[Opinion] Tax Assessment of A Person Other Than The One Searched: A Deer in The Headlights -‘Cascading Effect’ Not Any Longer!!

Aseem Chawla – [2024] 162 taxmann.com 28 (Article)

Background

In the lifecycle of tax assessment proceedings emanating from search proceedings, it is incumbent upon the Assessing Officer of the Person searched is to record a plain satisfaction that the material or document found pertains to the person other than the one searched.

Section 153C of the Income Tax Act, 1961 (“the Act”), is the relevant provision which comes into play, in such situations, which inter alia, hinges on the factum of satisfaction having been recorded by the Assessing Officer of the person other than the one searched, upon perusal of the material gathered in the course of search which unequivocally brings to assess the same having a bearing on the determination of the total income of such other person.

Resultantly, it can be inferred that Section 153C of the Act, broadly requires Satisfaction on two counts prior to commencement of income tax proceedings in the hands of the person other than the one searched:

• Recording of Satisfaction by the Assessing Officer of the searched entity that some of the material gathered (incriminating material) relates to a person other than the person searched.
• Recording of Satisfaction by the Assessing Officer of such other person (third person) that the incriminating material have bearing on the determination of the total income of the other person.

Formation of Satisfaction emanating from the Incriminating Material having a bearing on the determination of the total income can be suggested as jurisdictional pre-requisite for the purposes of initiation of proceedings in the hands of such other person under the Scheme of the Act.

The Instructive Observations of the Hon’ble High Court of Delhi in SSP Aviation Ltd. v. Dy. CIT [2012] 20 taxmann.com 214/207 Taxman 260/346 ITR 177, in this regard are relevant which assume importance. The same are usefully extracted as under:

“15. It needs to be appreciated that the satisfaction that is required to be reached by the Assessing Officer having jurisdiction over the searched person is that the valuable article or books of account or documents seized during the search belong to a person other than the searched person. There is no requirement in section 153C(1) that the Assessing Officer should also be satisfied that such valuable articles or books of account or documents belonging to the other person must be shown to show to conclusively reflect or disclose any undisclosed income.

17. The judgment of this court in Saraya Industries Ltd. (2008) 306 ITR 189 (Delhi) was relied upon by Mr. Bajpai, in support of his contention that the seizure of the document must be of such nature that even closed assessments for six years could be reopened and this requirement postulates that the provisions of section 153C can be set in motion only if there is a finding that the seized document or books of account or valuable article represents the undisclosed income of the other person. The said decision does not assist the petitioner. The section merely enables the Revenue authorities to investigate into the contents of the document seized, which belongs to a person other than the person searched so that it can be ascertained whether the transaction or the income embedded in the document has been accounted for in the case of the appropriate person. It is aimed at ensuring that income does not escape assessment in the hands of any other person merely because he has not been searched under section 132 of the Act. It is only a first step to the enquiry, which is to follow. The Assessing Officer who has reached the satisfaction that the document relates to a person other than the searched person can do nothing except to forward the document to the Assessing Officer having jurisdiction over the other person and thereafter it is for the Assessing Officer having jurisdiction over the other person to follow the procedure prescribed by section 153A in an attempt to ensure that the income reflected by the document has been accounted for by such other person. If he is so satisfied after obtaining the returns from such other person for the six assessment years, the proceedings will have to be closed. If the returns filed by the other person for the period of six years does not show that the income reflected in the document has been accounted for, additions will be accordingly made after following the procedure prescribed by law and after giving adequate opportunity of being heard to such other person. That, in sum and substance, is the position.”

The Hon’ble Delhi High Court in a an equally noteworthy subsequent decision rendered in the case of CIT v. RRJ Securities Ltd. [2015] 62 taxmann.com 391/[2016] 380 ITR 612 havingthe benefit and duly taking into consideration the SSP Aviation Ltd. (supra), held as follows:

“13. The first and foremost step for initiation of proceedings under Section 153C of the Act is for the AO of the searched person to be satisfied that the assets or documents seized belong to the Assessee (being a person other than the searched person). The AO of the Assessee, on receiving the documents and the assets seized, would have jurisdiction to commence proceedings under Section 153C of the Act. The AO of the searched person is not required to examine whether the assets or documents seized reflect undisclosed income. All that is required for him is to satisfy himself that the assets or documents do not belong to the searched person but to another person. Thereafter, the AO has to transfer the seized assets/documents to the AO having jurisdiction of the Assessee to whom such assets/documents belong. Section 153C(1) of the Act clearly postulates that once the AO of a person, other than the one searched, has received the assets or the documents, he is to issue a notice to assess/re-assess the income of such person – that is, the Assessee other than the person searched – in accordance with provisions of Section 153A of the Act.

18. It, plainly, follows that the recording of a satisfaction that the assets/documents seized belong to a person other than the person searched is necessarily the first step towards initiation of proceedings under Section 153C of the Act. In the case where the AO of the searched person as well as the other person is one and the same, the date on which such satisfaction is recorded would be the date on which the AO assumes possession of the seized assets/documents in his capacity as an AO of the person other than the one searched.”

The Seminal judgement of the Hon’ble Supreme Court in CIT v. Sinhgad Technical Education Society [2017] 84 taxmann.com 290/250 Taxman 225/397 ITR 344 on the essential requirement under Section 153C being a jurisdictional fact has held as follows:

“15. In these appeals, qua the aforesaid four assessment years, the assessment is quashed by the ITAT (which order is upheld by the High Court) on the sole ground that notice under Section 153- C of the Act was legally unsustainable. The events recorded above further disclose that the issue pertaining to validity of notice under Section 153-C of the Act was raised for the first time before the Tribunal and the Tribunal permitted the assessee to raise this additional ground and while dealing with the same on merits, accepted the contention of the assessee.

17. The ITAT permitted this additional ground by giving a reason that it was a jurisdictional issue taken up on the basis of facts already on the record and, therefore, could be raised. In this behalf, it was noted by the ITAT that as per the provisions of Section 153-C of the Act, incriminating material which was seized had to pertain to the assessment years in question and it is an undisputed fact that the documents which were seized did not establish any co-relation, document-wise, with these four assessment years. Since this requirement under Section 153-C of the Act is essential for assessment under that provision, it becomes a jurisdictional fact. We find this reasoning to be logical and valid, having regard to the provisions of Section 153-C of the Act. Para 9 of the order of the ITAT reveals that ITAT had scanned through the Satisfaction Note and the material which was disclosed therein was culled out and it showed that the same belongs to Assessment Year 2004-05 or thereafter. After taking note of the material in para 9 of the order, the position that emerges therefrom is discussed in para 10. It was specifically recorded that the counsel for the Department could not point out to the contrary. It is for this reason the High Court has also given its imprimatur to the aforesaid approach of the Tribunal. That apart, the learned Senior Counsel appearing for the respondent, argued that notice in respect of Assessment Years 2000-01 and 2001-02 was even time-barred.

18. We, thus, find that the ITAT rightly permitted this additional ground to be raised and correctly dealt with the same ground on merits as well. Order of the High Court affirming this view of the Tribunal is, therefore, without any blemish. Before us, it was argued by the respondent that notice in respect of Assessment Years 2000-01 and 2001-02 was time-barred. However, in view of our aforementioned findings, it is not necessary to enter into this controversy.”

The necessity of an indelible link being found to exist between the material recovered in the course of a search or a requisition made and a right to reassess under the provisions of Sections 153A and 153C of the Act, arose for consideration before the Hon’ble Supreme Court in Pr. CIT v. Abhisar Buildwell (P.) Ltd. [2023] 149 taxmann.com 399/293 Taxman 141/454 ITR 212. The Hon’ble Apex Court held that:

“23. The question which is posed for consideration in the present set of appeals is, as to whether in respect of completed assessments/unabated assessments, whether the jurisdiction of the AO to make assessment is confined to incriminating material found during the course of search under Section 132 or requisition under Section 132-A or not i.e. whether any addition can be made by the AO in absence of any incriminating material found during the course of search under Section 132 or requisition under Section 132-A of the 1961 Act or not.”

The Hon’ble Supreme Court in the aforesaid decision laid emphasis on the material gathered in the course of the search impacting the computation of income for each particular Assessment Year(s) as being determinative in nature. The Hon’ble Apex Court in Abhisar Buildwell (supra), affirmed the decision of the Hon’ble Delhi High Court rendered in the case of CIT (Central) v. Kabul Chawla [2015] 61 taxmann.com 412/234 Taxman 300/[2016] 380 ITR 573.

Although Kabul Chawla (Supra) was a decision rendered in the context of Section 153A, the judgment is instructive to the extent that it had held that Section 153A would warrant additions being made only on the basis of evidence found in the course of a search and those assessments not being liable to be arbitrarily reopened or examined afresh unless the seized material be found to have some nexus with the assessment of total income for that year. The Hon’ble Delhi High Court in Kabul Chawla further held that completed assessments could be interfered with only on the basis of incriminating material unearthed during the course of search.

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