When seized records implicate another person, tax authorities must use Sections 153C/153A and 153A-153D, not Section 148 reassessment

HC held that where incriminating material seized in a search of one entity relates to another person, the AO must, upon fulfilment of statutory prerequisites, proceed under Sections 153C/153A and follow the special procedure in Sections 153A-153D. Those special provisions prevail over general reassessment under Section 148 for matters arising from seized material. The Department failed to show any material beyond the seized records to justify issuance of notices under Section 148. Consequently the notices issued under Section 148 and the impugned assessment orders were quashed.

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Issues Involved:
1. Applicability of Sections 153C and 148 of the Income Tax Act in case of seizure of material in search or requisition of books/documents relating to an assessee other than the one on whom the search was conducted or requisition made.

Summary:

Issue of Jurisdiction under Section 148:
The writ petition challenges the notice issued u/s 148 of the Income Tax Act, 1961, and the order rejecting objections to the issuance of the notice. The petitioner argued that the notice should have been issued u/s 153C, a special provision for search cases, and not u/s 148, citing Karnataka High Court and Bombay High Court decisions. The respondents contended that Sections 153A to 153D do not eclipse Section 148 and that the Department can proceed under Section 148 even in search cases, relying on Supreme Court decisions.

History of Special Provisions:
The Finance Act, 1995, introduced Sections 158B to 158BG for special assessment procedures in search cases. The Finance Act, 2003, replaced these with Sections 153A to 153D, which mandated separate orders for each assessment year and included all income sources. The Finance Act, 2021, amended Section 153A, restricting its applicability to searches before 31.03.2021, and introduced new provisions for Section 148 effective from 1.4.2021.

Analysis of Sections 153A and 153C:
Section 153A mandates the AO to issue notices for six assessment years preceding the search year. Section 153C applies to persons other than the one searched if the seized material relates to them. The AO must hand over the material to the jurisdictional AO, who then proceeds under Section 153A. Both sections have an overriding effect over regular assessment provisions.

Case Law:
The Supreme Court in Abhisar Buildwell P. Ltd. held that in absence of incriminating material during a search, the AO cannot reassess completed/unabated assessments but can proceed u/s 147/148. The respondents' reliance on M.R. Shah Logistics Pvt. Limited was found inapplicable as it did not address the interplay of Sections 147/148 and 153C. The Karnataka High Court in Sri Dinakara Suvarna and Bombay High Court in M/s. Aditi Constructions supported the petitioner's argument that Section 153C should be invoked in search cases involving third-party material.

Conclusion:
The court quashed the notices issued u/s 148 and the impugned orders, stating that the Department can proceed against the petitioners in accordance with the law. The court did not address other grounds raised for challenging the notice u/s 148 due to the acceptance of the primary ground. The writ petitions were allowed, with interim protection granted during the pendency of the petitions.

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