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ASSESSMENT OF SEARCH CASES, C. A. VIPIN K.GUJARATHI

INTRODUCTION

The Finance Act 2003 has introduced a new scheme under section 153A, 153B and 153C of the Income Tax Act 1961 in respect of assessment in the cases where search action is initiated after 31st May 2003 or the books of accounts, documents or assets are requisitioned after 31st May 2003. The special provision of assessment of search cases which were introduced with effect from 1st July 1995 vide Chapter XIV-B are done away with by the Finance Act 2003 with effect from 1st June 2003. The abolition of Chapter XIV-B was based on the recommendation of Kelkar Committee. However, there being no recommendation from Kelkar Committee to introduce any alternative scheme of special assessment in respect of taxpayer subjected to search, the revenue has enacted new provisions in section 153A, 153B, & 153C with effect from 1st June 2003. In the short span of about 8 years the Government has found that the provisions of Chapter XIV-B not serving the objectives for which they were introduced. The omission of the entire Chapter clearly conveys that adequate and intelligent exercise, necessary for introduction of fundamental changes in the assessment of search cases, was not carried out before introduction of Chapter XIV-B. The failure is evident from the fact that the honourable Finance Minister while introducing the Finance Bill gave the same reasons for removal of Chapter XIV-B which were given for its introduction in 1995.

I proposed to divide the topic under discussion in three parts as follows

1) General -Assessment of search cases prior to introduction of concept of Block Assessment. Assessment under Chapter XIV-B of the I. T. Act in respect search action initiated during 1st July 1995 to 31st May 2003 and

2) Assessment under new provisions under section 153A/B/C in respect of searches initiated after 31st May 2003 and salient features of the new scheme.

3) Issues which may arise in case of assessment of search cases under the new scheme as contained in section 153A, 153B and 153C

1.00 GENERAL

1.01 ASSESSMENT OF SEARCH CASES PRIOR TO 1st July 1995:

1.02 BLOCK ASSESSMENT OF SEARCH CASES INITIATED AFTER 30TH JUNE 1995

1.03 ASSESSMENT UNDER NEW PROVISIONS:

The Finance Act 2003 has introduced a new scheme of assessment or reassessment of income in case of search initiated under section 132 or the books of accounts, documents or any asset etc requisitioned under section 132A after 31st day of May 2003. This new scheme of assessment has replaced the scheme of block assessment under Chapter XIV-B and is applicable for search action or requisition initiated after the 31st May 2003. The provisions of Chapter XIV-B shall not be applicable where a search initiated after 31st day of May 2003.

SALIENT FEATURE OF NEW SCHEME OF ASSESSMENT

a) Whether such loss, returned u/s 153A, will be permitted to be set off against the addition of undisclosed income or is allowed to be carried forward to the subsequent years?

b) Another issue is that if an assessee has originally filed a return of loss beyond the time permitted u/s 139(1) or has filed return declaring positive income and files the return in response to notice u/s 153A declaring loss. Whether, the assessee shall be entitled to carry forward or set of loss against the undisclosed income determined for other years?

a) The period stayed by the order of injunction,

b) The period required for audit under u/s 142 (2A),

c) The time taken in reopening the whole or part of the proceedings or in giving opportunity to the assessee of being heard under proviso to section 129.

d) The period commencing from the date of application is made u/s 245Cto the Settlement Commission and ending with the date on which such application is rejected

e) Time taken by Authority for Advance Ruling u/s 245Q/245R

i.Where the search is concluded during the financial year commencing on or after 1st April 2007 and

ii.During the course of assessment or reassessment proceedings reference under sub-section (1) of section 92CA is made to Transfer Pricing Officer was made before 1st June 2007 for computation of the arm’s length price in relation to the said international transaction but an order under section 92CA(3) has not been received before such date or

iii.Such reference is made after 1st June 2007

Proviso is inserted with effect from 1st June 2007

AMENDMENT BY FINANCE ACT 2007 TO CHAPTER XIX-A SETTLEMENT OF CASES: The Finance Act 2007 has amended to revamp the entire scheme of Settlement of Cases. Accordingly, the Finance Act 2007 has amended the definition of the term “case” with effect from 1st June 2007 so as to exclude proceedings for assessment or reassessment u/s 147, assessment or reassessment u/s 153A or 153B or proceedings for making fresh assessment pursuant to order setting aside or canceling assessment u/s 263, 264, 254. Therefore, no application can be made to the Settlement Commission after 1st June 2007 in respect of assessment of search cases.

2.0 ASSESSMENT OR REASSESSMENT:

2.01 The new search provisions do not define the terms “assessment” or “re-assessment”. Therefore, one will have to go by the meaning, which it is understood under the Act.

2.02 Section 153A begins with non obstante clause and overrides the provisions of Section 139, 147, 148, 149, 151 and 152. Therefore, the provisions as to the issue of notice u/s 148, time limit for issue of notice u/s 149, sanction for issue of notice u/s 151 and time limit for completion of assessment as provided in section 153 will not be applicable.

2.03 The provisions of section 153A are mandatory and the assessing officer is under an obligation to follow the same irrespective of the fact that no concealed income was detected as a result of search or no material was found or seized which could lead to the inference of undisclosed income or no additional income is declared by assessee. The following issues may come up in connection with assessment or reassessment of income under section 153A(b)

a) Whether the assessing officer is empowered to examine or re-examine the transactions entered in to normal course of business which are duly accounted for in the books of accounts?

b) Whether the assessing officer is empowered to examine the same issues which are already subjected to scrutiny even when no evidence is found during the course of search action in respect of subject matter?

c) Another issue is whether in case for reassessment of escaped income whether the assessing officer has power to look into issues which are finally concluded and entire assessments has reached finality?

2.04 BROUGHT FORWAD LOSSES / UNABSORBED DEPRECIATION: Under the block assessment brought forward losses and unabsorbed depreciation in the regular assessment was not allowed to be set off against the undisclosed income due to specific prohibition contained in Explanation to section 158BB (1). However, no such provision is contained in the new provisions of assessment of search cases. Therefore, in case of an assessee if there are any carried forward losses or unabsorbed depreciation the same can be set off against the additions, if any, made in the assessment.

2.05 NO APPROVAL REQUIRED OF HIGHER AUTHORITY TILL 01/06/2007 : Under the provisions of Block Assessment contained in Chapter XIV-B the assessing officer below the rank of joint commissioner was required to take approval of Joint Commissioner to the draft assessment order before passing final assessment order. In searches initiated prior to 1st January 1997 the approval of the Commissioner or Director was necessary. Under new provisions of search assessment there is no requirement of obtaining such approval till 31st May 2007. However, the Finance Act 2007 has changed this position.

AMENDMENT BY FINANCE ACT 2007: The Finance Act 2007 has inserted section 153D with effect from 1st June 2007 according to which no order of assessment or reassessment shall be passed by an officer below the rank of Joint Commissioner or except with the approval of Joint Commissioner.

3.0 ABATEMENT OF PENDING ASSESSMENT

3.01 Second proviso to section 153A provides that any assessment or reassessment relating to any year contained in relevant period shall abate if the same is pending on the date of initiation of search action or requisition of the books of accounts/assets etc

3.02 The dictionary meaning of the expression “abate” is “to put an end to, to curtail or to come to naught”.

3.03 In simple words, the proviso to section 153A states that assessment or reassessment relating to any year falling within specified six assessment years as on the date of commencement of search action or as on the date of requisition of books of accounts etc shall come to an end.

3.04 The proviso to section speaks about abatement of pending assessment as well as reassessment proceedings. However, there is no reference to the pending proceedings such as

a) Appellate Proceedings

b) Revision proceedings before CIT either u/s 263 or 264

c) Block assessment

d) Rectification

e) Settlement petition

f) Penalty proceedings

Similarly, no provisions are made for giving effect of assessment etc made under new scheme on such pending matter. The following issues may come up for consideration

a) Whether all proceedings including appeal proceedings and penalty proceedings shall abate?

b) Whether assessment or reassessment proceedings pending as on the date of initiation of search shall abate and other proceedings shall continue?

c) Another issue in case of pending appeal proceedings is that whether the CIT (Appeals) can use evidence found during the course of search action, which has a direct bearing on the pending appellate proceedings?

d) Another issue is as to whether original proceedings come to an end for all purposes what will happen to the finding of concealment in pending proceedings?

4.0 THIRD PARTY ASSESSMENT

Section 153C provides that where the assessing officer is satisfied that any money, bullion, or other valuable articles or thing or books of accounts or documents seized belongs to the person other than the person who has been searched, then the books of accounts or documents or assets seized shall be handed over to the assessing officer having jurisdiction over such other person and that assessing officer shall proceed against each such person and issue such other person notice and assess or reassess income in accordance with the provisions of Section 153A of the Act.

The objective of Section 153C is to cover such persons against whom no search is initiated but assets, books of accounts, or documents belongings to such person/s is/are found from a person against whom search of requisition is initiated. The intention of Section 153C is to widen the scope of post search assessments which other wise would be applicable only to those persons against whom search or requisition is initiated.

In case of assessment of search cases where the search was initiated before 1st Day of June 1995 there was no such provision in the statute regarding assessment of the third party. In such cases where any evidence of concealed or undisclosed income belonging to some other person was found the recourse was to take help of regular provisions of assessment as well as reassessment observing the time limit specified in section 153 of the Act.

The provisions of Section 153C are similar in spirit to the provisions of Section 158BD of Chapter XIV-B. However, there is a basic difference in both the provisions. Section 158BD provided that where the assessing officer is satisfied that any undisclosed income belongs to any person, other than a person with respect to whom the search was made under Section 132 or the books of accounts or other documents or assets were requisitioned under Section 132A then the books of accounts, documents or assets seized or requisitioned shall be handed over to the assessing officer having jurisdiction over such person and that assessing officer shall proceed under Section 158BC against such person under the provisions and the assessment of such person could be completed in accordance with the provisions contained in Chapter XIV-B.

Under the block assessments two basic conditions, which were required to be fulfilled, were that

a) During the search certain material was found and seized which could lead to the conclusion that it is undisclosed income and

b) Such undisclosed income belongs to the person other than the person against whom the search proceedings are initiated.

Therefore, the satisfaction of the assessing officer that undisclosed income belongs to other person was a precondition before proceeding to assess such person under Chapter XIV-B.

However, under the new provisions the existence of such precondition is absent. The provisions of Section 153C may be invoked once it is established that the assets, books of accounts, documents etc. belongs to other person. The assets, books of accounts, or documents may be the disclosed assets or regular books of accounts or documents executed in the course of business even though the provisions of section 153C may be invoked.

5.0 PENALTIES

Prior to 31st May 1995 there were no special provisions for assessment of search cases. Assessments were governed by the regular provisions of the I. T. Act as applicable to relevant assessment year as prevailing then. Assessments were used to be reopened having recourse to the provisions of section 147 of the Act. Normally the penalty provisions under Section 271(1) (c) were invoked and penalty was used to be levied in such cases. The special provision as contained in Explanation 5 to section 271(1)(c) regarding deemed concealment were invoked in search cases where the undisclosed assets like money, bullion, jewellery or other valuable assets or things etc. were found during the course of search.

After introduction of Chapter XIV-B the penalties contained in section 271 (1) (c), section 271A and section 271B were done away and the main penalty that could be levied was in accordance with section 158BFA(2) of the Act. Under this section penalty is leviable where the undisclosed income assessed is in excess of returned undisclosed income in the block return. Penalty under this section is also leviable even on the income declared in the block return for non-filing of return in accordance with the notice issued under section 158BC (c), making of appeal against income admitted in the return and non payment of taxes at the time of filing of return.

With the introduction of new search provisions the original position with respect to levy of penalties as prevailing before 31st May 1995 is restored. The Explanation to section 153A makes all other provisions, including provisions for imposition of penalties, applicable to assessment under section 153A. Therefore, all provisions of Chapter XXI- PENALTIES IMPOSIBLE, which consists of section 271 to 275, are applicable. Various decisions in regard to the scope of penalty provision as contained in section 271(1) (c) will now become relevant. Now Explanation 5 to section 271(1) (c) will become operative for levy of penalty for concealment of income and will play an important role in levy of concealment of income.

The major issue for the consideration that may come up is for the purposes of concealment penalty, whether the original return filed u/s 139 will be the basis or the return filed u/s 153A? For example if an assessee has filed original return under section 139 declaring an income of Rs. 2,00,000/- and after the search he files return declaring income Rs. 3,50,000/-. The assessment under section 153A is completed at Rs. 4,50,000/-. Now the issue is whether penalty will be leviable on Rs. 2,50,000/- or on addition of Rs. 1,00,000/-.

6.0 PENALTY U/S 271(1)(c) R. W. EXPLANATION 5

This is going to be one of the most crucial areas where number of litigations is going to come up in the times to come. Therefore I wish to deal in detail in respect of this issue

Explanation 5 to section 271(1) (c) comprises of two parts. The first part is deeming provision whereby an assessee is deemed to have concealed the particulars of his income. The second part provides an exception to the deeming provision upon compliance of certain conditions.

According to the first part of Explanation 5 to section 271(1)(c) where in the course of search action the assessee is found to be the owner of any money, bullion, jewellery or valuable articles or thing and the assessee claims that such assets have been acquired by him by utilizing (wholly or in part) his income for any previous year which has ended before the date of search but the return of income for such year has not been filed or where such return is filed before the date of search in which such income has not been declared by him or for any previous year which is to end after the date of search, then notwithstanding that such income is declared by him in any return of income furnished on or after the date of search, he shall be deemed to have concealed the particulars of his income.

The second part of Explanation 5 to section 271(1)(c) grants immunity from levying penalty in two circumstances as follows

1) Where such income or transactions resulting into income are recorded in the books of accounts, if any, maintained by him for any source of income or such income is otherwise disclosed to Chief Commissioner or commissioner before the date of search or

2) In the course of search action the assessee makes a statement under section 132(4)

i) That he has acquired such asset found in his possession out of his income which has not been disclosed so far in the return of income to be furnished before the expiry of time specified in section 139(1) and

ii) The assessee specifies the manner in which such income is derived and

iii) Pays tax together with interest, if any, in respect of such income.

The exemption from penalty under clause no 1 above is granted on satisfaction of the assessing officer that such income or transactions resulting into income were recorded in the books of accounts or disclosed to the Chief Commissioner or Commissioner.

The exemption from penalty under clause no 2 above is granted subject to following conditions

a) The statement of the assessee is recorded during the course of search action under section 132(4) wherein he makes admission as to the undisclosed income.

b) The assessee states the manner in which the income is derived. The word “manner” not only postulates the source of income but also the modus operandi/technique used for deriving such income.

c) The undisclosed income is pertaining to the year for which the time limit for filing of return under section 139(1) is not expired. Therefore, if the income is pertaining to earlier years for which the time limit u/s 139(1) is expired, the assessee cannot be granted immunity. For example if the search has taken place on 15th December 2003 and undisclosed assets are found to be acquired out of the income earned in the previous year relevant to assessment year 2002-03 then no immunity can be granted despite of the admission of the same by the assessee as the due date of filing of return is expired before the date of search.

d) The assessee, in order to avail the immunity must file the return of income along with payment of tax and interest before such date.

7.0 AMENDMENTS BROUGHT IN BY THE FINANCE ACT 2007

The Finance Act 2007 has inserted Explanation 5A to Section 271(1)(c) and Section 271AAA which deals penalty leviable in cases of specified years in cases of search initiated after 1st June 2007 and the immunity to be granted. Immunity presently available under Explanation 5 to Section 271(1) (c) is withdrawn from 1st day of June 2007. In case of search initiated on or after 1st day of June, 2007 the provisions of Section 271AAA and Explanation 5A shall be applicable for imposing penalties leviable. The new Explanation 5A to Section 271 (1) (c ) provides that immunity shall not be available in respect of undisclosed income if the same pertains to such previous year or years for which the due date for filing the return has expired prior to the date of search. Undisclosed income found as a result of search will be deemed to be concealed income notwithstanding that the income represented by any money, bullion, jewellery, or other valuable article or any income based on any entry in the books of account, is declared by the assessee in any return of income furnished on or after the date of search, he shall, for the purposes of imposition of penalty under Section 271(1) (c ) be deemed to have concealed the particulars of his income or furnished inaccurate particulars of such income.

According to section 271AAA(1), in respect of search initiated after 1st June 2007, the assessee shall be liable to pay penalty, in addition to tax, if any payable by him, a sum @ 10% of the undisclosed income of the specified previous years.

According Explanation (b) to section 271AAA “specified previous years” means the previous years which has ended before the date of search, but the due date of filing of return u/s 139(1) is not expired and the assessee has not filed the return of income or the year in which the search is conducted.

The immunity is provided against the levy of penalty under Section 271AAA(2) if following conditions are satisfied

a) The assessee in the course of statement u/s 132(4) admits the undisclosed income and specifies the manner in which such income is derived

b) Substantiates the manner in which the undisclosed income is derived and

c) Pays tax together with interest, if any, in respect of undisclosed income

8.0 PROSECUTION

According to Explanation (i) to section 153A all provisions of the Act are applicable to the assessment made under this section except provisions specifically made under section 153A, 153B & 153C. Therefore, all provisions of prosecution contained in section 275A to section 280 are applicable. There is specific amendment to section 276CC for prosecution of the person who willfully fails to furnish the return as required by section shall be punishable with rigorous imprisonment for a minimum period of three months and maximum period of seven year and fine also depending upon the quantum of tax sought to be evaded by failing to file the return.

There is no difference as to the provisions of prosecution as far as search provisions up to 31st May 1995, block assessment under Chapter XIV-B and new provisions relating to assessment of search conducted after 31st May 2003 are concerned.

I thank the organizers for having given me the opportunity to share my views on the topic.

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