Introduction: Prior to the concept of block assessment introduced by Finance Act, 1995, there was no special provision under the Act for making assessment or reassessment of any other person with respect to whom, books of account, documents or assets were found during search of any person. In this scenario, normal provisions of the Act for reopening of the case relating to other persons were applicable. As per Finance Act, 1995, the concept of block assessment, special provision to assess undisclosed income of any other person was legislated under Section 158BD. This block assessment was replaced by a new procedure of assessment and reassessment in search cases were introduced which is contained in Sections 153A to 153D of the Act.
This article deals with the concept of Sec.153C and its very basic requirement and its operation.
Before decoding the provision, let us travel back and find why the concept of block assessment was replaced by a new procedure and its impact.
The following table will make us understand why the new concept was introduced scrapping the block assessment
Head to Head – Sec.158 Vs Sec. 153:
|One assessment for the entire block period so that there was no requirement to re-open earlier year’s cases year wise||Assessments framed “year wise” and rate of tax including surcharge is applied as applicable for the relevant AY.|
|Regular income not covered – there used to be separate assessment for regular income||Total income of relevant AYs be assessed or reassessed.|
|Covers only undisclosed income found as a result of search.|
|AO was required to assess the undisclosed income in accordance with the provisions of 158BB.||AO is required to make a normal assessment or reassessment of total income of each of the relevant years, which would include all escaped income.|
|Period till the date of search was included||Entire period of the PY and not the broken period of year of search.|
Memorandum of objects of Finance Act, 2003 explaining the reason for abolishing the special procedure for block assessment, which is as under;
The existing provisions of the Chapter XIVB provide for a single assessment of undisclosed income of a block perid, which means the period comprising previous year relevant to six assessment years preceding the previous year in which the search was conducted and also includes the period upto the date of commencement of such search, and lay down the manner in which such income is to be computed. The main objectives for the introduction of the chapter XIVB were avoidance of disputes, early finalization of search assessments and reduction in multiplicity of proceedings. The idea was to have to a cost-effective, efficient and meaningful search assessment procedure.
However, the experience on implementation of the special procedure for search assessments (block assessment) contained in Chapter XIV-B, has shown that the new scheme has failed in its objective of early resolution of search assessments. The new procedure postulates two parallel streams of assessment, i.e., one of regular assessment and the other for block assessment during the same period, i.e., during the block period. Controversies have sprung up questioning the treatment of a particular income as ‘undisclosed’ and whether it is relatable to the material found during the course of search etc. Even where the facts are clear, litigation on procedural matters continue to persist. The new procedure has thus spawned a fresh stream of litigation.
♣ Section 153C is pari materia to Section 158BD.
Objective of the new procedure (Sec 153A/C):
The Provisions of Sections 153A/C are not only to make assessment of undisclosed income but to make assessment or reassessment of the total income including previously disclosed income as well as the undisclosed income found during the course of search.
DECODING the provision:
The following conditions are required to be fulfilled;
It is a settled law that recording of satisfaction before issuing a notice under section 153C is a pre-requisite for invoking jurisdiction, without which the entire proceedings stands vitiated. Now, the questions that arise/ comes in our mind are;
(i) Whether satisfaction should be in Writing?
In my opinion, there is no specific requirement under the section for the AO to record satisfaction in writing. But, this is significant and have severe consequences on the third person. It is not only that the AO of the searched person should be satisfied but the satisfaction should be recorded in writing so as to maintain the objectivity and such jurisdictional fact is amenable to be examined by the higher authorities in appropriate proceedings.
(ii) Time limit for recording satisfaction
There is no time limit prescribed under this section for recording of satisfaction and further for handing over the seized material belonging to the other person to his AO. In my opinion, satisfaction should be recorded by the AO before framing assessment in the case of person searched under section 153A. Once satisfaction is recorded, the process of handing over the seized material belonging to some other person is a procedural act which can be performed after finalization of assessment of the person searched.
Satisfaction should not be arrived at casual manner or merely on the basis of statement made by the person searched. It should be based upon cogent material.
(iv) Whether satisfaction is still required to be recorded in writing if the AO is common for both the person searched and other person:
Recording of satisfaction regarding seized material belonging to other person goes to the root of the matter to assume jurisdiction to make assessment of other person under section 153C. Therefore, recording of satisfaction is WARRANTED even when AO is common. Various courts and Tribunals have held that satisfaction is warranted even when the AO is common.
III. Materials belonging to more than one person:
For instance, if a search operation is being conducted in the premise of “A” wherein an agreement pertaining to “A,B,C” was unearthed, the assessment in case of “A” would be u/s.153A since he is the searched person and 153C applies to the other than searched person. A question may arise as to what is the recourse to Sec.153C. The legislature doesn’t tie the hands of the AO to open assessment u/s.147 in the case of other than searched person/s.
IV. Abatement of pending proceedings:
The proviso to 153C(1) of the Act stipulates that the date of initiation of the search proceedings in the 2nd proviso to Sec.153A(1) shall be construed as date of receiving the seized material belonging to other person. The purpose of the 2nd proviso to Sec.153A(1) is to clarify that any finalized assessment between the date of initiation of search and receiving of seized material will not be disturbed and the same shall NOT ABATE. It is only the pending cases as on the date of receiving of seized material of such other person but relating to those years which are covered u/s.153A and the year of search, shall ABATE.
V. Where two or more searches lead to incriminating materials against the same “other person”
Scenario 1: Two independent searches take place and unearths incriminating material against the same ‘OTHER PERSON’. In the instant case, the AO’s of two independent persons have to record satisfaction independently and hand over the seized material to the AO having jurisdiction. The ‘AO’ of the other person has to examine the incriminating materials and initiate proceedings against the other person u/s.153C. When the search proceedings took place in the same year, the six years period would be the same. Here, before initiating action u/s.153C as a result of second search, the proceeding u/s.153C upon first search if is completed, a fresh proceeding u/s.153C for that year shall be initiated. When the search u/s.153C on first search is pending, the initiation of 153C action as a result of second search would survive and the first one stands abated.
Scenario 2: When a person “A” is searched and another person “B” is searched, wherein incriminating material pertaining to “A” is found and seized, the AO of ‘B’ has to record satisfaction that this material pertains to ‘A’ and hand over the incriminating material to AO of the ‘A’. When proceedings against A is already initiated u/s.153A and is pending, the AO of the person “A” shall make use of the incriminating material handed over to him. Pending proceedings u/s.153A shall abate and the assessment has to be done u/s.153C r.w.s 153A.
VI. When a search lead to incriminating material belonging to one or more persons;
Let us say, if a document which was unearthed during search in the premise of “A” jointly belongs to several persons including “A”, the question that arises is – Whether on the basis of such document, action against Sec. 153C ca be taken against the other persons?
In my opinion, there are 2 views possible:
VII. Additions made in 153C:
Once provisions of Section 153C is invoked, it is not that the additions can be made only with respect to seized material belonging to him. The same principle will apply which is applicable and discussed in the context of assessment u/s.153A. Addition of undisclosed income relating to such other person based upon details/entires in the books/documents belonging to other person searched can be made, which could not otherwise form the basis for invoking provisions of section 153C with respect to other person. Interestingly, different views are taken by various courts.
In my opinion, the legislature has kept both the persons at par – one against whom the search warrant has been authorized & search has been conducted and the other person against whom no search warrant has been authorized and no search has been conducted. The purposive interpretation of section 153C is required to be adopted so that there is no unintended adverse impact upon the persons against whom no search warrant has been issued and no search has been conducted.