Assessment Quashed: No Approval u/s 148B for Pre-Search Year (A.Y. 2022-23)

Assessment Quashed: No Approval u/s 148B for Pre-Search Year (A.Y. 2022-23)

Issue

Whether an assessment for an assessment year immediately preceding the search year (A.Y. 2022-23) can be framed under Section 143(3) without issuing a notice under Section 148 and obtaining the mandatory prior approval under Section 148B of the Income-tax Act, 1961.

Facts

• Search Date: A search under Section 132 was conducted on 24.11.2022 (Financial Year 2022-23, relevant to A.Y. 2023-24).

• Return Filed: The assessee filed its return for A.Y. 2022-23 on 04.11.2022 (before the search).

• Assessment: The Assessing Officer (AO) issued a notice under Section 143(2) on 21.06.2023 (after the search) and completed the assessment under Section 143(3) on 31.03.2024.

• Statutory Requirement: Under Explanation 2(iv) to Section 148, the AO is “deemed to have information” suggesting income escapement for the three years preceding the search year. This mandates the initiation of reassessment proceedings under Section 148 for A.Y. 2022-23.

• Approval: The AO obtained approval from the Additional CIT under Section 143(3), not under the specific provision of Section 148B, which requires approval from a Joint Commissioner/Additional Commissioner for search-related assessments.

• Assessee’s Plea: The assessee argued that the assessment under Section 143(3) was void ab initio because the mandatory procedure of issuing a Section 148 notice and obtaining Section 148B approval was bypassed.

Decision

• The Income Tax Appellate Tribunal (ITAT) quashed the assessment order.

• Jurisdictional Defect: The Tribunal held that once a search is initiated, the assessment for the preceding three years (including A.Y. 2022-23) must necessarily be framed under Section 147/148, as per the special mechanism provided in the Act. The general provision of Section 143(3) cannot override this special provision (generalia specialibus non derogant).

• Mandatory Approval Missed: The failure to obtain prior approval under Section 148B was a fatal defect. The approval taken under Section 143(3) could not cure this, as Section 148B is a specific safeguard for search cases.

• Time Barred Notice: The Tribunal also noted that the notice under Section 143(2) was issued on 21.06.2023, which was beyond the 3-month limitation period from the end of the financial year in which the return was filed (return filed on 04.11.2022, limitation expired on 31.03.2023). Thus, the Section 143(3) assessment was invalid on this count as well.

• Mechanical Approval: Regarding the approval granted, the Tribunal found it was given on the same day the draft order was forwarded (31.03.2024), for a volume of 1,596 pages of seized material. This was held to be a mechanical approval without application of mind, rendering the order void.

Key Takeaways

• Search Trigger: A search operation triggers a special assessment regime under Section 147/148 for the preceding three years. Regular assessment under Section 143(3) is not the correct route for these years post-search.

• Section 148B is Mandatory: For search-related assessments, prior approval from the Joint/Additional Commissioner under Section 148B is a jurisdictional requirement.

• Application of Mind: Approving authorities cannot act as rubber stamps. Granting approval for voluminous records on the same day suggests non-application of mind and can vitiate the entire assessment.

• Limitation for 143(2): The strict timeline of 3 months for issuing a scrutiny notice under Section 143(2) applies even in search cases if the department attempts to use the regular assessment route.

GP Rate Restricted to 14% & Relief on Double Addition

Issue

1. Can an addition for unexplained opening balances in seized documents be sustained if 80% of the entries are reconciled with books?

2. Can the AO estimate Gross Profit (GP) at 23.85% (based on the previous year) when the current year’s turnover has significantly increased and the business mix has changed?

Facts

• Unexplained Balances: The AO made additions for opening balances found in rough seized sheets. The CIT(A) deleted most of these, noting that 80% of the entries matched the books. However, he sustained an addition of ₹1.83 crores for unexplained opening balances.

• Double Addition: The AO made a separate addition of ₹1.21 crores (20% of unreconciled entries), which overlapping with the ₹1.83 crore addition.

• GP Addition: The AO rejected the books and estimated GP at 20% (based on the previous year’s 23.85%), compared to the declared 12.16%, leading to a huge addition of ₹7.42 crores. The CIT(A) reduced this to 14.12%.

Decision

• Unexplained Balances: The ITAT upheld the CIT(A)’s decision to sustain the addition of ₹1.83 crores, as the assessee failed to explain the specific arithmetic differences in opening/closing balances of the rough sheets.

• Double Addition Deleted: The ITAT granted relief of ₹96.24 lakhs, holding that this amount was already covered in the ₹1.83 crore addition, and taxing it again would amount to double taxation.

• GP Rate: The ITAT further reduced the GP rate to 14%. It reasoned that while the AO’s 20% estimate was arbitrary (ignoring the volume increase and lower-margin gold sales), a slight increase over the declared 12.16% was justified due to the higher-margin polki/kundan jewellery segment.

Key Takeaways

• Rough Sheets: If seized papers are largely reconciled (80%), they are treated as business records. Additions are restricted only to the specific unexplained differences.

• Reasonable GP Estimation: When books are rejected, profit estimation must be based on market trends and specific business facts (like product mix and turnover volume), not just blindly adopting the previous year’s rate.

THE INCOME TAX APPELLATE TRIBUNAL, CHANDIGARH BENCH “A”, CHANDIGARH
Jamna Dass Nikkamal Jain Saraf
Private Ltd.
455, The Mall Road Ludhiana
Punjab-141001
Vs
The DCIT
Central Circle-1
Ludhiana