2023 (4) TMI 1056 - SC - Income Tax

Scope of Assessment u/s 153A - competency of AO to consider all the material that is available on record including that found during the search and make an assessment of total income - assessment of completed assessments/unabated assessment - Whether in case any incriminating material is found during search then even completed assessments can be assessed or reassessed taking into consideration the incriminating material and other material in possession of the Assessing Officer? - HELD THAT - We are in complete agreement with the view taken in the case of Kabul Chawla 2015 (9) TMI 80 - DELHI HIGH COURT and Saumya Construction 2016 (7) TMI 911 - GUJARAT HIGH COURT taking the view that no addition can be made in respect of completed assessment in absence of any incriminating material. When there shall be a block assessment under Section 153A?- On a plain reading of Section 153A of the Act 1961 it is evident that once search or requisition is made a mandate is cast upon the AO to issue notice under Section 153 of the Act to the person requiring him to furnish the return of income in respect of each assessment year falling within six assessment years immediately preceding the assessment year relevant to the previous year in which such search is conducted or requisition is made and assess or reassess the same. In case during the search no incriminating material is found in case of completed/unabated assessment the only remedy available to the Revenue would be to initiate the reassessment proceedings under sections 147/48 of the Act subject to fulfilment of the conditions mentioned in sections 147/148 as in such a situation the Revenue cannot be left with no remedy. Therefore even in case of block assessment under section 153A and in case of unabated/completed assessment and in case no incriminating material is found during the search the power of the Revenue to have the reassessment under sections 147/148 of the Act has to be saved otherwise the Revenue would be left without remedy. Conclusion i) that in case of search under Section 132 or requisition under Section 132A the AO assumes the jurisdiction for block assessment under section 153A; ii) all pending assessments/reassessments shall stand abated; iii) in case any incriminating material is found/unearthed even in case of unabated/completed assessments the AO would assume the jurisdiction to assess or reassess the total income taking into consideration the incriminating material unearthed during the search and the other material available with the AO including the income declared in the returns; and iv) in case no incriminating material is unearthed during the search the AO cannot assess or reassess taking into consideration the other material in respect of completed assessments/unabated assessments. Meaning thereby in respect of completed/unabated assessments no addition can be made by the AO in absence of any incriminating material found during the course of search under Section 132 or requisition under Section 132A of the Act 1961. However the completed/unabated assessments can be re-opened by the AO in exercise of powers under Sections 147/148 of the Act subject to fulfilment of the conditions as envisaged/mentioned under sections 147/148 of the Act and those powers are saved. Whether in case of completed/unabated assessments the AO would have jurisdiction to re-open the assessments made under Section 143(1)(a) or 143(3) of the Act 1961 and to reassess the total income taking notice of undisclosed income even found during the search and seizure operation ? - As once during search undisclosed income is found on unearthing the incriminating material during the search the AO would assume jurisdiction to assess or reassess the total income even in case of completed/unabated assessments. Therefore the impugned judgment(s) and order(s) passed by the High Court taking the view that the AO has the power to reassess the return of the assessee not only for the undisclosed income which was found during the search operation but also with regard to material that was available at the time of original assessment does not require any interference. Under the circumstances the aforesaid appeals preferred by the assessee M/s Kesarwani Zarda Bhandar Sahson Allahabad deserve to be dismissed and are accordingly dismissed.

Summary

The core legal questions considered by the Court in this batch of connected appeals revolve around the scope and ambit of assessment under Section 153A of the Income Tax Act, 1961, particularly in the context of searches conducted under Section 132 or requisitions under Section 132A. The principal issues include:

1. Whether the Assessing Officer (AO), upon initiation of proceedings under Section 153A consequent to a search or requisition, is empowered to assess or reassess the 'total income' including material other than the incriminating material found during the search, especially in cases where assessments for the relevant years have already been completed (unabated assessments).

2. Whether in the absence of any incriminating material found during the course of search, the AO can make additions or reassess completed/unabated assessments under Section 153A based on other material available on record.

3. The interpretation of the phrase 'total income' under Section 153A and its relationship with the earlier block assessment regime under Section 158BA.

4. The effect of the abatement proviso in Section 153A(1) and the revival provision in Section 153A(2) on pending and completed assessments.

5. The interplay between Section 153A assessments and regular assessments/reassessments under Sections 143(3), 144, and 147, particularly whether two parallel assessments can coexist.

Issue-wise Detailed Analysis

Issue 1: Scope of AO's jurisdiction under Section 153A to assess 'total income' including material beyond incriminating material found during search

The legal framework begins with the charging section, Section 4 of the Act, which taxes the 'total income' of a person. Section 2(45) defines 'total income' as the aggregate income computed as per the Act. Section 5 includes income from all sources for residents. The Revenue's contention is that once a search under Section 132 or requisition under Section 132A is initiated, the AO is empowered under Section 153A to assess or reassess the entire 'total income' for the six preceding assessment years, based on all material available, including incriminating material found during the search and other information from various sources.

The Court examined the evolution of assessment procedures in search cases. Prior to June 30, 1995, assessments were made under regular provisions (Sections 143(3), 147) considering all material. The Finance Act, 1995 introduced Chapter XIV-B (Sections 158B to 158BG) providing a block assessment scheme focusing on 'undisclosed income' found during search for a block period of six or ten years, assessed separately from regular assessments and taxed at a special rate under Section 113.

The 2003 Finance Act replaced this with Section 153A, abolishing parallel assessments and block period concepts, mandating a unified assessment of 'total income' for each of the six assessment years preceding the search. Section 153A is a non-obstante provision overriding Sections 139, 147, 148, 149, 151, and 153. It requires the AO to issue notices and assess or reassess total income for each relevant year independently, not as a block.

The Revenue argued that the AO's jurisdiction under Section 153A is triggered by the initiation of search or requisition, not contingent on finding incriminating material, and the AO may assess total income including material from sources other than the search. The Court noted this interpretation is supported by the plain language of Section 153A, which uses the terms 'assess' and 'reassess' total income, and omits the term 'undisclosed income' used in the earlier block assessment regime.

The Court also highlighted that the second proviso to Section 153A(1) mandates abatement of pending assessments or reassessments on the date of search, which then get subsumed into the Section 153A assessment. The AO is to pass one assessment order per assessment year covering total income, thereby avoiding parallel assessments.

Issue 2: Whether additions can be made in completed/unabated assessments in absence of incriminating material found during search

The assessees contended that the AO's jurisdiction under Section 153A is linked to the search or requisition and the incriminating material found therein. They argued that in the absence of incriminating material, the AO cannot make additions or reassess completed assessments. They emphasized that Sections 132 and 132A authorize search and requisition only upon reason to believe that undisclosed income or property exists, and if no incriminating material is found, the basis for search is vitiated, rendering any subsequent assessment under Section 153A invalid beyond the scope of such material.

They further submitted that the expression 'total income' in Section 153A should be read in the context of Sections 132 and 132A and the object of the provision, i.e., to bring to tax undisclosed income found during search. For completed assessments where no incriminating material is found, 'total income' should mean the income as per the earlier completed assessment or return, and no reassessment should be permitted under Section 153A. The assessees relied on various High Court decisions and this Court's precedents supporting this restricted interpretation.

The Court noted that the assessees' submissions are supported by various High Courts, including the Delhi High Court (Kabul Chawla), Gujarat High Court (Saumya Construction), Bombay, Karnataka, Orissa, Calcutta, Rajasthan, and Kerala High Courts, which held that no additions can be made in completed assessments in absence of incriminating material. Only the Allahabad High Court took a contrary view.

Issue 3: Interpretation of 'total income' under Section 153A and relationship with earlier block assessment regime

The Court examined the legislative intent behind Section 153A replacing the earlier block assessment regime under Section 158BA. The earlier regime involved two parallel assessments: block assessment of undisclosed income at a special rate and regular assessment of disclosed income at normal rates. Section 153A abolished this duality, mandating a single assessment of total income for each assessment year, including both disclosed and undisclosed income, taxed at normal rates.

However, the Court agreed with the assessees that the omission of 'undisclosed income' in Section 153A does not mean the AO can assess income beyond incriminating material in completed assessments. The 'total income' in completed assessments must be read in light of the search provisions and the purpose of Section 153A, which is to tax undisclosed income found during search. Thus, in completed assessments where no incriminating material is found, the AO cannot reopen assessments under Section 153A.

Issue 4: Effect of abatement proviso in Section 153A(1) and revival provision in Section 153A(2)

The Court analyzed the second proviso to Section 153A(1), which mandates abatement of pending assessments or reassessments on the date of search, and Section 153A(2), which provides for revival of such abated proceedings if the Section 153A assessment is annulled on appeal or other legal proceedings. The Court interpreted these provisions as indicating that only pending assessments abate and can be revived, whereas completed/unabated assessments do not abate and remain final unless reopened under other provisions.

The Court held that accepting the Revenue's contention that AO can reassess completed assessments under Section 153A even without incriminating material would render these abatement and revival provisions redundant and contradict the legislative scheme.

Issue 5: Interplay between Section 153A assessments and regular assessments/reassessments under Sections 143(3), 144, and 147

The Court observed that the earlier regime allowed parallel assessments under regular provisions and block assessments under Chapter XIV-B. The 2003 amendment introduced Section 153A to avoid such parallelism by subsuming all pending assessments into a single assessment under Section 153A upon search or requisition.

The Court clarified that in cases where no incriminating material is found during search, and assessments are completed/unabated, the AO cannot use Section 153A to reopen or make additions. However, the Revenue retains the right to initiate reassessment under Section 147 or best judgment assessment under Section 144, subject to fulfillment of their respective conditions, as a remedy to bring to tax escaped income not linked to incriminating material found in search.

Key evidence and findings

The Court relied on the statutory language of Section 153A and related provisions, the legislative history including the shift from block assessment under Section 158BA to the unified assessment under Section 153A, and the scheme of the Income Tax Act. It also considered authoritative judicial precedents from various High Courts and this Court interpreting the scope of Section 153A and the necessity of incriminating material for reassessment of completed assessments.

Treatment of competing arguments

The Court gave detailed consideration to the Revenue's argument that the AO's jurisdiction under Section 153A is triggered by search or requisition and is not contingent on discovery of incriminating material, allowing assessment of total income including other material. The Court rejected this expansive interpretation, emphasizing the statutory context, the object of search provisions, and the legislative intent behind Section 153A.

The Court accepted the assessees' argument that in absence of incriminating material, reopening completed assessments under Section 153A would be arbitrary, render the statutory abatement and revival provisions meaningless, and allow the Revenue to circumvent limitation periods and regular assessment safeguards.

Conclusions

The Court concluded that:

i) Section 153A is triggered by a valid search under Section 132 or requisition under Section 132A, and the AO assumes jurisdiction for block assessment for six years.

ii) All pending assessments or reassessments as on date of search shall abate and be subsumed into the Section 153A assessment.

iii) If incriminating material is found during search, the AO can assess or reassess total income for the relevant years, including completed/unabated assessments, taking into account incriminating material and other available material.

iv) If no incriminating material is found during search, the AO cannot make additions or reassess completed/unabated assessments under Section 153A based on other material. Such completed assessments remain final.

v) The Revenue retains the right to initiate reassessment under Section 147 or best judgment assessment under Section 144, subject to their conditions, in cases where no incriminating material is found during search.

Significant Holdings

The Court preserved the following crucial legal reasoning verbatim:

"Section 153A bears the heading 'Assessment in case of search or requisition'. It is well settled as held by the Supreme Court in a catena of decisions that the heading of the section can be regarded as a key to the interpretation of the operative portion of the section and if there is no ambiguity in the language or if it is plain and clear, then the heading used in the section strengthens that meaning. From the heading of section 153, the intention of the Legislature is clear, viz, to provide for assessment in case of search and requisition. When the very purpose of the provision is to make assessment in case of search or requisition, it goes without saying that the assessment has to have relation to the search or requisition. In other words, the assessment should be connected with something found during the search or requisition, viz., incriminating material which reveals undisclosed income."

"Although Section 153A 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 case no incriminating material is unearthed during the search, the AO cannot assess or reassess taking into consideration the other material in respect of completed assessments/unabated assessments."

"If the submission on behalf of the Revenue that in case of search even where no incriminating material is found during the course of search, even in case of unabated/completed assessment, the AO can assess or reassess the income/total income taking into consideration the other material is accepted, in that case, there will be two assessment orders, which shall not be permissible under the law."

Core principles established include:

- The jurisdiction of the AO under Section 153A is contingent upon a valid search/requisition and the discovery of incriminating material.

- Completed assessments cannot be reopened under Section 153A in absence of incriminating material found during search.

- Pending assessments abate upon search and are subsumed into Section 153A assessments.

- The Revenue's remedy in absence of incriminating material in completed assessments lies in reassessment under Section 147, subject to conditions.

- The legislative intent behind Section 153A is to unify assessment of total income for six years post-search, abolishing parallel block and regular assessments.

The Court's final determinations on each issue are reflected in the dismissal of the Revenue's appeals challenging the restrictive interpretation and the upholding of the assessees' position that additions in completed assessments require incriminating material found during search. The appeals filed by the assessees challenging this view were dismissed where incriminating material was found and the AO had jurisdiction to reassess total income.