New CBDT rule on I-T raids opens a pandora’s box

Hindi movie Raid was loosely based on the income tax (I-T) search operations at the house of a Kanpur-based businessman. In the movie, the protagonist and his team were able to find undisclosed cash and jewellery hidden in the civil structure of the premises. In reality, such a discovery is incriminating enough to justify the additions in the tax assessment pursuant to the search action. But what happens if no incriminating material is found during the search? Is any addition in the assessment then justified? The answer is clearly in the negative.

A ‘search’ action is considered an extreme measure of tax administration and its legislative mandate is given in section 132 of the Act. If the competent I-T authority, in consequence of any information in its possession, believes that any person is having any undisclosed income in the form of money, bullion, jewellery, or other similar valuables, then it can issue a search warrant against such person, and enter and search such person’s business and residential premises. During such searches, I-T officials are empowered to break open the lock of any door, locker, safe, vault, almirah, or other civil structure in the premises and impound or seize the valuables found therein.

Until fiscal 2021-22, the assessments pursuant to such searches were governed by separate provisions of sections 153A and 153C of the Act and could be reopened for past six years. From fiscal 2022-23 onwards, search related assessments have been subsumed in the new reassessment regime under sections 147-151 of the Act. The appellate authorities have recognised and held that, after subjecting the taxpayer to the extreme invasion of privacy and trauma and hardship of a search action, I-T authorities are expected to discover some incriminating material to justify the reopening of completed assessments of past years and making of consequential additions in respect of alleged undisclosed income. This established legal position has been given the final stamp of approval by the Supreme Court in a recent judgement, in the case of PCIT vs Abhisar Buildwell Pvt. Ltd. However, the apex court also observed that such otherwise quashed assessments may be reopened by revenue authorities, under reassessment sections 147/148, subject to the fulfilment of the specified conditions therein.

One such prescribed condition is that the revenue authorities do not have the power to reopen old search cases conducted before 1 April 2021 at present. However, on 23 August, CBDT came out with an instruction that conceived an out-of- the-box fictional concept of ‘time-travel’ in the Income Tax Act. It visualizes a scenario wherein assessing authorities can reopen completed assessments made pursuant to searches conducted before 1 April 2021, which otherwise had been quashed by the apex court.

The CBDT instruction relies upon section 150 of the Act, which gives leeway to the IT authorities to disregard the time barring limitation period, for reopening of already completed assessments, in order to give effect to the finding of any court in any appeal proceedings. The CBDT instruction directs the assessing authorities that, in order to give effect to the finding of the apex court in Abhisar Buildwell judgement that such otherwise quashed assessments may be reopened, under sections 147-148, and the above stated limitation conditions can be bypassed and undermined.

The legislative intent of the top dispensation is to provide a more stable, certain and conclusive taxation regime to the taxpayers to ensure that the tax assessments reach finality and are not left open inconclusive, infinitely. However, contrary to this legislative intent, a tsunami of litigations is foreseeable and expected after this adventurous CBDT instruction. It could be challenged in appropriate appellate forums as the directions given in it are not in accordance with the legislative sanctity of the Finance Act 2021.

Mayank Mohanka is the founder of TaxAaram India and a partner at S M Mohanka & Associates.

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Updated: 03 Sep 2023, 10:55 PM IST

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