Income Tax Act- AO Can’t Make Additions to Completed Assessments In Absence Of Incriminating Materials: Supreme Court

The bench of Justices M.R. Shah and Sudhanshu Dhulia remarked that block assessment under Section 153A of the Income Tax Act is linked with the search and requisition under Sections 132 and 132A, respectively. Further, the object of assessment under Section 153A is to bring under tax the undisclosed income which is found during the course of search or pursuant to search/requisition. Therefore, the court held that the jurisdiction of AO to make assessment is confined to the incriminating material found during the course of search or requisition.

Thus, only in cases where the undisclosed income is found on the basis of incriminating material in search/ requisition, the AO would assume the jurisdiction to assess or reassess the total income for the entire six years block assessment period, even in case of completed/unabated assessment.

The bench added that in case of completed/ unabated assessment, if no incriminating material is found during the search, the only remedy available to the revenue department would be to initiate the reassessment proceedings under Sections 147/148 of the Act, subject to fulfilment of the specified conditions.

The top court was dealing with a batch of appeals filed by the revenue department and the assessees, on the issue concerning the scope of assessment under Section 153A of the Income Tax Act.

The assessee, Abhisar Buildwell Pvt Ltd, argued that if no assessment proceeding is pending on the date of initiation of the search, the AO may consider only the incriminating material found during the search and he is precluded from considering any other material derived from any other source.

Per contra, the revenue department pleaded that the AO is competent to consider all the material that is available on record, including any incriminating material found during the search. It further contended that additions can be made by the AO in absence of any incriminating material found during the course of search/ requisition, even in respect of completed assessments/ unabated assessments.

The court observed that various High Courts, namely the Delhi, Gujarat, Bombay, Karnataka, Orissa, Calcutta, Rajasthan, and the Kerala High Courts have taken the view that no addition can be made in respect of completed/unabated assessments in absence of any incriminating material found during search.

The bench observed that the lead judgment was by the Delhi High Court in Commissioner of Income Tax, Central-III vs Kabul Chawla, (2015) 61 taxmann.com 412 (Delhi), which was subsequently followed and approved by the other High Courts.

The High Court in Kabul Chawla (2015) had held that completed assessments can be interfered with by the AO while making the assessment under Section 153 A, only on the basis of some incriminating material unearthed during the course of search or requisition, which were not produced or not already disclosed or made known in the course of original assessment.

The said decision was followed by the Gujarat High Court in Principal Commissioner of Income Tax vs. Saumya Construction, (2016) 387 ITR 529 (Gujarat), where it had held that in absence of any incriminating material found during search/ requisition, AO has no jurisdiction to re-open the completed assessment.

The Supreme Court observed that as per the provisions of Section 153A, the AO gets the jurisdiction to assess or reassess the ‘total income’ in respect of each assessment year falling within six assessment years.

The bench reckoned that search assessments/block assessments under Section 153A are triggered by conducting a valid search under Section 132 of the Income Tax Act. The very purpose of search, which is a prerequisite/trigger for invoking the provisions of Sections 153A/153C, is detection of undisclosed income, i.e., the income which cannot be detected in the ordinary course of regular assessment, by undertaking extraordinary power of search and seizure.

“Thus, the foundation for making search assessments under Sections 153A/153C can be said to be the existence of incriminating material showing undisclosed income detected as a result of search,” said the court.

Referring to the second proviso to Section 153A and Section 153A(2), the court remarked, “The intention of the legislation seems to be that in case of search only the pending assessment/reassessment proceedings shall abate and the AO would assume the jurisdiction to assess or reassess the ‘total income’ for the entire six years period/block assessment period. The intention does not seem to be to re-open the completed/unabated assessments, unless any incriminating material is found with respect to concerned assessment year falling within last six years preceding the search.”

The bench thus concluded that, if any incriminating material is found during the search, even in case of unabated/completed assessment, the AO would have the jurisdiction to assess or reassess the ‘total income’, taking into consideration the incriminating material collected during the search and other material, which would include income declared in the returns.

However, in case of completed/ unabated assessment, if no incriminating material is found during the search, the only remedy available to the revenue department would be to initiate the reassessment proceedings under Sections 147/148 of the Act, subject to fulfilment of the conditions mentioned therein, as in such a situation, the department cannot be left with no remedy, the court said.

Dealing with the contention advanced by the revenue department, the court said: “If the submission on behalf of the Revenue that in case of search even where no incriminating material is found during the course of search, even in case of unabated/completed assessment, the AO can assess or reassess the income/total income taking into consideration the other material is accepted, in that case, there will be two assessment orders, which shall not be permissible under the law.”

It added: “As per the second proviso to Section 153A, only pending assessment/reassessment shall stand abated and the AO would assume the jurisdiction with respect to such abated assessments. It does not provide that all completed/unabated assessments shall abate. If the submission on behalf of the Revenue is accepted, in that case, second proviso to section 153A and subsection (2) of Section 153A would be redundant and/or rewriting the said provisions, which is not permissible under the law.”

The court thus upheld the view taken by the Delhi High Court in Kabul Chawla (2015), the Gujarat High Court in Saumya Construction (2016), and the decisions of the other High Courts where they had held that no addition can be made in respect of the completed assessments in absence of any incriminating material found during the search/ requisition.

Case Title: Principal Commissioner of Income Tax vs Abhisar Buildwell P. Ltd

Citation : 2023 LiveLaw (SC) 346

Counsel for the Appellant: Mr. N. Venkataraman, Additional Solicitor General of India; Raj Bahadur Yadav, AOR

Counsel for the Respondent: Ambhoj Kumar Sinha, AOR; Mr. Arvind P. Datar, Kavin Gulati, Preteesh Kapoor, Senior Advocates; and Mr. Ved Jain.

Income Tax Act, 1961- Section 153A: The Supreme Court has ruled that no additions can be made by the Assessing Officer under Section 153A of the Income Tax Act in the absence of any incriminating material found during the course of search under Section 132 or requisition under Section 132 A, in respect of completed /unabated assessments.

The bench remarked that block assessment under Section 153A is linked with the search and requisition under Sections 132 and 132A, respectively. Further, the object of assessment under Section 153A is to bring under tax the undisclosed income which is found during the course of search or pursuant to search/requisition. Therefore, the court held that the jurisdiction of AO to make assessment is confined to the incriminating material found during the course of search or requisition.

Thus, only in cases where the undisclosed income is found on the basis of incriminating material in search/ requisition, the AO would assume the jurisdiction to assess or reassess the total income for the entire six years block assessment period, even in case of completed/unabated assessment.

The bench added that in case of completed/ unabated assessment, if no incriminating material is found during the search, the only remedy available to the revenue department would be to initiate the reassessment proceedings under Sections 147/148, subject to fulfilment of the specified conditions.

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