When Search Seizure Material Exists, Section 153C, Not Section 147, Must Be Invoked

The Bangalore bench of the Income Tax Appellate Tribunal in DCIT Vs D. K. Shivakumar has delivered an important ruling on the correct statutory route for bringing to tax income uncovered during a search when the incriminating documents are found in the premises of a third party. The Tribunal held that where seized documents relating to an assessee are found during a search on another person, the Assessing Officer (AO) must necessarily invoke the special scheme under Section 153C read with Section 153A and cannot bypass it by resorting to reassessment under Section 147/Section 148, so long as the limitation period for action under Section 153C is still open.

This decision not only invalidates the reassessment proceedings in the specific case but also reinforces the supremacy of the search assessment code (Sections 153A/153C) over the general reassessment provisions (Section 147/Section 148), especially after the Supreme Court’s ruling in ITO Vs Vikram Sujitkumar Bhatia.

Factual Matrix of the Case

Returns and Initial Processing

  • The assessee filed a return of income for Assessment Year (AY) 2007-08 on 21.04.2008, declaring:
    • Income of Rs.1,19,06,720/-, and
    • Agricultural income of Rs.2,50,650/-.
  • The return was processed under Section 143(1) on 10.11.2009 without any scrutiny assessment.

Searches on Third Parties and Seizure of Incriminating Material

Two separate search operations under Section 132 were carried out:

  1. Search in Davanam Group – 02.09.2010

    • During this search, documents were seized showing transactions relating to development rights allegedly sold by the assessee to Dinasty Developers.
    • These seized documents covered multiple years, including AYs 2006-07, 2007-08, 2009-10 and 2010-11.
    • The documents, marked as pages 13 to 16 of A2/DJPL/4 and page 15 of A/DJPL/10, contained details such as:
      • Date of agreement
      • Sale consideration
      • 80% payment terms
      • “Premium” amounts allegedly paid in cash.
    • The AO reproduced and relied on these pages in the assessment order.

  2. Search in Sobha Developers – 10.10.2013

    • A subsequent search in the Sobha Group also yielded material relating to alleged premium payments connected with purchase of shops in Madiwala Commercial Plaza.
    • These documents again pointed towards unaccounted consideration in the hands of the assessee.

Centralisation and Subsequent Action

  • Based on the search in Davanam Group, the assessee’s case was centralized to the Central Circle by order dated 03.07.2012 under Section 127(2) (F.No.6A/Centralisation/CIT-IV/2012-13).
  • The same AO handled the assessments of both:
    • The searched entities (Davanam Group / Sobha Developers), and
    • The assessee, after centralisation.

Despite having seized documents in his own custody, the AO:

  • Chose not to proceed under Section 153C, even though the limitation for such action had not expired;
  • Instead, issued notices under Section 148 and framed reassessment orders under Section 147 for AYs 2006-07 to 2010-11, making additions under Section 69 on the basis of alleged unaccounted premium recorded in seized documents.

Proceedings Before CIT(A)

Assessee’s Core Contention

The assessee argued before the Commissioner of Income Tax (Appeals) [CIT(A)] that:

  • The entire foundation of the reassessment was incriminating material found during search on third parties.
  • Where such seized material “pertains to” or “relates to” a person other than the searched party, the statutory mechanism of Section 153C must be invoked.
  • Because Section 153C begins with a non-obstante clause overriding Section 147 and Section 148, the AO had no jurisdiction to reopen under Section 147 when action under Section 153C was still legally possible.

CIT(A)’s Findings

For AYs 2007-08 to 2010-11 (and similarly for AY 2006-07), CIT(A):

  • Accepted that the additions were entirely rooted in seized material from searches under Section 132.
  • Followed coordinate bench decisions of ITAT Bangalore, including:
    • N. Suryanarayana (ITA Nos. 1708 & 1799/Bang/2017), and
    • Shri Srinivas Rao (ITA Nos. 1154 & 1155/Bang/2015).
  • Held that the AO was required in law to proceed under Section 153C and not under Section 147.
  • Consequently, quashed the reassessment orders as void for want of jurisdiction.

The Revenue appealed to the ITAT for AYs 2007-08 to 2010-11, while the assessee filed appeal for AY 2006-07.

Revenue’s Arguments Before the Tribunal

The Departmental Representative (DR) defended the AO’s action mainly on the following lines: