Income Tax Addition of Rs 1.34 Crore Based on Search Material Quashed; ITAT Says Department Applied Wrong Section

The ITAT Mumbai has allowed the appeals of Nanne Gulzar & Company for AYs 2017-18 and 2018-19 after holding that the reassessment proceedings initiated under Sections 147/148 were without jurisdiction, as the entire case was based on material gathered during a search action and therefore ought to have been proceeded with under Section 153C of the Income-tax Act.

The assessee, a partnership firm engaged in livestock commission business, had filed returns declaring modest income. Following a search and seizure operation conducted on the Allanasons Group on 3 January 2019, the Revenue relied upon statements and information allegedly revealing undisclosed transactions involving the assessee and its partner, Mohammad Saleem.

Based on such material, the Assessing Officer rejected the books of account and estimated commission income at 0.5% of turnover, resulting in additions of Rs 54.95 lakh for AY 2017-18 and Rs 1.34 crore for AY 2018-19.

Before the Tribunal, the assessee raised an additional legal ground contending that the assessments were invalid because they were founded entirely on search material. It was argued that the partner’s case, arising from the same search and based on the same material, had been assessed under the search provisions, whereas the assessee-firm was subjected to reassessment proceedings under Sections 147/148. According to the assessee, once the Revenue relied upon material seized during a search, the mandatory route prescribed under Section 153C had to be followed.

The Tribunal first condoned a delay of 120 days in filing the appeals, accepting the explanation regarding the partner’s ill health, advanced age, lack of formal education and the absence of effective communication of the appellate order.

On merits, the Tribunal noted that the assessment orders passed in the case of the partner and the firm were virtually identical. The same statements, search findings, allegations and estimation methodology had been adopted in both cases. The Bench observed that if the partner’s case was treated as a search case requiring assessment under the special provisions, there was no justification for assessing the firm through reassessment proceedings when both matters rested on the same search material.

Relying heavily on the Bombay High Court’s decision in Sejal Jewellery v. Union of India, the Tribunal held that Sections 153A and 153C begin with overriding non-obstante clauses and constitute a special code for assessments arising out of search and seizure actions. Once the Assessing Officer is satisfied that seized material pertains to a person other than the searched person, proceedings must be initiated under Section 153C and not under Sections 147/148.

Thus, the Tribunal held that the notices issued under Section 148 and all consequential proceedings were without jurisdiction and liable to be quashed. Having allowed the appeals on this legal issue, the Tribunal did not adjudicate the remaining grounds relating to rejection of books, estimation of income, accommodation entry allegations and penalty proceedings, leaving those issues open. The assessments for both AY 2017-18 and AY 2018-19 were set aside and the assessee’s appeals were allowed.

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