Supreme Court clarifies the validity of Section 153C Income Tax Act notices in search cases: Commissioner of Income Tax-III vs. Sinhgad Technical Education Society (29 August 2017)

Date of the Judgment: 29 August 2017

Citation: 2017 INSC 744

Judges: A.K. Sikri, J. and Ashok Bhushan, J.

Can the Income Tax Department initiate proceedings against a third party based on documents seized during a search, if those documents don’t directly relate to the assessment years under consideration? The Supreme Court of India tackled this question in a case involving an educational society, focusing on the interpretation of Section 153C of the Income Tax Act, 1961. This judgment clarifies the conditions under which such proceedings are valid, emphasizing the need for a direct link between seized materials and the relevant assessment years.

The Supreme Court bench comprised of Justice A.K. Sikri and Justice Ashok Bhushan. The judgment was authored by Justice A.K. Sikri.

Case Background

The case originated from a search and seizure operation conducted on July 20, 2005, on Mr. M.N. Navale, President of Sinhgad Technical Education Society (the assessee), and his wife. The Income Tax Department seized certain documents during this operation. According to the Revenue, these documents contained evidence of the assessee receiving capitation fees, suggesting that the society’s activities were not genuine and not in accordance with its trust deed. Based on these findings, the Assessing Officer (AO) issued a notice under Section 153C of the Income Tax Act, 1961, on April 18, 2007, for Assessment Years 2000-01 to 2005-06.

The assessee, an educational institution registered under the Bombay Public Trusts Act, 1950, and the Societies Registration Act, 1860, was also registered under Section 12AA of the Income Tax Act since the Assessment Year 1994-95. This registration allowed the assessee to claim exemptions under Sections 11 and 12 of the Act, provided its income was used for charitable or religious purposes.

Following the search, the assessee was treated as an Association of Persons (AOP), and a special audit under Section 142(2A) of the Act was conducted. The AO recorded a Satisfaction Note on April 18, 2007, stating that the assessee was not a genuine trust and was engaged in profiteering. Consequently, notices under Section 153C were issued for multiple assessment years.

Timeline

Course of Proceedings

The assessee initially filed revised returns for the Assessment Year 2006-07, but stuck to its original returns for other assessment years. The registration of the trust was cancelled on October 9, 2007, under Section 12AA(3) of the Income Tax Act, and the assessee was treated as an AOP. After a special audit, the AO passed an assessment order on August 7, 2008, covering Assessment Years 1999-2000 to 2006-07.

The assessee appealed this order, which was partially allowed by the Commissioner of Income Tax (Appeals) [CIT(A)]. However, the CIT(A) upheld the AO’s decision that the assessee was not eligible for exemption under Section 11 of the Act. The assessee then appealed to the Income Tax Appellate Tribunal (ITAT), raising an additional ground questioning the validity of the notice under Section 153C, arguing that the satisfaction was not properly recorded and that the notice was time-barred for Assessment Years 2000-01 to 2003-04. The ITAT allowed this additional ground and quashed the notice for those assessment years. The Revenue then appealed to the High Court, which upheld the ITAT’s decision.

Legal Framework

Several sections of the Income Tax Act, 1961, are pertinent to this case:

• Section 11: This section provides exemptions for income derived from property held for charitable or religious purposes.
• Section 12: This section provides exemptions for income from contributions to charitable or religious trusts.
• Section 12AA: This section deals with the procedure for registration of trusts or institutions for claiming exemptions under Sections 11 and 12.
• Section 12AA(3): This section allows for the cancellation of the registration of a trust if its activities are not genuine or not carried out in accordance with its trust deed.
• Section 132: This section empowers the Income Tax Department to conduct search and seizure operations.
• Section 142(2A): This section allows for a special audit to be conducted when the accounts are complex.
• Section 143(2): This section deals with the issuance of notices for assessment.
• Section 143(3): This section deals with assessment orders.
• Section 147: This section deals with the reassessment of income.
• Section 153A: This section deals with assessment in case of search or requisition.
• Section 153C: This section deals with assessment of income of any other person, based on documents seized during a search operation. It states that,

  “Notwithstanding anything contained in section 139, section 147, section 148, section 149, section 151 and section 153, 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 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”

The interplay of these sections determines the validity of the actions taken by the Income Tax Department against the assessee.

Arguments

Arguments by the Revenue:

• The Revenue argued that the ITAT erred in allowing the additional ground regarding the validity of the notice under Section 153C, as the assessee had not raised this objection before the AO.
• The Revenue contended that the Satisfaction Note recorded by the AO clearly indicated that the assessee was not a genuine trust and was engaged in profiteering.
• The Revenue relied on the judgments of the Delhi High Court in SSP Aviation Limited v. Deputy Commissioner of Income Tax and the Gujarat High Court in Kamleshbhai Dharamshibhai Patel v. Commissioner of Income Tax-III, which took a contrary view on similar issues.
• The Revenue emphasized that the documents seized during the search revealed that the assessee was collecting capitation fees and not adhering to its trust deed, justifying the denial of exemptions under Sections 11 and 12 of the Income Tax Act.

Arguments by the Assessee:

• The assessee argued that the ITAT was correct in permitting the additional ground, as it was a jurisdictional issue based on facts already on record.
• The assessee contended that the Satisfaction Note was prepared by the AO in his capacity as the AO of the assessee society and did not specify the date on which the seized documents were handed over to the AO of the assessee.
• The assessee submitted that the notice under Section 153C was time-barred for Assessment Years 2000-01 and 2001-02, as the documents were not handed over to the AO of the assessee before April 18, 2007, and assessment under Section 153A(1) can only be made for a period of six assessment years immediately preceding the assessment year relevant to the previous year in which the books of accounts or documents or assets were received by the AO of the assessee.
• The assessee argued that the seized documents did not pertain to the Assessment Years in question, which is a jurisdictional condition precedent for issuing a notice under Section 153C.
• The assessee highlighted that no money, bullion, jewellery, or other valuable articles, or books of accounts or documents were seized which related to the assessment years in question.

Submissions Table

Issues Framed by the Supreme Court

The Supreme Court did not explicitly frame issues in a separate section. However, the core issue was:

1. Whether the notice under Section 153C of the Income Tax Act was valid for Assessment Years 2000-01 to 2003-04, given the requirement that the seized documents must pertain to those assessment years.

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following authorities:

Cases:

• SSP Aviation Limited v. Deputy Commissioner of Income Tax, (2012) 20 taxmann.com 214 (Delhi High Court) – This case was distinguished by the Bombay High Court as it involved different facts.
• Kamleshbhai Dharamshibhai Patel v. Commissioner of Income Tax-III, (2013) 31 taxmann.com 50 (Gujarat High Court) – The Gujarat High Court held that for Section 153C to apply, the seized documents must belong to a person other than the person referred to in Section 153A.

Legal Provisions:

• Section 11 of the Income Tax Act, 1961: Provides exemptions for income derived from property held for charitable or religious purposes.
• Section 12 of the Income Tax Act, 1961: Provides exemptions for income from contributions to charitable or religious trusts.
• Section 12AA of the Income Tax Act, 1961: Deals with the procedure for registration of trusts or institutions for claiming exemptions under Sections 11 and 12.
• Section 132 of the Income Tax Act, 1961: Empowers the Income Tax Department to conduct search and seizure operations.
• Section 142(2A) of the Income Tax Act, 1961: Allows for a special audit to be conducted when the accounts are complex.
• Section 143(3) of the Income Tax Act, 1961: Deals with assessment orders.
• Section 147 of the Income Tax Act, 1961: Deals with the reassessment of income.
• Section 153A of the Income Tax Act, 1961: Deals with assessment in case of search or requisition.
• Section 153C of the Income Tax Act, 1961: Deals with assessment of income of any other person, based on documents seized during a search operation.

Authorities Considered by the Court

Judgment

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

How each authority was viewed by the Court?

• The Supreme Court distinguished the Delhi High Court’s judgment in SSP Aviation Limited v. Deputy Commissioner of Income Tax because the facts of that case were different.
• The Supreme Court approved the principle laid down by the Gujarat High Court in Kamleshbhai Dharamshibhai Patel v. Commissioner of Income Tax-III that the seized documents must belong to a person other than the person referred to in Section 153A, but distinguished it on facts.
• The Supreme Court used Section 11 and Section 12 of the Income Tax Act, 1961, to provide context to the exemptions claimed by the assessee.
• The Supreme Court used Section 12AA of the Income Tax Act, 1961, to provide context to the registration of the trust.
• The Supreme Court used Section 132 of the Income Tax Act, 1961, to provide context to the search and seizure operation.
• The Supreme Court used Section 142(2A) of the Income Tax Act, 1961, to provide context to the special audit conducted.
• The Supreme Court used Section 143(3) of the Income Tax Act, 1961, to provide context to assessment orders.
• The Supreme Court used Section 147 of the Income Tax Act, 1961, to provide context to the reassessment proceedings.
• The Supreme Court used Section 153A of the Income Tax Act, 1961, to provide context to the assessment in case of search or requisition.
• The Supreme Court interpreted and applied Section 153C of the Income Tax Act, 1961, to the facts of the case.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the lack of a direct link between the seized documents and the assessment years under consideration. The Court emphasized that for a notice under Section 153C of the Income Tax Act to be valid, the seized documents must pertain to the assessment years in question. This was considered a jurisdictional requirement. The Court also noted that the ITAT had scanned through the Satisfaction Note and the material disclosed therein and found that the same belonged to Assessment Year 2004-05 or thereafter. The Court’s reasoning focused on the procedural aspects and the specific requirements of Section 153C rather than delving into the merits of the case.

Sentiment Analysis of Reasons Given by the Supreme Court:

Fact:Law Ratio:

Logical Reasoning

Key Takeaways

• ✓ The Supreme Court emphasized that for a notice under Section 153C of the Income Tax Act to be valid, the seized documents must directly relate to the assessment years under consideration.
• ✓ The Court upheld the ITAT’s decision to allow an additional ground on the validity of the notice, as it was a jurisdictional issue.
• ✓ The judgment clarifies that the satisfaction recorded by the AO must be based on documents that pertain to the specific assessment years for which the notice is issued.
• ✓ This decision has implications for future cases where proceedings are initiated under Section 153C, highlighting the need for a direct link between seized material and the assessment years in question.
• ✓ The Court has not given any clean chit to the assessee insofar as the finding of the AO to the effect that the assessee had been indulging in profiteering and collecting capitation fee is concerned.

Directions

The Supreme Court did not issue any specific directions in this judgment, other than dismissing the appeals.

Development of Law

The ratio decidendi of this case is that for a notice under Section 153C of the Income Tax Act to be valid, the seized documents must directly relate to the assessment years under consideration. This judgment reinforces the jurisdictional requirements of Section 153C and clarifies that a general satisfaction without specific evidence linking the seized documents to the relevant assessment years is not sufficient. This decision does not change the previous position of law but rather clarifies the application of Section 153C.

Conclusion

The Supreme Court dismissed the appeals filed by the Revenue, upholding the decisions of the ITAT and the High Court. The Court ruled that the notice under Section 153C of the Income Tax Act was invalid for Assessment Years 2000-01 to 2003-04, as the seized documents did not pertain to those specific assessment years. The judgment emphasizes the importance of a direct link between seized materials and the relevant assessment years for proceedings under Section 153C to be valid. The Court clarified that it has not given any clean chit to the assessee insofar as the finding of the AO to the effect that the assessee had been indulging in profiteering and collecting capitation fee is concerned.

Category

• Income Tax Law
  • Section 153C, Income Tax Act, 1961
  • Search and Seizure
  • Assessment Proceedings
  • Jurisdictional Issues
• Income Tax Act, 1961
  • Section 153C, Income Tax Act, 1961

FAQ

Q: What is Section 153C of the Income Tax Act?

A: Section 153C of the Income Tax Act deals with situations where documents or assets seized during a search operation belong to someone other than the person who was searched. It allows the tax department to assess the income of this other person based on the seized materials.

Q: What was the main issue in this Supreme Court case?