Reassessment On Non-Searched Entity Is Governed By Limitation In First Proviso To Sec 149(1) R/w Sec 153C & 153A: Delhi High Court

The High Court rejected the AO's contention that Section 148 notice would not be beyond the limitation period as provided under the first proviso to Section 149 when computed from the date of actual search of the third party.

At the same time, the High Court pointed out that the reassessment procedure initiated after Apr 1, 2021 would have to meet the foundational tests as specified in the first proviso to Section 149(1), that is, the reassessment action would not only have to meet the time frames constructed in terms of Section 149, but also the time frames under Section 153A & 153C.

Section 149 of the Income tax Act provides for time limit of notice u/s 148. Clause (a) of sub-section (1) of section 149 provides for a three-year period as limitation to Income Tax Department to issue a notice u/s 148 of the Act.

Section 153A of the Income Tax Act provides for a mechanism to assess income in the case of a person being searched, where the AO is authorised to frame a person's assessment for the six assessment years that immediately come before the search year.

The Division Bench comprising Justice Yashwant Varma and Justice Purushaindra Kumar Kaurav observed that, although, Section 153C ceased to be applicable post Mar 31, 2021, but the first proviso to Section 149(1), introduced by Finance Act 2021, neither effaces nor removes from contemplation the first proviso to Section 153C(1).

Thus, in cases where a search is conducted after Mar 31, 2021, the said proviso would have to be construed and tested with reference to the date when the jurisdictional AO decides to initiate action against the non-searched entity, added the Bench.

Facts of the case:

The Assessee, an individual, was served with reassessment notice u/s 148 for AY 2013-14, based on a search operation conducted on a third party on Feb 9, 2022. This reassessment notice came to be challenged before the High Court on the ground of being barred by limitation under Section First Proviso to Section 149(1).

Observations of High Court:

The Bench observed that the provision of Section 153C would not apply to any search conducted after Apr 1, 2021, in light of the sunset clause under Section 153C(3) as regards the applicability of Section 153C.

The Bench further observed that the first Proviso to Section 149(1) requires consideration of timeframes specified in Sections 149, 153A and 153C as they stood prior to the commencement of Finance Act, 2021.

Explaining about the validity of initiation of action for reassessment commenced pursuant to a search, the Bench noted that the First Proviso to Section 153C(1), by virtue of a legal fiction enshrined therein requires one to treat the date of initiation of search, and which otherwise constitutes the commencement point for a search assessment in the case of a non-searched party, to be construed as the date when books of accounts or documents and assets seized or requisitioned are transmitted to the AO of such “other person”.

Thus, the Bench pointed out that, the computation of the six preceding AYs or the “relevant assessment year” in the case of the non-searched entity has to be reckoned from the time when the material unearthed in the search is handed over to the jurisdictional AO.

The Bench reiterated that the computation of the six preceding AYs or the “relevant assessment year” in the case of the non-searched entity has to be reckoned from the time when the material unearthed in the search is handed over to the jurisdictional AO.

The Bench also emphasised that, in cases of search post Apr 1, 2021 warranting initiation of a reassessment procedure, since no transmission of material would have occurred, the date when a decision may be taken by the jurisdictional AO to proceed against the non-searched entity in terms of the amended scheme pertaining to search assessments, and which now stands merged with the larger power of reassessment which stands comprised in Sections 147 and 148.

Thus, the High Court concluded that since in case of a search conducted after Mar 31, 2021, there would be no actual hand over of material to the jurisdictional AO, the computation of six AYs would have to be reckoned from the date when the reassessment action was initiated against the non-searched entity.

Hence, the High Court quashed the impugned reassessment notice u/s 148 and the consequential actions as barred by limitation u/s 153C read with Section 153A and allowed the Assessee's appeal.

Counsel for Assessee: Ved Jain, Nischay Kantoor and Soniya Dodeja

Counsel for Revenue: Prashant Meharchandani, Akshat Singh and Ritika Vohra Utkarsh Kandpal

Case Title: Dinesh Jindal Vs ACIT and Ors

Citation: 2024 LiveLaw (Del) 721

Case Number: W.P.(C) 12091/2023 & CM APPL 47460/2023

Click here to read/ download the Judgment