Assessment of income of third person under the Income Tax Act

Section 153C – Under this provision provides for the procedure for assessment of income of any other person.

Section 153C (1) provides that notwithstanding anything contained in section 139 (return of income), section 147 (income escaping assessment), section 148 (issue of notice where income has escaped assessment), section 149 (time limit for notice), section 151(sanction for issue of notice) and section 153 (Time limit for computation of assessment, reassessment and re-computation), where the Assessing Officer is satisfied that,- any money, bullion, jewellery or other valuable article or thing, seized or requisitioned, belongs to; or any books of account.

Detailed Discussion- Assessment of Income of Third Person

One of the fundamental and major principles of financial accounting is that if a person claims credit for payment of money to a third person, the credit should be allowed only if the payment and the information relating to the transaction have been received from the third person.  The advance tax and self-assessment tax is paid directly by the assessee by filling a Challan which bears a unique Challan Identification Number (CIN) and the PAN of the assessee.  These two number systems are used to cross verify the claim of payment made by the assessee and allow appropriate credit.

Can an Assessing Officer hold Jurisdiction over third person?

The Jurisdiction says that in the absence of search material proceedings under the particular Section 153C of the Act could not be initiated against a third person by the Assessing Officer. The fundamental jurisdictional requirement for invoking the powers under Section 153C was the seizure or requisitioning of books of account or documents or assets which belonged to a person other than the person referred to in Section 153A. Otherwise, the Assessing Officer has no jurisdiction under Section 153C.

The high court initiated that incriminating material must be found during search showing undisclosed income of the third person. The assessing officer is to record satisfaction for having jurisdiction over the third person in respect of search conducted that such money, asset or valuables belonged to the third person. In the absence of incriminating search material, the third person’s assessment can never be made.

The invalid proceeding and satisfaction of recording

The high court pointed out that the only document which was seized during the search was a cheque book that pertained to the assessee which in fact reflected the issue of cheques during the time period from August 2008 to December 2008 relevant to the assessment year 2009 -10. Since, there was no other evidence or undisclosed income, the proceedings under Section 153C were not valid.

Before initiating assessment of third person, AO has to record his satisfaction in writing

The recording satisfaction holds immense impetus due to some valid reasons. The Section 153C stressed mainly on the fact that the assessment of income on the third person can only be done if the Assessing Officer is made satisfied. Such satisfaction shall be recorded in writing. The high court held that one of the conditions precedents for the invoking of the block assessment pursuant to a search in respect of the third party under the Section 158 BD of the Act which includes recording satisfaction that was detected pursuant to a search had not been complied with.

If the third person, on whom the proceedings is supposedly initiated, submits necessary evidence to establish his bona fide transactions, then the onus will be handed over to the department in order to prove that the claim of the assessee is incorrect and false.

Also Read- No Addition to income can be made based on unsigned agreement to sell the property