The Income-tax Act of 1961's Section 153C was amended, and the Supreme Court ruled on Thursday that the amendment will apply retroactively to searches made before the amendment's effective date of June 1, 2015. This has significant implications for the search and seizure provisions of the IT Act. In this blog post, we will discuss the recent ruling of the Supreme Court on the retrospective application of Section 153C of the IT Act.
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Despite the Gujarat High Court's 2019 decision to the contrary, a bench led by Justice MR Shah ruled in favour of the Revenue Department and stated that searches carried out under Section 132 of the Act, 1961, prior to June 1, 2015, i.e., the date of the amendment, would be subject to the amendment to Section 153C of the Act, 1961.
However, the Supreme Court granted assessees the right to challenge the assessment orders within four weeks on any other grounds that may be available, and the department may consider them in accordance with the law and on their own merits.
The SC stated in its 67-page judgement that "as per the established legal principle, the courts, in interpreting the machinery provisions of a taxing statute, must give effect to its manifest purpose by construing it in such a manner so as to effectuate the object and purpose of the statute”.
"The object and purpose of Section 153C is to address people other than the person being searched." Even under the unamended Section 153C, the proceeding against other persons (other than the searched person) was based on the seizure of books of account or documents that "belong or belong to" a person other than the searched person, it stated.
By ruling that searches under Section 132 of the Act that were started before the date of amendment would not be covered by Section 153C (as amended by the Finance Act, 2015), the HC invalidated notices sent to assessees under that section as well as the ensuing assessment orders.
The Delhi High Court's 2014 ruling in the case of Pepsico India Holdings, which held that the provision could not be invoked unless the documents/material "belong to" the third party, was specifically removed by the 2015 amendment, according to the apex court, which relied on its objects and reasons (other than the searched person). Although incriminating evidence relating to a third party was discovered during search procedures under Section 132, the department was unable to take further action against the third party in light of the Delhi High Court's observations.
Because the Delhi High Court's observation was impeding the suppression of the very mischief that the legislature intended to suppress, the government amended the provision via Finance Act, 2015, to replace the words "belongs or belongs to" with the words "pertains or pertains to" in the case of books of account and documents.
The ruling of the Supreme Court has significant implications for taxpayers who may be subject to search and seizure by the tax authorities. The retrospective application of Section 153C means that the tax authorities can now assess the income of any person other than the one who was searched, even if the search was conducted before the introduction of Section 153C.
The ruling also has implications for taxpayers who have already been assessed under Section 153C. Taxpayers who have been assessed under Section 153C before the recent ruling may now face the possibility of reassessment, which could result in additional tax liabilities.
The ruling is also likely to have an impact on the approach of the tax authorities to search and seizure cases. The retrospective application of Section 153C gives the tax authorities greater powers to assess the income of persons who were not originally targeted in a search. This could lead to an increase in the number of search and seizure cases initiated by the tax authorities.
The Income Tax Act, 1961 (IT Act) is the primary legislation in India that governs the taxation of income. The IT Act provides for the assessment of income, the computation of taxable income, and the payment of tax. The IT Act also provides for the search and seizure of assets, as well as the assessment of undisclosed income.
Section 153C of the IT Act was introduced in 2003 to provide for the assessment of income in cases where a search has been conducted. Section 153C allows the tax authorities to assess the income of any person other than the person who was searched if certain conditions are met. These conditions include the discovery of documents or assets during the search that relate to a person other than the one who was searched, and the satisfaction of the tax authorities that such documents or assets belong to the person who was not searched.
The controversy surrounding the retrospective application of Section 153C arose due to a difference in interpretation of the law. The tax authorities contended that Section 153C applied retrospectively, while taxpayers argued that it applied prospectively.
In conclusion, the recent decision by the Supreme Court regarding the retrospective application of the amendment to Section 153C of the Income-tax Act, 1961 is likely to have significant implications for individuals and businesses who have undergone searches prior to June 1, 2015. This decision provides clarity on the issue of the applicability of the amendment and is expected to have a far-reaching impact on tax litigation in India. It is essential for taxpayers to understand the implications of this ruling and seek expert advice to navigate the complex tax laws and regulations effectively.
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