Assessment of income of a person other than the person in whose case search has been initiated or books of account, other documents or assets have been requisitioned

1. Search assessment provisions are always surrounded by controversy. One can take the experience from the earlier Block Assessment scheme which had failed. Department action and zeal in expanding the scope and application of the provisions leads to this controversy.

2. Under the existing provisions where search is initiated or requisition is made after 31-5-2003 the provisions 153A to 153D are applicable. These provisions have an overriding effect over the provisions of sections 139, 147, 148, 149, 151 and 153 of the Act since these provisions are non obstante provisions. The assessment proceedings are initiated for six assessment years immediately preceding the year in which search u/s. 132 is initiated or requisition is made u/s. 132A. The provisions of section 153C are analogous to section 158BD of the Act. Therefore, decision of the Apex Court in the case of Manish Maheshwari 289 ITR 341 SC would also apply where assessment is to be made u/s. 153C. The precondition for invoking jurisdiction for issue of notice u/s. 153C is that the AO must “record satisfaction” as to the seized material belongs to the assessee.

3. Under existing provision where the Assessing Officer is satisfied that any books of account or documents seized or requisitioned belong to or belongs to any person, other than the person referred to in section 153A, 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 for such jurisdictional Assessing Officer to complete the assessment.

Therefore, as per the existing provision if the books of account belong to the person searched but entry in such books reflect the undisclosed income of the third party then, the AO cannot assume jurisdiction u/s. 153C to assess such undisclosed income. The only course open to him would be to invoke the provisions of section 147 of the Act. This view is supported by the decision of Bangalore Bench of the Tribunal in the case of P. Shriniwas Naik (2008) 306 ITR 411 (Bang.). In this case, search was conducted at the premises of ‘R’ in the course of which certain books were seized. One of the books showed that assessee had advanced a loan to ‘R’. On that basis, section 153C was invoked and assessment was made in the hands of assessee. It was held by the Tribunal that section 153C could not be invoked as books seized did not belong to assessee.

4. Similarly in the case of Pepsi India Holdings Private Ltd v. ACIT (Delhi High Court) it was observed that S. 153C cannot be invoked unless the AO is satisfied for cogent reasons that the seized documents do not belong to the searched person. Finding of photocopies with the searched person does not mean they “belong” to the person holding the originals. The distinction between “belongs to” and “relates to” or “refers to” must be borne in mind by the AO. The Assessing Officers should not confuse the expression “belongs to” with the expressions “relates to” or “refers to”. A registered sale deed, for example, “belongs to” the purchaser of the property although it obviously “relates to” or “refers to” the vendor. In this example if the purchaser’s premises are searched and the registered sale deed is seized, it cannot be said that it “belongs to” the vendor just because his name is mentioned in the document. In the converse case if the vendor’s premises are searched and a copy of the sale deed is seized, it cannot be said that the said copy “belongs to” the purchaser just because it refers to him and he (the purchaser) holds the original sale deed. In this light, it is obvious that none of the three sets of documents – copies of preference shares, unsigned leaves of cheque books and the copy of the supply and loan agreement – can be said to “belong to” the petitioner.

5. Similar views have been expressed in the following decisions:

a) Tanvir Collections (P.) Ltd. v. Asst. CIT [2015] 54 taxmann.com 379 (Delhi) (Trib.)

b) Pepsi Foods (P.) Ltd. v. ACIT [2014] 367 ITR 112 (Delhi)(HC)

c) CIT v. Meghmani Organics Ltd. [2013] 40 taxmann.com 31 (Guj.)(HC)

6. Similarly in Sinhgad Technical Education Society v. ACIT (2011) 140 TTJ 233 (Pune)(Trib.) search & seizure action u/s. 132 was carried out in the case of Shri M. N. Navale, the President of the assessee’s Educational Society, in the course of which certain documents pertaining to the assessee were found. Based on the documents, the AO issued a notice u/s. 153C and made an assessment on the assessee. The assessee challenged the s. 153C proceedings on the ground that the mere finding of documents in the premises of the searched person was not sufficient if the documents were not “incriminating”.

The Tribunal held that though s. 153C confers jurisdiction if the AO is “satisfied” that “documents” seized belong to a person other than the person referred to in s. 153A so as to be able to assess that other person, the document must have prima facie incriminating information. The document seized must not only be a ‘speaking one’ but also be prima facie ‘incriminating one’ for attracting s.153C. If the impugned documents merely contain the notings of entries which are already recorded in the books of account or subjected to scrutiny of the AO in the past in regular assessment u/s. 143(3) of the Act, such document cannot be said to be containing the incriminating information so as to confer jurisdiction u/s. 153C.

Disputes have arisen as to the interpretation of the words “belongs to” in respect of a document. Existing section 153C could be invoked against such other person only when books of account, etc., belonged to him and not otherwise. As disputes had arisen as to the interpretation of the words “belongs to” the legislature brought the proposed amendment vide clause 36.

Under the proposed amendment, section 153C is to be amended to give the former Assessing Officer the power to hand over the books of account or documents to the jurisdictional Assessing Officer even if these pertains or pertain to, or any information contained therein, relates to the other person. Thus after the proposed amendment the dept. can issue 153C notice even if the document seized pertains or pertain to, or any information contained therein, relates to the other person. This amendment is proposed to take effect from the 1st day of June, 2015.

However, in my view, the grey area of whether the information contained in the seized documents is incriminating or not for attracting Section 153C still remains.

Certain accountants not to give reports/certificates

The Act contains several provisions (e.g. section 44AB, section 80-IA, section 92E, section 115JB, etc.) which mandate the taxpayers to furnish audit reports and certificates issued by an ‘accountant’ for ensuring correct reporting/computation of taxable income by the taxpayers. Explanation below section 288(2) of the Act defines an ‘accountant’ as a chartered accountant within the meaning of Chartered Accountants Act, 1949 (including a person eligible to be appointed as auditor under section 226(2) of the Companies Act, 1956, of the companies registered under any State).

The Comptroller and Auditor General of India (C&AG) published its report on “Appreciation of Third Party (Chartered Accountant) Certification in Assessment Proceedings” (No. 32 of 2014). In para 3.9 of the Report, it has been stated that the Chartered Accountants Act, 1949 debars an auditor to express his opinion on the financial statement of any business or any enterprise in which he, his relative, his firm or partner in the firm, has substantial interest. However, during the course of audit, it has been noticed that an auditor has furnished his report in Form 56F in respect of a closely held company in which the auditor’s brother was the managing director.

To ensure the independence of auditor, sub-section (3) of section 141 of the Companies Act, 2013 contains a list of certain persons who are not eligible for appointment as auditor. The audit/certification function under the Income-tax Act is mainly provided for protecting the interests of revenue. An auditor who is not independent cannot meaningfully discharge his function of protecting the interests of revenue.

Therefore, Clause 77 of the Bill seeks to amend section 288 of the Act to provide that an auditor who is not eligible to be appointed as auditor of a company as per the provisions of sub-section (3) of section 141 of the Companies Act, 2013 shall not be eligible for carrying out any audit or furnishing of any report/certificate under any provisions of the Act in respect of that company. On similar lines, ineligibility for carrying out any audit or furnishing of any report/certificate under any provisions of the Act in respect of non-company is also proposed to be provided.

It is proposed to revise the definition of ‘accountant’ in Explanation below section 288(2) of the Act on the lines of definition of ‘chartered accountant’ in the Companies Act, 2013. “Accountant” means a chartered accountant as defined in clause (b) of sub-section (1) of section 2 of the Chartered Accountants Act, 1949 who holds a valid certificate of practice under sub-section (1) of section 6 of that Act. It is further proposed to provide that the accountant shall not include the following persons (except for the purposes of representing an assessee under sub-section (1))—

(a) In case of an assessee, being a company, the person who is not eligible for appointment as an auditor of the said company in accordance with the provisions of sub-section (3) of section 141 of the Companies Act, 2013; or

(b) In any other case,

(i) The assessee himself or in case of the assessee, being a firm or association of persons or Hindu Undivided Family, any partner of the firm, or member of the association or the family;

(ii) In case of the assessee, being a trust or institution, any persons referred to in clauses (a), (b), (c) and (cc) of sub-section (3) of section 13;

(iii) In case of a person other than persons referred to in sub-clauses (i) and (ii), the person who is competent to verify the return under section 139 in accordance with the provisions of section 140;

(iv) Any relative of any of the persons referred to in sub-clauses (i), (ii) and (iii);

(v) An officer or employee of the assessee;

(vi) An individual who is a partner, or who is in the employment, of an officer or employee of the assessee;

(vii) An individual who, or his relative or partner is holding any security of or interest in the assessee.

It is also provided that the relative may hold security or interest in the assessee of the face value not exceeding one hundred thousand rupees; an individual who, or his relative or partner is indebted to the assessee. It is also provided that the relative may be indebted to the assessee for an amount not exceeding one hundred thousand rupees; an individual who, or his relative or partner has given a guarantee or provided any security in connection with the indebtedness of any third person to the assessee. It is also provided that the relative may give guarantee or provide any security in connection with the indebtedness of any third person to the assessee for an amount not exceeding one hundred thousand rupees;

(viii) A person who, whether directly or indirectly, has business relationship with the assessee of such nature as may be prescribed;

(ix) A person who has been convicted by a court of an offence involving fraud and a period of ten years has not elapsed from the date of such conviction.

It is further proposed to amend sub-section (4) of the said section so as to provide that a person who has been convicted by a court of an offence involving fraud shall not be qualified to represent an assessee under sub-section (1) of the said section for a period of ten years from the date of conviction.

It is also proposed to insert an Explanation at the end of the said section so as to provide that the expression “relative” in relation to an individual means (a) spouse of the individual; (b) brother or sister of the individual; (c) brother or sister of the spouse of the individual; (d) any lineal ascendant or descendant of the individual; (e) any lineal ascendant or descendant of the spouse of the individual; (f) spouse of a person referred to in clause (b), clause (c), clause (d) or clause (e); (g) any lineal descendant of a brother or sister of either the individual or of the spouse of the individual.

However, the Bill seeks to amend section 288 of the Income-tax Act relating to appearance by authorised representative. It is proposed to provide that the ineligibility for carrying out any audit or furnishing of any report/certificate in respect of an assessee shall not make an accountant ineligible for attending income-tax proceeding referred to in sub-section (1) of section 288 of the Act as authorised representative on behalf of that assessee. It is further proposed to provide that the person convicted by a court of an offence involving fraud shall not be eligible to act as authorised representative for a period of 10 years from the date of such conviction. These amendments will take effect from 1st June, 2015.

In my view the aforesaid amendment is in public interest at large.

Ajay R. Singh,
Advocate