Summary
A search of a business group in September 2013 yielded a hard disk with an excel sheet referring to third parties. After the Finance Act, 2015 substituted pertains or pertain to for belongs or belong to in Section 153C of the Income Tax Act, 1961 for books of account and documents from 1 June 2015, satisfaction notes were recorded in 2017 and notices under Section 153C issued in 2018 to those third parties. The Gujarat High Court quashed the notices, holding that the amendment brought a new class of assessees within the section, affected substantive rights and could not apply to earlier searches. The Supreme Court reversed: the amendment, made by substitution to remove the narrow reading in Pepsico India Holdings, applies to searches conducted before 1 June 2015, since the first proviso deems the relevant date to be when the other person's Assessing Officer receives the seized material.
Issues
- Whether the amendment to Section 153C of the Income Tax Act, 1961 by the Finance Act, 2015, substituting pertains or pertain to for belongs or belong to with effect from 1 June 2015, applies to searches conducted under Section 132 before that date.
Provisions considered
- Section 153C (as amended by the Finance Act, 2015 with effect from 01.06.2015), Income Tax Act, 1961A machinery provision for assessing persons other than the searched person; the substituted words pertains or pertain to apply where the satisfaction note and notice post-date the amendment even though the search was earlier, since any other reading would frustrate the object of the amendment. (¶¶ 8, 10, 10.1, 10.4, 10.6, 10.8, 11)
- First proviso to Section 153C(1) (inserted by the Finance Act, 2005 with retrospective effect from 01.06.2003), Income Tax Act, 1961Creates a deeming fiction that the reference to the date of initiation of search is a reference to the date the Assessing Officer of the other person receives the seized books, documents or assets; the material was received on 25.04.2017, after the amendment, so the amended provision governed the notice of 04.05.2018. (¶¶ 10.2, 10.3)
- Section 132, Income Tax Act, 1961The search of the group's premises on 04.09.2013 preceded the amendment, but the date of search is not determinative for proceedings against third parties under Section 153C. (¶¶ 8, 10.3)
Held
- The amendment was made to remedy the mischief created by the Delhi High Court's narrow reading of belongs to in Pepsico India Holdings, which prevented the Revenue from proceeding against third parties even where incriminating material pertaining to them was found in a search; by the first proviso the date of search is deemed to be the date of receipt of the seized material by the other person's Assessing Officer, so where that receipt and the notice post-date 1 June 2015 the amended Section 153C applies. (¶¶ 10.1, 10.2, 10.3)
- An amendment by substitution wipes out the earlier provision as if it never existed, as held in Shamrao Parulekar and Zile Singh; a machinery provision of a taxing statute must be construed to effectuate its manifest purpose and not defeat it, as in Calcutta Knitwears, and under the mischief rule and the principles in Girdhari Lal and Hindustan Bulk Carriers a construction that reduces a provision to a dead letter must be avoided. (¶¶ 10.4, 10.5, 10.6, 10.7)
- The submission that the amendment brings in persons not previously covered and so affects substantive rights, though attractive, is rejected; even the unamended section addressed assessment of persons other than the searched person, and excluding those against whom incriminating material was found merely because the search preceded the amendment would frustrate the very object of Section 153C and of the amendment. (¶ 10.8)
- The amendment to Section 153C by the Finance Act, 2015 applies to searches conducted under Section 132 before 1 June 2015; the assessees may challenge the assessment orders before the Commissioner (Appeals) on any other available grounds within four weeks. (¶ 11)
Result
Appeals allowed; Gujarat High Court common judgment dated 02.04.2019 and connected judgments quashing notices under Section 153C and consequent assessment orders set aside; question of law answered in favour of the Revenue; liberty to the assessees to appeal to the Commissioner (Appeals) on other grounds within four weeks, to be decided on merits; no costs.