SEARCH ASSESSMENTS

CA. R. KRISHNAN M.Com., FCA., ALLEPPEY

Objects & Consequences of Search

To detect concealed/undisclosed income, assess the same & levy tax thereon. A search invades the privacy of a citizen.
Powers of search and seizure draconian. Even then held to be valid in large public interest.

History

It was since 1956 that the provisions of search and seizure made its first entry into the Income Tax Act. Section 132 was totally substituted by the Finance Act, 1964. Section 132 underwent a thorough overhaul in the year 1976. Since then two committees had made certain recommendations on search and seizure provisions: i) The Raja Chellaiah Committee ii) The Kelkar Committee. The recommendations affecting the substantive law have mostly been given effect to. The assessee friendly measures recommended have not been given serious considerations.

History of assessment of Undisclosed Income

Phase 1 - Upto 30th June, 1995 (Normal Reassessment)

No special provisions for reassessment. Undisclosed income taxed under general provisions. Provisions of sections 143 & 147 were mainly used. Reopening of completed assessments possible. Regular rates of taxation & interest on undisclosed income. Penalty & prosecution for concealment possible. Conditional immunity under expln. 5 to section 271(1)(c ) was available.

Phase II - From 1st July, 1995 to 31st May, 2003 (Block Assessment)

FA 1995 inserted Chapter XIV-B for asst. of undisclosed income(UDI) Popularly known as Block Assessment. Only UDI detected in the course of search, assessable in Block asst. Block period comprised of 6 asst. years preceding the PY of search & included the period upto the date of search. UDI charged to tax at 60%.

Surcharge leviable at the rates prescribed in the Finance Act for the relevant year. [CIT Vs. Suresh N. Gupta 297 ITR 322 (SC)] Block asst. was in addition to & independent of regular asst. Disclosed income taxed in regular asst. & UDI in Block asst. Special provisions for asst. of third partys UDI. No interest u/s 234A, 234B & 234C. No penalty for concealment of income (upto 31-12-96). Order appealable directly to ITAT initially, subsequently like any other asst. order, to CIT (Appeals)

Phase III - From 1st June, 2003 onwards (Special Reassessment)

Finance Act, 2003 has introduced sections 153A, 153B and 153C w.e.f. 1-6-2003, which has replaced Chapter XIV-B. No more block period, undisclosed income and block assessment. Under the present scheme total income of an assessee will be determined year wise and not restricted to undisclosed income alone. Tax payable at the regular rates as applicable to respective years on total income Expln.(ii) to s. 153A. The returns are required to be filed after search in respect of six asst. years immediately preceding the year of search 153A(a)

The A.O. is required to issue separate notices for each of the specified years 153A(a). Returns to be filed within the time specified in the notice 153A(a). Returns will have to be filed afresh even if the same were filed earlier. Pending proceedings for assessment or reassessment for any of the specified years will be terminated proviso to s.153A. Fresh assessments or reassessments to be made. For any reasons, if the assessment/reassessment u/s 153A is cancelled/ annulled, the original assessment will revive 153A(2)

Self Assessment tax, if any, will be payable u/s 140A Interest u/ss. 234A and 234B will also be payable for each assessment year. Interestingly no reference to Sec. 153A in Sec. 234C. The assessments/reassessments are required to be completed within a period of 21 months from the end of the financial year in which the last of the authorization was executed. Where reference is made to Authority for Advanced Ruling , there is an extended time limit.

Penalty provisions applicable.

A return of income for the year of search would be filed in the regular course, for the whole year, by the due date. The income for such year also will be assessed within 21 months from the date on which the last of the authorisations was executed. The A.O. is required to transfer the seized assets and the material belonging to a third party to the A.O. having jurisdiction over the third party. On receipt of such assets and material, the A.O. of such person is required to issue a notice u/s 153A to such person and assess or reassess his income as per the provisions of s. 153A. Time limit for completion of third party asst. would be the same as the main search case or one year from the end of FY in which seized materials/valuables are handed over to the AO having jurisdiction, whichever is later.

The orders for each year appealable u/s 246A before the CIT(Appeals). The order u/s 153A will be capable of being rectified and also revised. Reassessment of such assessed or reassessed income u/s 147 may be possible. Expln. 5A to Sec. 271(1) (c) inserted for searches on or after 01-06-2007. Penalty for concealment u/s 271AAA in respect of undisclosed income for searches initiated on or after 1.6.07 @ 10% of the undisclosed income. No penalty under certain conditions. No penalty u/s 271(1)(c) in respect of undisclosed income covered u/s 271 AAA Prosecution u/s 276 CC is specifically made possible.

Notice for furnishing return of income -153-A

AO to activate proceedings by issue of notice. Not possible for assessee to file the returns without notice. The Assessing Officer under section 153A(a) would issue a notice to furnish returns of income for each of immediately six preceding years within specified time limit. If the search is initiated on 01-09-2008, the assessee can be called up to file returns for the A.Y. 2003-04 to 2008-09 (i.e. previous years 104-2002 to 31-03-2008. The notice issued under provision 153A can be issued even if the conditions laid down in sections 147 to 149, 151 and 153 are not satisfied.

Initiation of search is crucial what happens when the search is conducted by executing two warrants, of which one is before 1-6-03. Sections 147, 148, 149, 151 & 153 are not applicable. No time limit prescribed for issue of notice. No minimum period by which the assessee is to file the return is prescribed. No specific provision for extension of time

Case law on Section 153A

Reassessment- Provisions for assessment in search cases under section 153A--Not applicable to cases of reopening of assessment under section 148--Both operate in different fields and spheres-Notice under section 148 for assessment year 1997-98 not falling within six year period provided under section 153A Valid. Ramballabh Gupta Vs. Assistant Commissioner of Income-tax 288 ITR 347 (MP)

Return of Income

The return of income shall be in the prescribed form. The relevant form of the return of income is yet to be prescribed. Six separate returns have to be filed. Section 153A(a) provides that all the provisions of the Act will apply to the return u/s 153A as if such return were a return required to be furnished u/s 139. Whether it is possible to revise the return? Care to be taken to see that the returns are not defective.

Return of Loss

Whether possible to file a return of loss? If yes, whether such loss will be permitted to be carried forward.

Computation of Income & Rules thereof

Total income to be computed in the same manner as in the case of a regular return. Income to include already disclosed income plus undisclosed income detected/offered during the course of search and even income offered voluntarily without detection. Income will be computed under different heads. All the provisions of computation under each of the heads will apply. The provisions for set off of losses under each head will also apply.

The brought forward losses, otherwise permissible, will be set-off even against the undisclosed income. Gross total income will represent the aggregate of income under different heads of income. Provisions of s. 69 to 69B will apply. Clubbing provisions will also apply. Presumptive taxes wherever applicable will apply. Benefit of exemptions on reinvestment of capital gain will also be available. Provisions of DTAA will apply. Deduction under Chapter VIA will be available

Rate of Tax

Tax payable to be calculated as if it is a regular return u/s 139. Concessional rate of tax wherever applicable will apply. Surcharge leviable as per the law of the respective years. Benefit of marginal relief to be given wherever applicable. Rebate including u/ss 88B, 88C & deduction u/s 80C possible.

Payment of Taxes

Credit for all taxes paid till the filing of the return to be given. Credit for cash seized & appropriated towards tax to be given.

Assessment or Reassessment

No reasons to be recorded for reopening u/s 153A. No separate notice u/s 148. No time limit as prescribed u/s 149 nor any sanction needed. New time limits prescribed u/s 153B. Under section 153B the assessment proceeding shall be completed within a period of 21 months from end of the financial year in which last of the authorization of the search was executed. Provisions have been made for extending this time limit where special tax audit u/s 142(2A) has been ordered or where stay order by court has been issued or in similar circumstances.

Copies of seized materials etc. to be given. Reference to Valuation Officer to determine value of any investment referred to in Sec. 69, 69A, 69B possible in cases of reassessment u/s 153A. Notices u/s 143(2)/142(1) to be given. No sanction of higher authorities required before passing order (Till 31.05.2007). w.e.f. 01-06-2007 approval of JCIT is required Sec. 153D Asst. u/s 144 possible in case of failure to comply by assessee.

Case Laws

Whether proviso to Sec. 142A will not disturb assessments which have become final on or before 30-09-2004, but only those cases where reassessments are to be made u/s 153A even where assessments have become final and conclusive on or before 30-09-2004. Held Yes DCIT Vs. Shubham Industries 104 ITD 126 (Luck) (TM) Assessment u/s 153A need not be based on materials seized Ms. Shyam Lata Kaushik Vs. ACIT 306 ITR (AT) 117(Del) Shivnath Rai Harnarain (India) Ltd. Vs. DCIT 304 ITR(AT)271 (Del)

Pending assessment and other proceedings

All pending assessments will abate. No parallel assessments as in the case of Block asst. scheme. No provisions made for pending appeals, revisions, block asst., rectification, settlement petition and penalty proceedings. Whether appeal proceeding would also abate? Penalty proceedings being separate & distinct may not abate but would continue. Whether material found in search can be used in deciding pending appeals? What to do in cases where old provisions and new provisions overlap?

Case Law

Assessment for 2004-05 pending on date of search in August 2006-Assessment proceedings abate--No notice under section 153A-Assessment void. Abhay Kumar Shroff Vs Commissioner of Income-tax 290 ITR 114(Jharkhand )

Nature of Assessment

The following remedies/actions will be possible: Rectification u/ss. 154 and 155. Revision u/ss. 263 and 264 Penalty proceeding and waiver thereof Appeal to CIT(A) u/s 246A. A special clause (ba) has been inserted in s.246A(1) to make such order appealable before the CIT(A) Settlement petition u/s Chapter XIXA. It was possible to file a petition even in respect of one or more years out of the relevant period, but only up to 31.5.07 Prosecution possible

Third Party Assessment

Section 153C governs third party assessments. Most dangerous provision. Against the scheme of section 132 No need for undisclosed income belonging to third person. No need for element of concealed income. Can be proceeded against if money, bullion, jewellery or other valuable article or thing or books of accounts and documents belonging to third person are seized. All provisions of sections 153A & 153B will apply

Case Laws

Section 153A rws 153C Petitioner challenged constitutional validity of Sections 153A and 153C on ground that distinguishable categories of persons mentioned in these two provisions are treated on same basis for purposes of assessing/reassessing their income. Held that the procedure in respect of both 153A and 153C overlaps or is similar is hardly of any consequence, since both have to be treated in accordance with the principles of natural justice. There is nothing arbitrary in the procedure adopted. Essentially, both categories of persons are the same in as much as their books of accounts, assets, documents etc. are seized or requisitioned, though from different locations. Further it was held that the principles of natural justice are incorporated in Section 153C. Held that the provisions were constitutionally valid. Saraya Industries Ltd Vs, Union of India 171 Taxman 194(Del).

Section 153C rws 153A assessment of income of any other person whether items of regular assessment can be added back in proceedings u/s 153C held no whether only undisclosed income detected during the course of search can be added and taxed u/s 153C Held yes LMJ International Ltd. Vs DCIT Kolkotta 22 SOT 315 (Kol) Seized documents showing loan advanced by assessee. Transactions of assessee not recorded in books of account Books of account not belonging to assessee. Assessment proceedings u/s 153C cannot be initiated. P. Srinivas Naik Vs. ACIT 306 ITR (AT) 411 (Bang)

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