The Supreme Court has ruled that the income tax (I-T) department cannot reopen completed assessments under Section 153A of the I-T Act, unless "incriminating material" is found during search and seizure operations. This means that the tax authorities cannot issue reassessment orders for completed assessments or unabated assessments without any incriminating material found during a search under Section 132 or requisition under Section 132A of the Act. The ruling is significant as it reduces the scope for arbitrary re-assessments by the taxman and could give much relief to taxpayers.
However, the court clarified that completed or "unabated" assessments can be reopened under Sections 147 and 148 of the I-T Act, if any other material proof recovered by the assessing officer (AO) indicates that certain income has escaped assessment. These sections allow the AO to reassess returns in case any income stream other than disclosed by the taxpayer is detected and she holds proof of that.
The scheme of conducting tax assessment pursuant to a search conducted by tax authorities has been riddled with numerous controversies. Section 153A, which was introduced in 2003 and withdrawn in 2021, sought to ease the procedural hurdles. It required every taxpayer who has been subjected to a search to file a revised tax return for six proceeding years. However, controversy arose as to what would be the scope of assessment post such filing of returns by the taxpayers.
The Supreme Court has now clarified that the re-assessment under Section 153A pursuant to a search, should be restricted to income unearthed from incriminating material found during the search. This judgment would help several taxpayers who had been litigating on this aspect. However, the additional elbow room provided by the Supreme Court by clarifying that notices can be issued under Sections 147/148 of the Act would be of very little help to the Revenue, as the applicability of the Section itself would not apply to searches conducted post 31st March 2021.
The Court has held that incriminating material is a prerequisite for the Revenue to assume jurisdiction to assess or reassess the income for block assessment period in case of completed assessments. The Supreme Court has upheld previous rulings of the Delhi and Gujarat High Courts on the matter. The only remedy available to the department would be to initiate the reassessment proceedings under Sections 147/148 of the Act. This judgment would have a significant effect on the cases where the revenue authorities have proceeded on making plausible adjustment to taxable income, based on material not emanating out of the search.
The ruling could have a major impact on tax assessments conducted by the I-T department. It is expected to help taxpayers who have been challenging re-assessments orders without any unearthing of incriminating material and relying on other material emanating from search. The ruling will reduce the scope for arbitrary reassessments by the taxman and provide relief to taxpayers.
In conclusion, the Supreme Court has clarified the law on reopening completed assessments under Section 153A of the I-T Act. It has held that the tax authorities cannot issue reassessment orders for completed assessments or unabated assessments without any incriminating material found during a search under Section 132 or requisition under Section 132A of the Act. The Court has also clarified that completed or "unabated" assessments can be reopened under Sections 147 and 148 of the I-T Act, if any other material proof recovered by the assessing officer (AO) indicates that certain income has escaped assessment. This judgment is expected to have a significant impact on tax assessments conducted by the I-T department and could provide relief to taxpayers.
The author is a Chartered Accountant with 2 decades of experience into Accounting, Taxation, Auditing, Risk & Compliance, Credit Controls, Due diligence. Currently, the author is the founder and managing partner at RRL Global services.
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