2024 (3) TMI 1481 - HC - Income Tax

Section 153C assessment set aside for lack of hearing; treated as show-cause notice, taxpayer given 15 days to reply

M/s. Jaihan Infrastructure, Represented by its Partner T. Parvatham Versus The Deputy Commissioner of Income Tax, Office of the Deputy Commissioner of Income Tax, Central Circle-1 (4), Chennai

HC held that an assessment framed under section 153C, completed on a best-judgment basis after material unearthed in a 2012 search, required interference ... Assessment framed u/s 153C - period of limitation -satisfaction note as recorded belatedly - HELD THAT:- The profit was attributed to the petitioner on the basis of the registration of the immovable property in the name of M/s.Sree Sathyanarayana Enterprises. Such assessment was made on best judgment basis because the petitioner had not shown cause in response to the notice. Although the respondent cannot be faulted for completing the assessment on best judgment basis in the facts and circumstances, it is also clear that an assessment was made several years after the petitioner filed the return of income on the basis of material unearthed in course of search in 2012. When these facts and circumstances are considered cumulatively, I am of the view that it is appropriate that the petitioner be provided an opportunity of being heard before the reassessment is concluded. Solely for this reason, the impugned assessment order calls for interference. Consequently, the impugned assessment order is directed to be treated as a show cause notice. The petitioner shall file a reply on such basis within a maximum period of 15 days from the date of receipt of a copy of this order. ISSUES PRESENTED AND CONSIDERED 1. Whether an assessment framed under Section 153C based on documents seized in a search at a third person's premises is vitiated where the satisfaction note invoking Section 153C was recorded belatedly several years after filing of the return, particularly when the assessing officer for the searched person and the assessee is the same. 2. Whether interference under Article 226 is appropriate where an assessee has a statutory remedy of appeal against an assessment framed under Section 153C. 3. Whether an assessment completed on a best judgment basis without providing the assessee an opportunity of being heard (personal hearing / reply) is sustainable, and if not, what remedial direction is appropriate. ISSUE-WISE DETAILED ANALYSIS Issue 1: Validity of Section 153C assessment where satisfaction note was recorded belatedly and the assessing officer was common Legal framework: Section 153C permits assessment of a person other than the searched person where material seized in a search relates to that other person, upon recording of a satisfaction note by the officer conducting the search. Limitation under Section 153C is measured from the date of the relevant information/seizure as reflected in the provision (proceedings within six years in relevant facts). Precedent treatment: No specific precedent was applied or distinguished in the judgment; the Court confined itself to statutory scheme and facts. Interpretation and reasoning: The Court accepted that the search occurred prior to the return filing and that the satisfaction note was recorded years later (search on 11.10.2012; satisfaction recorded 27.03.2019). It was also not disputed that the assessing officer for the searched person and for the assessee were the same person, and that material seized linked the assessee to a disposal of property and an alleged profit. The Court observed that, although the assessment may fall within the six year period permissible under Section 153C, the belated recording of satisfaction and subsequent transfer/processing by the same assessing officer several years after return filing raises fairness concerns. The Court treated these cumulative facts as relevant to the exercise of writ jurisdiction to secure a fair opportunity to the assessee. Ratio vs. Obiter: Ratio - where an assessment under Section 153C is made years after return filing on the basis of material seized earlier, and the assessing officer is common to the searched person and the assessee, the belated recording of satisfaction and the timing of reassessment justify judicial intervention to ensure the assessee is afforded an opportunity to be heard before such reassessment is finalized. (The Court did not declare Section 153C invalid or extinguish its operation; it directed procedural remediation.) Conclusions: The Court held that, notwithstanding that proceedings may fall within the statutory limitation, the circumstances of belated satisfaction recording and common assessing officer justified interference limited to ensuring procedural fairness (see Issue 3 for remedial directions). Issue 2: Availability of writ relief where statutory appeal remedy exists Legal framework: Statutory scheme provides an appeal against an assessment order; ordinarily, administration of tax matters is subject to statutory appellate remedy, and judicial interference under Article 226 is generally restrained where efficacious alternate remedy exists. Precedent treatment: No authority was cited; the Court applied established administrative-law principles as reflected in the facts. Interpretation and reasoning: The Court acknowledged the respondent's submission that the assessee had the option of filing a statutory appeal. However, it did not view the existence of an appellate remedy as an absolute bar to writ relief when the impugned order was of a character so as to prejudice the fundamental right to be heard - specifically an assessment completed on a best judgment basis without any prior opportunity to respond to material discovered in search. The Court thus balanced the availability of appeal against the need to remedy a denial of opportunity before permitting the assessment process to be finalized. Ratio vs. Obiter: Ratio - existence of statutory appeal does not preclude limited judicial intervention under Article 226 where immediate corrective relief is necessary to secure the right to be heard before reassessment is finalized; the intervention is confined to affording an opportunity rather than substituting appellate review. Conclusions: The Court declined to refuse relief solely on the ground of available appeal; instead it directed procedural steps to cure the lack of hearing, leaving substantive appellate remedy intact. Issue 3: Sustenance of best judgment assessment made without giving opportunity of being heard and appropriate remedy Legal framework: Principles of natural justice require that an assessee be given an opportunity to show cause and a hearing before a final adverse assessment is made; assessments made on best judgment basis are permissible where the assessee fails to respond, but fairness requires that the assessee be given a chance to be heard when material is based on a third-party search and return had been filed earlier. Precedent treatment: The Court did not rely on external precedent; it applied the statutory and constitutional principle of audi alteram partem to the facts. Interpretation and reasoning: The assessment attributed a profit to the assessee on the basis of seized loose sheets and diary entries indicating registration of part of the land in the name of a third firm and valuing the property. The assessment was completed on best judgment because the assessee did not respond to notice. The Court held that, given the timing (return filed years earlier), the source of material (seized in third-party search), and the fact that the assessing officer recorded satisfaction belatedly, procedural fairness required treating the impugned order as a show cause notice and giving the assessee a fresh opportunity to reply and to be heard (including personal hearing) before a fresh assessment is passed. The Court framed specific directions (treat order as show cause, 15 days to file reply, AO to give hearing and pass fresh order within two months of reply). Ratio vs. Obiter: Ratio - where an assessment on a best judgment basis is founded on material seized from a third person and the assessee was not afforded an opportunity to respond (particularly where the satisfaction was recorded belatedly), the appropriate remedy is to treat the impugned assessment as a show cause notice, afford a time-bound opportunity to reply and hear the assessee, and thereafter pass a fresh assessment within a prescribed timeframe. This remedial direction constituted the operative ruling of the Court. Conclusions: The Court set aside the impugned assessment to the extent that it must be treated as a show cause notice, ordered a 15-day period for reply, directed a reasonable and personal hearing, and required the assessing officer to pass a fresh assessment within two months of receipt of the reply; no costs were awarded.