Decoding The Intricate Lanes Of Section 153C vis-à-vis Section 148

CA Nidhi Surana has explained the subtle differences between an assessment made under section 153C of the Act and that made under section 147/148 of the Act. She has pointed out that the different jurisdictional conditions that have to be satisfied before the AO invokes either of the two provisions. She has also highlighted the different consequences that befall the assessee under the two assessments. All the relevant judgements and Circulars of the CBDT have been referred to

Foreword: Many of us in the fraternity has faced these perplexing cases where though Search has been carried out the order is finalized under the reopening section 148 in place of section 153C. Section 153C is a Bullet missile which gives power to the department to bring with in their ambit even those individuals on whom search has not been conducted, but evidence(document/assets) have been found belonging to or relating to them. Whereas, Reassessment is another distinguished weapons in the armoury of the Department, which empowers the Assessing Officer to assess, reassess or recompute income, turnover etc, which has escaped assessment. The Article is aimed at removing the said ambiguity. In this Article not only a complete comparative analysis of both the sections are done but even various conditions for invoking section 153C are discussed.

A number of intricate issues crop up while deciding which section is to be invoked whether reassessment proceedings should be started or search assessment u/s 153C is to be done. Inspite, of various guidelines laid down by courts, dept constantly prefer to disobey the same leading to confusion and framing order under the wrong section. It seems departments simply wants to bring the person with in his ambit of jurisdiction whether it is via reopening the assessments or through search proceedings u/s 153C. But by doing so they are disregarding the real intend and purpose behind enacting both the said provisions. Assessment orders are not a scrap of paper where orders are to the AO’s whim finalized under section 148 0r 153C in a casual manner

1.1. Section 153C: When a search is carried out u/s. 132 of the IT Act, various assets and documents may be found and seized or requisition is made u/s. 132A. Several of these "assets/documents" may not actually belong to the "person searched" but may belong to such "other person". Section 153C clearly provides that proceedings as prescribed u/s. 153A can be initiated against such "other person" if conditions laid down in that section are satisfied.

One of the most important condition amongst all the condition is that the AO of the "person searched" must be satisfied that such "assets/documents" belongs to or relates to the person other than "person searched".

A clear analysis of the section 153C where it is made completely clear, without a shadow of doubt, that the said section comes into play if and only if

• search or requisition must have taken place

• any any money, bullion, jewellery or other valuable articles or other things or books of account or documents (hereinafter called "assets/documents") are found belonging/pertaining to “such other person”, or even any information contained therein relates to a person other than the person on whom the said search is conducted

• Satisfaction of AO that it belongs to or relates to “such other person”

1.2. After finding any books account or documents or assets seized or requisitioned, the same shall be handed over to the AO having jurisdiction over such other person. Now, AO (having jurisdiction) has to be satisfied that "assets/documents" seized or requisitioned have a bearing on the determination of the total income of such other person. Only then the AO (having jurisdiction) can proceed /s. 153C against such other person in the manner provided u/s. 153A.

1.3. So it is apparent from the above that two separate satisfaction ought to be recorded which is

• Firstly by the AO of the person on whom search was conducted i.e “searched person” for any “documents/assets” found pertaining to or belonging to the “such other person”

• Secondly by the AO of other person, regarding "assets/documents" seized or requisitioned have a bearing on the determination of the total income of such other person.

1.4. From the above analysis, it is clear that provision of Section 153C can be invoked in case of "Other Person" only if assets or documents as mentioned above are seized in the search u/s. 132(1) or requisitioned u/s. 132A in case of any other person. From this it follows that if documents are impounded u/s. 133A then provisions of Section 153C cannot be invoked.

A complete methodical breakdown and understanding of the Section 153C will be done in the later Paras of the article.

2.1. Section 148 : The general principle is that once an assessment is completed it becomes final. The power of assessment or reassessment of any income chargeable to tax that have escaped assessment has been provided under section 147 r.w.s 148 of Income Tax Act of 1961. If the assessing officer has the reason to believe that any income chargeable to tax has escaped assessment then the assessing officer may subject to the provisions of section 147 to 153 assess or reassess such income.

2.2. Section 147 empowers the Assessing Officer to reopen an assessment if the conditions prescribed therein are satisfied. The conditions are:

• AO has to record the reason for taking action under section 147. Only on the basis of such reasons recorded (a live link with the formation of the belief) in the file that the validity of the order reopening a assessment has to be decided.

• AO must also have reason to believe that income chargeable to tax has escaped assessment for any assessment year

• The jurisdictional condition is that the formation of belief by the AO that income has escaped assessment

• No action can be initiated after the expiry of 4 years from the end of the relevant assessment year unless reason for the failure is on the part of the taxpayer to disclose fully all material facts necessary for assessment and the income chargeable to tax which has escaped assessment amounts to or is likely to amount to one lakh rupees or more for that year

2.3. When a notice u/s 148 is received the assessee is asked to file a return of the relevant assessment year. After filling the return the assessee should ask for the copy of reasons recorded for issue of notice u/s 148 and can file objection to the issuance of notice. The assessee should ask specifically assessing officer to pass a speaking order by disposing off the objections giving reference of the Judgment of Honorable Supreme Court in GKN Driveshafts (India) Ltd vs ITO (2003) 259 ITR 19 (SC). The objections should be filled giving reasons for challenging the legality of the notice u/s 148. All this procedure has been laid down by the Honorable Supreme court in GKN Driveshafts (India) Ltd case. This procedure has been provided by the Honorable Supreme court to enable the assessee to file writ petition before the respective High court challenging the legality of the notice u/s 148 before the assessment is completed.

3.1. A comparative analysis :

3.2. Section 153C is a provision specifically provided “assessment of income any other person‘. It provides special procedure for assessment under such cases. It was introduced for the assessment of undisclosed income determined as a result of search carried out under Section 132 of the Act or requisitioning of documents or assets under Section 132A of the Act for a person other than the person on whom search was conducted. The chapter is a self-contained code and gets attracted as a result of search proceedings initiated by the income tax authorities, under Section 132 of the Act on some party where any books of account or documents pertaining to person other than person on whom search was conducted was found. Thus, section 153C is a special procedure for search assessment for a person other than the person on whom search was conducted.

3.3. Whereas, Section 147 is titled as ‘Income escaping assessment’. It provides that if the Assessing Officer has reason to believe that any income chargeable to the tax has escaped in any assessment year, he could reassess the income subject to fulfilling other conditions mentioned in that section.

3.4. One may agree on a simple reading that section 153C are applicable in cases where assessment is framed in lieu of search taking place. Whereas, u/s 147 assessment is reframed when the AO has reason to believe that income has escaped assessment.

4.1 For better understanding of both the sections the same are reproduced below and read parallelly

Section 153C

Section 147

(1) Notwithstanding anything contained in section 139, section 147, section 148, section 149, section 151 and section 153, where the Assessing Officer is satisfied that,— (a) any money, bullion, jewellery or other valuable article or thing, seized or requisitioned, belongs to; or (b) 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, 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 person and 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 six assessment years immediately preceding the assessment year relevant to the previous year in which search is conducted or requisition is made and for the relevant assessment year or years referred to in sub-section (1) of section 153A.

If the Assessing Officer has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of sections 148 to 153, assess or reassess such income and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under this section, or recompute the loss or the depreciation allowance or any other allowance, as the case may be, for the assessment year concerned

4.2 Section 153C that starts with Non obstante clause that is ‘Notwithstanding’ It overrides other provisions mentioned after this word. The language used in these sections, i.e. ‘notwithstanding anything contained’ in section 139, section 147, section 148, section 149, section 151 and section 153 made it clear that provisions of these sections are not made applicable to the assessments covered by the provisions of section 153C.

4.3 The CBDT issued a circular No.7 of 2003 dated 5-9-2003 provided that “The new section 153C provides that where an Assessing Officer is satisfied that any money, bullion, jewellery or other valuable article or thing or books of account or documents seized or requisitioned belong or belongs to a person other than the person referred to in section 153A, 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 person and that Assessing Officer shall proceed against such other person and issue such other person notice and assess or reassess income of such other person in accordance with the provisions of section 153A.”

4.4 A careful study of sections 153A/153B/153C also the circular issued by the CBDT explaining the procedure of assessment in search cases shows that these are separate provisions independent of other provisions relating to reassessment, because of the non abstante clause begins with the said sections.

4.5 Under the provisions of section 147, the Assessing Officer is having power to re-open the assessment, if he is of the opinion that the income chargeable to tax has escaped assessment. Before doing so the AO

– should satisfy himself that, there is material which suggests that there is an escapement of income.
– can exercise these powers with a reasonable belief coupled with some material which suggest the escapement of income.

4.6 Once the conditions precedent for assumption of jurisdiction to commence the reassessment proceedings, he has to cross the hurdles attached with reassessment by way of reasons for reopening of assessment, time limit for issue of notice and provision for obtaining sanction of higher authority in certain circumstances.

5.1 Under the provisions of sections 153C these hurdles are cleared by using the non obstante clause in the said section. In other words, under the provision of section 153C, the Assessing Officer is not required to satisfy these conditions before issue of notice. The only requirement is that there a search action u/s 132 is conducted and AO is satisfied that “assests/documents” found during search belongs to or relates to other person Therefore, though, the AO from both sections empowered to tax the income escaped from tax, both work in a different situations, i.e. section 147 comes into operation where there is an escapement of income chargeable to tax and section 153C comes into operation where there is search under section 132.

5.2 Section 153C clearly provides in the last line that “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”. AO will under obligation to issue notice to the person requiring him to furnish the return for the six assessment years immediately preceding the assessment year in which search took place. Thereafter, the Assessing Officer has to assess or reassess the total income of those six assessment years. The word "shall" used in section 153C made it clear that the Assessing Officer has no option, but to issue notice and proceed thereafter to assess or reassess the total income.

6.1 A clear distinction exist in between specific provisions and general provision. A specific provision overrides a general one in the Income-Tax Act. The AO can not bend the Act, to serve his purpose. Following aspects are to be considered:

• A Specific provision i.e. 153C starts with a Non Obstante clause in the beginning, which is with a view to give the enacting part of the Section, in case of conflict, an over-riding effect over the provision or Act mentioned in that clause.

• Material so gathered under the scope of which addition is made is to be checked ti if through search at third party premises it befalls under specific provision.

• Special Provision u/s 153 C is applicable looking at any document/assets found during search at third party premises.

• Also AO has some tangible material before him on which he is satisfied that the documents/assets belong to such person

• AO has no jurisdiction to issue notice under general provision i.e. section 148 of the Act to reopen the assessments which is solely on the basis of search conducted at third party premises. The matter under consideration falls within the exclusive domain of section 153A/B/C.

6.2 The Hon’ble Supreme Court in this case of Manish Maheshwari v. Asstt. CIT [2007] 208 CTR (SC) 97 : [2007] 289 ITR 341 (SC) has held that if procedure laid own in s. 158BD is not followed, the block assessment proceedings would be illegal. The provisions of s. 153C are exactly similar to the provisions of s. 158BD. As such the decision of the Supreme Court referred to above shall apply mutatis mutandis to the provisions of s. 153C of the Act as well.

Detailed discussion of section 153C

7.1 Satisfaction of the Assets/ documents belonging to other person

Firstly, the ‘satisfaction’ has to be in writing and it is based on details gathered from the assessment order passed in respect of the ‘searched person’ (third party on which search was conducted), if it is so mentioned/recorded or from any other order, note or record maintained by the Assessing Officer of the ‘searched person’

Secondly the satisfaction note has to be recorded by the AO of the "person searched" third party on which search was conducted) and not by the AO of "other person" on which setion 153C is applicable.

Last but not the least where the AO of the "person searched" and AO of the "other person" is the same, the satisfaction note can be placed in the file of "other person". It will not vitiate the proceedings.

7.2 Deadline for recording satisfaction:

As such there is no time limit prescribed under this section for recording of satisfaction However,CBDT has issued Circular No. 24/2015 dated 31/12/2015, wherein it is prescribed that satisfaction can be recorded,

a) at the time of or along with the initiation of proceedings against the searched person under section 153A of the Act; or (b) in the course of the assessment proceedings under section 153A of the Act; or (c) immediately after the assessment proceedings are completed under section 153A of the Act of the searched person."

7.3 Concept of belongs to in section 153C:

In common parlance, the expression "Belongs to" is used in sense of indicating " to be property of",or "to be a part, or adjunct of". Thus, in Section 153C(1) it would indicate that "assets/documents" are property of "other person". In other words, it indicates ownership of "other person".

Vide Finance Act, 2015, legislature had widen Scope of Section 153C by substituting words “belongs to” with the words “pertains or pertain to, or any information contained therein, relates to other person” with respect to documents seized from the possession of searched person.

Recently. Hon’ble Gujarat High Court in case of Anil Kumar Gopikisahn Agrawal (2019) 106 taxmann.com 137, held that Section 153C as amended with effect from 1-6-2015 would apply to search initiated on or after 1-6-2015 and thus, it is date of search that has been considered to be relevant date for purpose of applying amended provisions of section 153C(1)

7.4 Incriminating material

It is provided that after initiating proceedings u/s. 153C (1), income of such "other person" shall be assessed or reassessed in accordance with the provisions of section 153A, if the AO is satisfied that "assets/documents" have a bearing on the determination of the total income of such "other person". From this it follows that if the "assets/documents" do not lead to change in income in case of completed assessments and do not affect the income in case of abated proceedings, then proceedings u/s. 153C need not be initiated.

Further no proceeding u/s 153C can be initiated on the basis of mere statement recorded u/s 132(4) against the person, as statement recorded u/s 132(4) cannot be qualified as books of accounts or documents as mentioned in Section 153C(1)

7.5 Handing over to the AO of "other person" u/s 153 C and Duty of the AO to whom the satisfaction note is handed

• After recording satisfaction the AO must handover the assets/documents, to the AO of the "other person" in respect of whom satisfaction is drawn. Handing over of "assets/documents’ is a sine qua non for initiating action under section 153C.

• It is only post receipt of "assets/documents" that the AO of the "other person" can assume jurisdiction to commence proceedings under section 153C

• Before commencing proceedings u/s. 153C in the case of "other person" the AO has to apply his mind as to whether the "assets/documents" have a bearing on the total income of such "other person" so the AO of the “other person” is expected to conduct enquiry and due verification of the relevant facts before forming his prima facie satisfaction. He has to form an independent view before issuing notice to the "other person

• The "assets/documents" belonging to "other person", which are handed over to the AO of "other person" and based on which 153C proceedings are initiated are to be of incriminating nature. The material is incriminating as it indicates concealed/suppressed income of the assessee. That is, the detection of incriminating material leading to an inference of undisclosed income is a sine qua non for invocation of section 153C

• Thus, section 153C cannot be interpreted in a manner to contemplate that any innocuous material found during search of third party having reference of the assessee, whether it is incriminating or not, can be used to launch a proceeding under section 153C. That cannot be the intention of Legislature.

8. Pre-Post Amendment in Finance Act, 2015 w.e.f 01-006-2015

Section 153C (1) has been amended by the Finance Act, 2015 w.e.f. 01-06-2015, thereby "assets/documents" have been made two separate classes as under:
"(a) any money, bullion, jewellery or other valuable article or thing, seized or requisitioned belongs to; or
(b) any books of account or documents, seized or requisitioned, pertain or pertain to, or any information contained therein, relates to,"

The Whole concept of "belongs to" was narrowed down to ownership of the assets owned, or investments made by "other person” before the amendment.

Post Amendment any link towards any books of account or documents with "other person" is made through the words "pertains or pertains to" and that of "information" contained in books of account or documents seized/requisitioned has been made through the words "relates to".

The reason of doing the said change is because the word "pertain" is wider in scope than "belongs to". It would be far more exhaustive as it would mean to be associated with, to be concerned with, to be connected to, concerned with, or have implications for. Infact it would also include to mean belong to.

Such an exhaustive definition leads to even a simple document merely containing reference of the "other person" may be held as pertaining to him. However, a document like a deed, on which “such other person” has signed as a witness, would not mean it pertains to him. A connection of "other person" with the document has to be shown. Also, the word "relates" goes beyond mere reference of the name of "other person". It also covers within scope, concern/connection of "other person" with the information.

For Example,

If a document was found and seized from Mr.A indicating a receipt of cash by him for purchase of land for his group companies. There was simply an apportionment of this cash among various companies of the group in the ratio of recorded price of the land purchased by those companies.

Now, if the AO presumes that these companies must have paid cash to that extent to Mr. A.

On that basis he sought to initiate proceedings u/s. 153C and proposed addition u/s. 69C. There was no name of any company on the document seized; MR. A had no legal status in any of the company. It was not shown as to who had written the document. Thus, it could not be said that the document belonged to assessee-company. The grievance of the AO i.e. the department was based only on suspicion and not on any evidence on record.

It had been held in Mumbai High Court in Arpit Land (P.) Ltd. & CIT v. Ambit Reality Pvt. Ltd that non-satisfaction of the condition precedent, viz., the seized document must belong to the assessee was a jurisdictional issue and non-satisfaction thereof would make the entire proceedings taken thereunder null and void. The issue of Section 69C of the Act can only arise for consideration if the proceedings under Section 153C of the Act are held valid. In view of this, in another judgement of the Hon’ble Bombay High Court i.e. CIT v. Lavanya Land (P.) Ltd it was held that “Ingredients of Section 153C are not satisfied, therefore, its invocation is bad in Law. It, being a finding of fact, no substantial question of Law arises from the order of the Tribunal”

9. Conclusion

For invoking section 153C, the AO of the "person searched" must be satisfied that certain seized "assets/documents" do not belong to or relates to the "person searched" but belong to" or relates to other person". In absence of such satisfaction, proceedings initiated u/s. 153C will be invalid. It is necessary that the AO of the "person searched" must put a "satisfaction note" in the file of "person searched" or in the file of "other person", if he is Assessing Officer of both. Satisfaction note should contain certain specific ingredients to show an application of mind. Thereafter the "assets/documents" should be handed over to the AO of "other person" who has to apply his mind as to whether the "assets/documents" have any bearing on the determination of total income of "other person". In other words, if there is no incriminating material in the "assets/documents" received by him, he need not initiate proceedings u/s. 153C. The substitution of expressions "pertains to" or "relates to" in place of "belongs to" in the post-amendment provisions widens the link of documents/information with "other person". It need not be confined to simply ownership, but extends to any connection or concern of "other person" with them. If there are several "other persons" referred to in the seized documents, it will require supporting evidence and application of mind to narrow down the choice to a specific "other person".

Where as for invoking section 148 the AO must have reason to believe that any income chargeable to tax has escaped assessment. There must be a direct nexus between the material coming to the notice of the assessing officer and the formation of the belief that there has been escapement of income of the assessee from assessment in a particular year. The AO must record reasons in writing before issuing notice under section 148. Merely a reason recorded that “there is a huge concealment of income’ or ‘For further investigation’ without any specific instance of entries or material relevant to the assessee will not constitute a valid reason as it is vague and general in nature.

To constitute a valid reason to believe there must be some new material coming into light with the assessing officer, merely a change of opinion cannot constitute a reason to believe. If the assessee has disclosed basic and all the true facts during the course of assessment and the assessment is completed. Later on notice u/s 148 can not be issued merely because there is another inference possible from the same documents and the facts placed before the assessing officer during the course of assessment as it will amount to change of opinion. There must be some new material coming into light for action u/s 147/148. But if the assessee has suppressed some relevant facts which leads to concealment of income and later those facts come before the assessing officer the notice u/s 147/48 can be issued validly.

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