “pertains to” or “relates to” that other person.
• Section 158BD (predecessor in the block assessment regime) – contained a similar mechanism for assessing “other persons” in the old block assessment context. The Supreme Court’s interpretation of Section 158BD in Calcutta Knitwears has been transported to Section 153C.

A cardinal common element under Sections 158BD and 153C is the requirement of a prior satisfaction by the AO of the searched person that the seized material belongs to or pertains to another person, which is a jurisdictional condition.

5.2 CIT v. Calcutta Knitwears, [2014] 43 taxmann.com 446 (SC)

The Supreme Court in CIT-III v. Calcutta Knitwears dealt with Section 158BD and held:

• A satisfaction note is a sine qua non (an essential prerequisite) for initiating proceedings against a person other than the searched person.
• The satisfaction note must be recorded by the AO of the searched person before transmitting the records to the AO of such other person.
• The satisfaction note may be prepared at any of the following three stages:
  1. At the time of or along with the initiation of proceedings against the searched person under Section 158BC;
  2. In the course of the assessment proceedings under Section 158BC;
  3. Immediately after completion of the assessment proceedings under Section 158BC in the case of the searched person.

The Gujarat High Court reproduces paragraph 44 of the Supreme Court’s judgment, emphasizing that the third permissible stage is “immediately after” completion of the assessment.

5.3 CBDT Circular No. 24/2015 dated 31.12.2015

In the aftermath of Calcutta Knitwears, the Central Board of Direct Taxes (CBDT) issued Circular No. 24/2015 clarifying:

• The principles laid down in Calcutta Knitwears regarding recording of a satisfaction note under Section 158BD apply pari materia to proceedings under Section 153C;
• The satisfaction note must be recorded at the same three stages identified by the Supreme Court;
• Even if the AO of the searched person and of the “other person” is the same officer, he must still record separate satisfaction as to each;
• The Board directed that pending litigation on the issue of recording satisfaction should be decided in light of the Supreme Court judgment, and cases not meeting these guidelines should not be pursued.

The Gujarat High Court specifically notes that this Circular is:

• Issued by the respondent‑department itself; and
• Recognizes that Calcutta Knitwears applies to Section 153C and uses the expression “immediately after” completion of assessment.

5.4 PCIT v. Jitendra H. Modi (HUF), [2018] 92 taxmann.com 510 (Guj.)

In Jitendra H. Modi (HUF), a Coordinate Bench of the Gujarat High Court considered a nine‑month delay in recording a satisfaction note and, relying on Calcutta Knitwears, held that:

• Recording of satisfaction after nine months from completion of assessment of the searched person could not be termed “immediate”;
• Consequently, the jurisdictional prerequisites were not satisfied, and the notices under Section 158BD were quashed.

The present Bench uses this case as direct precedent within the same High Court, applying the same reasoning to the Section 153C context and treating a 22‑month delay as even more clearly beyond permissible limits.

5.5 Cit v. Jasjit Singh, (2023) 458 ITR 437 (SC)

The revenue cited Cit v. Jasjit Singh primarily to support that:

• Post legislative amendments, Section 153A/153C envisages an extended limitation period of ten assessment years in certain circumstances; and
• The expression “pertains to or relates to” is to be interpreted broadly, so that seized material need not strictly “belong” to the other person.

However, the Gujarat High Court ultimately does not rest its decision on limitation or scope of “relates to”. The judgment turns entirely on the timing and validity of the satisfaction note. Thus, Jasjit Singh is effectively rendered academic for the outcome in this case.

5.6 Bhupinder Singh Kapur v. ITO, [2025] 175 taxmann.com 689 (P&H)

The revenue also relied on the judgment of the Punjab & Haryana High Court in Bhupinder Singh Kapur, wherein:

• A satisfaction note recorded approximately nine months after completion of assessment of the searched person was upheld;
• The Supreme Court dismissed the SLP (Civil) No. 1352/2025 against this decision on 24 January 2025.

The Gujarat High Court distinguishes this authority by emphasizing:

• The delay in the present case is significantly longer (22 months);
• There was no insurmountable restriction on the AO’s ability to record satisfaction earlier; and
• The term “immediate” must not be stretched so far as to defeat the objectives of expeditious completion and certainty in search assessments.

6. Court’s Legal Reasoning

6.1 Application of Calcutta Knitwears and CBDT Circular to Section 153C

The Court first affirms that Calcutta Knitwears is fully applicable to Section 153C, based both on:

• Judicial pronouncements treating Sections 158BD and 153C as substantially similar / pari materia; and
• CBDT Circular No. 24/2015 expressly extending the Supreme Court’s guidelines to Section 153C proceedings.

Accordingly, the AO of the searched person must record a satisfaction note:

1. At the time of or along with initiation of Section 153A/158BC proceedings; or
2. During such assessment proceedings; or
3. Immediately after completion of such assessment.

In the present case, the AO of the searched person:

• Did not record satisfaction at stages (a) or (b);
• Recorded it only on 06 June 2023, i.e., almost 22 months after August 2021 when the assessment in the case of the searched person was completed.

Thus, the case squarely falls under stage (c), where the Supreme Court mandates that satisfaction must be recorded “immediately after” completion of the assessment.

6.2 Meaning of “Immediately” and the 22‑Month Delay

The Court acknowledges that:

• The term “immediate” is not susceptible to rigid or mathematical quantification; but
• It cannot be stretched to cover a delay so prolonged that it undermines the statutory scheme and the purpose of search assessments.

Relying on Jitendra H. Modi (HUF), where a nine‑month delay was held not “immediate”, the Bench reasons that:

• A delay of 22 months is even more plainly inconsistent with the requirement of immediacy laid down in Calcutta Knitwears and reiterated in Circular No. 24/2015;
• Such a delay defeats the purpose of:
  • Cost‑effective and efficient completion of search assessments; and
  • Reducing prolonged uncertainty and litigation by ensuring that proceedings against “other persons” are not kept hanging indefinitely.

The Court expressly cites the Circular’s phrase “immediately after the assessment procedure is completed” and holds that a 22‑month gap is in clear contravention of this standard.

6.3 Rejection of Department’s Justifications

The revenue advanced two explanations for the delay:

1. COVID‑19 pandemic; and
2. Operational burden and transitional issues relating to the Faceless Assessment Scheme, 2020.

6.3.1 COVID‑19 as a Justification

The Court finds this reasoning self‑contradictory and untenable because:

• The assessment of the searched person itself was completed in August 2021, i.e., during the pandemic period, indicating that the department was able to function and complete crucial tasks;
• The department’s own affidavit admitted that the Omicron wave spanned roughly from December 2021 to February 2022;
• Yet, the satisfaction note was recorded only in June 2023, well after the stated difficulties had subsided and near‑normal functioning had resumed by around May 2023.

Hence, the Court treats the COVID‑19 justification as an afterthought and insufficient to explain a delay of this magnitude.

6.3.2 Faceless Assessment Scheme

With respect to the Faceless Assessment Scheme, 2020, the Court notes:

• The Scheme came into effect on 13.08.2020 and restructured assessment functioning;
• However, search and seizure assessments under Sections 153A and 153C were explicitly kept outside the purview of the Scheme;
• Thus, while the department may have faced general administrative and workload challenges, these cannot be a legitimate basis for failing to comply with statutory and judicially‑mandated timelines in 153C cases.

The Court categorically terms this second justification a “lame excuse” and rejects it as another afterthought.

6.4 Distinction from Bhupinder Singh Kapur

The Court addresses the reliance placed by the revenue on Bhupinder Singh Kapur (Punjab & Haryana High Court), where a nine‑month delay in recording satisfaction was accepted, and notes that the SLP against it was dismissed.

It holds that:

• This precedent does not compel a similar conclusion in the present case, as:
  • The delay here is 22 months, more than double that in Bhupinder;
  • There were no compelling restrictive factors preventing the AO from earlier action; and
  • Extending the meaning of “immediate” to such a long duration is inconsistent with the statutory purpose.
• Moreover, a dismissal of SLP without a detailed speaking order does not necessarily lay down a binding, universal ratio that must override the Gujarat High Court’s own binding precedent in Jitendra H. Modi.

6.5 Jurisdictional Nature of the Satisfaction Requirement

Underlying the Court’s reasoning is the principle that:

• Recording of a satisfaction note by the AO of the searched person is not a mere procedural formality but a jurisdictional condition precedent to initiating proceedings under Section 153C;
• If this condition is not fulfilled validly and in time, the AO of the “other person” lacks lawful jurisdiction to issue a 153C notice;
• Accordingly, the High Court in its writ jurisdiction under Article 226 is justified in interdicting the proceedings at the threshold, without relegating the assessee to the appellate hierarchy.

On this basis, the Court holds that:

• The impugned notices under Section 153C are without jurisdiction;
• The writ petitions must be allowed and the notices quashed;
• No further examination of the merits of the alleged “on‑money” transaction is required.

7. Complex Concepts Simplified

7.1 Search under Section 132

A search under Section 132 allows the Income Tax Department to:

• Enter and search premises of persons suspected of tax evasion;
• Seize books of accounts, documents, assets;
• Use the seized material to assess or reassess undisclosed income.

The person in whose case a search is carried out is called the “searched person”.

7.2 Section 153A and Section 153C – Searched Person vs Other Person

• Section 153A applies to the searched person, allowing the AO to assess/reassess their income for specified years following a search.
• Section 153C extends this mechanism to a “person other than the searched person”, but only if:
  • Documents, books, or assets found during the search pertain to or relate to that other person.

Thus, Section 153C can be invoked against a non‑searched person if and only if the statutory condition about seized material is met, and the AO follows the required procedure.

7.3 What is a “Satisfaction Note”?

A satisfaction note is a written record made by the AO of the searched person, in which:

• He explains why he believes that certain seized documents or assets belong to or relate to some other person;
• He formally records his satisfaction that the case requires invocation of Section 153C;
• He then transmits the material and his satisfaction note to the AO having jurisdiction over that other person.

The Supreme Court in Calcutta Knitwears made it clear that such satisfaction is a mandatory jurisdictional step, not a discretionary or optional process.

7.4 Why Must the Satisfaction Be “Immediate”?

The word “immediately” (as used by the Supreme Court and repeated in CBDT Circular No. 24/2015) serves several purposes:

• It prevents the department from indefinitely postponing action against third parties discovered during search;
• It ensures timely, coordinated assessments linked to the search, maintaining logical proximity between discovery of material and assessment;
• It promotes certainty and finality for taxpayers, avoiding unreasonably prolonged exposure to search‑related proceedings;
• It preserves the integrity of the search regime, which is intended to be a focused, time‑bound process rather than an open‑ended fishing expedition.

7.5 CBDT Circulars and Their Binding Nature

CBDT is the apex administrative body for direct taxes. Its circulars:

• Are generally binding on the departmental authorities (officers of the Income Tax Department);
• Are not binding on courts, but often carry persuasive value and may even grant additional reliefs consistent with the statute;
• When accepting a particular judicial interpretation (as in Circular 24/2015), effectively direct officers to comply strictly with those judicial guidelines.

Here, CBDT’s own Circular accepted that Calcutta Knitwears governs Section 153C and required strict compliance at the three specified stages, including “immediately after” completion of assessment.

7.6 Writ Jurisdiction in Tax Matters

Normally, tax disputes are channeled through the statutory appeal and tribunal mechanisms. However, under Article 226 of the Constitution, High Courts:

• Can intervene where the action of the tax authority suffers from a jurisdictional error – for instance, when a mandatory precondition like a valid satisfaction note is absent or seriously defective;
• Need not wait for the completion of the entire assessment if the very initiation is challenged as unlawful;
• Provide a constitutional remedy against high‑handed or ultra vires tax actions.

In this case, since the defect is jurisdictional and foundational, the Court rightly exercises writ jurisdiction to quash the 153C notice at the threshold.

8. Impact and Future Implications

8.1 Reinforcing a Time‑Bound Duty to Record Satisfaction

This judgment sends a clear signal that:

• The AO cannot treat the satisfaction note as a task to be done at leisure; it is a time‑sensitive jurisdictional requirement;
• Delays of the order of 22 months after completion of the searched person’s assessment are incompatible with the requirement of immediacy and may render 153C proceedings void.

In combination with Jitendra H. Modi (where 9 months was held excessive), this case positions the Gujarat High Court on the stricter end of the spectrum regarding acceptable delay.

8.2 Potential Challenges to Existing and Future 153C Assessments

Assessees affected by Section 153C notices may:

• Scrutinize timelines of:
  • Search (Section 132);
  • Completion of assessment of the searched person (Section 153A);
  • Recording of satisfaction note under Section 153C;
  • Issuance of notice under Section 153C.
• Challenge 153C proceedings where:
  • Satisfaction was recorded long after completion of the searched person’s assessment; and/or
  • No reasons or inadequate reasons were offered for the delay.

Litigation in Gujarat (and possibly in other jurisdictions looking to Gujarat’s reasoning) is likely to intensify around the question of what time‑lag is permissible under the “immediate” standard.

8.3 Limited Tolerance for Administrative and Pandemic‑Related Excuses

The Court’s firm rejection of COVID‑19 and Faceless Scheme‑related reasons indicates:

• While extraordinary circumstances (e.g., pandemic) may justify temporary relaxation in some contexts, they cannot be used as a blanket, long‑term excuse, especially when:
  • Other critical tasks (such as completing assessments) were carried out during that period; and
  • The specific class of proceedings (153A/153C) is not even governed by the new scheme.
• The department must demonstrate concrete, case‑specific constraints if it seeks to justify departure from the timeline, mere generic references to systemic change or workload are inadequate.

8.4 Interplay with Extended Limitation Post Jasjit Singh

Although the revenue invoked Jasjit Singh to emphasize the extended ten‑year assessment horizon in certain search cases, this judgment clarifies implicitly that:

• An extended outer limit for issuing notices does not dilute preconditions like timely recording of satisfaction;
• Statutory time extensions cannot be read to permit indefinite procrastination in performance of jurisdictional prerequisites.

In other words, while the period within which a 153C notice may be issued can be extended legislatively, the requirement of contemporaneity and immediacy in satisfaction persists as a qualitative check on the exercise of that power.

8.5 Divergence Across High Courts and Future Supreme Court Clarification

There is now an evident difference of approach:

• Punjab & Haryana High Court (in Bhupinder Singh Kapur) has accepted a 9‑month delay;
• Gujarat High Court (in Jitendra H. Modi and now Parag Gathani) views 9 months (and certainly 22 months) as contrary to “immediacy”.

Although the SLP against Bhupinder Singh Kapur was dismissed, that does not necessarily harmonize the jurisprudence. This divergence may, in time, invite a more authoritative and detailed pronouncement from the Supreme Court specifically on what temporal range is permissible under “immediately after completion” in the context of Section 153C.

8.6 Practical Guidance for Taxpayers and Practitioners

From a practice standpoint, this judgment suggests:

• Whenever a 153C notice is received:
  • Promptly seek a copy of:
    • Satisfaction note of the AO of the searched person; and
    • Satisfaction note of the AO of the assessee (other person);
  • Construct a detailed timeline juxtaposing search, assessment completion, satisfaction notes, and issuance of notice.
• If there is a significant gap between completion of the searched person’s assessment and recording of satisfaction, consider:
  • Raising a preliminary jurisdictional objection before the AO; and
  • In appropriate cases, approaching the High Court under Article 226 to quash the notice.

9. Conclusion

The Gujarat High Court’s decision in Parag Rameshbhai Gathani v. ITO crystallizes an important principle: the requirement of “immediate” recording of satisfaction under Section 153C is real, substantive, and enforceable. A 22‑month delay between completion of assessment of the searched person and recording of the satisfaction note is held to be wholly inconsistent with:

• The Supreme Court’s mandate in CIT v. Calcutta Knitwears;
• The CBDT’s own Circular No. 24/2015;
• The Gujarat High Court’s prior ruling in Jitendra H. Modi (HUF).

By quashing the impugned notices, the Court underscores that:

• Jurisdictional safeguards in search‑related assessments are not to be diluted by administrative convenience or post facto justifications;
• COVID‑19 and faceless assessment transitions cannot be invoked indefinitely to justify non‑compliance with settled procedural requirements;
• The tax administration must act with reasonable promptness and discipline in moving from data discovered during search to assessments of third parties.

In the broader legal landscape, this judgment strengthens taxpayer protections in search‑related proceedings and emphasizes that powers under Section 153C, though wide, are circumscribed by strict procedural and temporal conditions. It is likely to serve as a key precedent in future challenges to Section 153C notices, especially where there is significant delay in recording satisfaction notes.