SC ruling on I-T searches big relief to taxpayers

According to a recent verdict by the SC, the income tax department cannot reopen completed assessments under Section 153A of the I-T Act unless they find “incriminating material” during search and seizure operations.

The court has emphasized that no other material found during the search can be used for issuing re-assessment orders.

Tax experts believe that this ruling will be a huge relief for taxpayers as it narrows down the possibility of the tax department making arbitrary re-assessments.

Many cases are currently in litigation due to re-assessment orders issued without the support of incriminating material under Section 153A, which was withdrawn in 2021 but still applies to past cases.

The court has stated that Section 147 and 148 of the I-T Act can allow the assessment to be reopened if any additional income stream is detected by the assessing officer (AO) which has not been disclosed by the taxpayer. This is allowed even if the assessment has been completed or “unabated”.

These sections permit the AO to reassess returns if there is evidence indicating certain income has been omitted by the taxpayer.

Section 153A of the I-T Act outlines the procedure for assessing income for a “searched person”, allowing the AO to reopen the tax return assessment for the six years preceding the year of the search if incriminating material is discovered during the search process.

Despite this legal position, reassessment orders have been issued with additional income without any incriminating material being found, relying instead on other material from the search. The Supreme Court order effectively prohibits the tax authorities from using such practices.

What happened next?

The judges MR Shah and Sudhanshu Dhulia stated that if the search does not uncover any suspicious material, the Assessing Officer (AO) cannot evaluate or re-evaluate by taking into account other evidence pertaining to completed or pending assessments.

This implies that in the case of completed or pending assessments, the AO cannot add anything without any evidence obtained during a search under Section 132 or requisition under Section 132A of the Act, 1961, the ruling by the Supreme Court judges read.

The revenue department filed multiple appeals which were dismissed by the apex court, leading to the latest ruling.

According to tax experts, the tax assessment process following a search conducted by tax authorities has been surrounded by controversy. Section 153A, which was introduced in 2003 and withdrawn in 2021, aimed to simplify the procedural hurdles.

It mandated taxpayers who were searched to file a revised tax return for the six preceding years. However, controversy arose regarding the scope of assessment after taxpayers submitted these returns.

S Sriram, partner at Lakshmikumaran & Sridharan Attorneys, has noted that the Supreme Court has clarified that the re-assessment under Section 153A after a search should only apply to income discovered from incriminating material uncovered during the search.

He added that this ruling could have a major impact on cases where revenue authorities have made plausible adjustments to taxable income based on material that does not stem from the search.

Speaker’s words:

The speaker explained that any new additions to the Section would be eliminated, even if they were legally permissible. He noted that while the Supreme Court had provided some additional flexibility by stating that notices can be issued under sections 147/148 of the Act, this would not be very helpful for Revenue as the applicability of the Section would not extend to searches conducted after March 31, 2021.

Section 147 permits the reopening of assessment proceedings, while Section 148 authorizes the AO to assess or reassess any income that has not been assessed.

“The moot point before the apex court was whether reassessment of completed years can be initiated by revenue in absence of any incriminating material found during a search.

The Court has held that an incriminating material is a prerequisite for the Revenue to assume jurisdiction to assess or reassess the income for block assessment period in case of completed assessments,” explained Abhishek A Rastogi, founder of Rastogi Chambers, who is also arguing before writ Courts on notices issued under Section 148.

According to tax partner Amit Maheshwari from AKM Global, the Supreme Court has confirmed the previous judgments of the Delhi and Gujarat High Courts regarding the matter. He further explained that the department’s only option now would be to initiate reassessment proceedings under Sections 147/148 of the Act.

Maheshwari opined that this verdict would benefit several taxpayers who have been fighting this issue in courts. He expects a surge in reassessments now under Section 147/148, which had already been increasing.

Vishwas Panijar, who is a partner at Nangia Andersen LLP, mentioned that a significant ruling was made by the Delhi High Court in 2015 which supported two fundamental principles related to search cases.

One of these principles stated that assessments should not be conducted in an arbitrary manner, but rather be based solely on seized material. The other principle indicated that in situations where there is no incriminating material, assessment or reassessment of the abated proceedings can be carried out.

Panijar further noted that reassessment is, by its very nature, disadvantageous to taxpayers, which is why the department should exercise a greater degree of caution when invoking the provisions.

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