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Karnataka High Court Quashes Income Tax Notices Under Section 153C: Petitioner Deemed 'Searched Person'

In a significant ruling for income tax jurisprudence, the High Court of Karnataka has quashed notices issued under Section 153C of the Income Tax Act, 1961, holding that a petitioner whose premises were directly searched cannot be treated as an "other person" for assessment purposes. The decision, delivered in Writ Petition No. 6530 of 2021 (T-RES), emphasizes the distinction between "searched persons" and "other persons" under the Act, reinforcing procedural safeguards in tax searches.

Case Overview

The petitioner, Mr. Yash, challenged notices issued by the Deputy Commissioner of Income Tax for assessment years 2013-14 to 2018-19 under Section 153C. These notices stemmed from a search operation conducted under Section 132 of the Income Tax Act from January 3 to 5, 2019. The search targeted Sri Vijay Kumar Thimmegowda and M/s. Hombale Construction and Estates Pvt. Ltd., but extended to the petitioner's residential premises in Bangalore and a hotel room at Taj West End.

During the search, documents were seized, and the petitioner's statement was recorded. The tax authorities prepared a satisfaction note and issued notices under Section 153C, followed by Section 143(2) notices and assessment orders dated September 8-9, 2021. Mr. Yash argued that as a directly searched individual, he qualified as a "searched person" under Section 153A, not an "other person" under Section 153C, rendering the proceedings invalid.

Arguments Presented

The petitioner's counsel contended that the search warrant explicitly included the petitioner's premises, making him a searched person. They relied on precedents like C.R. Ram Mohan Raju vs. Deputy Commissioner of Income Tax (W.P. No. 33057 of 2024, dated October 27, 2025), where similar facts led to quashing of proceedings. The argument highlighted that Section 153C applies only to non-searched persons whose documents are found during a search of others.

In response, the Revenue argued that the primary searched entities were Thimmegowda and Hombale Construction, positioning Mr. Yash as a mere incidental target. They claimed the search in his premises did not elevate him to "searched person" status, justifying Section 153C invocation. The Revenue reiterated points from their statement of objections, asserting procedural compliance.

Key Precedents and Legal Principles

The court drew heavily from C.R. Ram Mohan Raju , where a similar satisfaction note was scrutinized. In that case, the petitioner, as Chairman and Managing Director of the searched group, was deemed a searched person due to direct premises search and document seizure. The judgment extracted the satisfaction note, noting it failed to treat the petitioner as non-searched.

Further reliance was placed on Sunil Kumar Sharma vs. Deputy Commissioner of Income Tax (W.P. Nos. 9937-9946 of 2022), upheld by a Division Bench and the Supreme Court (SLP Diary No. 23406 of 2024, confirmed in Review Petition Diary No. 60856 of 2025). Here, loose sheets and diaries lacked evidentiary value under Section 34 of the Evidence Act, as per V.C. Shukla vs. State and Common Cause vs. Union of India . The court distinguished searched vs. other persons, mandating satisfaction recording before Section 153C proceedings.

Principles from Calcutta Knitwears vs. CIT and Super Malls (P.) Ltd. vs. CIT were invoked, stressing that Section 153C requires satisfaction that seized materials pertain to "other persons" with bearing on undisclosed income. The ruling aligned with CBDT Circular No. 24/2015, allowing satisfaction at various stages but mandating it for jurisdiction.

Pivotal excerpt from the judgment: "The petitioner whose residential premises was searched... was also the searched person and it cannot be said that the petitioner was a non-searched / such other person within the meaning and scope and ambit of Section 153C of the I.T. Act."

Distinctions were drawn: Unlike compounding under CrPC Section 320, tax quashing under Article 226 focuses on jurisdictional errors, not merits. The court rejected alternative remedies, citing violations of natural justice and Supreme Court precedents like Whirlpool Corporation vs. Registrar of Trade Marks .

Court's Decision and Implications

The single judge bench allowed the petition, quashing the notices (Annexures A to A5) and all subsequent proceedings, including assessment, penalty, and demand orders for the specified years. The court held the notices "illegal, arbitrary and without jurisdiction," as Mr. Yash was unequivocally a searched person.

This ruling clarifies Section 153C's scope, preventing misuse against directly searched individuals and upholding searched person protections under Section 153A. It impacts ongoing tax search cases, urging authorities to meticulously distinguish parties and record satisfaction. Taxpayers may now more readily challenge misapplied proceedings via writs, promoting procedural fairness in revenue enforcement.

The decision, rendered orally, underscores the High Court's role in checking executive overreach, with broader implications for tax compliance and litigation strategy.