The Supreme Court has held that the income tax (I-T) department cannot reopen completed assessments under the Section 153A of the I-T Act, unless “incriminating material” is unearthed during search and seizure operations. Any other material emanating from the search can’t be relied on for issuing re-assessment orders.
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The ruling, tax experts said, could give much relief to taxpayers, as it reduces the scope for arbitrary re-assessments by the taxman. A battery of current litigation is due to reassessment orders not supported by incriminating material under Section 153A, which was withdrawn in 2021, but remains applicable to past cases.
However, the court said that completed or “unabated” assessment can be reopened under Section 147 and 148 of the I-T Act, if “any other material proof” recovered by the assessing officer (AO) indicate certain income has escaped assessment. Essentially, these two Sections allow the AO to reassess returns in case any income stream other than disclosed by the taxpayer is detected by her and she holds proof of that.
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Section 153A outlines the system for assessing income in the case of a “searched person”, as per which the AO could reopen assessment of the tax return filed by such person for six assessment years immediately proceeding the year of search, provided incriminating material is discovered during the search procedure. Though this is the legal position, in an increasing number of instances, reassessment orders have been issued with addition to income, without any unearthing of incriminating material, and relying on other material emanating from search. The SC order virtually bars the tax authorities from adopting such practice.
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“…in case no incriminating material is unearthed during the search, the AO cannot assess or reassess taking into consideration the other material in respect of completed assessments or unabated assessments. Meaning thereby, in respect of completed or unabated assessments, no addition can be made by the AO in absence of any incriminating material found during the course of search under Section 132 or requisition under Section 132A of the Act, 1961,” said the ruling by Supreme Court judges MR Shah and Sudhanshu Dhulia.
The ruling came in respect to a number of appeals filed by the revenue department, which were dismissed by the apex court.
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Tax experts noted that the scheme of conducting tax assessment pursuant to a search conducted by tax authorities has been riddled with numerous controversies. Section 153A, which was introduced in 2003 and withdrawn in 2021, sought to ease the procedural hurdles. It required every taxpayer who has been subjected to a search to file a revised tax return for six proceeding years. Controversy arose as to what would be scope of assessment post such filing of returns by the taxpayers.
“The Supreme Court has now clarified that the re-assessment under the Section 153A pursuant to a search, should be restricted to income unearthed from incriminating material found during the search,” S Sriram, partner, Lakshmikumaran & Sridharan Attorneys, said, adding that the judgment would have a significant effect on the cases where the revenue authorities have proceeded on making plausible adjustment to taxable income, based on material not emanating out of the search.
“All such additions would now go, though they might legally be maintainable. The additional elbow room provided by the Supreme Court by clarifying that notices can be issued u/s 147/ 148 of the Act would be of very little help to the Revenue, as the applicability of the Section itself would not apply to searches conducted post 31st March, 2021,” he said.
Section 147 provides for reopening of assessment proceedings while Section 148 allows the AO to assess or reassess any income that has escaped assessment.
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“The moot point before the apex court was whether reassessment of completed years can be initiated by revenue in absence of any incriminating material found during a search. The Court has held that an incriminating material is a prerequisite for the Revenue to assume jurisdiction to assess or reassess the income for block assessment period in case of completed assessments,” explained Abhishek A Rastogi, founder of Rastogi Chambers, who is also arguing before writ Courts on notices issued under Section 148.
The Supreme Court has upheld previous rulings of the Delhi and Gujarat High Courts on the matter. Amit Maheshwari, tax partner, AKM Global said, “The only remedy available to the department would be to initiate the reassessment proceedings under sections 147/148 of the Act. This judgment would help several taxpayers who had been litigating on this aspect. We would see a lot of reassessments now (under Section 147/148), which were already on the rise.”
Vishwas Panijar, partner, Nangia Andersen LLP, noted that the Delhi High Court ruling of 2015 had upheld two very important principles relating to search cases. These included that assessments can not be conducted arbitrarily but should be purely based on seized material and in the absence of any incriminating material, assessment and/or reassessment of the abated proceedings can be conducted. “Reassessment by its very nature is detrimental to the taxpayer, hence a higher degree of care needs to be taken by the department while invoking the provisions,” he further noted.
