2.1.1 Power of search u/s.
132 gives wide powers to authorized officers for detection and collection of
evidences relating to income of a person. However, the ultimate collection
is dependent on valid assessment of person to whom income belongs and
utilization of evidences for making an assessment. Prior to 1995,
information collected in search action was also utilized in making an
assessment for a year where proceedings were pending or by reopening of
assessments where no proceedings were pending for years for which income
related.
2.1.2. Provisions for
assessment of undisclosed income detected during search were enacted in 1995
for making a block assessment for years for which reopening could have been
made. However, it generated more litigation than would have arisen if only
existing provisions of s. 147 had been resorted to.
2.1.3 The scheme of block
assessment has come to an end with effect from 1-6-2003 by insertion of
section 158BI and new provisions for assessment of search cases have been
enacted in sections 153A to 153C of the Income-tax Act. The new provisions
are introduced by the legislature for the reasons that the main objectives
for which the block assessment scheme was introduced; i.e., avoidance of
disputes, early finalisation of search assessments, reduction in
multiplicity of proceedings, cost-effective, meaningful and efficient
assessment proceedings, etc. have failed in totality and has spawned a fresh
stream of litigation. However, instead of taking benefit of existing
provisions of ss. 147, block assessment provisions have been substituted by
a new set of provisions. Time will only tell whether new provisions reduce
litigation or generate fresh round of litigation relating to the procedure
itself.
2.2.1 The new provision for
assessment of search and seizure cases as per sections 153A to 153C, in a
nutshell is a mixture of both the old provisions relating to reassessment as
well as the provisions contained in the block assessment scheme.
2.2.2 Section 153A provides
that in case of a person where a search action is initiated u/s. 132 of the
Act or books of account or other documents or assets are requisitioned u/s.
132A after 31-5-2003, the assessing officer shall issue a notice to such
person requiring him to furnish a return of income within such period as
mentioned in the notice. The return of income is required to be filed for
all the six assessment years preceding the assessment year in which search
action is initiated u/s. 132 or books of account, etc are requisitioned u/s.
132A. Section 153A overrides all other provisions and therefore the time
limit as well as the criteria for reopening of assessments would not be
applicable to the assessment made in respect of search cases.
2.2.3 The proviso to
section 153A provides that the assessing officer shall assess or reassess
all the six assessment years preceding the previous year in which search
action is initiated or requisition made.
2.2.4 It is further
provided by way of second proviso that the assessment pending on the date of
initiation of search u/s. 132 or requisition u/s. 132A shall abate.
2.2.5 All other provisions
of the Act except those overridden shall apply to the assessment or
reassessment made under this section.
2.2.6 Tax shall be charged
at the rates applicable to such assessment years.
2.2.7 Section 153B provides
for the time limit within which the assessment or reassessment u/s.153A has
to be made. This section is similar to the section 158BE of block assessment
and provides that the assessment or reassessment shall be made within a
period of two years (21 months for last of authorization executed during the
financial year commencing on 1-4-2004 onwards as amended by Finance Act
2006, w.e.f. 1-6-2006) from the end of the financial year in which the last
of the authorizations was executed in case of search and in case of
requisition, within a period of two years (21 months for last of
authorization executed during the financial year commencing on 1-4-2004
onwards as amended by Finance Act 2006, w.e.f. 1-6-2006) from the end of the
financial year in which the requisition was executed. With respect to
assessment of other person referred to in section 153C, the assessment or
reassessment shall be made within a period of 2 years in both the cases
referred to above or one year (21 months instead of 2 years and 9 months
instead of 1 year as amended by Finance Act, 2006 w.e.f. 1-6-2006) from the
end of the financial year in which the books of account or documents or
assets are handed over to the AO having jurisdiction over other person. The
time limit so provided is extended in certain circumstances. The proviso
further states that where the time limit available with the assessing
officer is less than 60 days after exclusion of the aforesaid period, the
time limit would be extended up to 60 days. For example, where the
assessment is getting time-barred on 30-6-2006 and an order of injunction is
made on 15-6-2006 staying the assessment proceedings and is vacated on
25-6-2006, the assessing officer would get a period of 60 days commencing
from 26-6-2006 even though the stay was only for a period of 10 days.
2.2.8 Section 153C is
analogous to section 158BD with the only exception that the words ‘any
Undisclosed Income’ is done away with in the new section 153C. The section
provides that where the assessing officer is satisfied that any money,
bullion, jewellery or other valuable article or thing or books of account or
documents or assets seized or requisitioned belong or belongs to any person
other than the person searched or requisitioned, then such money, bullion,
etc. is to be handed over to the assessing officer having jurisdiction over
such other person and that other assessing officer shall proceed against
such other person and assess or reassess in accordance with the provisions
laid down in section 153A.
2.3.1 Some of the important
issues arising out of the new provisions relating to assessment of search
cases are discussed hereafter.
2.3.2 Whether
assessment/reassessment mandatory
Proviso to section 153A
states that the assessing officer shall assess or reassess the six
assessment years preceding the previous year in which the search is
initiated or requisition made. The use of the word ‘shall’ connotes that the
assessment/reassessment is mandatory and will have to be made irrespective
of the fact as to whether any material/document, etc. is found in the course
of search action. This is more so when the proviso further states that the
assessment pending on the date of search action or requisition ‘shall’
abate. Therefore, the logical conclusion that could be drawn is that even if
nothing is found in the course of search action, assessment/reassessment
would have to be made.
However, another view could
be that though S. 153A ordains that reassessment be made, if no undisclosed
income or asset is detected than reassessment under S. 153A cannot be made.
As discussed in earlier part of paper on issue of S. 147, finality of
assessment cannot normally be disturbed. S. 132 can be carried out only in
specified circumstances and clause (c) of S. 132(1) reads: “any person is in
possession of any ….or other valuable article or thing and such …….
represents either wholly or partly income or property which has not been, or
would not be, disclosed …..”. The concept of undisclosed income though
absent in S. 153A, is very much present in S. 132 and it is only if a valid
search u/s. 132 has been carried out that assessment or reassessment be made
u/s. 153A. Therefore if nothing unaccounted is found in pursuance of search
action u/s. 132 than it can be claimed that assessment or reassessment u/s.
153A cannot be made.
2.3.3 Scope of
assessment/reassessment u/s. 153A
Unlike block assessment
which was only for assessment of undisclosed income, the new provisions
provide that once search is carried out the assessing officer shall carry
out assessment or reassessment of all the six years. The principle laid down
in reassessment proceedings that once reassessment proceedings have validly
commenced, the assessing officer can make addition of any other item of
escapement would equally apply to proceedings u/s. 153A. However, where
earlier a scrutiny assessment u/s. 143(3) has taken place, it can be
contended that assessing officer cannot make roving enquiries or that he
cannot make addition merely on change of opinion if in earlier proceedings
the assessing officer had taken a view after enquiry and no new material has
emerged calling for a different view.
2.3.3.1 Whether
deductions/exemptiions, etc. could be claimed for first time in return of
income filed in pursuance to notice issued u/s. 153A
In the case of
reassessment proceedings, the Hon’ble Supreme Court in CIT vs. Sun
Engineering Co. P. Ltd. 198 ITR 297 (SC) has laid down the ratio that the
department cannot be worse off by reopening an assessment and hence, the
assessee would be barred from claiming any relief in the course of
reassessment proceedings. However, the ratio laid down by the Supreme
Court in Sun Engineering, supra, was specifically in respect of reopening
of assessment where the income has escaped assessment. The provisions of
sections 148 & 149 are overridden by S. 153A and hence, the said ratio of
the Supreme Court may not apply. Since the entire assessment/reassessment
is to be made de novo (not only in respect of undisclosed income or the
income that has escaped assessment) it may be possible to make a new claim
altogether not made earlier.
2.3.3.2 Undisclosed loss
Issue arises whether loss
could be claimed for the first time in the return of income filed in
pursuance to notice issued in terms of provision of section 153A. Here
again, let us take an example of a person who has not filed his return of
income at all wherein such person has suffered a loss. Now as per the
normal provisions, the loss has lapsed since the return itself is not
filed. Under the new provisions. assessment shall be made for every
assessment year separately, which could include both disclosed as well as
undisclosed income. Since all the provisions of the Act are applicable to
the assessment made u/s. 153A, so far as the same assessment year is
concerned, the loss may be allowed to be set off against other income
assessed for that year. But it may be difficult to claim carry forward of
the said loss in view of specific provision of section 80 of the Act.
Another issue could be
where loss is claimed in the original return and also allowed to be
carried forward, but has lapsed due to insufficient profit in subsequent
years. Now if some income is assessed for such assessment year where the
loss was available for set off, in my view, in such cases, the loss ought
to be available for set off.
2.3.4 Issue of Notice u/s.
153A – Whether Mandatory and Whether separate notice for all the years
Issue of notice is a sine
qua non for making assessment under the new provisions. Since the section
uses the word ‘shall’, it becomes a pre-requisite for the assessing officer
to issue a notice u/s. 153A before issuing a notice u/s. 142(1)/143(2) of
the Act for making the assessment. The jurisdiction of the assessing officer
would also commence with the issue of notice and hence, the issue of notice
is mandatory before making an assessment
u/s.143(3) r.w.s 153A of the Act. Thus, if no notice is issued or the notice
issued is invalid, the assessment made in pursuance of such notice would
also be bad-in-law, illegal and void. Reference may be made to the decisions
in Karam Chand Thapar & Bros. (Coal Sales) Ltd. vs. DCIT [1997] 228 ITR 317
(Cal); CIT vs. Kurban Hussain Ibrahimji Mithiborawala [1971] 82 ITR 821
(SC); Verma Roadways vs. ACIT [2000] 75 ITD 183 (All) – in respect of block
assessment.
The second issue relates to
whether only one notice is sufficient for all the six assessment years
preceding the previous year in which search action is initiated or
requisition is made. One view could be that the assessing officer is
required to issue only one notice requiring the assessee to file return of
income for all the six assessment years for the reason that the section uses
the words ‘the return of income in respect of each assessment year’
following the words ‘issue notice’. Thus, the language indicates that only
one notice may be required. The second view is that separate notice is
required for each of the six-assessment year for the reason that each year
is a separate assessment year unlike the block assessment, where only
assessment was to be framed whereas under new provision, separate assessment
is to be framed and separate return of income is to be furnished. Secondly,
if one compares with section 148, separate notice is required for each
assessment year to be reopened and even though section 153A overrides
section 148, the analogy could be drawn as far as issue of notice is
concerned. Thirdly, if nothing is found for a particular assessment year,
the assessing officer may not issue any notice and no assessment may be
framed by him in order to save time, cost, etc. and hence, a separate notice
may be required to be issued for each of the six assessment years. The issue
is debatable, however, the second view seems to be a better view and in
order to avoid unintended litigation, it would be preferable if the
department issues separate notices for each of the six assessment years.
2.3.5 Abatement of
assessment
2.3.5.1 Proviso to
section 153A states that the assessment/reassessment on the date of
initiation of search or requisition shall abate. The literal meaning of
the word ‘abate’ means – the act of eliminating or nullifying; the
suspension or defeat of a pending action for a reason unrelated to the
merits of the claim. Therefore, if any assessment or reassessment is
pending with the assessing officer, the same shall become a nullity and
fresh assessment would be made in pursuance to notice issued under section
153A of the Act.
2.3.5.2 Issue arises is
what happens to the proceedings taken in furtherance of the completed
assessments, where assessments were completed before the date of search –
whether would become infructous or would have to be dealt with
independently. If assessment is completed before the date of initiation of
search, than the proceedings taken in furtherance to the completed
assessment would have to be dealt independent of 153A assessment. It is
only pending assessment or reassessment proceedings which shall abate and
not the completed assessment.
2.3.5.3 Interesting issue
arises where the assessment is pending due to set aside of assessment by
order u/s. 263 of the Act and what would happen to the appeal filed and
pending before the ITAT against 263 order. Though one can safely say that
order u/s. 263 survives and thereby even appeal, if filed, survives and
would not abate. However, whether assessment proceedings in pursuance of
263 order survives or abates depends on nature of set aside directions
issued by CIT.
2.3.5.4 Block assessment
proceedings pending on the date of search would not abate as the
proceedings are for assessment of undisclosed income independent of
regular assessment. Assessment/reassessment u/s. 153A is of regular years
and therefore would not effect block assessment.
2.3.6 Whether 153C
assessment could be made even if other person has disclosed the transaction,
but is undisclosed of the person searched
Section 153C provides that
where the assessing officer is satisfied that money, other valuable article
or thing belongs to person other than person searched, than the same shall
be handed over to Assessing Officer having jurisdiction over such other
person and provisions of S. 153A would apply to such other person. The
requirement of section 153C with reference to satisfaction seems to be only
prima facie satisfaction and not a firm conclusive satisfaction. Thus, the
assessing officer must be prima facie satisfied that the money, bullion,
etc. found in the course of search belongs to the person other than the one
searched. This satisfaction is required before invoking the proceedings
under section 153C and hence, the material, documents, money, bullion, etc.
belonging to other person must be found in the course of search action.
Question arises if the other person satisfies that such money, etc found
from person searched though belongs to him is a recorded transaction which
has been or would have been disclosed to department in regular course,
whether proceedings u/s. 153A r. w. s. 153C can continue? As discussed
earlier para 2.3.2, conditions prescribed in s. 132 would apply to
provisions of s. 153A/153C if nothing undisclosed is found in course of
search. If the person to whom notice u/s. 153C is issued is able to show
that money, etc is disclosed than he can contend that proceedings u/s. 153C
be dropped as basic ground collapses and jurisdiction to make
assessment/reassessment itself does not survive.