2025 (2) TMI 1145 - HC - Income Tax

Validity of Assessment u/s 153C - as argued material gathered had no correlation or connection with the individuals who were subjected to the search - whether in the absence of the evidence gathered being pertinent or relevant to the persons named in the search authorization the commencement of action u/s 153C against the writ petitioners would not sustain? HELD THAT - The trigger for Section 153C is thus the discovery of documents or articles in the course of a search which pertain or belong to a third party and which may have a bearing on the determination of the total income of such other person for the six AY period or the relevant assessment years. In terms of the procedure as prescribed under Section 153C the AO of the searched entity on being satisfied that the books or articles discovered in the course of the search belong or pertain to a person other than one referred to in Section 153A would transmit the same to the jurisdictional AO of the non-searched entity. That jurisdictional AO is thereafter obliged to form an opinion whether the books of account documents or assets seized are likely to have a bearing on the determination of the total income of such other person. The entire edifice of Section 153C is built on incriminating material that may be gathered in the course of a search. The submission that action under Section 153C must be premised upon some connection between the searched and the non-searched entity or for that matter on the material gathered having some link with the searched person is clearly misconceived. If the material that had been gathered were to have a link or connect to the searched persons it would clearly not fall within the scope of Section 153C at all. This since the commencement of action under that provision is itself predicated upon the material gathered in the course of the search belonging or pertaining to an unrelated party and one who may not have been covered under the search authorization. We are therefore of the firm opinion that the statutory scheme does not mandate or envisage the discovery of a connect or interrelationship between the searched and the non-searched entity. Action under Section 153C is premised solely on the discovery of incriminating material and which is likely to have an impact or bearing on the assessed income of a non-searched entity. The statute neither requires nor obliges the AO of the other person to find or uncover a relationship or an association between the searched and the non-searched person. The provision is merely concerned with the evaluation of the material unearthed in the course of a search and an assessment of whether it is likely to have a bearing on the income of a non-searched entity. If the submission of Mr. Sinha were to be accepted we would be compelled to read Section 153C as being liable to be invoked only if there be some relationship between persons who were subjected to the actual search and those to whom the material may relate. Interpreting Section 153C as suggested would lead one to a situation where even though the material unearthed may be incriminating absent a relationship between persons the AO would be left powerless to even consider the likely impact of that material. That clearly does not appear to be the object or the purpose of that provision. We are thus of the considered opinion that the challenge is clearly misconceived. WP dismissed.

Summary

ISSUES PRESENTED and CONSIDERED

The core legal issue presented and considered in this judgment is whether the initiation of action under Section 153C of the Income Tax Act, 1961, against the petitioners is valid and sustainable. This involves examining if the material gathered during a search operation pertains or relates to the petitioners and whether such material can be considered incriminating to justify the proceedings under Section 153C.

ISSUE-WISE DETAILED ANALYSIS

1. Relevant Legal Framework and Precedents

The legal framework revolves around Section 153C of the Income Tax Act, which deals with the assessment of income of any person other than the one referred to in Section 153A. Section 153C is triggered when documents or assets found during a search pertain to or belong to a person other than the one searched. The provision requires that such material must have a bearing on the determination of the total income of the non-searched person.

Precedents considered include the judgments in S.R. Batliboi & Co. v. Department of Income Tax (Investigation), which discussed the interpretation of "other person" in the context of Section 158BD, and Commissioner of Income Tax v. Arpit Land Pvt. Ltd, which emphasized that proceedings under Section 153C cannot be initiated merely on suspicion.

2. Court's Interpretation and Reasoning

The Court interpreted Section 153C as not requiring any connection between the searched and non-searched entities. The provision is solely concerned with whether the material discovered during the search pertains to or belongs to a third party and whether it has a bearing on the determination of that third party's income. The Court rejected the argument that a connection between the searched and non-searched persons is necessary for invoking Section 153C.

3. Key Evidence and Findings

During the search operation at the premises of Mr. Shiv Prakash Bansal, cash, jewellery, and incriminating documents in the form of digital evidence were found. These included WhatsApp chats and Excel sheets such as "SKY" and "BANK," which contained records of cash transactions. The Assessing Officer (AO) concluded that these materials pertained to Mr. Bansal and were likely to affect the determination of his income.

4. Application of Law to Facts

The AO's satisfaction note indicated that the materials found during the search pertained to Mr. Bansal and involved substantial cash transactions and an organized system for handling unaccounted cash. The AO determined that these materials had a bearing on Mr. Bansal's income, justifying the initiation of proceedings under Section 153C for the relevant assessment years.

5. Treatment of Competing Arguments

The petitioners argued that the seized material did not connect with the searched persons and thus could not be considered incriminating under Section 153C. They relied on the judgment in S.R. Batliboi to argue that "other person" must have dealings with the searched entity. The Court, however, found that Section 153C does not require such a connection and is concerned only with the material's relevance to the non-searched person's income.

6. Conclusions

The Court concluded that the statutory scheme of Section 153C does not mandate a connection between the searched and non-searched entities. The provision is based on the discovery of incriminating material that pertains to a non-searched person and affects their income assessment. The petitioners' challenge was found to be misconceived, and the writ petitions were dismissed.

SIGNIFICANT HOLDINGS

The Court established the principle that Section 153C does not require a connection between the searched and non-searched entities. The provision is triggered by the discovery of material during a search that pertains to a third party and affects their income determination. The Court emphasized that the AO of the searched person must transmit such material to the jurisdictional AO of the non-searched person, who then assesses its impact on the non-searched person's income.

The Court held that the action under Section 153C is based on incriminating material and not on any relationship between the searched and non-searched entities. This interpretation aligns with the statutory scheme and the purpose of Section 153C, which is to assess the income of a non-searched person based on material found during a search.

The writ petitions were dismissed, affirming the validity of the proceedings initiated under Section 153C against the petitioners.