2024 (9) TMI 1758 - AT - Income Tax

Validity of assessments framed u/s 153A - incriminating material recovered during the course of action u/s 132 of the Act or requisition u/s 132A HELD THAT - The Hon ble Apex Court in ABHISAR BUILDWELL P. LTD. 2023 (4) TMI 1056 - SUPREME COURT case has clarified that it is only incriminating material recovered during the course of action u/s 132 of the Act or requisition u/s 132A of the Act that would be relevant for framing an assessment u/s 153A of the Act. AO needs to consider appropriate action u/s 147/148 of the Act keeping in view the express provisions contained in Section 150 of the Act. Section 150 of the Act intends to lift the embargo of period of limitation u/s 149 of the Act to enable the Income Tax Authorities to re-open assessments not only on the basis of orders passed in proceedings under the Act but also on orders of appellate authorities. In considering the action u/s 147/148 of the Act the ld. AO would be advised to refer to Instruction No. 1/2003 dated 23.08.2023 which was issued by CBDT to give effect to the case of Abhisar Buildwell (P.) Ltd. (supra). Needless to say directions u/s 150(1) of the Act would need to be followed strictly and will need to be read in conjunction with the appropriate provisions contained u/s 147/148/149 of the Act. Assessee appeal allowed.

Summary

The core legal questions considered in this batch of appeals pertain to the validity and scope of assessments framed under section 153A read with section 143(3) of the Income Tax Act, 1961, following a search and seizure operation. Specifically, the issues revolve around:

(i) Whether the Assessing Officer (AO) could base additions to income on material derived from a survey under section 133A rather than from incriminating material seized during the search under section 132 or requisition under section 132A, for the purpose of framing assessments under section 153A;

(ii) The applicability and interpretation of the Supreme Court's ruling in the case of PCIT vs. Abhisar Buildwell (P.) Ltd., which clarified the scope of section 153A assessments vis-`a-vis incriminating material found during search or requisition;

(iii) The correctness of treating certain loans as unexplained cash credits under section 68 and disallowing interest expenses claimed against such loans;

(iv) The procedural and substantive implications for reopening assessments under sections 147/148 and the interplay with section 150 concerning limitation periods and revival of assessments.

Regarding the first issue, the legal framework centers on the provisions of sections 132, 132A, 133A, and 153A of the Income Tax Act. Section 153A empowers the AO to assess or reassess total income for six assessment years if a search under section 132 or requisition under section 132A is conducted and incriminating material is found. The Supreme Court in Abhisar Buildwell (P.) Ltd. emphasized that assessments under section 153A must be predicated on incriminating material seized during search or requisition, not on material obtained from survey operations under section 133A. The Court reiterated that section 153A's jurisdiction is linked exclusively to search/requisition actions under sections 132/132A, and material obtained otherwise cannot sustain assessments under section 153A.

In the present appeals, the AO's additions were based on information from a survey under section 133A conducted simultaneously with the search, which revealed that the companies from which loans were taken were shell companies providing accommodation entries. No incriminating material was seized during the search under section 132/132A. The AO treated the loan amounts as unexplained cash credits under section 68 and disallowed interest expenses claimed against such loans. The CIT(A) upheld these additions.

The Court's interpretation, following the Supreme Court's precedent, held that since no incriminating material was found during the search under section 132 or requisition under section 132A, the AO lacked jurisdiction to make additions under section 153A based solely on survey material under section 133A. The Court quoted extensively from the Abhisar Buildwell judgment, underscoring that section 153A assessments are contingent upon incriminating material found during the search or requisition. The Court rejected the Department's argument that the search was composite involving sections 132 and 133A, clarifying that survey material alone cannot validate assessments under section 153A.

On the application of law to facts, the Court found that the AO's reliance on survey findings to treat loans as unexplained cash credits and disallow interest expenses was not sustainable under the statutory scheme. The Court ordered deletion of the additions for all five assessment years under consideration. It also directed that the AO may consider reopening assessments under sections 147/148, which remain available remedies where no incriminating material is found during search but other material warrants reassessment, subject to conditions and limitation periods.

Regarding the reopening of assessments, the Court examined section 150, which overrides limitation provisions in section 149 to enable reassessment or recomputation consequent to appellate or revision orders. The Court emphasized that the AO must strictly comply with section 150(1) and related provisions when initiating reassessment proceedings under sections 147/148. The Court referred to CBDT Instruction No. 1/2003 issued to implement the Supreme Court's ruling in Abhisar Buildwell, which guides the Department on procedural compliance in such cases.

The Court also addressed the treatment of interest expenses claimed against the loans from the shell companies. Since the principal additions were deleted, the interest disallowances also fell away and were accordingly deleted for all years.

In dealing with competing arguments, the Court gave due consideration to the Department's contention that the search was composite and that the AO's assessments were valid. However, the Court found this argument inconsistent with the statutory mandate and Supreme Court precedent. The Court carefully distinguished between survey and search material and upheld the principle that section 153A jurisdiction is triggered only by incriminating material seized under sections 132/132A.

The conclusions reached were:

(i) The AO's assessments under section 153A based on survey material under section 133A are invalid;

(ii) Additions treating loans as unexplained cash credits under section 68 and disallowing interest expenses are deleted;

(iii) The AO may initiate reassessment proceedings under sections 147/148 subject to compliance with section 150 and limitation provisions;

(iv) The appeals for all assessment years 2015-16 to 2019-20 are allowed accordingly.

Significant holdings include the following verbatim excerpts from the Supreme Court judgment in Abhisar Buildwell (P.) Ltd., which the Court respectfully followed:

"As per the provisions of section 153A, in case of a search under section 132 or requisition under section 132A, the Assessing Officer gets the jurisdiction to assess or reassess the 'total income' in respect of each assessment year falling within six assessment years. ... The object of section 153A is to bring under tax the undisclosed income which is found during the course of search or pursuant to search or requisition. Therefore, only in a case where the undisclosed income is found on the basis of incriminating material, the Assessing Officer would assume the jurisdiction to assess or reassess the total income for the entire six years block assessment period even in case of completed/unabated assessment."

"In case no incriminating material is unearthed during the search, the Assessing Officer cannot assess or reassess taking into consideration the other material in respect of completed assessments/unabated assessments. ... However, the completed/unabated assessments can be reopened by the Assessing Officer in exercise of powers under section 147/148, subject to fulfilment of the conditions as envisaged/mentioned under section 147/148 and those powers are saved."

Core principles established are:

- The jurisdiction under section 153A is strictly linked to incriminating material found during search under section 132 or requisition under section 132A;

- Material obtained from survey under section 133A cannot sustain assessments under section 153A;

- Completed or unabated assessments cannot be reopened under section 153A without incriminating material found during search/requisition;

- Reassessment under sections 147/148 remains a viable remedy subject to procedural safeguards and limitation periods;

- Section 150 lifts limitation for reassessment consequent to appellate or revision orders, facilitating revival of assessments.

Final determinations on each issue are:

- The additions based on loans from shell companies and disallowance of interest expenses under section 153A are quashed;

- The AO is directed to consider reopening assessments under sections 147/148 in accordance with section 150 and relevant instructions;

- Appeals for all five assessment years are allowed in favor of the assessee.