Assessment orders cannot be passed under Section 153A order if no incriminating material is seized

Ruchi Gandhi

05 Jun, 2024

In the caselaw of Smt. Smrutisudha Nayak vs. Union of India & Others [W.P. (C) Nos. 10587 of 2009 dated October 27, 2021], the Honourable Orissa High Court (“hereinafter called the Orissa HC”) declared that assessment proceedings cannot be commenced if no incriminating materials are recovered during the time of the search. Let’s understand Section 153A.

Section 153A and incriminating materials

Section 153A of the Income-tax Act of 1961 specifies the framework for assessing income in the case of a searched person. In accordance with the aforementioned section, the Assessing Officer may form an assessment of a searched individual for the six assessment years immediately preceding the year of search.

The legality of assessment under Section 153A is to find an equilibrium between the rights and duties of both the assessee and the IT department in terms of the cardinal principles of any assessment mechanism, which is to meet the ends of natural justice, and any Authority cannot touch any matter which is sub-judice. Furthermore, one should not be permitted to analyze one’s own conduct. Each of the six assessment years is subject to a unique and different assessment.

Section 153A of the Act requires an assessment to be conducted in respect to the search or requisition, specifically in relation to the materials disclosed during the search or demand. If no incriminating material is uncovered in connection to any assessment year, no addition of taxes or disallowance can be imposed in relation to that particular assessment year in the exercise of the powers under section 153A of the Income Tax Act, and the earlier/previous assessment must be reconsidered as it is.

An Assessing Officer could interfere with completed assessments while making the assessment under Section 153A only when some incriminating materials are seized. In other words, an assessment/reassessment order may be passed only on the grounds of certain incriminating material unearthed during the time of the search or procurement of documents, or undisclosed income or property revealed in the course of the search that was not produced or not already brought up or made known in the course of the original assessment.

Facts of the Caselaw

The petitioner, namely, Smrutisudha Nayak lodged a suit to challenge the commencement of the assessment procedures by virtue of Section 153A of the Income Tax Act, 1961 (“the IT Act”). The Petitioner is a director of Sambit Resorts Private. Ltd, a private limited company registered under company law. The Income Tax Department investigated and concluded a search at the Petitioner’s Bhubaneswar residence on November 15, 2007, and a Panchnama was prepared on that date. Following that, one more search warrant was ordered under Section 132 (1) of the Income Tax Act to undertake a search and seizure operation at the Andhra Bank, Ashok Nagar Branch, Bhubaneswar, on the locker held jointly in the names of the Petitioner and her husband.

Despite the fact that the search was conducted, nothing was discovered in the locker. The search was not promptly followed up by a notification under Section 153A of the Income Tax Act, which would have started search assessment procedures. On July 14, 2009, the Assessing Officer filed a notice to initiate assessment proceedings for the Assessment Year 2002-2003 under Section 153A/143(3) of the Income Tax Act, which was more than 18 months later. Moreover, for each of the Assessment Years 2008-2009, identical notifications were sent out to the petitioner. For the aforementioned assessment years, the Petitioner had submitted her returns.

The case of Jai Steel (India) v. Assistant CIT [INCOME TAX APPEAL NO.53/2011 dated May 24, 2013] was cited by the Honourable Orissa High Court. In the said case, the Rajasthan High Court decided that there was no reason for the commencement of assessment proceedings under Section 153A of the Income Tax Act because no incriminating evidence or materials were discovered or seized by the department during the time of the search.

The Orissa High Court further ordered that the impugned notifications issued to the Petitioner under Section 153A (1) read with Sections 143 (3) of the Income Tax Act for the Assessment Years 2002-03 and 2008-09 be annulled. And the Petition has been thereby approved.

As a result, the assessments under section 153A can only be made on the basis of incriminating materials or pieces of evidence, which include books of account and other relevant documents discovered during the time of search but had not been produced during the original assessment, as well as undisclosed income or property disclosed during the search.

Conclusion

The Orissa High Court has declared that if no incriminating pieces of evidence are seized by the tax department during the time of the search, assessment procedures cannot be started. Thus, assessment or reassessment orders cannot be passed by the Assessing Officer under Section 153A except when incriminating materials are seized by the department during the course of the search.

Read our article:Assessment and Reassessment Notice under Section 148 of Income Tax Act