2025 (2) TMI 869 - HC - Income Tax

Revenue cannot initiate Section 153C proceedings without AO forming opinion that seized material impacts assessment

Pr. Commissioner Of Income Tax (Central) -3 Versus M/s. Ridgeview Construction Pvt. Ltd.

The Delhi HC upheld the Tribunal's decision annulling assessments under Section 153C. The Court held that proceedings under Section 153C cannot be ... Validity of proceedings initiated u/s 153C - no incriminating material was found during the search pertaining to the AYs in which the additions have been made - HELD THAT:- While and undoubtedly Section 153C as it stood at the relevant time did not contemplate a two tier recordal of satisfaction and the AO of the searched person was merely obliged to transmit the material belonging or pertaining to a third person gathered in the course of a search, proceedings under the said provision could not have been triggered mechanically absent the formation of opinion by the AO of the non-searched person that the material was likely to impact an assessment made. We are of the considered view that the subsequent introduction of the words “have a bearing on” in the provision was not an introduction of a new obligation upon the AO. The primordial requirement of the material relating to undisclosed income had existed even prior to the amendments introduced in 2015 and which position has been consistently recognized by our Court including in RRJ Securities and the host of precedents which followed. This would also appeal to reason since the family of provisions concerned with search were intended to enable the AO to utilise the material that may have been uncovered in a search to test the validity of assessments completed or the veracity of the disclosures made by assessees. The provisional Balance Sheet could not be said to be reflective of affairs pertaining to AYs 2004-05 and 2005-06. It was clearly not a document which displayed carried forward or past entries of income or expenditure. The Tribunal was thus justified in annulling the assessment undertaken. Decided against revenue. ISSUES PRESENTED and CONSIDEREDThe core legal question considered was whether the Income Tax Appellate Tribunal (ITAT) was legally justified in quashing the proceedings initiated under Section 153C of the Income Tax Act, 1961, on the grounds that no incriminating material was found during the search pertaining to the assessment years (AYs) 2004-05 and 2005-06.ISSUE-WISE DETAILED ANALYSISRelevant Legal Framework and PrecedentsSection 153C of the Income Tax Act, 1961, allows for the assessment of income of any person other than the person searched, provided that certain conditions are met, including the presence of incriminating material that pertains to the relevant assessment years. The legal framework requires that the material seized must relate to undisclosed income for the assessment years in question. The amendments introduced by the Finance Act, 2015, expanded the scope of Section 153C by including the phrase 'pertains to' in addition to 'belongs to.'Precedents considered include the Supreme Court's decision in Commissioner of Income Tax-III v. Sinhgad Technical Education Society, which emphasized that incriminating material must pertain to the assessment years in question for a valid assessment under Section 153C. Additionally, the judgment in SSP Aviation Limited v. Deputy Commissioner of Income Tax was referenced for its interpretation of the requirements under Section 153C.Court's Interpretation and ReasoningThe Court interpreted that the provisional Balance Sheet, which was seized during the search, did not pertain to the AYs 2004-05 and 2005-06. It was noted that the Balance Sheet was dated 30 September 2005 and did not contain any references or transactions relevant to the assessment years in question. The Court reasoned that the mere existence of a document bearing the name of the assessee does not automatically imply that it pertains to the relevant assessment years or that it is incriminating.Key Evidence and FindingsThe key evidence was the provisional Balance Sheet of Ridgeview Construction Private Limited, which was seized during the search. The Court found that this document did not contain any incriminating material related to the AYs 2004-05 and 2005-06. The Court also considered the statement of Mr. Suresh Kumar Gupta, who was involved in the operations of various companies, but found no direct link to the assessment years in question.Application of Law to FactsThe Court applied the legal framework of Section 153C and the relevant precedents to the facts of the case. It concluded that the provisional Balance Sheet did not qualify as incriminating material for the assessment years in question. The Court emphasized that the initiation of proceedings under Section 153C requires a clear link between the seized material and the assessment years, which was absent in this case.Treatment of Competing ArgumentsMr. Menon, counsel for the appellant, argued that the provisional Balance Sheet was relevant for examining transactions pertaining to the AYs 2004-05 and 2005-06. He contended that the amendments to Section 153C should apply retrospectively. However, the Court dismissed these arguments, stating that the Balance Sheet did not pertain to the assessment years in question and that the amendments did not alter the requirement for material to be incriminating and relevant to the specific years.ConclusionsThe Court concluded that the ITAT was justified in quashing the proceedings under Section 153C, as the seized material did not pertain to the assessment years in question. The appeals were dismissed, affirming the Tribunal's decision.SIGNIFICANT HOLDINGSPreserve Verbatim Quotes of Crucial Legal ReasoningThe Court emphasized, 'The aspect of material being incriminating and the same being a consistent requirement underlying Section 153C of the Act can perhaps no longer be doubted.'Core Principles EstablishedThe Court reaffirmed that for proceedings under Section 153C to be valid, the seized material must be incriminating and pertain to the specific assessment years in question. The amendments to Section 153C did not introduce new obligations but clarified existing requirements.Final Determinations on Each IssueThe Court determined that the provisional Balance Sheet did not pertain to AYs 2004-05 and 2005-06 and thus did not justify the initiation of proceedings under Section 153C. The appeals were dismissed, and the ITAT's decision was upheld.