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Rationale for Unearthing of Incriminating Evidence even in Abated Assessments

This article penned down by our Founder Director Sh. Mayank Mohanka, FCA has been published in taxmann.com with the citation (2021) 125 taxmann.com 248 (Article). Knowledge multiplies manifold by sharing so this article is shared here for the benefit of our Readers.

The legal jurisprudence in respect of the scope of unabated/concluded assessments under s.153A/153C of the Act, being confined to the incriminating evidence found during the search, is well-settled and established now. The Hon’ble High Courts and even the Hon’ble Supreme Court in a plethora of judgements have held that the additions/disallowances u/s 153A/153C of the Act towards unabated assessments (already concluded assessments or where statutory time period for issuing of notice u/s 143(2) has elapsed on the date of search), are permissible only where incriminating materials are found in search showing unaccounted income.

On the conspectus of a plethora of undermentioned judgments of different Hon’ble High Courts, and even the Hon’ble Supreme Court, the position of law as existing currently is loud and clear that additions/disallowances under s.153A/153C of the Act towards unabated assessments are permissible only where incriminating materials are found in search showing unaccounted income.

i) CIT vs. Sinhgad Technical Education Society Civil Appeal No. 11080 of 2017 arising out of Revenue’s SLP (C) No. 25257 of 2015;

ii) Pr.CIT vs. Meeta Gutgutia (2018) 96 taxmann.com 468 (SC);

iii) CIT vs. Kabul Chawla (2016) 380 ITR 573 (Del);

iv) Pr. CIT v. Lata Jain 384 ITR 543 (Del);

v) Pr. CIT vs. Mahesh Kumar Gupta 2016-TIOL-2994-HC-Del;

vi) CIT vs. Continental Warehousing Corporation (2015) 374 ITR 645 (Bom.);

vii) Gurinder Singh Baba 386 ITR 483 (Bom);

viii) Pr.CIT vs. Desai Construction Pvt. Ltd. 387 ITR 552 (Guj.);

ix) Pr. CIT v. Saumya Construction (P) Ltd 387 ITR 529 (Guj.);

x) CIT v. IBC Knowledge Park (P) Ltd. 385 ITR 346 (Kar);

However, habitually I am more inclined to venture and explore the unventured and unexplored periphery of legal jurisprudence. So, in this Taxalogue, I am discussing a lesser talked about or researched issue of the necessity or otherwise of discovery of incriminating material or evidence in abated/pending assessments on the date of search, for the sustainability of additions and more importantly the interpretation of the expression “pending assessment or reassessment on the date of search”.

In some of the aforesaid judgements of the Hon’ble High Courts, the assessments, where although notice u/s 143(2) of the Income Tax Act has not been issued by the assessing authority but the time period for issue of notice u/s 143(2) has not elapsed or is still available, on the date of search action, have been interpreted as pending or abated assessments u/s 153A/153C.

However, in my humble understanding, the interpretation of the expression “pending assessment or reassessment on the date of search” being used in second proviso to sections 153A/153C needs further review and examination.

The second proviso to section 153A/153C of the Income Tax Act, reads as under:

"Provided further that assessment or reassessment, if any, relating to any assessment year falling within the period of six assessment years and for the relevant assessment year or years referred to in this sub-section, pending on the date of initiation of the search under section 132 or making of requisition under section 132A, as the case may be, shall abate

Therefore, it is duly evident from above that only those assessments or re-assessments shall abate which are pending on the date of initiation of search u/s 132.

The term 'pending' means 'undecided' i.e., something which is not concluded. An action is considered as pending from the time of commencement of the proceedings. A legal proceeding is "pending" as soon as commenced, and until it is concluded.

As per Advanced Law Lexicon, third Edition of 2005, page 3521/3522, following are the definitions of the word 'pending':

A legal proceeding is "pending" as soon as commenced, see 5 Rep. 47, 48; 7 Rep. 30), and until it is concluded.

Pending judicial proceeding. A judicial proceeding is said to be pending:

(A) in the case of a civil proceeding, when it is instituted by the filing of a plaint or otherwise;

(B) in the case of a criminal proceeding under the Code of Criminal Procedure, 1898, or any other law-

(i) Where it relates to the commission of an offence, when the charge-sheet or challan is filed, or when the Court issues summons or warrant, as the case may be against the accused, and

(ii) in any other case, when the Court takes cognizance of the matter to which the proceeding relates, and in the case of a civil or criminal proceeding. [Contempt of Courts Act. (70 of 1971), S. 3 Expln. (a)] ".

From the above definitions of the expression 'pending', an authority is required statutorily to complete a proceeding when it is pending before him. Thus, unless authority/court, by operation of law, is required to conclude the proceedings, it could not be said to be pending before it. Further, for any proceedings to be construed as ‘pending’, it has to be commenced or initiated first.

So, when can a proceeding in the Income Tax Act be considered as being commenced or started? There are two schools of thoughts on this issue. One school of thought is that an income tax proceeding starts or commences only upon issuance of a statutory notice either u/s 143(2) or 142(1) or 148. And another school of thought is that an income tax proceeding starts or commences on mere filing of return of income.

Well, I am not going into the merit or proprietory of these two divergent views of two schools of thoughts. But instead, am considering both the views as plausible, by concluding that in the Income Tax Act, proceedings for assessment have two methods of commencement or initiation, one is when return of income is filed and the other is when notice u/s 143(2) is issued. However, proceedings arising after filing of the return (hereinafter referred to as first limb of proceedings), is a separate proceeding and proceedings initiated after issuance of notice u/s 143(2) (hereinafter referred to as second limb of proceedings) are separate proceedings.

So, in those cases, where no notice u/s 143(2) has been issued uptill the date of search action, the second limb of proceedings pursuant to issuance of notice u/s 143(2), do not initiate or commence. Thus, when proceedings pursuant to issuance of notice u/s 143(2) have not commenced or begun, the question of their pendency on the date of search doesn’t arise.

Further, the first limb of proceedings i.e., proceedings initiated by filing the return of income commence with the filing of the return u/s 139(1) and come to an end when processing of that return of income is done or acknowledgement is issued deeming it to be intimation. A return filed by an assessee and processed by the assessing officer or even where acknowledgement of return is treated as intimation, could not be said to be pending before the assessing officer as he is not statutorily required to conclude those proceedings. Thus, proceedings cannot be deemed to be pending before the assessing officer by virtue of return filed after assessing officer has processed the return, determined the tax payable including the interest on the returned income and also where return filed by the assessee is accepted by way of issuing acknowledgment. Therefore, it could not be said that a proceeding is pending because of the return filed by the assessee.

So, in view of the above-stated thread-bare interpretation of the expression ‘pending income tax proceeding’, in my humble understanding, even in those cases, where only a return of income has been filed by the assessee and the said return has been processed by CPC, however no notice u/s 143(2) has been issued by the assessing officer uptill the date of search action, though, the time period for issue of notice u/s 143(2) has not elapsed, can’t be considered as ‘pending assessment or reassessment on the date of search’ within the meaning of second proviso to sections 153A/153C and only those assessments can be considered as pending on the date of search action, where a statutory notice u/s 143(2) has already been issued.

Well Friends, my above stated interpretation of the expression ‘pending assessment or reassessment on the date of search’, is not merely a self-serving and empty argument but it is duly supported and fortified by some good legal precedents like the decisions of Hon’ble ITAT Ahmedabad in the case of Ripul C Dalal Daman vs. ITO in ITA No. 1118/Ahd/2003, and Kailash Auto Finance Limited Vs. DCIT (2009) 32 SOT 80 (ITAT, Lucknow)

My above understanding and interpretation gets further support and strength from the fact that sections 153A and 153C talk about assessment and reassessment both and not just assessment. So, if the non-lapsing of the statutory time period for issuance of notice u/s 143(2) on the date of search action is being construed as the pendency of assessment for that assessment year, then on same principle, the mere availability of statutory time period for issuance of notice u/s 148 for four or six years, in future, as the case may be, for initiating re-assessment proceedings for that assessment year, may also be construed as pendency of that assessment or reassessment for four or six years in future. So, going by this purposive interpretation, the assessments or reassessments of all six years in a block period are amenable to be considered as pending on the date of search action and in that case none of the six assessment years comprised in the block period would be ever considered as unabated or which have attained finality.

Therefore, the term ‘pending’ being used in section 153A or 153C has to be given a literal meaning only and not any constructive or purposive meaning.  It is the cardinal rule of interpretation of statute that the words of the statute must be understood in their natural, ordinary or popular sense unless the language of the statute is ambiguous as held by the Hon’ble Apex Court in the cases of:

(i) Taru Lata Shyam v/s. CIT 108 ITR 345;

(ii) Keshavji Raoji & Co. v/s. CIT 183 ITR 1;

(iii) Gum Devdutta VKSS Maryadit v/s. State of Maharashtra AIR 2001 SC 1980

(iv) CIT v/s. Anjum M.H. Ghaswala 252 ITR 1 (Constitution bench).

The constitution bench of the Hon'ble Apex court in the case of Anjuman M.H. Ghaswala 252 ITR 1 has held that the purposive interpretation can be resorted to only where the language of the statute is either ambiguous or conflicting or gives a meaning leading to absurdity. 

The issue as to when can a question or proceeding can be considered as pending before the income tax authority can also be understood from the settled and established legal jurisprudence in respect of the admissibility or otherwise of an application for admission of an advance ruling u/s 245R of the Income Tax Act. The first proviso to section 245R of the Income Tax Act, prevents the AAR from an admitting an application based on a question which is ‘pending’ before the income tax authority.

The Hon’ble Delhi High Court in the cases of Hyosung Corporation vs. AAR (2016) 382 ITR 371 (Delhi) and Sage Publication Ltd. Vs. Deputy Commissioner of Income-Tax (International Taxation), (2016) 387 ITR 437 (Delhi) and Commissioner of Income Tax, International Taxation vs. AAR, New Delhi in W.P. (C ) 5668/2020 dated 27.8.2020, has held that mere filing of a return by the taxpayer can’t be treated as the question raised in the Authority for Advance Ruling application being pending before the income tax authority.

Similarly, the Authority for Advance Rulings (“AAR”), in the case of In Re: Mitsubishi Corporation in AAR No 1309 of 2012, has held that the mere filing of a tax return does not create grounds for the rejection of an advance ruling application under proviso (i) to Section 245R of the Income Tax Act, 1961. While the proviso prevents the AAR from admitting an application based on a question which is ‘pending’ before the tax authorities, the AAR has held that this criterion would only be satisfied once a notice under either Section 142(1) or Section 143(2) of the Income Tax Act, has been issued by the authorities.

Friends, now coming to another less researched aspect of the necessity or otherwise of discovery or unearthing of incriminating material or evidence as a result of search for the sustainability of additions even in abated or pending assessments, on the date of search.

Friends I have always believed that Taxation Law is a very dynamic and ever evolving phenomenon. Every judgement or ruling has to be read and understood in toto and merely reading the head notes may not suffice. I am discussing here my own experience. I have read the judgement of Hon’ble Delhi High Court in the case of Kabul Chawla (2016) 380 ITR 573 (Del) and somehow registered this notion and belief in my mind that discovery or unearthing of incriminating material or evidence as a result of search for sustainability of additions is must only in cases of unabated or concluded assessments and not in pending or abated assessments.

However, somewhere in the back of my mind, this notion or belief kept on disturbing me because a search is a search. So, how can the abated and unabated assessments would have two different barometers for the sustainability of additions. This curiosity compelled me to do more research on this issue and I again read all the important judgements on this issue, and well friends, God has been kind enough to produce some productive results also.

I always have this firm belief and view that an assessment pursuant to a search action u/s 132 has to be treated differently and more sacrosanct from a regular assessment and as such the additions being sought to be made in such search assessments must have the backing and support of the discovery of some incriminating material or evidence in search. For many, the meaning of incriminating material or evidence may be complicated to understand but for me it is very simple. Any evidence or material is to be considered as incriminating if for discovering or unearthing it, the extreme measure of search was required. So, any of those seized material or evidences which are already there in public domain or which are simply dumb and non-speaking documents or records or which could have been requisitioned otherwise also, by a regular enquiry during regular assessment proceedings, can’t be considered as incriminating material or evidence.

It needs to be appreciated that after subjecting the assessee to the extreme mental trauma and hardship of a search action, the search party should atleast be expected to discover or unearth some incriminating material or evidence as a result of search in order to support the making of consequential additions. Making of huge additions merely on the basis of some dumb seized documents which usually are being seized during search action just for the heck of seizing something and documents and records which are already available in public domain and for the unearthing or discovering of which, search was not even required, obviously and naturally will not stand and muster the scrutiny and test of Law. So, I have always believed that in all assessments pursuant to search action, either abated or unabated, the unearthing or discovery of incriminating material or evidence should be considered as a mandatory requirement and pre-requisite for the sustainability of additions.

Fortunately, this logical view and belief of mine has also got the much-needed support and fortification, by a number of good and popular judgements as discussed below:

(i) Pr. CIT Vs Meeta Gutgutia Prop. Ferns ‘N’ Petals [2017] 395 ITR 526 (Del) :152 DTR 153 (Del), wherein the Hon’ble Delhi High Court has held as under:

“56. Section 153A of the Act is titled “Assessment in case of search or requisition”. It is connected to section 132 which deals with 'search and seizure'. Both these provisions, therefore, have to be read together. Section 153A is indeed an extremely potent power which enables the Revenue to re- open at least six years of assessments earlier to the year of search. It is not to be exercised lightly. It is only if during the course of search under section 132 incriminating material justifying the re-opening of the assessments for six previous years is found that the invocation of section 153A qua each of the AYs would be justified.”

It is also pertinent to mention here that the SLP filed by the I.T. Department before the Supreme Court against this judgement of Delhi High Court, has already been dismissed by the Supreme Court, vide judgement in the case of Pr.CIT Vs Meeta Gutgutiya [2018] 257 Taxman 441 (SC).

(ii) The Hon’ble Supreme Court in the case of Sinhgad Technical Education Society, Civil Appeal No. 11080 of 2017 arising out of Revenue’s SLP (C) No. 25257 of 2015, has held that if no incriminating material is found during the course of search in respect of an assessment year then the AO could not have any jurisdiction to invoke the provisions of section 153C of the Act.

(iii) Pr.CIT Vs Saumya Construction P.Ltd [2016] 387 ITR 529 (Guj), wherein the Hon’ble Gujarat High Court has held as under:

“Section 153A bears the heading “Assessment in case of search or requisition". It is well settled as held by the Supreme Court in a catena of decisions that the heading of the section can be regarded as a key to the interpretation of the operative portion of the section and if there is no ambiguity in the language or if it is plain and clear, then the heading used in the section strengthens that meaning. From the heading of section 153A, the intention of the legislature is clear viz., to provide for assessment in case of search and requisition. When the very purpose of the provision is to make assessment in case of search or requisition, it goes without saying that the assessment has to have relation to the search or requisition. In other words, the assessment should be connected with something found during the search or requisition, viz., incriminating material which reveals undisclosed income. Thus, while in view of the mandate of sub-section (1) of section 153A of the Act, in every case where there is a search or requisition, the Assessing Officer is obliged to issue notice to such person to furnish returns of income for the six years preceding the assessment year relevant to the previous year in which the search is conducted or requisition is made, any addition or disallowance can be made only on the basis of material collected during the search or requisition. In case no incriminating material is found, as held by the Rajasthan High Court in the case of Jai Steel (India), Jodhpur v. Assistant Commissioner of Income Tax (supra), the earlier assessment would have to be reiterated. In case where pending assessments have abated, the Assessing Officer can pass assessment orders for each of the six years determining the total income of the assessee which would include income declared in the returns, if any, furnished by the assessee as well as undisclosed income, if any, unearthed during the search or requisition. In case where a pending reassessment under section 147 of the Act has abated, needless to state that the scope and ambit of the assessment would include any order which the Assessing Officer could have passed under section 147 of the Act as well as under section 153A of the Act. [Emphasis added]

iv) CIT Vs Continental Warehousing corporation [2015] 120 DTR 89 (Bom)

Mr. Dastur would submit that the Revenue is protected completely in this case. The power is of drastic nature and has to be exercised within constitutional parameters. However, though the second proviso to sub-section (1) of section 153A would not apply in the first three years of this case, yet, as far as the second three-year period is concerned, the assessments were pending. The proceedings in relation thereto abate. Now the entire assessment in relation to the second phase of three years can be made but the foundation for all this and the action under section 153A is a search under section 132 or requisition of books of account and other assets under section 132A. In the present case, the notice under section 153A is founded on search. If there is no incriminating material found during the search, then, the Special Bench was right in holding that the power under section 153A being not expected to be exercised routinely, should be exercised if the search reveals any incriminating material. If that is not found, then, in relation to the second phase of three years, there is no warrant for making an order within the meaning of this provision. In any event, the issue stands concluded by a Division Bench judgment of this Court rendered in the case of Commissioner of Income Tax (Central) Nagpur vs. M/s. Murli Agro Products Limited in Income Tax Appeal No.36 of 2009 decided on 29th October, 2010. It is, therefore, apparent that the law laid down by this Court is binding on the Revenue. If that is binding then the questions of law and with regard to applicability of section 153A need to be answered against the Revenue and in favour of the assessee.

And lastly even in the Kabul Chawla case, the Hon’ble Delhi High Court have acknowledged and observed that,

“Although Section 153 A does not say that additions should be strictly made on the basis of evidence found in the course of the search, or other post-search material or information available with the AO which can be related to the evidence found, it does not mean that the assessment "can be arbitrary or made without any relevance or nexus with the seized material. Obviously, an assessment has to be made under this Section only on the basis of seized material."