Mr. Ajay Kumar Srivastava, IRS (IT: 1988)
Pr. Commissioner of Income Tax Central, Lucknow
ajay.k.srivastava@incometax.gov.in
Sh. Ajay Kumar Srivastava is an IRS officer of 1988 batch currently posted as Principal Commissioner of Income Tax (Central), Lucknow. He has done M.Sc (Biochemistry) and has worked in I.T Deptt at various levels dealing with assessment, administration, I&CI, Investigation, ITAT, Intl. Tax, and Central etc. He has also worked in the field of International taxation for 5 years.
Reckoning the Period of Six Assessment Years for Making Assessment under Section 153C(1) -Whether the Amendment w.e.f. 01.04.2017 IS Retroactive?
Executive Summary
Legal forums at various levels have been annulling assessment orders framed u/s 153C(1) in case of ‘other person’ (the non-searched person) for some of the assessment years out of a totalpermissible period of six assessment years on the ground that they fall beyond the relevant period if reckoned from the year of recording satisfaction/handing over of seized material, as opposed to the statutory provisions, which require the reckoning of the aforesaid period from the year of initiation of search itself,in the same manner as provided u/s 153A. The former view, as upheld by Delhi High Court for the first time in 2015 in the case of RRJ Securities, is being followed by lower forums, which is not only resulting in annulment of assessment orders and consequential revenue leakages but also bearing absurd consequences. Though a series of amendments have been brought u/s 153A & 153C by the Finance Act, 2017 w.e.f. 1.4.2017, including the amendment specifically providing for the manner of reckoning the period of six assessment years from the date of search itself u/s 153C also, yet the assessments u/s 153C(1) in pursuance of the searches initiated before 1.4.2017 are being annulled by legal forums in observance of the Delhi High Court decision (Supra). This article attempts to explore the possible arguments, which revenue may seek to put forward in defending the assessment orders in such cases from being annulled or defending the revenue’s appeals.
It is clearly provided under Section 153C(1) that the assessment can be made in respect of ‘other person’ ( non-searched person) for the relevant assessment year or years referred to in Sub-Section (1) of Section 153A’. Sub-section (1)(b) of 153A inter alia provides reckon the period of six assessment years immediately preceding the assessment year relevant to the previous year in which search is conducted. Thus, in order to make assessment in case of searched person as well as the ‘other person’ based on documents seized in the very same search, it was clear from the language of the Section that the period of relevant six assessment years for the purposes of Section 153C(1) would be in the similar manner as provided in Section 153A. Logically also, there could not be two separate yardsticks for reckoning period of six assessment years under Sections 153A(1) and 153C(1) as the provisions of Sections 153A and 153C are in the nature of mirror provisions and wherever procedure of Section 153A has to be followed under Section 153C, it was clearly provided even prior to 01.04.2017 and there was no ambiguity.
However, in absence of the specific expression ‘…six assessment years immediately preceding the assessment year relevant to the previous year in which search is conducted…’” appearing under Section 153C(1), the expression ‘…for the relevant assessment year or years referred to in Sub-section (1) of Section 153A…’ has been interpreted by Delhi HC in RRJ Securities 318 ITR 612 (Delhi) in conjunction with Firstt Proviso to Section 153C so as to conclude that the period of six assessment years in case of ‘other person’ would be reckoned from the assessment year preceding date of handing over of books/ documents/seized material/ recording satisfaction and not from the initiation of search. The High Court concluded as under:
…..In terms of proviso to Section 153C, a reference to the date of the search under the second proviso to Section 153A has to be construed as the date of handing over of assets/ documents belonging to the assessee (being the person other than the one searched) to the Assessing Officer having jurisdiction to assess the said assessee. Further proceedings, by virtue of Section 153C(1) of the Act, would have to be in accordance with Section 153A of the Act and the reference to the date of search would have to be construed as the reference to the date of recording of satisfaction. It would follow that the six assessment years for which assessments/ reassessments could be made under Section 153C would also have to be construed with reference to the date of handing over of assets/ documents to the Assessing Officer of the assessee……. It needs to be noted that substitution of date of handing over of seized material in place of date of initiation of search as mentioned in the First Proviso under Section 153C was only for a limited purpose to determine the years of abatement of assessment proceedings as provided in Second Proviso to Section 153A and not at all with reference to powers of AO to make assessment under Section 153C, which was separately provided under Section 153C(1) itself by using the phrase ‘for the relevant assessment year or years referred to in Sub-section (1) of Section 153A’. This view is further strengthened by the fact that even after to amendment brought under Section 153C(1) w.e.f. 01.04.2017 by inserting the expression “…six assessment years immediately preceding the assessment year relevant to the previous year in which search is conducted…” the First Proviso has still not been amended. This fortifies the view that First Proviso to Section 153C never dealt with the period of reckoning six assessment years for purposes of making assessment under Section 153C(1). Under Second Proviso to Section153A, only the abatement of proceedings in case of searched person was provided as on date of initiation of search without referring to which assessment years the assessment under Section 153A or Section 153C could be made due to initiation of search. The act of abatement and the act of assessment are two different functions, having different connotations and purpose and hence the two cannot be equated/ interchanged by any stretch of interpretation. The power to make assessment after initiation of search is separately provided in Section 153A(1) itself and not in Second Proviso to Section 153A. Therefore, First Proviso of Section 153C was entirely in different context and it clearly referred to Second Proviso of 153A only substituting the date of handing over in place of the date of initiation of search in case of ‘other person’ for the limited purposes of abatement only. The reliance on First Proviso of 153C for purpose of ascertaining the period of assessment under Section 153C(1) was therefore misplaced.
Under the scheme of the Act and time permitted to complete the assessment under Section 153C(1), these assessments under Section 153C are likely to be completed only after assessment under Section 153A in case of searched person is completed. Therefore, the reference point for abatement of pending proceedings in case of non-searched person at the time of issue of notice under Section 153C was accordingly required to be advanced further to the date of handing over of seized material to enable the AO make assessment under Section 153C. It was in this context that the First Proviso allowed to treat the date of handing over as deemed date of search, so that the assessment already completed in case of non-searched person in the intervening period before seized material was handed over do not get abated. This proviso has not yet been amended implying thereby that this logic still holds the ground and that date of handing over of documents as referred in First Proviso to Section 153C never had any nexus to the reckoning of the period of six assessment years which could be assessed under Section 153C(1) in case of ‘other person’.
If the period of six AYs for purposes of making assessment under Section 153C in case of ‘other person’ were to be reckoned from year of handing over of seized material and not the year of initiation of search, then it may lead to the following absurd consequences:
i. There will be always a time lag between examination of the seized material and recording of satisfaction about ‘other person’ by the AO of the searched person within the time available under the Act and handing over of the seized material. Thereby, in no case the period of 6 AYs of searched person will coincide with period of 6 AYs in case of ‘other person’, even though in both cases the trigger for assessment is the material seized from the very same search and the number of years effectively available for making assessment under Section 153C based on seized material would be lesser than what it is under Section 153A in spite of seized materials of ‘other person’ available for such mis-match period.
ii. The year of search for ‘other person’ shall also get advanced beyond the actual year of initiation of search to the year of handing over, which may be approximately 2-3 years after the actual year of search. As a result, there will be a situation where the period of six assessment years, if reckoned from handing over, would comprise of some assessment years in respect of which there can be no seized material because the period between year of search and year of actual handing over will fall beyond the actual year of search and there cannot be any chance of having any seized material for deemed year(s) post the actual year of search.
iii. Further, if the year of search is advanced to year of handing over for purposes of making assessment under Section 153C(1), then some of the assessment years which are though within six years w.r.t to actual year of search but may fall out of ambit of assessment under Section 153C w.r.t year of handing over, even though there may be seized material available pertaining to such AY(s).
In short, if the date of handing over is deemed to be from the date of initiation of search instead of the date of actual search for assessment under Section 153C(1), it would result into an anomalous situation wherein, on the one hand, in some AYs w.r.t year of handing over (‘deemed search year’) there would be no seized material, because such AYs may be beyond the year of actual search. This would thereby lead to redundancy as Section 153C can be invoked in cases of a non-searched person only when any document/ material relating to such person is found from the search initiated against any searched person. On the other hand, there may be a reverse situation in some of the assessment years, which may fall beyond 6AYs period if reckoned from subsequent date of handing over, even though some seized material pertaining to such AYs, albeit got excluded merely due to the substitution of the year of actual initiation of search with date of handing over, may actually exist. The intention of the Act could never have been to allow such AYs with available seized material pertaining to ‘other person’ to go beyond the scope for Section 153C by artificially replacing the year of search with the year of handing over. Under the holistic scheme of assessment under Sections 153A and 153C, which apply to procedure for assessments in case of search or requisition, it is the intention of the Act to place these provisions like mirror provisions for making assessment in case of searched and non-searched person, emanating out of the material seized in the same search. Hence, there cannot be two yardsticks for reckoning the relevant AYs for assessment in both sections with respect to the exact same search. The courts have invariably held that any interpretation, which is not as per express language of the Act, and as such, resulting in absurd consequences inconsistent with the intent of the statute, is to be ignored.
The appellate forums have also been relying upon the explanatory memorandum circulated vide CBDT Circular No. 2/2018 explaining the amendments brought by the Finance Act 2017 to conclude that amendment to 153C(1) was only prospective in nature w.e.f. 01.04.2017 and that prior to 01.04.2017 the period of six assessment years under Section 153C(1) are still to be reckoned from the date of handing over of documents only in case of ‘other person’.
The relevant part of the above circular is reproduced as under:
1. 80. Rationalisation of provisions of the Income Declaration Scheme 2016 and consequential amendment to Sections 153A and 153C.
2. 80. 1 The provisions of Clause (c) of the Section 197 of the Finance Act 2016 provide that where any income has accrued, arisen or been received or any asset has been acquired out of such income prior to commencement of the Income Declaration Scheme 2016 (the Scheme), and no declaration in respect of such income is made under the Scheme, then, such income shall be deemed to have accrued, arisen or received, as the case may be, in the year in which a notice under Sub-section (1) of Section 142 or Sub-section (2) of Section 143 or Section 148 or Section 153A or Section 153C of the Income-tax Act is issued by the Assessing Officer, and provisions of the said Act shall apply accordingly.
3. 80. 2 In view of the various representations received from stakeholders, Section 197 of the Finance Act 2016 has been amended so as to omit Clause (c) of the said Section.
4. 80. 3 Applicability: This amendment takes effect retrospectively from 1st June 2016.
5. 80. 4 However, in order to protect the interest of the revenue in cases where tangible evidence(s) are found during a search or seizure operation (including Section 132A cases) and the same is represented in the form of undisclosed investment in any asset, Section 153A of the Income-tax Act relating to search assessments has been amended to provide that notice under the said Section can be issued for an assessment year or years beyond the sixth assessment year already provided up to the tenth assessment year if— (i) the Assessing Officer has, in his possession, books of accounts or other documents or evidence which reveal that the income which has escaped assessment amounts to, or is likely to amount to, fifty lakh rupees or more in one year or in aggregate in the relevant four assessment years (falling beyond the sixth year); (ii) such income escaping assessment is represented in the form of asset; (iii) the income escaping assessment or part thereof relates to such year or years.
6. 80. 5 Applicability: The amended provisions of Section 153A of the Income-tax Act shall apply where search under Section 132 of the Income-tax Act is initiated or requisition under Section 132A of the Income-tax Act is made on or after the 1st day of April, 2017.
7. 80. 6 Section 153C of the Income-tax Act has also been amended to provide a reference to the relevant assessment year or years as referred to in Section 153A of the Income-tax Act.
8. 80. 7 Applicability: These amendments take effect from 1st April, 2017’
The heading of the said portion of the circular ‘Rationalization of provisions of IDS-2016 and consequential amendment to Sections 153A & 153C’ itself sets the context of the amendment under Section 153A & 153C. Further, as evident from para 80.1 to 80.4 of the circular, the consequential amendment under Section 153A was made to provide an increase in the period of assessment from a period beyond 6 years to a period of up to 10 years, subject to certain conditions, which were necessitated due to the removal of Clause (c) of Section 197 of the Finance Act 2016. This was obviously done by inserting the expression “…and for the relevant assessment year or years…” w.e.f. 01.04.2017 after the words “…six assessment years…” already existing under Section 153A prior to 01.04.2017. Simultaneously, the meaning of expression “relevant assessment year or years” was also provided for the first time under Section 153A(1) only w.e.f. 1.4.2017 as per which the expression “relevant assessment year or years” would have reference to only the additional period of 7th year to 10th year to rationalize the provisions of search assessment with provisions of IDS-2016. Thus, it is very clear that the expression “relevant assessment year or years” with certain new conditions was brought under Section 153A only with a view to tax the additional assessment years also from 7th year to 10th year w.e.f. 01.04.2017 considering the deletion of Clause (c) of Section 197 of the Finance Act 2016, without, in any way, affecting/ amending the original power to make assessment of the “six assessment years” which was already existing under Section 153A. Therefore, it is clear that the two expressions “six assessment years” and “the relevant assessment year or years” have been brought under Section 153A.
Further, a similar expression “and for the relevant assessment year or years” was inserted in the Second Proviso to 153C also w.e.f. 1.4.2017 with the intention to merely align & harmonize all the provisions of 153C with 153A in view of the holistic scheme of assessment under Section 153A and 153C. Further, no separate meaning of this expression was assigned under Section 153C, thereby implying that the meaning and implications of this expression appearing under Section 153C would remain the same as in the case of 153A. Hence, by implication, wherever the “relevant assessment year or years” appear under Section 153C, they refer to the period of 7th year to 10th year for the purposes of Section 153C in line with similar reference as provided for 153A and accordingly to this extent only applicable equally for searches initiated after 1.4.2017 as in case of 153A. Therefore, the reference in para 80.7 in CBDT circular no 2/2018 in connection with amendments becoming applicable from 1.4.2017 for purposes of 153C also can be inferred to be applicable only to the limited extent of the amendment of the expression “ the relevant assessment year or years”.
Though the expression “…six assessment years immediately preceding the assessment year relevant to the previous year in which search is conducted…” was not specifically mentioned under Section 153C(1) but this expression was appearing already in Second Proviso to Section 153C. Further, it was already provided under Section 153C(1) that the assessment can be made under Section 153C in respect of such other person ‘for the relevant asst year or years referred to in Sub-section (1) of Section 153A’. 153A(1) inter alia provided to make assessment for the period of “…six assessment years immediately preceding the assessment year relevant to the previous year in which search is conducted…”. Thus, it was clear that the period of 6 assessment years for the purposes of 153A(1) would also be the same period of 6 assessment years for the purposes of 153C(1) also and there could not be two separate yardsticks for reckoning period of 6 assessment years under Section 153A(1) and 153C(1) in order to make the assessments in case of searched person and ‘other person’ on the basis of documents seized in the exact same search. It is quite apparent that the interpretation made by legal forums, by relying upon the First Proviso under Section 153C to arrive at the relevant 6 assessment years from date of handing over when the Second Proviso under the same Section 153C as well under Section 153A is referring to reckon the period of 6 assessment years from the year of search only, was not as per the scheme of the Act. Therefore, in order to prevent the unintended and inconsistent consequences pouring over from the provisions of the Act, a curative amendment was made by the Finance Act 2017 by inserting the words “six assessment years immediately preceding the assessment year relevant to the previous year in which search is conducted…” just before the extant expression “…and for the relevant assessment year or years” under Section 153C(1) also. Furthermore, it is not the case that the above expression was brought under Section 153C for the first time only w.e.f. 1.4.2017. This expression has been existing under Section 153C even prior to 1.4.2017, as may be noted from the Second Proviso to Section 153C(1) inserted w.e.f. 1/7/2012, which provides enabling powers to the Central Government to make rules to prevent the AO from issuing notices under Section 153C for the “six assessment years immediately preceding the assessment year relevant to the previous year in which search is conducted”. It is important to note here that the Second Proviso to 153C clearly provided to reckon such period of six assessment years from the year in which the search is conducted for the purpose of enabling the central govt to make rules in this regard. Hence, the Second Proviso to 153C itself w.e.f. 01.07.2012 already provided for the manner of computing the period of 6 assessment years, i.e., from year immediately preceding the previous year in which search is conducted, which inter alia is similar to the extant provision under Section 153A also. Therefore, even if the expression “six assessment years immediately preceding the assessment year relevant to the previous year in which search is conducted…” was inserted under Section 153C(1) w.e.f. 01.04.2017 but as this very expression was already appearing in Second Proviso to same Section 153C w.e.f. 01.07.2012, the curative amendment to this extent has to be read ibid to cure the defect and align and harmonize the provisions of Section 153C(1) with Second Proviso of Section 153C and to make it consistent and in pari materia with similar provisions of Section 153A also, as evident from para 80.6 of the Circular.
Accordingly, the reference in para 80.7 of the CBDT Circular No. 2/2018 in connection with the amendment to Section 153C being effective from 01.04.2017 has to be inferred in the limited context only to the extent that it refers to the newly inserted expression “relevant assessment year or years” under Section 153C w.e.f. 01.04.2017 and cannot, in any way, be inferred to be applicable to the expression “six assessment years immediately preceding the assessment year relevant to the previous year in which search is conducted”. Otherwise, the conflict between the same expression appearing in Second Proviso to Section 153C and the main Section 153C(1) cannot be resolved for periods prior to 01.04.2017.
Further, in spite of inserting the expression“… six assessment years immediately preceding the assessment year relevant to the previous year in which search is conducted…” under Section 153C(1), no simultaneous amendment was made in First Proviso implying and reinforcing the intention of the statute that the reference to 6 assessment years in First Proviso to Section 153C from the date of handing over was only for limited purpose of abatement as provided in Second Proviso to Section 153A and not in context of reckoning the period of 6 assessment years for purpose of making assessment under Section 153C(1). Hence, it is again clear that the amendment under Section 153C(1) inserting the expression “six assessment years immediately preceding the assessment year relevant to the previous year in which search is conducted” ….
was merely clarificatory and curative, without bringing any substantive changes or creating any new conditions and as such amendment under Section 153C(1) has to be read into from the date from which the power to make assessment for 6 assessment years was originally provided under Section 153A itself.
Notwithstanding the above arguments, as para 80.5 of CBDT circular refers to the extended period of relevant assessment years from 7th year to 10th year only, the condition of the date of initiation of search after 01.04.2017 would be applicable in that context alone and not in any other context which is not covered by CBDT circular para 80.5
As already explained in earlier paras, the amendment under Section 153C(1) inserting the expression “six assessment years immediately preceding the assessment year relevant to the previous year in which search is conducted” is not only curative but also in the nature of a machinery provision without imposing any new conditions, denying any accrued rights or imposing disabilities to this extent as the powers to assess for six assessment years under Section 153C already existed prior to amendment also. As held by the Apex Court in case of CIT vs. M/s Calcutta Knitwears 362 ITR 673(SC), it is trite that while interpreting a machinery provision, the courts would interpret the provision in such a way that it would give meaning to the charging provisions and that the machinery provisions are liberally construed. Therefore, without prejudice to the earlier arguments, the amendment brought in the statute on 01.04.2017 to the machinery provision to the extent of inserting the expression “six assessment years immediately preceding the assessment year relevant to the previous year in which search is conducted” under Section 153C(1) being only clarificatory/ curative in nature, has to be given a construction so as to give the charging provision of Section 153C a purposive meaning, thereby implying that the amendment to this extent would always be applicable to all pending cases where the issue of notices under Section 153C was on or after 01.04.2017 irrespective of AY, as in the present case. If this interpretation is followed, then there shall remain no conflict between provisions of the statute and the clarification issued by CBDT in Circular No. 2/2018, at least to the proceedings commenced after 01.04.2017.
The foregoing arguments discussed in this article have remained to be considered by the Delhi High Court in case of RRJ Securities 380 ITR 612 (Delhi) in the correct perspective. Further, the amendment w.e.f. 01.04.2017 for the purposes of curing the defect together with the CBDT Circular No. 2/2018 seeking to clarify the full and proper context of the amendments were not available at the time when the decision in RRJ Securities was delivered in 2015. Hence, the decision of Delhi HC in RRJ Securities (supra) is distinguishable. In fact, the department did contest the decision by filing the SLP against the decision of HC in RRJ Securities, however, the same got dismissed due to an incorrect tagging with another case on a different question of law, and consequently, no review was filed by the department because the tax effect was below the monetary limits as prescribed by the CBDT for filling SLP as evident from the CBDT letter F. No. ADG(L&R)-II/SCC/FTS No. 200304/2015/2019-20/4638 dated 25.09.2019. Hence, the decision of the Delhi High Court in RRJ Securities has neither been ratified by SC nor has it considered all the aspects of the law as discussed in this paper and clarified by the notifications thereafter.
Therefore, there is a definite ground to contest any view which holds the date of handing over for purposes of reckoning 6 assessment years under Section 153C(1) instead of date of search as provided under the law, in respect of searches prior to 01.04.2017 also.
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Source- Taxalogue 3- April to June 2020
I am afraid that your explanation is not correct. SC has held that in a taxing statute it the wording which has to be emphasised upon. Six years are to be reckoned from the date of handing over because the third person would come to know only at the time of handing over that something ‘ belonging or ‘ pertaining ‘ ( after 2015 amendment) to him has been found. And it has been held by the high court that if the reckoning is done from the date of actual search, the scope of such six years would stand widened in case of third person. The question arises that why the AO of searched person should take years to hand over documents to AO of third person. It is entirely the lapse of the dept not to specify the time, for which benefit must accrue to the tax payer. ( in cases prior to 2017 amendment as the position is clear now). Though the case against HC order is lying in SC, but I want to emphasise that in several SC judgements , it is amply clarified that any law, which involves levying of taxes, cannot be given retrospective effect. Even a clarificatory explanation lateron cannot help the department.