Section 153C of the Income Tax Act: Supreme Court clarifies procedure in search cases: Commissioner of Income Tax vs. Vijaybhai N. Chandrani (2013)

Date of the Judgment: July 18, 2013
Citation: 2013 INSC 509
Judges: H.L. Dattu, J., Dipak Misra, J.
Can an assessee directly challenge a show cause notice issued under Section 153C of the Income Tax Act, 1961 in a writ petition? The Supreme Court of India addressed this procedural question in a batch of appeals. The court clarified that an assessee must first respond to the notice before approaching the High Court. This judgment emphasizes the importance of exhausting alternative remedies before invoking writ jurisdiction. The bench comprised Justices H.L. Dattu and Dipak Misra, with the judgment authored by Justice H.L. Dattu.

Case Background

The case involves multiple appeals against various assessees. In the lead case, the respondent, Vijaybhai N. Chandrani, purchased land from “Samutkarsh Co-operative Housing Society.” This society was being developed by Savvy Infrastructure Ltd. In 2008, the Income Tax Department conducted a search under Section 132 of the Income Tax Act, 1961 at the premises of the Society and Savvy Infrastructure Ltd. During this search, certain documents were seized under Section 132A of the Income Tax Act, 1961. These documents included names of individuals, including the respondent.

The Assessing Authority, upon scrutinizing the seized documents, concluded that there might be an escapement of income. Consequently, the Assessing Authority issued show cause notices under Section 153C of the Income Tax Act, 1961 to the respondent for reassessment of income for assessment years 2001-2002 to 2006-2007. The respondent, instead of replying to the notices, filed a writ petition in the High Court challenging the show cause notices.

Timeline

Course of Proceedings

The High Court of Gujarat, in the lead case, set aside the show cause notices issued by the Assessing Authority under Section 153C of the Income Tax Act, 1961. The High Court reasoned that the seized documents did not belong to the assessee. Therefore, the condition precedent for issuing a notice under Section 153C was not met. Aggrieved by this decision, the Assessing Authority appealed to the Supreme Court.

Legal Framework

The case primarily revolves around Section 153C of the Income Tax Act, 1961. This section deals with the assessment of income in cases where documents seized during a search do not belong to the person being assessed under Section 132 or 132A of the Income Tax Act, 1961. The section allows the Assessing Officer to assess or reassess the income of a person if the seized documents indicate that the person has undisclosed income. Section 132 of the Income Tax Act, 1961 deals with search and seizure, while Section 132A of the Income Tax Act, 1961 deals with requisition of books of account etc.

Section 153C of the Income Tax Act, 1961 states:

“Notwithstanding anything contained in section 139, section 147, section 148, section 149, section 151 and section 153, where the Assessing Officer is satisfied that,—
(a) any money, bullion, jewellery or other valuable article or thing, seized under section 132 or requisitioned under section 132A, belongs to; or
(b) any books of account or documents, seized under section 132 or requisitioned under section 132A, pertains or pertain to, or any information contained therein, relates to, a person other than the person referred to in section 153A, 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 under section 153A.”

Arguments

Arguments by the Appellant (Commissioner of Income Tax)

• The High Court should not have entertained the writ petition against the show cause notices.
• The assessee should have first replied to the show cause notices issued under Section 153C of the Income Tax Act, 1961.
• The assessee should have exhausted the alternative remedies available under the Income Tax Act, 1961 before approaching the High Court.

Arguments by the Respondent (Vijaybhai N. Chandrani)

• The High Court was correct in setting aside the show cause notices.
• The documents seized did not belong to the assessee.
• The condition precedent for issuing a notice under Section 153C of the Income Tax Act, 1961 was not fulfilled.

Submissions Table

Issues Framed by the Supreme Court

1. Whether the High Court should have entertained the writ petition against the show cause notices issued under Section 153C of the Income Tax Act, 1961.

Treatment of the Issue by the Court

Authorities

The Supreme Court relied on the following cases:

• Bellary Steels & Alloys Ltd. v. CCT, (2009) 17 SCC 547, Supreme Court of India: This case emphasized that the High Court should not interfere in matters where the assessee has not exhausted the statutory remedy of replying to a show cause notice.
• Indo Asahi Glass Co. Ltd. v. ITO, (2002) 10 SCC 444, Supreme Court of India: This case held that the assessee should first reply to the show cause notice and take available defenses before approaching the High Court.

Authorities Table

Judgment

The Supreme Court set aside the judgment of the High Court. The court held that the High Court should not have entertained the writ petition at the stage of issuance of show cause notices. The assessee should have first replied to the notices and availed the remedies under the Income Tax Act, 1961. The court granted the assessee 15 days to file a reply to the show cause notices. The Assessing Authority was directed to consider the reply and then direct the assessee to file the return for the relevant assessment years. The court clarified that the Assessing Authority should not be influenced by the observations made by the High Court.

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

How each authority was viewed by the Court?

The Supreme Court relied on the following cases:

• Bellary Steels & Alloys Ltd. v. CCT, (2009) 17 SCC 547*: The Court followed this case to emphasize that the High Court should not interfere in matters where the assessee has not exhausted the statutory remedy of replying to a show cause notice.
• Indo Asahi Glass Co. Ltd. v. ITO, (2002) 10 SCC 444*: The Court followed this case to reiterate that the assessee should first reply to the show cause notice and take available defenses before approaching the High Court.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the principle that alternative remedies should be exhausted before invoking writ jurisdiction. The Court emphasized that the assessee had an opportunity to present their case before the Assessing Authority by replying to the show cause notices. The Court also relied on previous judgments that upheld this principle.

Sentiment Analysis of Reasons

Fact:Law Ratio

Logical Reasoning

The Supreme Court reasoned that the High Court should not have interfered at the stage of show cause notice. The assessee had an alternative remedy of replying to the notice and presenting their case before the Assessing Authority. The court emphasized that the assessee should have exhausted these remedies before approaching the High Court.

The Court observed, “In our considered view, at the said stage of issuance of the notices under Section 153C, the assessee could have addressed his grievances and explained his stand to the Assessing Authority by filing an appropriate reply to the said notices instead of filing the Writ Petition impugning the said notices.”

The Court further stated, “It is settled law that when an alternate remedy is available to the aggrieved party, it must exhaust the same before approaching the Writ Court.”

The Court also noted, “In the present case, the assessee has invoked the Writ jurisdiction of the High Court at the first instance without first exhausting the alternate remedies provided under the Act.”

Key Takeaways

• Assessees must first respond to show cause notices issued under Section 153C of the Income Tax Act, 1961.
• Alternative remedies available under the Income Tax Act, 1961 must be exhausted before approaching the High Court.
• High Courts should generally not entertain writ petitions against show cause notices.

Directions

The Supreme Court directed the assessee to file a reply/objections to the show cause notices within 15 days. The Assessing Authority was directed to consider the reply and then direct the assessee to file the return for the relevant assessment years.

Development of Law

The ratio decidendi of this case is that an assessee must exhaust all alternative remedies available under the Income Tax Act, 1961 before approaching the High Court with a writ petition against a show cause notice. This case reinforces the principle that High Courts should not interfere with the tax assessment process at the stage of show cause notices. There is no change in the previous position of the law, but it reiterates the importance of exhausting statutory remedies.

Conclusion

The Supreme Court’s judgment in Commissioner of Income Tax vs. Vijaybhai N. Chandrani clarifies the procedure for challenging show cause notices issued under Section 153C of the Income Tax Act, 1961. The court emphasized that assessees must first respond to the notices and exhaust alternative remedies before approaching the High Court. This decision reinforces the principle of exhaustion of remedies and provides clarity on the procedural aspects of tax assessments in search cases.