2024 (4) TMI 461 - HC - Income Tax

Initiating proceedings u/s 153C - issuance of the notice was preceded by the drawl of a Satisfaction Note by the jurisdictional AO - importance of material recovered in the course of a search or a requisition made and a right to reassess u/s 153A and 153C - petitioners contended that in the absence of any incriminating material having been unearthed in the search, it would be impermissible for the respondents to initiate action u/s 153C for the six AYs preceding the year of search or for that matter, the relevant assessment year . Distinction between Section 153A and Section 153C - HELD THAT - It is only when the transmitted documents and material reaches the desk of the jurisdictional AO that it becomes empowered to initiate action u/s 153C of the Act. This is evident from a plain textual reading of that provision and which speaks of the commencement point being the handing over of documents or assets seized or requisitioned to the AO of the other person and it in turn proceeding to issue notice to assess or reassess the income of the non-searched entity in accordance with Section 153A. However, the initiation of action u/s 153C is significantly premised upon the AO being satisfied that the books of account or documents and assets seized or requisitioned having a bearing on the determination of the total income of such other person . Issuance of a notice u/s 153C is clearly not intended to be an inevitable consequence to the receipt of material by the jurisdictional AO. That the AO before commencement of action u/s 153C is also obliged to be satisfied that the material so received would have a bearing on the determination of the total income of such other person is an aspect of significance and constitutes a fundamental point of distinction between Section 153A and Section 153C. This distinguishing element of the two provisions would become further apparent from the discussion which ensues. It becomes apparent from the legislative mandate of those two provisions being applicable to searches undertaken in a particular time period, the principles of abatement being replicated and the search assessment power being available to be invoked for the relevant assessment year , and which extended the power to be exercised over a ten year block, being simultaneously introduced in those provisions. The Legislature clearly intended both these provisions to form part of a cohesive scheme and to be complementary to each other. The aspects of satisfaction and of the material likely to implicate or influence were not added in Section 153A. The fact that any additions that may be ultimately made upon a culmination of assessment under Section 153A being indelibly founded on the material gathered in the course of the search is a separate issue all together. The usage of the expression have a bearing would necessarily lead one to conclude that the mere discovery of books, documents or assets would not justify the initiation of proceedings under that provision. Upon receipt of that material, the jurisdictional AO must additionally be satisfied that those are likely to have an impact on the determination of the total income . Bearing would include something which would lend support or credence. It has also been defined to mean something which may have a practical relation or effect upon, influence or relevance. This leads us to the inevitable conclusion that the initiation of action under Section 153C would have to be founded on a formation of opinion by the jurisdictional AO that the material handed over and received pursuant to a search is likely to influence the determination of the total income and would be of relevancy for the purposes of assessment or reassessment. Incriminating material - Cascading effect - The spectre of abatement insofar as the other person is concerned would arise only after the jurisdictional AO has formed the requisite satisfaction of the material having a bearing on the determination of the total income of such other person and having formed the opinion that proceedings u/s 153C are liable to be initiated. It would be pertinent to bear in mind that Kabul Chawla 2015 (9) TMI 80 - DELHI HIGH COURT was a decision rendered in the context of Section 153A. It was in the aforesaid backdrop that the Court significantly observed that once a search takes place u/s 132 of the Act, notice under Section 153A(1) would mandatorily issue. The abatement of assessment and reassessment pending on that date would, in the case of a Section 153A assessment, be a preordained consequence. However, and in light of what has been observed hereinabove, it is apparent that Section 153C constructs a subtle and yet significant distinction insofar as the question of commencement of proceedings or assumption of jurisdiction is concerned. Nature of the incriminating material that may be obtained and the years forming part of the block which would merit being thrown open - Section 153C enables and empowers the jurisdictional AO to assess or reassess the six AYs or the relevant assessment year . Ultimately Section 153C is concerned with books, documents or articles seized in the course of a search and which are found to have the potential to impact or have a bearing on an assessment which may be undergoing or which may have been completed. The words have a bearing on the determination of the total income of such other person as appearing in Section 153C would necessarily have to be conferred pre-eminence. Therefore, and unless the AO is satisfied that the material gathered could potentially impact the determination of total income, it would be unjustified in mechanically reopening or assessing all over again all the ten AYs that could possibly form part of the block of ten years. A reading of the aforesaid Satisfaction Notes would establish that jurisdictional AOs appear to have proceeded on the premise that the moment incriminating material is unearthed in respect of a particular AY, they would have the jurisdiction and authority to invoke Section 153C in respect of all the assessment years which could otherwise form part of the relevant assessment year as defined in Section 153A. In our considered opinion, the aforesaid understanding of Section 153C is clearly erroneous and unsustainable. As explained hereinabove, the discovery of material likely to implicate the assessee and impact the assessment of total income for a particular AY is not intended to set off a chain reaction or have a waterfall effect on all AYs which could form part of the relevant assessment year . This, more so since none of the Satisfaction Notes record any reasons of how that material is likely to materially influence the computation of income for those AYs . The Satisfaction Notes would thus have to evidence a formation of opinion that the material is likely to be incriminating for more than a singular assessment year and thus warranting the drawl of Section 153C proceedings for years in addition to those to which the material may be directly relatable. Conclusion - On an overall consideration of the structure of Sections 153A and 153C, we thus find that a reopening or abatement would be triggered only upon the discovery of material which is likely to have a bearing on the determination of the total income and would have to be examined bearing in mind the AYs which are likely to be impacted. Thus be incorrect to either interpret or construe Section 153C as envisaging incriminating material pertaining to a particular AY having a cascading effect and which would warrant a mechanical and inevitable assessment or reassessment for the entire block of the relevant assessment year . In our considered view, abatement of the six AYs or the relevant assessment year u/s 153C would follow the formation of opinion and satisfaction being reached that the material received is likely to impact the computation of income for a particular AY or AYs that may form part of the block of ten AYs . Abatement would be triggered by the formation of that opinion rather than the other way around. This, in light of the discernibly distinguishable statutory regime underlying Sections 153A and 153C as explained above. While in the case of the former, a notice would inevitably be issued the moment a search is undertaken or documents requisitioned, whereas in the case of the latter, the proceedings would be liable to be commenced only upon the AO having formed the opinion that the material gathered is likely to inculpate the assessee. We would thus recognize the flow of events contemplated u/s 153C being firstly the receipt of books, accounts, documents or assets by the jurisdictional AO, an evaluation and examination of their contents and an assessment of the potential impact that they may have on the total income for the six AYs immediately preceding the AY pertaining to the year of search and the relevant assessment year . It is only once the AO of the non-searched entity is satisfied that the material coming into its possession is likely to have a bearing on the determination of the total income that a notice u/s 153C would be issued. Abatement would thus be a necessary corollary of that notice. However, both the issuance of notice as well as abatement would have to necessarily be preceded by the satisfaction spoken of above being reached by the jurisdictional AO of the non-searched entity. Therefore, and in our opinion, abatement of the six AYs or the relevant assessment year would follow the formation of that opinion and satisfaction in that respect being reached. We come to the firm conclusion that the incriminating material which is spoken of would have to be identified with respect to the AY to which it relates or may be likely to impact before the initiation of proceedings under Section 153C of the Act. A material, document or asset recovered in the course of a search or on the basis of a requisition made would justify abatement of only those pending assessments or reopening of such concluded assessments to which alone it relates or is likely to have a bearing on the estimation of income. The mere existence of a power to assess or reassess the six AYs immediately preceding the AY corresponding to the year of search or the relevant assessment year would not justify a sweeping or indiscriminate invocation of Section 153C. The jurisdictional AO would have to firstly be satisfied that the material received is likely to have a bearing on or impact the total income of years or years which may form part of the block of six or ten AYs and thereafter proceed to place the assessee on notice under Section 153C. The power to undertake such an assessment would stand confined to those years to which the material may relate or is likely to influence. Absent any material that may either cast a doubt on the estimation of total income for a particular year or years, the AO would not be justified in invoking its powers conferred by Section 153C. It would only be consequent to such satisfaction being reached that a notice would be liable to be issued and thus resulting in the abatement of pending proceedings and reopening of concluded assessments. Operative Directions - We find that except for a few exceptions which were noticed in the introductory parts of this judgment, the writ petitions forming part of this batch, impugn the invocation of Section 153C in respect of AYs for which no incriminating material had been gathered or obtained. Satisfaction Notes also fail to record any reasons as to how the material discovered and pertaining to a particular AY is likely to have a bearing on the determination of the total income for the year which is sought to be abated or reopened in terms of the impugned notices. Respondents have erroneously proceeded on the assumption that the moment any material is recovered in the course of a search or on the basis of a requisition made, they become empowered in law to assess or reassess all the six AYs years immediately preceding the assessment correlatable to the search year or the relevant assessment year as defined in terms of Explanation 1 of Section 153A. The said approach is clearly unsustainable and contrary to the consistent line struck by the precedents noticed above.

Summary

Issues Involved:
1. Legality of notices issued u/s 153C of the Income Tax Act, 1961.
2. Requirement of incriminating material for reopening assessments u/s 153C.
3. Abatement of pending assessments under Section 153C.
4. Distinction between Sections 153A and 153C.
5. Validity of reopening assessments for multiple assessment years based on incriminating material for a single year.

Summary:

1. Legality of Notices Issued u/s 153C:
The petitioners challenged the legality of notices issued u/s 153C of the Income Tax Act, asserting that the assumption of jurisdiction was illegal as no material pertaining to the Assessment Years (AYs) proposed to be reopened was gathered during the search. The court noted that in some cases, Satisfaction Notes were neither provided to the petitioners nor brought on record by the respondents, leading to the assumption that the incriminating material did not pertain to the AY in question.

2. Requirement of Incriminating Material for Reopening Assessments u/s 153C:
The court emphasized that the power to assess or reassess u/s 153C is premised on the existence of incriminating material that has a bearing on the determination of the total income of the non-searched entity. This requirement is essential even for abated assessments. The court referred to the Supreme Court's decision in Commissioner of Income Tax v. Sinhgad Technical Education Society (2018) 11 SCC 490, which held that incriminating material must pertain to the AY in question.

3. Abatement of Pending Assessments under Section 153C:
The court clarified that under Section 153C, abatement of pending assessments would follow the formation of an opinion that the material received is likely to impact the total income for a particular AY. The court distinguished this from Section 153A, where the issuance of a notice is mandatory upon a search.

4. Distinction between Sections 153A and 153C:
The court highlighted the differences between Sections 153A and 153C. Section 153A mandates the issuance of a notice upon a search, whereas Section 153C requires the AO to be satisfied that the documents or assets seized have a bearing on the determination of the total income of the non-searched entity. This satisfaction is a jurisdictional precondition for invoking Section 153C.

5. Validity of Reopening Assessments for Multiple Assessment Years Based on Incriminating Material for a Single Year:
The court rejected the respondents' argument that incriminating material for a single AY justifies reopening assessments for the entire block of six or ten AYs. The court held that the AO must identify the specific AYs to which the incriminating material relates and can only reopen those assessments. The court referred to Principal Commissioner of Income Tax v. Abhisar Buildwell Private Limited (2024) 2 SCC 433, which affirmed that no addition can be made in respect of completed assessments in the absence of incriminating material.

Operative Directions:
The court quashed the impugned notices insofar as they pertained to AYs 2013-14 to 2020-21, except for W.P.(C) 3007/2023 and W.P.(C) 3019/2023, where the notices were found to be valid as they were based on incriminating material specific to those AYs.