Supreme Court clarifies scope of assessment under Section 153A of the Income Tax Act in search cases (24 April 2023)

Date of the Judgment: 24 April 2023
Citation: (2023) INSC 379
Judges: M.R. Shah, J. and Sudhanshu Dhulia, J.

Can tax authorities reassess income for previous years based on materials found during a search, even if those years’ assessments were already completed? The Supreme Court of India recently addressed this crucial question regarding the scope of assessment under Section 153A of the Income Tax Act, 1961, in cases involving search and seizure operations. This judgment clarifies the extent to which tax authorities can delve into past assessments following a search.

The core issue revolved around whether the Assessing Officer (AO) can consider all available material, including that found during a search, to assess ‘total income’ under Section 153A, or if their assessment is limited to the incriminating material discovered during the search. The court also examined whether completed assessments could be reopened based on search findings alone. The bench comprised Justices M.R. Shah and Sudhanshu Dhulia, with Justice M.R. Shah authoring the judgment.

Case Background

The case involves a batch of appeals filed by both the Revenue (tax department) and various assessees (taxpayers). The Revenue contended that after a search under Section 132 or requisition under Section 132A of the Income Tax Act, the Assessing Officer (AO) has the power to assess the ‘total income’ of the assessee, considering all available material, even if no incriminating material was found during the search, including for completed assessment years. Conversely, the assessees argued that the AO’s jurisdiction in such cases is limited to the incriminating material found during the search, particularly for completed assessment years.

The assessees contended that if no incriminating material is found during the search, then the assessment should be limited to the original assessment. The Revenue argued that the assessment under Section 153A of the Income Tax Act, 1961 is to assess the total income and not just the undisclosed income.

Timeline

Course of Proceedings

Various High Courts, including Delhi, Gujarat, Bombay, Karnataka, Orissa, Calcutta, Rajasthan, and Kerala, have held that no additions can be made to completed assessments without incriminating material. The Delhi High Court’s decision in Commissioner of Income Tax, Central-III v. Kabul Chawla (2015) and the Gujarat High Court’s decision in Principal Commissioner of Income Tax-4 v. Saumya Construction (2016) are key judgments supporting this view. The Allahabad High Court, however, took a contrary view in Pr. Commissioner Of Income Tax v. Mehndipur Balaji (2022).

Legal Framework

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

Section 153A(1) of the Income Tax Act, 1961 states:
“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 132-A 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 132-A, as the case may be, shall abate.”

Section 153A(2) of the Income Tax Act, 1961 states:
“(2) If any proceeding initiated or any order of assessment or reassessment made under sub-section (1) has been annulled in appeal or any other legal proceeding, then, notwithstanding anything contained in sub-section (1) or Section 153, the assessment or reassessment relating to any assessment year which has abated under the second proviso to sub-section (1), shall stand revived with effect from the date of receipt of the order of such annulment by the Commissioner:
Provided that such revival shall cease to have effect, if such order of annulment is set aside
Explanation.—For the removal of doubts, it is hereby declared that,—
(i) save as otherwise provided in this section, Section 153-B and Section 153-C, all other provisions of this Act shall apply to the assessment made under this section;
(ii) in an assessment or reassessment made in respect of an assessment year under this section, the tax shall be chargeable at the rate or rates as applicable to such assessment year.”

The court also considered the implications of Sections 132 and 132A of the Income Tax Act, 1961, which authorize search and seizure operations under specific conditions, primarily to unearth undisclosed income.

Arguments

The Revenue argued that Section 153A mandates the assessment of ‘total income’ for six assessment years preceding the search year, and the Assessing Officer (AO) is not restricted to using only the incriminating material found during the search. They contended that the term ‘total income’ as defined in Section 2(45) of the Income Tax Act, 1961, includes all income from any source, and any interpretation that excludes a portion of this income would be incorrect. The Revenue also argued 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,” implying that the AO can reassess the entire income, not just the undisclosed portion.

The assessees, on the other hand, argued that while the jurisdiction to issue a notice under Section 153A arises from a search, the jurisdiction to assess or reassess income is limited to the incriminating material found during the search, especially for completed assessments. They argued that Section 153A is a special procedure linked to search and requisition under Sections 132 and 132A, designed to bring to tax undisclosed income found during such operations. They also contended that if no incriminating material is found, the completed assessment should not be disturbed, and the AO cannot use the search as a tool to enlarge the limitation period for regular assessments. The assessees further argued that the term “total income” under Section 153A should be interpreted in light of the context of Sections 132 and 132A, meaning that it should be limited to the income related to the incriminating material found during the search.

Issues Framed by the Supreme Court

The core issue framed by the Supreme Court was:

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

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following authorities:

Judgment

The Supreme Court held that the Assessing Officer’s (AO) jurisdiction to assess or reassess income under Section 153A of the Income Tax Act, 1961, is limited to incriminating material found during the search, especially for completed assessments. The court rejected the Revenue’s argument that the AO can reassess the ‘total income’ based on all available material, even without incriminating evidence, for completed assessment years.

The court noted that Section 153A is triggered by a search under Section 132 or a requisition under Section 132A, and its main objective is to bring to tax undisclosed income discovered during such operations. The court emphasized that while the AO has the power to assess or reassess the total income for the six assessment years preceding the search year, this power is linked to the discovery of incriminating material.

The court also clarified that the second proviso to Section 153A(1), which states that pending assessments shall abate, is intended to avoid parallel assessments. However, this does not mean that completed assessments can be reopened without incriminating material. The court held that if no incriminating material is found during a search, the AO cannot reassess completed assessments under Section 153A. In such cases, the Revenue’s only recourse is to initiate reassessment proceedings under Sections 147/148 of the Income Tax Act, 1961, subject to the conditions outlined in those sections.

The court quoted the following from the judgment:

“The very purpose of search, which is a prerequisite/trigger for invoking the provisions of sections 153A/153C is detection of undisclosed income by undertaking extraordinary power of search and seizure, i.e., the income which cannot be detected in ordinary course of regular assessment.”

“Therefore, the intention of the legislation seems to be that in case of search only the pending assessment/reassessment proceedings shall abate and the AO would assume the jurisdiction to assess or reassess the ‘total income’ for the entire six years period/block assessment period. The intention does not seem to be to re-open the completed/unabated assessments, unless any incriminating material is found with respect to concerned assessment year falling within last six years preceding the search.”

“If the submission on behalf of the Revenue that in case of search even where no incriminating material is found during the course of search, even in case of unabated/completed assessment, the AO can assess or reassess the income/total income taking into consideration the other material is accepted, in that case, there will be two assessment orders, which shall not be permissible under the law.”

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the need to maintain a balance between the tax authority’s power to assess income and the taxpayer’s right to finality in completed assessments. The court emphasized that the purpose of a search under Section 132 is to uncover undisclosed income. If no such income is found, there is no justification for disturbing completed assessments.

The court also aimed to prevent the misuse of search operations as a tool to circumvent the limitation period for regular assessments. By limiting the scope of assessment under Section 153A to incriminating material, the court ensured that the search is not used as a pretext for a fishing expedition into past assessments.

The court’s reasoning also considered the legislative intent behind Section 153A, which was to replace the block assessment scheme with a more streamlined process. The court held that the term “total income” in Section 153A should be interpreted in the context of the search and requisition provisions, particularly in the case of completed assessments.

The court’s reasoning for the issue is explained in the following flowchart:

Key Takeaways

• Limited Reassessment: Completed assessments cannot be reopened under Section 153A unless incriminating material is found during a search.
• Protection for Taxpayers: Taxpayers are protected from arbitrary reassessments based on material unrelated to the search.
• Reassessment under Sections 147/148: The Revenue can still reassess completed assessments under Sections 147/148, provided the conditions of those sections are met.
• Focus on Undisclosed Income: Section 153A is primarily intended to bring to tax undisclosed income discovered during search operations.

Directions

The Supreme Court dismissed the appeals filed by the Revenue and upheld the decisions of the High Courts that had ruled in favor of the assessees. The appeals filed by the assessees in Civil Appeal Nos. 7738-7739/2021, 7736-7737/2021, 7732-7735/2021 and 7740-7743/2021 were also dismissed. The appeals filed by the assessee in Civil Appeal Nos. 15617/2017, 10267/2017, 10266/2017 & 10268/2017 were dismissed.

Development of Law

The ratio decidendi of this case is that in cases of search under Section 132 of the Income Tax Act, 1961, the assessment under Section 153A of the Income Tax Act, 1961 for completed assessments can only be done if incriminating material is found during the search. This judgment clarifies the scope of assessment under Section 153A, limiting it to incriminating material found during the search for completed assessments. This is a significant departure from the Revenue’s stance that all available material can be used for assessment under Section 153A.

Conclusion

The Supreme Court’s ruling provides much-needed clarity on the scope of assessment under Section 153A of the Income Tax Act, 1961. It establishes that for completed assessments, the Assessing Officer’s jurisdiction is limited to incriminating material found during the search. This decision protects taxpayers from arbitrary reassessments and ensures that the power of search is not misused. The judgment emphasizes that the purpose of search and assessment under Section 153A is to bring to tax undisclosed income found during search operations.