S.153C Income Tax Act | Two-Tier Satisfaction Of Assessing Officers Of Both Searched & Non-Searched Entity Needed Even Prior To 2015 Amendment: Delhi HC

The Delhi High Court has held that even though Section 153C of the Income Tax Act, 1961 did not in its original form prescribe two-tier satisfaction of Assessing Officers of both the searched and non-searched entity for initiating reassessment, the same cannot be deemed absent.

Section 153C allows the Revenue department to proceed against a party other than the person who is being searched, if incriminating articles belonging to the other person are found during the search.

The provision was amended by virtue of Finance Act 2015 to the extent that the words material discovered “belongs to” non-searched person were substituted with “pertains to”.

“In our considered opinion, while and undoubtedly Section 153C as it stood at the relevant time did not contemplate a two tier recordal of satisfaction and the AO of the searched person was merely obliged to transmit the material belonging or pertaining to a third person gathered in the course of a search, proceedings under the said provision could not have been triggered mechanically absent the formation of opinion by the AO of the non-searched person that the material was likely to impact an assessment made,” a division bench of Justices Yashwant Varma and Harish Vaidyanathan Shankar observed.

The Respondent-assessee contended that a notice under Section 153C of the Act could be sustained only if the material gathered was recognisable as incriminating and pertaining to the AY in question, which was not the case here, and hence, the AO of the non-searched entity could not have recorded any satisfaction.

However, the Department contended that since the case at hand pertained to the Assessment Year prior to the 2015 amendment, there was no occasion at the time for the AO of the non-searched entity to record any satisfaction as is contemplated under Section 153C. He submitted that in the unamended regime, it was the satisfaction of the AO of the searched person alone which would have driven an assessment under Section 153C of the Act.

Rejecting such contention, the High Court observed that the initiation of assessment under Section 153C against the non-searched entity was never intended to be automated or an inevitable fallout.

It said, “We are of the considered view that the subsequent introduction of the words “have a bearing on” in the provision was not an introduction of a new obligation upon the AO. The primordial requirement of the material relating to undisclosed income had existed even prior to the amendments introduced in 2015.”

It cited SSP Aviation Limited vs. Deputy Commissioner of Income Tax (2012) where a Division Bench of the High Court had held that “The Assessing Officer who has reached the satisfaction that the document relates to a person other than the searched person can do nothing except to forward the document to the Assessing Officer having jurisdiction over the other person and thereafter it is for the Assessing Officer having jurisdiction over the other person to follow the procedure prescribed by section 153A in an attempt to ensure that the income reflected by the document has been accounted for by such other person. ”

The Court also referred to its decision in Commissioner of Income Tax vs. RRJ Securities Ltd (2015) where it was held that even under the unamended regime, it was incumbent upon the AO of the third party to form prima facie opinion that the material represented or was likely to be demonstrative of concealment of income.

Coming to the facts of the case, the Court found that the alleged incriminating material, the provisional Balance Sheet, could not be said to be reflective of affairs pertaining to AYs in question.

The Court cited Commissioner of Income Tax-III v. Sinhgad Technical Education Society where the Supreme Court had observed “…as per the provisions of Section 153-C of the Act, incriminating material which was seized had to pertain to the assessment years in question and it is an undisputed fact that the documents which were seized did not establish any co-relation, document-wise, with these four assessment years. Since this requirement under Section 153-C of the Act is essential for assessment under that provision, it becomes a jurisdictional fact. We find this reasoning to be logical and valid, having regard to the provisions of Section 153-C of the Act.”

As such, it held that the Income Tax Appellate Tribunal was justified in annulling the assessment undertaken against the Respondent, and it dismissed the appeal.

Also Read: 2015 Amendment To Section 153C Of Income Tax Act Will Apply To Searches Conducted Prior To Date Of Amendment : Supreme Court

Appearance: Mr. Indruj Singh Rai, SSC with Mr. Sanjeev Menon, Mr. Rahul Singh, JSCs & Mr. Anmol Jagga and Mr. Gaurav Kumar, Advs. for Appellant; Mr. Gautam Jain & Mr. Manish Yadav, Advs. for Respondent

Case title: Pr. Commissioner Of Income Tax (Central)- 3 v. M/S Ridgeview Construction Pvt. Ltd

Case no.: ITA 618/2019

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