Incriminating material has to be identified with respect to each Assessment Year before proceeding u/s 153C – Department’s SLP dismissed
In a recent judgment, Hon’ble Supreme Court has dismissed the SLP against the judgment of the Delhi High Court in holding that “incriminating material” would have to be identified with respect to each Assessment Year to which it relates or may be likely to impact before the initiation of proceedings under Section 153C of the Act.
ABCAUS Case Law Citation:
4392 (2025) (01) abcaus.in SC
Important Case Laws relied upon by Parties:
Commissioner of Income Tax v. Sinhgad Technical Education Society
CIT (Central)- III v. Kabul Chawla
CIT vs RRJ Securities Ltd.
SSP Aviation Ltd v. Deputy Commissioner of Income Tax
Commissioner of Income Tax vs. Ram Avtar Verma
ARN Infrastructure India Ltd. v. ACIT
Principal Commissioner of Income Tax vs. Abhisar Buildwell Private Limited
Principal Commissioner of Income Tax v. Saumya Constructions Private Limited
In the instant case, the core issue was whether merely because incriminating material may have been found or discovered and which would pertain to a particular AY, would the same constitute sufficient basis for initiation of assessment or reassessment proceedings in respect of the six Assessment Years preceding the year of search or the entire block comprised in the “relevant assessment year” as defined by Explanation 1 to Section 153A of the Act.
The litigation started when batch of writ petitions were filed before the Hon’ble High Court impugning notices issued under Section 153C of the Income Tax Act, 1961 (the Act) with the assessees asserting that in the absence of any material pertaining to the Assessment Years which are proposed to be reopened and assessed having been gathered during the course of a search, the assumption of jurisdiction is wholly illegal and unsustainable in law.
The challenge was founded on the contention that in the case of completed assessments which may fall either within the ambit of six preceding AYs’ or proverbially within the scope of “relevant assessment year”, a reassessment can be initiated only in respect of those AYs’ corresponding to which material may have been discovered in the course of a search and basis which the AO of the “other person” would be of the opinion that the same is likely have a “bearing on the determination of the total income” of the non-searched entity. The additional submission was that the requirement of incriminating material existing and thus constituting the basis for invocation of Section 153C would be liable to be viewed on identical terms, even in those cases where assessments may come to abate.
A a search and seizure operation u/s 132 of the Act was carried out in respect of a business group. Following the aforesaid, the Section 153C notices came to be issued by the assessees requiring ROI for AY 2015-16. The issuance of the notice was preceded by the drawing of a Satisfaction Note by the jurisdictional Assessing Officer (AO). The said satisfaction note referred to incriminating material found in the course of the search and pertaining to preceding years but did not talk of the AY 2015-16. It was the case of the assessees that the invocation of Section 153C for AY 2015-16 was wholly arbitrary and legally unsustainable.
The Hon’ble High Court observed that there is an evident distinction between Section 153A and Section 153C. Under Section 153A, where a search is initiated or documents and books requisitioned, the AO is mandated to issue notice calling upon the searched person to submit a ROI in respect of each AY falling within the six AYs’ and for the “relevant assessment year”. Upon submission of that ROI, the AO stands empowered statutorily to assess or reassess the total income of six AYs’ immediately preceding the assessment year corresponding to the year of search and for the “relevant assessment year”.
The Hon’ble High Court further noted that the AO of the searched person is only required to be satisfied that the documents or materials pertain to the “other person” at the stage of transmission of material or documents to the jurisdictional AO of the non-searched entity. It is only when the transmitted documents and material reaches the desk of the jurisdictional AO that it becomes empowered to initiate action under Section 153C of the Act. However, the initiation of action under Section 153C is significantly premised upon the AO being satisfied that the books of account or documents and assets seized or requisitioned having “a bearing on the determination of the total income of such other person”. Thus, the issuance of a notice under Section 153C is clearly not intended to be an inevitable consequence to the receipt of material by the jurisdictional AO. That the AO before commencement of action under Section 153C is also obliged to be satisfied that the material so received would “have a bearing on the determination of the total income of such other person” is an aspect of significance and constitutes a fundamental point of distinction between Section 153A and Section 153C.
The Hon’ble High Court further observed that in terms of the Second Proviso to Section 153A, all assessment or reassessment proceedings relating to the six AYs’ or the “relevant assessment year” pending on the date of search are statutorily envisaged to abate. However, the spectre of abatement insofar as the “other person” is concerned would arise only after the jurisdictional AO has formed the requisite satisfaction of the material having “a bearing on the determination of the total income of such other person” and having formed the opinion that proceedings under Section 153C are liable to be initiated.
The Hon’ble High Court emphasised that merely because Section 153C confers jurisdiction upon the AO to commence an exercise of assessment or reassessment for the block of years which are mentioned in that provision, the same alone would not be sufficient to justify steps in that direction being taken, unless the incriminating material so found is likely to have an impact on the total income of a particular AY forming part of the six AYs’ immediately preceding the AY pertaining to the search year or for the “relevant assessment year”.
The Hon’ble High Court further observed that the Supreme Court in unequivocal terms held that absent incriminating material, the AO would not be justified in seeking to assess or reassess completed assessments. Though the aforesaid observations were rendered in the context of completed assessments, the same position would prevail when it comes to assessments which abate pursuant to the issuance of a notice under Section 153C.
The Hon’ble High Court opined that a reopening or abatement would be triggered only upon the discovery of material which is likely to “have a bearing on the determination of the total income” and would have to be examined bearing in mind the AYs’ which are likely to be impacted. It would thus be incorrect to either interpret or construe Section 153C as envisaging incriminating material pertaining to a particular AY having a cascading effect and which would warrant a mechanical and inevitable assessment or reassessment for the entire block of the “relevant assessment year”.
The Hon’ble High Court opined that abatement of the six AYs’ or the “relevant assessment year” would follow the formation of that opinion and satisfaction in that respect being reached. The “incriminating material” would have to be identified with respect to the AY to which it relates or may be likely to impact before the initiation of proceedings under Section 153C of the Act. A material, document or asset recovered in the course of a search or on the basis of a requisition made would justify abatement of only those pending assessments or reopening of such concluded assessments to which alone it relates or is likely to have a bearing on the estimation of income. The mere existence of a power to assess or reassess the six AYs’ immediately preceding the AY corresponding to the year of search or the “relevant assessment year” would not justify a sweeping or indiscriminate invocation of Section 153C.
The Hon’ble High Court held that Revenue erroneously proceeded on the assumption that the moment any material is recovered in the course of a search or on the basis of a requisition made, they become empowered in law to assess or reassess all the six AYs’ years immediately preceding the assessment correlatable to the search year or the “relevant assessment year” as defined in terms of Explanation 1 of Section 153A. The said approach is clearly unsustainable and contrary to the consistent line followed by the Courts.
Accordingly, the Hon’ble High Court allowed the Writ petitions and quashed the impugned notices.
However, not satisfied with the quashing of notices, the Revenue challenged the order of the Hon’ble High Court before the Hon’ble Supreme Court by filing a Special Leave Petition (SLP).
However, the Hon’ble Supreme Court dismissed the ALP of the Revenue observing as under;
“There is a gross delay of 142 and 172 days respectively in filing the Special Leave Petitions which has not been satisfactorily explained by the petitioners. Even otherwise, we see no reason to interfere with the impugned order passed by the High Court.”
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