2024 (7) TMI 1698 - HC - Income Tax

Section 153C can be invoked only for assessment years materially linked to seized evidence; AO must limit notices accordingly

HC held that invocation of s.153C requires the assessing officer to be satisfied that seized material is likely to bear on or affect the total income of ... Assessment u/s 153C - incriminating material as been found related to assessee or not? - HELD THAT:- Undisputedly, the issue now stands answered and covered in favour of the writ petitioner bearing in mind the principles that we had enunciated in Saksham Commodities Limited [2024 (4) TMI 461 - DELHI HIGH COURT] as held jurisdictional AO would have to firstly be satisfied that the material received is likely to have a bearing on or impact the total income of years or years which may form part of the block of six or ten AYs' and thereafter proceed to place the assessee on notice u/s 153C. The power to undertake such an assessment would stand confined to those years to which the material may relate or is likely to influence. Absent any material that may either cast a doubt on the estimation of total income for a particular year or years, the AO would not be justified in invoking its powers conferred by Section 153C. We allow the instant writ petitions and quash the impugned notices issued u/s 153C. ISSUES PRESENTED AND CONSIDERED 1. Whether a notice under Section 153C of the Income Tax Act can be validly issued where the AO's satisfaction relates to incriminating material pertaining to assessment years other than those for which the Section 153C notice was issued. 2. Whether the formation of satisfaction that recovered material is 'likely to have a bearing on the determination of the total income' must be made with reference to specific assessment year(s) before issuance of a Section 153C notice and consequent abatement/reopening of assessments. 3. The proper scope and temporal sequence of events under Section 153C vis-à-vis Section 153A - i.e., whether abatement/reopening for the block of relevant assessment years follows automatically upon receipt of material or only after a considered satisfaction by the jurisdictional AO. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Validity of Section 153C notices where AO's satisfaction pertains to different assessment years Legal framework: Section 153C permits the jurisdictional AO of a non-searched person to issue a notice and proceed with assessment/reassessment where books, accounts, documents, etc. seized or requisitioned in a search of another person are received and the AO is satisfied that such material is likely to have a bearing on the determination of total income for the relevant assessment years (the block of years immediately preceding the year of search). Precedent treatment: The Court expressly applied reasoning from a recent decision interpreting Sections 153A and 153C (referred to in the judgment) and followed the principles therein regarding identification of incriminating material vis-à-vis specific assessment years. Interpretation and reasoning: The Court found on the record that the Satisfaction Notes issued by the AO related to incriminating material for AYs 2010-11, 2011-12, 2014-15 and 2015-16, and that no incriminating material for the impugned AYs (for which the Section 153C notices were issued) had been identified. The Court reasoned that issuance of a Section 153C notice is justified only when the AO has formed a prima facie satisfaction that the material received is likely to impact the total income for specific assessment year(s). Absent such identification with the assessment year(s) to which the notice relates, the notice is ex facie unsustainable. Ratio vs. Obiter: Ratio - A Section 153C notice is invalid where the AO's satisfaction does not identify incriminating material as likely to affect the specific assessment year(s) to which the notice relates. The requirement that incriminating material be identified vis-à-vis the relevant assessment year(s) before issuing a Section 153C notice is central to the decision. Conclusion: The impugned Section 153C notices were quashed because the satisfaction related to other AYs and no incriminating material for the impugned AYs had been found; consequently the notices were invalid. Issue 2 - Necessity of forming satisfaction with reference to specific AY(s) before issuing Section 153C notice and triggering abatement/reopening Legal framework: Sections 153A and 153C operate on distinct statutory schemes. Section 153A is triggered by a search or requisition and leads to notice issuance for assessments of the searched person, while Section 153C requires receipt of material by the jurisdictional AO of a non-searched person and formation of a satisfaction that the material is likely to affect computation of income for specified assessment years. Precedent treatment: The Court adopted the construction that under Section 153C the AO must first examine and evaluate the contents of material received and form the opinion that it may have a bearing on particular AY(s) before issuing a notice and abating proceedings; it followed the earlier authority that distinguished the flow under Sections 153A and 153C. Interpretation and reasoning: The Court set out a sequential flow: (1) receipt of books/accounts/documents/assets by the jurisdictional AO; (2) evaluation/examination of contents; (3) assessment of potential impact on total income for the relevant AY block; (4) formation of satisfaction that material is likely to bear on specific AY(s); and only then (5) issuance of Section 153C notice and attendant abatement/reopening. The Court emphasized that abatement is a corollary of issuance of notice, which itself is predicated on the prior formation of the stated satisfaction. Ratio vs. Obiter: Ratio - The formation of satisfaction with respect to particular assessment year(s) precedes and authorizes issuance of a Section 153C notice and resultant abatement/reopening; abatement does not occur automatically upon mere receipt of material. Conclusion: The statutory scheme mandates that the AO must identify and be satisfied that recovered material is likely to influence the total income of particular AY(s) before invoking Section 153C and causing abatement; failure to do so invalidates the notice and any consequential proceedings. Issue 3 - Scope of Section 153C: confinement to years to which material relates; avoidance of sweeping invocation Legal framework: Section 153C permits assessment/reassessment for the block of assessment years but must be exercised in conformity with the requirement that the material received be shown to relate to or be likely to influence computation of income for specific year(s) within that block. Precedent treatment: The Court relied on the earlier exposition that rejected a mechanical, sweeping application of Section 153C across the entire block of relevant assessment years merely because power exists to do so; instead, the power is confined by the AO's satisfaction as to the years affected. Interpretation and reasoning: The Court held that the term 'incriminating material' must be identified with respect to the particular AY to which it relates or may be likely to impact. The mere existence of statutory power to assess or reassess the block of years does not justify indiscriminate invocation of Section 153C. The AO's power is confined to those years to which the material may relate or influence; absent material casting doubt on estimation of income for a particular year, Section 153C cannot be invoked. Ratio vs. Obiter: Ratio - The exercise of Section 153C power is confined to those assessment years to which the material relates or is likely to relate; indiscriminate or sweeping invocation across the block of years is impermissible. Conclusion: Section 153C may be invoked only in respect of those specific assessment year(s) that the seized/requisitioned material is shown to affect; the impugned notices were quashed because this requirement was not met. Cross-references and Application 1. Issues 1-3 are interrelated: the validity of a Section 153C notice (Issue 1) depends on the statutory sequence and required formation of satisfaction (Issue 2) and the confined scope of assessment years to which the material relates (Issue 3). 2. The Court followed and applied the principles articulated in the earlier authority addressing Sections 153A and 153C, treating those principles as directly governing the instant petitions and forming the basis for quashing the notices and consequential proceedings.