Delhi High Court: Tax Assessment Not Valid Without Relevant Evidence Against Non-Searched Person

The Delhi High Court has ruled that assessments under Section 153C of the Income Tax Act, 1961 can only be made against a person who was not directly searched if there is incriminating material clearly connected to their income.

Section 153C allows the Income Tax Department to assess someone other than the person being searched, but only if documents, valuables, or evidence belonging to the other person are found during the search.

The Income Tax Department (Revenue) claimed that Section 153C includes three conditions (limbs) under which it can act:

1. First Limb: If seized cash, jewellery, or valuables belong to someone other than the searched person.
2. Second Limb: If the seized books or documents pertain to a different person.
3. Third Limb: If the documents contain information that relates to someone else.

The Revenue argued that in the third case, there is no requirement for the information to be connected to the income of that other person.

What the High Court Said

The Court rejected the Revenue’s view. A division bench of Justice Vibhu Bakhru and Justice Tejas Karia clarified that:

The Assessing Officer (AO) must be satisfied that the material seized has a bearing on the income of the other person (non-searched individual). Any assumption of jurisdiction under Section 153C without this condition is legally invalid.

Background of the Case

The case involved a person who was related to one of the Directors and Promoters of Moser Baer Group, the company that was actually searched by the Income Tax Department under Section 132. Later, tax notices were issued to the petitioner (the relative) for the assessment years 2015-16 to 2020-21, claiming he had purchased properties in his wife’s name, partly using cash.

Court’s Finding on the Evidence

The Court reviewed the available material and made the following observations:

• The alleged cash payments were made during financial year 2013-14, relevant to AY 2014-15.
• However, the notices were issued for AYs 2015-16 to 2020-21.
• There was no material connecting the petitioner’s income during these later years with the seized documents.

Therefore, the Court held that the AO did not have valid grounds to issue notices for those assessment years.

The Delhi High Court allowed the petition, stating that the notices under Section 153C were not legally sustainable due to the absence of evidence linking the seized material to the income of the petitioner.

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