Income Tax (Legal & Research)
Santosh Kumar is Graduate in Electrical Engineering from IIT Kanpur. He had more than Six years of experience in Multinational Corporation. He joined the Income Tax Department in 2013 as an IRS officer and worked at Business, Central Circle and Directorate of L&R.
This article covers some of the basic but important issues faced by the Assessing Officer in Search assessment. It also covers the judicial history of the issue and stand taken by the Department. After completion of search by the Investigation Wing, correct application of the provision of the Income Tax Act and assessment of true income of the assessee is most important task of the A.O. in Central Charge.
This article covers the challenges faced at the time of search assessment and how to proceeds in that situation. Section 153A, 153B and 153C are most important sections for Search assessment. These sections were introduced by the Finance Act 2003 w.e.f. 01.06.2003. It replaced the provisions relating to block assessment contained in Chapter XIV-B. Section 153A is relevant for the assessment of the case in which a search was initiated under section 132 or books of account, other documents or any assets are requisitioned under section 132A after the 31st day of May, 2003. Section 153B is for Time limit to be followed in completion of assessment under section 153A and 153C. Section 153C provides that where search is conducted against a person and undisclosed assets/documents indicating undisclosed income are found as belonging to “other person” other than “searched person”, then the proceedings u/s 153C would be undertaken against “other person” and all the provisions of section 153A would be applicable to such proceeding. In this article all the major issues faced by the Assessing Officer(A.O.) during the operation of section 153A, 153B and 153C are briefly described:-
Section 153A starts with notwithstanding clause as “Notwithstanding anything contained in section 139, section 147, section 148, section 149, section 151 and section 153,…” Further clause (a) of Sub-Section(1) mentioned that A.O. shall issue notices requiring him to furnish return for six A.Ys. relevant to the previous year in which search is conducted. So it is relevant which are six A.Ys. required to be covered.
For example if search was initiated on 01.05.2014 and concluded on 01.07.2014 then relevant previous year is F.Y. 2014-15(corresponding A.Y. is 2015-16) and six years for which notice u/s 153A required to be issued are A.Y. 2009-10 to A.Y. 2014-15 and notice u/s 143(2) for A.Y. 2015-16 [As per yearly manual scrutiny guidelines issued by the Board].
When the commencement and conclusion of search falls in two different financial years, which six assessment years are covered in notice under section 153A?; as per manual scrutiny guidelines in the previous year in which authorization for search and seizure was executed under section 132 or 132A of the Act, required to taken for manual scrutiny. Therefore, year in which authorization was executed relevant for selection of 7th year under manual scrutiny. So, six financial years prior to this needs to be taken for assessment under 153A of the Act. Date of conclusion of the search is relevant for calculating time limit for completion of assessment u/s 153A.
Six A.Ys. in Respect of Section 153C: The language of section 153C(1) makes it very clear that A.O. to issue notice u/s 153C of the Act for six assessment years immediately preceding the assessment year in which search is conducted. Therefore, six A.Ys. involved are the same as in the case of assessment u/s 153A of “searched person”. This further clarified from the reading of the Section 153C of the Act as introduced by the finance act 2003 w.e.f. 01.06.2003. It mentioned that the Assessing Officer of ‘other person’ shall proceed and issue notice and assess or reassess income in accordance with the provisions of section 153A.
However in some cases assessee takes plea that “date of search” in the case of 153C proceeding is date on which documents seized/impounded handed over to the Assessing Officer of “other person” and argument was accepted by the few High courts and accordingly it leads to a situation in which one or two initial A.Y. out of the six A.Ys. were concluded by the Courts as without jurisdiction. This interpretation of the assessee is not correct, as 1st proviso to the Section 153C is to be read only in the context of 2nd proviso to sub-section(1) of section 153A, which deals with abatement of pending assessment/reassessment proceedings on the date of initiation of search. The relevant proviso of section 153C reproduced below:-
153C. (1) …
[Provided that in case of such other person, the reference to the date of initiation of the search under section 132 or making of requisition under section 132A in the second proviso to [sub-section (1) of] section 153A shall be construed as reference to the date of receiving the books of account or documents or assets seized or requisitioned by the Assessing Officer having jurisdiction over such other person:]
The relevant proviso of section 153A reproduced below:-
Provided further that assessment or reassessment, if any, relating to any assessment year falling within the period of six assessment years [and for the relevant assessment year or years] referred to in this [sub-section] pending on the date of initiation of the search under section 132 or making of requisition under section 132A, as the case may be, shall abate:
Therefore, this date on which documents seized/ impounded handed over to the Assessing Officer of “other person” is relevant only in the context of identification of A.Ys., which requires to be abated.
However, in the case of RRJ Securities [IT APPEAL NOS. 164,175,176 & 177 OF 2015], in this case documents seized handed over to the A.O of ‘other person’ on 08.09.2010 and search u/s 132 was conducted on 20.10.2008; the High Court of Delhi in its order dated 30.10.2015 held that date of search in the case of ‘other person’ i.e. RRJ Securities to be taken as 08.09.2010. Therefore, A.O has no jurisdiction to make assessment for A.Y. 2003-04 and 2004-05 as it is beyond six years of which assessment to be made u/s 153C. The relevant part of para-24 of the High Court judgment reproduced below:-
24. ……….… It is contended by the Revenue that the relevant six assessment years would be the assessment years prior to the assessment year relevant to the previous year in which the search was conducted. If this interpretation as canvassed by the Revenue is accepted, it would mean that whereas in case of a person searched, assessments in relation to six previous years preceding the year in which the search takes place can be reopened but in case of any other person, who is not searched but is assets are seized from the searched person, the period for which the assessments could be reopened would be much beyond the period of six years. This is so because the date of handing over of assets/documents of a person, other than the searched person, to the AO would be subsequent to the date of the search. This, in our view, would be contrary to the scheme of Section 153C(1) of the Act, which construes the date of receipt of assets and documents by the AO of the Assessee (other than one searched) as the date of the search on the Assessee. The rationale appears to be that whereas in the case of a searched person the AO of the searched person assumes possession of seized assets/documents on search of the Assessee; the seized assets/documents belonging to a person other than a searched person come into possession of the AO of that person only after the AO of the searched person is satisfied that the assets/ documents do not belong to the searched person. Thus, the date on which the AO of the person other than the one searched assumes the possession of the seized assets would be the relevant date for applying the provisions of Section 153A of the Act. We, therefore, accept the contention that in any view of the matter, assessment for AY 2003-04 and AY 2004-05 were outside the scope of Section 153C of the Act and the AO had no jurisdiction to make an assessment of the Assessee’s income for that year.
Against this High Court order, Revenue filed SLP before Supreme Court (Diary Number-23182/2016 for A.Y. 2003-04) which was wrongly tagged with Container Corporation of India Ltd. (Diary Number- 33542/2012) which was dismissed vide order dated 24.04.2018. This issue of date of Search in the case of ‘other person’ was not considered by the Supreme court as clear from the Para-5 (reproduced below) of the above order of Supreme Court.
Points for consideration:
5) The only point for consideration before this Court is whether in the facts and circumstances of the case the Inland Container Depots (ICDs) under the control of the Respondent, during the relevant period, qualified for deduction under Section 80-IA(4) of the IT Act or not.
However, review petition in the case of RRJ Securities for A.Y. 2003-04 was not filed only due to tax effect, which was below the prescribed revised monetary limit(CBDT Circular 3/2018). Further, the Department has filed SLP in the case of Raj Buildworth Pvt. Ltd.( Diary No-21284/2019) on similar issue, which was also dismissed vide order dated 14.10.2019 but Supreme Court kept the Question of Law open. Therefore, for determination of six A.Ys. in 153C proceedings, whether the date of receiving documents to be taken as the ‘date of search’ is not settled by the Supreme court and as per above mentioned SLPs it seems that view of the Department is six A.Ys. for 153C proceedings to be taken as per date of search i.e. same A.Y. as in 153A proceedings.
There is no requirement of recording satisfaction for initiating proceedings u/s 153A. Since no search under Section 132(1) of the Act can be initiated without a satisfaction note being recorded by the Conducting Officer of such “searched person”. However in the case of assessment of “other person” u/s 153C. There is a requirement of recording satisfaction. One in the case case “searched person” in whose case proceedings u/s 153A was initiated that any undisclosed income belongs to any person, other than the person with respect to whom search was made u/s 132. Second satisfaction by the A.O. having jurisdiction over such “other person” that the books of account or documents or assets seized or requisitioned have a bearing on the determination of the total income of such “other person” for the relevant A.Ys. The satisfaction has to be recorded in writing before issuance of notice u/s 153C to such “other person”.
Supreme Court in the case of CIT vs M/s. Calcutta Knitwears [Civil Appeal No. 3958 of 2014 dated 12-3-2014] held that for the purpose of Section 158BD, a satisfaction note is sine qua non and must be prepared by the A.O. before he transmits the records to the other AO who has jurisdiction over such other person. The satisfaction note could be prepared at either of the following stages:-
a. at the time of or along with the initiation of proceedings against the searched person u/s 158BC;
b. along with the assessment proceedings u/s 158BC; and
c. immediately after the assessment proceedings are completed u/s 158BC of the searched person.[Refer para-44 of the Order]
Further, CBDT vide Circular No. 24/2015 dated 31-12-2015 has clarified that the provisions of Section 153C are substantially similar/ parimateria to the provisions of Sec 158BD and therefore, the guidelines of Apex Court shall apply in respect of assessment of income of other than searched person. This Circular further clarified that even if the AO of the searched person and the “other person” is one and the same, then he is also required to record his satisfaction as has been held by the Courts.
However for recording two separate satisfaction, Hon’ble High Court of Delhi in the case of Ganapati Fincap Services Pvt. Ltd. Vs. CIT in W.P (C) 525/2015 dated 25.05.2017 held that no separate satisfaction required to be recorded, when A.O. of the “searched person” and “other person” are the same. The relevant para-41 of the above order reproduced below:-
41 (v): There do not have to be two separate satisfaction notes prepared by the AO of the searched person even where he is also the AO of the other person. In such event, the AO need make only one satisfaction note. That satisfaction note is qua the other person. Further it is sufficient that such satisfaction note is placed in the file of the other person by the AO in his capacity as the AO of such other person.
Block Assessment: There is no concept of block assessment u/s 153A or u/s 153C of the Act. Therefore, every assessee as per name in warrant of authorization and panchanama should be treated separately and accordingly six A.Ys. & time limit for completion of assessment to be followed.
The High Court of Delhi in the case of MDLR Resorts (P.) Ltd.(WP(C)- 823 of 2013 & Othrs), its order dated 20.12.2013 held that though no panchnamas were drawn in the names of 22 petitioners, but this would not affect the validity of the search. We only record that panchnamas in the present case to this extent are defective, but the search or initiation of search cannot be disputed.
Section 143(2) notice: whether it is compulsory to issue notice u/s 143(2) of the Act to assume jurisdiction of cases in which notice u/s 153A was issued. The High Court of Delhi in the case of Ashok Chaddha [ITA NO. 271 of 2011] in its order dated 27.07.2011[NJRS Citation 2011-LL-0727-8 ] held that there is no specific notice required under s. 143(2) of the Act when the notice as required under s. 153(A)(1)(a) of the Act was already given.
7th year of Assessment to be selected as per “CBDT Guidelines for manual selection of returns for Complete Scrutiny during the financial-year” by sending notice u/s 143(2) as per the timeline provided in the Act. Therefore, it is mandatory for the A.O. issue notice as per time limit provided in the Act before completion of assessment u/s 143(3) of the Act.
The Hon’ble Supreme Court in the case of CIT Vs Laxman Das Khandelwal [CIVIL APPEAL NOS. 6261,6262 OF 2019], its order dated 13.08.2019 held that the failure to issue a notice u/s 143(2) renders the assessment order void even if the assessee has participated in the proceedings. Section 292BB does not save complete absence of notice. For Section 292BB to apply, the notice must have emanated from the department. It is only the infirmities in the manner of service of notice that the Section seeks to cure. The Section is not intended to cure complete absence of notice itself.
In the above mentioned case assessee did not filed return in time and subsequently notice u/s 142(1) was issued to file return. Assessee filed return only after reminder send by the A.O. However after the filing of return, A.O. has completed assessment without issuing notice u/s 143(2). Therefore, it is mandatory for the A.O. to issue notice u/s 143(2) before completing assessment u/s 143(3) of the search year.
As per the Section 153D of the Act, Assessing Officer below the rank of Joint Commissioner has to obtain prior approval of the Joint Commissioner before passing the assessment order u/s 153A or 153C of the Act. Approving authority can not escape from the responsibility by recording that draft Assessment order was submitted on the last day of time barring and there was not enough time left to analyze the issue of draft order on merit. In these type of recording in approval weaken the case of Revenue.
In the case of Pr. CIT(c)-II vs Smt. Shreelekha Damani [ITA 668 of 2016], the High Court of Bombay its order dated 27.11.2018 held that Additional CIT recorded that the Assessing Officers were asked to submit the draft orders for approval u/s 153D on or before 24.12.2010. However, this draft order has been submitted on 31.12.2010. Hence there is no much time left to analyze the issue of draft order on merit. Therefore, the draft order is being approved as it is submitted.
Finally High Court held that clearly this is a case in which the higher Authority had granted the approval without consideration of relevant issues. Accordingly, the Tax Appeal of the Revenue is dismissed.
High court of Gujarat in the case of Pr. CIT Vs Sunrise Finlease (P.) Ltd[ITA No. 936&937] its order dated 28.11.2017 held that approval of Joint Commissioner also require while passing assessment order u/s 143(3) r.w.s. 153A r.w.s. 263 passed in consequence of revisional proceeding u/s 263 of the Act.
In the case of Akil Gulamli Somji for A.Y. 2004-05[ITA(L) 1419 of 2012], A.O. submitted draft Assessment Order for the approval of the Joint Commissioner and he has made some changes in the draft which was subsequently incorporated by the A.O. in final order. However, after incorporating changes, neither A.O. put Assessment order for approval, nor approval was given. In this case also High Court of Bombay order dated 15.01.2013 dismissed the appeal of the Revenue and held that the approval of the Joint Commissioner was not obtained. Therefore assessment made are null and void.
Therefore, a formal approval of the Joint Commissioner has to be obtained before passing the assessment order u/s 153A or 153C r.w.s 143(3). It is good practice to mention approval reference in the body of final Assessment Order.
As per Second Proviso of Section 153A that any assessment or reassessment relating to any of the assessment years falling within the said period of six assessment years, pending on the date of initiation of the search, shall abate.
It results into converge/merge of abated assessment in proceedings under section 153A or 153C. Abatement includes those A.Y. also for which time limit for sending notice u/s 143(2) has not expired. The appeal, revision or rectification proceedings pending on the date of initiation of search under section 132 shall not abate. In case the proceeding or an assessment under section 153A is annulled, the assessment or reassessment of any of the assessment years falling within the period of six years, which had been abated, shall revive from that stage.
Time limit for completion of search assessment extend by the period which was excluded because of FT&TR reference made to foreign countries, for exchange of information u/s 90 or 90A of the Act, as per Explanation- (ix) of Section 153B of the Act. Exclusion period starts from the first reference made by the competent authority. It starts from the date on which reference was made by the JS FT&TR(not by the jurisdictional PCIT), as JS FT&TR is competent authority. Timer ends from the date on which final reply received by the jurisdictional Pr.CIT.
Benefit of time period exclusion available as per Explanation of Section 153B. This Explanation of the Section makes sure that whatever period available to the A.O. at the time of reference made, should also be available when final reply received. For example, if time barring of assessment is December 2019 and A.O. made reference on 1st October; then as on reference date ie. 1st October time period left for assessment is 92 days i.e. 1st October to 31st December. Therefore, if final reply received on 1st April 2020, then A.O. has to complete assessment within 92 days from 1st April 2020. If this period(i.e. 92 Days) is less than 60 days then A.O. get at least 60 days for completion of assessment.
The High Court of Delhi in the case of Ulike Promoters [ITA No. 1528 to 1530 & 1532 of 2010] in its order dated 24.01.2012 held that this 60 days period can be available multiple times in the same assessment proceedings. Relevant para 18 of the order is reproduced below:-
18. The proviso quoted above has an object and purpose. It stipulates that the Assessing Officer should have a minimum period of 60 days to complete the assessment, in case after exclusion of period under the Explanation, the period for completing the assessment is less than 60 days. Every time this situation occurs, the proviso comes into play and has to be applied. The proviso can come into operation on one, two or more occasions in the same assessment/reassessment proceedings. In the present case, the respondent assessee had filed a writ petition. Because of the stay order passed, the period during which the stay order was in operation in the High Court has to be excluded. Thereafter, the Assessing Officer passed an order under Section 142(2A) of the Act and the period for conducting special audit has to be excluded. The proviso to Explanation stipulates that the Assessing Officer can pass the assessment order within 60 days, if after excluding the time mentioned in the Explanation, the time for completing the assessment is less than 60 days. In terms of the said proviso, the Assessing Officer had the extended period to complete the assessment proceedings. The Assessing Officer had to complete the assessment within 60 days from the date on which the special audit report was to be submitted to him.
The controversy, whether A.O. while making assessment in search cases restrict addition only to incriminating material found during the search, leads to litigation of more than 100 cases SLP filed and pending at Supreme court. This issue yet to be settled by the Hon’ble Supreme Court and currently “APAR Industries”(Diary No 37848/2015) is lead case tagged with more than 115 cases on this issue. This issue mainly started with the Delhi High Court judgment dated 28-08-2015(ITA No. 707, 709 and 713 of 2014, A.Y. 2002-02, 2005-6 and 2006-07) in the case of “Kabul Chawla”. Revenue filed SLP against this order with Diary No. 3267 of 2016, 5952 of 2016 and 6377 of 2016 respectively. Since tax effect involved in all the three cases was below one Crore. Therefore, all these cases were withdrawn after CBDT Circular 3 of 2018. However, Supreme Court vide order dated 17.09.2018 reported these cases as dismissed.
In another case Meeta Gutgutia(ITA No. 06 TO 310 OF 2017 for A.Y. 2000-01 to 2004-05), The High Court of Delhi vide order dated 25.05.2017, held that Revenue was not justified in invoking Section 153A of the Act against the Assessee in relation to AYs 2000-01 to AYs 2003-04. However, in A.Y. 2004-05 issue involved was not on 153A. Relevant para-72 of the order is reproduced below:-
72. To conclude:
(i) Question (i) is answered in the negative i.e., in favour of the Assessee and against the Revenue. It is held that in the facts and circumstances, the Revenue was not justified in invoking Section 153A of the Act against the Assessee in relation to AYs 2000-01 to AYs 2003-04?
(ii)Question (ii) is answered in the affirmative i.e., in favour of the Assessee and against the Revenue.
It is held that with reference to AY 2004-05, the ITAT was correct in confirming the orders of the CIT (A) to the extent it deleted the additions made by the AO to the taxable income of the Assessee of franchise commission in the sum of Rs. 88 lakhs and rent payment for the sum of Rs. 13.79 lakhs?
Therefore, this order goes one step ahead of Kabul Chawla case by concluding that where there is no incriminating material, invoking of 153A is not justified. Revenue filed SLPs against this order for all four A.Ys. Supreme Court vide order dated 02.07.2018 dismissed the SLP only for A.Y. 2004-05. For other A.Ys. 2000-01 to AYs 2003-04, SLPs on the issue of 153A is still pending and tagged with APAR Industries case. Therefore, Revenue’s stand, that A.O. can make addition on all issues(not restricted to incriminating material), is still holds because the issue is not yet settled by the Supreme Court.
In the case of Books of accounts and other documents seized in consequence of Search and Seizure action u/s 132(1) or 132(1A) and are used in the Assessment order; then A.O. has to take approval of the Pr. CIT u/s 132(8) within 30 days from the date of assessment order for the retention of these documents.
A.O. has not this flexibility to retain documents, without approval of Pr. CIT till passing of assessment order, in the case of documents impounded u/s 133A(3)(ia) or u/s 131(3). In this case A.O. has to take approval of Pr. CIT for retention within 15 days from first impounding of documents.