Tax Assessments: Supreme Court Lays Down The Litmus Test

The Income Tax Department can reopen assessments only if any incriminating material is found during a search, providing evidence of the existence of undisclosed income, the Supreme Court has said.

Currently, tax authorities reopen completed assessments and make additions to income basis material found from other sources, not just what they have gathered during a search.

It’s a detailed, reasoned, and path-breaking order, according to Amit Singhania, partner at Shardul Amarchand Mangaldas. With this judgement, the issues arising from search cases would be resolved.

"The most significant one would be in respect of completed or unabated assessments," Singhania said. "Now, no addition would be made by the assessing officer in the absence of any incriminating material found during the course of a search or requisition under the Income Tax Act."

The Supreme Court said so while interpreting Section 153A of the Act.

The section states that in cases of search or requisition under the Act, the tax officer gets the jurisdiction to assess or reassess the "total income" in respect of each assessment year within the previous six assessment years.

The object of this provision, as the court highlighted, is to tax undisclosed income that is found during the course of a search. Therefore, only in those cases where incriminating material is found against the taxpayer during the search could the authorities assume the power to reassess the total income for the entire six-year period.

It was clarified that the intention of the legislature was to not reopen the completed assessments unless any incriminating material was found with respect to the concerned assessment year.

While the judgement re-emphasises the need for filing a fresh tax return for six years once a search or requisition is made, it has also clarified that the assessing officer will not "assume jurisdiction" to assess or reassess income other than the income in relation to which incriminating material is found during the search, S. Sriram, partner at Lakshmikumaran and Sridharan, explained.

To ensure that the department is not left without a remedy, the apex court said that tax authorities can initiate reassessment proceedings on the basis of other provisions under the law.

The apex court has reaffirmed the stance taken by the high courts of Delhi, Gujarat, and other states by taking the view that no addition can be made with respect to completed assessments in the absence of any incriminating material.

The hallmark of this particular judgement is the clarity and certainty regarding the powers of the assessing officer. Singhania said even in cases where an action is taken against the taxpayer, the taxpayer will know what could be used against him.