Section 263 Revision Invalid On Issues Beyond Incriminating Material Uncovered During Search Proceedings

ORDER

Rajesh Kumar, Accountant Member. – This is an appeal preferred by the assessee against the revisionary order passed by the ld. Pr. Commissioner of Income Tax (Central), Kolkata-2, (hereinafter referred to as the “Ld. PCIT”] dated 18.03.2026 for the AY 2017-18.

2. The only issue raised in the various grounds of appeal is against the invalid exercise of jurisdiction by the Ld. PCIT u/s 263 of the Act, thereby setting aside the assessment framed u/ 147/ 143(3) of the Act dated 12.07.2023, on the ground of being erroneous and prejudicial to the interest of the Revenue.

3. The facts in brief are that the assessee filed the return of income on 29.102.017, declaring total income at Rs. 21,19,160/-. A search and seizure action u/s 132 of the Act was conducted on the Naxal Group on 24.02.2022. The case of the assessee was reopened u/s 147 of the Act and accordingly, the assessment was framed u/s 147 /143(3) of the Act vide order dated 12.07.2023, determining the total income at Rs. 21,17,360/-. The Ld. PCIT upon perusal of the assessment record noted that the Ld. AO has not examined the issue of transportation charges. The PCIT noted that the assessee incurred total expenditure of Rs. 2,43,46,239/-, out of which Rs. 2,08,63,787/- was claimed towards transportation charges. The Ld. PCIT noted that the assessee was engaged in the business of transportation services, however no related assets were shown in the balance sheet meaning there by that the transportation services were out sourced and the payments were made exceeding the mandatory limit of 30,000 per contract/ payment of Rs. 1.00 lacs in aggregate during the year as prescribed u/s 194C of the Act and liable for deduction of tax at source at the rate of 2% which the assessee has failed to deduct. Accordingly, the 30% of the transportation charges should have been disallowed which worked out to Rs. 62,59,136/-, which were not disallowed and added to the income. Accordingly, the order passed by the Ld. AO is erroneous and prejudicial to the interest of the Revenue as the Ld. AO has not enquired into the said issue. Thereafter, the show cause notice u/s 263 of the Act was issued which was not replied by the assessee and finally the Ld. PCIT passed the order u/s 263 of the Act ex-parte by setting aside the assessment to the file of the Ld. AO with a direction to conduct necessary enquiry/ verification on the said issue and pass a fresh assessment order recomputing income of the assessee after proper enquiries and after affording reasonable opportunity of hearing to the assessee.

4. The Ld. AR vehemently submitted before us that in pursuance to search action u/s 132 of the Act, the case of the assessee was reopened u/s 147 of the Act by issuing notice u/s 148 of the Act on 17.02.2023, as per the explanation 2 to section 148 of the Act after obtaining prior approval from the PCIT-2, Central Circle, Kolkata. The Ld. AR submitted that since the proceedings were arising out of the search and seizure action u/s 132 of the Act on 24.04.2022, therefore, there should be information with the Ld. AO in the form of incriminating evidences found during the course of search proceedings. The Ld. AR submitted that prior to 1.4.2021 , the assessment in the search case was governed by provisions of Section 153A /153C of the Act. The Finance Act 2021, has amended procedure for assessment and reassessment of income with effect from 1^st April, 2021, by brining a new scheme of reassessment u/s 147 to 151 of the Act which includes procedure of assessment and reassessment in respect of searches conducted on or after 01.04.2021. Thus the Finance Act, 2021, has abolished the erstwhile special search assessment procedure as per section 153A and 153C of the Act for search initiated after 01.04.2021 and the assessment in the search case was to be framed u/s 148 of the Act. The Ld. AR submitted that was the statute carved out a distinction between the assessment in case of search cases and non-search cases. The Ld. AR referred to explanation 1 and explanation 2, of section 148 of the Act and submitted that the explanation 1 is applicable to non-search cases whereas explanation 2 to deals with the cases in the cases of search. The Ld. AR submitted that the assessee’s case is covered under Explanation 2 and not under explanation 1. The Ld. AR further referred to the new section 148A of the Act inserted by Finance Act, 2021. The Ld. AR submitted that Proviso to Section 148 of the Act provides for exception where provisions of Section 148A are not applicable. The Ld. AR dealt upon the said explanation in detail and submitted that the Provisions of Section 148A of the Act are not applicable in case of information under Explanation 2 clause (i) (iii) and (iv) of the Act. The Ld. AR therefore submitted that it is evident that assessments in search case and non-search case have been taken up differently in spite of fact that assessment is made u/s 148 of the Act. In other words, the assessments u/s 153A / 153C of the Act in such cases have been included in the provisions of section 147 to 151 of the Act vide explanation 2 of the Act. The ld. AR has submitted that therefore, assessment in non-search cases and search cases are under same sections 147 – 151 of the Act but cannot be treated at par. The Ld. AR submitted that in terms of first proviso to section 148 of the Act, the Ld. AO cannot issue notice u/s 148 of the Act until and unless he has information which suggests that income of the assessee has escaped assessment. The Ld. AR submitted that the proviso applies in the case of both information under Explanation 1 as well as explanation 2. The Ld. AR submitted that now the questions were arising as to what constitute the information in such cases. The Ld. AR in order to explain the point has referred to the decision of the Hon’ble Apex Court in the case of Pr. CIT v. Abhisar Buildwell (P.) Ltd. 454 ITR 212 (SC), wherein the Hon’ble Supreme Court while dealing with the incriminating material found during the course of search held that no addition can be made by the Ld. AO in absence of incriminating material found during the course of search u/s 132 of the Act or requisition u/s 132A of the Act. The Ld. AR further submitted that Hon’ble Apex Court has ruled that the assessment can be reopened by the Ld. AO in exercise of power u/s 147/ 148 of the Act subject to the fulfillment of the conditions as envisaged/ mentioned in section 147/ 148 of the Act and those powers the AO have and are saved. The ld. AR further submitted that in case of search assessment u/s 147 of the Act vide explanation 2 of Section 148 read with section first proviso to Section 148 of the Act, information shall be in the form of incriminating material found during the course of search in absence of which any other information shall constitute information under explanation -1 of Section 148 of the Act which is the search assessment u/s 147 of the Act cannot be framed in absence of incriminating material found during the course of search. The ld AR also vehemently submitted before us that in the instant case, notice u/s 142(1) of the Act dated on 06.06.2023 pursuant to reopening of assessment u/s 148 of the Act was issued on two points namely, the suppression of sales and source of advance payment made to supplier were raised in relation to seized material seized during the course of search conducted u/s 132 of the Act on 24.04.2022. The ld. AR submitted that the assessee filed all the details vide written submission dated 22.06.2023 and same is available at page no. 16 to 21. The ld. AR submitted that the ld. AO examined the submission and being satisfied with the submission and reply of the assessee framed the assessment u/s 147 of the Act accepting the returned income and had not made any addition to the returned income. Thus, there being no incriminating material found in the course of search and seizure action on 24.04.2022, the ld. AO completed the assessment on the returned income only. Therefore issuance of notice u/s 148 of the Act as per explanation 2 of the Act is bad in law since no incriminating material was found during the course of search. The third submission made by the counsel of the assessee is that the ld. PCIT had invoked jurisdiction u/s 263 of the Act on the ground that TDS was not deducted on the transportation charges amounting to Rs. 2,08,63,787/- and therefore, expenses to the tune of Rs. 30% were not allowable in terms of section 40(a)(ia) of the Act to the tune of Rs. 62,59,136/-. The Id. PCIT accordingly held the order of the assessment to be erroneous and prejudicial to the interest of the Revenue. The ld. AR submitted that the ld. AO passed the order u/s 147 of the Act on 09.06.2023, which was held to be erroneous by the ld. Pr. Commissioner of Income Tax. The ld. AR submitted that assessee filed the return of income on 29.09.2017 and the time to issue notice u/s 143(2) of the Act expired on 31.12.2018. The search was initiated on 24.02.2022. The ld. AR therefore submitted that at the time of search the assessment year 2017-18 was not pending and has attained finality. In other words, the assessment was unabated on the date of search. Therefore, the addition can only be made on the basis of incriminating material found and seized during search. The ld. AR submitted that the ld. AO by issuing notice u/s 142(1) of the Act and on the basis of seized documents asked assessee to submit reply in respect of two points as indicated above and the assessee duly replied the same and the assessment was framed accordingly. The ld. AR in defense of his argument relied on the decision of the coordinate Bench of this Tribunal in case of Indian Roadways Corporation v. Pr. CIT [IT Appeal No. 787 (KOL) of 2018, dated 12-9-2018]. The ld. AR therefore submitted that the order passed by the ld. PCIT u/s 263 of the Act is invalid as there was no incriminating material qua the transportation expenses incurred by the assessee. Therefore, without incriminating material in case of unabated assessment the addition cannot be made. Therefore, the order passed by the ld. AO is not erroneous and prejudicial to the interest of the revenue. The ld. AR submitted that the ld. PCIT has exceeded his power which is beyond his jurisdiction and therefore proceedings u/s 263 of the Act are not sustainable in law. The ld. AR also relied on the decision of the coordinate Bench of this Tribunal in case of B.P. Poddar Foundation for Education v. ACIT [IT Appeal No. 1863 (KOL) of 2019, dated 13-11-2019], and submitted that the same is confirmed by Hon’ble High Court also in ITAT No.143 of 2021. The ld. AR submitted that in terms of the said decision, the notice issued u/s 148 of the Act as per explanation 2 to section 148 (search case), the ld. AO did not find any incriminating material and accepted the returned income of the assessee in the assessment framed u/s 147 of the Act. Therefore, the power of interference with the assessment made, not based on any incriminating material, cannot be vested in Ld. PCIT to invoke Section 263 of the Act on the basis that in the assessment made by the ld. AO, the addition u/s 40(a)(ia) of the Act is warranted for the reason of non-deduction of TDS as per provisions of Section 194C of the Act. The ld. AR therefore submitted that since the original issue for reopening the concluded assessment did not survive, it was not open to ld. PCIT, Kolkata to include and adjudicate the different item of income not connected to or related with the assessment independently. Therefore, the ld. PCIT has exceeded his jurisdiction by passing the order u/s 263 of the Act. The ld. AR finally prayed that the order passed by the ld. PCIT is invalid and may kindly be quashed.

5. The ld. DR on the other hand relied on the order of the ld. PCIT heavily.

6. After hearing the rival contentions and perusing the materials available on record, we find that a search u/s 132 of the Act was conducted on Naxal Group on 24.02.2022 and in pursuance to search action, a notice u/s 148 of the Act was issued on 17.02.2023, after obtaining the approval from the competent authority. The assessee complied with the notice by fling the return of income on 14.03.2023, declaring total income of Rs. 21,17,360/-. Subsequently, notice u/s 143(2) and 142(1) of the Act were issued along with questionnaire. The query raised with respect to suppression of sales and source of advance payment to the suppliers. The assessee complied with the said questionaries and the ld. AO framed the assessment u/s 147 of the Act vide order dated 12.07.2023 accepting the returned income. We note that post amendment by Finance Act, 2021, the scheme of assessment has changed from the erstwhile provisions as contained in Section 153A and 153C of the Act and new scheme of reassessment u/s 147 to 151 of the Act has been provided for the searches conducted on or after 01.04.2021. Now the provisions of Section 147 to 151 are applicable to both search cases as well as non-search cases. We note that the explanation 1 and explanation 2 deal with the non-search cases and search cases respectively. For the sake of ready reference the same are extracted below:-

“”148. Issue of notice where income has escaped assessment.

Explanation 1. For the purposes of this section and section 1484, the information with the Assessing Officer which suggests that the income chargeable to tax has escaped assessment means,

(1) any information in the case of the assessee for the relevant assessment year in accordance with the risk management strategy formulated by the Board from time to time,

(ii) any audit objection to the effect that the assessment in the case of the assessee for the relevant assessment year has not been made in accordance with the provisions of this Act: or

(iii) any information received under an agreement referred to in section 90 or section 90A of the Act; or

(iv) any information made available to the Assessing Officer under the scheme notified under section 135A; or

(v) any information which requires action in consequence of the order of a Tribunal or a Cour

Explanation 2. For the purposes of this section, where.

(i) a search is initiated under section 132 or books of account, other documents or any assets are requisitioned under section 1324, on or after the 1st day of April, 2021. in the case of the assessee; or

(ii) a survey is conducted under section 1334, other than under sub-section (24) [***] of that section, on or after the 1st day of April, 2021, in the case of the assessee: or

(iii) 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 or requisitioned under section 132 or section 1324 in case of any other person on or after the 1st day of April, 2021, belongs to the assessee; or

(iv) the Assessing Officer is satisfied, with the prior approval of Principal Commissioner or Commissioner, that any books of account or documents, seized or requisitioned under section 132 or 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, relate to, the assessee.

the Assessing Officer shall be deemed to have information which suggests that the income chargeable to tax has escaped assessment in the case of the assessee [where] the search is initiated or books of account, other documents or any assets are requisitioned or survey is conducted in the case of the assessee or money, bullion, jewellery or other valuable article or thing or books of account or documents are seized or requisitioned in case of any other person”.

6.1. It is apparent from the above that explanation 1 is applicable in non-search cases whereas search cases were covered under explanation 2. We also note that a new section u/s 148A of the Act have been inserted by Finance Act, 2021 and the Proviso to Section 148A of the Act provides that explanation where provisions of Section 148A of the Act are not applicable. For the sake of ready reference the same are extracted below:-

“Provided that the provisions of this section shall not apply in a case where.

(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 1324, 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 1324, in case of any other person on or after the 1st day of April, 2021, pertains or pertain to, or any information contained therein, relate to, the assessee; or””

6.2. We therefore note that the provisions of Section 148 of the Act is not applicable in case of information under explanation 2 clause (i),(iii) and (iv). Therefore, we find merit in the contention of the assessee that the provisions of Section 147 to 151 of the Act in terms of explanation-2, are not at bar with non-search cases u/s 147 to 151 of the Act. Further, we want to refer to the first proviso to Section 148 of the Act which provides that the ld. AO cannot issue notice u/s 148 of the Act until and unless he has information which suggests that income of assessee has escaped assessment. For ready reference the first proviso is extracted as under:-

“Provided that no notice under this section shall be issued unless there is information with the Assessing Officer which suggests that the income chargeable to tax has escaped assessment in the case of the assessee for the relevant assessment year and the Assessing Officer has obtained prior approval of the specified authority to issue such notice”

6.3. Therefore, it is clear from the above that the proviso applies to both the information under Explanation 1 as well as explanation 2. Now the issue before us is what material constitute the information in the search case. We have perused the decision of the Hon’ble Apex Court in case of Abhisar Buildwell P. Ltd. (supra), wherein the Hon’ble Court while dealing with issue of the incriminating material found during the course of search held that no addition can be made by the ld. AO in absence of any incriminating material found during the course of search u/s 132 of the Act or requisition u/s 132A of the Act. The Hon’ble Apex Court further ruled that the assessment can be re-opened by the ld. AO in exercise of power of Section 147/ 148 of the Act subject to the fulfillment of the conditions as mentioned under the relevant section and those powers of the AO are saved. Therefore, in the search assessment u/s 147 of the Act, explanation 2 of Section 148 read with first proviso to Section 148 of the Act, the information shall be in the form of incriminating material found during the course of search in absence of which any other information shall constitute the information under explanation 1 of section 148 of the Act. Therefore, search assessment u/s 147 of the Act cannot be framed in absence of incriminating material found during the course of search.

6.4. We note that during the course of search, certain materials were found relating suppression of sales and source of advance payments to suppliers and accordingly the ld. AO had initiated proceeding u/s 147 read with section 148 of the Act. We note that the assessee replied vide submission dated 22.06.2023, which is available at page no.16 to 21 and the ld. AO being satisfied with the reply of the assessee passed the assessment u/s 147 of he Act accepting the returned income. In our considered opinion , since no incriminating material was found qua the transportation charges during the course of search, the ld. AO could not have examined the issue as there was no information in terms of explanation 2 to section 148 of the Act. Considering the facts and submissions of the assessee , we are of the view that the order passed by the ld. AO is neither erroneous nor prejudicial to the interest of the Revenue and therefore, the ld. PCIT has wrongly exercised and exceeded his jurisdiction. The case is squarely covered by the decision of Hon’ble Apex Court in case of Malabar Industrial Co. Ltd. v. CIT [2000] 109  243 ITR 83 (SC), wherein it has been held that satisfaction of two condition is pre-condition for invoking the jurisdiction. The case of the assessee is also covered by the decision of the co-ordinate Bench in case of B.P. Poddar Foundation for Education (supra), wherein the Hon’ble Bench has held as under:-

“We note that solitary reason to reopen the assessment is that the americe and deposited money with Nissan Developers & Properties Pvt. Lad for an amount of Rs.39.42.to the company is a specified person of the assessee. We, therefore 10 was of the view that the asse has violated the provisions of sections 13tbec)tio and 13thidh of the Act and hence the said me is to b taxed separately at Maximum Marginal Rate. On appeal by the assessee the Id CITIA) deled the said amount of Rs 59,42,709 observing the following

…………………………………………….

12. We note that it is abundantly clear that the addition of Rs 59,42,709-made in the assessment order us. 143(3)147 of the Act dated 28.12.2016. on the basis of the above reasons recorded war deleted by the Ld CLT (A), vide order dated 30.07 2019. In that view of the matter, the other additions made in the said reassessment order which were not part of the reasons recorded for reopening the assessment are not sustainable in the eyes of lave even after invertion of Explanation 3 to section 147 of the Act by Finance Act. 2009

We note that AO may assess or reassess the income in respect of any issue which comes to his notice subsequently in the course of the proceedings though the reasons for such issue were not included in the notice, however, if after issuing a notice under section 148 of the Act. the AO accepted the contention of the assessee and holds that the income which he has initially formed a reason to believe had escaped assessment, has as a matter of fact not escaped assessment, it is not open to him independently to assess some other income, for that we rely on the judgment of Hon’ble Bombay High Court in the case of Jet Airways (1) limited 331 ITR 236 (Bom), wherein it was held as follows

……………………………………..

We note that in the assessee’s case under consideration, the assessment for AY 2009-10 was completed us. 143(3)/11 of the Act on 01/03/2011. A notice under section 148 of the Act was issued on 22.03.2016 to reopen the assessment w/s. 147 of the Act. The only reason for issuing the said 148 notice as per Reasons Recorded dated 17.08.2016 was that income of Rs.59,42,709-hus escaped assessment for having deposited money with the specified person Ms. Nissan Developers & Properties Pvt. Ltd. We note that addition of Rs. 59,42,709/- was deleted by ld CIT(A) and since AO has not issued a fresh notice under section 148 of the Act to reassess the other iAncome therefore, the reassessment proceedings initiated by the assessing officer to reassess other income (as noted by us above) is null and void in the eye of law, hence we quash the reassessment proceedings under section 147/148 of the Act. 14. In the result, the appeal of the assessee is allowed.””

6.5. We note that the said decision of the co-ordinate Bench has been upheld by the Hon’ble Jurisdictional High Court as stated (supra). We note that in terms of the notice issued u/s 148 of the Act as per Explanation 2 to section 148 of the Act (search cases), the ld. AO did not find any incriminating material qua the impugned issue and accepted the returned income filed by the assessee in the assessment framed u/s 147 of the Act. Therefore, the PCIT has no power of invoking jurisdiction u/s 263 of the Act to interference with the assessment made as there was no incriminating material in respect of the issue which was subject matter of the proceedings u/s 263 of the Act. Consequently, we quash the order passed u/s 263 of the Act. The appeal of the assessee is allowed.

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