Reopening assessment under Section 153C is invalid if the incriminating material from a search pertains to an earlier financial year

Reopening assessment under Section 153C is invalid if the incriminating material from a search pertains to an earlier financial year and not the relevant assessment year.

Issue:

Whether an assessment for a particular year (Assessment Year 2021-22) can be reopened under Section 153C of the Income-tax Act, 1961, based on a satisfaction note recorded during a search on a third party, if the incriminating material (a pen-drive containing information about accommodation entries) specifically pertains to a transaction from a much earlier financial year (Financial Year 2014-15) and not the relevant assessment year.

Facts:

• For Assessment Year 2021-22, a satisfaction note was recorded by the Assessing Officer (AO) pursuant to a search conducted in the case of a “searched person” (a third party, not the assessee directly).
• The satisfaction note indicated that a pen-drive was found during the search.
• This pen-drive allegedly contained information regarding transactions entered into by the assessee with companies that had provided accommodation entries through the generation of bogus invoices.
• However, it was specifically noted that the information allegedly found was regarding a purported transaction pertaining to Financial Year 2014-15.
• The assessment sought to be reopened was for Assessment Year 2021-22.

Decision:

The court held in favor of the assessee. It ruled that the pen-drive found could not be considered as containing any “incriminating material” pertaining to the assessee in respect of the relevant assessment year (2021-22). Therefore, the assessee’s assessment for the said year could not be reopened under Section 153C.

Key Takeaways:

• Scope of Section 153C (Assessment of Income of Other Person): Section 153C allows the AO of a “searched person” to hand over books of account, documents, or assets seized or requisitioned during a search, to the AO of “any other person” if the AO of the searched person is satisfied that such books, documents, or assets belong to or relate to such other person. The AO of the “other person” then proceeds to assess or reassess income for six assessment years immediately preceding the assessment year relevant to the previous year in which the search was conducted,¹ or for the relevant assessment year itself.
• Crucial Condition: Incriminating Material for Relevant Year: For Section 153C to be validly invoked for a particular assessment year, the seized or requisitioned material must contain “incriminating material” that pertains to the relevant assessment year for which the assessment is being reopened.
• Information for Past Years Only: If the incriminating material (like the pen-drive in this case) contains information solely related to a past financial year (FY 2014-15), it cannot be used to reopen an assessment for a much later, unrelated assessment year (AY 2021-22). The “incriminating material” must be relevant to the escaped income of the year sought to be assessed/reassessed.
• Jurisdictional Prerequisite: The presence of incriminating material pertaining to the specific assessment year is a fundamental jurisdictional prerequisite for invoking Section 153C.
• “In favour of assessee”: The quashing of the Section 153C proceedings means that the assessment for AY 2021-22 cannot be reopened based on this specific piece of evidence that is relevant to an earlier period.
• Distinction from Section 147/148: While Section 147/148 deals with general reopening, Section 153C is a specific provision linked to search operations and requires that the material seized from a third party is incriminating for the assessee and relevant to the year being reopened.