ITO v. Vikram Sujit Kumar Bhatia

This Article attempts to analyze the decision of the Apex Court in the case of ITO v. Vikram Sujit Kumar Bhatia [(2023) 149 taxmann.com 123 (SC)],rendered on 06-04-2023.

BACKGROUND
1. The relevant provisions of Section 153C of the Income tax Act, 1961 (‘the Act’) as they stood before the amendment made by Finance Act 2015 stood as under.
  ” 153-C. Assessment of income of any other person.—(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, any money, bullion, jewellery or other valuable article or thing or books of account or documents, seized or requisitioned, belongs or belong to a person other than the person referred to in Section 153-A, 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…..”
  
  {Emphasis supplied}
2. A controversy arose, among other, on interpretation of the term ‘belongs’ or ‘belong to’. Among many judgments, the Delhi High Court in the case of Pepsi Food (P.) Ltd v. ACIT [WP(C) No. 415 of 2014]held, in this context, that the first step for the assessing officer before issuing a notice u/s 153 C of the Act is to arrive at a clear satisfaction that the seized document does not belong to the person searched but belongs to some other person, which satisfaction should be based on some cogent material and not merely based on surmise and conjecture. This observation was refereed with approval by the same High Court in a subsequent case of Pepsico India Holdings (P.) Ltd v. ACIT [(2015) 370 ITR 295 (Del)] {“Pepesico”},decided on 14.08.2014. This was a case where three documents found and seized by the Department in course of search proceedings against Jaypuria Group were held by the Department to be ‘belonging to’ Pepsico. These documents were, (i) photocopies of share certificates in the name of Pepsico, (ii) photocopy of an agreement executed by Pepsico with another company, and (iii) unsigned cheque in the name of Pepsico which was the original leaves in the cheque book belonging to the Jaypuria Group. Pepsico challenged legality of the action of the Department in issuing a notice u/s 153C of the Act in its name, by filing a writ petition before the Delhi High court. Taking note of the fact that the original share certificates as well as the original agreement were with Pepsico and the cheques were not handed over to Pepsico, the Delhi High Court held that the expression ‘belongs to’ is different from the expression ‘relates to’ or ‘refers to’. Taking further note of the fact that nothing was brought on record to establish that the Jaypuria Group had disclaimed these documents, the Court held that these documents cannot said to be ‘belonging to’ Pepsico and, consequently, the notice u/s 153C of the Act issued in the name of Pepsico was required to be quashed.
3. To overcome this decision, section 153C was amended by the Finance Act, 2015 with effect from 1st June 2015, as under-
  “ 153-C. Assessment of income of any other person.—(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,—
  1. 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 153-A, 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… ” {Emphasis supplied}
4. As per the Memorandum explaining the provision of the Finance Bill, 2015, the amendment was carried out as “Disputes have arisen as to the interpretation of the word ‘belonging to’ in respect of a document as for instance when a given document seized from a person is a copy of the original document. Accordingly, it is proposed to amend the aforesaid section to provide that … “ The Memorandum does not use the words ‘to clarify’ or ‘to remove doubt’ or any similar expression to indicate that the legislative intention was to make this amendment having retrospective/retroactive effect. The amendment did not indicate that as per the legislature, the earlier decisions were against the legislative intent. It was simply mentioned that “This amendment will take effect from the 1st day of June, 2015.” In otherwards, it was not clarified whether the amendment would apply to all existing proceedings pending or would apply to the searches carried out after 01.06.2015.
THE FACTS OF THE CASE
1. For A.Y. 2012-13, Vikram Bhatia [‘the Petitioner ‘] filed his return of income on 11.09.2012. A search and seizure operation was carried out against one H.
  N. Safal Group, in course of which many documents were found and seized. Though no document belonging to the Petitioner was found, a hard disk was seized that contained an Excel Sheet wherein there were references to the Petitioner’s name. Panchnama was made on 07.09.13. On 30.01.2015, the Petitioner moved an application before Settlement Commission and “accepted receipt of money on the basis of hard disk from the petitioners.”
2. After 2 years and 3 months, on 25.04.2017 the relevant documents were transferred to the Assessing Officer [“AO”] of the Petitioner and on 08.02.2018 a notice u/s 153C of the Act came to be issued in the name of the Petitioner. The objections raised by the Petitioner included, among other things, that the condition precedent for invoking section 153 C of the Act as it stood on the date of the search was not satisfied. Against dismissal of such objections by the AO, the Petitioner filing writ petition before the Gujarat High Court challenging the notice.
3. The Gujarat High Court quashed the notice by holding that the amendment made by the Finance Act, 2015 with effect from 01.06.2015 was prospective in nature and applied only to the search carried out after that date. The High Court held that, by the amendment, a new class of assessees was sought to be brought within the sweep of section 153C of the Act, which affected the substantive right of such assessees and, therefore, the amendment cannot said to be a mere change in the procedure but the amendment expanded the scope of section 153C of the Act. It was against this judgment that the Department preferred Special Leave Petition before the Supreme Court, before which many other SLP’s on the same aspect were also filed. In some of the SLPs, the assessment was already completed, which was also permitted to be challenged.
BEFORE THE SUPREME COURT
1. The Supreme Court heard a bunch of SLP’s involving the same issue (around 115 SLP’s), with the lead case of Shri Vikram Bhatia – hereinafter together referred as ‘the Petitioners”.
2. Arguments of the Department
  1. The High Court had not properly appreciated and considered the object and purpose which necessitated the amendment. In Pepsico’s case, “… tough incriminating material pertaining to a third party was found during search proceedings under section 132, the Revenue could not proceed against such third party in view of the observations of the Delhi High Court, which observations of were coming in the way of suppressing the very mischief which the legislature intended to suppress.” Therefore, the legislature expanded the scope of operation of section 153.
    {Emphasis supplied}
  2. While interpreting the amendment, the following principles and tests need to be kept in mind:
    1. Effect of amendment by substitution The amendment being amendment by way of ‘substitution’, it relates back to the date of the Parent Act, wiping out the earlier provision from the statute book and replacing it with the amended provision as if the unamended provision never existed. Reliance, for this, was placed on the decisions of the Apex Court in the case of Shamrao V. Parulekar v. District Magistrate [(1952) 2 SCC 1] and Zile Singh v. State of Haryana (2004) 8 SCC 1.
    2. Legislative intent The legislative intent was to bring within the scope of section 153 C of the Act those persons against whom incriminating material is found in another person’s premises during search proceeding u/s 132 of the Act {Emphasis supplied}. As the narrow scope given by the Delhi High Court frustrated this purpose, the Court would fail to advance the object of the legislation if this mischief is not suppressed. It is the duty of the Court to give the statute a purposeful or a functional interpretation once the legislative intent is known. For this, reliance was placed also on the decision in the case of Girdhari Lal & Sons v. Balbir Nath Mathur [(1986) 2 SCC 237].
    3. Section 153C of the Act, 1961 is a machinery provision Section 153 C being a machinery provision, for which reliance was based on the decision in the case CIT
      
      v. Calcutta Knitwears [(2014) 6 SCC 444], it is the duty of the court to give effect to its manifest purpose.
    4. Interpretation which makes the statute or a part of it a “dead letter” to be avoided; On the basis of the Principle of Harmonious Interpretation, any interpretation which makes the statute or a part of it a ‘dead letter’ or which uses one provision to defeat the object and purpose of another, has to be avoided. For this, reliance was placed also on the decision in the case of CIT v. Hindustan Bulk Carriers [(2003) 3 SCC 57].
    5. Power to legislate includes power to legislate retrospectively.
    The power to legislate includes power to legislate retrospectively, which can also be done through necessary implication.
  3. It was also argued that no substantive right, as claimed by the Petitioners, stood ever vested in the Petitioners. By merely issuing a notice u/s 153 C, no liability is fastened ipso facto.
3. Arguments of the Petitioner
  1. The amendment expanded the scope by including a new set of assessees who were not covered by the pre-amendment position, as of the date of the search. This affected the substantive rights of such new class of assessees. Consequently, the amendment is not merely a change in procedural provision affecting the assessees already covered but altogether a new class of assessees was sought to be roped in. The amendment deals with both procedural and substantive rights.
  2. It is a very well settled legal position that every Statute is prima facie prospective unless it is expressly or by necessary implication made to have a retrospective operation.
  3. A machinery / procedural provision that affects substantive rights cannot be held to be retrospective; more so where the object of the statute is to affect vested rights or to impose new burdens or to impair existing obligations.
  4. Reliance was placed on the Finance Act, 2003 that introduced section 153 C as well as the amendments to section 153 C carried out by Finance Act, 2017, both of which specifically referred the date of search as the date of applicability of the section coming in to force and the amendment, respectively.
  5. In the case of the Petitioner, if, on the date of the search in 2013, the documents would have been forwarded to the AO of the Petitioner along with the satisfaction note, the challenge against the issue of notice u/s 153C of the Act would have been successful. However, in the present case, there was considerable delay on the part of the Department in forwarding the documents – the documents were forwarded after 2 years and 3 months from the date of the search.
  6. As various other grounds were raised before the High Court for holding that the notices issued u/s 153C of the Act were bad and illegal, it was urged that if the Supreme Court decided to allow the appeals of the Revenue, the matters may be sent back to the High Court for deciding the validity of the notices and other issues that were originally left undecided.
  7. Reliance was placed on the following decisions-
4. Findings of the court
  1. The Supreme Court firstly traced the legislative history concerning the amendment. Taking note of the fact that the amendment was carried out to remove the basis of the observations made by the Delhi High Court in Pepsico’s case, the Court observed that the Delhi High Court gave a very narrow and restrictive meaning to the expression / word “belongs to”, which observations were coming in the way of suppressing the very mischief that the legislative intended to suppress, necessitating the amendment. The ‘mischief’, as per the Court, was that due the ruling by the Delhi High Court, “…. though incriminating material pertaining to third party was found during the search proceedings under Section 132, the Revenue could not proceed against the third parties…” {Emphasis supplied}. As a consequence, the Court observed that this was a case of an amendment by substitution – of the words.
  2. The Supreme Court then referred and relied upon the amendment made in section 153C of the Act by the Finance Act 2005, by way of insertion of the first proviso thereunder and creating a deeming fiction, with was brought specifically with retrospective effect from 01.06.2003. Taking cue from this, the Court observed that, “in the present case, even though the search under Section 132 was initiated prior to the amendment to Section 153 C w.e.f. 01.06.2016, the books of account or documents or assets were seized by the Assessing Officer of the non-searched person only on 25.04.2017, which is subsequent to the amendment, therefore, when the notice under Section 153C was issued on 04.05.2018, the provision of the law existing as on that date, i.e., the amended Section 153 C shall be applicable.” {Emphasis supplied}
  3. The Court then referred the legal precedents on the Doctrine of Amendment by Substitution / Retrospective Amendment, as relied upon the Department, and reproduced extensively portions from the decision in the case of Zile Singh (supra).
  4. Holding section 153 C as a machinery provision (based on the decision in the case of Calcutta Knitwears as relied upon by the Department) and noticing that this was the case of even the Gujrat High Court, the Court held that the Court must give effect to the manifest purpose by construing it in such a manner so as to effectuate the object and the purpose of the statute.
  5. Echoing the argument of the Department on the aspect of purposeful or functional interpretation based on the legislative intent (actual or imputed), the Court held that a construction which leads to anomalies, injustices or absurdities should not be adopted, for which reliance was placed on the decision in the case of Girdhari Lal, as relied upon by the Department.
  6. The Court also reproduced portions from the decision in the case of Hindustan Bulk Carriers, as relied upon by the Department.
  7. As regards the main plank of arguments on behalf of the Petitioners on the aspect of the amendment affecting the substantive rights of the persons who were so far not covered by its, the Court observed “the submission seems to be attractive but deserves to be rejected.” The Court then held as under:
    “Therefore, if the submission on behalf of the respective respondents – assessees that despite the fact that the incriminating materials have been found in the form of books of account or documents or assets relating to them from the premises of the searched person, still they may not be subjected to the proceedings under Section 153C solely on the ground that the search was conducted prior to the amendment is accepted, in that case, the very object and purpose of the amendment to Section 153C, which is by way of substitution of the words “belongs or belong to” to the words “pertains or pertain to” shall be frustrated.”
    
    {Emphasis supplied}
  8. With this, the Court held that the amendment would be applicable also to the searches conducted u/s 132 of the Act before 01.06.2015 and, consequently, the order of the High Court was quashed and set aside.
  9. The Court, however, reserved the liberty in favour of the respective assessees to challenge the assessment orders before CIT (A) on any other grounds which may be available and directed that if said appeals are preferred within four weeks from the date of the order, the same be considered in accordance with law and on their own merits, on any other grounds.
5. SOME OBSERVATIONS
  1. While attempting to decipher the judgment, it may be worthwhile to raise some posers in this regard that need to be addressed.
    1. What was the position of law before the amendment, as also interpreted by courts?
    2. Was it contrary to the legislative intention?
    3. Was there really a ‘mischief’ that required to be suppressed?
    4. Did Delhi High Court in the case of Pepsico really changed these positions?
    5. Did the amendment really address the so-called ‘mischief’?
    6. Even irrespective, was this aspect of the provisions of section 153 C of the Act can said to be merely a machinery provision?
  2. Within the limitation of this article, these posers can be addressed, in brief and to an extent, as under:
    1. What was the position of law before the amendment, as also interpreted by courts?
      Under the pre-amendment scenario, some of the well settled position under law, in this regard, can be summarized as under:
      1. The presumption as to assets, books of accounts, etc., as envisaged under section 132 (4A) read with section 292 C of the Act equally applies to the Department as well. More specifically, during a search under section 132 of the Act, if some documents, assets, etc. are found from possession or control of a person, the presumption is that they belong to such person. As such, the legislature very consciously used the same phraseology in section 292 C, as both the provisions required to be in sync and in harmony with each other. Otherwise, there could arise conflict within the same enactment.
      2. Under both the provisions, the issue was not whether a seized document was ‘incriminating’ or not – for that is the fundamental or neutral requirement otherwise also and which, in any case, is going be decided ultimately during assessment. The issue is, to whom the seized document can said to ‘belongs to’; the prima facie presumption being that such document belongs to the person from whose possession or control the document was found. The presumption is rebuttable. The onus lies on the person claiming otherwise, which onus is required to be discharged strictly and with cogent material.
      3. Reopening of an assessment is a serious invasion of the right of the concerned assessee to have finality of the assessment already done in his case. Any provision that attempts to disturb such finality is to be strictly construed. Consequently, the conditions precedent are required to be strictly fulfilled. In any case, this is jurisdictional aspect and can in no way be regarded as merely a procedural requirement.
      4. More so, when assessment of a person is sought to be reopened u/s 153 C of the Act, automatically for six years, on the sole basis of something found from a third person, the burden is extremely heavy on the Department to establish strong nexus / live link between the such material seized and its connection with, firstly, the assessee and then with undisclosed income of the assessee, before proceeding to reopen assessment of such assessee. In this regard, it is worthwhile to reproduce some observations of the Supreme
        Court in the case Calcutta Knitwears – the very judgment relied upon by the Court in this case:
        
        “Under Section 158 – BD the existence of cogent and demonstrative material is germane to the assessing officers’ satisfaction in concluding that the seized documents belong to a person other than the searched person is necessary for initiation of action under Section 158 – BD.”
      5. However, an important legislative amendment seems to have been lost sight of, which amendment could have an important bearing. Finance (No. 2) Act, 2014 made a significant amendment in the language of section 153 C of the Act with effect from 01.10.2014, putting a condition before a notice u/s 153C could be issued, by stipulating that the assessing officer of the other person (like Pepsico), after receiving seized material from the assessing officer of the person searched, can proceed against the other person only “…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…” {Emphasis supplied}. Significantly, at this time also, the Legislature did not find anything wrong with the words ‘belongs to’, much less finding those words going against the legislative intent. Pertinently, after the amendment, it really mattered little whether the document seized belongs to a third person or pertains to a third person, as the main ingredient now was whether such document has a bearing on the determination of the total income of such third person.
      6. As such, the language consciously used by the legislature in section 153 C of the Act before its amendment by the Finance Act, 2015 was perfectly in sync with not only the well-established legal position but was in harmony with the corresponding language of sections 132 (4A) and 292 C of the Act.
      7. Another important aspect is that neither of the sections uses the word ‘incriminating’, and wisely so because that aspect has no relevance, as discussed above. In fact, this word is conspicuous by its absence in the entire Act. This aspect is very significant as will be apparent from the ensuing discussion.
      8. Lastly, it is not that the Department was remedy less altogether. If a case of an assessee did not fall within the provisions of section 153 C of the Act, the Department could always invoke and take recourse of the provisions of section 148 and initiate reassessment proceeding on the basis of such ‘incriminating’ material. In this view of the matter aswell, there was no ‘mischief’ that existed prior to the amendment.
    2. Was it contrary to the legislative intention?
      Well, for over a decade, the legislature found the language as adequately reflecting the legislative intent and did not find any need to tinker with it. Even Supreme Court in its earlier decisions did not find the language lacking in any manner.
    3. Was there really a ‘mischief’ that required to be suppressed?
      This was the main plank of the argument of the Department, which got acceptance from the Court. The mischief, as understood by the Court and as referred at para III (4) (i) above, was that though ‘incriminating’ documents pertaining to a third person was found in course of search action against a person, the observations of the Delhi High Court came in the way of the Department to proceed against such third person. As discussed herein above, the issue was not at all whether a document was ‘incriminating’ or not; for a document may not be incriminating even if it is found to be ‘belonging’ to or ‘pertaining’ to a person, and vice versa. In any case, none of the provisions of the Act is concerned with the word ‘incriminating’, much less refers that word. As such, there existed no such ‘mischief’, as claimed by the Department.
    4. Did Delhi High Court in the case of Pepsico really changed these -positions?
      The Delhi High Court was called upon to adjudicate, and did adjudicate, merely the aspect of interpretation of the term ‘belonging to’ as contained in section 153 C of the Act, in the backdrop of the peculiar facts before it. The Court was not at all concerned with the issue whether the material was incriminating or not, nor was this a case of even the Department. Even otherwise, the documents were regularly disclosed documents and did not per se suggest any incriminating nature. In any case, the Supreme Court did not give finding that the ruling of the Delhi High Court was wrong, and how, and what could have been the correct interpretation. Besides, there already existed other judgments rendered prior, touching upon this aspect. As such, the Delhi High Court in the case of Pepsico really did not change any position.
    5. Did the amendment really address the so-called ‘mischief’?
      It may be a case of just a knee- jerk reaction to the decision of the Delhi High Court rendered just few months before the Finance Bill 2015 was presented. At the most, the amendment did broaden the scope of the third persons against whom the Department could proceed against, to start with; at the stage of forwarding the concerned documents by the officer of the searched person to the officer of the person to whom the documents allegedly pertain to (in contradiction with ‘belong to’). But, even otherwise and ultimately, before proceeding against such third person by issuing notice u/s 153 C of the Act, the assessing officer of such third person, to whom the documents are transferred by the officer of the searched person, would still have to get satisfied, objectively, that such documents have a bearing on determination of total income of such third person, irrespective whether the documents belonged to or pertained to such third person. In any case, the decision is rendered by the Apex Court on 06.04.2023, by which time the provisions 153 C stood no longer operative with effect from 1st April 2021.
    6. Even irrespective, was this aspect of the provisions of section 153 C of the Act can said to be merely a machinery provision?
      Heavy reliance is placed by the Court on the decision in the case of the Calcutta Knitwears. Now, in that case, the only issue involved for consideration was purely a procedural one under the erstwhile scheme of block assessment under section 158 BC read with section 158 BD of the Act; more particularly, at what stage of the proceedings should the satisfaction note be prepared by the assessing officer of the searched person – whether before or after the assessment is framed in the case of the searched person – there being no doubt about the jurisdiction to proceed against the third person. It was only in this context that there is an observation to the effect that “the said provision is a machinery provision.” The jurisdictional aspect as to the category the persons against whom the Department can proceed against u/s 153 C of the Act was neither a subject matter before the Court nor was any argument on this aspect was raised by either side
      
      before the Court. It is a well settled position under law that a ruling of a court is to be read, understood and interpreted in the context of not only the issue that was under adjudication but also in the context of the points of arguments canvassed by both the sides. Though there is plethora of judicial precedents on this aspect, suffice will be here to refer the judgment of the Apex Court in the case of CIT v. Sun Engineering Works (P) Ltd. – [(1992) 198 ITR
      
      297 (SC)], rendered in the context of Income – tax Act, 1961. The following extract of the judgment is self – explanatory and illuminating:
      
      “It is neither desirable nor permissible to pick out a word or sentence from the judgment of this court, divorced from the context the question under consideration and treat it to be the complete law declared by this court. ….”.
    This decision is ‘historic’, it the sense that is has now become academic in view of the insertion of sub – section (3) of section 153C w.e.f. 01.04.2021 as per which the provisions of section 153 C of the Act have become un-operative with effect from 01.04.2021 and the cases of search u/s 132 or requisitioned u/s 132A of the Act initiated after 31.03.20121 are now governed by the new scheme of assessment under the amended section 147 to 151 of the Act. However, this decision touches upon some important legal principles concerning retrospective operation of an amendment. It may also be interesting to ponder whether one can draw similar analogy for the amendment in section 153 C of the Act made by the Finance (No. 2) Act, 2014, as refereed above.