Scope of search assessments u/s 153A: The unending controversy
CA Vidhan Surana & CA Sunil Maloo
S. 153A, which deals with search assessments continues to baffle tax experts. In All Cargo, the Special Bench held that “completed assessments” can be assessed only on the basis of seized / incriminating material. While one view is that this interpretation is incorrect, the authors have taken the converse view after a careful study of the entire law on the subject
The scope of Assessment u/s 153A of the Income Tax Act, 1961 has been a controversial aspect since long. Though recently it has been settled courtesy to the announcement of the Finance Act 2012, which has lead to certain legal development and judicial clarification; nevertheless the verdict of Apex Court on the same is yet awaited.
The usual queries pertaining to the Assessment u/s 153A of the Act is:
“What is the Legislative Intention behind making Assessment / Reassessment u/s 153A and the definite scope thereunder”
After analyzing it has been conceived that the said section generated bivalent view:-
– On one hand it is clear that 153A is for Search Assessment, so basically undisclosed income should be assessed;
– While on the other hand some are of the view that 153A assessments are de-nevo, as it prescribes that if a return is filed under this section then provision of this Act shall apply accordingly as if such return were a return required to be furnished under section 139.
Above conflict and contradiction about the burning issue here had caused a perplexity among the taxation fraternity across the country until the happening of recent developments. It seems there has been two major type of developments we have on the said issue, firstly Legal development i.e. amendment in the Income Tax Act, 1961 through Finance Act, 2012 and secondly Judicial clarification from Allahabad High Court & ITAT Mumbai Special Bench.
Legal Development: – Amendment through Finance Act 2012
The Finance Act 2012, has inserted third proviso to section 153A(1) of the Act, empowering the Central Government to make rule in respect of the Assessment Year except in cases where any assessment or reassessment has abated, specify the class or classes of cases 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.
Memorandum explaining the provisions of the finance bill 2012 states that Under the existing provisions of section 153A of the Income-tax Act, it is mandatory to issue a notice for filing of tax returns for 6 assessment years immediately preceding the assessment year relevant to the previous year in which search is conducted under section 132 or requisition is made under section 132A.
This move by the Parliament is illuminating and welcomed. Nonetheless Central Government have still not notified any rules in this respect, but the intention of law is apparent that merely a Search in the premises of the assessee, would not AUTOMATICALLY confer jurisdiction to the AO to initiate proceedings for all such six years as de-nevo.
Recent Judicial Clarification:-
The said issue has been examined and observed at great lengths by various courts and after in depth discussion and analysis of all the relevant sections & earlier judgments, the verdict was present among the corporate masses. Following important questions were raised before the Hon’ble Courts:-
"Whether on the facts and in the circumstances of the case, the Hon’ble Income tax Appellate Tribunal was justified in law in setting aside the case and restore to the file of A.O. without appreciating that as per provisions of section 153A, "only assessment pending" as on the date of search are abated and not the "assessment completed" or ‘appeal pending’?"
(Before the Allahabad High Court)
“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”?
(Before the ITAT Mumbai, Special Bench)
Scheme of Assessment u/s 153A:-
It is evidently inscribed in the law that an assessment u/s 153A is different from regular assessment. The section can be provoked only when a search is initiated u/s 132 or books of account, other documents or any assets are requisitioned u/s 132A after 31.5.2003. Also tobe highlighted that it is during the course of search itself, such generally incriminating documents or papers etc. or unaccounted assets are found.
The provision u/s 153A should be read in conjunction with the provision contained in section 132(1), the reason being that the latter deals with search and seizure and the former deals with assessment in case of search etc., thus, the two are inextricably linked with each other, which implies that existence of books of account, incriminating documents or unaccounted assets is or are sine qua non of making the assessment under this provision. Therefore, if nothing is found during the course of search, the step of making assessment or re-assessment u/s 153A is not only erroneous it also serves no purpose.
Mutually contradictory provisos to section 153A(1) & its harmonious reading
The provision of section 153A starts with non-obstante clause with reference to sections 139, 147, 148, 149, 151 and 153. It requires the AO to issue a notice to the Assesse for filing the return in respect of each assessment year falling within six assessment years immediately preceding the assessment year relevant to the previous year in which the search or the requisition is made. First proviso is reiteration of the provision containing clause (b) of section 153A (1) that the AO shall assess or reassess the total income of each of the six assessment years
The second proviso contemplates that if any of the aforesaid six assessments is pending on the date of initiation of the search or requisition, the same shall abate. A comprehensive reading of section 153A reveals apparent contradiction in the first proviso and the second proviso. Amongst the salutary rules, the rule of harmonious construction is the most imperative one. As per the said rule, a statue must be read as a whole i.e. unabridged version is essential and one of the provisions of the Act should be construed with reference to other provisions in the same Act so as to make a consistent enactment.
Abatement: legal meaning
The word ‘abatement’ is referable to something, which is pending alive, or is subject to deduction. The abatement refers to suspension or termination of the proceedings either of the main action, or the proceedings ancillary or collateral to it. The proceedings, which have already terminated are not liable for abatement unless statute expressly provides for such consequence thereof.
Pending: legal meaning
The word ‘pending’ occurring in the second proviso to Section 153A of the Act, is also significant. It is qualified by the words ‘on the date of initiation of the search’, and makes it abundantly clear that only such assessment or reassessment proceedings are liable to abate. In other words, Assessments which are not pending i.e. Competed Assessments as on the date of Search would hold their base and would not abate.
Only pending Assessments as on the date of Search shall abate. The legislature is clear that any appeal, revision or rectification proceedings, if pending as on the date of Search shall not abate. Circular No.7 of 2003 dated 5.9.2003 issued by the Commissioner of Income Tax has clarified the position in Para 65.5 as follows:-
"The Assessing Officer shall assess or reassess the total income of each of these six assessment years. Assessment or reassessment, if any, relating to any assessment year falling within the period of six assessment years pending on the date of initiation of the search under section 132 or requisition under section 132A, as the case may be, shall abate. It is clarified that the appeal, revision or rectification proceedings pending on the date of initiation of search under section 132 or requisition shall not abate……….."
Accordingly as far as completed assessments are concerned, they do not abate and pending appeals etc. in respect thereof continue to exist notwithstanding the fact that the search has been made. Thus a completed assessment becomes final unless some incriminating material is found in the course of search. Otherwise the AO will be empowered to undo what has already been completed and has become final.
Extracts from Memorandum of Finance Bill, 2003
In the Memorandum explaining the provisions of Finance Bill 2003, it was observed that the existing provisions (at that time) for single assessment of undisclosed income for block period were introduced for avoidance of disputes, early finalisation of such assessments and reduction in multiplicity of proceedings. However, since there were parallel proceedings namely regular assessment proceedings as well as assessment of block assessments for undisclosed income had amounted to multiplicity of proceedings. In order to avoid multiplicity of proceedings, a scheme of single assessment in respect of assessment years for which ASSESSMENT PROCEEDINGS are pending, Section 153 A to Section 153C of the Act were proposed to be introduced.
If the AO is allowed to assess / reassess the total income for all six assessment years as per first proviso to section 153A, in contradiction of the second proviso, particularly when there is no incriminating material etc., then the same will not only multiply assessment proceedings but will multiply even the appellate proceedings. Primarily this can never be the intention of the Legislature.
Supreme Court’s observation:-
The Hon’ble Supreme Court in the case of Parshuram Pottery Works Co. Ltd. Vs ITO, Circle-1, Ward A, Rajkot 106 ITR 1 (SC) observed that
“It has been said that the taxes are the price that we pay for civilization. If so, it is essential that those who are entrusted with the task of calculating and realising that price should familarise themselves with the relevant provisions and become well-versed with the law on the subject. Any remissness on their part can only be at the cost of the national exchequer and must necessarily result in loss of revenue. At the same time, we have to bear in mind that the policy of law is that there must be a point of finality in all legal proceedings, that stale issues should not be reactivated beyond a particular stage and that lapse of time must induce repose in and set at rest judicial and quasi-judicial controversies as it must in other spheres of human activity.”
It is important to note that all reassessments such as under sections 147, 263 etc. have to be made within well-defined limits subject to satisfaction of pre-conditions and, therefore, similar limitation may have to be read in the instant provision. Therefore, making any Assessment which is already completed will also require the satisfaction of pre-conditions as contemplated in section 153A, its first proviso, its second proviso read with section 132. The Assessment u/s deals with search cases, therefore, the concept of undisclosed income u/s 132(1)(c) will come into picture.
The second proviso to section 153A is intended to avoid two assessments for the same year. Therefore, proper construction would be that in respect of completed assessments, the assessment shall be made only if incriminating documents etc. are found. Therefore, the term “assess and reassess” appearing in section 153A(1)(b) means that assessment shall be made in case of pending assessments and reassessments shall be made in respect of completed assessments where incriminating material is found.
In support of the above discussion, we have following recent judicial pronouncements on the matter:-
1. CIT Vs. Smt. Shaila Agarwal
Allahabad High Court, reported in 204 Taxman 276
2. ALL CARGO GLOBAL LOGISTICS LTD Vs. DCIT
Mumbai ITAT Special Bench, reported in 2012-TIOL-391-ITAT-MUM-SB
The summary of the various scenario explaining the provisions of section 153A as referred in Para 41 of the Judgment of the Mumbai ITAT Special Bench in case of ALL CARGO GLOBAL LOGISTICS LTD Vs. DCIT, (Supra) extracts of which is reproduced as under:-
The final conclusion of the Mumbai ITAT Special Bench in case of ALL CARGO GLOBAL LOGISTICS LTD Vs. DCIT (Supra), on the issue is as under:-
a) In assessments that are abated, the AO retains the original jurisdiction as well as jurisdiction conferred on him u/s 153A for which assessments shall be made for each of the six assessment years separately;
b) In other cases, in addition to the income that has already been assessed, the assessment u/s 153A will be made on the basis of incriminating material, which in the context of relevant provisions means – (i) books of account, 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.
(Para 58)
The other earlier contradictory judgments in the matter, have been disapproved by the Special bench in case of ALL CARGO GLOBAL LOGISTICS LTD (Supra), therefore at this juncture same are not referred.
Application of above principles to Section 153C Assessments:-
According to the scheme of Assessment of Other Person, as a result of Search u/s 132 of the Act, AO of the searched party shall hand over such seized paper/ assets to the AO having jurisdiction over the case of such other person, and he is required to assess or reassess income of such other person in accordance with the provisions of section 153A. Therefore, above principles shall be applicable mutatis mutandis for assessment u/s 153C too.
Therefore, the completed Assessment on the basis of “Assessment Year Specific Incriminating Documents / transactions or seized asset” should only be reopened under the provisions of the first proviso to section 153A of the Act and not otherwise.
According to the ITAT Pune Bench, in the case of Sinhgad Technical Education Society Vs. ACIT (ITA Nos. 114 to 117/PN/10 dated 28/01/2011) it was held that section 153C assessment sans “speaking” & “incriminating” documents are void.
Conclusion:-
Thus it can be précised that an assessment or reassessment u/s 153A arises only when a search has been initiated and conducted. Therefore, such an assessment has imperative link with the initiation and conduct of the search. As per section 132, the search can be authorized on satisfaction of one of the three conditions enumerated earlier. Consequently, while interpreting the provision contained in section 153A, all these conditions should to be taken into account. In absenteeism of any incriminating material re-assessment of the previously completed assessment, in contradiction to second proviso to section 153A, would result in multiplicity of not only Assessment Proceedings but also Appellate proceedings, which is not at all intended by the legislature.
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When no warrant r shown not any panchnama is drawn up a o issued noticr u/s 153A assessee file its original rrtunas already filed. A o make heavy addition. Can assessee challenge thr sec 153A that no esrrant wss shown nor panchanma drawn up. All producing r illegal. Cit drclarr assesdment as invalid can department take acton 148
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If cit (a) declared assessment as in valid as no search warrant issued nor any panchnama drawn up and had declared assessment invalnon est .can department will second appreal as well as issure notice 148. Pl enlightened
Section 153A starts with the non-obstante clause and therefore, I personally feel that Section 147 can not be invoked in a Search case u/s 132. With due respect, I differ with the Judgment of the Honourable Madhya Pradesh High Court in the case of Ramballabh Gupta v/s ACIT reported in 288 ITR 374.
Kindly throw light on the issue if, there is any further development w.r.t. the issue above and the above cited case of the Honourable M. P. High Court.
@Sudhanshu: Sir, this is not fair critisism. What is “mediocre” or not so is subjective, depending on the reader’s level of knowledge. For a novice or the inexperienced, everything is educative while for an Albert Einstein, even the theory of relativity can be elementary. At least two readers before you have commented that they benefitted by the article. If one does know better than the author then constructive critisim should be offered on what should be done to improve the article, rather than to discourage him.
I will not hold back my punches. This article is a mediocre work . It clarifies less and confuses more. I request the administrators not to publish articles just for the heck of it. I also request the authors to first be clear in their head what they have to write. The most fundamental prerequisite of giving the correct answer is understanding the question properly.
thanks Jajoo, for appreciation, based on experience of handinling the Search proceedings including Assessments follwing are the steps in my view:-
1. there is a internal system prevails in investigation wing to complie the report based on the seized documents & investigation during the Search termed as “Aprraisal Report”, which is the guiding factor for the AO to verify that any incriminating material i.e. (a) the books of accounts and other documents found in the course of the search but not produced in the course of original assessment and (b) undisclosed income or property disclosed in the course of search, found and which require to re-assess the competeled assessment u/s 153A. In other words anology of 148 assessment proceedings i.e. recording the reasons by AO has to be followed before issuing mechnically notices u/s 153A for all six assessment years. If AO deviates from the report of investigation wing then official joint meeting are being held with investigation wing for discussion and decision of deviation.
2. further in our article, we are of the considered opinion that assessment u/s 153A and 153C sans assessment year specifc “speaking” & “incriminating” documents are void.
3. Invariably AO seeks page wise comments/ explanation from the assessee of the seized material thruugh which AO can ascertain is there any incriminating material, then only he is authorized to proceed u/s 153A for Re assessment of completed assessments.
Nice Article, but still I have a doubt in my mind that in case of completed assessment how the AO will come to the conclusion that what he has found during search proceedings were already disclosed by the taxpayer in his ROI or during regular assessment proceedings related to that specific year. (Because what I understand is that the search team is comprised of different officers who post completion of search handovers the requisite documents to the jurisdictional AO).
So to correlate that the documents/assets found during search were already disclosed by the taxpayer in his ROI or during his regular assessment, the AO needs to revisit the earlier year records / completed assessment orders and accordingly it would be imperative for AO to initiate fresh assessment proceedings for earlier years even though the regular assessment for those year is already completed.
As far as appeal proceedings are concerned, if no incriminating material is found during search then the assessment order will be passed without making any adjustments and consequentially the taxpayer will not prefer any appeal against the fresh tax assessment order.
So to conclude in search cases even though the Special Bench has prescribed the approach to be adopted by the Tax Authorities in case assessment is already completed, but still there is a grey area that practically how the approach prescribed by Special Bench would be implemented.
Vidhan /Sunil appreciate if you can let me know if you have any differing views on the above……..thanks
Pl refer:-
1. Vipan Khanna v. CIT: 255 ITR 220 (P&H)
2. Kailash Auto Finance Ltd., v. CIT: (2009) 32 SOT 80 (Luck.)
Held that by processing the return and by issuing acknowledgment as token of accepting the return, the proceedings initiated by filing the return are terminated and no proceedings, therefore, remain pending.
Thanks for such a nice article. I have a query. Where timelimit for issuance of notice u/s 143(2) has expired, can he not resort to power given u/s 153A(1) to make assessment. Even though no incriminating material was found, its possible that during assessment proceedings he may come across some unknown fact. This is considering the fact that return filed has attained finality where it gets coveredunder ‘reassessment’ used in 153A. Please clarify.