The tax department collects information from various sources viz. Enforcement Directorate, Financial Intelligence Unit, informants, foreign tax departments, etc.
By SR Patnaik and Thangadurai V. P
In a landmark ruling, the Supreme Court has recently held in the case of PCIT v. Abhisar Buildwell Pvt Ltd that the income tax department should not be allowed to reassess the completed assessments if no incriminating evidence was unearthed in the search and seizure proceedings conducted by it. The Indian tax laws empower the tax department with extraordinary powers to detect undisclosed income through search and seizure proceedings. Typically, the tax department collects information from various sources viz. Enforcement Directorate, Financial Intelligence Unit, informants, foreign tax departments, etc. Basis the collected information, if the tax department is of the view that a particular taxpayer is involved in tax evasion, it would launch a search and seizure proceeding against him.
However, many times, the tax department would not be able to unearth any critical evidence at the time of the search, making the entire search and seizure proceeding a fruitless exercise for the tax department. In such a case, typically, the tax department would impose taxes based on the information it had already collected from other sources.
Before this judgement by the Supreme Court, the tax department interpreted the provision governing the search assessment in its favour and proceeded to impose taxes even in the absence of any incriminating evidence being found in the search proceeding.
In its judgement, the Apex Court took a logical view on how the tax assessment should be made in the search cases. In doing so, it provided a major relief to the taxpayers by holding that the very purpose of search proceedings is to detect evidence pertaining to undisclosed income. The evidence should be the foundation for making search assessments. Therefore, if no incriminating evidence was found against the taxpayer during the search proceedings, then the tax department should not be allowed to reassess the income of the taxpayers pertaining to past years. This would mean that thousands of cases pending against various forums on this issue will now be annulled.
However, the Apex Court had also left a window open for the tax department by holding that the tax department would be left remediless if it was unable to unearth any incriminating evidence during the search proceedings, but certain critical evidence was collected from other sources (i.e. sources other than search proceeding). It held that the tax department should be allowed to reassess the income under other provisions of the Indian tax laws.
This has the potential to undo the original relief provided by the Supreme Court since the cases annulled by this decision may be reopened again by the tax department under other provisions. However, practically speaking, the limitation period to reopen cases under the Indian tax laws has long expired and therefore, it may not be possible to reopen such cases, unless the Supreme Court gives a specific direction in this regard. We understand that the tax department has now approached the Supreme Court through a Miscellaneous Application by praying that it should be allowed to reopen the cases annulled by this decision under appropriate provisions and that the limitation period should be ignored to that extent. We will have to wait for the outcome of the Miscellaneous Application filed by the tax department to decide if this decision is beneficial or not to the taxpayers. It is worthwhile to highlight that the Supreme Court had earlier allowed a similar plea of the tax department last year in another landmark ruling in the case of Ashish Agarwal [Civil Appeal No. 3005 of 2022].
(SR Patnaik, Partner & Head-Taxation and Thangadurai V. P., Principle Associate at Cyril Amarchand Mangaldas. Views expressed are author’s own.)
Source:financialexpress.com