AO can initiate Income Tax Proceedings against Non-Searched Persons in Searches prior to 2015 Amendment: Supreme Court

In a significant move, the Supreme Court has held in Income Tax Officer vs Vikram Sujitkumar Bhatia that the Income Tax Assessing Officer can initiate proceedings under Section 153C of the Income Tax Act, 1961 against non-searched persons, even for searches conducted prior to the amendment in 2015, i.e., before The revenue preferred the present set of appeals, along with a Special Leave petition against the order whereby the High Court has quashed the notice under Section 153C of the Income Tax Act issued to the respondent – assessee - respondents. The consequent Assessment Orders (where assessment stood completed) were also set aside in the earlier ruling of the High Court by holding that Section 153C of the Act, 1961 (as amended by Finance Act, 2015) would not apply to searches under Section 132 of the Act, 1961 initiated before the date of amendment. A search came to be conducted on various premises of the original petitioner on 04.09.2013. A panchnama came to be prepared on 07.09.2013. On the basis of the seized material, the Assessing Officer initiated proceedings against the assessee under Section 153C of the Act, 1961 by issuing a notice dated 08.02.2018. Multiple objections arose against such orders, impugned by many concerned assessees, resulting in a series of petitions and appeals in the High Court. The High Court had observed in such cases that, “Section 153C of the Act, 1961 is a machinery provision for assessment of income of a person other than the person searched; Section 153C of the Act as amended w.e.f. 01.06.2015 by Finance Act, 2015 shall not be made applicable with respect to the searches conducted prior to 01.06.2015.” K M Nataraj, ASG appearing on behalf of the Revenue submitted that while passing the impugned common judgment and order and quashing and setting aside the notice under Section 153C of the Act, 1961 issued against the original writ petitioners – the persons other than the searched persons, the High Court has not properly appreciated and considered the object and purpose, which necessitated the amendment in Section 153C of the Act, 1961. The ASG further submitted that, “It is submitted by Shri Nataraj, learned ASG that the amendment in Section 153C was necessitated in view of the observation of the Delhi High Court in the case of Pepsico India Holdings Private Limited Vs. Assistant Commissioner of Income Tax, whereby the High Court has observed that the words “belongs or belong to” should not be confused with the words ‘relates to or refers to,’ the former being much narrower than the latter. It is submitted that it was held that therefore, the provision could not have been invoked unless the documents / material ‘belong to’ the third party (other than the searched person). While opposing the present appeals, the counsel appearing on behalf of the respective assessees have vehemently submitted that the controversy in the present group of appeals is with respect to the point of applicability of the extant law in search cases, i.e., whether Section 153C of the Income Tax Act, as amended with effect from 01.06.2015 would be applicable to cases where search is initiated prior to that date. It is further submitted on behalf of the respective assessees that it is the case on behalf of the Department that as Section 153C of the Act, 1961 is a procedural and machinery provision, the amendment, though made with effect from 01.06.2015, is retrospective and, thus, applicable to the cases where search was conducted prior to amendment but the notices under Section 153C of the Act, 1961 have been issued after the amendment. In short, the crux of the matter is whether a notice under Section 153C can be issued, for the searches conducted prior to the amendment. Or, in terms of law, that, “Whether the amendment brought to Section 153C of the Income Tax Act, 1961 vide Finance Act, 2015 would be applicable to searches conducted under Section 132 of the Act, 1961 before 01.06.2015, i.e., the date of amendment?” It was observed by the Supreme Court that, “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.” It was further noted by the Two-Judge Apex Court Bench that, “any interpretation, which may frustrate the very object and purpose of the Act / Statute shall be avoided by the Court.” The question of law was thus answered, in favour of the Revenue and against the assessees. It was therefore observed and held that the amendment brought to Section 153C of the Act, 1961 vide Finance Act, 2015 shall be applicable to searches conducted under Section 132 of the Act, 1961 before 01.06.2015, i.e., the date of the amendment. The impugned common judgment and order passed by the High Court, were thereby quashed and set aside by the Two-Judge Bench of the Supreme Court consisting of Justice M R Shah and Justice B V Nagarathna. However, it was also conservatively held that, “as before the High Court respective assessment orders were challenged mainly on the aforesaid issue, which is now answered in favour of the Revenue as above, we reserve 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 it is observed that if said appeals are preferred within four weeks from today, the same be considered in accordance with law and on their own merits, on any other grounds.” Support our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates