2015 (9) TMI 80 - HC - Income Tax

Assessment u/s 153A - Deemed dividend u/s 2(22)(e) - Completed Assessment - Whether additions made to the income of the Assessee for the AYs were not sustainable because no incriminating material concerning such additions were found during the course of search and further no assessments for such years were pending on the date of search? - Held that - Once a search takes place u/s 132 of the Act notice u/s 153 A (1) will have to be mandatorily issued to the person searched requiring him to file returns for six AYs immediately preceding the previous year relevant to the AY in which the search takes place. Assessments and reassessments pending on the date of the search shall abate. The total income for such AYs will have to be computed by the AOs as a fresh exercise. The AO will exercise normal assessment powers in respect of the six years previous to the relevant AY in which the search takes place. The AO has the power to assess and reassess the total income of the aforementioned six years in separate assessment orders for each of the six years. In other words there will be only one assessment order in respect of each of the six AYs in which both the disclosed and the undisclosed income would be brought to tax . Although Section 153 A does not say that additions should be strictly made on the basis of evidence found in the course of the search or other post-search material or information available with the AO which can be related to the evidence found it does not mean that the assessment can be arbitrary or made without any relevance or nexus with the seized material. Obviously an assessment has to be made under this Section only on the basis of seized material. In absence of any incriminating material the completed assessment can be reiterated and the abated assessment or reassessment can be made. The word assess in Section 153 A is relatable to abated proceedings (i.e. those pending on the date of search) and the word reassess to completed assessment proceedings. Insofar as pending assessments are concerned the jurisdiction to make the original assessment and the assessment under Section 153A merges into one. Only one assessment shall be made separately for each AY on the basis of the findings of the search and any other material existing or brought on the record of the AO. Completed assessments can be interfered with by the AO while making the assessment under Section 153 A only on the basis of some incriminating material unearthed during the course of search or requisition of documents or undisclosed income or property discovered in the course of search which were not produced or not already disclosed or made known in the course of original assessment. Thus the present appeals concern AYs 2002-03 2005-06 and 2006-07.On the date of the search the said assessments already stood completed. Since no incriminating material was unearthed during the search no additions could have been made to the income already assessed. Decided in favour of the Assessee

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal question considered by the Court was whether additions made to the income of the Assessee for Assessment Years (AYs) 2002-03, 2005-06, and 2006-07 under Section 2(22)(e) of the Income Tax Act, 1961 ("Act") were sustainable in law, given that no incriminating material concerning such additions was found during the course of search under Section 132 of the Act, and no assessments for those years were pending on the date of search. Specifically, the Court examined whether the Assessing Officer (AO) could make additions in completed assessments under the provisions of Section 153A(1) of the Act without any incriminating material unearthed during the search.

2. ISSUE-WISE DETAILED ANALYSIS

Issue: Sustainability of additions under Section 2(22)(e) in completed assessments without incriminating material found in search

Relevant legal framework and precedents: The Court analyzed Section 153A(1) of the Act, which mandates that once a search is conducted under Section 132, the AO must issue notices requiring the searched person to file returns for six preceding AYs. Assessments pending on the date of search abate, and the AO can assess or reassess total income for those years, including undisclosed income unearthed during the search. The first proviso to Section 153A(1) permits reassessment of completed assessments for the six years preceding the search. However, the scope of such reassessment is debated in terms of whether incriminating material must be found during the search to justify additions in completed assessments.

Key precedents considered include:

• CIT v. Anil Kumar Bhatia: The Court held that Section 153A empowers the AO to reassess completed assessments if incriminating material is found during search. However, the Court expressly left open the question whether Section 153A can be invoked in the absence of any incriminating material.
• CIT v. Chetan Das Lachman Das: The Court emphasized that while Section 153A does not explicitly require additions to be strictly based on seized material, assessments under the Section must have relevance or nexus to the seized material and cannot be arbitrary.
• Madugula Venu v. Director of Income Tax: It was held that issuance of notice under Section 153A is mandatory once a search is conducted, regardless of incriminating material found, but the question of additions without incriminating material was left open.
• Jai Steel (India) v. ACIT: The Court held that additions in completed assessments can only be made on the basis of incriminating material found during search; otherwise, the completed assessment can be reiterated.
• Commissioner of Income Tax v. Continental Warehousing Corporation: The Bombay High Court held that no addition can be made in respect of completed assessments if no incriminating material is found during search, affirming that assessment or reassessment under Section 153A must have a vital link to the search and seized material.
• Filatex India Ltd. v. CIT-IV: The Court held that additions under Section 153A need not be restricted to incriminating material found during search, but this was in a case where incriminating material was found for other additions.

Court's interpretation and reasoning: The Court undertook a detailed examination of the statutory scheme of Section 153A, particularly the distinction between pending assessments (which abate) and completed assessments (which do not abate but may be reassessed). The Court noted that for pending assessments, the AO's jurisdiction merges into one under Section 153A, allowing fresh assessment including undisclosed income found during search or other material. However, for completed assessments, the AO's power to reassess is circumscribed and can only be exercised if incriminating material is found during the search or requisition. The Court emphasized that the words "assess" and "reassess" in Section 153A are used in context: "assess" relates to abated (pending) proceedings, and "reassess" relates to completed assessments.

The Court observed that the decisions in Anil Kumar Bhatia and Chetan Das Lachman Das did not deal with the situation where no incriminating material was found during search, which is the factual matrix of the present case. The Court further clarified that while issuance of notice under Section 153A is mandatory once a search is conducted, this does not mean that additions in completed assessments can be made without any incriminating material unearthed during the search. The Court relied on the reasoning in Jai Steel and Continental Warehousing to hold that additions in completed assessments must be founded on incriminating material found during search.

Key evidence and findings: The search was conducted on 15th November 2007, and no incriminating material was found relating to AYs 2002-03, 2005-06, and 2006-07. The assessments for these years had already been completed under Section 143(1) before the search. The AO made additions under Section 2(22)(e) of the Act on the basis of protective assessments in related companies where the Assessee was a substantial shareholder, but these additions were not based on any incriminating material found during the search. The ITAT set aside these additions, holding them unsustainable in law.

Application of law to facts: Applying the legal principles, the Court held that since no incriminating material was found during the search for the relevant AYs, the AO had no jurisdiction to make additions in the completed assessments under Section 153A. The additions under Section 2(22)(e) were therefore not sustainable.

Treatment of competing arguments: The Revenue argued that Section 153A does not require incriminating material to be found for framing assessments in completed years and that the AO must assess total income including undisclosed income even if no such material was found. The Revenue relied on decisions such as Madugula Venu and Filatex India Ltd. to contend that the AO's powers under Section 153A are wide and not limited to incriminating material found during search.

The Assessee contended that the settled law requires incriminating material to be found during search to justify additions in completed assessments and that in the absence of such material, the AO's action amounted to impermissible change of opinion, violating Section 147 of the Act. The Assessee relied on Anil Kumar Bhatia, Jai Steel, and other decisions to support this position.

The Court accepted the Assessee's arguments, distinguishing the precedents cited by the Revenue on their facts and emphasizing the need for a nexus between the additions and incriminating material found during the search for completed assessments.

3. SIGNIFICANT HOLDINGS

"If no incriminating material is found in respect of such completed assessments then the total income in the proceedings under Section 153A(1) of the Act shall be computed by considering the originally determined income."

"For completed assessments, the AO can interfere only on the basis of some incriminating material unearthed during the course of search or requisition of documents or undisclosed income or property discovered in the course of search which were not produced or not already disclosed or made known in the course of original assessment."

"The words 'assess' or 'reassess' have been used at more than one place in the Section and a harmonious construction of the entire provision would lead to an irresistible conclusion that the word assess has been used in the context of an abated proceedings and reassess has been used for completed assessment proceedings, which would not abate as they are not pending on the date of initiation of the search or making of requisition and which would also necessarily support the interpretation that for the completed assessments, the same can be tinkered only based on the incriminating material found during the course of search or requisition."

Core principles established include:

• Section 153A mandates issuance of notice to the searched person to file returns for six preceding AYs, regardless of incriminating material found.
• Pending assessments abate and are reopened for fresh assessment including undisclosed income found during search.
• Completed assessments do not abate but can be reassessed only if incriminating material is found during search.
• Additions in completed assessments without incriminating material found during search are not sustainable in law.
• The assessment under Section 153A must have a nexus to the search and seized material; it cannot be arbitrary or based on mere change of opinion.

Final determination on the principal issue:

The additions made to the income of the Assessee for AYs 2002-03, 2005-06, and 2006-07 under Section 2(22)(e) of the Act were not sustainable as no incriminating material was found during the search for these years and the assessments were already completed on the date of search. The appeals by the Revenue were dismissed accordingly.