Why The Verdict Of The Special Bench In All Cargo Global Requires Reconsideration

The nature and scope of assessment / re-assessment of total income u/s 153A in the case of a person who has been searched u/s 132 or in whose case requisition has been made u/s 132A has been an issue of debate and controversy. The issue as to what kind of additions can be made during assessment and re-assessment proceedings undertaken u/s 153A in the case of searched person has been put to judicial test  at different occasions and there have been contradictory judgments delivered by different benches of Income Tax Appellate Tribunal.

In view of the contradictory judgments of the different benches delivered on this issue, Special Bench of Income Tax Appellate Tribunal (Mum) was constituted in the case of M/s All-Cargo Global Logistics Ltd. vs. DCIT on the question, inter alia, as to whether on the facts and in law, the scope of assessment u/s 153A encompasses additions, not based on any incriminating material found during the course of search.

The Special Bench of Income Tax Appellate Tribunal has delivered its judgment in the above case answering the above question as under as stated in Para 58 of the judgment:

“Thus, question No.1 before us is answered as under:-

In assessments that are abated, the A.O. retains the original jurisdiction as well jurisdiction conferred on him u/s 153A for which assessments shall be made for each of the six assessment years separately.

In other cases, in addition to the income that has already been assessed, the assessment u/s 153A will be made on the base of incriminating material, which in the context of relevant provisions means- i). Books of accounts, other documents, found in the course of search, but not produced in the course of original assessment and ii). Undisclosed income or property discovered in the course of search”.

While arriving at the above conclusion, Hon’ble Special Bench of the Tribunal made harmonious interpretation of the provisions of the section 153A and 132(1). It has been observed, inter alia, as under:-

“……..the question now is – what is the scope of assessment or re-assessment of total income u/s 153A (1)(b) and the first proviso? We are of the view that for answering this question guidance will have to be sought from section 132(1). If any books of accounts or other documents relevant to the assessment have not been produced in the case of original assessment and found in the course of search, in our humble opinion such books of accounts and other documents had to be taken into account while making assessment or re-assessment of total income under the aforesaid provision. Similar position will obtain in a case where undisclosed income or undisclosed property has been found as a consequence of search. In other words harmonious interpretation will produce the following results:-

In so far as the pending assessment are concerned, the jurisdiction to make original assessment and assessment u/s 153A merge into one and only one assessment for each assessment year shall be made separately on the basis of the finding of the search and any other material existing or brought on the  record of the A.O.

In respect of non-abated assessments the assessment will be made on the basis of the books of account or other documents not produced in the course of original assessment but found in the course of search, and undisclosed income or undisclosed property discovered in the course of search.”

Contradiction regarding mandatory assessment / reassessment of earlier six years cases

Regarding mandatory reopening of earlier six years’ cases irrespective of whether any incriminating material relating to a particular year is found or not, the Hon’ble Special Bench has opined in Para 52 of the order that:-

“AO is under obligation to issue notice to the person requiring him to furnish the return of income of six years immediately preceding the year of search. The word used is “shall” and thus, there is no option but to issue such a notice. Therefore, he has to assess or re-assess total income of the six years.

The pending proceeding shall abate. This means that out of six years, if any assessment or re-assessment is pending on the date of initiation of the search, it shall abate. In other words pending proceeding will not be proceeded thereafter. The assessment has now to be made u/s 153A(1)(b) and the 1st proviso. It also means that only one assessment will be made under the aforesaid provisions as the two proceedings i.e. assessment or re-assessment proceedings and proceedings under this provision merge into one.”

Further, at Para 55(i) it has been stated that,

“………we may add that we have not held the assessment can be made only for those years in respect of which books or assets are found. We have come to the clear finding that assessment/ re-assessment for all six years will have to be made. The real question is the scope of re-assessment which is not pending for which we have read provisions of section 132(1) and section 153A together. Thus, the total income under re-assessment may be the same as in the original assessment or may be higher than that, depending upon the material which are uncovered in the course of search. We are also of the view that issue of notice for six years and computing re-assessment for these years even if no material is found in the course of search for some years does not amount to harassment etc. and even if it does so, the same has to be ignored in view of the clear statutory provision.”

On the other hand, while justifying harmonious construction of the provison of section 132(1) and section 153A, the Hon’ble bench in Para 55(d) of the order has observed as under:-

“…..we have read the provision of section 132(1) and 153A together, which are in the nature of cause and effect and therefore, in our humble opinion we have rightly read them together. Reading section 153A in isolation and as interpreted by the Ld. Standing Counsel would have the effect that in case of an assessment, which is not pending and where nothing is found, the same maybe reopened. Such interpretation will produce a result that an assessment which has come to an end for which there is no cause of reopening shall revive simply because a search has been conducted. According to us, this will not be a harmonious interpretation of various provisions of section 132(1) and 153A”.

The above two views expressed by Hon’ble Special Bench at two different places in the same order, it is submitted with great respect, seem to be contradictory to each other. On one hand, section 153A was interpreted to mean so as to result in reopening of earlier six years cases mandatorily, while on the other hand it has been held that reopening/reassessment is not required in the case of the assessment year relating to which no incriminating material is found during search.

Provisions of section 153A appear not to have been appreciated in proper perspective

As per the above decision, Hon’ble Special bench has held that in the case of completed assessments which are not abated, the assessment u/s 153A will be made, inter alia, on the basis of incriminating material i.e. undisclosed income or property discovered in the course of search.

Such interpretation would create anomaly with respect to the manner in which undisclosed income found and detected otherwise than in course of search can be assessed or reassessed in the hands of the searched person during the pendency of search cases u/s 153A. Evidences relating to undisclosed income maybe found by the A.O. during different stages, apart from as found in the course of search, such as:-

(a) During post search inquiries conducted by ADI or by A.O.

(b) During assessment proceedings, some new information may come to the possession of the A.O. regarding income escaping assessment.

(c) During assessment proceedings and on examination of books of account, it may be noticed by A.O. that apparently wrong claim of expenses, bogus claim of expenses or excess deduction has been claimed by the assessee.

A question may arise as to under what mechanism, proceedings may be undertaken and addition can be made by the A.O. with respect to the above escaped income.

There does not seem to be any dispute to the proposition that during the course of assessment or re-assessment proceedings pending u/s 153A, no other assessment proceedings u/s 143 or section 148 can be initiated, inter alia, for the reason to avoid multiplicity of assessment/ reassessment proceedings at the same time and also for the reason that reopening of an assessment during the course when assessment proceeding is already open can not be validly initiated/undertaken. There is no concept of assessment u/s 153A and parallel assessment u/s 143(3) or under section 147 as was the case in Chapter XIVB relating to assessment of undisclosed income of the Block Period u/s 158BC.

When cases u/s 153A for assessment or re-assessment are pending no other proceeding for reassessment u/s 147/ 148 or in pursuance to direction u/s 263 or any other provisions of the Act can be undertaken by the A.O. separately otherwise it would tantamount to duplicate proceedings which is not intended to be undertaken as per the provision of section 153A r/w second proviso of the Act and also for the above stated reasons and legal position. The very purpose of introducing the second proviso to section 153A is to do away with the duplicate assessment proceedings at the same time.

With respect to reopening of the cases u/s 147, it is settled position of law that where re-assessment initiated u/s 147 have not been concluded to the logical end and assessment order has not been passed, issue of a fresh notice u/s 147 shall be invalid and unsustainable as held by Hon’ble Rajasthan High Court in the case of CIT VS. Jaideo Jain & Co. (1997) 227 ITR 302. The same ratio shall be applicable in case of pending proceedings u/s 153A.

Nature of assessment u/s 153A is entirely different from the nature of assessment during block assessment regime u/s 158B. During block assessment, undisclosed income found as a result of search was to be assessed u/s 158B(b) read with section 158BA and 158BB and for any other kind of undisclosed or escaped income found or for the purpose of regular assessment, separate regular assessment or reassessment proceedings were permitted to be undertaken under normal provisions of the Act. But this is not the case in the case of assessment/ re-assessment procedure for search cases u/s 153A. As per section 153A, multiplicity of assessment proceedings is not contemplated which is evident from this fact that even the pending assessment proceedings as on the date of search are abated.

Thus, the objective of shifting from block assessment procedure under erstwhile chapter XIVB to new procedure of assessment in search cases u/s 153A was, interalia, to do away with the system of multiplicity of assessment / reassessment proceedings and resultant litigation arising due to same. During block assessment system, there was unending litigation emerged relating to the issues as to whether the evidences on the basis of which addition were made could be said to have been found in the course of search or relatable to the seized material or not and further relating to the issue as to whether particular addition could be made during block assessment or during regular assessment proceedings. The provision of section 153A, in our humble opinion, cannot be interpreted in a manner so as to revive the same controversy again contrary to the present scheme of the law.

Therefore, the interpretation of section 153A cannot be restricted to make assessment only with respect to undisclosed income or incriminating material discovered in the course of search. In case such interpretation is accepted, it would mean that during pendency of assessment proceedings u/s 153A, separate proceedings u/s 148 may be initiated for making assessment of escaped income discovered otherwise than in the course of search. But as discussed earlier such interpretation cannot be derived out of provision of section 153A. Under such situation, harmonious construction of various provisions of section 153A would mean that scope of assessment of section 153A shall cover not only undisclosed income discovered as a result of search but any other escaped income also found by the A.O. during assessment proceedings u/s 153A. This aspect of the matter, it appears with great respect, seems to have been overlooked in the decision of the special Bench, supra.

PUTTING THE SEARCHED PERSON AT PREMIUM

In the case of reopening of case u/s 148, it is settled position of law that any income which has escaped assessment and which comes to the notice of the A.O. in the course of the reassessment proceedings can be assessed apart from the income which has escaped assessment for which reopening of the case u/s 148 was done. In the case of assessment or re-assessment proceedings u/s 153A, to restrict the scope of addition only relating to evidences of undisclosed income or undisclosed asset discovered during search would imply putting the searched person at premium in comparison to the normal situation in as much as there does not appear to be any mechanism by which such escaped income which was not discovered during the course of search but came to the notice either in post search investigation or during investigation carried out in the assessment proceeding or any other source, can be assessed. Since there is no logical answer to this question therefore; the above interpretation of the scope of section 153A placed by Hon’ble Special Bench, it is submitted with great respect, requires reconsideration.

PRINCIPLE OF HARMONIZED CONSTRUCTION OF STATUTE  NOT PROPERLY APPLIED

The judgment by the Hon’ble Special Bench is based upon combined reading of provision of section 132(1) and 153A and applying the principle ‘harmonized construction of statute’.

The purpose and intent of section 132(1) is to prescribe the circumstances when income tax search can be authorized by the competent authority. It is when there is “reason to believe” by the competent authority based upon the information in his possession regarding existence of undisclosed income or undisclosed asset or when there is defiance made by the person disrespecting the summons issued by income tax authorities for producing certain books of accounts or documents. These conditions, in our respectful opinion, cannot be imported to interpret the purpose and intent of the provisions of section 153A regarding making assessment / re-assessment in the search cases or for the purpose of deciding nature and scope of additions which can be made in search cases under provisions of section 153A. Section 132 may be the precursor to the proceeding u/s 153A but to restrict the scope of the additions to be made in proceeding u/s 153A having regard strictly to the language of section 132 is, it is submitted with great respect, too narrow and defeats the Rule of Literal Construction.

In fact harmonization is required to interpret first proviso and second proviso of section 153A. In the case of search, first proviso requires the A.O. to assess or reassess the total income of earlier six years mandatorily. There is no dispute regarding this proposition as held by Hon’ble Special Bench of ITAT also. There may be a situation when as on the date of search, assessment proceedings may be pending relating to either of the earlier six years u/s 143(3)/ 147etc. In case any kind of assessment or re-assessment proceedings are pending with respect to the searched person with the A.O., it would lead to a situation towards multiplicity of proceedings relating to the same year. To avoid such situation, second proviso provides that all existing assessment or re-assessment proceedings pending as on the date of search shall abate. It would imply that all issues pending thereat shall be merged with the new proceedings to be undertaken in pursuance to notice u/s 153 A.

The objective and intent of the second proviso is only to this extent and nothing more is required to be interpreted out of this. Second proviso can not be used to define the nature and scope of additions which can be made relating to the completed assessment years or to the assessment years with respect to which there were no pending assessment proceedings and which are not abated.

ADDITION ON THE BASIS OF BOOKS OF ACCOUNT NOT PRODUCED

Hon’ble Special Bench has held that addition u/s 153A can be made on the basis of incriminating material, which in the context of relevant provisions mean- books of accounts, other documents found during the course of search, but not produced in the course of original assessment proceedings and undisclosed income or property discovered during the course of search.

The above interpretation has been made by making harmonized interpretation of section 153A with the provisions of section 132(1). The first limb i.e. books accounts and other documents found during the course of search but not produced during the course of original assessment has been imported to define the incriminating material by the Hon’ble Bench, since search can be authorized on the basis of books of account and other documents not produced before the tax authorities as required to be produced as per notice issued u/s 142(1) or summons issued u/s 131(1), as provided under clause (a) of section 132(1). Such interpretation, it is submitted with great respect, instead of harmonizing provision of section 153A with provision of section 132(1), is likely to create many controversial questions such as:-

(a) Whether this clause will be applicable only when search was authorized on the basis of situation prevailing under clause (a) of section 132(1)?

(b) Whether this clause will be applicable when in the case of a search, such situation as given under clause (a) of section 132(1) was existing?

(c) In case answer to the above questions is affirmative, the scope of applicability of this clause shall become very limited as in rare cases, it has been seen in practice, search is authorized based upon such situation and moreover, the reasons recorded by the competent authority for authorizing search are not known to the person searched or to the Assessing Officer.

(d) In case answer to the above questions is negative, how to determine which books of account, other documents were not earlier produced by the assessee in the course of original assessment proceedings?

(e) In case assessment for the earlier year was not framed u/s 143(3) but processed u/s 143(1), no books of account or other documents can be said to have been produced in the course of original assessment. Whether it would mean that in such a situation, any addition can be made based upon such books of accounts, other documents which were not required and could not be produced during the course of original assessment proceedings?

(f) Books of account or other documents found in the course of search would mean simply found and inventorized or it would mean found and seized. In case harmonized construction is made with section 132(1)(a), then books of account and other documents not produced in spite of summon u/s 131 or notice u/s 142(1) are prone to be seized as the very purpose of authorizing search is to make seizure of such books of account or other documents.

In our humble opinion, the above questions do not have any logical answer and therefore, with due respect, the interpretation of section 153A harmonizing with the provision of section 132(1) requires reconsideration.