AO Cannot Invoke S.147/148 to Reopen Income Tax Assessment Solely on Search Material Without S.153C Satisfaction Note: Gujarat HC [Read Order]

The Gujarat High Court has ruled that a jurisdictional AO cannot invoke reassessment through Sections 147 or 148 of the Income Tax Act, 1961 exclusively based on the search material without following the special procedure prescribed under Sections 153A and 153C.

The present group of petitions arise from the proceedings/ notices issued to the numerous petitioners under Section 148, reopening the assessment under Section 147 of the Act.

A search was conducted under Section 132 of the Act on the entities, i.e. the searched persons under Section 153A of the Act, and the information collected from such searches was forwarded to the jurisdictional Assessing Officers (AOs) of the respective petitioners, i.e. the other persons under Section 153C of the Act.

However, instead of recording satisfaction, the jurisdictional AOs proceeded to issue the impugned notices under Section 148 of the Act for reopening the assessments.

It is the case of the petitioners that, when the proceedings arise from a search conducted under Sections 132/132A of the Act, the AO having jurisdiction over the respective petitioners is mandatorily required to follow the provisions of Sections 153A or 153C of the Act, instead of switching over or resorting to the reopening of assessment under Section 147 of the Act.

The counsel for the petitioner, Mr Tushar Hemani, Senior Advocate, along with others contended that resorting to Sections 147 or 148 of the Act is permissible only in respect of material other than those arising from the search. It was further contended that once the AO of the searched person arrives at such satisfaction, he has no discretion but to transmit the material to the jurisdictional AO of the other person after recording satisfaction.

It was further submitted that Sections 153A and 153C of the Act are special provisions having non-obstante clauses for assessment or reassessment of income based on material seized during search proceedings under Section 132 of the Act, and have an overriding effect on Sections 147/148 of the Act.

According to the respondent counsel, Mr Varun K Patel, Senior Advoate along with others, it was not mandatory in all such cases to invoke Section 153C. It was contended that documents or information originating from or gathered during a search or requisition can form the basis for assumption of jurisdiction either under Section 153C of the Act or under Sections 147/148 of the Act, subject to fulfilment of the respective statutory conditions. Both provisions are enabling provisions intended to assess or reassess escaped income.

Also, it was argued that the non-obstante clause at the beginning of Section 153C(1) of the Act cannot be construed to imply the exclusion of the operation of Sections 147/148 of the Act in such cases. It was further submitted that the phrase “Where the AO is satisfied…” employed in Section 153C(1) of the Act itself indicates that the invocation of Section 153C of the Act is conditional and not automatic.

The division bench of Justices A.S. Supehia and Pranav Trivedi observed that the use of the expression “the AO is satisfied” in Section 153C mandates the recording of satisfaction on the incriminating material sent to him/her by the AO of the searched person. The court depended on the Supreme Court case, Manish Maheshwari vs. Asstt.Commissioner of Income Tax with Indore Construction (Pvt.) Limited vs. Commissioner of Income Tax and Another, 2007

It was held that the absence of satisfaction recorded by the AO of the searched person does not vest jurisdiction in the AO of the third person to directly invoke the provisions of Sections 147/148 of the Act on the incriminating material found during search, more particularly when the provisions of Section 153C of the Act are not followed.

It was noted that the Supreme Court has clarified that the provisions of Sections 147/148 of the Act can be resorted to if there is any other material available other than the incriminating material, which can suggest that the income has escaped assessment

The Court then applied these principles to the four groups of petitions before it. In Group A, involving the Navratna Group, incriminating material in the form of an Excel sheet was seized, but the decisive evidence came later when the builder admitted before the Income Tax Settlement Commission that “on‑money” was received from purchasers.

Since this constituted independent post‑search information, the Court upheld reassessment under Sections 147 and 148.

In Group B, involving the K‑Star Group, reassessment was based solely on search material transmitted without a satisfaction note. The Court quashed the reopening, holding it illegal and without jurisdiction.

In Group C, involving Flamingo, the situation was similar to Group B, and reassessment was quashed for the same reason. In Group D, involving Affluence Commodities, the petitioners themselves were searched, and incriminating material was found. The Court held that assessments should have proceeded under Section 153A, not 147/148, and quashed the reopening.

Support our journalism by subscribing to Taxscanpremium. Follow us on Telegram for quick updates