Supreme Court: In Absence of Incriminating Material No Additions can be levied to Taxable Income

Supreme Court: In Absence of Incriminating Material No Additions can be levied to Taxable Income

The Supreme Court while adjudicating batch of appeals has observed that, in the case of completed/unabated assessments, no addition can be made by the Assessing Officer (AO) in absence of any incriminating material found during the course of search under Section 132 or requisition under Section 132A of the Income Tax Act, 1961.

The division judges bench comprising of Justices M.R, Shah and Sudhanshu Dhulia were considering batch of appeals wherein the core issue involved was with respect to the scope of assessment under section 153A of the Income Tax Act, 1961 (hereinafter referred to as the ‘Act, 1961’).

Shri N. Venkataraman, learned Additional Solicitor General of India, appeared on behalf of the Revenue and Shri Arvind P. Datar, Kavin Gulati, Preteesh Kapoor, learned Senior Advocates and Shri Ved Jain, learned Counsel appeared on behalf of the respective assessees.

It was the case on behalf of the Revenue that once the search initiated under Section 132 or requisition under Section 132A, the assessment has to be done under Section 153A of the Act, 1961 and the AO thereafter has the jurisdiction to pass assessment orders and to assess the ‘total income’ taking into consideration other material, even if no incriminating material is found during the search in respect of completed/unabated assessments.

The question which was posed for consideration before the Apex Court was with respect to completed assessments/unabated assessments, whether the jurisdiction of AO to make assessment was confined to incriminating material found during the course of search under Section 132 or requisition under Section 132A or not, i.e., whether any addition can be made by the AO in absence of any incriminating material found during the course of search under Section 132 or requisition under Section 132 A of the Act, 1961 or not.

The Apex Court at the outset concurred with the decisions passed by the Delhi High Court in the case of Commissioner of Income Tax, Central-III vs. Kabul Chawla, (2015) and Gujarat High Court in the case Principal Commissioner of Income Tax-4 vs. Saumya Construction, wherein it was held that no addition can be made in respect of completed assessment in absence of any incriminating material.

On perusal of Section 153A of the Income Tax Act, 1961, the Court was of the view that, “under Section 153A regime, the intention of the legislation was to do away with the scheme of two parallel assessments and tax the ‘undisclosed’ income too at the normal rate of tax as against any special rate. Thus, after introduction of Section 153A and in case of search, there shall be block assessment for six years.”

The bench clarified that search assessments/block assessments under Section 153A are triggered by conducting a valid search under Section 132 of the Act, 1961.

The bench stated that the very purpose of search, which is a prerequisite/trigger for invoking the provisions of sections 153A/153C is detection of undisclosed income by undertaking extraordinary power of search and seizure, i.e., the income which cannot be detected in ordinary course of regular assessment.

“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,” the Court observed.

Next the bench while interpretating Section 153A of the Act, 1961, held that, in case of a search under Section 132 or requisition under Section 132A and if during the search any incriminating material is found, even in case of unabated/completed assessment, then the AO shall have the jurisdiction to assess or reassess the ‘total income’ by considering the incriminating material collected during the search and other material which would include income declared in the returns, furnished by the assessee as well as the undisclosed income.

However, the Court clarified that in case during the search no incriminating material is found, in case of completed/unabated assessment, the only remedy available to the Revenue would be to initiate the reassessment proceedings under Sections 147/48 of the Act, subject to fulfilment of the conditions mentioned in sections 147/148, of the Act.

“Therefore, even in case of block assessment under section 153A and in case of unabated/completed assessment and in case no incriminating material is found during the search, the power of the Revenue to have the reassessment under sections 147/148 of the Act has to be saved, otherwise the Revenue would be left without remedy,” stated the bench.

Furthermore, the bench particularly pointed out that the assessment under Section 153A of the Act is linked with the search and requisition under Sections 132 and 132A of the Act.

While noting the object of Section 153A, the bench expressed, “the object of Section 153A is to bring under tax the undisclosed income which is found during the course of search or pursuant to search or requisition. Therefore, only in a case where the undisclosed income is found on the basis of incriminating material, 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 while referring to the second proviso to Section 153A, stated that, only pending assessment/reassessment shall stand abated and the AO would assume the jurisdiction with respect to such abated assessments.

Further it was of the view that the provision does not provide that all completed/unabated assessments shall abate.

While concluding the Apex Court appositely observed, that in case no incriminating material is unearthed during the search, the AO does not have the power to assess or reassess by considering other material in respect of completed assessments/unabated assessments.

Accordingly, the Court dismissed the appeals and review petition preferred by the Revenue.