Direct Tax

May 2023

SC holds that completed assessments can be interfered with only incriminating material is found, in which case AO can make assessment not just based on incriminating material but also other material u/s 153A. Also holds that resource to section 147 can be taken in absence of incriminating material ini completing assessment

Supreme Court (“SC”) in a recent case of PCIT v. Abhisar Buildwell (P.) Ltd. (149 399[1]), while upholding the decision of Del HC in the case of CIT v. Kabul Chawla[2], held that in the absence of any incriminating material, no addition can be made in respect of the unabated/completed assessments. However, in such cases, assessments can be re-opened by the AO u/s 147/148, subject to the provisions contained therein

SC further held that if any incriminating material is found during search, the AO can assess/reassess the total income u/s 153A of the Income-Tax Act, 1961 (“the Act”) in case of completed assessments, taking into consideration not just incriminating material but also other material available with the AO, including income declared in the returns.

Issue involved and Department’s contentions:

∞ The core issue involved is whether in respect of completed assessments/unabated assessments, the AO has jurisdiction to make assessment confined to incriminating material found during the course of search u/s 132 or requisition u/s 132A.

∞ Department contended that it is the total income and not the undisclosed 1 Lead matter in a bunch of 50 civil appeals 2 [2015] 380 ITR 573 (Del HC) income that requires to be assessed u/s 153A.

∞ The expression ‘undisclosed income’ which was defined under erstwhile scheme Section 158B(b) has not found a reference or mention under the new scheme.

∞ The requirement to pass orders under section 153A(1)(b) is initiation of a search/requisition u/s 132/132A and not seizure of any incriminating material.

∞ Further, in absence of any statutory mandate, any interpretation that assessment u/s 153A should be limited to the incriminating material is erroneous, as section 153A requires assessment of ‘Total Income’.

∞ Language and meaning of Section 153A is plain and unambiguous, i.e., if search is conducted, assessment of ‘total income’ for each of the six AYs has to be made, irrespective of whether they are pending or not and irrespective of whether incriminating material is found or not.

Assessees’ contentions:

The Assesses, inter alia, contended as under:

∞ The jurisdiction to issue notice u/s 153A may arise consequent to search, however, jurisdiction to assess/reassess cannot be assumed merely on the basis of ‘search’ when no incriminating material is unearthed.

∞ In a case where time limit to make assessment u/s 143(3)/147 is pending or assessment is on-going, the said assessment shall get abated and the AO can carry out assessment in respect of such abated assessment dehors any incriminating material as per second proviso to section 153A(1).

∞ However, for completed assessment, an assessment has to be made only based on incriminating material found, if any. Else, search will become a tool to enlarge the limitation period to make assessment u/s 143(3).

∞ Where time limit to initiate assessment proceedings has expired or assessment has been completed, total income as per return or as per assessment order respectively, shall be treated as ‘total income’ for the purpose of first proviso to Section 153A.

SC’s ruling:

The key takeaways from the SC decision are summarized below: 

∞ The foundation for making search assessments u/s 153A/153C can be said to be the detection of incriminating material found as a result of search.

∞ From the second proviso to section 153A(1), the intention of the legislation is that in case of search only the pending assessment/reassessment proceedings shall abate and the AO would assume the jurisdiction to assess or reassess the ‘total income’ for the entire six years period/block assessment period.

∞ In case no incriminating material is found during search, the AO cannot assess/re-assess after considering the other material. However, the completed assessments can be re-opened u/s 147/48, subject to fulfilment of the conditions mentioned therein.

∞ However, if any incriminating material is found, then, even in case of a completed assessment, the AO would have the jurisdiction to assess or reassess the ‘total income’ after considering such incriminating material and other material which would include income declared in the returns and undisclosed income.

Our Views:

  • SC has given finality to the decision of various High Courts which have ruled that completed proceedings shall be interfered only if incriminating material is found.
  • Although the SC has not left Revenue without a remedy by allowing it to initiate the reassessment proceedings u/s 147/148 subject to fulfilment of the conditions contained therein, it will be interesting to see how the same gets implemented.
  • Whether the requirement of recording the reasons for reopening, giving approval by the concerned authority and inviting the objections of Assessee is to be done away with is to be decided by the SC?
  • To seek various such clarifications, the Revenue had filed a Miscellaneous Application (MA) filed before SC. However, the SC rejected it and directed the Revenue to file an appropriate review application. Hence the said issue is far from over.

The above article is contributed by – Krupa Gandhi, Partner and Ayushi Modani, Senior Manager  

[1] Lead matter in a bunch of 50 civil appeals
[2] [2015] 380 ITR 573 (Del HC)

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