ITAT Quashes Reassessment Based Solely on Pre-2021 Third-Party Search Material

The Kolkata Bench of the Income Tax Appellate Tribunal (ITAT) has held that where reassessment is initiated solely on the basis of documents seized during a search conducted on a third party before 1 April 2021, the Revenue must invoke Section 153C and cannot resort to reassessment proceedings under Sections 147/148. The Tribunal accordingly quashed the reassessment orders passed against Maan Steel & Power Ltd. for AYs 2018-19 and 2019-20.

The assessee’s original assessments were reopened under the new reassessment regime after the Assessing Officer received information through the Insight Portal based on a search conducted on the Anoop Majhi Group on 5 November 2020 in connection with the alleged coal scam. According to the department, the seized material indicated that the assessee had purchased illegally excavated coal in cash amounting to Rs.₹13.62 crore during AY 2018-19. Based on this information, the Assessing Officer estimated that the unaccounted coal purchases had generated suppressed sales and, after applying the gross profit rate disclosed by the assessee, made an addition of ₹7.72 crore under Section 147.

The Commissioner (Appeals) partly accepted the assessee’s case by directing the Assessing Officer to adopt a 6% gross profit rate instead of 6.43%, resulting in partial relief. Both the assessee and the Revenue challenged the appellate order before the Tribunal.

Before the Tribunal, the assessee raised an additional legal ground contending that the reassessment itself was void because the entire basis of reopening was material seized during a third-party search conducted before 1 April 2021. It argued that the second proviso to Section 149(1) specifically excludes the applicability of Section 148 where proceedings under Sections 153A or 153C are required. Therefore, if the seized documents allegedly belonged or related to the assessee, the only permissible course was to initiate proceedings under Section 153C.

The Tribunal admitted the additional ground, observing that it involved a pure question of law requiring no fresh investigation of facts. It noted that the reopening notice under Section 148 had been issued on 31 March 2022, whereas the information relied upon originated entirely from the search conducted on the Majhi Group on 5 November 2020. Since the search had taken place prior to 1 April 2021, the statutory scheme required the department to proceed under Section 153C rather than under the reassessment provisions of Sections 147 and 148. Accordingly, the Tribunal held that the reopening notice as well as the consequential assessment orders were without jurisdiction and liable to be quashed.

The Tribunal also examined the additions on merits and found that they could not survive independently. It observed that the Assessing Officer had relied entirely upon documents seized from the Majhi Group without confronting those documents to the assessee, supplying copies of the statements relied upon, or granting an opportunity to cross-examine the persons whose statements formed the basis of the additions. The assessee had consistently denied purchasing coal from the Majhi Group, and the department had not produced any independent corroborative evidence establishing the alleged transactions.

Following its earlier decision in Shakambhari Ispat & Power Ltd., the Tribunal held that additions based solely on untested third-party material, without compliance with the principles of natural justice, were legally unsustainable. It further observed that the Assessing Officer had neither disturbed the books of account nor demonstrated any discrepancy in the manufacturing records or consumption pattern of coal, making the estimation of suppressed turnover and profits entirely conjectural.

Holding that both the jurisdictional foundation and the additions on merits were unsustainable, the Tribunal allowed the assessee’s appeals for AYs 2018-19 and 2019-20 and dismissed the Revenue’s cross appeals as infructuous.

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