Survey Authorization for Entity A, Documents Found for Entity B: Section 153C Third-Party Tax Assessment, Section 292C Presumption Trap, and Group Company Liability

Understanding the Jurisdictional Anomaly in Tax Assessments

During tax enforcement proceedings, the Income Tax Department often encounters a peculiar situation where survey or search operations are authorized against one entity, but documents, books of account, or digital data belonging to entirely different entities are discovered during the process. This seemingly straightforward scenario has created a complex legal framework that continues to challenge taxpayers, particularly those operating within group company structures. The interplay between Section 292C and Section 153C of the Income Tax Act, 1961 has generated significant litigation, with courts attempting to balance the Department’s investigative powers against the fundamental rights of taxpayers who never faced direct search action.

The presumption mechanism under Section 292C operates as a rebuttable statutory presumption that fundamentally shifts the burden of proof from the Revenue to the assessee once documents are found during search or survey operations [1]. However, this provision was originally designed for situations where documents found in a person’s possession are presumed to belong to that person. When extended to third-party scenarios involving group companies, the application of this presumption becomes contentious and legally problematic.

Legislative Framework Governing Third-Party Documents

Section 292C of the Income Tax Act, 1961

Section 292C provides the foundational presumption for materials discovered during enforcement actions. The provision states: “Where any books of account, other documents, money, bullion, jewellery or other valuable article or thing are or is found in the possession or control of any person in the course of a search under section 132 or survey under section 133A, it may, in any proceeding under this Act, be presumed— (i) that such books of account, other documents, money, bullion, jewellery or other valuable article or thing belong or belongs to such person; (ii) that the contents of such books of account and other documents are true; and (iii) that the signature and every other part of such books of account and other documents which purport to be in the handwriting of any particular person or which may reasonably be assumed to have been signed by, or to be in the handwriting of, any particular person, are in that person’s handwriting” [2].

This Section 292C provision creates a discretionary presumption, not a mandatory one, as evidenced by the use of the term “may presume” rather than “shall presume.” The Mumbai Bench of the Income Tax Appellate Tribunal has repeatedly emphasized that the presumption under Section 292C is rebuttable and discretionary in nature, not compulsory or conclusive [3]. The ITAT has held that the presumption is one of fact rather than law, allowing assessees to challenge and rebut it with appropriate evidence.

Section 153C and Assessment of Other Persons

Section 153C addresses the specific scenario where documents belonging to third parties are discovered during search or requisition proceedings. The provision mandates that when books of account or documents pertaining to any person other than the searched person are found, these materials shall be handed over to the Assessing Officer having jurisdiction over such other person [4]. The receiving Assessing Officer can then proceed against that person and assess or reassess income for six assessment years immediately preceding the assessment year relevant to the previous year in which the search was conducted.

The Supreme Court of India has clarified critical aspects of Section 153C’s operation, particularly regarding the limitation period. In Commissioner of Income Tax vs. Jasjit Singh, the apex court held that the six-year block period under Section 153C must be reckoned from the date when the Assessing Officer receives the seized documents, not from the date of the original search [5]. This interpretation prevents taxpayers from facing unreasonably extended record retention requirements and protects against arbitrary assessments for periods beyond the statutory limitation.

The Presumption Trap: Practical Implications for Group Companies

Automatic Attribution Without Direct Nexus

The most significant challenge arises when tax authorities attempt to automatically attribute documents found at Entity A’s premises to Entity B based solely on the presumption under Section 292C, without establishing a direct connection through corroborative evidence. Courts have consistently held that the presumption under Section 292C applies only to the person in whose possession or control the documents are found. When documents are found in third-party possession, the presumption cannot be automatically extended to another entity without independent verification and corroboration [6].

The Delhi High Court has emphasized that for proceedings under Section 153C to be validly initiated, two conditions must be satisfied. First, the Assessing Officer of the searched entity must record satisfaction that the discovered material belongs to or pertains to a third party. Second, the Assessing Officer of the third party must independently record satisfaction that the material has a bearing on determining that person’s total income [7]. This dual satisfaction requirement serves as a crucial safeguard against arbitrary assessments.

The Incriminating Material Requirement

Recent judicial pronouncements have established that not all documents found during search operations justify assessment proceedings for the entire six-year block period. The concept of “incriminating material” has become central to determining the validity and scope of Section 153C proceedings. Incriminating material must demonstrate a direct nexus to undisclosed income or assets and cannot consist merely of rough notings, unsigned papers, or speculative entries without corroboration [8].

The judiciary has held that additions cannot be sustained solely on the basis of documents found in third-party premises without bringing corroborative evidence on record. This principle prevents the Revenue from making fishing expeditions and arbitrary additions based on tenuous connections between group companies. The burden remains on the Department to establish not just the existence of documents but their relevance and accuracy concerning the assessee being assessed.

Regulatory Framework and Cross-Statutory Application

GST Proceedings and the Inapplicability of Section 292C

A landmark ruling by the Delhi High Court in December 2024 clarified that presumptions under Sections 132(4A) and 292C of the Income Tax Act are rebuttable and apply only to proceedings under the IT Act itself, specifically for provisional assessment purposes [9]. These presumptions cannot be imported or automatically applied to proceedings under the Central Goods and Services Tax Act, 2017. However, the court acknowledged that documents seized under the IT Act can form the basis for independent GST investigation, provided the GST authorities conduct their own analysis and do not merely rely on Income Tax Department findings.

This distinction is crucial for taxpayers facing parallel proceedings under different fiscal statutes. While material discovered during IT searches may be shared with GST authorities, each department must independently establish the factual and legal basis for any additions or demands. The presumption mechanisms available under one statute do not carry over to other tax regimes.

Group Company Liability: Piercing the Corporate Veil

When Corporate Separation Matters

Corporate law principles recognize each company within a group structure as a separate legal entity with distinct rights, obligations, and liabilities. Tax authorities cannot disregard this fundamental principle merely because entities belong to the same corporate group or share common management. For documents found at Company A’s premises to be used against Company B, the Department must establish a clear connection demonstrating that the documents genuinely belong to or pertain to Company B.

The challenge becomes particularly acute when group companies share physical premises, common management personnel, or integrated accounting systems. In such scenarios, the physical location where documents are found becomes less determinative than their actual ownership and relevance to specific transactions. Tax authorities often argue that the close relationship between group entities justifies treating them as a single economic unit for assessment purposes, but courts have generally rejected this approach absent specific statutory provisions permitting such treatment.

The Satisfaction Note Limitation

A critical procedural requirement established by judicial precedent is that assessments under Section 153C must be limited to documents specifically mentioned in the satisfaction note recorded by the Assessing Officer. The Delhi High Court has ruled that the Department cannot make additions based on materials not cited in the satisfaction note that initiated the Section 153C proceedings. This limitation prevents authorities from expanding the scope of assessment beyond what was originally determined to have relevance to the third-party assessee.

Furthermore, the satisfaction note cannot be a mere formality or pro forma document. It must contain specific reasons explaining why the seized material is believed to belong to or pertain to the other person and how it has a bearing on that person’s income determination. Generic or boilerplate satisfaction notes that fail to establish this connection have been struck down by tribunals and courts as insufficient to sustain Section 153C proceedings.

Practical Considerations and Risk Mitigation

Documentation and Record Management for Group Entities

Group companies should maintain meticulous documentation clearly identifying ownership of records, especially when operating from shared premises or using common service platforms. Each entity should maintain separate books of account with clear demarcation of transactions. Digital records should include metadata establishing which entity created or owns particular documents. Regular audits should verify that inter-company transactions are properly documented with appropriate agreements, invoices, and payment records.

When group companies share administrative services, formal service agreements should document which entity bears costs for shared resources and how allocation is determined. Email communications and internal memoranda should clearly indicate which entity’s personnel are acting and in what capacity. These practices create an evidentiary trail that can rebut presumptions and establish actual ownership when disputes arise.

Responding to Section 153C Notices

Upon receiving a notice under Section 153C based on documents found at a related entity’s premises, the assessee should immediately request copies of the seized material and the satisfaction notes recorded by both Assessing Officers. A detailed analysis should identify which documents actually relate to the assessee and which may have been erroneously attributed. The response should specifically rebut the presumption under Section 292C by demonstrating that documents belong to the searched entity rather than the assessee.

Taxpayers should not hesitate to challenge procedural defects in Section 153C proceedings, including missing or inadequate satisfaction notes, assessments based on documents not mentioned in satisfaction notes, or assessments for years where no incriminating material was found. These challenges have proven successful in numerous cases before appellate authorities. Legal representation from the outset is advisable given the technical nature of these proceedings and the potentially significant tax exposures involved.

Conclusion

The intersection of Section 292C’s presumption mechanism and Section 153C’s third-party assessment provisions creates a complex legal landscape that requires careful navigation by group companies. While these provisions serve legitimate enforcement purposes in combating tax evasion, their application must be tempered by procedural safeguards and evidentiary standards that protect innocent third parties from arbitrary assessment action. The evolving jurisprudence emphasizes that corporate separateness remains meaningful, that presumptions are rebuttable rather than conclusive, and that the burden ultimately rests on tax authorities to establish factual connections between seized documents and assessees being assessed. Taxpayers facing such situations should proactively challenge unsupported presumptions and demand strict compliance with statutory requirements, while maintaining robust documentation practices that can withstand scrutiny during enforcement proceedings.

References

[1] Income Tax Department. “Presumption as to books of accounts, other documents, etc. found during survey.” https://taxguru.in/income-tax/presumption-as-to-books-of-accounts-other-documents-etc-found-during-survey.html

[2] AUBSP. “Section 292C of Income Tax Act 1961.” https://www.aubsp.com/section-292c-income-tax-act/

[3] Tax Management India. “Section 292C Documents Found in Searches Presumed Correct But Not Income of Assessee.” https://www.taxmanagementindia.com/web/tmi_highlights_details.asp?id=32290

[4] Indian Kanoon. “Section 153C in The Income Tax Act, 1961.” https://indiankanoon.org/doc/159286607/

[5] TaxGuru. “Section 153A & 153C of Income Tax Act: Analysis & Implications.” https://taxguru.in/income-tax/section-153a-153c-income-tax-act-analysis.html

[6] TaxGuru. “Section 292C’s presumption applies only to person from whom documents seized.” https://taxguru.in/income-tax/section-292cs-presumption-applies-person-documents-seized.html

[7] SAG Infotech Blog. “Delhi HC: IT Section 153C Limits Assessment to Documents Cited in Satisfaction Note.” https://blog.saginfotech.com/delhi-hc-it-section-153c-limits-assessment-documents-cited-satisfaction-note-proceedings-other-person

[8] CA Club India. “Sections 153A & 153C of the Income Tax Act: Incriminating Material, Judicial Rulings & Assessment Scope.” https://www.caclubindia.com/articles/sections-153a-153c-of-the-income-tax-act-incriminating-material-judicial-rulings-assessment-scope-53929.asp

[9] TaxO. “Presumptions under Section 292C IT Act is not automatically applicable in CGST proceedings.” https://taxo.online/latest-news/01-11-2025-presumptions-under-section-292c-it-act-is-not-automatically-applicable-in-cgst-proceedings-materials-seized-by-the-it-department-can-indeed-form-the-basis-for-independent-gst-investigatio/