Delhi HC Interprets Section 153C: Incriminating Material Alone Sufficient to Assess Non-Searched Persons

Introduction

The Delhi High Court, in its recent ruling Shiv Parkash Bansal v. Deputy Commissioner of Income-tax[i] addressed the scope and applicability of s.153C of the Income-tax Act, 1961 (‘Act’), which empowers tax authorities to initiate assessment proceedings against a non-searched person based on incriminating material discovered during a search of another person’s premises.

The petitioner challenged the initiation of proceedings under S.153C on the ground that such action must be predicated on a demonstrable connection between the searched and non-searched persons. The Court clarified that s.153C is triggered solely by the discovery of documents or assets that belong or pertain to a non-searched entity, which may have a bearing on their income assessment, irrespective of any relationship or connection with the searched person. This judgment reinforces the legislative intent that s.153C proceedings are driven by seized material that pertains to the non-searched person, rather than any relationship between parties, thereby broadening the revenue’s investigative powers in cases involving undisclosed income and assets.

Facts

• Shiv Prakash Bansal ('petitioner'), along with other related petitioners, challenged the initiation of assessment proceedings under s.153C for assessment years 2015-16 to 2021-22. The proceedings stemmed from a search operation carried out between 28.12.2020 and 31.12.2020 against certain individuals under s.132 of the Income-tax Act. During this search, premises belonging to the petitioner (ND-8, Pitampura, Delhi) were also covered.

• Substantial cash (Rs. 18,00,000), high-value jewellery (worth Rs. 1.80 crores), and a pen drive containing Excel sheets with substantial cash transactions were recovered from the petitioner’s premises. The digital data included a worksheet named ‘SKY’ detailing inflows and outflows of funds in excess of Rs. 265 crores and Rs. 206 crores, respectively, and another worksheet ‘BANK’ showing transactions routed through bank accounts held in the names of Amit Industries and KG Cool Enterprises. The petitioner was unable to provide documentary evidence for these transactions or identify the clients involved, despite claiming the transactions pertained to agricultural commodity and cryptocurrency trading on behalf of unnamed investors.

• The Assessing Officer (‘AO’) recorded a satisfaction note under s.153C stating that the documents and digital evidence pertained to and had a bearing on the income of the petitioner. Consequently, proceedings under s.153C were initiated. The petitioner challenged this action, arguing that such proceedings could only be triggered if there was a demonstrable nexus between him and the parties actually subjected to the search, and that no such nexus existed.

Issues

i) Whether action under s.153C can be initiated against a non-searched entity solely on the discovery of incriminating material during a search of another person’s premises?

ii) Whether the statute requires a connection or relationship between the searched person and the non-searched person for initiation of proceedings under s.153C?

iii) Whether the initiation of proceedings against the petitioner under s.153C was valid in the absence of such a connection?

Held

The High Court dismissed the writ petition, holding that the initiation of proceedings under s.153C was lawful and based on a correct interpretation of the statutory scheme. The key points of the Court’s reasoning are as follows:

Statutory Trigger for S. 153C

The Court clarified that s.153C is triggered when material seized during a search belongs or pertains to a person other than the searched person and is likely to have a bearing on such person’s income. The provision does not require any connection or relationship between the searched person and the third party (non-searched person).

Scope of S. 153C Post-Amendment

The amendment to s.153C by the Finance Act, 2015, adding the phrase ‘pertains to’ alongside ‘belongs to’, was held to be clarificatory and applicable retrospectively, as previously settled by the Supreme Court in ITO v. Vikram Sujitkumar Bhatia[ii].

Evidence-Based Satisfaction

In the instant case, the satisfaction note recorded by the AO detailed (i) the seizure of significant cash and jewellery, (ii) recovery of detailed Excel records in the pen drive, and (iii) WhatsApp chats corroborating the entries in the ‘SKY’ worksheet. These facts, supported by the petitioner’s own statements and admissions, established that the seized material pertained to him and had a bearing on his taxable income.

No Requirement of Interpersonal Nexus

The Court rejected the petitioner’s reliance on the decision in S.R. Batliboi & Co. v. Department of Income-tax (Investigation)[iii], holding that s.153C neither mandates nor contemplates establishing any nexus between the searched and non-searched persons. The relevant consideration is whether the material found during the search belongs to or pertains to the non-searched party and has income implications for them.

Legality of Satisfaction Note

The Court upheld the sufficiency and legal correctness of the satisfaction note drawn by the AO, observing that it contained a detailed and reasoned basis for invoking s.153C.

Incriminating Nature of Material

The worksheets ‘SKY’, ‘BANK’, and others, when read with WhatsApp conversations and statements of the petitioner and his associates, were found to clearly reflect unaccounted transactions and receipt/payment of huge cash amounts, validating the proceedings under s.153C.

Our Analysis

This judgment is an authoritative restatement of the correct legal position on the threshold for invoking s.153C. The Court’s reasoning firmly establishes that material discovered in a search may independently lead to assessment proceedings against a non-searched entity if it satisfies two conditions: (i) it must belong to or pertain to the non-searched person, and (ii) it must have a bearing on that person’s income. No nexus, business or otherwise, is required with the originally searched entity.

The Court’s adoption of the clarificatory nature of the 2015 amendment ensures consistency with the ruling of the Supreme Court in Vikram Sujitkumar Bhatia (supra). It avoids interpretive anomalies between pre- and post-amendment cases.

Importantly, the judgment illustrates the procedural rigour expected in satisfaction notes under s.153C. Here, the AO’s detailed documentation of seized assets, digital evidence, matching WhatsApp chats, and failure of the assessee to provide corroborative records, met the legal threshold for invoking s.153C proceedings.

The ruling also indirectly serves as a warning against attempts to disguise large-scale unaccounted transactions by invoking vague business practices or alleging a lack of formal documentation. The Court was not persuaded by the petitioner’s claims of operating cash-based trades in agricultural commodities or cryptocurrency without any books of account or customer details. In fact, it found the operation to resemble an organised cash movement network under the guise of informal trade.

Finally, the Court’s rejection of the argument based on S.R. Batliboi (supra) appropriately confines that precedent to the block assessment regime under the repealed s.158BD, reaffirming that the framework under s.153C is materially distinct and more flexible.

In conclusion, the Delhi High Court’s decision upholds the legislative intent behind s.153C, ensuring that tax authorities are not constrained by technical objections when investigating unaccounted income unearthed during valid searches, even if pertaining to non-searched parties.

End Notes

[i] 2025 SCC OnLine Del 1156 dated 18.02.2025.

[ii] (2024) 7 SCC 741.

[iii] [2009] 181 Taxman 9.

Authored by the Metalegal Editorial Board, the views expressed are personal and do not constitute legal advice or opinion.