Reopening Or Abatement Of Assessment To Be Triggered Only Upon Discovery Of Material: Delhi High Court

The Delhi High Court has held that a reopening or abatement would be triggered only upon the discovery of material that is likely to “have a bearing on the determination of the total income” and would have to be examined bearing in mind the AYs' that are likely to be impacted.

The bench of Justice Yashwant Varma and Justice Purushaindra Kumar Kaurav has observed that abatement of the six AYs' or the “relevant assessment year” under Section 153C would follow the formation of an opinion and satisfaction being reached that the material received is likely to impact the computation of income for a particular AY or AYs' that may form part of the block of ten AYs'. Abatement would be triggered by the formation of that opinion, rather than the other way around.

The batch of writ petitions were filed challenging notices issued under Section 153C of the Income Tax Act, 1961, with the petitioners-assessees asserting that in the absence of any material pertaining to the assessment years that are proposed to be reopened and assessed having been gathered during the course of a search, the assumption of jurisdiction is wholly illegal and unsustainable in law.

The submission principally flows from the record of facts appearing in each of the satisfaction notes drawn by the assessing officer of the non-searched person, and the same carry no reference specific to the AY in respect of which the impugned notices have come to be issued. In some of the writ petitions, the satisfaction notes as drawn by the AO of the non-searched person had neither been provided to the writ petitioners nor were they brought on record by the respondents. However, submissions were addressed on the assertion as made in the writ petition, with the position so set out not being disputed by the respondents.

The court proceeded on the basis that the incriminating material did not pertain to the AY, in respect of which reopening was impugned.

The petitioners contended that merely because incriminating material may have been found or discovered and would pertain to a particular AY, the same would not constitute sufficient basis for the initiation of assessment or reassessment proceedings in respect of the six AYs' preceding the year of search or the entire block comprised in the “relevant assessment year” as defined by Explanation 1 to Section 153A of the Income Tax Act.

The petitioner argued that the power to assess or to reassess conferred by virtue of Section 153C is premised on the AO of the non-searched entity being satisfied on a perusal of the material handed over to it that the same would “have a bearing on the determination of the total income” of the “other person” for six AYs' immediately preceding the AY relevant to the FY in which the search was undertaken or documents requisitioned, as well as for the “relevant assessment year” as defined in Section 153A. The existence of material that is likely to impact the total income, as determined or assessed for any AY, is a sine qua non for sustaining the initiation of action under Section 153C. The reopening of all AYs', which may form part of the block of six or ten AYs', would not be justified merely on the ground of incriminating material having been discovered pertaining to a particular AY.

The court noted that merely because Section 153C confers jurisdiction upon the AO to commence an exercise of assessment or reassessment for the block of years that are mentioned in that provision, the same alone would not be sufficient to justify steps in that direction being taken, unless the incriminating material so found is likely to have an impact on the total income of a particular AY forming part of the six AYs' immediately preceding the AY pertaining to the search year or for the “relevant assessment year”.

"Ultimately, Section 153C is concerned with books, documents, or articles seized in the course of a search and which are found to have the potential to impact or have a bearing on an assessment that may be undergoing or that may have been completed. The words “have a bearing on the determination of the total income of such other person” as appearing in Section 153C would necessarily have to be conferred preeminence. Therefore, unless the AO is satisfied that the material gathered could potentially impact the determination of total income, it would be unjustified to mechanically reopen or assess all over again all the ten AYs' that could possibly form part of the block of ten years,” the court said.

The court held that the respondents have erroneously proceeded on the assumption that the moment any material is recovered in the course of a search or on the basis of a requisition made, they become empowered in law to assess or reassess all six AYs' years immediately preceding the assessment correlatable to the search year or the “relevant assessment year” as defined in terms of Explanation 1 of Section 153A. The approach is clearly unsustainable and contrary to the consistent line struck by the precedents.

Counsel For Petitioner: Salil Kapoor

Counsel For Respondent: Sunil Agarwal

Case Title: Saksham Commodities Limited Versus Income Tax Officer

Citation: 2024 LiveLaw (Del) 436

Case No.: W.P.(C) 1459/2024 & CM APPL 6031/2024

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