S.153A Income Tax Act| Can Assessments Be Reopened If No Incriminating Material Is Found During Search? Supreme Court Starts Hearing

The Supreme Court on Wednesday commenced hearing on whether in an assessment under section 153A of the Income Tax Act, besides the incriminating material found during search,  such materials which the Assessing Officer has on hand and the third party records available can be relied on to assess total income, or whether the assessment has to confined only to the incriminating material seized during the search. The Court also discussed the issue whether there is no incriminating material seized during the search, then those assessments be reopened and reassessed under Section 153A.

The bench of Justices M. R. Shah and Sudhanshu Dhulia heard a string of pleas on this issue arising on account of conflicting High Court judgments.

Additional Solicitor General of India N Venkataraman, appearing for the revenue, explained the issue to the bench as follows :

 "There were two separate, independent assessment mechanisms- you can have original assessment under 143 and you can have escaped assessment under 147, and you will capture the search-based assessment as a block assessment of six years or 10 years as the case maybe only under the erstwhile 158. So you have two parallel assessments- one regular assessment is going on, one search assessment is going on. This was the law between 1995 and 2003 but this did not succeed. What was unbundled as two separate assessments between 95 and 2003- search assessments are separate and regular or escaped assessments separate- got bundled under 153A. Once a search takes place under 132 or 132A, once a search or an enquiry for seeking of records happened, all judgments are consistent that regular assessment under 143,147 gets ousted".

Pointing out that Section 153A uses the expression 'total income', the ASG said that the Court is called upon to resolve the question how to do the assessment of total income when a search takes place under 153A. There are conflicting High Court judgments on this point.

"One set of view says very clearly that the law says that wherever assessments have been finalised, 153A permits revenue to go back for six years. The moment search takes place, we can travel back for 6 assessment years. Three assessment years are complete and three assessment years are yet to be completed, they are pending, then the law makes a distinction that completed assessments would not abate and incomplete assessments would abate and all subsumed under 153A. But the language used in 153A is 'total income', 'assess' and 'reassess'. So the question is what happens to completed assessments. One view of the High Courts is that 'See, look here, you will now do it under 153A. You can rely on the incriminating material which has been found during search, you can rely on such materials which the AO (Assessing Officer) has on hand, you can rely on such material which are the third party records available to you. Because what you can otherwise do under 147, you can do it under 153A. That is how you will be able to assess total income. This is one view.

The other view is that you will have to confine it only to the incriminating material seized so any reassessment of those closed assessments should be confined to incriminating materials, but if during the search you don’t have incriminating material, then those assessments cannot be reopened and reassessed under 153A, which means, in our very humble view, the expression 'total income' stands judicially amended to a process to say instead of total income, taxation on undisclosed income found during search. This is the limitation we will form. So we will not meet the law which permits assessment of total income. Suppose I have three strings of material with me as an AO- I have material from third-party, I have found my material In assessment, and I have material in the search. 153A says search should culminate in a seizure of material. If you don’t seize any incriminating material, then there is a jurisdictional failure under 153A, you cannot reopen those assessments"

Justice Shah : "That can be only under Section 147"

ASG: "We can’t. Because 153A is 'notwithstanding'. This is a problem for 20 years. You can neither do under 153A nor under 147, then those assessments will go"

Justice Shah: "Why?"

ASG: "153A says 'notwithstanding anything contained'. That is why you are to exercise the power there. There are two difficulties in the dissenting judgment that we have. The first is that the jurisdictional requirement for satisfaction of 153A is not seizure of incriminating material. The jurisdictional requirement is that any such initiation should fall under 153A the moment there is a search. Then 143, 147 get suspended and 153A starts applying. So the jurisdictional requirement is search and not seizure of incriminating material. The second downside of this interpretation is that you seize incriminating material, then you come to assessment on all the three, if you don’t seize incriminating material, then you can’t do assessment on the rest of the two. It means we are shifting the jurisdictional requirement from search to seizure of incriminating material"

Justice Shah: "We are concerned with the concluded assessments. Whether with respect to the concluded assessments the power would be re-assessment under 147 or assessment under 153A"

ASG: "Because 153A is non obstante, it brings all assessment practises as a bundle under 153A, it relieves them from 147, 143, puts them under 153A. It uses the expression 'total income', it uses the expression 'assessment', it uses the expression 'reassessment'. All three expressions which are otherwise found in the other two provisions. It is a mixture of 143, 147 and the original powers of 153A. You may seize material, you may not seize material, having initiated the search, as long as search is not found faulty- if somebody challenges the very search as illegal or ultra vires and the court declares that the search is illegal, then you may not go under the assessment under 153A and then 143 and 147 will resume because the jurisdictional requirement is not met. If the search is found to be valid and not in question or disputed, then the jurisdictional requirement is satisfied, then that requirement gets satisfied that the assessment has to happen only under 153A. The line which the dissenting High Courts have taken leads to leakage of tax revenue, what can be reassessed from different sources. But now it says that unless you have incriminating material, you abandon your right to us. So materials available cannot be used for a reassessment and I can go either under 143, 147, 153A. So it will have the downside that we will be moving away from the object of income tax act and not taxing the total income. The second downside is that this results in judicial revisitation of the very provision. What is sought to be taxed under 153A is total income whereas the dissenting High Court judgment view is that you should see only the undisclosed income seized during the time of search and nothing else. This will be the re-writing of the rule of the law not intended. It leads to leakage or loss of revenue. They are saying 'if you don’t find incriminating material, don’t do reassessment'. Suppose I am a third party, I have other evidences...."

Justice Shah: "It cannot be done under 147?"

ASG: "My submission would be- So how do we do it? I start the process under 153A. Once search is followed by a notice, and notice issued under 153A is to reassess total income for six years, now how do I do it if in the absence of any incriminating material, the search will abate? Once you start the search, then you must complete the assessment only under 153A, and you can do it for six years, both for closed assessment and for fresh assessment"

Justice Shah: "For pending assessment, there is no problem. Everything is open. 143 will be substituted by 153A. The question is only with regard to the concluded assessment- whether it can be under 153A or 147"

Senior Advocate Arvind Datar for respondents then intervened to clarify: "Even 147 will apply. The provision says that all existing provisions will continue to apply. So reassessment can happen under 147"

Justice Shah: "There is a caveat. In case of a concluded assessment, there is a search, either it may be 153B or 153C, and some incriminating evidence is found, in that case, it will be reassessment or assessment under 153A. The ASG's submission is that in case of a search, 143 is abated and assessment and reassessment- reassessment can only be after assessment is concluded- that can be only under 153A read with fourth proviso. And the fourth proviso is akin to 147. It doesn’t speak about the incriminating material found only"

ASG: "Reassessment can be done from all the sources of material available including incriminating material"

Justice Dhulia: "Fourth proviso says no notice for assessment or reassessment shall be issued unless the assessing officer has in his possession books of account or other documents or evidence which reveal that the income, represented in the form of asset, has escaped assessment. That is what you get in the search"

ASG: "Fourth proviso is confined only to the relevant assessment year, it is not all six years. The jurisdictional enquiry is not on seizure. If the enquiry is confined only to the incriminating material seized under 153A, what happens to the expression "total income"?"

Justice Dhulia: "Suppose you do a search and you find nothing?"

ASG: "Then you cannot go back to 147"

Justice Shah: "The question would be, assuming that 147 powers are available for the time being, can it be that under 153A, there cannot be any reassessment and the reassessment can only be with respect to the undisclosed income only?"

ASG: "One, I do a search. I seize material. Now the material stands affirmed. Now you have got the material, you can do whatever you want. If you take incriminating material, then you are free to do whatever you want. The dissenting judgment says that if you don’t take incriminating material, leave 153A. That’s not the law. The law the dissenting High Courts are holding is that if you go for the incriminating material, you may find or you may not find or you may find that which may get reversed. All the three are possible. Say, in 2010, a search happens. That matter comes to the Supreme Court in 2020. This court holds that incriminating material is not valid and it cannot be a ground for an assessment. This assessment will be closed and it will go back under 147. But the time limit will be over by then. We will only be creating difficulties"

ASG: "Search is a very important process for the revenue and for the assessee. Unless the search is declared bad, you cannot presume that searching some person is bad. Abuse of process has to be declared by a court. 153A(1) says notwithstanding your assessment powers under 147, the assessment officer shall issue notice to the assessee to file return of income of 6 years and he shall assess or reassess total income under 153A(1)(b). We don’t want two Parallel assessments (under 147 and 153A). It is not that both are different officers. Both are the same officers"

ASG: "The dissenting judgment contradicts itself. When the object is to assess total income, the assessment will not mature into a total income assessment if it is to be based only on the incriminating material".

The hearing will continue today.

Case Title : PR. COMMISSIONER OF INCOME TAX CENTRAL v. ABHISAR BUILDWELL P. LTD| C.A. No. 6580/2021 and connected cases