Introduction
The Hon'ble Union Finance Minister Nirmala Sitharaman had presented the Union Budget 2021 of India on the 1st of February, 2021. In significant changes to the taxation process, among other tax measures, the Hon'ble Finance Minister recommend paradigm changes to the provisions relating to Assessment in case of Search or requisition. The Finance Bill, 2021 received the Assent of the President on 28th March 2021 and thereafter became FINANCE ACT, 2021 (NO. 13 OF 2021).
In this article, the author has attempted to highlight the significant changes brought in by the virtue of the Finance Act'2021 in context to the Income Tax assessments to be made in pursuance to an Income Tax Search and Seizure Action conducted u/s 132 of the income tax Act'1961 and its implications thereupon.
Changes relating to Income Tax Search and Seizure Assessments brought in the statute by virtue of the Finance Act' 2021
The Finance Act' 2021 has done away with the existing legal framework for Assessment in case of search or requisition (forming part of Chapter XIV of the Income Tax Act'1961- Procedure for Assessment) viz. Section 153A to 153D of the Income Tax Act'1961 in respect of search or requisition conducted on or after 1st April'2021. For searches conducted on or after 1st April'2021, then forth, assessments shall be framed under Section 147 read with section 148, 148A, 149,151 of the Income Tax Act'1961.
While doing so, the reasons advanced in the memorandum explaining the provisions of Finance Bill'2021 are that the existing search assessment framework ( like the erstwhile block assessment procedure under Chapter XIV-B of the Act) has failed to in its objective of early resolution of search assessments and were proving to be highly litigation-prone. As stated in the memorandum explaining the provisions of Finance Bill'2021 which later on culminated into Finance Act'2021, it is expected that the new system would result in less litigation and would provide ease of doing business to taxpayers as there is a reduction in time limit by which a notice for assessment or reassessment or re-computation can be issued.
Necessary Changes made by the Finance Act'2061 in the Income Tax Act' 1961
(Relevant changes only having a bearing on search and seizure assessments have been discussed here)
(a) Section 148 of the Income Tax Act'1961: " Issue of Notice where income has escaped assessment"
The erstwhile Section 148 of the Income Tax Act'1961 has been substituted by a distinct Section 148 viz. "Issue of Notice where income has escaped assessment."
Under the newly substituted Section 148, Explanation 2 has been brought into place to cover search, survey or requisition cases initiated or made or conducted, on or after 1st April, 2021, wherein it shall be deemed that the Assessing officer has information which suggests that the income chargeable to tax has escaped assessment in the case of the assessee for the three assessment years immediately preceding the assessment year relevant to the previous year in which the search is initiated or requisition is made or any material is seized or requisitioned or survey is conducted.
The relevant explanation 2 is reproduced herein under:-
"Explanation 2.- For the purposes of this section, where,-
(i) a search is initiated under section 132 or books of account, other documents or any assets are requisitioned under section 132A, on or after the 1st day of April, 2021, in the case of the assessee; or
(ii) a survey is conducted under section 133A, other than under sub-section (2A) or sub-section (5) of that section, on or after the 1st day of April, 2021, in the case of the assessee; or
(iii) the Assessing Officer is satisfied, with the prior approval of the Principal Commissioner or Commissioner, that any money, bullion, jewellery or other valuable article or thing, seized or requisitioned under section 132 or section 132A in case of any other person on or after the 1st day of April, 2021, belongs to the assessee; or
(iv) the Assessing Officer is satisfied, with the prior approval of Principal Commissioner or Commissioner, that any books of account or documents, seized or requisitioned under section 132 or section 132A in case of any other person on or after the 1st day of April, 2021, pertains or pertain to, or any information contained therein, relate to, the assessee,
the Assessing Officer shall be deemed to have information which suggests that the income chargeable to tax has escaped assessment in the case of the assessee for the three assessment years immediately preceding the assessment year relevant to the previous year in which the search is initiated or books of account, other documents or any assets are requisitioned or survey is conducted in the case of the assessee or money, bullion, jewellery or other valuable article or thing or books of account or documents are seized or requisitioned in case of any other person."
(b) Section 148A of the Income Tax Act'1961: " Conducting inquiry, providing opportunity before issue of notice under Section 148"
The Finance Act' 2021, inserted a new Section 148A which mandates that before issuance of notice under Section 148, the Assessing Officer shall conduct enquiries, if required, and provide an opportunity of being heard to the assessee. After considering his reply, the Assessing Office shall decide, by passing an order, whether it is a fit case for issue of notice under section 148 and serve a copy of such order along with such notice on the assessee. The Assessing Officer shall before conducting any such enquiries or providing opportunity to the assessee or passing such order obtain the approval of specified authority.
Most important to note here is that this procedure of enquiry, providing opportunity and passing order, before issuing notice under section 148 of the Act, shall not be applicable in search or requisition cases. {Emphasis Supplied}
(c) Section 149 of the Income Tax Act'1961: "Time limit for notice"
The erstwhile Section 149 of the Income Tax Act'1961 has been substituted by a distinct Section 149. The newly substituted Section provides that in normal cases, no notice shall be issued if three years have elapsed from the end of the relevant assessment year. However, notice beyond the period of three years from the end of the relevant assessment year but not beyond the period of ten years from the end of the relevant assessment year can be issued only in a few specific cases where the Assessing Officer has in his possession books of accounts or other documents or evidence which reveal that the income chargeable to tax, represented in the form of asset, which has escaped assessment amounts to or is likely to amount to fifty lakhs rupees or more for that year.
Interestingly, the first proviso to sub-section (1) of Section 149 provides that no notice under section 148 shall be issued at any time in a case for the relevant assessment year beginning on or before 1st day of April, 2021, if such notice could not have been issued at that time on account of being beyond the time limit specified under the provisions of clause (b) of sub-section (1) of this section, as they stood immediately before the commencement of the Finance Act, 2021. The implication of this proviso is of wide import in search and seizure cases so far as to which all assessments years can be covered for assessment. The issue is discussed in the later part of this article.
Furthermore, the second proviso also clarifies that Section 149(1) shall not apply in cases where search has been initiated on or before 31st March'2021.
(d) Section 153A, 153B, 153C and 153D of the Income Tax Act'1961:
"Section 153A:Assessment in case of search or requisition" and Section 153C: Assessment of income of any other person" have been suitably amended by inserting a sunset clause so far as the they shall cease to operate for searches initiated on or after 01st April'2021. Accordingly, "Section 153B: Time limit for completion of assessment under Section 153A" and "Section 153D: Prior approval necessary for assessment in case of search or requisition" shall also become otiose and thus not applicable for searches initiated on or after 01st April'2021.
Analysis of the changes made by the Finance Act'2021 and its apparent implications there upon the Assessments pursuant to a Search and Seizure action
(a) Apparent revival of Dual Assessment concept
Under the erstwhile law, Section 153A of the act provides that the assessment(s) or reassessment (s) pending as on the date of initiation of search shall abate. Section 153A was brought in the statute only w.e.f. 1-6-2003 and thereafter ceased to operate for searches initiated on or after 01st April'2021 by virtue of Finance Act'2021.
Prior to the advent of Section 153A i.e. before 01-06-2003, Qua the search assessments, the earlier applicable procedure was contained in Chapter XIV-B (sections 158B to 158BI) wherein only undisclosed income mentioned in the seized documents, etc., relatable to the block of ten years was liable to be brought to tax and for the regular income, the Assessing Officer had to frame the normal assessments. Therefore, there was a concept of dual assessments proceedings (assessment of regular income and assessment of undisclosed income separately) under the erstwhile Chapter XIV-B. This dual assessment concept was taken away by the advent of Section 153A for framing assessments for searches initiated after 31st May' 2003 since it was provided under Section 153A that the assessment(s) or reassessment (s) pending as on the date of initiation of search shall abate.
It can be traced out in the historical study of law relating to the search and seizure assessments that the Special Procedure for Assessment of search cases contained in erstwhile Chapter XIV-B (sections 158B to 158BI) which was brought in the statute book way back by the Finance Act'1995 w.e.f. 01-07-1995 was abolished by the Finance Act'2003 primarily to do away with the dual assessment concept. While doing so, the memorandum explaining the provisions of Finance Bill'2003 mentioned that the block assessment concept involving dual assessments for the same period have led to intense controversies and litigation. It further stated that the experience on implementation of the special procedure for search assessments (block assessment) contained in Chapter XIV-B, has shown that the new scheme has failed in its objective of early resolution of search assessments.
It is pertinent to reproduce the relevant part of the memorandum explaining the provisions of Finance Bill'2003 wherein it was proposed to abolish the special procedure for assessment in search cases contained in Chapter XIV-B.
Assessment in search cases - Abolition of the special procedure in Chapter XIV-B and introduction of new provisions
The existing provisions of the Chapter XIV-B provide for a single assessment of undisclosed income of a block period, which means the period comprising previous years relevant to six assessment years preceding the previous year in which the search was conducted and also includes the period up to the date of the commencement of such search, and lay down the manner in which such income is to be computed. The main objectives for the introduction of the Chapter XIV-B were avoidance of disputes, early finalisation of search assessments and reduction in multiplicity of proceedings. The idea was to have a cost-effective, efficient and meaningful search assessment procedure.
However, the experience on implementation of the special procedure for search assessments (block assessment) contained in Chapter XIV-B, has shown that the new scheme has failed in its objective of early resolution of search assessments. The new procedure postulates two parallel streams of assessment, i.e., one of regular assessment and the other for block assessment during the same period, i.e., during the block period. Controversies have sprung up questioning the treatment of a particular income as ‘undisclosed' and whether it is relatable to the material found during the course of search etc. Even where the facts are clear, litigation on procedural matters continue to persist. The new procedure has thus spawned a fresh stream of litigation.
It is proposed to provide that the provisions of this Chapter shall not apply where a search is initiated under section 132, or books of account, other documents or any assets are requisitioned under section 132A after 31st May, 2003 by inserting a new section 158BI in the Income-tax Act.
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These amendments will take effect from 1st June, 2003."
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