2023 (3) TMI 1592 - AT - Income Tax

Time Limit for Assessment Under Section 153A and 143(3) Is 21 Months, Not 24 Months

Jignesh Hiralal Shah Versus ACIT, Central Circle 1 (2), Ahmedabad And (Vice-Versa)

Jignesh Hiralal Shah Versus ACIT, Central Circle 1 (2), Ahmedabad And (Vice-Versa) - TMI 1. ISSUES PRESENTED and CONSIDERED 1. Whether the assessment orders passed under section 153A read with section 143(3) of the Income Tax Act, 1961, are barred by limitation under the amended provisions of section 153B of the Act applicable from 1 June 2016. 2. Whether the period of limitation for completion of assessment under section 153B is 24 months or 21 months from the end of the financial year in which the last authorization for search under section 132 was executed. 3. The interpretation and application of the exclusion period under the Explanation to section 153B, specifically the exclusion of time due to references made to competent authorities under section 90/90A for exchange of information, and whether such exclusion extends or merely excludes time from the limitation period. 4. Whether the Commissioner of Income Tax (Appeals) erred in rejecting additional legal grounds raised at the appellate stage concerning limitation and validity of assessment orders. 5. Whether additions made under section 153A can be based solely on incriminating material found during the search of the assessee's premises, or whether material found from third parties can be used without following the procedure under section 153C. 6. Whether the Assessing Officer can make additions under section 153A in respect of regular income or expenses disclosed in the return in the absence of incriminating material found during search proceedings. 7. Whether the order passed under section 263 of the Act revising the assessment order is sustainable when the assessment order itself has been quashed on limitation grounds. 8. Miscellaneous technical grounds concerning procedural compliance under sections 153A, 153B, and 153C, including approval under section 153D and jurisdictional issues. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 & 2: Limitation period for completion of assessment under section 153B and its applicability post amendment Legal Framework and Precedents: Prior to the Finance Act 2016 amendment, the limitation period under section 153B was two years (24 months) from the end of the financial year in which the last authorization for search was executed. Post amendment effective 1 June 2016, the period was reduced to 21 months. Section 153B(3) provides that the pre-amendment provisions apply to assessments completed before 1 June 2016 or where notices under section 153A/153C were issued before that date and assessments remained incomplete due to exclusion of time. Court's Interpretation and Reasoning: The assessment order under challenge was passed on 29 December 2017, after 1 June 2016. The last authorization for search was executed on 3 February 2015, i.e., in the financial year ending 31 March 2015. Accordingly, the 21-month limitation period post amendment expired on 31 December 2016. The Tribunal held that the amended limitation period of 21 months applies, not the earlier 24 months. Key Evidence and Findings: The AO argued that the limitation period was extended by one year due to references made to competent authorities for exchange of information under section 90/90A, which had not been responded to within one year. The AO relied on the Explanation to section 153B excluding the period of such references (up to one year) from the limitation period calculation. Application of Law to Facts: The Tribunal examined the Explanation to section 153B, particularly clause (ix), which excludes from the limitation period the time from the date of first reference for exchange of information to the date when the requested information is received or one year, whichever is less. The proviso to the Explanation provides that if the remaining time after exclusion is less than 60 days, it shall be extended to 60 days. The Tribunal found that the first reference was made on 8 October 2015, and the maximum exclusion period of one year expired on 7 October 2016. Thus, after excluding one year, the AO had 85 days remaining (until 31 December 2016) to complete the assessment, which is more than the minimum 60 days extension. Therefore, no further extension of limitation was permissible beyond 31 December 2016. Treatment of Competing Arguments: The AO contended that the limitation period was extended by one year due to non-receipt of information from the competent authority, effectively extending the time limit to 31 December 2017. The Tribunal rejected this, emphasizing the statutory language 'excluded' (not 'extended') and the maximum exclusion period of one year, supported by judicial precedents emphasizing literal interpretation of unambiguous statutory language. Conclusions: The assessment order dated 29 December 2017 was beyond the 21-month limitation period expiring on 31 December 2016 and was therefore barred by limitation and liable to be quashed. Issue 3: Interpretation of exclusion period under Explanation to section 153B Legal Framework and Precedents: The Explanation to section 153B excludes from the limitation period the time spent in references to competent authorities under section 90/90A for exchange of information, up to a maximum of one year. The proviso mandates a minimum of 60 days extension if the remaining period is less than 60 days. Court's Interpretation and Reasoning: The Tribunal emphasized the use of the word 'excluded' in the statute, rejecting the AO's interpretation that the exclusion period amounts to an extension. It held that exclusion means the period is not counted towards the limitation period, but does not extend the overall time beyond the statutory maximum. Key Evidence and Findings: The Tribunal noted the first reference date and the maximum exclusion period of one year, and calculated the remaining time after exclusion to be 85 days, which is more than the 60 days minimum extension. Application of Law to Facts: The Tribunal applied the literal rule of statutory interpretation, supported by Supreme Court precedents emphasizing that unambiguous statutory language must be given its ordinary meaning. It rejected any purposive interpretation that would extend the limitation period beyond the statutory maximum. Conclusions: The AO's contention to extend the limitation period by one year was rejected; the exclusion period does not extend the limitation period beyond 21 months. Issue 4: Admission of additional legal grounds at appellate stage Legal Framework and Precedents: The Tribunal referred to Supreme Court authority holding that the Tribunal's powers under section 254 of the Act are wide and it can admit new legal grounds at any stage if the facts are on record and the ground is bona fide. Court's Interpretation and Reasoning: The learned CIT(A) rejected the additional legal ground raised by the assessee on limitation on the ground of no formal request and no explanation for delay. The Tribunal held this rejection erroneous because the CIT(A) had called for a remand report on the additional ground and therefore had considered it. The Tribunal held that purely legal grounds based on facts on record should be admitted to ensure correct tax liability assessment. Conclusions: The Tribunal allowed the additional legal ground raised by the assessee and proceeded to adjudicate it. Issue 5 & 6: Scope of additions under section 153A - reliance on incriminating material and use of third-party materials Legal Framework and Precedents: Section 153A provides for assessment or reassessment of income of a searched person for six assessment years. Section 153C applies to assessment of persons other than the searched person based on incriminating material found during search of third parties. The Hon'ble Gujarat High Court and various Tribunals have held that additions under section 153A must be based on incriminating material found during search of the assessee's premises. Use of third-party material without following section 153C procedure is impermissible. Court's Interpretation and Reasoning: The Tribunal agreed with the CIT(A) that no incriminating material was found during the search of the assessee's premises for the relevant years. The AO had made additions based on material found in searches of third parties without issuing notices under section 153C. The Tribunal held this to be non-compliance with mandatory provisions and judicial precedents, rendering additions under section 153A unsustainable. Key Evidence and Findings: The search was conducted on the Barter Group and other third parties, but no incriminating material was found at the assessee's premises. The AO's additions were based on third-party material, without invoking section 153C. Application of Law to Facts: The Tribunal applied the principle that section 153A assessments are confined to incriminating material found during search of the assessee. Use of third-party material requires separate proceedings under section 153C. The Tribunal relied on judicial decisions including the Gujarat High Court in Saumya Construction and Delhi High Court in CIT v. Kabul Chawla. Treatment of Competing Arguments: The Revenue argued that section 153A/153C does not restrict assessments to incriminating material only and that additions can be made on other grounds. The Tribunal rejected this, emphasizing settled judicial position and statutory scheme. Conclusions: Additions made under section 153A without incriminating material found during search of the assessee's premises and without following section 153C procedure for third-party material are unsustainable and liable to be deleted. Issue 7: Validity of revision under section 263 when assessment order is quashed Legal Framework and Precedents: Section 263 empowers the Commissioner to revise an order if it is erroneous and prejudicial to revenue. However, if the order itself is quashed by a competent authority, it ceases to exist for revision. Court's Interpretation and Reasoning: The Tribunal observed that the assessment order under section 153A read with section 143(3) was quashed on limitation grounds. Therefore, the order sought to be revised under section 263 did not subsist and could not be revised. Conclusions: The revision order under section 263 is not sustainable if the assessment order is quashed. The appeal against revision order is allowed accordingly. Issue 8: Miscellaneous technical grounds The Tribunal, having allowed the appeal on the primary technical ground of limitation, declined to adjudicate other technical grounds raised by the assessee, considering them infructuous. Similarly, issues raised by the Revenue on merits were dismissed as infructuous following the Tribunal's findings on limitation and incriminating material. 3. CONCLUSIONS 1. The limitation period for completion of assessment under section 153B post amendment is 21 months from the end of the financial year in which the last authorization for search under section 132 was executed. 2. The exclusion of time for references made to competent authorities under section 90/90A is limited to a maximum of one year and does not extend the limitation period beyond 21 months. 3. The assessment orders passed beyond the limitation period are barred and liable to be quashed. 4. Additional legal grounds concerning limitation can be admitted at appellate stage if facts are on record and the ground is bona fide. 5. Additions under section 153A can only be made on the basis of incriminating material found during search of the assessee's premises; use of third-party materials requires compliance with section 153C. 6. Assessments under section 153A cannot be disturbed in absence of incriminating material in unabated/completed assessment years. 7. Revision proceedings under section 263 cannot be sustained if the assessment order is quashed. 8. Other technical and merit-based grounds become infructuous once the primary grounds on limitation and incriminating material are decided.