2025 (5) TMI 439 - AT - Income Tax

Validity of assessment u/s 147 OR proceedings ought to have been initiated u/s 153C instead - incriminating material seized or requisitioned belonging or relatable to the person other than on whom search was conducted HELD THAT - We observed that Revenue Department has issued 153(C) notice and now the present appeal becomes infructuous as the department cant issue Sec 148 notice and Sec 153(C) simultaneously for the same assessment year. Appeal of the Revenue is dismissed as infructuous.

Summary

Issues Presented and Considered

1. Whether the Learned Commissioner of Income Tax (Appeals) erred in quashing the assessment proceedings initiated under Section 148 of the Income Tax Act solely based on the High Court judgment in DBCWP 18363/2019, without considering the unique facts and circumstances of the present case.

2. Whether the notice issued under Section 148 of the Income Tax Act is legally sustainable when incriminating material seized during search proceedings relates to a person other than the one on whom the search was conducted, and whether the proceedings should have been initiated under Section 153C instead.

3. Whether the Learned CIT(A) erred in overturning the issuance of the notice under Section 148 despite the Supreme Court precedent affirming the validity of such notices unless compelling reasons exist to deviate.

4. Whether the Revenue's appeal challenging the quashing of the Section 148 notice and resultant assessment order should be allowed or dismissed.

Issue-wise Detailed Analysis

Issue 1 and 2: Validity of Notice under Section 148 vis-`a-vis Applicability of Section 153C

Legal Framework and Precedents: The Income Tax Act provides specific provisions for reassessment and assessment proceedings. Section 148 empowers the Assessing Officer (AO) to reopen an assessment if there is reason to believe that income has escaped assessment. However, Sections 153A to 153C prescribe a special procedure for assessment/reassessment in cases involving search and seizure operations. Section 153C specifically applies where incriminating material seized during a search conducted on one person relates to another person. The AO must then transfer such material to the jurisdictional AO of the other person who will proceed under Section 153A.

The Rajasthan High Court in D.B. Civil Writ Petition No. 18363/2019 and linked petitions (dated 19.03.2024) clarified that the special provisions under Sections 153A to 153C have an overriding effect over the general provisions under Sections 139, 147, 148, etc. The Court held that where incriminating material seized during search relates to a person other than the one searched, the AO must proceed under Section 153C and not Section 148. The Court emphasized that the procedure under Sections 153A to 153C is mandatory and exclusive in such cases.

Court's Interpretation and Reasoning: The CIT(A) relied heavily on the above High Court decision, noting that the present case involved reopening of assessment under Section 148 based solely on incriminating material seized during the search of the Ramesh Manihar Group, to which the appellant was related but not the searched person. The CIT(A) observed that the AO did not demonstrate possession of any material other than the seized documents to justify initiation under Section 148. The Court reasoned that the AO should have proceeded under Section 153C in accordance with the statutory scheme and the High Court's ruling.

Key Evidence and Findings: The search and seizure operation under Section 132 was conducted on the Ramesh Manihar Group, during which voluminous data including excel sheets and pen drives were seized. The seized data revealed details of cash loans and brokerage income not reflected in accounts. The appellant was identified as a lender associated with the group, with undisclosed income and interest earnings. The AO issued notice under Section 148 based on this seized material and passed reassessment order adding undisclosed income.

Application of Law to Facts: Since the incriminating material related to the appellant was seized during search of another person (Ramesh Manihar Group), the AO should have followed the procedure under Section 153C rather than initiate proceedings under Section 148. The CIT(A) found that the AO's initiation under Section 148 was contrary to the statutory scheme and the High Court's ruling, rendering the notice and reassessment order invalid.

Treatment of Competing Arguments: The Revenue contended that the notice under Section 148 was valid and relied on Supreme Court precedent in Deputy Commissioner of Income Tax (Central) Circle 1(2) vs. M/s. M.R. Shah Logistics Private Limited (2022) 14 SCC 101, which upheld the issuance of Section 148 notices unless compelling reasons exist to deviate. The CIT(A) distinguished the present case on facts, emphasizing the High Court's specific ruling on the applicability of Sections 153A to 153C in search-related cases involving third parties. The Tribunal noted that the Revenue had also issued a Section 153C notice, making simultaneous issuance of Section 148 notice infructuous.

Conclusions: The CIT(A) quashed the notice under Section 148 and the resulting reassessment order, holding that the AO ought to have proceeded under Section 153C. The Tribunal upheld this view, dismissing the Revenue's appeal as infructuous due to the issuance of Section 153C notice and the established legal position.

Issue 3: Applicability of Supreme Court Precedent on Section 148 Notice

Legal Framework and Precedents: The Supreme Court in Deputy Commissioner of Income Tax (Central) Circle 1(2) vs. M/s. M.R. Shah Logistics Private Limited held that issuance of notice under Section 148 is valid unless there are compelling reasons to invalidate it. The Court emphasized the AO's discretion in reopening assessments.

Court's Interpretation and Reasoning: The CIT(A) acknowledged this precedent but held that the special provisions under Sections 153A to 153C, introduced to streamline assessments in search cases, override the general provisions including Section 148. The High Court's ruling specifically addressed this interplay, clarifying that Section 148 cannot be invoked when incriminating material seized during search relates to a third party, who must be assessed under Section 153C.

Key Evidence and Findings: The AO's initiation under Section 148 was based solely on seized material relating to the appellant, a person other than the one searched. No independent material was shown to justify Section 148 proceedings.

Application of Law to Facts: The Tribunal agreed that while the Supreme Court's ruling is authoritative, the facts of the present case fall within the special procedural regime under Sections 153A to 153C, which prevail over general provisions. Thus, the Supreme Court precedent does not support sustaining the Section 148 notice here.

Treatment of Competing Arguments: The Revenue's reliance on the Supreme Court decision was considered but found inapplicable due to the overriding effect of the special provisions and the High Court's binding interpretation.

Conclusions: The CIT(A) correctly applied the legal framework, and the Tribunal concurred that the Section 148 notice was not sustainable in the present circumstances.

Issue 4: Disposition of Revenue's Appeal

The Tribunal observed that since the Revenue had issued a Section 153C notice, the present appeal against quashing of the Section 148 notice and reassessment order became infructuous. The Tribunal dismissed the Revenue's appeal accordingly.

Significant Holdings

"In cases of the person other than on whom search was conducted but material belonging or relating such person was seized or requisition, the AO has to proceed under Section 153C of the Act instead of section 147/148 of the Act, as the proceedings in the relevant cases were initiated based on the incriminating material and documents including Pen Drives seized during the course of search carried out in the case of Ramesh Manihar Group and the statements recorded during proceedings."

"Special procedure is prescribed under Section 153A to 153C for assessment in cases of search and requisition. There cannot be a quibble with the proposition that the special provision shall prevail over the general provision."

"The language of explanation 2 to new Section 148 is akin to Section 153A and Section 153C. Corollary being that after seizing of operational period of Section 153A to 153C, the cases being dealt thereunder were circumscribed in the scope of newly substituted Section 148."

"The Department has not set up a case that for initiating proceedings under Section 148 it had material other than the material seized during the search of Manihar Group."

"The notices issued under Section 148 and the impugned orders are quashed. However, the respondents shall be at liberty to proceed against the petitioners in accordance with law."

Core Principles Established

- The special provisions under Sections 153A to 153C for assessment/reassessment in search and seizure cases have an overriding effect over the general provisions including Section 148.

- Where incriminating material seized during a search relates to a person other than the one searched, proceedings must be initiated under Section 153C and not Section 148.

- The AO cannot initiate reassessment under Section 148 solely on the basis of seized material relating to a third party without independent material.

- The issuance of notice under Section 148 is not sustainable in such cases, and resultant assessment orders are liable to be quashed.

- The Revenue cannot issue notices under both Section 148 and Section 153C simultaneously for the same assessment year.

Final Determinations

The Tribunal upheld the order of the CIT(A) quashing the notice issued under Section 148 and the consequential reassessment order. The appeal filed by the Revenue was dismissed as infructuous due to the issuance of Section 153C notice. The special procedure under Sections 153A to 153C was held to be mandatory and exclusive in cases involving incriminating material seized during search relating to persons other than the one searched. The AO's action in initiating proceedings under Section 148 was held to be legally unsustainable in the facts of the case.