The Supreme Court has held that the income tax (I-T) department cannot reopen completed assessments under the Section 153A of the I-T Act, unless “incriminating material” is unearthed during search and seizure operations. Any other material emanating from the search can’t be relied on for issuing re-assessment orders.
The ruling, tax experts said, could give much relief to taxpayers, as it reduces the scope for arbitrary re-assessments by the taxman. A battery of current litigation is due to reassessment orders not supported by incriminating material under Section 153A, which was withdrawn in 2021, but remains applicable to past cases.
However, the court said that completed or “unabated” assessment can be reopened under Section 147 and 148 of the I-T Act, if “any other material proof” recovered by the assessing officer (AO) indicate certain income has escaped assessment. Essentially, these two Sections allow the AO to reassess returns in case any income stream other than disclosed by the taxpayer is detected by her and she holds proof of that.
Section 153A outlines the system for assessing income in the case of a “searched person”, as per which the AO could reopen assessment of the tax return filed by such person for six assessment years immediately proceeding the year of search, provided incriminating material is discovered during the search procedure. Though this is the legal position, in an increasing number of instances, reassessment orders have been issued with addition to income, without any unearthing of incriminating material, and relying on other material emanating from search. The SC order virtually bars the tax authorities from adopting such practice.
“…in case no incriminating material is unearthed during the search, the AO cannot assess or reassess taking into consideration the other material in respect of completed assessments or unabated assessments. Meaning thereby, in respect of completed or unabated assessments, no addition can be made by the AO in absence of any incriminating material found during the course of search under Section 132 or requisition under Section 132A of the Act, 1961,” said the ruling by Supreme Court judges MR Shah and Sudhanshu Dhulia.
The ruling came in respect to a number of appeals filed by the revenue department, which were dismissed by the apex court.