Search cases… Wrongly curtailing wings of revenue?

Background-:

1. Recently, Delhi High Court in the case of Kabul Chawla [1] has laid down a ratio on jurisdiction of AO in assessment of search cases.

2. The bench has duly considered apparently conflicting judgements of Bombay and Karnataka High Court along with its co-ordinate bench judgement in Anil Kumar Bhatia.

Take-away-:

3. The ratio arising out being, in the cases of completed assessments say u/s 143(3), the AO will have jurisdiction only in terms of incriminating material even though the time available for assessment u/s 147 for income escaping assessment is available.

Observations of Delhi High court in Kabul Chawla case

4. The relevant para 37 reads as follows.

Summary of the legal position

37. On a conspectus of Section 153A(1) of the Act, read with the provisos thereto, and in the light of the law explained in the aforementioned decisions, the legal position that emerges is as under:

i. Once a search takes place under Section 132 of the Act, notice under Section 153A(1) will have to be mandatorily issued to the person searched requiring him to file returns for six AYs immediately preceding the previous year relevant to the AY in which the search takes place.

ii. Assessments and reassessments pending on the date of the search shall abate. The total income for such AYs will have to be computed by the AOs as a fresh exercise.

iii. The AO will exercise normal assessment powers in respect of the six years previous to the relevant AY in which the search takes place. The AO has the power to assess and reassess the ‘total income’ of the aforementioned six years in separate assessment orders for each of the six years. In other words, there will be only one assessment order in respect of each of the six AYs “in which both the disclosed and the undisclosed income would be brought to tax”.

iv. Although Section 153 A does not say that additions should be strictly made on the basis of evidence found in the course of the search, or other post-search material or information available with the AO which can be related to the evidence found, it does not mean that the assessment “can be arbitrary or made without any relevance or nexus with the seized material. Obviously an assessment has to be made under this Section only on the basis of seized material.”

v. In absence of any incriminating material, the completed assessment can be reiterated and the abated assessment or reassessment can be made. The word ‘assess’ in Section 153A is relatable to abated proceedings (i.e. those pending on the date of search) and the word ‘reassess’ to completed assessment proceedings.

vi. Insofar as pending assessments are concerned, the jurisdiction to make the original assessment and the assessment under Section 153A merges into one. Only one assessment shall be made separately for each AY on the basis of the findings of the search and any other material existing or brought on the record of the AO.

vii. Completed assessments can be interfered with by the AO while making the assessment under Section 153A only on the basis of some incriminating material unearthed during the course of search or requisition of documents or undisclosed income or property discovered in the course of search which were not produced or not already disclosed or made known in the course of original assessment.

5. The AO will mandatorily have to do the assessment for 6 preceding assessment years i.e. 7 financial years. All other assessments will abate and the AO will have exclusively jurisdiction to do the assessment u/s 153A.

6. Consider the scenario of jurisdiction available for completed assessments.

Completed assessments can be interfered with by the AO while making the assessment under Section 153A only on the basis of some incriminating material unearthed during the course of search or requisition of documents or undisclosed income or property discovered in the course of search which were not produced or not already disclosed or made known in the course of original assessment.

Opinion of Author regarding points in favour of Revenue

7. Thus it means that, an AO will not have jurisdiction

a) u/s 147 i.e. income escaping assessment.

b) u/s 143 – scrutiny assessment.

8. In such a case, the AO is helpless in terms of issues coming to his knowledge outside the seized material.

9. In this regard, it will be appropriate to consider the submission of Mr. Ajay Vohra as per para 41 of the All Cargo [2] case

41. Mr. Ajay Vohra, learned Counsel for the intervener in the case of M/s. NIIT Ltd., in addition to what has been submitted by his predecessors referred to:

 (iv)Filed a scenario explaining the provisions of Section 153 A in the table form as under:

scenario	Assessment under section 143(3) completed
scope for sec 153A	Since regular assessment proceedings have been completed and are not pending, there would be no abatement of proceedings. AO loses jurisdiction to review the completed assessment. Accordingly, the scope of assessment under section 153A would be restricted to incriminating material found during the course of search.
remark / decisions	Interpretation canvassed by the Revenue would result in defeating the scheme of the I.T. Act and would wipe out the finality attached to the completed assessment. Proceedings under section 153A is not intended to give another innings to the assessing officer to make assessment under section 143(3).

 10. Finality does not get attached to an assessment u/s 143(3). It is always amenable to re-assessment u/s 147 or action by CIT u/s 263. The Income Tax Act, 1961, for the first time uses the word “final” in context of assessment in section e. an order of ITAT u/s 254 which is also appealable.

Orders of Appellate Tribunal.

254. (1) The Appellate Tribunal may, after giving both the parties to the appeal an opportunity of being heard, pass such orders thereon as it thinks fit

(2)…

(3)

(4)  Save as provided in section 256or section 260A, orders passed by the Appellate Tribunal on appeal shall be final.

11. A question arose in my mind that, just because a search is conducted, does AO loses its jurisdiction u/s 147 which he could have exercised within the time frame allowable?

12. A view may be taken that, section 153A is a tool in the hands of Revenue and while assuming jurisdiction, the AO will have jurisdiction u/s 147 as well in case of completed assessments.

Points in favour of Assessee

13. It will be appropriate to re-produce the analysis made in Kabul Chawla case

The decision in Canara Housing

25. The Court would also like to refer to a judgement of the Karnataka High Court dated 25th July, 2014 in ITA No.38/2014Canara Housing Development Co. v. Dy. CIT [2014] 49 taxmann.com 98. There the Assessee, which was carrying on real estate business filed its return for AY 2008-2009. His case was taken up under Section 143(3) of the Act and an order came to be passed on 31st December, 2010. Subsequently a search took place in the premises of the Assessee under Section 132 of the Act on 12th April, 2011. The judgement notes “in the course of search, incriminating material leading to undisclosed income was seized.” The notice was issued to the Assessee under Section 153A(1) of the Act to file return of income on 13th January, 2012. Even while the return was under consideration, the CIT initiated proceedings under Section 263 of the Act on the ground that the order passed on 31st December, 2010 under Section 143(3) of the Act was prejudicial to the interests of the Revenue. When the CIT negated the objections of the Assessee to the said order, the Assessee appealed to the ITAT. The ITAT negated the plea of the Assessee that by virtue of the proceedings initiated under Section 153A of the Act, the assessment for six years stood reopened and it is for the assessing authority to pass appropriate order on the basis of the return filed under Section 153A(1)(a) of the Act.

26. In the High Court the question was whether the CIT could invoke the power under Section 263 of the Act once the proceedings under Section 153A was initiated. The High Court inCanara Housing Development Co. (supra) answered the question in the negative. It referred to the decision of this Court in Anil Kumar Bhatia (supra) and came to the conclusion that once proceedings are initiated under Section 153A of the Act the legal effect was that even where an assessment order is passed, it would stand reopened. In the eye of law there was no order of assessment. It meant that the AO “shall assess or reassess the total income of six assessment years. Once the assessment is reopened, the assessing authority can take note of the income disclosed in the earlier return, any undisclosed income found during search or and also any other income which is not disclosed in the earlier return or which is not unearthed during the search, in order to find out what is the “total income” of each year and then pass the assessment order.”

27. It is important to note that Canara Housing was also a case where some material was unearthed during the search. Further, the High Court was clear that the addition to the income already disclosed would have to be based on some material unearthed during the search. This is clear from the observation in para 9 of the decision to the effect: “The AO is empowered to reopen those proceedings and reassess the total income, taking note of the undisclosed income, if any, unearthed during the search.” It was further observed that in the facts of that case if the CIT had come across any income that the AO had not taken note of while passing the earlier order, “the said material can be furnished to the assessing authority” who will take note of it while determining total income.

The decision in Continental Warehousing

35. InCIT v. Continental Warehousing Corporation (NhavaSheva) Ltd. [2015] 374 ITR 645/232 Taxman 270/58 taxmann.com 78 (Bom.) the question addressed by the Bombay High Court was whether the scope of assessment under Section 153A encompasses additions, not based on any incriminating material found during the course of search? It was held that no addition could be made in respect of the assessments that had become final in the event no incriminating material was found during search. The Bombay High Court relied on the earlier decision in Murli Agro Products Ltd.(supra) and discussed the scope and ambit of the proceedings for assessment and reassessment of total income under Section 153A (1) of the Act and the provisos thereto. One of the specific pleas taken by the Assessee was that if no incriminating material was found during the course of search in respect of an issue then no addition in respect of any issue can be made to the assessment under Sections 153A and 153C. It was observed that the assessment or reassessment under Section 153A arises only when a search has been initiated and conducted and, therefore, “such an assessment has a vital link with the initiation and conduct of the search.” The Court then reproduced and affirmed the decision of the Special Bench of the ITAT in All Cargo Global Logistics Ltd. v. Dy CIT [2012] 23 taxmann.com 103/137 ITD 287 (Mum.) (SB) and answered the question as regards the scope of the assessment of total income as under:

“53. . . . . . . . We are of the view that for answering this question, guidance will have to be sought from section 132(1). If any books of account or other documents relevant to the assessment had not been produced in the course of original assessment and found in the course of search in our humble opinion such books of account or other documents have to be taken into account while making assessment or reassessment of total income under the aforesaid provision. Similar position will obtain in a case where undisclosed income or undisclosed property has been found as a consequence of search. In other words, harmonious interpretation will produce the following results:

a. Insofar as pending assessments are concerned, the jurisdiction to make original assessment and assessment u/s 153A merge into one and only one assessment for each assessment year shall be made separately on the basis of the findings of the search and any other material existing or brought on the record of the AO, (b) in respect of non-abated assessments, the assessment will be made on the basis of books of account or other documents not produced in the course of original assessment but found in the course of search, and undisclosed income or undisclosed property discovered in the course of search”

36. Ultimately inContinental Warehousing Corporation (NhavaSheva) Ltd. (supra), the Bombay High Court answered the question framed by it as under:

a. In assessments that are abated, the AO retains the original jurisdiction as well as jurisdiction conferred on him u/s 153Afor which assessments shall be made for each of the six assessment years separately;

b. In other cases, in addition to the income that has already been assessed, the assessment u/s 153A will be made on the basis of incriminating material, which in the context of relevant provisions means – (i) books of account, other documents, found in the course of search but not produced in the course of original assessment, and (ii) undisclosed income or property discovered in the course of search.”

References

Sr	Particulars
[1]	[2015] 61 taxmann.com 412 (Delhi)CIT-Central -III v Kabul Chawla with IT APPEAL NOS. 707,709 & 713 OF 2014 dated 28 August 2015
[2]	[2012] 23 taxmann.com 103 (Mum.) (SB)  ITAT MUMBAI BENCH (SPECIAL BENCH) All Cargo Global Logistics Ltd. v. Deputy Commissioner of Income-tax, Central Circle-44 IT APPEAL NOS. 5018 TO 5022 & 5059 (MUM.) OF 2010 AND OTHERS [ASSESSMENT YEARS 2004-05 TO 2009-10] JULY 6, 2012

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