2023 (7) TMI 1515 - AT - Income Tax

ITAT quashes Section 147 assessment proceedings when incriminating material found during third party search requires Section 153C instead

ITAT Delhi quashed assessment proceedings under Section 147 where incriminating material regarding payment to Santosh Medical College was found during ... Applicability of section 153C vis-a -vis section 147 - Validity of reassessment notices issued under section 148/147 when incriminating material is seized from a third person - Quashing of reassessment proceedings as void ab initio - Framing of assessment on basis of material seized during search of another personApplicability of section 153C vis-a -vis section 147 - Validity of reassessment notices issued under section 148/147 when incriminating material is seized from a third person - Quashing of reassessment proceedings as void ab initio - Reassessment proceedings initiated under section 147/148 were not valid where the incriminating material leading to reassessment was found in a search of another person and assessment ought to have been initiated under section 153C. - HELD THAT: - The Tribunal found on the material on record that a search on Santosh Group of Medical Institution resulted in seizure and confessional material identifying payment by the assessee during FY 2011-12 relevant to AY 2012-13. The Assessing Officer reopened assessment invoking section 147 on the basis of information received from the Investigation Wing. Reliance was placed on coordinate decisions holding that where incriminating material is found in the search of a third person, the statutory scheme of section 153C applies and excludes the operation of section 147. Applying that settled position, the Tribunal concluded that the AO erred in invoking section 147 instead of following the procedure under section 153C; consequently the notice under section 148 and all proceedings and orders pursuant thereto are void ab initio and required to be quashed. [Paras 6, 7, 8, 10, 11]Reasons recorded under section 147 and the reassessment proceedings (including the assessment order and the CIT(A) order) are quashed; appeal is partly allowed.Final Conclusion: The reassessment initiated under section 147/148 was void because incriminating material was seized during a search of a third person and assessment, if any, ought to have been framed under section 153C; the reassessment order and the CIT(A)'s order are quashed and the appeal is partly allowed. Issues:1. Validity of assessment under section 147/148 versus section 153C of the Income Tax Act.2. Admissibility of incriminating material found during a search.3. Compliance with principles of natural justice and opportunity of cross-examination.Analysis:Issue 1: Validity of assessment under section 147/148 versus section 153C of the Income Tax ActThe appellant contended that the assessment should have been made under section 153C of the Act, as the reopening was based on documents/information found during a search. The appellant relied on judicial pronouncements to support this argument. The Departmental Representative, on the other hand, supported the orders of the lower authorities. The Tribunal analyzed the reasons recorded for reopening the assessment, which were based on information received during a search at Santosh Group of Medical Institution. The Tribunal referred to a Co-ordinate Bench decision where it was held that in cases where incriminating material is found during a search of a third party, provisions of section 153C should be applied, excluding sections 147 and 148. Consequently, the Tribunal found that the AO erred in invoking section 147 instead of section 153C, leading to the quashing of the assessment order and the CIT(A) order.Issue 2: Admissibility of incriminating material found during a searchThe Tribunal noted that during the search at Santosh Group of Medical Institution, incriminating material was found regarding the payment of capitation fees by the appellant to the institution. The Tribunal emphasized that since the appellant was not assessed under section 153C, which specifically excludes the operation of section 147, the AO's decision to proceed under section 147 was incorrect. The Tribunal highlighted that the incriminating material found during the search of a third party should have triggered the application of section 153C, rendering the assessment under section 147 invalid.Issue 3: Compliance with principles of natural justice and opportunity of cross-examinationThe appellant raised concerns about the violation of natural justice principles, specifically the lack of opportunity for cross-examination. However, the Tribunal's decision to quash the assessment order and the CIT(A) order was primarily based on the incorrect application of sections 147/148 instead of section 153C. The Tribunal did not delve into the issue of natural justice violations due to the fundamental flaw in the assessment proceedings.In conclusion, the Tribunal allowed the appellant's appeal, quashing the assessment order and the CIT(A) order. The decision was based on the incorrect invocation of sections 147/148 instead of section 153C, as per the settled legal position.