2025 (4) TMI 1258 - AT - Income Tax

Assessment u/s 153A/153C or 147 - documents found during the search on third party - HELD THAT - As per the express scheme of the Act where documents seized in a search pertain to or belong to a person other than the searched party the appropriate and mandatory course of action is to proceed u/s 153C and not u/s 147. The documents cited in the assessment order clearly form part of the material seized from the premises of the Ameya Group. No new or independent information was unearthed by the AO in the normal course of assessment proceedings. AO despite initiating the reassessment on the basis of alleged cash receipts ultimately made additions on an entirely different ground namely cash payments thus deviating from the recorded reasons. Such divergence between the recorded reasons and the eventual addition undermines the very jurisdiction assumed under Section 147. Thus the assumption of jurisdiction u/s 147 by the issuance of notice under Section 148 dated 30.03.2019 is invalid and without legal sanction.

Summary

The core legal questions considered by the Tribunal in this appeal and cross-objection pertain primarily to the validity and jurisdictional competence of the Assessing Officer (AO) in reopening the assessment under Section 147 of the Income-tax Act, 1961 ("the Act") based on documents seized during a search conducted on a third party. The issues include:

1. Whether the reopening of assessment under Section 147 read with Section 148 of the Act was legally sustainable when the basis of reopening was documents seized during a search on a third party (Ameya Group), and no independent or fresh information was gathered in the normal course of assessment proceedings.

2. Whether the AO ought to have proceeded under Section 153C of the Act, which governs assessment or reassessment of "other persons" when incriminating documents are found during a search on a different person, instead of invoking Section 147.

3. Whether the AO's recorded reasons for reopening the assessment were consistent with the additions made in the reassessment order, and if any divergence impacts the validity of the reopening.

4. The applicability and interpretation of the "belongs to" test under Section 153C, and whether the documents seized "belonged" to the assessee or the searched party, impacting the choice of procedure.

5. The effect of judicial precedents and statutory amendments, including the non-obstante clause in Sections 153A and 153C, on the jurisdiction of the AO to reopen assessments under Section 147 in search-related cases.

Issue-wise Detailed Analysis:

1. Validity of Reopening under Section 147 vs. Section 153C Procedure

Legal Framework and Precedents: Section 147 empowers the AO to reopen an assessment if there is a reason to believe that income chargeable to tax has escaped assessment. However, Sections 153A and 153C provide a special procedure for assessments arising from search or requisition operations under Section 132 or 132A. Section 153C specifically deals with assessments of "other persons" whose documents or assets are found during a search on a different person. The non-obstante clause in these sections overrides the general provisions of Section 147 for the relevant assessment years.

Judicial pronouncements such as G. Koteswara Rao v. DCIT emphasize that Section 147 and Section 153A/153C operate in different factual matrices: Section 147 applies where escapement is detected through material evidence or belief, while Section 153A/153C applies exclusively to search/requisition cases. The Supreme Court and various High Courts have held that where a search is conducted on a third party, the assessment of other persons must be under Section 153C, not Section 147.

Court's Interpretation and Reasoning: The Tribunal noted that the reopening in the present case was based solely on documents seized during the search on the Ameya Group, a third party. No fresh or independent information was obtained through normal assessment proceedings. The AO's invocation of Section 147 was thus procedurally incorrect because the statutory scheme mandates that assessments based on search materials relating to other persons must be conducted under Section 153C.

The Tribunal observed that allowing the AO to proceed under Section 147 in such circumstances would circumvent the safeguards and special procedures prescribed under Section 153C, rendering it redundant and defeating legislative intent.

Key Evidence and Findings: The documents relied upon for reopening were seized from the Ameya Group's premises during the search on 31.07.2014. The AO's reasons for reopening did not demonstrate possession of independent material beyond these seized documents. Furthermore, the AO's reassessment order reflected additions on grounds different from those recorded in the reopening reasons, undermining the jurisdictional basis.

Application of Law to Facts: Since the documents did not belong to the assessee but were seized from the Ameya Group, the proper procedure would have been to invoke Section 153C. The AO's failure to do so rendered the reopening under Section 147 invalid. The Tribunal relied on the "belongs to" test prevailing at the relevant time, which required the documents to belong to the assessee for Section 153C to apply. The AO did not establish this ownership, thus negating the applicability of Section 153C and simultaneously invalidating the use of Section 147.

Treatment of Competing Arguments: The Revenue argued that the AO had a bona fide reason to reopen under Section 147 based on the incriminating documents and that exactitude in recorded reasons is not required. They also contended that Section 153C did not bar action under Section 147 where the documents did not "belong" to the assessee, citing subsequent judicial decisions including a recent Delhi High Court ruling. However, the Tribunal distinguished these later judgments as not applicable to the facts and law as it stood at the time of reopening.

Conclusion: The Tribunal held that the reopening under Section 147 was invalid and the reassessment proceedings were void ab initio, as the statutory procedure under Section 153C was not followed and the AO failed to satisfy jurisdictional preconditions.

2. Consistency Between Recorded Reasons and Additions Made

Legal Framework: The recorded reasons for reopening must disclose a prima facie case of escapement of income. While exact precision is not mandatory, the reasons should broadly correlate with the additions made in the reassessment.

Court's Reasoning: The AO's reasons recorded reopening based on alleged cash receipts from the assessee, but the reassessment order made additions on cash payments instead. This divergence indicated a lack of proper application of mind and undermined the validity of the reopening.

Findings: The Tribunal found that the AO did not properly examine seized documents before recording reasons and that the reasons were inconsistent with the additions. This procedural lapse further invalidated the reopening.

Conclusion: The inconsistency between reasons and additions contributed to the invalidity of the reassessment proceedings.

3. Applicability of the "Belongs To" Test Under Section 153C

Legal Framework: At the time of reopening (2019), Section 153C required that the seized documents or assets must "belong to" the person whose assessment is being reopened. This test was interpreted narrowly by courts to mean legal ownership or possession.

Court's Interpretation: The Tribunal found that the seized documents belonged to the Ameya Group and not to the assessee. Therefore, Section 153C was not triggered. However, this did not empower the AO to resort to Section 147, as the statutory scheme envisaged a special procedure for search-related assessments.

Conclusion: The AO's failure to conform to the "belongs to" test and the consequent invocation of Section 147 was improper and invalid.

4. Effect of Judicial Precedents and Statutory Amendments

Relevant Judgments: The Tribunal considered decisions including G. Koteswara Rao v. DCIT, Abhisar Buildwell Pvt. Ltd. v. Union of India, and Sejal Jewellery v. UOI, which emphasize the exclusive jurisdiction of Sections 153A/153C in search cases and the limited scope of Section 147 in such contexts.

While the Revenue relied on later rulings, including a 2024 Delhi High Court decision interpreting the amended Section 153C retrospectively, the Tribunal distinguished these as not applicable to the facts and law at the time of reopening for AY 2012-13.

Conclusion: The Tribunal adhered to the law as it stood at the time of reopening, leading to the conclusion that the reopening under Section 147 was not sustainable.

Significant Holdings:

"The reopening was initiated without the existence of a prima facie belief that any income chargeable to tax had escaped assessment."

"Allowing the AO to proceed under Section 147 in such circumstances would render Section 153C otiose, defeating the purpose of the special procedure laid down by the legislature."

"The invocation of Section 147 by the issuance of notice under Section 148 dated 30.03.2019 is invalid and without legal sanction."

"The reassessment proceedings, and the resultant additions made therein, are liable to be quashed in their entirety."

"The AO did not establish that the documents 'belonged' to the assessee, as required under the law prevailing at the relevant time to invoke Section 153C."

"The divergence between the recorded reasons and the eventual addition undermines the very jurisdiction assumed under Section 147."

"The Tribunal allowed the assessee's grounds in cross-objection and held the reassessment proceedings void ab initio."

In conclusion, the Tribunal dismissed the Revenue's appeal and allowed the assessee's cross-objection, thereby quashing the reassessment proceedings initiated under Section 147 on the basis of documents seized in a search on a third party without following the mandatory procedure under Section 153C. The decision underscores the importance of adhering to the statutory scheme governing search-related assessments and the necessity of proper jurisdictional compliance before reopening assessments.