Introduction:

In a recent ruling, the Delhi High Court addressed the applicability of the ten-year block period for search assessments under Section 153C of the Income Tax Act, 1961. The court ruled that the extended block period introduced by the Finance Act of 2017 does not apply to searches conducted before April 1, 2017. The case, PCIT vs. Karina Airlines International Ltd, was decided by Justice Yashwant Varma and Justice Ravinder Dudeja.

The case arose from a search conducted on April 7, 2016, which led to a satisfaction note and subsequent assessments. The central issue was whether the amendments to Section 153C by the Finance Act, 2017, which extended the block period to ten assessment years, could be applied retroactively to searches conducted before the amendment.

Arguments:

Department’s Arguments:

Counsel for the department, Anant Mann, argued that the six-year block period for assessments should be linked to the date of the search or requisition, as outlined before the 2017 amendment. The key points included:

1. Block Period Connection: The department contended that the six assessment years should be connected to the previous year in which the search or requisition took place. This connection, according to the department, is reinforced by the amendment which mentions “relevant to the previous year in which search is conducted.”
2. Application of the Finance Act: The department argued that post-amendment, the block period of ten years should apply even to non-searched entities if the assessing officer was common for both searched and non-searched entities.
3. Common Jurisdictional AO: The department emphasized that the jurisdictional assessing officer’s commonality meant that the extended period under the new provision should be considered. They argued that the satisfaction note for non-searched entities would start from the date of search for the searched entity.

Respondent’s Arguments:

Counsel for the respondent, Ruchesh Sinha, argued against the applicability of the extended block period, focusing on the following points:

1. Pre-Amendment Applicability: Sinha argued that the amendments made by the Finance Act of 2017 could not be applied retroactively. Since the search occurred on April 7, 2016, the block period should be governed by the provisions that were in place before the amendment.
2. Limitation and Procedure: The respondent contended that the reassessment proceedings initiated after the expiry of the six-year period as per the pre-amendment law were barred by limitation. The assessment made on December 31, 2019, was thus invalid.
3. Timeliness of Proceedings: The respondent highlighted that the proceedings under Section 153C should adhere to the limitation period applicable at the time of the search. The extended block period could not apply as the amendment came into force after the search date.

Court’s Judgment:

The Delhi High Court, in its judgment, addressed the core issues of the case and clarified the scope of the block period under Section 153C:

1. Non-Retroactivity of Amendments: The court held that the amendments introduced by the Finance Act of 2017, which extended the block period to ten assessment years, did not apply to searches conducted before April 1, 2017. The provisions in force at the time of the search, which allowed for a block period of six years, remained applicable.
2. Commencement of Limitation Period: The court emphasized that the assessment proceedings must be conducted within the block period applicable at the time of the search. Since the search occurred on April 7, 2016, the six-year limitation period was to be followed.
3. Validity of Assessments: The court agreed with the ITAT’s decision that the assessment made on December 31, 2019, under Section 153C was barred by limitation, as it was beyond the applicable six-year period. The court dismissed the appeal by the department, affirming that the reassessment proceedings were invalid due to being out of time.

Conclusion:

The Delhi High Court’s ruling reaffirms the principle that legislative amendments affecting procedural timelines cannot be applied retroactively. The decision underscores the importance of adhering to the legal framework in place at the time of the search, ensuring that assessment and reassessment actions are conducted within the appropriate limitation period. This ruling provides clarity on the application of the block period under Section 153C and reinforces procedural fairness in tax assessments.