Merger of Original Assessment into Search Assessment: Original Disallowances Become Inoperative

Facts

Original Assessment: For AY 2006-07, an assessment was completed under Section 143(3), where the Assessing Officer (AO) disallowed a claim for short-term capital loss.
Search Proceedings: Subsequently, a search was conducted on the assessee’s premises, triggering the block assessment regime under Section 153A.
The Second Order: The AO passed a fresh assessment order under Section 153A (read with Section 143(3)) for the block period. Notably, in this second order, the AO did not disallow the short-term capital loss.
The Conflict: The Revenue sought to maintain the disallowance from the original Section 143(3) order, while the assessee contended that the original order had become inoperative and was substituted by the search assessment order.
Tribunal’s Initial View: The Tribunal originally held that the first assessment did not “abate,” implying the previous disallowance could still stand.

Decision

Final Verdict: In favour of the Assessee.
Ratio Decidendi:
- Doctrine of Merger: The Court held that once a search assessment is initiated under Section 153A for a block period, the earlier assessment orders for those years are effectively re-opened. The previous orders merge into the subsequent search assessment order.
- Inoperative Status: Upon the passing of the Section 153A order, the original assessment order becomes infructuous, inoperative, and unenforceable.
- Scope of the New Order: It is irrelevant whether the specific issue (like the short-term capital loss) was re-discussed or incorporated into the search order. The search order is the only valid assessment for that year.
- Prevalence of Latest Order: Since the AO did not disallow the short-term capital loss in the subsequent Section 153A order, that “nil disallowance” position prevails. The Revenue cannot rely on an “extinct” order to raise a demand.

Key Takeaways

The “One Assessment” Rule: For search cases, professionals must remember that the Section 153A/153C order is the final word. Any disallowances made in a prior Section 143(3) or 147 order must be explicitly re-stated in the search order by the AO to remain valid.
Opportunity in Search: If an item was disallowed in an original assessment, but the AO “forgets” or chooses not to include that disallowance in the subsequent search assessment, the taxpayer effectively gains relief as the old order dies.
Abatement vs. Merger: While “abatement” specifically applies to pending proceedings, this ruling clarifies that even completed assessments lose their independent existence once a search order is finalized.
Appellate Strategy: If an appeal is pending against an original assessment and a search order is subsequently passed for the same year, the original appeal may become academic because the underlying order is no longer enforceable.

IN THE ITAT DELHI BENCH ‘G’

Bando India (P.) Ltd.

Income-tax Officer^*

YOGESH KUMAR US, Judicial Member
and Smt. Renu Jauhri, Accountant Member

IT Appeal No. 6020 (Delhi) of 2025
[Assessment year 2018-19]

FEBRUARY 26, 2026

Arun Kishore, CA for the Appellant. Sahil Kumar Bansal, Sr. DR for the Respondent.

ORDER

Smt. Renu Jauhri, Accountant Member.- The above captioned appeal is preferred by the assessee against the order dated 21.08.2025, passed by Commissioner of Income Tax (Appeals)/National Faceless Appeal Centre [for short, Ld. CIT(A)/NFAC], Delhi u/s 250 of the Income Tax Act, 1961 [hereinafter referred to as, “Act”] for A.Y. 2018-19 in Appeal No. NFAC/2017-18/10086237.

2. The assessee has raised following grounds of appeal:

“(i)

That on the facts and circumstances of the case and in law Ld. CIT(A) has erred in confirming the addition of Rs. 9,25,662/- towards Duty Drawback, as erroneously made by the Ld. Assessing Officer u/s 143(3) order dated 03.09.2021.

(ii)

That as per the specific provisions of Section 145B (3) r.w.s. 2(24)(xviii), Duty Drawback is taxable on Accrual basis.

(iii)

That Ld. CIT(A) and AO have both erred in taxing Duty Drawback of Rs. 9,25,662/- on accrual basis, when the appellant has been consistently declaring this income on actual receipt basis.

(iv)

That as per note no. 2 annexed with the audited financial statements, the appellant had declared the basis of preparation of financial statements as: “The accounting policies adopted in preparation of the financial statements are consistent with those of the previous years”.

(v)

That the addition of Rs. 9,25,662/- erroneously made by changing the consistently followed accounting policy of the appellant, be deleted.”

3. Brief facts of the case are that the assessee filed its return for A.Y. 2018-19 on 29.11.2018, declaring NIL income and deemed income u/s 151JB at Rs. 15,07,99,048/-. The return was processed u/s 143(1) of the Act at an income of Rs. 10,88,640/- and deemed income u/s 151JB at Rs. 15,07,99,048/- . Subsequently, the case was selected for limited scrutiny on the ground that there was a mismatch in duty drawback offered as income by the assessee and as per the Central Board of Excise and Customs (for short, CBEC) data. The assessee contended that income on account of duty drawback claims is being offered on actual receipt basis consistently since last several years. However, Ld. AO rejected the assessee’s contention and observed that the assessee is following mercantile system of accounting, and, therefore, the duty drawback amount of Rs. 9,25,662/- not offered as income was added to the total income and assessment completed u/s 143(3) of the Act. Aggrieved, the assessee preferred an appeal before Ld. CIT(A).

3.1 Ld. CIT(A) also concurred with the observations of Ld. AO and held that since the assessee followed mercantile system of accounting, provisions of section 145B(2) of the Act are applicable whereas the assessee contended that section 145B(3) is applicable in its case. Vide order dated 21.08.2025, Ld. CIT(A) dismissed the assessee’s appeal after rejecting assessee’s contentions. Further aggrieved, the assessee filed present appeal before the Tribunal.

4. Before us, Ld. AR has submitted that the assessee’s case is clearly covered by the provisions of section 145B(3) according to which the income from duty drawback etc is deemed to be the income of the previous year in which it is received. Ld. AR has further pointed that this system of accounting in respect of duty drawback is being consistently followed by the assessee and the same has been accepted by the revenue in earlier years even under scrutiny.

4.1 On the other hand, Ld. DR has argued that the issue was taken up based on specific inputs from the CBEC data as per which duty drawback of Rs. 9,80,193/-was sanctioned during the relevant financial year whereas the assessee had offered only Rs. 54,531/- as income in the year under consideration. Since the amount was sanctioned by the CBEC, there was a reasonable certainty of its realisation within the year and accordingly, the remaining amount of Rs. 9,25,662/- has rightly been taxed by the Ld. AO during the year under consideration.

5. We have heard the rival submissions and perused the material available on record. We note that the taxability of income received by way of duty drawback etc is specifically covered by the provisions of section 145B and the relevant sub section (3) is reproduced below:

“Sec. 145B

(1)

(2)

(3) The income referred to in sub-clause (xviii) of clause (24) of section 2 shall be deemed to be the income of the previous year in which it is received, if not charged to income-tax in any earlier previous year.”

6. In view of clear legal position, we are of the considered view that the duty drawback has rightly been shown as income in the year of receipt and Ld. AO was not justified in including the same on accrual basis during the year under consideration. Accordingly, we hereby, direct the Ld. AO to delete the addition of Rs. 9,25,662/- made on account of duty drawback.

7. In the result, the appeal of the assessee is allowed.