Section 153C of the Income Tax Act: Supreme Court clarifies applicability to searches before June 2015

LEGAL ISSUE: Applicability of amended Section 153C of the Income Tax Act, 1961 to searches conducted before the amendment date.
CASE TYPE: Income Tax Law
Case Name: Income Tax Officer vs. Vikram Sujitkumar Bhatia
[Judgment Date]: April 6, 2023

Date of the Judgment: April 6, 2023
Citation: 2023 INSC 316
Judges: M.R. Shah, J. and B.V. Nagarathna, J.
Can the Income Tax Department apply the amended provisions of Section 153C of the Income Tax Act, 1961, to searches conducted before the amendment came into effect? The Supreme Court of India addressed this crucial question in a batch of appeals, clarifying the scope and applicability of the amended provision. This judgment settles the dispute on whether the amended Section 153C, which broadens the scope of persons covered under search assessments, applies to searches initiated before June 1, 2015. The bench comprised Justices M.R. Shah and B.V. Nagarathna, with the majority opinion authored by Justice M.R. Shah.

Case Background

The case revolves around a search conducted on September 4, 2013, at the premises of H.N. Safal Group. During the search, authorities seized various documents and materials. Subsequently, the Assessing Officer initiated proceedings against individuals other than the searched person (the respondents) under Section 153C of the Income Tax Act, 1961, based on the seized materials. These notices were issued after June 1, 2015, when Section 153C was amended. The amendment broadened the scope of Section 153C, changing the criteria for initiating proceedings against third parties from “belongs or belong to” to “pertains or pertain to.” The respondents challenged these notices, arguing that the amended provision should not apply to searches conducted before the amendment date.

Timeline

Course of Proceedings

The respondents challenged the notices issued under Section 153C of the Income Tax Act, 1961, before the High Court of Gujarat. The High Court quashed the notices and subsequent assessment orders, holding that the amended Section 153C would not apply to searches conducted before June 1, 2015. The High Court reasoned that the amendment expanded the scope of Section 153C, affecting the substantive rights of assessees. The Revenue appealed to the Supreme Court against this decision.

Legal Framework

The core of the dispute lies in the interpretation of Section 153C of the Income Tax Act, 1961, before and after its amendment by the Finance Act, 2015.

The pre-amendment Section 153C stated:

“where the Assessing Officer is satisfied that any money, bullion, jewellery or other valuable article or thing or books of account or documents seized or requisitioned belongs or belong to a person other than the person referred to in Section 153-A, then, the books of account or documents or assets seized or requisitioned shall be handed over to the Assessing Officer having jurisdiction over such other person and that Assessing Officer shall proceed against such other person and issue such other person notice and assess or reassess income of such other person in accordance with the provisions of Section 153A.”

The amended Section 153C, effective from June 1, 2015, states:

“where the Assessing Officer is satisfied that,—(a) any money, bullion, jewellery or other valuable article or thing, seized or requisitioned, belongs to; or (b) any books of account or documents, seized or requisitioned, pertains or pertain to, or any information contained therein, relates to, a person other than the person referred to in Section 153-A, then, the books of account or documents or assets, seized or requisitioned shall be handed over to the Assessing Officer having jurisdiction over such other person and that Assessing Officer shall proceed against each such other person and issue notice and assess or reassess the income of the other person in accordance with the provisions of Section 153A, if, that Assessing Officer is satisfied 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 six assessment years immediately preceding the assessment year relevant to the previous year in which search is conducted or requisition is made and for the relevant assessment year or years referred to in sub-section (1) of Section 153-A.”

The key change is the substitution of “belongs or belong to” with “pertains or pertain to” for books of account and documents, broadening the scope of the provision. The first proviso to Section 153C, inserted by the Finance Act, 2005, with retrospective effect from June 1, 2003, states that the reference to the date of search under Section 132 in Section 153A shall be construed as a reference to the date of receiving the seized materials by the Assessing Officer of the other person.

Arguments

Revenue’s Arguments

• The amendment to Section 153C was a result of the Delhi High Court’s interpretation in Pepsico India Holdings Private Limited Vs. Assistant Commissioner of Income Tax, which narrowly defined “belongs to,” thus hindering the department’s ability to proceed against third parties with incriminating material.
• The phrase “pertains or pertain to” has a wider scope than “belongs or belong to,” and the amendment aimed to include cases where incriminating documents related to a third party are found during a search.
• The amendment to Section 153C was by way of “substitution,” which means the amended provision relates back to the date of the parent act, as per Shamrao V. Parulekar Vs. District Magistrate.
• The legislative intent behind the amendment was to suppress the mischief of tax evasion by third parties, and the interpretation should advance this object, as per Zile Singh Vs. State of Haryana and Girdhari Lal & Sons Vs. Balbir Nath Mathur.
• Section 153C is a machinery provision, and the court should interpret it to give effect to its manifest purpose, as per Commissioner of Income Tax – III Vs. Calcutta Knitwears, Ludhiana.
• The power to legislate includes the power to legislate retrospectively, and the legislature intended to expand the scope of the statute.
• The respondents do not have a vested right, and the amendment does not affect any substantive rights.

Assessees’ Arguments

• The amendment to Section 153C expands the scope of third parties covered by the search, including a new set of assessees, thus affecting substantive rights.
• A machinery provision that affects substantive rights cannot be held to be retrospective, as per Controller of Estate Duty Vs. M.A. Merchant.
• Reopening an assessment is a question of power, not procedure, as per State of Tamil Nadu Vs. Star Tobacco Co.
• The amendment has added a new class of assessees and not merely changed the procedure for existing assessees.
• Before June 1, 2015, the Assessing Officer could only record satisfaction if the seized material belonged to the other person. In this case, the hard disk did not belong to the respondents, so the jurisdiction under Section 153C did not exist.
• The amended Section 153C deals with both procedural and substantive rights, and therefore, the prospective rule of construction should apply, as per Zile Singh (supra).
• The date of search is the relevant date for applying the amendment, as clarified by the CBDT Circular No. 2/2018 dated 15.02.2018.

Submissions Table

Issues Framed by the Supreme Court

1. Whether the amendment brought to Section 153C of the Income Tax Act, 1961, vide Finance Act, 2015, would be applicable to searches conducted under Section 132 of the Act, 1961, before 01.06.2015, i.e., the date of amendment?

Treatment of the Issue by the Court

Authorities

Cases Relied Upon by the Court

Legal Provisions Considered by the Court

• Section 153C of the Income Tax Act, 1961 (pre-amendment and amended)
• Section 132 of the Income Tax Act, 1961
• Section 153A of the Income Tax Act, 1961

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• Pepsico India Holdings Private Limited Vs. Assistant Commissioner of Income Tax: The Court acknowledged that this case led to the amendment of Section 153C due to its narrow interpretation of the term “belongs to”.
• Shamrao V. Parulekar Vs. District Magistrate: The Court relied on this case to establish that an amendment by substitution has the effect of wiping out the earlier provision.
• Zile Singh Vs. State of Haryana: The Court used this case to reinforce the principles of substitution and the presumption against retrospective operation, noting that the presumption does not apply to declaratory statutes.
• Girdhari Lal & Sons Vs. Balbir Nath Mathur: The Court cited this case to emphasize the importance of purposeful interpretation of statutes to advance the object and purpose of the enactment.
• Commissioner of Income Tax – III Vs. Calcutta Knitwears, Ludhiana: The Court referred to this case to highlight that machinery provisions should be interpreted to give effect to the charging provisions.
• Commissioner of Income Tax Vs. Hindustan Bulk Carriers: The Court used this case to reiterate that a statute must be read as a whole and that one provision should not defeat the object of another.
• Controller of Estate Duty Vs. M.A. Merchant: The Court distinguished this case, stating that it was about vested rights and not applicable to the present case.
• State of Tamil Nadu Vs. Star Tobacco Co.: The Court distinguished this case, stating that it was about reopening of assessment and not applicable to the present case.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the legislative intent behind the amendment to Section 153C, which was to broaden the scope of the provision to include third parties with related documents. The Court emphasized that the amendment was by way of substitution, and therefore, it relates back to the date of the parent act. The Court also considered that Section 153C is a machinery provision and should be interpreted to give effect to its manifest purpose, which is to assess the income of persons other than the searched person. The Court rejected the argument that the amendment affected substantive rights, stating that the unamended provision also pertained to the assessment of income of other persons. The Court also relied on the proviso to Section 153C, which creates a deeming fiction wherein any reference made to the date of initiation of search is deemed to be a reference made to the date when the Assessing Officer of the non-searched person receives the books of account or documents or assets seized etc.

Logical Reasoning

The court rejected the argument that the amended Section 153C should not apply to searches conducted before the amendment date. The court reasoned that the amendment was by way of substitution, and therefore, it relates back to the date of the parent act. The court also relied on the proviso to Section 153C, which creates a deeming fiction wherein any reference made to the date of initiation of search is deemed to be a reference made to the date when the Assessing Officer of the non-searched person receives the books of account or documents or assets seized etc.

The Court quoted the following from the judgment:

“Thus, in the present case, even though the search under Section 132 was initiated prior to the amendment to Section 153C w.e.f. 01.06.2015, the books of account or documents or assets were seized by the Assessing Officer of the non-searched person only on 25.04.2017, which is subsequent to the amendment, therefore, when the notice under Section 153C was issued on 04.05.2018, the provision of the law existing as on that date, i.e., the amended Section 153C shall be applicable.”

“As observed hereinabove, Section 153C has been amended by way of substitution whereby the words “belongs or belong to” have been substituted by the words “pertains or pertain to”. As observed and held by this Court in the case of Shamrao V. Parulekar (supra) that amendment by substitution has the effect of wiping the earlier provision from the statute book and replacing it with the amended provision as if the unamended provision never existed.”

“Therefore, if the submission on behalf of the respective respondents – assessees that despite the fact that the incriminating materials have been found in the form of books of account or documents or assets relating to them from the premises of the searched person, still they may not be subjected to the proceedings under Section 153C solely on the ground that the search was conducted prior to the amendment is accepted, in that case, the very object and purpose of the amendment to Section 153C, which is by way of substitution of the words “belongs or belong to” to the words “pertains or pertain to” shall be frustrated.”

Key Takeaways

• The amended Section 153C of the Income Tax Act, 1961, applies to searches conducted before June 1, 2015, if the notice under Section 153C is issued after the amendment.
• The amendment to Section 153C was by way of substitution, which means the amended provision relates back to the date of the parent act.
• The term “pertains or pertain to” has a wider scope than “belongs or belong to,” allowing the Income Tax Department to proceed against third parties with related documents.
• The date of receiving the seized material by the Assessing Officer of the other person is the relevant date for applying the amended provision.

Directions

The Supreme Court allowed the appeals of the Revenue, quashing the High Court’s judgment. However, the Court granted liberty to the assessees to challenge the assessment orders before CIT (A) on any other grounds, provided the appeals are filed within four weeks.

Development of Law

The ratio decidendi of the case is that the amended Section 153C of the Income Tax Act, 1961, applies to searches conducted before June 1, 2015, if the notice under Section 153C is issued after the amendment. This changes the previous position of law by clarifying that the date of receiving the seized material by the Assessing Officer of the other person is the relevant date for applying the amended provision, rather than the date of the search itself.

Conclusion

The Supreme Court’s judgment clarifies that the amended Section 153C of the Income Tax Act, 1961, applies to searches conducted before June 1, 2015, if the notice under Section 153C is issued after the amendment. This ruling settles the dispute on the applicability of the amended provision and provides clarity for both the Income Tax Department and assessees. The Court emphasized that the amendment was by way of substitution and that Section 153C is a machinery provision to be interpreted to give effect to its manifest purpose. The judgment ensures that the legislative intent behind the amendment is upheld, preventing tax evasion by third parties.