PCIT Vs VSL Mining Company Pvt Ltd (Karnataka High Court)
Summary: The Karnataka High Court dismissed the Revenue’s appeal under Section 260A of the Income-tax Act, 1961, arising from the Income Tax Appellate Tribunal, Bengaluru order dated 28 June 2019 concerning Assessment Year 2008-09. The principal dispute concerned whether material found and seized during a search conducted in the case of a third party could be relied upon while completing a regular assessment under Section 143(3), without invoking Section 153C of the Income-tax Act.
M/s VSL Mining Company Pvt Ltd, belonging to the Lad group of companies and engaged in extraction and trading of iron ore, had filed its return for AY 2008-09 declaring total income of ₹55,96,22,255/-. A search under Section 132 had been conducted in the Lad group on 26 October 2007. Following notices under Sections 143(2) and 142(1), the Assessing Officer completed the assessment on 31 December 2009, determining taxable income at ₹115,89,54,044/- and balance tax payable at ₹44,31,32,567/-.
Separately, a survey under Section 133A was conducted on 25 March 2008 and a search under Section 132 was conducted on 1 April 2008 in the case of Shri Manoj Kumar Jain. According to the Revenue, various documents concerning transactions between Shri Manoj Kumar Jain and the assessee were recovered and impounded. While completing the assessee’s assessment, the Assessing Officer considered those documents and statements of Shri Manoj Kumar Jain and made an addition of ₹28 crore for AY 2008-09 in relation to alleged unaccounted transactions.
The assessee challenged the assessment before the Commissioner of Income Tax (Appeals), Mysuru. The Commissioner partly allowed the appeal on 17 October 2013. Both sides thereafter approached the Tribunal. By order dated 28 June 2019, the Tribunal dismissed the Revenue’s appeal and partly allowed the assessee’s appeal. The Revenue then filed the present appeal before the High Court.
The High Court had admitted the appeal on 30 September 2020 and framed two substantial questions of law. The first concerned the assessee’s entitlement to deduction under Section 10B. The second concerned whether the Assessing Officer could take cognizance of seized material in proceedings under Section 143(3) without invoking Section 153C.
On the Section 10B issue, the High Court noted that the Tribunal had adjudicated the matter in accordance with the coordinate Bench decision in Tata Elxsi Ltd. v. ACIT. As the Revenue had not demonstrated how the Tribunal’s decision was erroneous, the Court answered substantial question of law No. 1 against the Revenue and in favour of the assessee.
On the second question, the Court examined the Tribunal’s reasoning concerning material seized during the search of Shri Manoj Kumar Jain. The Tribunal had found that the Assessing Officer did not invoke Section 153C after receiving the seized material, but instead used that material during the pending assessment proceedings under Section 143(3). The Tribunal concluded that the jurisdictional conditions prescribed for proceedings under Section 153C were distinct from those governing a regular assessment. It further held that the pending assessment proceedings would abate upon receipt of the seized material and that, if the Assessing Officer intended to act upon that material, the statutory procedure under Section 153C had to be followed after recording the requisite satisfaction.
The High Court referred to the statutory scheme under Sections 153A, 153B and 153C, noting that these provisions were introduced by the Finance Act, 2003 with effect from 1 June 2003 to specifically deal with assessments in search or requisition cases. The Court also considered Dinakar Suvarna v. DCIT, where a coordinate Bench had considered a situation involving reopening based on search material without following the Section 153C procedure.
The Court further considered the Division Bench judgment in Shyam Sunder Khandelwal v. ACIT, which held that where material belonging or relating to a person other than the searched person is seized, the Assessing Officer is required to proceed under Section 153C after satisfaction of the prescribed conditions. That judgment also recognised the special nature of Sections 153A to 153D in relation to regular assessment or reassessment provisions.
The Karnataka High Court ultimately held that, once material pursuant to a search is relied upon, the Assessing Officer is required to follow the procedure contemplated under Sections 153A, 153B and 153C, and it is impermissible to continue the regular assessment on that basis. Substantial question of law No. 2 was therefore answered in favour of the assessee and against the Revenue.
Accordingly, the Revenue’s appeal was dismissed as devoid of merit.
Cases Discussed
- Tata Elxsi Ltd. v. ACIT, ACIT (2015) 127 DRT 327 (Kar) — considered in relation to the Tribunal’s decision on the assessee’s claim for deduction under Section 10B; the High Court found that the Revenue had not demonstrated any error in the Tribunal following that coordinate Bench judgment.
- Dinakar Suvarna v. DCIT, ITA No.16/2015, judgment dated 08.07.2022 — considered for the position concerning failure to initiate proceedings under Section 153C in a case involving material arising from a search.
- Shyam Sunder Khandelwal v. ACIT, (2024) 161 taxmanncom 255 (Rajasthan) — considered for the requirement of proceeding under Section 153C where seized material belonging or relating to a person other than the searched person is relied upon.
FULL TEXT OF THE JUDGMENT/ORDER OF KARNATAKA HIGH COURT
The present appeal is filed by the Revenue under Section 260A of the Income Tax Act, 19611 challenging the order dated 28.6.2019 passed in ITA No.204/Bang/2014 by the Income Tax Appellate Tribunal, ‘C’ Bench, Bengaluru2, for the Assessment Year3 2008-2009.
2. The relevant facts leading to the present appeal are that the assessee belongs to the Lad group of companies and is engaged in the business of extraction and trading of iron ore. A search was conducted under Section 132 of the IT Act in the Lad group on 26.10.2007. The assessee filed its return of income for AY 2008-09 declaring a total income of `55,96,22,255/-. A notice under Section 143(2) as also Section 142(1) of the IT Act was issued, consequent to which vide Assessment Order4 dated 31.12.2009 the Assessing Officer4 assessed the taxable income as `115,89,54,044/- and the balance tax payable at `44,31,32,567/-.
3. It is further forthcoming that a survey under Section 133A of the IT Act was conducted on 25.3.2008 and search under Section 132 of the IT Act was conducted on 1.4.2008 in respect of one Sri Manoj Kumar Jain5, wherein the Revenue alleges to have recovered various documents with regard to the transactions of the said MKJ with the assessee, which were impounded.
4. Vide order dated 31.12.2009, the AO also dealt with the issues pertaining to the alleged unaccounted transactions of the assessee with the said MKJ. It referred to various documents that were recovered in the search conducted as well as the statements of MKJ. After considering the same, the AO recorded a finding that MKJ carried out transactions on behalf of Lad group and made substantial cash payments to Anil Lad and his group concerns. The AO, after considering the response of the assessee has, made an addition of `28.00 crores to the AY 2008-09 of the assessee, which was the subject matter of the order dated 31.12.2009.
5. Being aggrieved by the said order dated 31.12.2009, the assessee preferred an appeal before Commissioner of Income Tax (Appeals), Mysuru6. The Commissioner, vide order dated 17.10.2013, partly allowed the said appeal. Challenging the said order dated 17.10.2013 passed by the Commissioner, both the assessee as well as the Revenue preferred appeals before the Tribunal. The Tribunal, by its order dated 28.6.2019 dismissed the appeal of the Revenue and partly allowed the appeal of the assessee. Being aggrieved, the present appeal is filed by the Revenue.
6. This Court, vide order dated 30.9.2020 admitted the above appeal and framed the following substantial question of law:
1. “Whether on the facts and circumstances of the case, it is submitted that the Tribunal erred in holding that assessee-company is entitled for deduction under section 10B of the Act without appreciating that the assessee-company has not exported Article to satisfy the conditions set out in section 10B of the Act?
2. Whether on the facts and in the circumstances of the case, the Tribunal is right in law in holding that the assessing authority cannot take cognizance of the seized material in the proceedings under section 143(3) of the Act without invoking provisions of Section 153C of the Act by ignoring that there is no bar section 143(3) nor under section 153C or under any other provisions of the Act to take cognizance of seized material in regular assessment?”
7. It is the contention of learned counsel Sri Y.H.Raviraj appearing along with Sri Sushal Tiwari, learned counsel for the Revenue that the Tribunal erred in holding that the Revenue ought to have initiated proceedings as contemplated under Section 153C of the IT Act without noticing that there was no bar for the Revenue to continue the proceedings under Section 143(3) of the IT Act even after taking into consideration the materials that were found during the search conducted in the premises of MKJ. Hence, it is contended that the orders of the Tribunal and Commissioner being erroneous, are liable to be set aside.
8. Per contra, Sri A.Shankar, learned Senior Counsel appearing along with learned counsel Sri M.Lava for the assessee submits that the moment the articles recovered from the search of another person are taken into consideration by the AO, he also ought to have assumed jurisdiction under Section 153C of the IT Act and the procedure of the AO in continuing the proceedings under Section 143(3) of the IT Act is erroneous. Hence, it is submitted that the order of the Tribunal is just and proper. Hence, he seeks for dismissal of the above appeal.
9. The submissions of the learned counsel for the Revenue and the learned Senior Counsel for the assessee have been considered and the material on record has been perused.
Re. substantial question of law No.1:
10. It is forthcoming that the Tribunal while adjudicating regarding the disallowance of deduction claimed under Section 10B of the IT Act has noticed that the said aspect is covered by a coordinate Bench judgment of this Court in the case of Tata Elxsi Ltd., v. ACIT7. Having regard to the fact that the Tribunal has decided the matter in accordance with a judgment of this Court, the Revenue has not demonstrated as to how the same is erroneous. Hence, the substantial question of law No.1 is answered against the Revenue and in favour of the assessee.
Re. substantial question of law No.2:
11. It is forthcoming that the assessee has specifically raised additional grounds before the Tribunal by contending that the AO has not followed the procedure as envisaged under Section 153C of the IT Act and that the additions made in regular assessment proceedings are required to be deleted. While considering the said contentions, the Tribunal has held as follows:
“7.6.1 We have carefully considered the legal arguments/contentions put forth by both parties. The facts not in dispute are that the substantive and protective additions were made in the case on hand on the basis of material found and seized from the premises of Shri. Manoj Kumar Jain. It is also amply clear that the AO did not invoke the provisions of Section 153C of the Act on receipt of the material; but rather chose to take cognizance of these materials (i.e., seized in the case of Shri. Manoj Kumar Jain) in the course of pending assessment proceedings under section 143(3) of the Act for Assessment Year 2008-09 that were before him. It is therefore clearly established that the AO has used seized material/documents found in the course of search conducted in the case of a third party (i.e., search of Shri. Manoj Kumar Jain) for making the additions in the hands of the assessee, although, on protective and substantive basis; which was later on modified as substantive by the CIT(A).
7.6.2 The provisions of Section 153C of the Act enjoins upon the AO of the person searched; that on being satisfied that books of account seized or requisitioned belongs to or pertain to some other persons, to handover the books of account to the AO having jurisdiction over such other person. Thereafter, the second AO, on being satisfied that the books of account and documents received have a bearing on the determination of the total income of the other person, should assume jurisdiction under section 153C of the Act. After assuming jurisdiction under section 153C of the Act, the AO proceeds to carry out an assessment in terms of section 153A r.w.s. 143(3) of the Act. ……..
7.6.3 From the above, it is seen that the jurisdictional conditions and circumstances prescribed by the legislature for assumption of jurisdiction and taking action under section 153C of the Act is different when compared to a regular assessment. The jurisdiction to make an assessment under section 153C of the Act arises when satisfaction is reached that the materials found in the course of search of some other person have a bearing on the determination of the income of the assessee. Further, in the first proviso to section 153C of the Act, it is provided that the reference to the date of search in the second proviso to section 153A of the Act; dealing with abatement of pending proceedings on the date of search; shall for the purpose of the persons proceeded under section 153C of the Act be construed as the date on which the seized materials are received by the AO.
7.6.4 In the case on hand, we find that there was a search under section 132 of the Act in the case of the assessee on 26.10.2007. After the regular assessments proceedings under section 143(3) of the Act were taken up by the assessee and during the pendency thereof; the AO received material / information from the AO of Shri. Manoj Kumar Jain. As per the second proviso to section 153C of the Act, the assessment proceedings pending under section 143 of the Act in the case of the assessee before the AO would abate on the date the AO received the seized material from the AO of Shri. Manoj Kumar Jain and fresh proceedings under section 153C of the Act ought to have been initiated. However, it is seen that, upon receipt of the said information / materials, the AO did not assume jurisdiction under section 153C of the Act, but rather chose to use the said materials/information for making additions in the impugned order of assessment for Assessment Year 2008-09 concluded under section 143(3) of the Act. The AO has discussed these additions in the order of assessment under the caption “Unaccounted Transactions with Shri. Manoj Kumar Jain”. The AO noted that the assessment proceedings in the case of Shri. Manoj Kumar Jain were ‘being concluded at Central Circle-1, Belgaum’. Thereafter, he has gone on to set-out the issues in the case of Shri. Manoj Kumar Jain, relevant to the assessee in the case on hand. But no satisfaction, it appears, has been recorded that these materials have a bearing on the determination of income. Thus, the AO has not followed the procedure laid down in section 153C of the Act for taking cognizance of the material found / seized in the case of Shri. Manoj Kumar Jain and making an assessment with reference to those materials in the case on hand.
7.6.7 Taking into account the aforesaid factual and legal matrix, we are of the considered view that the AO could not have taken cognizance of the seized documents and other material found and seized in the course of search conducted in the premises / case of Shri. Manoj Kumar Jain, while framing the order of assessment under section 143(3) of the Act in the case on hand. As a matter of fact, the ongoing assessment proceedings under section 143(3) of the Act would abate on receipt of these seized materials as per the second proviso to section 153A of the Act. We are of the view that in the event the AO wanted to take cognizance of the seized materials, he ought to have invoked the provisions section 153C of the Act after recording his satisfaction based on material sent by the AO of Shri. Manoj Kumar Jain. This jurisdictional pre-condition laid down by the Legislature of recording of satisfaction for taking action under section 153C of the Act cannot be side-stepped / brushed aside and additions be made in proceedings pending under section 143(3) of the Act as the scope of assessments framed under sections 143(3) and 153C of the Act are quite different. In that view of the matter, we hold that the protective additions made by the AO in the impugned order of assessment for Assessment Year 2008-09 dated 31.12.2009, are contrary to the provisions of the Act and are therefore to be deleted. Similarly, the addition sustained by the CIT(A) of Rs.6,45,000/- on substantive basis as profit from trading in iron-ore based on the material found and seized in the search conducted in the case of Shri. Manoj Kumar Jain is also hereby deleted. It is accordingly ordered. Consequently, the additional grounds raised by the assessee are allowed.”
(emphasis supplied)
12. It is relevant to note that Chapter VI of the IT Act contemplates the procedure for assessment, wherein various stipulations are provided in terms of Sections 136 to 153 of the IT Act. Section 153A, 153B and 153C have been inserted by the Finance Act, 2003 w.e.f., 1.6.2003, which specifically contemplates assessments in cases of search or requisition. Section 153A of the IT Act contains various stipulations with regard to the person searched and Section 153C of the IT Act contains various stipulations with regard to such other person, other than the person searched.
13. A coordinate Bench of this Court in the case of Dinakar Suvarna v. DCIT8 while considering an appeal of the assessee, in a fact situation wherein an assessment was re-opened under Section 147 of the IT Act based on a search conducted and the procedure under Section 153 of the IT Act was not followed was under consideration. It was held as follows:
“10. Admittedly no proceedings were initiated under Section 153C of the Act. Thus, there is patent non-application of mind. It is relevant to note that the author of the diary Smt. Soumya Shetty had passed away prior to the date of search. It was argued on behalf of the Revenue that Shri. Ashok Kumar Chowta had offered tax on lump-sum income.
11. Further, the Assessing Officer has not recorded his satisfaction with regard to escapement of income. On the other hand, he has based Revenue’s case entirely on the statement of assessee. ……”
(emphasis supplied)
14. A Division Bench of the Rajasthan High Court in the case of Shyam Sunder Khandelwal v. ACT9 has held as follows:
“24. In the case where search or requisition is made, the AO under Section 153A mandatorily is required to issue notices to the assessee for filing of income tax return for the relevant preceding years. The AO assumes jurisdiction to assess/reassess ‘total income’ by passing separate order for each assessment.
25. In cases of the person other than on whom search was conducted but material belonging or relating such person was seized or requisition, the AO has to proceed under Section 153C. The two pre-requisites are that the AO dealing with the assessee on whom search was conducted or requisition made, being satisfied that seized material belongs or relates to other assessee shall hand over it to AO having jurisdiction of such assessee. Thereafter, the satisfaction of AO receiving the seized material that the material handed over has a bearing for determination of total income of such other person for the relevant preceding years. On fulfillment of twin conditions the AO shall proceed in accordance with the provisions of Section 153A.
26. Special procedure is prescribed under Section 153A to 153D for assessment in cases of search and requisition. There cannot be a quibble with the proposition that the special provision shall prevail over the general provision. To say it differently the provisions of Section 153A to 153D have prevalence over the regular provisions for assessment or reassessment under Sections 143 & 147/148.
27. Section 153A and 153C starts with non-obstante clause. The procedure for assessment/reassessment in Section 153A, 153C in cases of search or requisition has an overriding effect to the regular provisions for assessment or reassessment under Sections 139, 147, 148, 149, 151 & 153.
32. The argument that Section 153C can be invoked in case there is incriminating material for all the relevant preceding years and otherwise Section 148 is to be resorted to, is misplaced. On satisfaction of the twin condition for proceedings under Section 153C, the AO has to proceed in accordance with Section 153A. Notice is to be issued for filing of the returns for relevant preceding years and thereupon proceed to assessee or reassessee the ‘total income’. It is not obligatory on the AO to make assessment for all the years, the earlier orders passed may be accepted. But once there is incriminating material seized or requisitioned belonging or relatable to the person other than on whom search was conducted, Section 153C is to be resorted to.”
(emphasis supplied)
15. In view of the settled position of law as noticed above, once material pursuant to a search is relied upon, the AO is required to follow the procedure as contemplated under Section 153A, 153B and 153C of the IT Act and it is impermissible for the AO to continue the regular assessment.
16. In view of the aforementioned, substantial question of law No.2 is answered in favour of the assessee and against the Revenue.
17. Hence, the above appeal is dismissed as being devoid of merit.
Notes:
1 Hereinafter referred to as the ‘IT Act’
2 Hereinafter referred to as the ‘Tribunal’
3 Hereinafter referred to as ‘AY’
4 Hereinafter referred to as the ‘AO’
5 Hereinafter referred to as ‘MKJ’
6 Hereinafter referred to as the ‘Commissioner’
7ACIT (2015) 127 DRT 327 (Kar)
8 Judgment dated 8.7.2022 passed in ITA No.16/2015
9 (2024) 161 taxmanncom 255 (Rajasthan)
