Enforceability of Section 153A/ Section 153C –An Analysis

Section 153 A of the Income-tax Act, 1961 provides for the scheme of assessment of income in case of a searched person. In terms of the said section, the Assessing Officer can frame assessment of a searched person for six assessment years immediately preceding the year of search. One of such facet is whether while framing assessment under the said section, the addition/disallowance, if any, with respect to the assessment year for which the proceedings does not abate (means there has either been assessment done earlier or the time period for making such an assessment has elapsed), should be restricted only qua the ‘incriminating’ materials found during the course of search proceedings. Till today, the majority of the judicial precedents, discussed infra, indicates that the Assessing Officer, while framing assessment under section 153A of the Act cannot make the addition/disallowance dehors any ‘incriminating’ material.

ISSUE 1- DOES AO GET UNFETTERED JURISDICTION U/S 153A

Whether the AO, get unfettered jurisdiction over the assessee for assessment of income for the period mentioned in section 153A or whether pre-conditions of sec. 153A/132 are to comply with mandatorily?

Though not specifically mentioned in the IT Act, an assessee has the right to have the finality of assessment and IT Dept cannot simply keep on doing re-assessment, litigations without sufficient checks and balances. It is true that there is No time limit prescribed for issue of notice u/s 153A because Section mentions about the issue not service of the notice. Further Notice U/s. 153A issued without search is bad in law. The natural corollary, which, therefore, follows is that all the proceedings flowing from such invalid notice, including the resultant assessment order, are bad in law and hence liable to be quashed. So AO doesn’t get unfettered jurisdiction u/s 153A.

Held in:

Jindal Stainless Ltd. v ACIT, ITA Nos. 3480 & 3481 (Del) 2006- 122 TTJ 902

-The prerequisite condition for application of section 153A is that assessment under this section can be made against a person in case of whom a search is initiated u/s 132; non-fulfilment of conditions laid down in sections 153A is a jurisdictional defect which cannot be cured.

Rajat Tradecom India Pvt. Ltd. v. DCIT, 120ITD 301Appeal No. IT (SS) A No: 182 & 183/Ind./2007 –Indore ITAT

-Before invoking the provision of section 153A it would be necessary to comply with the provisions contained u/s 132(1); the mere issue of a warrant of authorization without there being a search of the premises mentioned in the warrant of authorization would be meaningless and would not serve the purpose of section 132. therefore, the actual search shall have to be carried out necessarily before proceeding u/s 153A

Regency Mahavir Properties v. Assistant Commissioner of Income-tax, Cen Cir. 1, Thane*[2018] 89 taxmann.com 444 (Mumbai – Trib.) Section 153A of the Income-tax Act, 1961 – Search and seizure – Assessment in case of (General) – Assessment years 2007-08 and 2010-11 – Whether until and unless Assessing Officer assumes valid jurisdiction under section 153A, assessment made in consequence of notice issued under section 153A, is invalid and void ab initio – Held, yes – Whether in absence of search being conducted at place of business of assessee, no assessment can be made by issuing notice under section 153A – Held, yes [Para 7] [In favour of assessee]

ISSUE 2- DOES AO HAS A RIGHT TO ASSESS TOTAL INCOME

Whether the AO, has the right to make the assessment in terms of total income [disclosed or un disclosed] or are there any limitations?

The legality of assessment u/s 153A is to find out equilibrium among rights and duties of both i.e. of an assessee and of IT department in terms of cardinal principles of any assessment mechanism is to meet the ends of natural justice and any Authority cannot touch any matter which is sub-judice. Further one should not be allowed to review its own actions. The assessment in respect of each of the six assessment years is a separate and distinct assessment. Under section 153A of the Act, an assessment has to be made in relation to the search or requisition, namely, in relation to material disclosed during the search or requisition. If in relation to any assessment year, no incriminating material is found, no addition or disallowance can be made in relation to that assessment year in the exercise of powers under section 153A of the Act and the earlier assessment shall have to be reiterated.

Hon’ble Bombay High Court in the case of Continental Warehousing Corporation (Nhava Sheva) Ltd. (supra), wherein considering the judgment of the Special Bench of the Mumbai Tribunal in the case of All Cargo Global Logistics 137 ITD 287(SB) (Mum), considered this issue that,

i. whether there is the scope of assessment under section 153A of the Act in respect to completed assessment which is limited only to undisclosed income and undisclosed assets found during the course of the search or not? Hon’ble High Court held that on a plain reading of section 153 of the Act it becomes clear that on initiation of the proceedings under section 153A of the Act, it is only the assessment/reassessment proceedings that are pending on the date of search under section 132 of the Act stand abated and not the assessments/reassessments already final for those assessment years which are covered under section 153A of the Act. Hon’ble High Court discussed the CBDT Circular No. 8 of 2003, date 18-9-2003 in 263 ITR (st.) 61 at page 107 wherein CBDT has clarified that on initiation of proceedings under section 153A of the Act the proceedings pending in appeal, revision or rectification proceedings against a final assessment shall not abate. It is only because the final assessments do not abate the appeal, revision or rectification pending against final assessments would not abate.

ii. Therefore, Hon’ble High Court rejected the arguments of the Revenue that on initiation of proceedings under section 153A of the Act, the reassessment final for assessment years covered under section 153A of the Act stands abated. Only the pending assessments get revived under section 153A of the Act. Hon’ble High Court further held that once assessment has attained finality, then the assessing officer while passing independent assessment order under section 153A/143(3) of the Act could not disturb the assessment order which has attained finality unless the material gathered in the course of search under section 132/153A of the Act established that the finality attained in the assessment were contrary to the facts unearthed during the course of search.

Principal Commissioner of Income Tax Vs Dipak J Panchal (Gujarat High Court at Ahmedabad) Appeal Number : Tax Appeal No. 134 of 2017 Dated 20/02/2017 The questions proposed in the present Appeal is squarely covered against the revenue in light of the decision of the Division Bench of this Court in the case of Principal Commissioner of Income Tax-1 Vs. Devangi Alias Rupa rendered in Tax Appeal Nos.54/2017 to 57/2017 by which with respect to the other assessee in whose case on the basis of the very search the additions were made under Section 153A of the Income Tax Act, which came to be deleted by the learned tribunal. Considering the decision of the Delhi High Court in the case of CIT Vs. Kabul Chawla reported in [2016] 380 ITR 573 (Delhi) as well as another decision of the Division Bench of this Court in the case of Principal Commissioner of Income Tax -4 Vs. Saumya Construction Pvt. rendered in Tax Appeal No.24/2016, it is held that the Assessing Officer while framing the assessment under Section 153A of the Act for the block period may make addition considering the incriminating material found for the year under consideration only which was collected during the search. It is required to be noted that while holding so the Division Bench has considered in paragraph nos.15, 16 and 19 in the case of Saumya Construction Pvt. (Supra)

Regency Mahavir Properties v. Assistant Commissioner of Income-tax, Cen Cir. 1, Thane [2018] 89 taxmann.com 444 (Mumbai – Trib.) Section 69, read with section 153A, of the Income-tax Act, 1961 – Unexplained investment (On money) Assessment years 2007-08 and 2010-11 – Whether no addition under section 69 can be made in case of assessee on basis of documents being found from premises of the third party where neither name of assessee was mentioned nor any document found evidencing fact that assessee had paid any cash as on-money to said party – Held, yes [Paras 12 and 13] [In favour of assessee]

ISSUE-3, DOES ASSESSMENT LINKED TO INCRIMINATING MATERIAL

Whether the scope of the assessment is limited by incriminating material found during the search. Yes, Assessment under section 153A can only be made on the basis of incriminating material which in the context of relevant provisions means books of account and other documents found in the course of search but not produced in the course of original assessment and undisclosed income or property disclosed during the course of the search. The legal position relating to assessment under section 153A of the Act has been examined in great detail by the Hon’ble Delhi High Court in the case of Kabul Chawla (supra) and the following principles thereof has, after analysing a host of decisions, been succinctly laid down by the Hon’ble Court:

The Hon’ble Delhi High Court in the case of CIT v. Kabul Chawla (2016) 380 ITR 573 (Del.) has held as under:–

“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 ITA Nos. 707, 709 and 713 of 2014 of decisions, the legal position that emerges is as under:–

i. Once a search takes place under section 132 of the Act, notice under section 153 A (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 assessment year in which the search takes place.

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

iii. The assessing officer will exercise normal assessment powers in respect of the six years previous to the relevant assessment year in which the search takes place. The assessing officer 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 assessment years “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 assessing officer 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 ITA Nos. 707, 709 and 713 of 2014 of assessment have 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 153 A 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 assessment year on the basis of the findings of the search and any other material existing or brought on the record of the assessing officer.

vii. Completed assessments can be interfered with by the assessing officer while making the assessment under section 153 A 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.

ISSUE 4 – RETURN FILED U/S 153A IS THE ORIGINAL RETURN

A return filed under Section 153A takes the place of the original return under Section 139, for the purposes of all other provisions of the Act. Once the A.O. accepts the revised return filed under Section 153A, the original return under Section 139 abates and becomes non-est.

Delhi High Court in the case of Principal Commissioner of Income-tax-19 Vs Neeraj Jindal [2017] 393 ITR 1 (Delhi). Para 20 & 21 of the said case was as under:

Therefore, the position that emerges from the above-mentioned provision is that once the assessee files a revised return under Section 1 53A, for all other provisions of the Act, the revised return will be treated as the original return filed under Section 139. On similar lines, the Gujarat High Court in the case of Kirit Dahyabhai Patel v. Asstt. CIT [2015] 280 CTR 216, held that: “In view of the specific provision of s. 1 53A of the I. T. Act. the return of income filed in response to notice under s. 1 53A of the I. T. Act is to be considered as a return filed under s. 139 of the Act, as the AO has made an assessment on the said return and therefore, the return is to be considered for the purpose of penalty under s. 271 (1)(c) of the I. T. Act and the penalty is to be levied on the income assessed over and above the income returned under s. 1 53A, if any.”

Thus, it is clear that when the A.O. has accepted the revised return filed by the assessee under Section 1 53A, no occasion arises to refer to the previous return filed under Section 139 of the Act. For all purposes, including for the purpose of levying penalty under Section 271(1)(c) of the Act, the return that has to be looked at is the one filed under Section 153A ”

In the case of ACIT Vs M/s. Splendour Landbase Limited, Honble ITAT Delhi (2018) I.T.A..No.2461/DEL/2016 has held that section 153A starts with Non-obstante clause which inter alia overrides the provisions of section 139. This shows that return filed under section 153A is a separate return. Ld. AR relied upon the judgment of Jurisdictional High Court of Delhi in the case of Principal Commissioner of Income-tax-19 Vs Neeraj Jindal [2017] 393 ITR 1 (Delhi) wherein it was held that once the assessee files a revised return under Section 153A, for all other provisions of the Act, the revised return will be treated as the original return filed under Section 139. The reference to revised return u/s 153A in this decision refers to return u/s 153A. When the A.O. has accepted the return filed by the assessee under Section 153A, no occasion arises to refer to the previous return filed under Section 139 of the Act. For all purposes of the Act, the return that has to be looked at is the one filed under Section 153A. Exactly similar facts and circumstances of the case, the ITAT, Pune Bench in the case of Sanjay Nandlal Vyas Vs ITO, (ITAT Pune) – ITA No 771 to 774/PN/2010 vide its dated 23.12.2011 has adjudicated the similar issue in favour of the assessee

In the case of ACIT, Central Circle -1(3), Chennai Vs. V.N. Devadoss [2013] 32 taxman.com133 (Chennai – Trib.) Hon’ble ITAT Chennai Bench has held that the returns filed by the assessee under Section 1 53A are to be treated as returns filed under Section 139(1) by virtue of the law stated in Section 153A(1)(a). We quote from the headnotes as under:- “Whether a return filed in pursuance of a notice issued under Section 153A is as good as a return filed under section 139 and more particularly under section 139(1) – Held, yes – Whether deduction claimed under section 80- IB(1 0) in a return filed under section 1 53A can be denied on ground that claim was not made earlier in a return filed under section 139(1) – Held, no [Paras 26 to 42] [In favour of assessee]”

Hon’ble Bombay High Court in the case of CIT vs B.G Shirke Construction Technology Pvt Ltd [2017] 79 taxmen.com306 (BOM) held that:“A return filed u/s 1 53A is a return furnished u/s 139 and therefore, provisions of the Act which apply to return filed in regular course u/s 139(1), would also continue to apply in case of return filed u/s 153A.”In view of the above as the appellant’s return was filed and assessed under section 153A and this return is treated as a valid return for the said assessment under section 1 53A, it is a return under section 139(1) filed by the appellant. Accordingly, the provisions of section 80 do not apply to the appellant and the appellant is eligible for carrying forward of the business loss

ISSUE 5- RECENT DEVELOPMENTS – SECTION 153(A)

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. 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 the asset;

iii. The income escaping assessment or part thereof relates to such year or years.

Explanation 1.––For the purposes of this subsection, the expression “relevant assessment year” shall mean an assessment year preceding the assessment year relevant to the previous year in which search is conducted or requisition is made which falls beyond six assessment years but not later than ten assessment years from the end of the assessment year relevant to the previous year in which search is conducted or requisition is made.

Explanation 2.––For the purposes of the fourth proviso, “asset” shall include immovable property being land or building or both, shares and securities, loans and advances, deposits in a bank account.’

It is also proposed to consequentially amend section 153C to provide a reference to the relevant assessment year or years as referred to in section 1 53A. These amendments made effected from lst April, 2017.