2025 (4) TMI 1554 - AT - Income Tax

Assessment u/s 153C or 147 - Scope of the phrase belongs or belong to versus pertains or pertain to in section 153C - HELD THAT - In the case of the assesse was centralized on 03.07.2012 whereas search was conducted on 02.09.2010 and in case of search conducted on 10.10.2013 in case of Shobha Group the notice was issued on 27.03.2015 after of 17 months. The period for issue of notice under section 153C was not expired. In this case prima-facie appears that the revenue officers have not properly followed the Instruction No 1927 dated 21.07.1995 specifically in this point (vi) The seized material shall be handed over to the Assessing Officer at the earliest. AO was the same person for the searched person and the assesse he could have issue notice under section 153C after following the procedure laid down therein. AO has choosing to issue notice under section 148 instead of 153C since there were incriminating materials were found and seized. The very basis of reason for reopening the case is on the basis of Seized materials unearthed during the course of searched person. On examination of the documents handed over by the Investigation Wing to the AO has a bearing for determination of total income of such other person for the relevant preceding years. In view of the above the case is covered u/s 153C of the Act but not under section 147/148 of the Act. Now coming to the case of the assessee the search was conducted on 02/09/2010 10/10/2013 in the case of Davanam Jewellers and Sobha Developers and incriminating materials were found and seized and it was marked as A2/DJPL/4 Page No. 13 to 16 and AO has quantified which is clear from the AO s order at Para No. 4.2 to 4.4. noted supra. During the search it was found and seized by the Investigation Wing in respect of transactions carried out for purchase of the Madiwala Commercial Plaza and noted that huge premium have been paid by the assessee and it was not recorded by the assessee. Consequently the case of the assessee came to be centralized on 03/07/2012. The AO has received information and perused the seized documents thereafter the AO has issued a notice under section 148 after the date of centralisation. The time limit to initiate proceedings under section 153C for each of the assessment years from Assessment Year 2006-07 to Assessment Year 2010-11 had not expired as on the date on which notice under section 148 was issued for these respective assessment years. Thus the AO was not precluded from initiating proceedings under section 153C of the Act since in the case of the assessee there were incriminating materials unearthed during the course of search therefore the AO has to follow the procedure as per sections 153A/153C of the Act. That the case of the assessee does not fall under section 147 of the Act since the materials were unearthed and seized during the course of search. In view of this the arguments of the learned Standing Council for the Revenue are not acceptable. The decision of Tribunal in the case of M/s. Ickon Projects 2023 (10) TMI 1471 - ITAT BANGALORE where the ITAT held that the decision of Vikram Sujitkumar Bhatia 2023 (4) TMI 296 - SUPREME COURT clearly mandates that the amended in Section 153C is deemed to have been on the statute since the very inception of that section thus if any material which is seized in a search conducted under section 132 of the Act is to be used to assess a person who is not searched the AO would have to necessarily initiate proceedings under section 153C of the Act in order to do the same proceeding initiated under section 147 of the Act to assess the same is bad in law. To sum up going through the arguments advanced by both the sides and considering the case laws noted supra. we find that the learned CIT (A) has done good reasoned order and there is no any infirmity. The AO should not have issued notice under section 148 of the Act. In the result the appeals filed by the Revenue are dismissed in above terms.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal in these appeals are:

• Whether the Assessing Officer (AO) was correct in initiating reassessment proceedings under section 147 of the Income Tax Act, 1961, by issuing notice under section 148, when the incriminating material on which the reopening was based was seized during search proceedings conducted under section 132 in the case of a third party?
• Whether the correct procedure for reassessment in such circumstances is to initiate proceedings under section 153C of the Act, which specifically deals with cases where seized material belongs or pertains to a person other than the searched person?
• Whether the amendment to section 153C of the Act, effective from 1 June 2015, substituting the words "belongs or belong to" with "pertains or pertain to," applies retrospectively to searches conducted prior to the amendment date?
• Whether the AO had jurisdiction to reopen assessments under section 147/148 when the incriminating material was seized in search proceedings of another person and the assessment years for which reassessment was initiated had not abated?
• Whether the CIT(A) was justified in allowing the Revenue's rectification application under section 154 of the Act to recall its earlier appellate order that had held initiation under section 147/148 as invalid?
• Whether the meaning of "belong to" in section 153C should be narrowly construed to mean ownership or more broadly to include material that "pertains or relates to" the person, and the implications thereof on the validity of reassessment proceedings?

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1 & 2: Validity of initiation of reassessment proceedings under section 147/148 instead of section 153C when incriminating material is seized in search of a third party

Relevant legal framework and precedents: Sections 147 and 148 empower the AO to reopen assessments if income has escaped assessment. Sections 153A to 153C, introduced to deal with search and seizure cases, contain non obstante clauses overriding sections 139, 147, 148, 149, 151, and 153. Section 153C specifically applies where seized material belongs or pertains to a person other than the searched person, mandating that such material be handed to the AO having jurisdiction over that other person, who then proceeds under section 153A.

Pre-amendment section 153C required that seized material "belongs or belong to" the other person; post-amendment, the term was expanded to "pertains or pertain to" to cover a broader scope.

Judicial precedents from coordinate benches of the ITAT Bangalore (e.g., N. Suryanarayana and Shri Srinivas Rao Hoskote) and High Courts (e.g., Dinakar Suvarna vs DCIT, PCIT vs VSL Mining) have held that reassessment based on seized material found in search of a third party must be initiated under section 153C and not under section 147/148. The non obstante clause in section 153C excludes the applicability of section 147 in such cases.

The Supreme Court in the case of Vikram Sujitkumar Bhatia clarified that the amendment to section 153C is retrospective and applies to searches conducted before 1 June 2015, thereby broadening the scope of section 153C to include material that "pertains or relates to" the other person, not strictly owned by them.

Court's interpretation and reasoning: The Tribunal observed that the AO reopened assessments under section 147/148 based on material seized during search of M/s Davanam Group, a third party. The AO should have issued notice under section 153C and proceeded accordingly, as the incriminating material did not belong to the searched person but related to the assessee.

The Tribunal relied heavily on the Supreme Court's decision in Vikram Sujitkumar Bhatia, which held that the amendment to section 153C is retrospective and clarifies that proceedings under section 153C are mandatory when the seized material pertains or relates to the other person.

The Tribunal rejected the Revenue's contention that the AO was justified in proceeding under section 147 because the amendment was prospective or because the AO only had information and not possession of seized material. The Tribunal noted that the AO himself recorded in the assessment orders that reopening was based on seized material, not mere information.

Key evidence and findings: Seized documents marked A2/DJPL/4 pages 13 to 16 showed details of shops purchased by the assessee with premium payments not recorded in the returns. The material was seized from the premises of M/s Davanam Jewellers Pvt Ltd, a third party. The AO centralized the case and had possession of the seized material before issuing notices under section 148.

Application of law to facts: Since the incriminating documents were seized in the search of a third party and related to the assessee, the AO was required to initiate proceedings under section 153C. The AO's initiation under section 147/148 was contrary to the statutory scheme and thus invalid.

Treatment of competing arguments: The Revenue argued that the law prevailing at the time required the material to "belong to" the other person, not merely "pertain to" them, and that the amendment was prospective. The Tribunal rejected this, relying on the Supreme Court's retrospective interpretation and the expanded meaning of "pertain to". The Revenue's reliance on earlier High Court decisions was held to be overruled by the Supreme Court.

Conclusions: The initiation of reassessment under section 147/148 was unsustainable; proceedings should have been initiated under section 153C. The AO lacked jurisdiction to reopen assessments under section 147 in these circumstances.

Issue 3: Retrospective application of amendment to section 153C

Relevant legal framework and precedents: The amendment to section 153C substituted "belongs or belong to" with "pertains or pertain to" effective 1 June 2015. The Supreme Court in Vikram Sujitkumar Bhatia held that this amendment is by way of substitution and is retrospective, applying to searches conducted before the amendment.

Court's interpretation and reasoning: The Tribunal followed the Supreme Court's reasoning that substitution wipes out the earlier provision and replaces it as if the original never existed. The amendment was clarificatory to remedy the mischief caused by the narrow interpretation of "belong to" by the Delhi High Court in Pepsico India Holdings.

Application of law to facts: The searches in this case occurred before 1 June 2015, but the amended section 153C applies retrospectively. Therefore, the AO was required to proceed under the amended section 153C.

Conclusions: The amendment applies retrospectively and supports the assessee's position that section 153C proceedings were mandatory.

Issue 4: Jurisdiction of AO to reopen assessments under section 147/148 when incriminating material was seized in search of another person and assessments had not abated

Relevant legal framework and precedents: Section 153A provides for block assessments of six years in search cases, abating pending assessments but not completed ones. The AO can reassess total income, including undisclosed income found during search.

Supreme Court judgments (e.g., Abhisar Buildwell) clarify that if incriminating material is found during search, the AO can reassess unabated assessments under section 153A/153C. If no incriminating material is found, reopening under section 147/148 is permissible subject to conditions.

Court's interpretation and reasoning: Since incriminating material was found and seized, the AO's jurisdiction to reassess arose under the special provisions of sections 153A/153C. The AO could not bypass this procedure by resorting to section 147/148.

Application of law to facts: The AO reopened assessments under section 147/148 despite incriminating material seized and assessments not abated. The Tribunal held this procedure improper and invalid.

Conclusions: The AO lacked jurisdiction to reopen assessments under section 147/148 in these circumstances; reassessment had to be under sections 153A/153C.

Issue 5: Legality of CIT(A)'s recall of earlier appellate order via rectification under section 154

Relevant legal framework and precedents: Section 154 permits rectification of mistakes apparent from record. However, issues involving debatable questions of law or fact are generally not amenable to rectification.

Court's interpretation and reasoning: The first CIT(A) had dismissed the Revenue's rectification application, holding the issue debatable and not a mistake apparent from record. The successor CIT(A) allowed a second rectification application, relying on a Supreme Court decision that was not directly applicable.

Application of law to facts: The Tribunal found the second rectification order erroneous as it reviewed a debatable issue and traversed beyond the scope of section 154. The issue was already decided on merits and was not a mistake apparent on record.

Conclusions: The CIT(A)'s order allowing the second rectification application was set aside; the original appellate order dismissing the reopening under section 147/148 was restored.

Issue 6: Interpretation of "belong to" vs. "pertain to" in section 153C and its impact on reassessment jurisdiction

Relevant legal framework and precedents: The Supreme Court in Vikram Sujitkumar Bhatia held that the term "belong to" in section 153C was interpreted narrowly by earlier courts, leading to legislative amendment substituting it with "pertain to" to widen the scope.

Court's interpretation and reasoning: The Tribunal accepted the expanded meaning of "pertain to" to include documents or information that relate to or have reference to the person, not necessarily owned by them. This interpretation prevents frustration of the legislative intent to tax undisclosed income detected through search.

Application of law to facts: The seized documents, though found in premises of a third party, pertained to the assessee's transactions and income. Thus, the reassessment had to be initiated under section 153C.

Conclusions: The broader interpretation of "pertain to" governs, mandating reassessment under section 153C in the present case.

3. SIGNIFICANT HOLDINGS

The Tribunal made several crucial legal determinations, including the following verbatim excerpts of legal reasoning:

"Section 153C starts with a non obstante clause, which actually prohibits initiation of proceedings under any section other than Section 153C under the facts and circumstances as prevalent in the present case."

"In our view the scope of Section 153C and 148 are clear from the bare reading of the two provisions insomuch as Section 153C it starts with 'Notwithstanding nothing containing in Section 139, 147, 148, 149, 151 and 153'. Thus if there is any contradiction between Sections 153C and 148, in that eventuality, Section 148 shall give way to Section 153C."

"The amendment to Section 153C by substituting the words 'Belongs or Belong To' with the words 'Pertains or Pertain to', was done to remedy the mischief that was noted pursuant to the decision of the Delhi Court in the Pepsico case. The Court goes on to observe that if the amendment provision is held to be prospective, it would then frustrate the very object of substitution and the very object and purpose of section 153C shall be frustrated."

"The amendment made in section 153C of the Act is retrospective as we have held above in appeals for Assessment Years 2007-08 to 2010-11 in favour of the assessee."

"In view of the settled position of law as noticed above, once material pursuant to a search is relied upon, the AO is required to follow the procedure as contemplated under Section 153A, 153B and 153C of the IT Act and it is impermissible for the AO to continue the regular assessment."

"The learned CIT(A) has done good reasoned order and there is no any infirmity. The AO should not have issued notice under section 148 of the Act."

Core principles established:

• The provisions of sections 153A to 153C override the general reassessment provisions under sections 147 and 148 in cases where incriminating material is found during search or requisition proceedings.
• When incriminating material seized during a search of a person pertains or relates to another person, reassessment proceedings against the latter must be initiated under section 153C, not section 147.
• The amendment to section 153C substituting "belongs or belong to" with "pertains or pertain to" is retrospective and clarificatory, expanding the scope of section 153C to cover documents or information relating to the other person.
• The AO cannot rely on section 147 to reopen completed assessments based on seized material from a third party search; the special provisions under sections 153A/153C must be followed.
• Rectification under section 154 cannot be used to review or overturn appellate orders on debatable legal issues; such rectification is limited to mistakes apparent on record.

Final determinations on each issue:

• The AO's initiation of reassessment under section 147/148 was invalid; proceedings should have been initiated under section 153C.
• The amendment to section 153C applies retrospectively to searches conducted before 1 June 2015.
• The CIT(A)'s first appellate order dismissing reopening under section 147/148 was correct; the subsequent rectification order allowing reopening was set aside.
• The seized documents pertained to the assessee, mandating reassessment under section 153C.
• The appeals filed by the Revenue for Assessment Years 2007-08 to 2010-11 were dismissed; the assessee's appeal for Assessment Year 2006-07 was allowed.