Search on others cannot extend third-party reassessment limits without specific seized material pertaining to them.
The Dispute: Section 148 vs. Section 153C
The Conflict: The Revenue searched the “SMC Group” and suspected the assessee of taking a loan from a shell entity. They issued a reassessment notice on 30-08-2024 for AY 2016-17, trying to use the relaxed 10-year window applicable to search cases.
The Legal Barrier: To use the extended search-related timelines for a third party (the assessee), the Revenue must satisfy strict conditions under the proviso to Section 148A:
Clause (a): The assessee must be the one searched (Not applicable here).
Clause (c): Seized assets or documents must “belong to” or “pertain to” the third party (The AO failed to prove this).
The Judicial Verdict
The High Court quashed the notice as time-barred, ruling in favour of the Assessee:
1. Failure to Trigger Search Provisions
Because no specific books or assets belonging to the assessee were found during the SMC Group search, a notice under Section 153C (Assessment of third parties in search) could not have been issued.
2. Reverting to the “Six-Year” Rule
Since the search-based extension didn’t apply, the validity of the notice had to be tested against the First Proviso to Section 149(1). This proviso states that no notice can be issued under the new regime if it would have been time-barred under the old (pre-2021) regime.
The Limit: Under the old regime, the maximum limit to reopen was 6 years.
The Math: For AY 2016-17, the six-year period ended on 31-03-2023.
The Result: The notice issued on 30-08-2024 was well beyond the 6-year limit and was therefore legally invalid.
Transition to the Income-tax Act, 2025
Under the new Act, these protections are further solidified:
Section 280 (New Act): Replaces Section 148. It mandates that reassessment for “information from search” can only happen if there is a direct nexus with the assessee.
Section 282 (New Act): Replaces Section 149. It maintains the “sunset clause” that prevents the Revenue from reviving years that were already “dead” (time-barred) under previous laws.
Key Takeaways for Taxpayers
Direct Nexus Required: If the Revenue tries to reopen your case because of a search on your “lender” or “supplier,” they must prove they found your documents or assets. Mere suspicion of a “shell entry” is not enough to skip the standard limitation period.
The 31-March-2023 Deadline: For AY 2016-17, any notice issued after March 2023 (under general provisions) is highly likely to be time-barred. Always verify the date of the notice against the end of the relevant assessment year.
Writ Jurisdiction: This is a “jurisdictional fact.” If the notice is time-barred, you don’t need to argue the merits of the loan; you can challenge the very authority of the AO to issue the notice in the High Court.
and TUSHAR RAO GEDELA, J.
(a) conduct any enquiry, if required, with the prior approval of specified authority, with respect to the information which suggests that the income chargeable to tax has escaped assessment;
(b) provide an opportunity of being heard to the assessee, by serving upon him a notice to show cause within such time, as may be specified in the notice, being not less than seven days and but not exceeding thirty days from the date on which such notice is issued, or such time, as may be extended by him on the basis of an application in this behalf, as to why a notice under Section 148 should not be issued on the basis of information which suggests that income chargeable to tax has escaped assessment in his case for the relevant assessment year and results of enquiry conducted, if any, as per clause (a);
(c) consider the reply of assessee furnished, if any, in response to the show-cause notice referred to in clause (b);
(d) decide, on the basis of material available on record including reply of the assessee, whether or not it is a fit case to issue a notice under Section 148, by passing an order, with the prior approval of specified authority, within one month from the end of the month in which the reply referred to in clause (c) is received by him, or where no such reply is furnished, within one month from the end of the month in which time or extended time allowed to furnish a reply as per clause (b) expires:
(a) a search is initiated under Section 132 or books of account, other documents or any assets are requisitioned under Section 132A in the case of the assessee on or after the 1st day of April, 2021; or
(b) the Assessing Officer is satisfied, with the prior approval of the Principal Commissioner or Commissioner that any money, bullion, jewellery or other valuable article or thing, seized in a search under Section 132 or requisitioned under Section 132A, in the case of any other person on or after the 1st day of April, 2021, belongs to the assessee; or
(c) the Assessing Officer is satisfied, with the prior approval of the Principal Commissioner or Commissioner that any books of account or documents, seized in a search under Section 132 or requisitioned under Section 132A, in case of any other person on or after the 1st day of April, 2021, pertains or pertain to, or any information contained therein, 2[relate to, the assessee; or
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