ASSESSMENT OF THIRD PERSON UNDER INCOME TAX ACT, 1961

[Mr. M. GOVINDARAJAN]

Section 153C provides for the procedure for assessment of income of any other person.

 

Section 153C (1) provides that notwithstanding anything contained in section 139 (return of income), section 147 (income escaping assessment), section 148 (issue of notice where income has escaped assessment), section 149(time limit for notice), section 151(sanction for issue of notice) and section 153(Time limit for computation of assessment, reassessment and recomputation), where the Assessing Officer is satisfied that,-

• any money, bullion, jewellery or other valuable article or thing, seized or requisitioned, belongs to; or
• any books of account or documents, seized or requisitioned, pertains or pertain to, or any information contained therein, relates to, a person other than the person referred to in section 153A (Assessment in case of search or requisition) then, the books of account or documents or assets, seized or requisitioned shall be handed over to the Assessing Officer having jurisdiction over such other personand that Assessing Officer shall proceed against each such other person and issue notice and assess or reassess the income of the other person in accordance with the provisions of section 153A, if, that Assessing Officer is satisfied that the books of account or documents or assets seized or requisitioned have a bearing on the determination of the total income of such other person for the relevant assessment year or years referred to in sub-section (1) of section 153A.

The first proviso to this section provides that in case of such other person, the reference to the date of initiation of the search under section 132 or making of requisition under section 132A in the second proviso to sub-section (1) of section 153A shall be construed as reference to the date of receiving the books of account or documents or assets seized or requisitioned by the Assessing Officer having jurisdiction over such other person.

The second proviso to this section provides that the Central Government may by rules made by it and published in the Official Gazette, specify the class or classes of cases in respect of such other person, in which the Assessing Officer shall not be required to issue notice for assessing or reassessing the total income for six assessment years immediately preceding the assessment year relevant to the previous year in which search is conducted or requisition is made except in cases where any assessment or reassessment has abated.

Section 153C (2) provides that where books of account or documents or assets seized or requisitioned as referred to in sub-section (1) has or have been received by the Assessing Officer having jurisdiction over such other person after the due date for furnishing the return of income for the assessment year relevant to the previous year in which search is conducted under section 132 or requisition is made under section 132A and in respect of such assessment year-

•  no return of income has been furnished by such other person and no notice under sub-section (1) of section 142 has been issued to him, or
• a return of income has been furnished by such other person but no notice under sub-section (2) of section 143 has been served and limitation of serving the notice under sub-section (2) of section 143 has expired, or
• assessment or reassessment, if any, has been made,

before the date of receiving the books of account or documents or assets seized or requisitioned by the Assessing Officer having jurisdiction over such other person, such Assessing Officer shall issue the notice and assess or reassess total income of such other person of such assessment year in the manner provided in section 153A.

 Section 153C begins with a non obstante clause excluding the Sections 139, 147, 148, 149, 151 and 153 and as per this Section where the Assessing Officer is satisfied that any money, bullion, jewellery or other valuable article or thing or books of account or documents seized in a branch under Section 132 of requisitioned under Section 132A, belongs or belong to a person other than the person referred to in Section 153A, then the books of accounts or documents or assets seized or requisitioned shall be handed over to the Assessing Officer having jurisdiction over such other person and the jurisdictional Assessing Officer shall proceed against such other person and issue such person notice and assess or reassess the income of such other person in accordance with the provisions of Section 153A.

Case laws

In this articles various issues relating to the assessment of third person are discussed with reference to decided case laws.

Jurisdiction

In the absence of search material proceedings under Section 153C of the Act could not be initiated against a third person by the Assessing Officer. The fundamental jurisdictional requirement for invoking the powers under Section 153C was the seizure or requisitioning of books of account or documents or assets which belonged to a person other than the person referred to in Section 153A. Otherwise the Assessing Officer has no jurisdiction under Section 153C.

In ‘Commissioner of Income Tax V. Promy Kuriakose’ – 2016 (8) TMI 327 - KERALA HIGH COURT the High Court held that incriminating material must be found during search showing undisclosed income of third person. The Assessing Officer is to record his satisfaction for having jurisdiction over the third person in respect of search conducted that such money, asset or valuables belonged to third person. In the absence of incriminating search material the assessment of third person cannot be made.

In ‘Principal Commissioner of Income Tax V. Nikki Drugs and Chemicals Private Limited’ – 2015 (12) TMI 304 - DELHI HIGH COURT the assessee was assessed under Section 153C of the Act pursuant to a search conducted at SVP Group of industries. The Assessing Officer passed assessment orders assessing the amounts credited in the books of assessee as income under Section 68 of the Act. The Commissioner (Appeals) held that the assessee was carrying on business only on paper and its sole purpose was to benefit others and hence the addition must be made in the hands of the beneficiaries and not in the hands of the assessee. The Tribunal held that the documents found during the search and seizure operation conducted with reference to the SVP Group did not belong to the assessee and therefore the assumption of jurisdiction under Section 153C of the Act was unsustainable.

On appeal the High Court held that it was necessary for the Assessing Officer of the person in respect of whom search was conducted to record his satisfaction that the specified seized documents belonged to the assessee to initiate proceedings under Section 153C of the Act. The Department failed to confirm whether such note was prepared before the initiation of the proceedings under Section 153C of the Act and also failed to controvert the contention of the assessee that such note was not disclosed despite its request. Moreover the documents seized could not be considered to be belonging to the assessee. The High Court held that the initiation of the proceedings under Section 153 is without jurisdiction.

Invalid proceeding

In ‘Commissioner of Income Tax V. Refam Management Services Private Limited’ – 2015 (11) TMI 410 - DELHI HIGH COURT the High Court held that the only document seized during the search was a cheque book pertaining the assessee which reflected the issue of cheques during the period from August 2008 to December 2008 relevant to the assessment year 2009 -10. Since there was no other evidence or undisclosed income, the proceedings under Section 153C were not valid.

Recording satisfaction

Section 153C(1) stressed that the assessment on third person can be done only if the Assessing Officer is satisfied. Such satisfaction shall be recorded in writing. In ‘Commissioner of Income Tax V. IBC Knowledge Park P Limited’ – 2016 (5) TMI 372 - KARNATAKA HIGH COURT the High Court held that one of the conditions precedent for invoking a block assessment pursuant to a search in respect of a third party under Section 158 BD of the Act, i.e., recording satisfaction, which was detected pursuant to a search had not been complied with. Though the documents belonging to the assessee were seized at the time of operation, there was no incriminating material found leading undisclosed income. Therefore the assessment of income of the assessee was unwarranted.

In ‘Gyanendra Kumar Jain and Others V. Assistant Commissioner of Income Tax and others’ – 2014 (12) TMI 840 - ALLAHABAD HIGH COURT the High Court held that Section 158 BD of the Act clearly indicates that where the Assessing Officer is satisfied that any undisclosed income belongs to any person other than the person with respect to whom search was made under Section 132 of the Act, the Assessing Officer shall proceed under Section 1589BC of the Act against such person since an entry was found in the books maintained by the firm where the search was conducted which even the petitioner admits in his writ petition, the satisfaction of the Assessing Officer and the issuance or to notice seems to be perfectly correct which requires no interference.

In ‘Commissioner of Income Tax V. Manoj Bansal and others’ – 2015 (1) TMI 617 - DELHI HIGH COURT the High Court held that assessment of third person requires the satisfaction of the Assessing Officer of person searched that undisclosed income discovered during the search belonged to the third person. In this case the opinion was not formed in terms of Section 158 BB. The High Court held that the assessment is not valid.

In ‘Commissioner of Income Tax V. Champakbhai Mohanbhai Patel’ – 2014 (2) TMI 1168 - GUJARAT HIGH COURT the High Court held that in order to make a block assessment under Section 158 BC in relation to a third person whenever search has been conducted under Section 132 or the documents have been requisitioned under Section 132 A the Assessing Officer of the person in respect of whom search was conducted needs to record his satisfaction that undisclosed income belongs to the person other than the person with respect to whom search was carried out. In this case the High Court held that since the recording of reasons in the assessee’s case was absent, the notice under Section 158 BD was invalid.

In ‘Pepsico India Holdings Private Limited V. Assistant Commissioner of Income tax and another’ – 2014 (8) TMI 898 - DELHI HIGH COURT the High Court held that the condition precedent for the assessment of third person is recording the satisfaction of the Assessing officer that seized material was belonged to third person. There is no indication in the satisfaction note that documents are belonged to third person. There is not disclaimer by person in respect of whom search was conducted that the documents did not belong to him. The High Court held that the notice issued under Section 153C is not valid.

The satisfaction recorded by the Assessing Officer shall not be in general nature. In ‘Commissioner of Income Tax V. Sinhgad Technical Education Society’ – 2015 (4) TMI 190 - BOMBAY HIGH COURT the High Court held that the reasons assigned by the Assessing Officer in the satisfaction note were silent about the assessment year in which specific incriminating information or unaccounted or undisclosed hidden information was discovered or seized by the Revenue from the assessee. The general satisfaction as recorded in the note was not enough. There is no connection between the seized documents and third person. The High Court upheld the order of the Tribunal which held that assessment of third person is not valid.          

Mere using the words ‘satisfaction’ or ‘I am satisfied’ are not enough for the purpose of assessment of third person as held in ‘Pepsi Foods Private Limited V. Assistant Commissioner of Income Tax’ – 2014 (8) TMI 425 - DELHI HIGH COURT In this case the High Court held that it was evident from the satisfaction note that apart from saying that the documents belonged to the assessee and that the Assessing Officer was satisfied that it was a fit case for issuance of a notice under Section 153C, there was nothing which would indicate how the presumptions which were to be normally raised had been rebutted by the Assessing Officer. Mere use or mention of the word ‘satisfaction’ or the words ‘I am satisfied’ in the order or the note would not meet the requirement of the concept of the ‘satisfaction’ under Section 153C. The satisfaction note that must display the reasons or basis for conclusions that the Assessing Officer of the person in respect of whom the search is conducted is satisfied that the seized document belonged to another person. On going through the contents of the satisfaction note, no ‘satisfaction’ of the kind required under Section 153C could be discerned. Thus the very first step prior to the issuance of a notice under Section 153C had not been fulfilled. Inasmuch as this condition precedent had not been met the notices under Section 153C were liable to be quashed.

Onus on the part of Department

If the third person, on whom the proceedings are initiated, submits necessary evidence to establish his bona fide transactions, then the onus is shifted to the Department to prove that the claim of the assessee is incorrect.

In ‘Assistant Commissioner of Income Tax V. Goodview Trading P. Limited’ – 2016 (2) TMI 624 - ITAT DELHI the assessee is engaged in the business of investments in capital market. A search was initiated on the Jackson group and its associates on 10.02.2010. Notice under Section 153C was issued on 02.06.2011, in response to which the assessee filed a return on 01.07.2011 declaring an income of ₹ 17,640/-. The Assessing Officer included an addition of ₹ 25 crores under Section 68 of the Act, vide order dated 29.12.2011. The Commissioner (Appeals) partly allowed the appeal and deleted the addition in dispute. The Commissioner (Appeals) held that the assessee had submitted necessary evidence to establish the bona fides of the transactions. Thereafter, the onus was shifted on the Revenue to prove that the claim of the assessee was factually incorrect. Though it was part of their duty to ensure that no tax which was legitimately due from the assessee remained unrecovered, at the same time they would not act in a manner as might indicate that scales were weighed against the assessee. On appeal the Tribunal upheld the order of Commissioner (Appeals).

Limitation

In ‘Commissioner of Income Tax V. V.D. Muralidharan and others’ – 2014 (11) TMI 607 - MADRAS HIGH COURT the High Court held that the provisions of Section 158 BD (undisclosed income of any other person) and 158BC (Procedure for block assessment) are intertwined. The jurisdiction to issue notice under Section 158 BD to any person, other than the person with respect to whom search was made and the consequent time prescribed under Section 158BE (time limit for completion of block assessment) in respect of third parties would certainly be included with in the two year period given to the Assessing Officer for completion of the block assessment under Section 158BE (1). The High Court dismissed the appeal holding that the statute for completion of block assessment in respect of persons other than the person on whom search was made and therefore the notices issued under Section 158BD by Assessing Officer was not valid.

In ‘Commissioner of Income Tax V. Calcutta Knit wares’ – (2014) 362 ITR 673 (SC) the Supreme Court observed that Section 158BE(2)(b) of the Act, only provides for the period of limitation for completion of block assessment under Section 158BD in the case of person other than the person in respect of whom search was conducted, as two years from the end of the month in which the notice under Chapter XVI-B was served on such other person in respect of search carried on. Section 158BD neither provides for not impose any restrictions on the period or limitation for preparation of the satisfaction note under Section 158BD and consequent issues of notice to the other person.

In ‘Commissioner of Income Tax V. Sudhir Dhingra and others’ – 2015 (5) TMI 319 - CALCUTTA HIGH COURT the High Court held that the delay of 5 months in issuing of notice by the Assessing Officer was not unreasonable. The Notices issued under Section 158 BC read with Section 158BD were not barred by limitations.

It is quite possible that if a search, conducted against one assessee, reflects some facts and figures referable to another assessee, proceedings can be initiated against the later also. That, however, would be possible if only the item of income that is noticed in the search or the one assessee is not reflected in the returns of the other assessee, who is sought to be preceded. Conversely or axiomatically, if the so called information that was discovered in the course of search has already been reflected in the returns or the assessment of the other assessee, the occasion to proceed against him does not arise at all.

In ‘Commissioner of Income Tax V. Bharat Bhushan Jain’ – 2015 (1) TMI 705 - DELHI HIGH COURT the High Court held that the Revenue has to be vigilant in issuing notice to third party under Section 158BD immediately after the completion of the assessment or the person in respect of whom search was conducted. The assessees were third parties who were issued with notices under Section 158 BD pursuant to search proceedings in respect of Manoj Agarwal group. In all these cases, the search proceedings were conducted on 30.08.2000. Thereafter the notices were issues to them for block assessment calling upon them to file the returns for the previous years in question. The assessment proceedings were completed on 28.09.2002. Thereafter notices were not issued in conformity with the requirements of Section158BD and were unduly delayed.

In ‘Commissioner of Income Tax V. Apna Organics Private Limited’ – 2015 (8) TMI 506 - BOMBAY HIGH COURT the authorities conducted the search on 23.10.1998. But intimation to the assessee as third person under Section 158BD was given on 04.10.2005. The High Court held that the proceedings were initiated by enormous and unexplained delay.

Suppression

In ‘Commissioner of Income Tax V. Sunny Liquors Private Limited’ – 2015 (1) TMI 103 - ANDHRA PRADESH HIGH COURT the High Court held that in this case no search was conducted against the respondent. The proceedings under Chapter XIV –B of the Act were initiated against him on the basis of the alleged discoveries in the course of search, conducted in the premises of M/s Mahaveer Group of companies. Firstly the finding that there was suppression of the sale of gift articles worth of ₹ 49.90 lakhs by M/s Mahaveer Group of companies itself is not well founded. In their books of account, the transaction was very much reflected. An inference was drawn to the effect that the transaction is fictitious, only on the ground that the sale was accommodative in nature. Secondly the respondent has shown the purchase of the gift articles not only in their books of account but also in the returns. The Assessing Officer has also accepted the same. Hence there did not exist any occasion or basis for the department to initiate block assessment proceedings against the respondent. The Tribunal has taken the correct view of the matter and there is no basis to interfere with the same.

When notice cannot be issued?

In ‘Commissioner of Income Tax and another V. Anil Kumar Chaddha’ – 2015 (2) TMI 723 - ALLAHABAD HIGH COURT three persons were going on a rickshaw to board the Praygraj Express for going to Delhi. They were detained by the police. A sum of ₹ 17 lakhs was recovered from their possession. On interrogation they replied that the money belonged to Anil Kumar Chaddha. The police referred to Income Tax department. The Department issued a notice under Section 158 BC to the assessee and added ₹ 17 lakhs and made assessment. The Commissioner (Appeals) has confirmed the same. The Tribunal has deleted the addition by observing that no search warrant was issued under Section 132 of the Act in the name of the assessee. Therefore no notice can be issued in the name of the assessee under Section 158BC of the Act. The High Court upheld the order of the Tribunal and held that there is no substantial question of law emerged from the impugned order.

Evidence

In ‘Commissioner of Income Tax V. DPA FINVEST Services Limited’ – 2015 (7) TMI 918 - DELHI HIGH COURT in the course of assessment proceedings M/s Friends Portfolio Private Limited (FPPL) it transpired that they were using the name and accounts of FPPL for the purposes of providing accommodation entries. One of such persons who benefited from such accommodation entry was found to be the assessee. It was shown to have received a sum of ₹ 61,993/- from FPPL on accommodation entry. On the basis of material a notice was issued to the assessee to explain each of credit entries in its bank account. The Assessing Officer concluded that entries in the accounting totaling ₹ 33.75 lakhs could not be explained by the assessee. They were treated as unexplained credit. Penalty proceedings were also initiated. The Commissioner (Appeals) held that the additions made were based on transactions which were not related to any evidence collected during the course of such proceedings in respect of the main person. The Tribunal dismissed the appeal of Revenue on the ground that addition could be made only for ₹ 61,993/-. The High Court dismissed the appeal filed by the Revenue by upholding the findings of Commissioner (Appeals) and confirmed by the Tribunal.