Supreme Court Ruling On Income Tax Searches To Provide Relief To Taxpayers

Tax experts have stated that the Supreme Court's decision holds that the income tax department can not reopen finalized assessments under Section 153A of the Income Tax Act unless "incriminating material" is found during search and seizure operations.

Additionally, any other material discovered during the search cannot be used to issue re-assessment orders. This ruling is expected to give some significant relief to the taxpayers by decreasing the potential for arbitrary re-assessments by tax officials.

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Here, it is to be noted that there is a backlog of ongoing litigation due to reassessment orders not backed by incriminating evidence under Section 153A. Although this section was withdrawn in 2021, it still applies to past cases.

The Supreme Court clarified that assessments that are already concluded or "unabated" can still be reopened under Sections 147 and 148 of the Income Tax Act if "Any other material proof" discovered by the assessing officer (AO) suggests that certain income has evaded assessment.

These two sections essentially authorize the assessing officer (AO) to reevaluate tax returns if they discover any income sources that were not disclosed by the taxpayer and they possess evidence to support their findings.

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Section 153A lays out the process for evaluating the income of a "searched person". According to this section, the assessing officer can reopen the assessment of the taxpayer's returns for the six years immediately preceding the year of the search, but only in case of incriminating material is found during the search operation.

Apart from this legal requirement, there have been several cases where re-assessment orders were issued with additional income added, despite the absence of any incriminating material being discovered.

These orders were based solely on other material obtained during the search. However, the Supreme Court's decision essentially prohibits tax authorities from doing such a practice.

The Supreme Court judges, MR Shah, and Sudhanshu Dhulia, clarified that if no incriminating material is discovered during the search procedure, the assessing officer is prohibited from using any other material to assess or reassess completed or unabated assessments.

The Supreme Court judges, MR Shah, and Sudhanshu Dhulia, clarified that if no incriminating material is discovered during the search procedure, the assessing officer is not allowed to use any other material to assess/reassess completed or unabated assessments.

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So this simply means “In the absence of any incriminating material found during the search under Section 132 or requisition under Section 132A of the Act, 1961, the assessing officer is not permitted to make any additional assessments or add any income to the taxpayer's returns”.

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