2025 (5) TMI 2156 - HC - Income Tax

Validity of assessment beyond the period of the limitation - whether a notice u/s 153C of the Act could have been issued for the relevant AY 2014-15 for the limited purposes of determining whether a notice u/s 148 of the Act can be issued in view of the first proviso to Section 149 (1) of the Act? HELD THAT - There is no mandatory requirement for an assessing officer of a searched person to record his satisfaction that the assets or documents found during the search belong to a person other than the one searched or contained information regarding such other person in cases of search conducted after 31.03.2021. Thus for the purposes of considering the limitation u/s 153C of the Act it is apposite to consider the date on which the decision is taken by the AO to take steps for initiating re-assessment proceedings as the relevant date. Block of ten assessment years is required to be reckoned from the end of the AY 2025-26 being the assessment year relevant to the financial year in which the impugned notice u/s 148 was issued. The present petition is allowed. The impugned notice is set aside as being barred by limitation. Decided in favour of assessee.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Court in the present matter are:

(a) Whether the notice issued under Section 148 of the Income Tax Act, 1961, seeking to reopen the assessment for the Assessment Year (AY) 2014-15, is barred by limitation;

(b) Whether the provisions of Section 153C of the Act are applicable to the present case, particularly in light of the amendments effective from 1 April 2021, and how the limitation period should be computed in cases involving search and seizure;

(c) Whether the Assessing Officer was required to record satisfaction regarding the ownership of assets or documents found during the search for initiating reassessment proceedings under Section 148;

(d) The legal principles governing the computation of the relevant block of years (six or ten years) for issuance of notices under Sections 148, 153A, and 153C of the Act, especially when searches are conducted after 31 March 2021;

(e) The applicability and interpretation of the first proviso to Section 149(1) of the Act in determining the limitation period for reopening assessments post-search operations.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a): Whether the notice under Section 148 is barred by limitation

The petitioner challenged the impugned notice dated 31.08.2024, issued under Section 148 of the Income Tax Act, to reopen the assessment for AY 2014-15, on the ground that it was issued beyond the prescribed limitation period.

Relevant legal framework and precedents: Section 148 read with Section 149 of the Act governs the reopening of assessments. The limitation period for issuance of notice under Section 148 is generally four years from the end of the relevant AY, extended to six or ten years in cases involving income escaping assessment on specified grounds. The first proviso to Section 149(1) introduces additional considerations in the context of reassessment proceedings initiated post-search operations.

Court's interpretation and reasoning: The Court examined the limitation period by applying the principles laid down in recent authoritative decisions, particularly the judgments in Dinesh Jindal v. Assistant Commissioner of Income Tax and Principal Commissioner of Income Tax-Central-1 v. Ojjus Medicare Pvt. Ltd. The Court observed that the limitation period for issuing the notice under Section 148 must be reckoned from the date of initiation of reassessment proceedings, which in this case was 31.08.2024.

Application of law to facts: Since the impugned notice pertained to AY 2014-15, the Court computed the block of ten years backward from the end of AY 2025-26 (the AY relevant to the financial year in which the notice was issued). The tabular computation demonstrated that AY 2014-15 fell outside the permissible ten-year block, rendering the notice barred by limitation.

Conclusion: The Court concluded that the notice under Section 148 was issued beyond the statutory limitation period and was therefore invalid.

Issue (b): Applicability of Section 153C and computation of limitation post-1 April 2021

Relevant legal framework and precedents: Section 153C of the Act regulates reassessment proceedings in cases where a search under Section 132 has been conducted. However, post the Finance Act, 2021, the applicability of Section 153C has been curtailed for searches conducted after 31 March 2021. The Court relied on the decision in Dinesh Jindal, which clarified that Section 153C ceases to regulate reassessment proceedings for searches after this date, but the limitation period must still be considered in light of the first proviso to Section 149(1).

Court's interpretation and reasoning: The Court held that although Section 153C is no longer applicable for searches after 31 March 2021, the limitation period for reopening assessments must be reckoned by reference to the principles applicable prior to the Finance Act, 2021, as mandated by the first proviso to Section 149(1). The Court also noted that the date of decision by the Assessing Officer to initiate reassessment proceedings is the relevant date for limitation computation.

Key findings: The Court emphasized that the limitation period is not to be reckoned from the date of search but from the date of initiation of reassessment proceedings or receipt of seized material by the jurisdictional AO, as clarified in Ojjus Medicare and other precedents.

Conclusion: Section 153C does not apply to the present case, but the limitation period must be computed with reference to the first proviso to Section 149(1), which incorporates the timelines prescribed under earlier provisions.

Issue (c): Requirement of recording satisfaction by the AO in cases of search after 31 March 2021

Relevant legal framework: Prior to the amendment effective 1 April 2021, the AO was required to record satisfaction that the assets or documents found during a search belonged to a person other than the searched person before initiating proceedings under Section 153C. Post-amendment, this requirement has been removed.

Court's reasoning: The Court observed that for searches conducted after 31 March 2021, there is no mandatory requirement for the AO to record satisfaction regarding ownership of assets or documents to initiate reassessment proceedings under Section 148. This change affects the procedural requirements but does not impact the limitation period analysis.

Conclusion: The AO was not obliged to record satisfaction in the present case, but this procedural change does not validate the issuance of a notice barred by limitation.

Issue (d): Computation of six-year and ten-year blocks for limitation purposes in search cases

Relevant legal framework and precedents: The Court extensively relied on the decision in Ojjus Medicare, which elucidated the method for calculating the six-year and ten-year blocks for limitation under Sections 153A and 153C. The First Proviso to Section 153C shifts the reference date for computation from the date of search to the date of receipt of seized books of accounts or documents by the jurisdictional AO of the non-searched person.

Court's interpretation and reasoning: The Court reiterated that the six-year block refers to the assessment years immediately preceding the AY relevant to the year when books of accounts or documents are handed over to the AO, not the year of search. The ten-year block is reckoned from the end of the AY relevant to the year of search. This distinction is critical in determining whether a notice is barred by limitation.

Application of law to facts: Applying these principles, the Court found that the AY 2014-15 was outside the permissible ten-year block reckoned from AY 2025-26, thus barring the issuance of the notice.

Conclusion: The limitation period must be computed in accordance with the settled principles, which preclude reopening of AY 2014-15 in the present case.

Issue (e): Interpretation of the first proviso to Section 149(1)

Relevant legal framework and precedents: The first proviso to Section 149(1) mandates that reopening of assessments post-search must comply with the limitation periods as they stood prior to the Finance Act, 2021, effectively preserving the earlier timelines for such proceedings.

Court's reasoning: The Court emphasized that the proviso requires a backward-looking approach to limitation computation, ensuring that reassessment actions initiated after 1 April 2021 still adhere to the pre-amendment limitation periods. This was underscored in the Dinesh Jindal decision.

Conclusion: The proviso effectively bars reopening of assessments beyond the prescribed limitation period as per the pre-2021 regime, which applies to the present case.

3. SIGNIFICANT HOLDINGS

The Court held that:

"The First Proviso to Section 149 (1), however, bids us to go back in a point of time, and to examine whether a reopening would sustain bearing in mind the timeframes as they stood embodied in Section 149 (1) (b) or Section 153A and 153C, as the case may be. The First Proviso essentially requires us to undertake that consideration bearing in mind the timeframes which stood specified in Sections 149, 153A and 153C as they stood prior to the commencement of Finance Act, 2021."

"Undisputedly, and if the validity of the reassessment were to be tested on the anvil of Section 153C, the petitioner would be entitled to succeed for the following reasons. It is an undisputed fact that the proceedings under Section 148 commenced on the basis of the impugned notice dated 30 March 2023. This date would be of seminal importance since the period of six AYs' or the 'relevant assessment year' would have to be reckoned from the date when action was initiated to reopen the assessment pertaining to AY 2013-14."

"The identification of the starting block for the purposes of computation of the six and the ten year period is governed by the First Proviso to Section 153C, which significantly shifts the reference point spoken of in Section 153A (1), while defining the point from which the period of the 'relevant assessment year' is to be calculated, to the date of receipt of the books of accounts, documents or assets seized by the jurisdictional AO of the non-searched person."

"The reckoning of the six AYs' would require one to firstly identify the FY in which the search was undertaken and which would lead to the ascertainment of the AY relevant to the previous year of search. The block of six AYs' would consequently be those which immediately precede the AY relevant to the year of search."

"The block of ten assessment years is required to be reckoned from the end of the AY 2025-26 being the assessment year relevant to the financial year in which the impugned notice under Section 148 was issued."

Core principles established include:

- The limitation period for reopening assessments post-search conducted after 31 March 2021 must be computed in accordance with the pre-amendment provisions due to the first proviso to Section 149(1).

- Section 153C ceases to regulate reassessment proceedings for searches conducted after 31 March 2021, but limitation principles under Sections 149, 153A, and 153C as they stood pre-2021 continue to apply.

- The date of initiation of reassessment proceedings or receipt of seized material by the AO is the relevant date for computing limitation, not the date of search.

- The AO is not required to record satisfaction regarding ownership of assets or documents for searches conducted after 31 March 2021 before issuing a notice under Section 148.

Final determinations:

The impugned notice issued under Section 148 for AY 2014-15 was held to be barred by limitation and was set aside accordingly.