Supreme Court clarifies assessment period for third parties in search cases under Section 153C of the Income Tax Act: Commissioner of Income Tax vs. Jasjit Singh (26 September 2023)

Introduction

Date of the Judgment: 26 September 2023

Citation: 2023 INSC 882

Judges: Hon’ble Mr. Justice S. Ravindra Bhat and Hon’ble Mr. Justice Aravind Kumar.

When a search is conducted on one person, and documents belonging to another person are seized, from which date should the assessment period for the other person be calculated? The Supreme Court of India recently addressed this question, clarifying the interpretation of Section 153C of the Income Tax Act, 1961. This judgment clarifies the date from which the six-year assessment period should be calculated for third parties whose documents are seized during a search, ensuring fair treatment and preventing undue hardship. The judgment was delivered by a division bench comprising Hon’ble Mr. Justice S. Ravindra Bhat and Hon’ble Mr. Justice Aravind Kumar.

Case Background

On 19 February 2009, search and seizure operations were conducted at the premises of M/s KOUTON Group. During the scrutiny, the Assessing Officer (A.O.) found documents and materials that were believed to belong to the respondents. Consequently, the A.O. with jurisdiction over the respondents issued notices to them on different dates: 25 February 2010 for [SLP(C) No. 6644 of 2016 & SLP(C)No. 14447 of 2016], 12 March 2009 for [SLP(C)No. 23621 of 2016], and 11 August 2014 for [SLP(C) Diary No(s). 30718/2023]. The respondents argued that the period for filing returns should start from the date the materials were forwarded to their respective A.O.s. The Revenue, however, contended that the relevant date should be the date of the search and seizure operations on the main assessee, M/s KOUTON Group.

Timeline

Course of Proceedings

The Income Tax Appellate Tribunal (ITAT) upheld the assessee’s arguments, which was further upheld by the Delhi High Court. The Revenue then appealed to the Supreme Court.

Legal Framework

The case revolves around the interpretation of Section 153A and Section 153C of the Income Tax Act, 1961.

Section 153A of the Income Tax Act, 1961, outlines the procedure for assessment in cases where a search is initiated under Section 132 of the Income Tax Act, 1961. It mandates the Assessing Officer to issue notice to the person searched, requiring them to file returns for six assessment years preceding the year of the search. The second proviso to Section 153A(1) states that any assessment or reassessment pending on the date of the search shall abate.

Section 153C of the Income Tax Act, 1961, deals with situations where documents or assets seized during a search belong to a person other than the one searched. It states that the Assessing Officer having jurisdiction over such other person shall proceed against them and issue notice to assess or reassess their income, in accordance with the provisions of Section 153A of the Income Tax Act, 1961. The proviso to Section 153C(1) clarifies that for such other persons, the reference to the date of initiation of the search under Section 132 of the Income Tax Act, 1961, in the second proviso to Section 153A(1) shall be construed as a reference to the date of receiving the seized documents or assets by the Assessing Officer having jurisdiction over such other person.

The relevant portions of the sections are:

“153A. (1) Notwithstanding anything contained in section 139, section 147, section 148, section 149, section 151 and section 153, in the case of a person where a search is initiated under section 132 or books of account, other documents or any assets are requisitioned under section 132A after the 31st day of May, 2003 61[but on or before the 31st day of March, 2021], the Assessing Officer shall—
(a) issue notice to such person requiring him to furnish within such period, as may be specified in the notice, the return of income in respect of each assessment year falling within six assessment years and for the relevant assessment year or years referred to in clause (b), in the prescribed form and verified in the prescribed manner and setting forth such other particulars as may be prescribed and the provisions of this Act shall, so far as may be, apply accordingly as if such return were a return required to be furnished under section 139;
(b) assess or reassess the total income of six assessment years immediately preceding the assessment year relevant to the previous year in which such search is conducted or requisition is made and for the relevant assessment year or years:
Provided that the Assessing Officer shall assess or reassess the total income in respect of each assessment year falling within such six assessment years and for the relevant assessment year or years:
Provided further that assessment or reassessment, if any, relating to any assessment year falling within the period of six assessment years and for the relevant assessment year or years referred to in this sub-section pending on the date of initiation of the search under section 132 or making of requisition under section 132A, as the case may be, shall abate:…”

“153C.(1) 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 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 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 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 153A:
Provided that in case of such other person, the reference to the date of initiation of the search under section 132 or making of requisition under section 132A in the second proviso to sub-section (1) of section 153A shall be construed as reference to the date of receiving the books of account or documents or assets seized or requisitioned by the Assessing Officer having jurisdiction over such other person :
Provided further that the Central Government may by rules made by it and published in the Official Gazette, specify the class or classes of cases in respect of such other person, in which the Assessing Officer shall not be required to issue notice for assessing or reassessing the total income 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 as referred to in sub-section (1) of section 153A except in cases where any assessment or reassessment has abated.”

Arguments

Submissions by the Revenue:

• The Revenue argued that the date referred to in the proviso to Section 153(1) of the Income Tax Act, 1961, is related to the second proviso to Section 153A of the Income Tax Act, 1961, only concerning abatement.
• The Revenue contended that the relevant date for calculating the six-year assessment period should be the date when the search and seizure proceedings were conducted on the main assessee under Section 132 of the Income Tax Act, 1961.
• The Revenue relied on the Delhi High Court’s ruling in “SSP Aviation Ltd. vs. Deputy Commissioner of Income Tax” [(2012) 346 ITR 177] to support their argument.

Submissions by the Assessee:

• The assessee argued that the period for which they were required to file returns should commence from the date the materials were forwarded to their respective A.O.s.
• The assessee contended that the proviso to Section 153C(1) of the Income Tax Act, 1961, should be interpreted to mean that the date for calculating the six-year assessment period for third parties should be the date when the seized materials were received by their jurisdictional A.O.

The core of the dispute lies in the interpretation of the proviso to Section 153C(1) of the Income Tax Act, 1961. The Revenue argued that the proviso is limited to the question of abatement of pending assessments, while the assessee contended that it also determines the date from which the six-year period for assessment should be calculated.

Innovativeness of the argument: The assessee’s argument is innovative in that it emphasizes the practical difficulties and potential prejudice faced by third parties if the assessment period is linked to the date of search on the main assessee. This interpretation aligns with principles of fairness and prevents undue hardship on third parties who may have no connection to the search.

Issues Framed by the Supreme Court

The primary issue before the Supreme Court was:

1. What is the relevant date for determining the six-year assessment period for third parties under Section 153C of the Income Tax Act, 1961, whose documents are seized during a search on another person?

Treatment of the Issue by the Court

The following table demonstrates how the Court decided the issue:

Authorities

The court considered the following authorities:

Judgment

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

How each authority was viewed by the Court?

• The Delhi High Court ruling in SSP Aviation Ltd. vs. Deputy Commissioner of Income Tax [(2012) 346 ITR 177]* was followed by the Supreme Court. The High Court’s interpretation of Section 153C of the Income Tax Act, 1961, was upheld, stating that the date for calculating the assessment period for third parties is the date when their jurisdictional A.O. receives the seized documents.

What weighed in the mind of the Court?

The Supreme Court emphasized the potential prejudice to third parties if the assessment period was linked to the date of search on the main assessee. The Court noted that the A.O. of the search party might take time to forward the materials to the A.O. of the third party. If the date related back to the date of seizure, third parties would be unduly burdened, having to preserve records for an extended period. The Court held that such harsh consequences could not be attributed to Parliament’s intent. The court also considered the plain reading of Section 153C of the Income Tax Act, 1961, which supported the interpretation that the date of receiving the documents by the third party’s A.O. was the relevant date.

Logical Reasoning:

The Court rejected the Revenue’s argument that the proviso to Section 153C(1) of the Income Tax Act, 1961, is limited to abatement. It held that the proviso also determines the date from which the six-year assessment period is to be reckoned for third parties. The Court reasoned that without this interpretation, third parties would face undue hardship, as they would have to preserve records for an extended period, potentially up to ten years, which is not the requirement of law. The Court also considered the practical difficulties in linking the assessment period to the date of search on the main assessee, as the A.O. of the search party might take time to forward the materials to the A.O. of the third party.

The Court quoted from the judgment:

“It is quite plausible that without the kind of interpretation which SSP Aviation adopted, the A.O. seized of the materials – of the search party, under Section 132 – would take his own time to forward the papers and materials belonging to the third party, to the concerned A.O. In that event if the date would virtually “relate back” as is sought to be contended by the revenue, (to the date of the seizure), the prejudice caused to the third party, who would be drawn into proceedings as it were unwittingly (and in many cases have no concern with it at all), is dis-proportionate.”

“For instance, if the papers are in fact assigned under Section 153-C after a period of four years, the third party assessee’s prejudice is writ large as it would have to virtually preserve the records for at latest 10 years which is not the requirement in law. Such disastrous and harsh consequences cannot be attributed to Parliament.”

“On the other hand, a plain reading of Section 153-C supports the interpretation which this Court adopts.”

Key Takeaways

• The relevant date for calculating the six-year assessment period for third parties under Section 153C of the Income Tax Act, 1961, is the date when the Assessing Officer having jurisdiction over the third party receives the seized documents or assets.
• This interpretation prevents undue hardship to third parties who may have no connection to the search conducted on the main assessee.
• The proviso to Section 153C(1) of the Income Tax Act, 1961, is not limited to abatement of pending assessments but also determines the date for calculating the assessment period for third parties.

Directions

No specific directions were given by the Supreme Court.

Development of Law

The ratio decidendi of this case is that the proviso to Section 153C(1) of the Income Tax Act, 1961, determines the date for calculating the six-year assessment period for third parties, which is the date when their jurisdictional A.O. receives the seized documents. This clarifies the interpretation of Section 153C and ensures fair treatment of third parties in search cases. This judgment affirms the position taken by the Delhi High Court in SSP Aviation Ltd. vs. Deputy Commissioner of Income Tax [(2012) 346 ITR 177].

Conclusion

The Supreme Court dismissed the appeals filed by the Revenue, affirming the interpretation that the assessment period for third parties under Section 153C of the Income Tax Act, 1961, should be calculated from the date their jurisdictional A.O. receives the seized documents. This decision ensures fairness and prevents undue hardship to third parties involved in search and seizure operations.