Supreme Court Clarifies Assessment Scope Under Section 153A of Income Tax Act: Abhisar Buildwell P. Ltd. vs. PCIT (24 April 2023)

Date of the Judgment: 24 April 2023

Citation: 2023 INSC 417

Judges: M.R. Shah, J., Sudhanshu Dhulia, J.

Can the Income Tax Department reassess previously completed assessments based on materials not discovered during a search? The Supreme Court of India recently addressed this critical question, clarifying the extent of the Assessing Officer’s powers under Section 153A of the Income Tax Act, 1961. This judgment is crucial for understanding the limits of tax assessments following search and seizure operations. The core issue was whether the Assessing Officer (AO) can consider materials beyond those found during a search when assessing income under Section 153A, particularly for assessments already completed. The Supreme Court, in a detailed judgment, held that the AO’s jurisdiction is indeed limited to the incriminating material found during the search for completed assessments.

Case Background

This batch of appeals involves a common question of law regarding the scope of assessment under Section 153A of the Income Tax Act, 1961. The Revenue (Income Tax Department) contended that the AO is authorized to consider all available material, including that found during a search, to assess ‘total income.’ Conversely, the assessees argued that if no assessment proceeding is pending on the date of search, the AO can only consider incriminating material found during the search.

The appeals were filed by both the Revenue and various assessees, challenging orders passed by different High Courts. The Revenue appealed against decisions that restricted the AO’s assessment scope to only incriminating material found during a search. The assessees challenged orders that allowed the AO to consider all available material, even in the absence of incriminating material found during the search.

Timeline:

Legal Framework

The core of this case revolves around the interpretation of Section 153A of the Income Tax Act, 1961. This section deals with assessments in cases of search or requisition.

Key provisions include:

• Section 4, Income Tax Act, 1961: This is the charging section that imposes tax on ‘total income.’
• Section 2(45), Income Tax Act, 1961: Defines ‘total income’ as the total amount of income computed as per the Act.
• Section 5, Income Tax Act, 1961: Specifies that ‘total income’ includes all income from whatever source derived for a resident assessee.
• Section 132, Income Tax Act, 1961: Empowers tax authorities to conduct search and seizure operations.
• Section 139, Income Tax Act, 1961: Requires assessees to furnish a return of their total income.
• Section 143, Income Tax Act, 1961: Deals with assessment of total income.
• Section 147, Income Tax Act, 1961: Enables the AO to assess or reassess income that has escaped assessment.
• Section 153A, Income Tax Act, 1961: Provides for assessment in case of search or requisition. It allows the AO to assess or reassess the total income for six assessment years preceding the year of search. The second proviso states that pending assessments on the date of search shall abate.
  
  “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, 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 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: Provided that the Assessing Officer shall assess or reassess the total income in respect of each assessment year falling within such six assessment years: Provided further that assessment or reassessment, if any, relating to any assessment year falling within the period of six assessment 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.”

Arguments

Submissions by the Revenue:

• The Revenue argued that income tax is a tax on ‘total income,’ and any interpretation that excludes a portion of total income from taxation is impermissible. They contended that the AO is competent to consider all available material, including that found during the search, to assess total income.
• The Revenue submitted that Section 153A is a non-obstante provision that overrides other sections of the Act. The AO has the power to assess or reassess the ‘total income’ for six assessment years preceding the year of search.
• It was argued that the term “total income” in Section 153A(1)(b) means the entire income, not just the undisclosed income. The Revenue emphasized that the concept of ‘block period’ was abandoned, and assessments are now made for each assessment year separately.
• The Revenue contended that the second proviso to Section 153A(1), which states that pending assessments shall abate, should be read with the expression “assess or reassess the total income” in Section 153A(1)(b). They argued that once a search is initiated, all pending assessments abate and get subsumed into the assessment under Section 153A(1)(b), which is for ‘total income.’
• The Revenue argued that the omission of the term “undisclosed income” in Section 153A indicates that the assessment is not limited to just the undisclosed income found during the search.

Submissions by the Assessees:

• The assessees argued that while the jurisdiction to issue notice under Section 153A arises from a search, the jurisdiction to assess or reassess income is contingent upon unearthing incriminating material during the search.
• They submitted that assessment under Section 153A is a special procedure linked with search and requisition under Sections 132 and 132A. The object of the section is to bring to tax the undisclosed income found during the search.
• The assessees contended that in cases of completed assessments, if no incriminating material is found, the AO cannot make additions. They argued that allowing the AO to make additions despite the absence of incriminating material would render the terms “search” and “requisition” in Section 153A otiose.
• They argued that the term ‘total income’ under Section 153A, for unabated assessments, should be read in light of Sections 132 and 132A. The omission of the term “undisclosed income” does not mean that the AO can assess income de hors incriminating material.
• The assessees submitted that the intention of Section 153A was to do away with two parallel assessments. The expression “total income” should be interpreted in light of the objective of Sections 132 and 132A, and not literally as per the definition in Section 2, which would give unfettered powers to the Revenue.
• The assessees argued that the expression “total income” in Section 153A for completed assessments should mean the total income as per the assessment order or the return where no assessment was made, if the time limit to issue notice has expired.

Issues Framed by the Supreme Court:

The core issue before the Supreme Court was:

1. Whether, in respect of completed/unabated assessments, the jurisdiction of the Assessing Officer (AO) to make an assessment is confined to incriminating material found during the course of a search under Section 132 or requisition under Section 132A of the Income Tax Act, 1961.

Treatment of the Issue by the Court:

The following table demonstrates as to how the Court decided the issues

Authorities

The Supreme Court considered the following authorities:

Cases:

• Commissioner of Income Tax-III, Pune vs. Sinhgad Technical Education Society [CITATION] (Supreme Court): This case was relied upon by the assessees in support of their arguments.
• Principal Commissioner of Income Tax-4 vs. Saumya Construction [CITATION] (Gujarat High Court): This case was followed by the Supreme Court, holding that no addition can be made in respect of completed assessments in absence of any incriminating material.
• Principal Commissioner of Income Tax, Ahmedabad vs. Dipak Jashvantlal Panchal [CITATION] (Gujarat High Court): This case was cited as a supporting authority for the assessee’s position.
• Commissioner of Income Tax-II, Thane vs. Continental Warehousing Corporation (Nhava Sheva) Ltd. [CITATION] (Bombay High Court): This case was cited in support of the assessee’s position.
• Pr. Commissioner of Income Tax (Central), Bangalore and Ors. vs. M/s. Delhi International Airport Pvt. Ltd. and Ors. [CITATION] (Karnataka High Court): This case was cited in support of the assessee’s position.
• Commissioner of Income Tax (Central)-III vs. Kabul Chawla [CITATION] (Delhi High Court): This case was followed by the Supreme Court, establishing that completed assessments can be interfered with only on the basis of incriminating material found during the search.
• Principal Commissioner of Income Tax, Central -2, New Delhi vs. Meeta Gutgutia [CITATION] (Delhi High Court): This case was cited in support of the assessee’s position.
• Chintels India Ltd. vs. Deputy Commissioner of Income Tax – Circle -8, Delhi [CITATION] (Delhi High Court): This case was cited in support of the assessee’s position.
• Sri. S.M. Kamal Pasha vs. The Deputy Commissioner of Income-Tax Central Circle – 6 (3) (2) Bangalore [CITATION] (Karnataka High Court): This case was cited in support of the assessee’s position.
• Principal Commissioner of Income Tax-2 vs. Jay Infrastructure and Properties Pvt. Ltd. [CITATION] (Gujarat High Court): This case was cited in support of the assessee’s position.
• Smt. Jami Nirmala vs. Principal Commissioner of Income Tax [CITATION] (Orissa High Court): This case was cited in support of the assessee’s position.
• Smt. Smrutisudha Nayak vs. Union of India [CITATION] (Orissa High Court): This case was cited in support of the assessee’s position.
• Commissioner of Income Tax, Kolkata vs. Veerprabhu Marketing Limited [CITATION] (Calcutta High Court): This case was cited in support of the assessee’s position.
• Principal Commissioner of Income Tax-2, Kolkata vs. M/s. Salasar Stock Broking Ltd. [CITATION] (Calcutta High Court): This case was cited in support of the assessee’s position.
• Pr. Commissioner of Income Tax-Central, Jaipur vs. Smt. Daksha Jain, Sirohi [CITATION] (Rajasthan High Court): This case was cited in support of the assessee’s position.
• Dr. A.V. Sreekumar vs. The Commissioner of Income Tax, Kochi and Assistant Commissioner of Income Tax, Calicut [CITATION] (Kerala High Court): This case was cited in support of the assessee’s position.
• Pr. Commissioner Of Income Tax v. Mehndipur Balaji [CITATION] (Allahabad High Court): This case took a contrary view, which was not followed by the Supreme Court.

Legal Provisions:

• Section 4, Income Tax Act, 1961: Charging section for income tax.
• Section 2(45), Income Tax Act, 1961: Definition of ‘total income’.
• Section 5, Income Tax Act, 1961: Scope of total income.
• Section 132, Income Tax Act, 1961: Search and seizure powers.
• Section 139, Income Tax Act, 1961: Filing of income tax returns.
• Section 143, Income Tax Act, 1961: Assessment of income.
• Section 147, Income Tax Act, 1961: Reassessment of income.
• Section 153A, Income Tax Act, 1961: Assessment in case of search or requisition.
• Section 158BA, Income Tax Act, 1961: Block assessment (erstwhile provision).

Judgment

How each authority was viewed by the Court?

• Kabul Chawla [CITATION]: The Supreme Court followed the Delhi High Court’s decision, which held that completed assessments can be interfered with only on the basis of incriminating material unearthed during the search.
• Saumya Construction [CITATION]: The Supreme Court agreed with the Gujarat High Court’s view that no addition can be made in respect of completed assessments in the absence of any incriminating material.
• Mehndipur Balaji [CITATION]: The Allahabad High Court’s contrary view was not followed by the Supreme Court.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the following factors:

• Interpretation of Section 153A: The Court emphasized that Section 153A is linked to search and requisition under Sections 132 and 132A. The object is to bring to tax undisclosed income found during the search.
• Object of Search: The Court noted that the purpose of a search under Section 132 is to detect undisclosed income, and the assessment under Section 153A should be related to this purpose.
• Limitation on Reassessment: The Court highlighted that the second proviso to Section 153A only provides for the abatement of pending assessments, not completed assessments. Allowing reassessment of completed assessments without incriminating material would render the second proviso redundant.
• Avoiding Parallel Assessments: The Court reiterated that the intention behind Section 153A was to do away with the scheme of two parallel assessments. Allowing the AO to make additions in completed assessments without incriminating material would defeat this objective.
• Protection of Assessees: The Court was mindful of protecting assessees from arbitrary reassessments and roving inquiries, especially in cases where no incriminating material was found during the search.
• Saving the Power of Reassessment: The Court clarified that in the absence of incriminating material, the power to reassess under Sections 147/148 is still available to the Revenue, subject to the conditions mentioned in those sections.

Final Decision

The Supreme Court held that in respect of completed/unabated assessments, the Assessing Officer’s jurisdiction to make an assessment under Section 153A of the Income Tax Act, 1961 is confined to incriminating material found during the course of a search under Section 132 or requisition under Section 132A.

The Court clarified that in the absence of any incriminating material, no additions can be made in respect of completed assessments. The remedy for the Revenue in such cases is to initiate reassessment proceedings under Sections 147/148 of the Act, subject to the conditions mentioned in those sections.

The appeals filed by the Revenue were dismissed, and the appeals filed by the assessees were allowed.

Flowchart of the Decision

Implications

For Taxpayers:

• Protection from Arbitrary Reassessments: Taxpayers are protected from arbitrary reassessments under Section 153A in cases where no incriminating material is found during the search.
• Finality of Completed Assessments: Completed assessments cannot be reopened merely on the basis of a search, unless incriminating material is found.
• Reduced Litigation: This judgment reduces the scope for litigation by limiting the AO’s powers in cases of completed assessments.

For Tax Authorities:

• Limited Powers under Section 153A: The AO’s powers under Section 153A are limited to incriminating material found during the search for completed assessments.
• Reassessment under Sections 147/148: The Revenue can still reassess income that has escaped assessment by initiating proceedings under Sections 147/148, subject to the conditions mentioned in those sections.
• Need for Incriminating Material: Tax authorities must ensure that they have incriminating material before making additions in completed assessments under Section 153A.

Conclusion

The Supreme Court’s judgment in Abhisar Buildwell P. Ltd. vs. PCIT has clarified the scope of assessment under Section 153A of the Income Tax Act, 1961. The Court has held that for completed assessments, the Assessing Officer’s jurisdiction is limited to the incriminating material found during the search. This judgment provides much-needed clarity and protection to taxpayers, while also ensuring that the Revenue’s power to reassess income is not completely curtailed. The remedy for the Revenue in cases where no incriminating material is found is to initiate reassessment proceedings under Sections 147/148 of the Act.