2025 (2) TMI 870 - HC - Income Tax

Reassessment under Section 147/148 invalid when based on seized materials from search operations under Section 132

Sejal Jewellary & Anr., Shineshilpi Jewellers Pvt. Ltd., Shilpin Khyalilal Tater, Khyalilal Mohanlal Tater, Symphony Pvt. Co., Symphony, Rekha Rajneesh Mehta, Neelam Promod Mehta, Ashokkumar Bhanwarlal Tated, Pramod Surendra Kumar Mehta, and Unitouch creations LLP Versus Union of India & Ors.

The Bombay HC held that reassessment proceedings under Section 147/148 based on materials seized during search operations under Section 132 are invalid ... Validity of reassessment proceedings on the basis of a search action u/s 132 - HELD THAT:- As in the event any incriminating material is found during the search, the Revenue necessarily would be required to take recourse to the provisions of Section 153A and in the event no incriminating material found during the search, then the power of the Revenue to have the reassessment u/s 147/148 stands saved, failing which, the Revenue would be left without remedy. Rajasthan High Court in Shyam Sunder Khandelwal s/o. Late Damodar Lal Khandelwal [2024 (4) TMI 196 - RAJASTHAN HIGH COURT] also had taken a similar view when the issue which had arisen before the Court was in regard to the notice issued u/s 148 the basis of issuance of such notice was the material seized during search. The contention of the assessee was to the effect that in the said circumstances, the proceedings ought to have been initiated u/s 153C. The Division Bench referring to the decision of Supreme Court in Abhisar Buildwell P. Ltd. [2023 (4) TMI 1056 - SUPREME COURT] as also the decision of Sri Dinakara Suvarna [2022 (7) TMI 800 - KARNATAKA HIGH COURT] allowed the petitions observing that the department had not set up a case, that for initiating proceedings under Section 148, it had material other than the material seized during the search of a related party. We are of the clear opinion that the foundation of the present case was certainly a search action which was undertaken by the Revenue against one Shilpi Jewellers Pvt. Ltd. and in such search and seizure action, materials were seized and such materials were further explored and enquired. Such enquiry revealed significant information in regard to M/s. Green Valley Gems Pvt. Ltd., which according to the Revenue had provided accommodation entries to the petitioner, in which it was also revealed that Green Valley Gems Pvt. Ltd. was a shell company. We do not find that the record would indicate something which is not on the basis of such new materials gathered under the search and seizure action under Section 132. There cannot be any doubt on the position in law when the Revenue intends to proceed purely on materials relevant for an action under Section 148 r.w.s. 147. The provisions of Sections 147, 148 vis-a-vis Section 153A and Section 153 are quite compartmentalized. To avoid any overlapping of these provisions, the legislature in its wisdom has thought it appropriate to provide for an independent effect, to be given u/s 153A r.w.s. 153C by incorporating the “non-obstante” clause, in these provisions, which carves out an exception to any normal/regular action being resorted u/s 147. We are of the clear opinion that the impugned notice u/s 147 and all actions consequent thereto are required to be held to be without jurisdiction and bad in law. The petition is accordingly allowed in terms of prayer clauses (a) and (b). 1. ISSUES PRESENTED and CONSIDEREDThe core legal issue considered was whether the respondent was correct in issuing a notice under Section 148 of the Income-tax Act, 1961, based on a search action under Section 132, instead of proceeding under Section 153A or 153C, which specifically deal with assessments following a search or requisition.2. ISSUE-WISE DETAILED ANALYSISRelevant Legal Framework and PrecedentsThe legal framework primarily involved Sections 147, 148, 153A, and 153C of the Income-tax Act, 1961. Section 147 pertains to income escaping assessment, allowing for reassessment if the Assessing Officer has reason to believe income has escaped assessment. Sections 153A and 153C relate to assessments following a search or requisition, with Section 153A providing for assessments in the case of a search and Section 153C dealing with assessments of income of any other person when materials are seized during a search.The Supreme Court in Abhisar Buildwell Pvt. Ltd. and other precedents like Kabul Chawla and Saumya Construction were crucial in interpreting these sections, particularly emphasizing that Section 153A must be invoked when a search action is the basis for reassessment.Court's Interpretation and ReasoningThe Court emphasized the non-obstante clauses in Sections 153A and 153C, which override other sections, including Section 147, when a search has been conducted. It noted that these sections are specifically designed to deal with assessments following a search and have an overriding effect on the general provisions for reassessment under Section 147.Key Evidence and FindingsThe evidence central to the case was the material seized during the search of Shilpi Jewellers Pvt. Ltd., which was used to issue the notice under Section 148 to the petitioner. The Court found that the materials seized during the search were the basis for the reopening of the assessment, indicating that the proper procedure under Section 153A or 153C should have been followed.Application of Law to FactsThe Court applied the legal principles from the Supreme Court's decision in Abhisar Buildwell Pvt. Ltd., which mandates that when a search is conducted, the assessment must proceed under Section 153A. It found that the Assessing Officer's action to proceed under Section 147 was incorrect, as the search action was the foundation for the notice.Treatment of Competing ArgumentsThe petitioners argued that the reopening should have been under Section 153A, as the basis was a search action, while the respondents contended that Section 147 was applicable as no incriminating material was found directly against the petitioner. The Court sided with the petitioners, emphasizing that the search action's findings necessitated proceedings under Section 153A or 153C.ConclusionsThe Court concluded that the notice under Section 148 was without jurisdiction and bad in law, as the appropriate procedure under Sections 153A and 153C was not followed.3. SIGNIFICANT HOLDINGSCore Principles EstablishedThe Court reinforced the principle that Sections 153A and 153C, being special provisions with non-obstante clauses, take precedence over Section 147 when a search action is the basis for reassessment. It emphasized that these sections must be invoked when the foundation for reopening an assessment is a search action.Final Determinations on Each IssueThe Court determined that the notice issued under Section 148 was without jurisdiction and invalid. It held that the proper course of action was to proceed under Section 153A or 153C, given the search action's findings.The petitions were allowed, and the notices under Section 148 were quashed, with the Court making the rule absolute in favor of the petitioners.