2025 (5) TMI 1672 - HC - Income Tax

Reassessment Rules Clarified: Tax Officer Can Complete Pending Assessment Without Incriminating Evidence Under Section 153A

The SC clarified the scope of Section 153A in income tax reassessments. The court held that when an assessment is pending and abates upon search notice ... Assessment u/s 153A - Whether any incriminating material during the course of search for the relevant Assessment Year? - ITAT had held that the assessment was pursuant to the search that was conducted on 14.11.2011 and was in respect of unabated assessment and, therefore, the said assessment could be reopened for reassessment only on the basis of the incriminating material found during the search. HELD THAT:- The facts as obtaining in the present case clearly indicate that the assessment in respect of AY 2006-07 had abated and therefore, learned ITAT had proceeded on an ex-facie erroneous premise that the assessment for the AY 2006-07 has not abated and had been reopened. The assessment order as initially framed on 24.12.2009 had been set aside by the appellate order dated 28.06.2013. CIT(A) initiated proceedings under Section 263 of the Act, which culminated into the order dated 20.03.2012 wherein the assessment order dated 24.12.2009 was set aside on certain issues and the AO was directed to pass fresh assessment order. In the meanwhile, a search was conducted in the premises of the Assessee u/s 132 of the Act. Pursuant to the said search, a notice dated 19.10.2012 was issued under Section 153A of the Act which culminated in an assessment order dated 13.03.2015. Thus, on the date of the search and the issuance of notice under Section 153A of the Act, the assessment proceedings were live and pending before the AO pursuant to the directions issued by the CIT(A) under Section 263 of the Act. By virtue of the notice under Section 153A of the Act, the said assessment proceedings abated. Thus, ITAT’s conclusion that no assessment could be made other than on the basis of incriminating material in respect of AY 2006-07 is, prima facie, erroneous. In cases of assessments which are pending and abated on account of issuance of notice under Section 153A of the Act, the AO has power to complete the assessment in accordance with law. The power of the AO to frame the assessment is not conditional on incriminating material being found during the search proceedings. This is obvious because in case of abated assessment, the initial assessment does not exist and a fresh assessment is required to be made. However, in case of concluded assessments, the proceedings initiated under Section 153A may be called in question on account of absence of any incriminating material found during the search. Suffice it to say that the learned ITAT has proceeded on an ex-facie erroneous premise that the assessment for AY 2006-07 had abated and, therefore, the impugned order is required to be set aside. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered by the Court include:Whether the Income Tax Appellate Tribunal (ITAT) erred in law by holding that the assessment for Assessment Year (AY) 2006-07 was unabated and that no proceedings under Section 153A of the Income Tax Act, 1961 (the Act) could be undertaken in the absence of incriminating material found during a search.Whether the reopening and reassessment of AY 2006-07 pursuant to a search and notice under Section 153A was valid, particularly considering the status of the assessment as abated or concluded at the time of the search.The scope and limitations on the Assessing Officer's (AO) power to complete assessment proceedings in cases where assessments have abated due to issuance of notice under Section 153A, especially in relation to the requirement of incriminating material.Whether the claim regarding subsidy on account of sales tax, which was not raised before the AO but raised before the Commissioner of Income Tax (Appeals) (CIT(A)), should have been entertained.2. ISSUE-WISE DETAILED ANALYSISIssue 1: Validity of reopening assessment under Section 153A in absence of incriminating material and status of assessment as abated or concludedRelevant legal framework and precedents: Section 153A of the Income Tax Act empowers the AO to assess or reassess income when a search or seizure is conducted under Section 132. The Supreme Court's decision in Principal Commissioner of Income-tax, Central-3 v. Abhisar Buildwell (P.) Ltd. was cited by the ITAT to support the proposition that reassessment under Section 153A is permissible only if incriminating material is found during the search.Court's interpretation and reasoning: The Court found the ITAT's premise erroneous in holding that the assessment for AY 2006-07 was unabated and concluded. The facts demonstrated that the assessment had abated due to the issuance of notice under Section 153A following the search. Prior to the search, the assessment was pending in light of the CIT(A)'s direction under Section 263 to the AO to pass a fresh assessment order. Thus, the assessment proceedings were live and abated on issuance of the Section 153A notice.The Court reasoned that when an assessment abates due to issuance of a Section 153A notice, the AO's power to complete the assessment afresh is not contingent upon the discovery of incriminating material during the search. This is because the abated assessment ceases to exist and requires a fresh assessment. The requirement of incriminating material applies only to cases where the assessment is already concluded and reopening is sought under Section 153A.Key evidence and findings: The sequence of events showed that the initial assessment order dated 24.12.2009 was set aside by the CIT(A) on 28.06.2013, and the CIT(A) had directed the AO under Section 263 to pass a fresh assessment order. The search was conducted on 14.11.2011, and notice under Section 153A was issued on 19.10.2012. Since the assessment was pending and not concluded, it abated upon issuance of the Section 153A notice.Application of law to facts: Given the abatement of assessment, the AO was empowered to complete the assessment without the necessity of incriminating material found during the search. The ITAT's reliance on the absence of incriminating material to quash the assessment was therefore misplaced.Treatment of competing arguments: The appellant argued that the assessment was pending and abated, allowing reassessment under Section 153A without incriminating material. The ITAT had held otherwise, relying on Supreme Court precedent to require incriminating material for reopening. The Court rejected the ITAT's approach as based on an incorrect factual premise.Conclusions: The Court concluded that the ITAT's order was based on an erroneous premise that the assessment was unabated and concluded. The AO's power to reassess after abatement under Section 153A is not conditional on incriminating material. Accordingly, the ITAT's quashing of the assessment order was set aside and the matter remanded for fresh consideration.Issue 2: Admissibility of the additional claim regarding sales tax subsidy not raised before AORelevant legal framework and precedents: Generally, claims not raised before the AO may be disallowed at appellate stages unless substantiated by adequate evidence and reflected in the accounts or audit reports.Court's interpretation and reasoning: The CIT(A) had declined to entertain the claim regarding subsidy on sales tax on the ground that it was not raised before the AO and was not reflected in the final accounts or tax audit report. The ITAT did not specifically address this issue in detail, focusing instead on the validity of the reassessment under Section 153A.Key evidence and findings: The claim was not substantiated by the Assessee before the AO and was absent from the audited financial statements.Application of law to facts: Since the claim was not substantiated or reflected in the accounts, the CIT(A)'s refusal to entertain the claim was justified. The Court did not find it necessary to delve deeper into this issue given the primary focus on the assessment's validity.Treatment of competing arguments: The appellant sought to raise this claim at the appellate stage, but the authorities held that it could not be entertained due to lack of prior substantiation. The Court did not intervene on this point.Conclusions: The issue of the sales tax subsidy claim was not allowed to be raised belatedly and was not examined further by the Court.3. SIGNIFICANT HOLDINGSThe Court established the following core principles and made key determinations:'In cases of assessments which are pending and abated on account of issuance of notice under Section 153A of the Act, the AO has power to complete the assessment in accordance with law. The power of the AO to frame the assessment is not conditional on incriminating material being found during the search proceedings.'The ITAT's conclusion that no assessment could be made other than on the basis of incriminating material in respect of AY 2006-07 was 'prima facie erroneous' because it was based on the incorrect premise that the assessment had not abated.The assessment proceedings abated on issuance of notice under Section 153A, as the assessment was pending pursuant to directions under Section 263, and therefore the AO was entitled to complete the assessment afresh.The Court set aside the impugned ITAT order and remanded the matter to the ITAT for fresh consideration based on the correct factual premise regarding abatement of assessment.