Can the Income Tax Department Reassess without Incriminating Evidence? SC says No in Abhisar Buildwell

- by Vanshika Gera, Student at O.P. Jindal Global University

Introduction

The landmark judgment in PCIT v. Abhisar Buildwell, arising out of a batch of appeals, decided by the Supreme Court on 24.04.2023, concerns the interpretation of the reassessment provisions under the Income Tax Act, 1961 (hereinafter “Act”). The case addresses ambiguities surrounding the application of Section 153A of the Act with regard to the powers of reassessment of the tax authorities when incriminating evidences are not found during a search or requisition conducted under Sections 132 and 132A of the Act, respectively.

Background: Under the Indian tax laws, the Assessing Officer (hereinafter “AO”) has the powers to collect information from the assessee and even from various other sources such as the Enforcement Directorate, Financial Intelligence Unit and other third-party sources for the proper calculation of ‘total income’ of the assessee and detect any possible tax evasion.

In cases where the tax department fails to unearth any significant evidence during the search, the entire search operation would be rendered futile, and the AO would typically levy taxes based on any information gathered from these other sources. A striking example of this was seen in CIT v. Kabul Chawla, wherein a search was carried out at the premises of the assessee but no incriminating material for certain assessment years was found. Despite this, the AO made the additions to income under Section 153A. The Delhi High Court declared such additions unsustainable, observing that without fresh incriminating material, no jurisdiction existed to reopen final assessments. Before this judgment, the tax authorities interpreted such provisions to impose taxes on the information gathered even when no incriminating evidence was found.

The Supreme Court, in this judgment, adopted a rational stance about the appropriate method of tax assessment in such cases.

Issue: The primary issue in this case is whether in respect of completed or unabated tax assessments, the AO’s authority to make additions during reassessment under Section 153A of the Act is limited to incriminating material uncovered during a ‘search’ under Section 132 or a ‘requisition’ under Section 132A or whether additions can be made in absence of such materials?

 

Legal Background: The Relevant Provisions

Section 153A - Provides for the assessment or reassessment of total income for six assessment years preceding the previous year by the AO, wherein a search under Section 132 or a requisition under Section 132A takes place.

Section 132 - Empowers the AO to conduct searches and seizures of persons and properties where any undisclosed assets are suspected, to prevent tax evasion.

Section 132A - Provides for the requisition of documents, assets, books from third parties if they contain information concerning undeclared income and assets, thereby supporting any ongoing investigation and/or assessments.

Contentions of the Revenue: The Revenue argued that the ‘Assessing Officer’ has the authority to carry out a reassessment under Section 153A following the completion of a search or a requisition under Sections 132 & 132A of the Act. The Revenue claims that even in cases of completed and unabated assessments, wherein no evidence was discovered during the search, the AO is authorized to determine the ‘total income’ by taking into account other materials.

Contentions of the Assessee: It was submitted on behalf of the assessee that in cases of completed assessments, where no incriminating evidence is discovered during the search, no additions could be made to ‘total income’. To substantiate this argument, the assessees relied on court precedents, particularly the Delhi High Court's decision in CIT v. Kabul Chawla, which stated that in the absence of incriminating evidence, the AO cannot reconsider completed assessments. The Gujarat High Court expressed similar views in PCIT v. Saumya Construction Pvt. Ltd., as did the Delhi High Court in PCIT v. Meeta Gutgutia, both of which cumulatively strengthened the contention that completed assessments gain finality unless interfered with by search-specific material. Parliament’s intent behind these provisions was never to intervene in such circumstances, as Section 153A was intended to handle undeclared income surfaced during a search and not to revisit pre-decided assessments without any fresh information. It was further contended that the term ‘total income’ in such instances should not be strictly construed as per Section 2 of the Act, but in view of Sections 132 and 132A, which seek to tax undisclosed income. Employing Section 153A to reassess completed assessments would be arbitrary and allow the Revenue to get past statutory limitations.

 

The Supreme Court's Decision

The Supreme Court held that. in the absence of any ‘incriminating material’ coming out during a search or requisition under the relevant provisions of the Act, the Revenue does not have jurisdiction under Section 153A of the Act to assess or reassess the consideration of other material found for completed or unabated assessments.

The Court, in taking this stance, upheld the decision of the Delhi High Court in Commissioner of Income Tax v. Kabul Chawla and the Gujarat High Court in Principal Commissioner of Income Tax v. Saumya Construction and observed that various other High Courts had taken the same view, while the Allahabad High Court in the case of Pr. Commissioner Of Income Tax v. Mehndipur Balaji had taken a contrary position.

The Court, however, acknowledged that the Revenue in such cases cannot be left remediless and thus further held that as long as the conditions under Sections 147&148 are fulfilled, the Revenue may initiate reassessment.

It was further clarified that the AO would assume jurisdiction to assess or reassess the ‘total income’ to include any undisclosed income, unearthed by incriminating evidence in cases of completed assessments, along with income declared in the assessee’s returns.

Key Takeaways from Principal Commissioner of Income Tax v. Abhisar Buildwell Pvt. Ltd.

This landmark decision of the Supreme Court strikes a balance between safeguarding taxpayer rights while also providing the Revenue with appropriate instruments to unearth undisclosed income. By affirming that ‘incriminating material’ is the sole determinant for reassessment under Section 153A in the search operations conducted for completed assessments, the Supreme Court ensures that the AO cannot use its powers arbitrarily.

Taxpayers endure a severe invasion of privacy if a search action is imposed, in addition to the hardship and agony that goes along with it. Tax officials are expected to find substantial proof to support the reassessment of previously completed assessments for earlier years, which allows for the inclusion of additions related to suspected hidden income. The main goal of these search operations is to find and obtain information about income that was left out of the initial assessment; Reliance on concrete evidence should be the foundational principle for conducting search assessments. Therefore, if no incriminating evidence is found during the search, the AO should be barred from reevaluating the income of such assessees. Hence, any legal provision, guideline or instruction that goes against this principle is unjustified and unlawful by way of the reasons discussed hitherto.

From the taxpayer’s perspective, this judgment seems appreciable because it protects them from indiscriminate reassessments, thereby upholding the canon of certainty in taxation. Taxpayers  not being subjected to reassessment solely on the grounds of unrelated evidence found during search operations provides an element of finality to tax matters, allowing taxpayers to rely on past assessments without unwarranted scrutiny. Furthermore,, the judgment also allows for the protection of the taxpayer’s right to procedural fairness, therefore preventing unwarranted disruptions in cases where no new specific evidence is found during search operations.

Critical Analysis

While the Supreme Court’s decision creates a safeguard for taxpayers, it may complicate situations for the Revenue in certain cases of tax evasion, such as when search operations are not conducted comprehensively. So, to not leave the Revenue remediless, the Court left a window open for the tax authorities to conduct reassessment even if no ‘incriminating material’ is found during the search, as long as the conditions under Sections 147 & 148 are met. Section 147 authorizes the Assessing Officer to reopen assessments if there is reason to believe that income chargeable to tax has escaped assessment. Section 148 addresses the process of issuing such a notice, such as time frames and permissions needed, particularly when a considerable lapse in time has occurred since the initial assessment.

However, reassessment under such provisions must satisfy procedural safeguards and cannot be undertaken in an arbitrary manner. The Supreme Court left such a window open to allow bona fide cases of evasion still to be pursued, even if Section 153A cannot be invoked. Given the possibility of the tax department reopening the cases nullified by this ruling under other laws, this could reverse the initial orders of the Supreme Court. However, the feasibility of something like this remains low because under Indian tax regulations, the statute of limitations for reopening cases has long since passed.

The revenue subsequently filed a miscellaneous application seeking clarification regarding the waiver of the limitation period for issuance of notices under Section 148 reassessment notices, by invoking Section 150 of the Act. It was contended that if such a notice had been legally issued on the date of assessment under Section 153A, the limitation period should be reckoned from that point, thereby allowing reassessment despite the lapse of time. However, this application was disposed of and the Court decided not to go into the merits of the case, directing the Revenue to file a proper revenue application.

Impact and the CBDT's Response

Pursuant to the judgment, the Central Bureau for Direct Taxation (hereinafter “CBDT”) released a new instruction dated 23rd August, 2023, providing interpretative guidance for implementing the decision of this case. The CBDT believes that corrective action should be taken only in matters currently before Appellate Authorities, tagged with the lead matter, or in matters wherein orders have been issued in violation of the Abhisar Buildwell Pvt. Ltd. ratio. By issuing the current directive, the CBDT has granted relief in several instances that are settled and not pending. Having said that, the cases currently pending at various appellate authorities are likely to be significantly impacted by this judgment, particularly in light of the CBDT's directions issued under its interpretative instruction. It is also worth noting that, even in the current environment, corrective action anticipated under Sections 147/148 read with Section 150 will be difficult due to the fact that several litigations around the country have yet to be resolved.

Conclusion

In conclusion, the judgment, reinforced by the CBDT circular, sets clear guidelines for reassessments, making incriminating evidence the threshold for initiating such reassessments under Section 153A of the Act. This approach guards the taxpayers from reassessments while still allowing Revenue to address undisclosed income under Sections 147 & 148, when conditions are fulfilled, thereby promoting fair and consistent taxation regimes.