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Section 148 Reassessment Notice Issued Beyond Ten-Year Block Period Calculated From Search Date Is Time-Barred

Ashwani Kumar — Sat, 25 Jul 2026 06:11:12 +0000

Section 148 Reassessment Notice Issued Beyond Ten-Year Block Period Calculated From Search Date Is Time-Barred

Issue

Computation of Ten-Year Block Period under Section 153A/153C: Whether the assessment year relevant to the previous year in which the search was conducted is included when computing the extended 10-year block period under Explanation 1 to Section 153A read with Section 153C.
Bar of Limitation under Section 149: Whether a Section 148 notice issued on 16.03.2026 for AY 2015–16, following a search conducted on 18.05.2024, is time-barred as being beyond the 10-year limit.

Facts

Background & Filing: The assessee-company, an entity belonging to an infrastructure development group, filed its original return of income for Assessment Year 2015–16.
Search Action: A search operation under Section 132 was carried out across the group on 18.05.2024 (which falls in Previous Year 2024–25 / Assessment Year 2025–26).
Reopening Notice: Based on seized/requisitioned material allegedly belonging or pertaining to the assessee, the Assessing Officer issued a notice dated 16.03.2026 under Section 148 for AY 2015–16 after recording satisfaction and obtaining statutory approvals.
Assessee’s Objection: The assessee challenged the notice on the ground of limitation, contending that AY 2015–16 fell beyond the permissible extended 10-year block period when reckoned from the end of the relevant assessment year of search.

Decision

Inclusion of Search Assessment Year in Computation (In favor of Assessee): Held YES. In calculating the extended 10-year period under Explanation 1 to Section 153A read with Section 153C, the assessment year relevant to the previous year in which the search took place must be included. [Para 13.3]
Notice Barred by Limitation (In favor of Assessee): Held YES. The impugned notice dated 16.03.2026 for AY 2015–16 fell beyond the 10 assessment years immediately preceding the search year, rendering it time-barred and liable to be quashed. [Paras 13.3 and 14]

Key Takeaways

Search Year Counts in Block Period: The assessment year corresponding to the search date serves as the anchor point for counting the 10-year limitation period under Section 153A/153C.
Strict Computation of Extended Limitation: Reassessment notices issued under Section 148 pursuant to search materials cannot stretch beyond the rigid 10-year outer cap calculated from the search assessment year; any notice issued beyond this window is void ab initio for lack of jurisdiction.

HIGH COURT OF GUJARAT

Ashok Madhavdas Khurana

Assistant Commissioner of Income-tax

A.S. Supehia and Ms. VAIBHAVI D. NANAVATI, JJ.

R/SPECIAL CIVIL APPLICATION NO. 7392 of 2026

JUNE 29, 2026

B.S. Soparkar for the Petitioner. Varun K.Patel for the Respondent.

JUDGMENT

A.S. Supehia, J.- Heard learned Advocate Mr.B.S.Soparkar appearing for the petitioner and learned Senior Standing Counsel Mr.Varun K. Patel for the respondent. The Affidavit tendered by learned Senior Standing Counsel, Mr.Varun K. Patel is ordered to be taken on record.

2. Having regard to the controversy involved, with the consent of the learned advocates for the respective parties, the matter is taken up for final hearing.

3. RULE. Learned Senior Standing Counsel Mr.Varun K Patel waives service of notice of rule on behalf of the respondent.

4. By this petition under Article 226 of the Constitution of India, the petitioner challenges the notice dated 16.03.2026 issued under Section 148 of the Income Tax Act, 1961 (for short “the Act”) seeking to re-open income tax assessment of the petitioner for the Assessment Year 2015-16 (for short “the assessment year under consideration”) by the Assistant Commissioner of Income Tax, Central Circle 2(3), Ahmedabad (for short “the respondent”).

4.1 The petitioner is a company and has filed its return of income for the assessment year 2015-16 on 30.10.2015 declaring total income at Rs.7,17,970/-. The petitioner is part of MSK Group which is engaged in the business of infrastructure development. The said MSK and Madhav Group of Gujarat including the petitioner were subjected to search action under Section 132 of the Act on 18.05.2024. The Respondent issued a notice dated 16.03.2026 under Section 148 of the Act for the year under consideration. It is stated therein that a search was initiated under Section 132 of the Act on 18.05.2024 in the case of the Petitioner or in the case of the person in respect of which the Petitioner is assessable under the Act. It was further stated that the Respondent is satisfied, with the approval of Principal Commissioner or Commissioner, that the books of accounts or documents, seized or requisitioned under section 132 or section 132A of the Act in the case of MSK and Madhav Group pertains or pertain to, or any information contained therein, relate to the Petitioner or the person in respect of which, the Petitioner is assessable under the Act and hence, the notice dated 16.03.2026 is issued under Section 148 of the Act after obtaining prior approval of Directorate General of Income Tax (Investigation), Ahmedabad. The Petitioner has challenged the said notice under Section 148 of the Act principally on the ground of limitation.

5. Learned Advocate Mr.B.S.Soparkar for the petitioner submitted that the respondent has acted illegally and without jurisdiction while issuing Notice under Section 148 of the Act as the same is barred by limitation. It was further contended that the impugned notice is time-barred under the statutory scheme governing search assessment. It was submitted that in the present case, search action in question was carried out on 18.05.2024 i.e. during the Financial Year 2024-25. Since the search under Section 132 of the Act was initiated on or after 1^st April, 2021 but before 1^st September, 2024, the provisions of Sections 147 to 151 of the Act as they stood immediately before the commencement of Finance (No. 2) Act, 2024 shall apply as contemplated under Section 152(3) of the Act. Hence, relying upon Section 149 of the Act, it is contended that the Notice under Section 148 of the Act can be issued up to six years from the end of the relevant assessment year. Further, relying upon the Section 153A of the Act, it is submitted that Notice under Section 153A of the Act can be issued for a period of “ten assessment years” immediately preceding the assessment year relevant to the previous year in which search is carried out and for the “relevant assessment years”, subject to fulfillment of certain conditions.

5.1 It is further submitted that the “relevant assessment year” means assessment year preceding the assessment year relevant to the previous year in which search is carried out or requisition is made, which falls beyond six assessment years but not later than ten assessment years from the “end of the assessment year relevant to the previous year in which search is conducted”.

5.2 Reference is also made to the provisions of Section 149 of the Act, more particularly the proviso to Section 149 read with explanation – 1 to Section 153A of the Act, and it is submitted that so far as the limitation is concerned, for reopening of the assessment, the same is pari materia to Section 153C of the Act.

5.3 It is submitted that in the instant case, the search action was carried out in the case of third party on 18.05.2024 i.e. during the Financial Year 2024-25, and hence relevant assessment year to the previous year in which the search was undertaken under Section 132 of the Act is Assessment Year 2025-26. It is further submitted that the notice under Section 148 of the Act for the Assessment Year 2015-16 would be time-barred, as the period of ten years would end at the Assessment Year 2016-17, since the Assessment Year 2025-26 will become the first assessment year as per the provisions of Section 153A of the Act. The table showing the calculation was placed before this Court and the same is reproduced as under:

Number	Assessment Year
1^st year	Assessment Year 2025-26
2^nd year	Assessment Year 2024-25
3^rd year	Assessment Year 2023-24
4^th year	Assessment Year 2022-23
5^th year	Assessment Year 2021-22
6^th year	Assessment Year 2020-21
7^th year	Assessment Year 2019-20
8^th year	Assessment Year 2018-19
9^th year	Assessment Year 2017-18
10^th year	Assessment Year 2016-17

5.4 In support of his submissions, learned Advocate Mr.Soparkar has placed reliance on the judgment of the Delhi High Court in the case of Dinesh Jindal v. Asstt. CIT 469 ITR 32 (Delhi) / Writ Petition (Civil) No. 12091 of 2023 decided on 27.05.2024. Reliance is also placed on the judgment of the Delhi High Court in the case of Pr. CIT v. Ojjus Medicare (P.) Ltd. 465 ITR 101 (Delhi). Finally, he has also placed reliance on the judgment of Madras High Court, Bench at Madurai, passed in A.R. Safiullah v. ACIT [Writ Petition (MD) No. 4327 of 2021, dated 24-3-2021].

5.5 Thus, it is urged that the impugned notice issued under Section 148 of the Act for the assessment year 2015-16 may be quashed and set aside.

6. Per contra, learned Senior Standing Counsel Mr.Varun Patel for the respondent Department opposed the petition and contended that the impugned notice under Section 148 of the Act is valid and within the limitation. It is further contended that since the search was initiated after 01.04.2021, the old Section 153A/153C assessment regime does not apply to the present case. Instead, the case falls under the new Section 148/149 reassessment regime introduced by the Finance Act, 2021. Under the new Section 149(1)(b), the limitation period is not calculated backward from the search year. Instead, a notice can be issued if not more than 10 years have elapsed from the end of the relevant assessment year, provided the escaped income is Rs. 50 lakhs or more. Accordingly, the notice for AY 2015-16 is perfectly valid and within the limitation period.

7. It is further submitted that the petitioner assessee in support of the contention regarding inclusion of search year has wrongly construed the word ‘end’ used in the explanation 1 to Section 153A, which is otherwise missing in the notes on clauses and the memorandum explaining the provisions. It is further submitted that the assessment year has two ends, one 1^st April, and 2^nd 31^st March. For the purpose of going forward, the end would be considered as 31^st March. Whereas for the purpose of going backward, the end would be considered as 1^st April. Thus, since it is required to go backward for purpose of calculating 10 assessment years, ‘end’ is to be construed as 1^st April. It is therefore submitted that considering the aforesaid contentions and the legislative intent as borne out from the notes on clauses and memorandum explaining the provisions relating to Finance Act, 2017, for purpose of calculating 10 assessment years, search year is to be excluded and it is always to be considered as six plus four assessment years and therefore, ‘end’ is to be construed as 1^st April for going backward for making the said provision effectively workable as per the legislative intent. It is submitted that the purpose of introducing the amendment was to extend the reach of assessing officer and therefore while interpreting the provisions of Section 153A of I.T., apart from the six previous assessment years, the authority of assessing officer must include for another four years, otherwise the intention of the legislature and purpose of the proviso would be defeated.

7.1 While referring to Explanation (1) to Section 153A of the Act, it is contended that the “relevant assessment year” which finds place in the provisions of Section 153A(b) of the Act cannot be construed by adopting two different methodologies – one wherein, for calculating the six assessment years, the period would start from the previous year in which such search is conducted or requisition is made, and for the very same assessee, if it is found that the income of Rs.50 lakhs has escaped, for calculating ten years, the first assessment year has to be ignored. In other words, if search year is included for calculating period of 10 A.Ys. as contended by the petitioner, there will be two different calculations, first, for six AYs excluding the search year and second, for 10 A.Ys. including the search year, which cannot be legislative intent. It is also submitted that the assessment year in which search was conducted, cannot be included while calculating ten assessment years, otherwise, A.Y. 2019-20 will come under both i.e. original six assessment years preceding the relevant assessment year in which search was carried (as 6^th AY) and under extended category of ten assessment years also (as 7^th AY) and the same could not be the intention of the legislature. The following statement containing the calculation of ten assessment year as per Assessee’s case and Revenue’s case corroborates the aforesaid contentions:

No of Year.	Assessee’s calculation of 10A.Ys. (including search year)	Revenue’s calculation of 10A.Ys. (Excluding search year)
1.	2025-26	2024-25
2.	2024-25	2023-24
3.	2023-24	2022-23
4.	2022-23	2021-22
5.	2021-22	2020-21
6.	2020-21	2019-20
7.	2019-20	2018-19
8.	2018-19	2017-18
9.	2017-18	2016-17
10.	2016-17	2015-16

7.2 It is further submitted that in case of Bhavin Kishorbhai Zinzuwadia v. ACIT (Gujarat) this Hon’ble Court has already decided this issue accepting the calculations of 10 assessment years for the purpose of Section 153C excluding the search year/the year in which the incriminating material is received by AO of other person.

7.3 An attempt is also made to distinguish the judgment of the Delhi High Court in the case of Ojjus Medicare (supra), by submitting that two methods cannot be adopted for computation of the six-year block period as mentioned in Sections 153A and 153C of the Act and for calculation of the ten-year block period by excluding the previous year from computation of ten years. Thus, it is urged that this Court may take a different view, disagreeing with the judgments of the Delhi High Court as well as the Kerala High Court, and it is urged that the action of the respondent may be upheld for reopening the Assessment Year 2015-16.

7.4 Thus, it is urged that the action of the respondent in issuing the impugned notice for the A.Y. 2015-16 under Section 148 of the Act may be upheld and the present petition may be dismissed.

ANALYSIS AND OPINION:

8. We have heard the learned advocates for the respective parties at length. We have also perused the case laws cited, considered the provisions threadbare and have also perused the material on record.

9. The sole issue that arises for consideration in the present petition is that –

(i)

Whether the notice issued by the respondent for the Assessment Year 2015-16 is barred by limitation;

(ii)

Dealing with this issue, uncontroverted facts are that the search took place in the case of the petitioner on 18.05.2024 which indisputably falls in the Financial Year 2024-25 and Assessment Year 2025-26. Therefore, the date of search would be taken into consideration for the purpose of initiation of proceedings under Section 153A of the Act. Keeping that legal principle in mind, ten years that could be covered subject to fulfilling other conditions emanating from the statute, would be as under:

Number	Assessment Year
1^st year	Assessment Year 2025-26
2^nd year	Assessment Year 2024-25
3^rd year	Assessment Year 2023-24
4^th year	Assessment Year 2022-23
5^th year	Assessment Year 2021-22
6^th year	Assessment Year 2020-21
7^th year	Assessment Year 2019-20
8^th year	Assessment Year 2018-19
9^th year	Assessment Year 2017-18
10^th year	Assessment Year 2016-17

•

The only difference between the calculation as per the revenue and the petitioner is the inclusion or exclusion of the search year. Revenue contends that while calculating the period of ten years, search year is to be excluded and the calculation starts from assessment year immediately preceding the previous year relevant to the assessment year in which search is conducted whereas the petitioner’s contention is that the calculation of the period of ten years would include the search year.

10. The short controversy turns upon whether, while computing the ten-year block, the assessment year relevant to the previous year in which search is conducted (hereinafter “the search assessment year”) is to be included in the reckoning, unlike the computation of six assessment years which expressly excludes it.

11. With reference to the relevant assessment year, it is necessary to refer to the provisions of Section 153A(1)(b) of the Act which reads as under :

“Section 153A(1)(b) : (The Assessing Officer shall) assess or reassess the total income of six assessment years immediately preceding the assessment year relevant to the previous year in which such search is conducted or requisition is made and for the relevant assessment year or years.”

11.1 The key expression that flows from reading of the section is “six assessment years immediately preceding the assessment year relevant to the previous year in which such search is conducted” and “for the relevant assessment year or years.” is phrased independently, disjointed from earlier phrase.

12. In juxtaposition, the Fourth Proviso permits assessment beyond six years subject to specified conditions and refers to “relevant assessment year” as stated in Explanation 1 of Section 153A of the Act defines “relevant assessment year” as:

“For the purpose of this sub-section, the expression “relevant assessment year” shall mean an assessment year preceding the assessment year relevant to the previous year in which search is conducted or requisition is made which falls beyond six assessment years but not later than ten assessment years from the end of the assessment year relevant to the previous year in which search is conducted or requisition is made.”

12.1 The key expression that flows from reading of the section is “not later than ten assessment years from the end of the assessment year relevant to the previous year in which search is conducted”.

13. Thus, the computational framework of Section 153A of the Act, including Explanation 1, applies pari materia to the proceedings under Section 153C of the Act. A plain reading of Section 153A of the Act reveals that the Parliament has consciously adopted two different phraseologies:

Six-Year Block	Ten-Year Block
“six assessment years immediately preceding”	“not later than ten assessment years from the end of the assessment year”

13.1 This linguistic distinction is deliberate and must be given full effect. Under Section 153A(1)(b) of the Act, the anchor point is “the assessment year relevant to the previous year in which search is conducted”. Therefore, six years must be “immediately preceding” that assessment year. The phrase “immediately preceding” necessarily excludes the search assessment year itself. In contrast thereto, Explanation 1 of Section 153A of the Act introduces a materially different formulation: “not later than ten assessment years from the end of the assessment year relevant to the previous year in which search is conducted”. This computation mechanism does not use the phrase “immediately preceding” but instead, requires reckoning from the end of the assessment year relevant to the previous year of search. Thus, the assessment year relevant to the previous year of search becomes the reference year and the ten-year period is counted from the end of that assessment year. This necessarily includes the search assessment year within the ten-year framework and resultantly, the search year becomes the first year in the reckoning of the ten-year block.

13.2 If Parliament intended identical computation for both six and ten years, it would have used identical language. Instead, it has consciously used different phraseology, for six years “immediately preceding” and for ten years “from the end of the assessment year”. Legally, it is well settled that while interpreting plain language of a Statute, the Court must give meaning to every word used by the Legislature. To compute ten years by excluding the search year (as is done for six years) would render the phrase “from the end of the assessment year” otiose and merge two distinct statutory schemes into one that would violate settled principles of statutory interpretation. The scheme of Section 153A reflects calibrated expansion in as much as ordinary search assessment would be computed as six years immediately preceding the search year whereas exceptional extended jurisdiction up to ten years is not a mere arithmetic extension of the six-year model; it is governed by a separately structured computational rule. The Legislature, in its wisdom, has consciously created:

•

A backward-looking “preceding” model (six years), and

•

A reckoning “from the end of the assessment year” model (ten years).

13.3 Thus, it can be concluded that Section 153A of the Act prescribes two distinct and independent computational regimes. The six assessment years are those “immediately preceding” the assessment year relevant to the previous year of search, thereby excluding the search year whereas the ten assessment years under Explanation 1 of Section 153A of the Act are to be computed “from the end of the assessment year” relevant to the previous year of search. The statutory language necessarily results in inclusion of the search assessment year within the ten-year reckoning. Any interpretation that applies the six-year exclusion model, if made applicable to the ten-year block, would defeat the legislative scheme and render material words redundant. Accordingly, while computing the extended ten-year period under Explanation 1 to Section 153A read with Section 153C of the Act, the assessment year relevant to the previous year of search is to be included in the reckoning.

13.4 Even otherwise, this issue is no more res integra as the same is covered by the judgement of this Court in the case of Jayantibhai Karamshibhai Maniya v. ITO 488 ITR 90 (Gujarat). This Court has taken a view, after considering the earlier judgement in the case of Bhavin Zinzuwadia (supra), that while calculating the period of ten years under Section 153C of the Act, keeping in mind the language of Explanation 1 to Section 153A of the Act, the search year or the year in which seized material is received by the Jurisdictional Assessing Officer of the petitioner is required to be taken into consideration. Relevant extract of the said judgment can be usefully referred to as under:

” 9.2 The provisions of Sections 153A / 153C of the Act find place in the proviso to Section 149 of the Act and, hence, the limitation as provided in Sections 153A / 153C of the Act gets triggered upon the initiation of assessment proceedings emanating from a search under Sections 132 / 132A of the Act. We may, at this stage, mention that the Delhi High Court as well as the Madras High Court has already considered the implications of Explanation (1) to Section 153A of the Act to the limitation and the expression “relevant assessment year” used therein in Explanation (1) to Section 153A of the Act. The Delhi High Court, in the case of Ojjus Medicare (P.) Ltd. (supra), after considering an array of judgments of other High Courts as well as of the Supreme Court and upon a threadbare consideration and analysis of the statutory provisions of Sections 153A, 148 and 149 of the Act, has held thus:

” 88 Section 153A replicates the basis on which the six AYs’ are to be identified and computed with the solitary distinction being that in the case of the searched person, the six AYs’ are liable to be computed from the AY pertaining to the FY in which the search was conducted. The starting point for the purpose of identifying the six AYs’ in the case of section 153A would thus turn upon the year of search as opposed to the handover of material which is spoken of in the First Proviso to section 153C. If one were to therefore assume that a search took place on a person between 01 April 2021 to 31 March 2022, the pertinent AY would become AY 2022-23 and the corresponding six AYs’ would by as follows:

Computation of the six-year block period as provided under section 153C of the Act	No of years
AY 2021-22	1
AY 2020-21	2
AY 2019-20	3
AY 2018-19	4
AY 2017-18	5
AY 2016-17	6

89. That takes us then to the issue of identifying the “relevant assessment year” for the purposes of computing the ten year block. Explanation 1 to section 153A specifies the manner in which the entire ten AY period is to be computed. While the computation of six AYs follows the position as enunciated and identified above, Explanation I prescribes that the ten AYs’ would have to be computed from the end of the AY relevant to the FY in which the search was conducted or requisition made The ten AY period consequently is to be reckoned from the end of the AY pertaining to the previous year in which the search was conducted as distinct from the preceding year which is spoken of in the case of the six relevant AYs.

90. Viewed in that light, and while keeping the period of 01 April 2021 to 31 March 2022 as the constant, the relevant AY would be AY 2022-23. The ten AYs would have to be computed from 31 March 2023with the said date indubitably constituting the end of the AY relevant to the previous year of search. Viewed in light of the above, the block period of 10 AYs would be as follows.-

Computation of the six-year block period as provided under section 153C read with Section	No of years
153Aof the Act
AY 2022-23	1
AY 2021-22	2
AY 2020-21	3
AY 2019-20	4
AY 2018-19	5
AY 2017-18	6
AY 2016-17	7
AY 2015-14	8
AY 2014-15	9
AY 2013-14	10

91 Tested on the aforesaid precepts, it would be manifest that AY 2022-23 would form the first year of the block of ten AYs’ terminating in AY 2013-14. We, in this regard also bear in consideration the following instructive passages as appearing in the decision handed down by a learned Judge of the Madras High Court in A. R. Safiullah. We deem it appropriate to extract the following paragraphs from that decision:-

“9 Explanation-I is clear as to the manner of computation of the ten assessment years. It clearly and firmly fixes the starting point. It is the end of the assessment year relevant to the previous year in which search is conducted or requisition is made. There cannot be any doubt that since search was made in this case on 10.04.2018, the assessment year is 2019-20. The end of the assessment year 2019-20 is 31.03.2020. The computation of ten years has to run backwards from the said date i.e. 31.03.2020. The first year will of course be the search assessment year itself. In that event, the ten assessment years will be as follows:

1st Year	2019-20
2nd Year	2018-19
3rd Year	2017-18
4th Year	2016-17
5th Year	2015-16
6th Year	2014-15
7th Year	2013-14
8th Year	2012-13
9th Year	2011-2012
10th Year	2010-2011

The case on hand pertains to AY 2009-10. It is obviously beyond the ten year outer ceiling limit prescribed by the statute. The terminal point is the tenth year calculated from the end of the assessment year relevant to the previous year in which search is conducted. The long arm of the law can go up to this terminal point and not one day beyond. When the statute is clear and admits of no ambiguity, it has to be strictly construed and there is no scope for looking to the explanatory notes appended to statute or circular issued by the department.

10. In the case on hand, the statute has prescribed one mode of computing the six years and another mode for computing the ten years. Section 153A(1)(b) states that the assessing officer shall assess or reassess the total income of six years immediately preceding the assessment year relevant to the previous year in which search is conducted. Applying this yardstick, the six years would go up to 2013-14. The search assessment year, namely, 201920 has to be excluded. This is because, the statute talks of the six years preceding the search assessment year. But, while computing the ten assessment years, the starting point has to be the end of the search assessment year. In other words, search assessment year has to be including in the latter case. It is not for me to fathom the wisdom of the parliament. I cannot assume that the amendment introduced by the Finance Act, 2017 intended to bring in four more years over and above the six years already provided within the scope of the provision. When the law has prescribed a particular length, it is not for the court to stretch it. Plasticity is the new mantra in neuroscience, thanks to the teachings of Norman Doidge. It implies that contrary to settled wisdom, even brain structure can be changed. But not so when it comes to a provision in a taxing statute that is free of ambiguity Such a provision cannot be elastically construed.

11. One other contention urged by the standing counsel has to be dealt with. It is pointed out that the petitioner has invoked the writ jurisdiction at the notice stage. Since the petitioner has demonstrated that the subject assessment year lies beyond the ambit of the provision, the respondent has no jurisdiction to issue the impugned notice Once lack of jurisdiction has been established, the maintainability of the writ petition cannot be in doubt.”

In our considered opinion, the decision in A.R Safiullah correctly expounds the legal position and the interpretation liable to be accorded to the identification of the ten AYs which are spoken of in sections153A and 153C.”

9.3 Thus, it is precisely held hereinabove that the statute prescribes different modes of computation for six years and ten years. We reiterate that the provisions of Section 153A(1) (b) of the Act stipulate that the Assessing Officer shall assess or reassess the total income of six years immediately preceding the assessment year relevant to the previous year in which the search is conducted. However, the ten assessment year period, consequently, is to be reckoned from the end of the assessment year pertaining to the previous year in which the search was conducted, as distinct from the preceding year which is spoken of in the case of the six relevant assessment years. Thus, the contention with regard to the computation of six years as well as ten years under the provisions of Section 153A of the Act has already been gone into by the Delhi High Court as well as the Madras High Court, and we have no convincing reason to take a divergent view from the view expressed hereinabove. Applying the aforesaid computation to the facts of the present case, taking the date of the search as 09.05.2024 during the Financial Year 2024-25, the Assessment Year 2025-26 will become the first assessment year and, in the same manner, the Assessment Year 2016-17 will become the tenth assessment year. Thus, the year under consideration, namely, Assessment Year 201516, for which the impugned notice has been issued under Section 148 of the Act, would fall beyond the period of ten years prescribed under the statute as it stood immediately before the commencement of the Finance Act, 2021, and hence, on this count, the impugned notice can be said to be barred by limitation. “

14. For the foregoing reasons, the impugned Notice issued under Section 148 of the Act dated 16.03.2026 for A.Y. 2015-16 is barred by limitation as the same falls beyond the permissible period of ten years. We, therefore, quash and set aside the Notice dated 16.03.2026 issued under Section 148 of the Act for Assessment Year 2015-16 on the ground of limitation. Accordingly, the present writ petition is allowed. RULE is made absolute. No order as to cost.

Agricultural Land Within Statutory Distance of Tambaram Municipality Constitutes Capital Asset, On-Money Restricted to Admitted Cash, and 70% Indexed Cost Allowed

Ashwani Kumar — Sat, 25 Jul 2026 04:33:10 +0000

Agricultural Land Within Statutory Distance of Tambaram Municipality Constitutes Capital Asset, On-Money Restricted to Admitted Cash, and 70% Indexed Cost Allowed

Issue

Capital Asset Determination: Whether land located within 4.45 km of Tambaram Municipality (population exceeding 1.65 lakh) qualifies as a capital asset under Section 2(14)(iii)(b), making the gains arising from its sale taxable under ‘Capital Gains’.
Full Value of Consideration (On-Money Addition): Whether the addition of Rs. 4.72 crores as unrecorded cash consideration (on-money) was sustainable in full, or if it should be restricted to the Rs. 84.60 lakhs explicitly admitted by the assessee in the absence of independent evidence proving receipt of the balance Rs. 3.88 crores.
Indexed Cost of Acquisition/Improvement: Whether total disallowance of indexed cost of acquisition and improvement is justified merely for lack of complete bills and vouchers, or if a reasonable estimation should be allowed for long-held property.

Facts

Property Sale & Search Proceedings: The assessee sold 1.41 acres of land at Madambakkam during AY 2015–16. Following search proceedings under Section 153C, the assessee claimed the land was non-capital agricultural land.
Distance & Population Verification: The Assessing Officer (AO) and CIT(A) verified that the land was situated within an aerial distance of 3.70 km to 4.45 km from Tambaram Municipality, which had a population of ~1.65 lakh as per the 2011 Census. The assessee provided no counter-evidence, survey reports, or municipal records to dispute this distance.
On-Money Allegations: Revenue alleged the assessee received Rs. 4.72 crores in cash (“on-money”) above the registered sale deed value, relying on statements under Section 132(4) and seized electronic records from a land aggregator.
Assessee’s Cash Admission & Lack of Corroboration: During assessment, after examining seized materials and cross-examinations, the assessee unequivocally admitted receiving Rs. 84.60 lakhs in cash. However, Revenue found no physical cash, assets, investments, or bank records corroborating the remaining Rs. 3.88 crores.
Disallowance of Cost of Acquisition: The tax authorities completely disallowed the assessee’s claim for indexed cost of acquisition and improvement on the ground that full supporting bills and vouchers were not produced.

Decision

Issue 1 (In favor of Revenue): Held YES. The land lies within the statutorily prescribed distance from Tambaram Municipality and meets the population criteria under Section 2(14)(iii)(b). Since the assessee failed to provide rebutting geographical or municipal evidence, the land is a capital asset and gains are taxable under Capital Gains.
Issue 2 (Partly in favor of Assessee): Held YES. The addition towards on-money is restricted to Rs. 84.60 lakhs. The balance addition of Rs. 3.88 crores is deleted due to a lack of independent evidence showing actual receipt, movement of cash, or expenditure by the assessee.
Issue 3 (Partly in favor of Assessee): Held YES. It is unrealistic to assume zero maintenance or acquisition expenditure over a long holding period. To meet the ends of justice, the AO is directed to allow 70% of the indexed cost claimed by the assessee and restrict the disallowance to 30%.

Key Takeaways

Rebuttal Burden in Distance Criteria: To challenge an AO’s spatial measurement under Section 2(14)(iii)(b), the assessee must produce concrete documentary proof (e.g., official municipal boundary maps or certified surveyor reports).
Corroborative Evidence for On-Money Additions: Retracted or contested statements regarding undisclosed cash consideration cannot sustain additions without tangible, independent evidence showing actual cash movement or subsequent investment.
Principle of Estimation for Cost Claims: Complete absence of supporting vouchers does not warrant a 100% disallowance of indexed acquisition and improvement costs when long-term ownership is undisputed; tribunals can apply reasonable estimations to prevent injustice.

IN THE ITAT CHENNAI BENCH ‘A’

Narayanan Sundaramahalingam Rajkumar

Assistant Commissioner of Income-tax

GEORGE GEORGE K., Vice President
and S.R. Raghunatha, Accountant Member

IT Appeal Nos. 432 & 439 (Chny) of 2025
[Assessment year 2015-16]

JUNE 15, 2026

N.R. Krishnamoorthy, FCA for the Appellant. Ms. E. Pavuna Sudari, CIT for the Respondent.

ORDER

1. The present appeals of the assessee are directed against the separate orders of the Learned Commissioner of Income Tax (Appeals)-20, Chennai [hereinafter referred to as “the Ld.CIT(A)”] both dated 16.12.2024, arising out of the assessment orders passed u/s.153C of the Income-tax Act, 1961 [hereinafter referred to as “the Act”] by the Assistant Commissioner of Income Tax, Central Circle 3(2), Chennai [hereinafter referred to as “the AO”] pertaining to the Assessment Year 2015-16.

2. Since the issues involved in both the appeals are common and the additions have been made on identical facts and circumstances, both the appeals are being disposed of by this consolidated order for the sake of convenience and to avoid repetition of facts. With the consent of the parties, ITA No.432/Chny/2025 has been taken as the lead case. Accordingly, the findings and conclusions recorded herein in the said appeal shall apply mutatis mutandis to ITA No.439/Chny/2025 as well.

ITA No.432/Chny/2025

3. The brief facts of the case are that assessee, is an individual carrying on business as the proprietor of M/s.Guru Builders, engaged in the business of construction and development of residential flats. For the impugned assessment year, the assessee filed his original return of income on 30.09.2015 declaring a total income of Rs.70,41,740/-.

4. Subsequently, a search and seizure operation u/s.132 of the Act was conducted on 27.11.2019 in the cases belonging to the group of M/s.Asvini Fisheries Pvt. Ltd. (“AFPL”). During the course of such search proceedings, the Investigation Wing unearthed certain transactions relating to acquisition of lands by M/s.Prathishri Properties Pvt. Ltd., a group concern of AFPL. The investigation revealed that the assessee had sold lands situated at Madambakkam Village, Tambaram Taluk, during the financial year 2014-15 to M/s.Prathishri Properties Pvt. Ltd. It was further alleged that consideration in excess of the value disclosed in the registered sale deed had been paid to the assessee in cash. Consequently, the residential premises of the assessee were also subjected to search u/s.132 of the Act.

5. During the course of search and post-search investigations, the Department found and seized various documents, loose sheets and property-related records. According to the Revenue, such materials evidenced payment of substantial cash consideration over and above the registered value reflected in the conveyance documents executed in favour of M/s.Prathishri Properties Pvt. Ltd.

6. The record reveals that the assessee had transferred land admeasuring approximately 1.41 acres situated at Madambakkam Village. The sale transaction was evidenced by registered Sale Deed bearing Document No.1357/2015 dated 09.02.2015. As per the registered document, the assessee sold the land comprised in Survey Nos.77/2, 88/1B, 86/2B2 and 92/1 for a consideration of Rs.1,26,90,000/-, which was also stated to be the market value adopted for registration purposes.

7. The Revenue relied heavily upon the statement recorded u/s.132(4) of the Act from Shri K.Sreejith, Managing Director of M/s.Lotus Castle Pvt. Ltd., a company stated to have acted as land aggregator for M/s.Prathishri Properties Pvt. Ltd. During the search conducted in the cases of Lotus Group on 29.01.2019, Shri K.Sreejith allegedly admitted that an amount of Rs.4,72,35,000/- had been paid in cash to the assessee over and above the registered consideration for acquisition of the aforesaid land. According to him, the agreed rate for acquisition was Rs.4,25,000/- per cent and a substantial portion of the agreed consideration was discharged in cash.

8. The assessee was confronted with the aforesaid information during the search conducted at his premises on 27.11.2019. In the statement recorded u/s.132(4) of the Act, the assessee acknowledged that the land at Madambakkam belonged to him and had been sold to M/s.Prathishri Properties Pvt. Ltd. He further stated that while he had received Rs.1,26,90,000/- through demand drafts as reflected in the sale deed, he had also received approximately Rs.4.72 crores in cash. The assessee specifically admitted that the total consideration received by him was around Rs.5.99 crores. The assessee further admitted that the cash component had not been incorporated in his books of account and had never been offered to tax in any assessment year. In response to a specific question, the assessee admitted that the cash component represented his undisclosed income pertaining to Financial Year 2014-15.

9. Consequent to the search, the case of the assessee was centralized. Thereafter, proceedings u/s.153C of the Act were initiated against the assessee. Notice u/s.153C of the Act dated 17.02.2021 was issued calling upon the assessee to furnish a return of income for A.Y. 2015-16. In response thereto, the assessee filed his return of income on 28.02.2021 declaring the same total income of Rs.70,41,740/- as originally returned.

10. Subsequently, notice u/s.143(2) of the Act dated 13.03.2021 and notice u/s.142(1) of the Act dated 15.04.2021 were issued. The assessee, furnished details and explanations from time to time. During the course of assessment proceedings, the AO observed that despite the categorical admission made by the assessee during the search proceedings, the additional cash consideration had not been offered for taxation in the return filed pursuant to notice issued u/s.153C of the Act.

11. Accordingly, the AO issued a show-cause notice proposing to bring to tax the sum of Rs.4,72,00,000/- received in cash over and above the registered consideration. In response, the assessee submitted that the land transferred was agricultural land and that exemption had been claimed in respect thereof. It was contended that since the assessee was under the bona fide belief that the land was not a capital asset, the additional consideration was also not offered to tax. The assessee requested that the amount should not be assessed as income from other sources u/s.56(2)(vii)(a) of the Act.

12. The AO examined the nature and location of the land and found that the land was situated within an aerial distance of 4.45 kilometres from the limits of Tambaram Municipality. The AO further noted that the population of Tambaram Municipality as per Census 2011 was 1,64,830. Relying upon the provisions of section 2(14)(iii) of the Act, the AO concluded that although the land was agricultural in nature, it constituted an urban agricultural land falling within the definition of “capital asset”. Consequently, the exemption claimed by the assessee on the footing that the land was not a capital asset was proposed to be denied.

13. During the course of assessment proceedings, the assessee sought copies of the seized documents and the statement recorded from Shri K.Sreejith. The AO furnished the same. Thereafter, the assessee requested that an opportunity be granted to cross-examine Shri K.Sreejith. Accepting the request, the AO arranged for cross-examination on 10.08.2021.

14. In the course of cross-examination, Shri K.Sreejith reiterated his earlier statement and maintained that cash consideration of Rs.4,72,35,000/- had been paid to the assessee in connection with the purchase of 1.41 acres of land at Madambakkam. He affirmed that the agreed rate was Rs.4,25,000/- per cent and that the registered consideration represented only a part of the actual consideration agreed between the parties. The assessee, however, disputed the quantum and contended that he had received only Rs.84,60,000/- in cash in addition to the documented consideration of Rs.1,26,90,000/-.

15. Following the cross-examination, the assessee furnished a revised computation of income wherein he admitted receipt of cash consideration of Rs.84.60 lakhs but continued to claim exemption on the ground that the land was agricultural land not falling within the ambit of a capital asset. It was also argued that any additional consideration received was intrinsically connected with the transfer of land and therefore could not be assessed separately under the head “Income from Other Sources”.

16. The AO accepted the latter contention and held that the additional amount received by the assessee represented consideration for transfer of land and therefore formed part of the full value of consideration for the purposes of computation of capital gains. Consequently, the proposal to assess the amount u/s.56(2)(vii)(a) of the Act was dropped.

17. However, the AO rejected the assessee’s contention regarding the quantum of on-money received. The AO observed that the assessee had unequivocally admitted receipt of approximately Rs.4.72 crores in his statement recorded u/s.132(4) of the Act on the date of search. Further, during post-search proceedings before the Investigation Wing, the assessee had again referred to receipt of Rs.4,72,35,000/- and had even prepared a cash book reflecting receipt of such amount in February 2015 while explaining the source of cash found during the search. The AO noted that the assessee had not disputed the quantum in his earlier replies and that the plea of receipt of only Rs.84.60 lakhs had been raised for the first time much later during the assessment proceedings.

18. The AO further observed that despite being afforded an opportunity of cross-examination, the assessee had failed to discredit the testimony of Shri K.Sreejith. It was also noted that although the assessee claimed to have negotiated the transaction through one Shri Bala and one Shri Sivaramakrishnan, neither of them was produced before the Department to substantiate the assessee’s version. The valuation report subsequently produced by the assessee estimating the value of the land at Rs.2.04 crores was also rejected by the AO as a self-serving document incapable of displacing the categorical admissions and corroborative evidence available on record.

19. Based on the foregoing, the AO held that the retraction attempted by the assessee was belated, unsupported by evidence and merely an afterthought. Accordingly, the entire amount of Rs.4,72,35,000/- was treated as additional sale consideration and included in the full value of consideration for computing long-term capital gains arising from transfer of the Madambakkam property.

20. The AO also examined the deductions claimed by the assessee towards indexed cost of acquisition and indexed cost of improvement/development. In respect of the Madambakkam land, while evidence regarding cost of acquisition was furnished, no satisfactory evidence was produced in support of the indexed cost of development amounting to Rs.68,70,154/-. The assessee was unable to establish either the nature of the development activities allegedly undertaken or the expenditure incurred thereon. Consequently, the claim of indexed cost of development was disallowed.

21. Similarly, in respect of capital gains arising from sale of lands situated at Athur, the assessee claimed indexed cost of development amounting to Rs.21,19,754/-. Although a year-wise break-up of expenditure was furnished, no supporting vouchers, bills or documentary evidence substantiating the expenditure were produced. In the absence of adequate supporting evidence, the AO disallowed 30% of the indexed cost of development amounting to Rs.6,35,926/- while computing long-term capital gains from the Athur land transaction.

22. The assessment was ultimately completed by treating the land at Madambakkam as a capital asset within the meaning of section 2(14) of the Act, by including the alleged on-money consideration of Rs.4,72,35,000/- in the full value of consideration for computation of long-term capital gains, and by making consequential disallowances in respect of the indexed cost of development claimed by the assessee. Thus, the impugned assessment was completed u/s.153C of the Act on 21.09.2021 determining the total income of the assessee at Rs.6,56,09,211/-.

23. Aggrieved of the above assessment order, the assessee carried the matter in appeal before the Ld.CIT(A), who vide the impugned appellate order dated 16.12.2024 dismissed the appeal of the assessee.

24. The assessee before the Ld.CIT(A) urged that the land sold is an agricultural land and not a capital asset within the meaning of section 2(14) of the Act and also contended that the that he never received alleged on-money consideration of Rs.4,72,35,000/-. The assessee also contended AO’s action of the disallowance of indexed development expenditure amounting to Rs.68,70,154/-.

25. The Ld.CIT(A) after considering the assessment records, seized materials, statements recorded during search proceedings and the submissions advanced by the assessee, dismissed all the grounds raised in appeal for the reasons recorded in detail in the appellate order.

26. The first issue adjudicated by the Ld.CIT(A) was whether the land measuring 1.41 acres situated in Survey Nos.77/2, 88/1B, 86/2B2 and 91/1 at Madambakkam Village, Tambaram Taluk, sold by the assessee to M/s.Prathishree Properties on 09.02.2015, constituted an agricultural land excluded from the definition of “capital asset” u/s.2(14)(iii) of the Act.

27. Before the Ld.CIT(A), the assessee contended that the land in question was a “Wet Irrigation Nanjai Land”, that agricultural operations had been carried out thereon and that the transfer of such agricultural land could not give rise to taxable capital gains. In support of the said contention, the assessee relied upon the revenue records evidencing classification of the land as Nanjai land and also furnished a valuation report dated 07.09.2021 obtained from a registered valuer.

28. The Ld.CIT(A) examined the findings recorded by the AO and noted that during the assessment proceedings, the AO had already verified the location of the land and found that the distance between the subject property and Tambaram Municipality was within the prescribed limit contemplated u/s.2(14)(iii)(b) of the Act. The AO had further observed that the population of Tambaram Municipality, as per Census 2011, was 1,64,830 and therefore satisfied the statutory population criterion prescribed under the Act.

29. The Ld.CIT(A) specifically recorded that the assessee had not disputed either the population of Tambaram Municipality or the distance adopted by the AO. Nevertheless, to independently verify the issue, the Ld.CIT(A) examined the municipal boundaries of Tambaram Municipality and the subsequent expansion of the municipal area into Tambaram City Municipal Corporation. After analysing the available geographical and municipal records, the Ld.CIT(A) observed that prior to its conversion into a Corporation, the limits of Tambaram Municipality extended up to Selaiyur and that the assessee’s land was situated well within the prescribed aerial distance from the municipal limits. Referring to the amendment introduced by the Finance Act, 2013, which mandated measurement of distance on an aerial basis, the Ld.CIT(A) recorded a finding that the aerial distance between the assessee’s land and Camp Road, Selaiyur, which formed part of the municipal limits, was only about 3.70 kilometres and that the distance from the actual municipal boundary would be even lesser. Upon the aforesaid factual findings, the Ld.CIT(A) concluded that the subject land was situated within six kilometres from the limits of Tambaram Municipality, whose population exceeded one lakh but remained below ten lakhs as per the last preceding census.

30. Having recorded the aforesaid findings, the Ld.CIT(A) held that the question whether agricultural operations were actually carried out on the land became irrelevant in view of the statutory provisions contained in section 2(14)(iii)(b) of the Act. According to the Ld.CIT(A), once an agricultural land is situated within the prescribed distance from a municipality satisfying the population criterion, such land automatically assumes the character of a capital asset irrespective of its actual agricultural use. The Ld.CIT(A) therefore, rejected the assessee’s reliance upon the revenue records and valuation report and held that even assuming the land to be agricultural in nature, the same would nevertheless constitute a capital asset u/s.2(14)(iii)(b) of the Act. Consequently, the action of the AO in bringing the gains arising from transfer of the land to tax under the head “Capital Gains” was upheld.

31. The second and principal issue before the Ld.CIT(A) related to the addition made by the AO on account of alleged cash consideration of Rs.4,72,35,000/- received by the assessee over and above the registered consideration of Rs.1,26,90,000/-.

32. The assessee challenged the addition on various grounds, namely that there was no documentary evidence to establish receipt of such amount, that only Rs.84,60,000/- had actually been received in cash, that the valuation report demonstrated a substantially lower value of the property and that the statements relied upon by the AO had been obtained under circumstances which rendered them unreliable.

33. The Ld.CIT(A) traced the genesis of the addition to the search action conducted u/s.132 of the Act in the case of M/s. Lotus Castle Pvt. Ltd. (LCPL) on 29.01.2019. During the said search, certain electronic records maintained in an online application known as “Evernote” by Shri K.Sreejith, Director of LCPL, were seized. The seized records allegedly contained details of substantial cash receipts received by LCPL from M/s.Asvini Fisheries Pvt. Ltd./prathishree Properties and corresponding cash payments made to various landowners in connection with acquisition of lands at Madambakkam Village. The Ld.CIT(A) observed that Page No.45 of the seized Evernote records specifically contained entries showing payment of Rs.4,72,35,000/- to the assessee and Rs.6,78,40,000/- to his father, Shri S.Narayanan, towards sale of their respective lands.

34. The Ld.CIT(A) further noted that Shri K.Sreejith, in his statement recorded u/s.132(4) of the Act, had categorically admitted receipt of cash aggregating to Rs.57.20 crores from the purchaser group and payment of Rs.35.70 crores to landowners and brokers. He had further explained that the details of such receipts and payments were contemporaneously recorded in the Evernote account maintained by him.

35. The Ld.CIT(A) thereafter referred to the search conducted in the assessee’s own case on 27.11.2019. During the course of the said search, the assessee’s statement was recorded u/s.132(4) of the Act. The Ld.CIT(A) extracted the relevant portions of the statement and observed that the assessee had unequivocally admitted receipt of total sale consideration amounting to Rs.5,99,25,000/- for the sale of the Madambakkam land, consisting of Rs.1,26,90,000/- received through demand drafts; and Rs.4,72,35,000/-received in cash. The Ld.CIT(A) noted that the assessee had not only admitted receipt of the aforesaid cash component but had also explained the manner in which the said cash had been utilised for business purposes, purchase of lands, brokerage payments, litigation expenses, jewellery purchases and other personal expenditures. The assessee had further stated that a part of the cash found during search represented the balance of the said on-money receipts. The Ld.CIT(A) further observed that the assessee had specifically affirmed that the statement had been given voluntarily, without threat, coercion or undue influence and while being in a sound state of mind.

36. The Ld.CIT(A) next considered the assessee’s subsequent claim that he had actually received only Rs.84,60,000/- in cash and not Rs.4,72,35,000/-. The Ld.CIT(A) observed that this stand was taken for the first time during the assessment proceedings through a submission dated 06.08.2021, nearly twenty-one months after recording of the statement u/s.132(4) of the Act. According to the Ld.CIT(A), the assessee had failed to furnish any contemporaneous evidence demonstrating that the original statement was factually incorrect. The retraction was therefore held to be belated, unsupported by evidence and legally ineffective. The Ld.CIT(A) also took note of the fact that even after completion of the search proceedings, the assessee had submitted a letter dated 09.03.2020 before the Investigation Wing wherein he had once again admitted receipt of cash consideration of Rs.4,72,35,000/-. The Ld.CIT(A) therefore held that the subsequent retraction was an afterthought and could not displace the evidentiary value of the original statement.

37. The Ld.CIT(A) further examined the statement recorded from Shri K.Sreejith during the cross-examination afforded to the assessee on 10.08.2021. The Ld.CIT(A) observed that even during cross-examination, Shri K.Sreejith consistently maintained that the entries in Evernote were contemporaneously recorded in 2015; the records were produced before the Income-tax Department during search; the entries were genuine and not fabricated; cash of Rs.4,72,35,000/- was paid to the assessee at the time of registration; and the assessee’s claim that he received a lower amount was incorrect. The Ld.CIT(A) observed that the testimony of Shri K.Sreejith remained consistent throughout and was fully corroborated by the seized documents as well as by the assessee’s own admissions.

38. The Ld.CIT(A) devoted considerable discussion to the evidentiary value of the Evernote records. The Ld.CIT(A) held that the seized records clearly identified the assessee and his father, quantified the cash payments made to them and were directly relatable to the land transactions under consideration. It was further observed that the entries were corroborated by the statements recorded from Shri K.Sreejith and the assessee himself. The Ld.CIT(A) therefore rejected the contention that the seized documents were “dumb documents” and held that they constituted valid and reliable evidence. Invoking the presumption u/s.132(4A) of the Act, the Ld.CIT(A) further held that the contents of the seized records were presumed to be true and correct and that the said presumption extended to the transactions recorded therein.

39. The Ld.CIT(A) additionally referred to proceedings before the Interim Board for Settlement in the case of LCPL. It was noted that LCPL had filed a settlement application wherein the cash receipts and corresponding cash payments recorded in the seized Evernote records were accepted and offered for settlement. According to the Ld.CIT(A), the Interim Board had accepted the authenticity of the seized records and determined the income of LCPL on that basis. The Ld.CIT(A) treated this as further corroboration of the genuineness of the entries showing payment of Rs.4,72,35,000/- to the assessee.

40. Upon cumulative consideration of the seized Evernote records, statements of Shri K.Sreejith, the assessee’s statement u/s.132(4) of the Act, the assessee’s subsequent admission before the Investigation Wing, the crossexamination proceedings, and the settlement proceedings in the case of LCPL, the Ld.CIT(A) concluded that the assessee had in fact received cash consideration of Rs.4,72,35,000/- over and above the registered consideration. The addition made by the AO by adopting total sale consideration of Rs.5,99,25,000/- for computation of long-term capital gains was therefore confirmed.

41. The final issue considered by the Ld.CIT(A) concerned the disallowance of indexed development expenditure of Rs.68,70,154/- claimed by the assessee while computing long-term capital gains. The Ld.CIT(A) noted that the AO had disallowed the claim on the ground that no evidence whatsoever had been furnished to establish that any developmental work had been carried out on the land. The Ld.CIT(A) observed that despite repeated opportunities during appellate proceedings, the assessee failed to produce any documentary evidence, bills, vouchers, agreements, details of contractors, or any other material substantiating the claim. The Ld.CIT(A) therefore held that the assessee had completely failed to discharge the burden cast upon him to prove the incurrence of such expenditure. In the absence of any supporting evidence, the claim of indexed development expenditure was held to be unsubstantiated. Accordingly, the disallowance of Rs.68,70,154/- made by the AO was confirmed.

42. Based on the above reasoning, the Ld.CIT(A) held that:

The land sold by the assessee was a capital asset within the meaning of section 2(14)(iii)(b) of the Act;

ii.

The assessee had received cash consideration of Rs.4,72,35,000/- in addition to the registered sale consideration;

iii.

The total sale consideration for purposes of capital gains computation was correctly adopted at Rs.5,99,25,000/-; and

iv.

The claim of indexed development expenditure of Rs.68,70,154/- was unsupported by evidence and rightly disallowed.

43. Accordingly, all the grounds raised by the assessee were dismissed.

44. Aggrieved of the above order of the Ld.CIT(A), the assessee is in appeal before this Tribunal.

45. The Ld.AR, appearing on behalf of the assessee submitted that the assessment framed u/s.153C of the Act and the order passed by the Ld.CIT(A) are contrary to the facts of the case, the evidence available on record and the settled principles of law. The Ld.AR submitted that the additions sustained by the Ld.CIT(A) deserve to be deleted for the reasons stated hereinbelow.

46. The Ld.AR submitted that the assessment year under appeal is an unabated assessment year. The original return of income had already attained finality prior to the date of search. The Ld.AR argued that it is a settled proposition of law that in respect of completed assessments, no addition can be made in proceedings u/s.153A/153C of the Act in the absence of incriminating material belonging to or pertaining to the assessee. In the present case, no incriminating material evidencing receipt of any undisclosed consideration by the assessee was found from his possession. The addition has been made merely on the basis of third-party documents and statements. Therefore, even on this preliminary legal ground, the impugned addition is liable to be deleted. Reliance in this regard is placed on the recent decision of the Co-ordinate Bench of this Tribunal in the case of R.Viswanathan v. DCIT [IT Appeal Nos.1321 to 1324 (Chny) of 2025, dated 22-1-2026] andDCIT v. R.Viswanathan [IT Appeal Nos.1556 & 1597 (Chny) of 2025, dated 22-1-2026], wherein it has been held that no addition can be made in respect of completed assessments in the absence of incriminating material.

47. The Ld.AR further submitted that the principal addition sustained by the Ld.CIT(A) relates to the alleged undisclosed cash consideration of Rs.3,87,75,000/-. The entire addition is founded upon the statement recorded from the assessee during the course of search proceedings u/s.132(4) of the Act and certain electronic data maintained by M/s.LCPL, the purchaser of the property. The Ld.AR submitted that the statement recorded during search cannot be treated as conclusive evidence. The statement was recorded when the assessee was under considerable mental stress and tension arising out of the search proceedings and was merely reiterating the version put forth by his father during the course of examination. Subsequently, after obtaining professional advice and after examining the actual facts, the assessee retracted the statement and explained the correct factual position. The Ld.AR contended that it is a settled principle that an admission is not conclusive and can always be explained or shown to be erroneous. The Ld.AR placing reliance in the judgment of the Hon’ble Supreme Court in Sarwan Singh Rattan Singh v. State of Punjab 1957 SC 637, submitted that it has been clearly held that an admission is not conclusive proof of the matter admitted. Similarly, various judicial authorities have held that additions cannot be sustained solely on the basis of statements unless supported by independent corroborative evidence.

48. The Ld.AR submitted that both the AO and the Ld.CIT(A) have heavily relied upon the “Evernote” data seized from M/s. LCPL. The Ld.AR submitted that such electronic records are nothing but unilateral documents maintained by a third party. The same cannot be treated as conclusive evidence against the assessee in the absence of any corroborative material establishing that the alleged cash consideration had actually passed from the purchaser to the assessee. No evidence has been brought on record to demonstrate movement of cash, utilisation of such alleged cash, withdrawal of corresponding amounts by the purchaser or receipt thereof by the assessee. A one-sided record maintained by a third party cannot by itself establish receipt of undisclosed income in the hands of the assessee. The Ld.AR contended that the Hon’ble Rajasthan High Court in Bhanwarlal Murwatiya v. CIT [IT APPEAL NOS. 68 & 69 OF 2004 AND 8 OF 2005, dated 11-2-2008] has held that unless it is established that the alleged higher consideration had actually passed to the seller, no addition can be sustained.

49. The Ld.AR further submitted that the assessee had specifically requested for cross-examination and the same was conducted by the Department. During such cross-examination, the assessee categorically clarified that he had received cash only to the extent of Rs.84,60,000/- and not the amount alleged by the Department. The cross-examination proceedings were conducted subsequent to the search and afforded the assessee an opportunity to explain the true factual position. The statement recorded during cross-examination clearly establishes that the actual cash received was only Rs.84,60,000/-. The Department has not brought any material on record to disprove the specific admission made during cross-examination. Therefore, the authorities below were not justified in ignoring the cross-examination proceedings and relying solely upon the original statement recorded during search.

50. The Ld.AR argued that the conduct of the Department itself demonstrates the improbability of the alleged receipt of Rs.3,87,75,000/-. Assessments for several assessment years were completed subsequent to the search. Despite detailed scrutiny, the Department could not identify any investment, expenditure, asset creation or utilisation attributable to the alleged cash receipt of Rs.3,87,75,000/-. The Ld.AR submitted that the assessee consistently maintained that only Rs.84,60,000/- was received in cash and the utilisation thereof was explained as having been incurred towards development and construction activities. Had the assessee actually received the much larger amount alleged by the Department, some trace of its deployment or utilisation would necessarily have surfaced during the course of assessment proceedings. The complete absence of any such evidence strongly supports the assessee’s case and demolishes the allegation of receipt of additional cash consideration. The Ld.AR further submits that the assessee had also furnished an independent valuation report prepared by a qualified valuer during the course of assessment proceedings. The valuation report determined the fair market value of the property at Rs.2,04,00,000/-. The actual consideration admitted by the appellant was Rs.2,11,50,000/-, which is broadly in line with the fair market value determined by the expert. On the contrary, the Revenue seeks to attribute an aggregate consideration of nearly Rs.6 crores to the transaction, which is substantially higher than the fair market value of the property. According to the Ld.AR that the Ld.CIT(A) dismissed the valuation report as a self-serving document without obtaining any contrary valuation report or any expert evidence to dislodge the findings contained therein. Such rejection of expert evidence without any supporting material is arbitrary and contrary to settled legal principles. The valuation report constitutes an important piece of evidence which clearly demonstrates the improbability of the alleged consideration adopted by the Revenue.

51. The Ld.AR further submitted that the Ld.CIT(A) has further relied upon the order passed by the Interim Board for Settlement in the case of M/s. LCPL. Such reliance is wholly misplaced and legally unsustainable. The assessee was not a party to the proceedings before the Settlement Commission or the Interim Board for Settlement. It is well settled that an order passed in the case of another assessee cannot operate as evidence against a person who was not a party to such proceedings. Every assessment must be decided independently on the basis of evidence available in the assessee’s own case. Therefore, the findings recorded in the settlement proceedings of M/s.LCPL cannot be treated as binding upon the assessee and could not have been relied upon to sustain the addition.

52. The Ld.AR submitted that the AO has also disallowed the entire indexed cost of development amounting to Rs.68,70,154/-. The Ld.AR submitted that the development expenditure had been incurred over a period of time and that complete supporting records were not readily available owing to the passage of time. Even assuming that all supporting documents were not available, the complete disallowance of the expenditure is highly excessive and arbitrary. In earlier assessment proceedings relating to the assessee, where similar circumstances existed, only an estimated disallowance of 30% of the expenditure had been made. The Ld.AR had therefore requested that, at the very least, a reasonable estimate be adopted and the disallowance be restricted to 30%. The Ld.AR argued that the authorities below failed to consider this request and proceeded to disallow the entire claim. Such an approach is contrary to settled principles governing estimation of expenditure and deserves to be interfered with.

53. The Ld.AR further submitted that the Ld.CIT(A) erred in holding that the land transferred by the assessee was not agricultural land. The Ld.AR submitted that the assessee had furnished copies of Chitta, Adangal and Patta during the course of assessment proceedings. These are official revenue records which clearly establish that the land was classified as agricultural land and that agricultural operations were being carried on therein. The land was categorised as wet irrigation Nanjai land and was capable of agricultural use. The authorities below have not disputed the authenticity of these records.

54. The ld.AR placing reliance on the judgment of the Hon’ble Supreme Court in the cases of Commissioner of Wealth-tax v. Officer-in-Charge (Court of Wards) [1976] 105 ITR 133 (SC) and Smt. Sarifabibi Mohmed Ibrahim v. CIT [1993] 204 ITR 631 (SC) submitted that the said decision has laid down various tests for determining the agricultural character of land, including actual agricultural use, classification in revenue records, nature of the soil, intention of the owner and surrounding circumstances. According to the Ld.AR that the assessee satisfies all these tests. The evidence on record clearly demonstrates that agricultural activities were being carried on and that the land continued to retain its agricultural character.

55. The Ld.AR submitted that the Ld.CIT(A) appears to have proceeded on the basis that the land was situated near a municipality and therefore had potential for non-agricultural use. Such reasoning is contrary to settled law. Mere proximity to municipal limits or the existence of development in the surrounding area does not alter the agricultural character of land when agricultural operations are actually being carried on. The Ld.AR argued that in the case of George Gee Varghese v. ITO 202 ITD 339 (Chennai – Trib.), this Tribunal has categorically held that agricultural land does not lose its character merely because it is situated in an area having road connectivity or because it is sold to a non-agriculturist. The crucial test remains the actual nature and use of the land. The Ld.AR submitted that the assessee had also furnished a valuation report confirming the agricultural nature of the property. The same has been rejected without any cogent basis.

56. In view of the facts and circumstances stated above, the Ld.AR submitted that the addition of Rs.3,87,75,000/- towards alleged undisclosed cash consideration is wholly unsustainable in law and on facts and deserves to be deleted. It is further submitted that the land transferred by the assessee was agricultural land and therefore not a capital asset within the meaning of section 2(14) of the Act. Consequently, no capital gains tax is exigible on the transfer of such land. It is also prayed that the indexed cost of development claimed by the assessee be allowed and, without prejudice, any disallowance may be restricted to a reasonable estimate of 30% in accordance with the consistent approach adopted in earlier proceedings. The Ld.AR therefore prays that the appeal be allowed and the additions sustained by the Ld.CIT(A) be deleted in full.

57. Per contra, the Ld.DR relied upon the orders of the lower authorities and prayed for confirming the order of the Ld.CIT(A) in dismissing the appeal of the assessee.

58. We have heard the rival submissions advanced by both sides, carefully perused the orders of the lower authorities and examined the entire material available on record. We have also considered the various judicial precedents relied upon by the parties. The issues arising for our adjudication relate to the character of the land transferred by the assessee, the addition made towards alleged receipt of unaccounted cash consideration over and above the registered sale consideration and the allowability of indexed cost of acquisition/improvement claimed while computing capital gains.

59. At the outset, we shall deal with the contention of the assessee that the land sold at Madambakkam Village was agricultural land and therefore did not constitute a capital asset within the meaning of section 2(14) of the Act. The Ld.AR placed considerable reliance upon the revenue records such as Chitta, Adangal and Patta, which classified the property as Nanjai land and further contended that agricultural operations were being carried on in the said land. It was argued that the authorities below failed to appreciate the true character of the land and erroneously proceeded on the footing that the property was liable to capital gains tax merely because of its proximity to municipal limits.

60. We have carefully considered the aforesaid submissions. The issue, however, is not whether the land was classified as agricultural land in the revenue records or whether agricultural operations were carried on therein. The decisive issue is whether such agricultural land falls within the exclusion provided u/s.2(14)(iii) of the Act. The statutory scheme makes it abundantly clear that agricultural land situated within the prescribed distance from a municipality having the requisite population ceases to enjoy the exclusion contemplated u/s.2(14)(iii) of the Act and consequently assumes the character of a capital asset for the purposes of the Act.

61. The AO, after conducting independent verification, recorded a finding that the impugned land was situated at an aerial distance of approximately 4.45 kilometres from the limits of Tambaram Municipality. The AO further found that the population of Tambaram Municipality as per the Census 2011 was 1,64,830. The Ld.CIT(A), instead of mechanically affirming the findings of the AO, undertook an independent examination of the geographical location of the property and the municipal limits prevailing during the relevant period. The Ld.CIT(A) has recorded a detailed factual finding that the limits of Tambaram Municipality extended up to Selaiyur and that the aerial distance between the assessee’s land and Camp Road, Selaiyur, which formed part of the municipal area, was only around 3.70 kilometres. The Ld.CIT(A) has further observed that the actual distance from the municipal boundary would be even lesser.

62. Significantly, the assessee has not produced any material before us to dislodge the aforesaid factual findings. No alternative survey report, municipal record, geographical study or other evidence has been placed on record to establish that the land was situated beyond the statutory distance prescribed under section 2(14)(iii)(b) of the Act. Equally, the population criterion recorded by the authorities below remains undisputed. Once these two statutory requirements stand established, the inevitable legal consequence is that the land falls within the ambit of a capital asset irrespective of its classification in revenue records or actual agricultural use.

63. The reliance placed by the assessee on the decisions of the Hon’ble Supreme Court in Officer-in-Charge (Court of Wards) (supra) and Sarifabibi Mohmed Ibrahim (supra) does not advance his case. Those decisions lay down various tests for determining whether a land possesses agricultural character. However, the present controversy does not primarily concern the agricultural nature of the land. Even assuming for the sake of argument that the land was agricultural in character and agricultural activities were carried on therein, the statutory fiction embodied in section 2(14)(iii)(b) of the Act would nevertheless apply once the land is situated within the notified distance from a municipality having the prescribed population. Therefore, the issue is governed not merely by the agricultural character of the land but by the specific statutory conditions contained in section 2(14)(iii)(b) of the Act.

64. We therefore find ourselves in complete agreement with the reasoning and conclusions recorded by the Ld.CIT(A). The findings recorded by the first appellate authority are based upon proper appreciation of the statutory provisions and the factual materials available on record. Accordingly, we uphold the conclusion of the Ld.CIT(A) that the land sold by the assessee constituted a capital asset within the meaning of section 2(14)(iii)(b) of the Act and consequently the gains arising therefrom are chargeable to tax under the head “Capital Gains”.

65. We shall now advert to the principal controversy relating to the addition made on account of alleged receipt of unaccounted cash consideration. The Revenue authorities have proceeded on the basis that the assessee received a sum of Rs.4,72,35,000/- in cash over and above the registered sale consideration of Rs.1,26,90,000/- and accordingly adopted a total sale consideration of Rs.5,99,25,000/- for computing capital gains.

66. The material relied upon by the Revenue in support of the aforesaid addition consists principally of the statement recorded from Shri K.Sreejith, Director of M/s.Lotus Castle Pvt. Ltd., certain electronic records maintained in the Evernote application, the statement recorded from the assessee u/s.132(4) of the Act during the course of search and the subsequent proceedings before the Interim Board for Settlement in the case of M/s.Lotus Castle Pvt. Ltd.

67. There is no dispute that during the course of search proceedings conducted on 27.11.2019, the assessee made a statement u/s.132(4) of the Act admitting receipt of cash consideration over and above the registered consideration. Equally, there is no dispute that subsequently during the assessment proceedings and during cross-examination proceedings, the assessee explained that the actual cash received by him was only Rs.84,60,000/- and not Rs.4,72,35,000/- as alleged by the Revenue.

68. In our considered opinion, while evaluating such evidence, it becomes necessary to distinguish between the portion of the cash receipt which stands clearly admitted and the balance amount sought to be assessed solely on the basis of inferences and third-party materials. So far as the sum of Rs.84,60,000/- is concerned, the assessee himself has unequivocally admitted receipt of the said amount in connection with the sale transaction. Such admission was made during the assessment proceedings after the assessee had the benefit of examining the seized materials and after availing the opportunity of cross-examination. Therefore, to that extent, the receipt of on-money stands established beyond doubt. The assessee cannot be permitted to approbate and reprobate by simultaneously admitting receipt of Rs.84,60,000/-and denying its taxability. We therefore hold that the authorities below were justified in treating the sum of Rs.84,60,000/- as additional sale consideration received by the assessee.

69. However, the position stands on an entirely different footing with regard to the balance amount of Rs.3,87,75,000/-. We find that apart from the entries found in the electronic records maintained by M/s.Lotus Castle Pvt. Ltd. and the original statement recorded during search, there is no independent material demonstrating actual receipt of the said amount by the assessee. The Revenue has not brought on record any evidence indicating movement of cash from the purchaser to the assessee. No corresponding withdrawals have been established. No asset acquisition, investment, expenditure pattern or deployment of funds corresponding to such huge cash receipts has been identified despite extensive investigation carried out over a prolonged period.

70. We note that the search was conducted in November 2019 whereas the transaction pertains to February 2015. The Department had the benefit of examining several assessment years after the search. If indeed the assessee had received cash consideration aggregating to Rs.4.72 crores, some trace of its utilisation, investment or deployment would ordinarily have surfaced during the course of investigations. The absence of any such evidence assumes significance while evaluating the correctness of the Revenue’s allegation.

71. It is undoubtedly true that a statement recorded u/s.132(4) of the Act constitutes a relevant and important piece of evidence. However, it is equally well settled that an admission is not conclusive and the evidentiary value of such statement must be tested in the light of surrounding circumstances and corroborative evidence. Courts have repeatedly held that additions involving substantial tax consequences cannot be sustained solely on the basis of confessional statements where supporting evidence is lacking.

72. We find that the Evernote entries relied upon by the Revenue undoubtedly constitute relevant evidence. However, they are records maintained by a third party. Such records may justify further investigation and may lend support to the Revenue’s case, but where the assessee disputes the quantum recorded therein, the Revenue is still required to establish by cogent evidence that the amount mentioned therein actually changed hands. In the present case, such corroborative evidence is conspicuously absent.

73. We also find merit in the contention of the assessee that the proceedings before the Interim Board for Settlement in the case of M/s.Lotus Castle Pvt. Ltd. cannot be treated as substantive evidence against him. The assessee was not a party to those proceedings and therefore findings recorded therein cannot automatically bind him. At best, such proceedings may provide corroborative background material but cannot substitute independent evidence required to establish receipt of undisclosed income in the hands of the assessee.

74. Having regard to the entirety of the facts and circumstances, we are of the considered view that the Revenue has successfully established receipt of cash consideration only to the extent of Rs.84,60,000/- which stands admitted by the assessee. Insofar as the balance amount of Rs.3,87,75,000/- is concerned, the evidence available on record falls short of the degree of proof necessary to sustain the addition. We therefore hold that the addition deserves to be restricted to Rs.84,60,000/- and the balance addition of Rs.3,87,75,000/-is liable to be deleted. The AO is directed accordingly.

75. The remaining issue relates to the claim of indexed cost of acquisition/improvement. The authorities below have disallowed the claim primarily on the ground that complete supporting documents, bills and vouchers were not produced by the assessee. We find that the assessee has not been able to substantiate the entirety of the expenditure claimed by producing satisfactory documentary evidence. At the same time, it would be wholly unrealistic to presume that no expenditure whatsoever was incurred towards acquisition, maintenance, improvement and development of the property during the long period of ownership. The computation provisions relating to capital gains contemplate taxation of real gains and not hypothetical gains. Where some expenditure is demonstrably relatable to the asset but precise quantification becomes difficult because of lapse of time and absence of complete records, a reasonable estimate is permissible. The Revenue itself has adopted an estimated disallowance of 30% in respect of similar expenditure relating to another land transaction of the assessee. The principle of consistency also requires that similar treatment be accorded in comparable circumstances. Considering the totality of facts, the nature of the asset, the long holding period and the probabilities of the case, we are of the opinion that the ends of justice would be adequately served by disallowing 30% of the indexed cost claimed by the assessee towards acquisition/improvement. We accordingly direct the AO to allow indexed cost to the extent of 70% of the claim while recomputing the capital gains. The balance disallowance of 30% shall stand sustained.

76. In the result, we uphold the finding of the Ld.CIT(A) that the land sold by the assessee constituted a capital asset within the meaning of section 2(14)(iii)(b) of the Act. We further hold that the addition towards undisclosed cash consideration shall be restricted to Rs.84,60,000/- and the balance addition of Rs.3,87,75,000/- shall stand deleted. We also direct the AO to allow 70% of the indexed cost claimed by the assessee while recomputing the capital gains. The grounds raised by the assessee are partly allowed in the above terms.

77. In the result, the appeal of the assessee in ITA No.432/Chny/2025 is partly allowed.

ITA No.439/Chny/2025

78. The brief facts are that the assessee, an individual carrying on business in the name and style of M/s.Guru Foundations, filed his return of income for A.Y.2015-16 on 30.09.2015 declaring total income of Rs.75,80,310/-. Assessment u/s.143(3) of the Act was completed on 30.12.2017 determining the total income at Rs.2,75,59,940/-.

79. Subsequently, a search u/s.132 of the Act was conducted in the case of Lotus Castle Pvt. Ltd. on 29.01.2019. During the course of search, materials were seized evidencing payment of cash consideration towards acquisition of lands aggregated for Asvini Fisheries Pvt. Ltd. at Madambakkam Village, Tambaram. Based on the findings of the said search, a search u/s.132 of the Act was conducted in the group cases of AFPL on 27.11.2019, wherein the residential and business premises of the assessee were also covered.

80. During the search proceedings, it was found that the assessee had sold land admeasuring 2.12 acres situated at Madambakkam Village during F.Y. 2014-15 to M/s. Prathishri Properties, a group concern of AFPL, through LCPL. A statement u/s.132(4) of the Act was recorded from the assessee, wherein he admitted having received cash consideration of Rs.6,78,40,000/- over and above the registered sale consideration of Rs.1,91,30,000/-. Thereafter, notice u/s.153C of the Act was issued on 04.02.2021. In response, the assessee filed return of income on 28.02.2021 declaring the same income as originally returned and did not offer any additional income on account of the alleged on-money receipt.

81. The AO observed that, during the search in the case of LCPL, its Director, Shri K. Sreejith, in his statement recorded u/s.132(4) of the Act, had admitted payment of on-money of Rs.6,78,40,000/- to the assessee in respect of the aforesaid land transaction. Further, certain loose sheets and documents seized from the assessee’s premises contained details relating to the transfer of the said land. On the basis of the seized material and statements recorded, the AO concluded that the assessee had received total sale consideration of Rs.8,90,90,000/-, comprising Rs.1,91,30,000/- received through banking channels and Rs.6,99,60,000/- received in cash.

82. Since the assessee had not disclosed the alleged additional consideration in the return filed pursuant to notice under section 153C, the AO recomputed the Long-Term Capital Gain at Rs.8,83,51,515/- and completed the assessment u/s.153C of the Act vide order dated 24.09.2021, determining the total income at Rs.9,75,19,940/- after making an addition of Rs.6,99,60,000/-towards undisclosed Long-Term Capital Gain.

83. Aggrieved of the above assessment order, assessee carried the matter in appeal before the Ld.CIT(A), who vide the impugned appellate order dated 16.12.2024 dismissed the appeal of the assessee by confirming the addition made by the AO towards alleged on-money cash consideration of Rs.6,99,60,000/-.

84. Aggrieved of the above order of the Ld.CIT(A), assessee is in appeal before this Tribunal.

85. We have carefully considered the rival submissions, perused the orders of the lower authorities and examined the entire material placed on record. Since, the facts and issues are identical to the issue dealt in ITA No.432/Chny/2025 (supra), the detailed reasons recorded by us vide paragraphs 64 to 73 hereinabove, which shall form an integral part of this order, we are of the considered view that the Revenue has been able to establish, on the basis of cogent and reliable evidence, receipt of cash consideration by the assessee only to the extent of Rs.1,27,00,000/-. The said amount also stands admitted by the assessee and therefore constitutes a legally sustainable basis for making the addition. However, insofar as the balance amount of Rs.5,72,60,000/- is concerned, we find that the evidentiary material brought on record by the Revenue is insufficient to satisfy the degree of proof required for sustaining an addition under the provisions of the Act. The documents relied upon by the Revenue, when tested in the light of surrounding circumstances and the settled principles governing assessment of undisclosed income, do not conclusively establish receipt of the said amount by the assessee. Accordingly, we hold that the addition made by the AO and sustained by the Ld.CIT(A) is liable to be restricted to Rs.1,27,00,000/-. Consequently, the balance addition of Rs.5,72,60,000/- is directed to be deleted. The AO is directed to recompute the total income of the assessee in conformity with the above findings.

86. In the result, the appeal of the assessee in ITA No.439/Chny/2025 is partly allowed.

Section 148 Reassessment Notice for AY 2015-16 Quashed as Barred by Ten-Year Limitation Period

Ashwani Kumar — Thu, 23 Jul 2026 06:00:10 +0000

Section 148 Reassessment Notice for AY 2015-16 Quashed as Barred by Ten-Year Limitation Period

Issue

Whether the assessment year relevant to the previous year in which a search is conducted must be included when reckoning the extended ten-year limitation period under Section 149 read with Explanation 1 to Section 153A/153C, rendering a Section 148 notice issued on 30.03.2026 for Assessment Year 2015-16 time-barred.

Facts

Search Context: Reassessment proceedings were initiated pursuant to search and seizure operations conducted under the provisions of Section 153A/153C of the Income-tax Act, 1961.
Issuance of Notice: The Assessing Officer issued a notice under Section 148 on March 30, 2026, seeking to reopen the assessment for Assessment Year 2015-16.
Limitation Challenge: The assessee challenged the Section 148 notice on the ground that it was issued beyond the permissible extended period of ten assessment years provided under Section 149 read with Explanation 1 to Section 153A.
Interpretation Dispute: The key legal dispute pertained to the computation of the extended ten-year timeframe, specifically whether the assessment year relevant to the previous year of the search itself must be counted within the ten-year limit.

Decision

Computation of Extended Period: The assessment year relevant to the previous year in which the search is conducted must be included when reckoning the ten-year limitation period under Section 149 read with Explanation 1 to Section 153A [Para 13.3].
Notice Barred by Limitation: Reassessment for Assessment Year 2015-16 fell beyond the permissible period of ten assessment years from the search execution timeframe [Para 14].
Quashing of Notice: The impugned Section 148 notice dated March 30, 2026, was held to be time-barred, invalid, and accordingly quashed and set aside, deciding the matter in favor of the assessee [Para 14].

Key Takeaways

Strict Computation of 10-Year Outer Limit: When determining the extended ten-year limitation window for reassessment in search cases, the search assessment year itself forms part of the counting mechanism and cannot be excluded to stretch the statutory deadline.
Strict Construction of Section 149 & 153A: Reopening notices issued under Section 148 after the expiry of the ten-year statutory ceiling are void ab initio due to lack of jurisdiction.
Interpretation of Search Clauses: Statutory expressions defining assessment block limits—such as “six assessment years immediately preceding” and “not later than ten assessment years”—must be applied strictly as constructed by the legislature to prevent indefinite exposure to reassessments.

HIGH COURT OF GUJARAT

Madhav Power (P.) Ltd.

Assistant Commissioner of Income-tax

A.S. Supehia and Ms. VAIBHAVI D. NANAVATI, JJ.

R/SPECIAL CIVIL APPLICATION NO. 7305 of 2026 ^†

JUNE 29, 2026

B S Soparkar for the Petitioner. Varun K.Patel for the Respondent.

JUDGMENT

2. Having regard to the controversy involved, with the consent of the learned advocates for the respective parties, the matter is taken up for final hearing.

3. RULE. Learned Senior Standing Counsel Mr.Varun K Patel waives service of notice of rule on behalf of the respondent.

4. By this petition under Article 226 of the Constitution of India, the petitioner challenges the notice dated 30.03.2026 issued under Section 148 of the Income Tax Act, 1961 (for short “the Act”) seeking to re-open income tax assessment of the petitioner for the Assessment Year 2015-16 (for short “the assessment year under consideration”) by the Assistant Commissioner of Income Tax, Central Circle 2(3), Ahmedabad (for short “the respondent”).

4.1 The petitioner is a company and has filed its return of income for the assessment year 2015-16 on 30.10.2015 declaring total income at NIL. The petitioner is part of MSK Group which is engaged in the business of infrastructure development. The said MSK and Madhav Group of Gujarat including the petitioner were subjected to search action under Section 132 of the Act on 18.05.2024. The Respondent issued a notice dated 30.03.2026 under Section 148 of the Act for the year under consideration. It is stated therein that a search was initiated under Section 132 of the Act on 18.05.2024 in the case of the Petitioner or in the case of the person in respect of which the Petitioner is assessable under the Act. It was further stated that the Respondent is satisfied, with the approval of Principal Commissioner or Commissioner, that the books of accounts or documents, seized or requisitioned under section 132 or section 132A of the Act in the case of MSK and Madhav Group pertains or pertain to, or any information contained therein, relate to the Petitioner or the person in respect of which, the Petitioner is assessable under the Act and hence, the notice dated 30.03.2026 is issued under Section 148 of the Act after obtaining prior approval of Directorate General of Income Tax (Investigation), Ahmedabad. The Petitioner has challenged the said notice under Section 148 of the Act principally on the ground of limitation.

Number	Assessment Year
1^st year	Assessment Year 2025-26
2^nd year	Assessment Year 2024-25
3^rd year	Assessment Year 2023-24
4^th year	Assessment Year 2022-23
5^th year	Assessment Year 2021-22
6^th year	Assessment Year 2020-21
7^th year	Assessment Year 2019-20
8^th year	Assessment Year 2018-19
9^th year	Assessment Year 2017-18
10^th year	Assessment Year 2016-17

5.4 In support of his submissions, learned Advocate Mr.Soparkar has placed reliance on the judgment of the Delhi High Court in the case of Dinesh Jindal v. Asstt. CIT 469 ITR 32 (Delhi)/Writ Petition (Civil) No. 12091 of 2023 decided on 27.05.2024. Reliance is also placed on the judgment of the Delhi High Court in the case of Pr. CIT v. Ojjus Medicare (P.) Ltd. 465 ITR 101 (Delhi)/ . Finally, he has also placed reliance on the judgment of Madras High Court, Bench at Madurai, passed in A.R. Safiullah v. ACIT [Writ Petition (MD) No. 4327 of 2021, dated 24-3-2021].

5.5 Thus, it is urged that the impugned notice issued under Section 148 of the Act for the assessment year 2015-16 may be quashed and set aside.

No of Year.	Assessee’s calculation of 10A.Ys. (including search year)	Revenue’s calculation of 10A.Ys. (Excluding search year)
1.	2025-26	2024-25
2.	2024-25	2023-24
3.	2023-24	2022-23
4.	2022-23	2021-22
5.	2021-22	2020-21
6.	2020-21	2019-20
7.	2019-20	2018-19
8.	2018-19	2017-18
9.	2017-18	2016-17
10.	2016-17	2015-16

7.2 It is further submitted that in case of Bhavin Kishorbhai Zinzuwadia v. ACIT (Guj.) this Hon’ble Court has already decided this issue accepting the calculations of 10 assessment years for the purpose of Section 153C excluding the search year/the year in which the incriminating material is received by AO of other person.

7.4 Thus, it is urged that the action of the respondent in issuing the impugned notice for the A.Y. 2015-16 under Section 148 of the Act may be upheld and the present petition may be dismissed.

ANALYSIS AND OPINION:

9. The sole issue that arises for consideration in the present petition is that –

(i)

Whether the notice issued by the respondent for the Assessment Year 2015-16 is barred by limitation;

(ii)

Number	Assessment Year
1^st year	Assessment Year 2025-26
2^nd year	Assessment Year 2024-25
3^rd year	Assessment Year 2023-24
4^th year	Assessment Year 2022-23
5^th year	Assessment Year 2021-22
6^th year	Assessment Year 2020-21
7^th year	Assessment Year 2019-20
8^th year	Assessment Year 2018-19
9^th year	Assessment Year 2017-18
10^th year	Assessment Year 2016-17

•

11. With reference to the relevant assessment year, it is necessary to refer to the provisions of Section 153A(1)(b) of the Act which reads as under :

Six-Year Block	Ten-Year Block
“six assessment years immediately preceding”	“not later than ten assessment years from the end of the assessment year”

•

A backward-looking “preceding” model (six years), and

•

A reckoning “from the end of the assessment year” model (ten years).

13.4 Even otherwise, this issue is no more res integra as the same is covered by the judgement of this Court in the case of Jayantibhai Karamshibhai Maniya v. ITO (Guj.) . This Court has taken a view, after considering the earlier judgement in the case of Bhavin Zinzuwadia (supra), that while calculating the period of ten years under Section 153C of the Act, keeping in mind the language of Explanation 1 to Section 153A of the Act, the search year or the year in which seized material is received by the Jurisdictional Assessing Officer of the petitioner is required to be taken into consideration. Relevant extract of the said judgment can be usefully referred to as under:

Computation of the six-year block period as provided under section 153C of the Act	No of years
AY 2021-22	1
AY 2020-21	2
AY 2019-20	3
AY 2018-19	4
AY 2017-18	5
AY 2016-17	6

Computation of the six-year block period as provided under section 153C read with Section 153Aof the Act	No of years
AY 2022-23	1
AY 2021-22	2
AY 2020-21	3
AY 2019-20	4
AY 2018-19	5
AY 2017-18	6
AY 2016-17	7
AY 2015-14	8
AY 2014-15	9
AY 2013-14	10

1st Year	2019-20
2nd Year	2018-19
3rd Year	2017-18
4th Year	2016-17
5th Year	2015-16
6th Year	2014-15
7th Year	2013-14
8th Year	2012-13
9th Year	2011-2012
10th Year	2010-2011

14. For the foregoing reasons, the impugned Notice issued under Section 148 of the Act dated 30.03.2026 for A.Y. 2015-16 is barred by limitation as the same falls beyond the permissible period of ten years. We, therefore, quash and set aside the Notice dated 30.03.2026 issued under Section 148 of the Act for Assessment Year 2015-16 on the ground of limitation. Accordingly, the present writ petition is allowed. RULE is made absolute. No order as to cost.

Assessment Order Passed Within Extended Statutory Limit Is Valid as Draft Order and Hearing Procedures Were Complied With

Ashwani Kumar — Thu, 23 Jul 2026 05:55:36 +0000

Assessment Order Passed Within Extended Statutory Limit Is Valid as Draft Order and Hearing Procedures Were Complied With

Issue

Whether the assessment order for AY 2020-21 passed on 28.09.2022 was time-barred, and whether the non-issuance of a draft assessment order under Section 144C and absence of an oral hearing under Section 144B violated statutory requirements or natural justice principles for an ordinary assessee.

Facts

Assessment & Timeline: The assessee, a partnership firm engaged in construction, filed its income tax return for Assessment Year 2020-21. Statutory notices under Sections 143(2) and 142(1) were issued, to which the assessee submitted replies along with supporting documents.
Extension of Limitation Period: The time limit for completing assessment under Section 143 for AY 2020-21 was statutorily extended up to 30.09.2022. The AO finalized the assessment on 28.09.2022.
Show-Cause & Oral Hearing Opportunity: Prior to finalization, a show-cause notice was issued specifically highlighting proposed variations. The notice explicitly informed the assessee that a personal hearing could be requested via the “Seek Video Conferencing” option. The assessee filed a written reply to the show-cause notice but did not click or request the video conferencing option.
Draft Assessment Challenge: The AO finalized the assessment without issuing a draft assessment order. The assessee challenged the assessment order via a writ petition, alleging procedural invalidity due to non-issuance of a draft order, denial of personal hearing, and time-bar.

Decision

Assessment Passed Within Limitation: Since the statutory time limit under Section 143 for AY 2020-21 was extended up to 30.09.2022, the assessment order issued on 28.09.2022 was well within time [Para 8].
Draft Assessment Not Required for Non-Eligible Assessees: Serving a draft assessment order under Section 144C is required solely for an “eligible assessee” under Section 144C(15)(b). As an ordinary partnership firm, the assessee was not entitled to a draft assessment order under Section 144B [Paras 11, 15].
No Violation of Natural Justice: Since the show-cause notice highlighted proposed variations and offered an option for a video conference hearing that the assessee failed to opt for, there was no breach of natural justice [Para 16].
Writ Petition Dismissed: The court dismissed the writ petition, directing the assessee to pursue statutory appellate remedies for merits-based challenges [Para 17].

Key Takeaways

Scope of Section 144C Draft Orders: The requirement to issue a draft assessment order is restricted exclusively to “eligible assessees” (such as foreign companies or international transaction cases). Ordinary domestic taxpayers cannot claim procedural invalidity on this ground under faceless assessment procedures.
Responsibility to Request Video Hearing: Under faceless assessment (Section 144B), providing the electronic link/option (“Seek Video Conferencing”) in a show-cause notice satisfies natural justice requirements. If a taxpayer fails to actively request the hearing via the portal, they cannot later allege a denial of an opportunity to be heard.
Statutory Extensions Are Binding: Assessment orders passed on or before extended statutory deadlines introduced via amendments are valid and timely.
Alternative Remedies First: High Courts will refrain from deciding the factual merits of an assessment under Article 226 when efficacious statutory appellate remedies are available.

HIGH COURT OF KERALA

Noel Villas and Apartments

Assistant Commissioner of Income-tax

ZIYAD RAHMAN A.A., J.

WP (C) NOs. 33538 OF 2022 and 4122 OF 2023

JUNE 8, 2026

Aswin Gopakumar, Anwin Gopakumar, Aditya Venugopalan, Smt. Nikitha Susan Paulson, Mahesh Chandran, Gautham Krishna E.J., Advs. Christopher Abraham, Addl. Standing Counsel and P.R. Ajith Kumar, Adv. for the Respondent.

JUDGMENT

[WP(C) Nos.4122/2023, 33538/2022]

1. Both these writ petitions are filed by the petitioner, an assessee under the provisions of the Income Tax Act, being aggrieved by the order of assessment, pertaining to the assessment year 2020-21 and also against the order passed rectifying the aforesaid assessment order. The consequential notices issued to the petitioner proposing to impose penalty under Section 270A read with Section 274 of the Income Tax act are also challenged in these writ petitions.

2. The facts that led to the filing of these writ petitions are as follows:

The petitioner is a partnership firm engaged in the business of construction of apartments, villas and commercial complexes. The petitioner had submitted the return of income under Section 139(1) of the Income Tax Act pertaining to the assessment year 2020-21. The faceless assessment authority issued a notice under Section 143(2) of the Act, requiring the petitioner to submit certain clarifications regarding its stock valuation. Ext.P2 reply was submitted by the petitioner on 21.07.2021. Later, Ext.P3 notice was served upon the petitioner under Section 142(1) of the Act, requiring the petitioner to furnish the Balance Sheet, Profit and Loss A/c, Cash Flow statement, Form 26AS, note on nature of business activity, details of raw materials used, output produced, technology used for production etc. According to the petitioner, Exts.P4 and P5 replies were submitted by the petitioner along with necessary documents. However, the petitioner was thereafter, issued with a show cause notice dated 12.09.2022, requiring the petitioner to show cause as to why certain variations (3 Nos), as proposed in the said notice should not be made and assessment be completed. Ext.P6 is the show cause notice and in response to the same, the petitioner submitted Ext.P7 reply, along with necessary documents. According to the petitioner, without considering the aforesaid objections, Ext.P8 order of assessment was passed, in terms of the proposals made in Ext.P6 show cause notice.

3. Ext.P9 is the demand notice issued based on Ext.P8 order. The said order was followed by Ext.P10 notice, requiring the petitioner to show cause as to why an order imposing penalty under Section 270A of the Act should not be passed. Challenging Ext.P8 order, Ext.P9 demand notice and Ext.P10 show cause notice, W.P(C)No.33538 of 2022 was filed by the petitioner. This Court admitted the said writ petition and passed and interim order staying further proceedings based on the impugned order. Pending consideration of the aforesaid writ petition, proceedings were initiated for rectifying Ext.P8 order, and it ultimately culminated in Ext.P14 order rectifying Ext.P8 order. Based on Ext.P14, Ext.P15 demand notice was issued to the petitioner. Challenging Exts.P14 and P15, W.P.(C).No.4122 of 2023 was filed by the petitioner.

4. A detailed counter affidavit was submitted by the respondents, in W.P.(C).No.33538 of 2022 denying the averments contained in the writ petition and also explaining the procedure followed by the respondents while completing the assessment as per Ext.P8.

5. I have heard Sri.Aswhin Gopakumar, learned counsel appearing for the petitioner and Sri.Christopher Abraham, learned standing counsel for the respondents.

6. The learned counsel for the petitioner vehemently contended that, Ext.P8 order and the Ext.P14 rectified order are liable to be interfered with, as the same were issued in utter disregard to the statutory stipulations contained in Section 144B of the Income Tax Act. The learned counsel for the petitioner raised contentions highlighting various irregularities in the matter of compliance of the procedure contemplated under the aforesaid provision, which essentially centered around two aspects; firstly, the assessment was completed beyond the time limit contemplated under Section 153 of the Income Tax Act and secondly, it was contended that, the respondents fail to furnish a draft assessment order to the petitioner, as contemplated under Section 144 B(1) of the Act, before finalizing the proceedings of assessment as per Ext.P8. The learned counsel also placed reliance upon the decisions rendered in Chander Arjandas Manwani v. National Faceless Assessment Centre [2022] 442 ITR 197 (Bombay), Deputy Commissioner of Income Tax v. Abacus Real Estate Private Limited [2023] 453 ITR 224 (SC)/[(2023) 332 CTR (SC) 38], Golden Tobacco Ltd. v. National Faceless Assessment Centre 442 ITR 204 (Bombay), Multiplier Brand Solutions Pvt.Ltd. v. Addl. Joint Deputy Asstt. CIT. [2022] 442 ITR 202 (Bom), P. T. Lee Chengalvaraya Naicker Trust v. Income Tax Officer [2022] 449 ITR 351 (Madras)/[(2022) 329 CTR (Mad) 613] and National Faceless Assessment Center v. Automotive Manufactures Pvt. Ltd. [2023] 331 CTR (SC) 717.

7. On the other hand, learned standing counsel stoutly opposed the aforesaid contentions by pointing out that, the assessment was finalized after strictly following the procedure contemplated under the Act and giving the petitioner a proper opportunity to submit objections and thereby fulfilling the principles of natural justice. As far as the impugned orders are concerned, those are appealable under the provisions of the Income Tax act and hence it is for the petitioner to invoke the said remedies, instead of challenging the same by way of writ petition.

8. I have carefully gone through the records and considered the contentions raised from both sides. When it comes to the question of completion of the assessment beyond the period contemplated under Section 153 of the Act, it is to be noted that, the relevant assessment year is 2020-2021, and as per Finance Act, 2022, the second proviso to Section 153(1) was substituted, extending the time limit for passing an order of assessment under Section 143(3) for the assessment year 20202021 up to 30.09.2022 and since the assessment order was passed on 28.9.2022, it was well within the time as extended by the said amendment. Even though the petitioner seeks to read down the aforesaid provision, no grounds are placed before this Court to consider the said contention of the petitioner. The time was extended by way of a statutory amendment, and there is no challenge against the said provision, and hence, I do not find any justifiable grounds to entertain the said contention.

9. The second contention raised by the learned counsel for the petitioner is with regard to the non-issuance of a draft assessment order to the petitioner before finalizing the assessment as evidenced by Ext.P8. In support of the said contention, the learned counsel for the petitioner placed reliance upon the statutory stipulations contained under Section 144B(1). The learned counsel for the petitioner also relied on the decisions rendered by the High Court of Bombay in Golden Tobacco Ltd. (supra) and Multiplier Brand Solutions Pvt Ltd. (supra), the decision rendered by the Honourable Supreme Court in Abacus Real Estate Private Limited (supra) and the decision of the Madras High Court in P.T Lee Chengalvareya Naicker Trust (supra).

10. However, on going through the statutory stipulations contained under Section 144 B (1) of the Act where, the procedure to be followed for faceless assessment is contemplated, it can be seen that, nowhere it is made mandatory that a draft assessment order is to be served upon the assessee. Of course, it is true that, under Section 144B(1) (xxi) of the Act as amended as per Finance act, 2022, it is contemplated that, in the case of an “eligible assessee”, where there is a proposal to make any variation which is prejudicial to the interest of “such assessee” as mentioned in Sub Section (1) of Section 144C, the National Faceless Assessment Center shall serve the draft assessment order on the assessee. Section 144(C) (15)(b) defines the eligible assessee which reads as follows:

” “Eligible assessee” means,-

(i)

any person in whose case the variation referred to in sub-section (1) arises as consequence of the order of the Transfer Pricing Officer passed under sub-section (3) of Section 92CA; and

[(ii)

any non-resident not being a company, or any foreign company.]

[Provided that, such eligible assessee shall not include person referred to in sub-section (1) of Section 158BA or other person referred to in Section 158BD]”

11. Thus, going by the procedure contemplated as above, the requirement of issuing a draft assessment order before finalizing the proceedings is necessitated only in the case of an “eligible assessee” as defined under Section 144 (C)(15)(b) of the Act. The petitioner does not have a case that, he is falling under the category of “eligible assessee” as defined above. Therefore, the petitioner is to be treated as an ordinary assessee and there is no provision in Section 144B, to serve a draft assessment order to such an assessee, before finalizing the assessment. The legal procedure in this regard was the same even before the amendment introduced to Section 144B of the Act as per Finance Act, 2022. Section 144(B)(1)(xvi) of the unamended Act, did not provide for issuance of a draft assessment order before finalizing the assessment, which reads as follows:

Section 144B (1)(xvi) -the National Faceless Assessment Centre shall examine the draft assessment order in accordance with the risk management strategy specified by the Board, including by way of an automated examination tool, whereupon it may decide to-

(a)

finalise the assessment, in case no variation prejudicial to the interest of assessee is proposed, as per the draft assessment order and serve a copy of such order and notice for initiating penalty proceedings, if any, to the assessee, along with the demand notice, specifying the sum payable by, or refund of any amount due to, the assessee on the basis of such assessment; or

(b)

provide an opportunity to the assessee, in case any variation prejudicial to the interest of assessee is proposed, by serving a notice calling upon him to showcause as to why the proposed variation should not be made; or

(c)

assign the draft assessment order to a review unit in any one Regional Faceless Assessment Centre, through an automated allocation system, for conducting review of such order.

12. Section 144 B(1)(xxv) of the unamended Act also provided only for issuing a revised draft assessment order in the cases of an eligible assessee, which reads as follows:

Section 144B (1) (xxv) -the National Faceless Assessment Centre shall, upon receiving the revised draft assessment order,-

a in case the variations proposed in the revised draft assessment order are not prejudicial to the interest of the assessee in comparison to the draft assessment order or the final draft assessment order, and-

(A)

in case the revised draft assessment order is in respect of an eligible assessee and there is any variation prejudicial to the interest of the assessee proposed in draft assessment order or the final draft assessment order, forward the said revised draft assessment order to such assessee;

(B)

in any other case, finalise the assessment as per the revised draft assessment order and serve a copy of such order and notice for initiating penalty proceedings, if any, to the assessee, along with the demand notice, specifying the sum payable by, or refund of any amount due to, the assessee on the basis of such assessment;

(b)

in case the variations proposed in the revised draft assessment order are prejudicial to the interest of the assessee in comparison to the draft assessment order or the final draft assessment order, provide an opportunity to the assessee, by serving a notice calling upon him to show-cause as to why the proposed variation should not be made.

13. Thus, from the above statutory provisions, it is evident that, since there is a distinction made between the “eligible assessee” and other assessee, as per the provisions of the Act and that the requirement of issuance of draft assessment order is made only in respect of an “eligible assessee”, which term is clearly defined under the Income Tax Act itself, unless it is shown that, the petitioner is an “eligible assessee”, he cannot insist that a draft assessment should have been issued to it, before finalizing the assessment. Thus, the petitioner does not have any legal right to claim the same and the respondents do not have a corresponding duty to furnish the same to the assessee. Hence the contention of the petitioner in this regard cannot be accepted.

14. As regards the decisions relied on by the learned counsel for the petitioner, it is to be noted that, in none of the cases, it is clear whether the assessment which was the subject matter, was in respect of an eligible assessee. Those decisions also do not contain any discussion regarding the distinction between the procedure to be adopted in the case of eligible assessee and the other assessees. Since this is a crucial distinction that is made in the Act itself, the observations made in those decisions cannot be made applicable to the facts of this case. On the other hand, a Division Bench of this Court specifically considered this issue in Joint CIT v. Sujatha Revikumar [WA NO. 2156 OF 2024, dated 27-3-2025], and after referring to the relevant statutory provisions, observed about the difference between the ordinary assessee and the eligible assessee. The relevant observations made by the Division Bench of this Court in the aforesaid decision in paragraph 6 thereof reads as follows:

“6. We have considered the rival submissions and we find ourselves in agreement with the learned counsel for the appellant, especially when we read the statutory provisions. No doubt, there is a different procedure prescribed under the statute for proceeding against an ordinary assessee and an eligible assessee as understood under the statute. While there is a requirement under Section 144B to issue a copy of the draft assessment order or the finalized draft assessment order along with the show cause notice proposing a variation, to an ‘eligible assessee’, the procedure prescribed in relation to an ordinary assessee as contemplated in Clause xvi of Section 144B(1) does not require the furnishing of a draft assessment order along with the show cause notice that is issued to such assessee. In the case of an ordinary assessee, the draft assessment order has to be seen as merely an internal document that is sent from the assessment unit which has been assigned with the task of assessment and the National Faceless Assessment Centre concerned. Thus, we cannot sustain the impugned judgment of the learned Single Judge which takes a view contrary to the express provisions of the statute while finding that there was a violation of the principles of natural justice that vitiated the assessment completed against the respondent – assessee.”

15. Thus, in the light of the above, the aforesaid contention of the petitioner is only to be rejected. It is to be noted in this regard that, in Ext.P6 show cause notice, the proposals for variation were specifically highlighted and the response of the petitioner was also sought. Going by the statutory procedure applicable to an assessee, who is not an eligible assessee as referred to above, the requirement is that, the assessee should be served with a show cause notice intimating about the proposal. In this case, it is discernible that, in Ext.P6, that statutory requirement has been fulfilled and therefore, no interference is warranted.

16. The learned counsel for the petitioner also raised a contention that the petitioner was not afforded with an opportunity for being heard. The decision of High Court of Bombay in Chander ArjandasManwani’s case (supra) was also relied on by the petitioner. However, in this case, in Ext.P6, the petitioner was intimated that it may request for a personal hearing so as to make oral submissions or to present its case. It was also conveyed therein that, such request will have to be made, by clicking the “Seek Video Conferencing” but it available against the show cause notice. However, the petitioner while submitting reply to Ext.P6, did not request for such hearing. In the case of Chander Arjandas Manwani (supra), the Bombay High Court interfered with the proceedings on the ground that, despite the petitioner’s request for a personal hearing, no such hearing was granted. Here there was no such request and hence on that ground also no interference is warranted.

17. As far as Ext.P8 and Ext.P14 are concerned, the petitioner is having a statutory remedy of appeal. Since the sustainability of the assessment is a matter to be considered on its merit, based on the documents, it is only proper that the same be considered by the statutory authorities. In this regard it is to be noted that, in the writ petition even though the petitioner had contended that no proper opportunity was granted to produce the documents, the same is stoutly denied in the counter affidavit, by referring to the averments made by the petitioner in the reply submitted to the show cause notice itself. Therefore, it is also a factual dispute to be resolved by the statutory authorities. To be precise, as far as the contentions regarding the merits/demerits of the assessment made in the impugned orders are concerned, those are matters beyond the scope of a writ petition, being questions of facts.

In such circumstances, I do not find any justifiable grounds to entertain the reliefs sought in these writ petitions and accordingly, these writ petitions are dismissed, without prejudice to the right of the petitioner to invoke the statutory remedies. However, it is clarified that, the period from the filing of the writ petitions i.e. , 20.10.2022 and 01.02.2023 in respect of Ext.P8 and Ext.P14 respectively, till the date of receipt of certified copy of this judgment shall be excluded, while computing the period of limitation for submitting the appeal.

Unrecorded Sales Gross Profit Estimate Deleted As Assessing Officer Failed To Formally Reject Books

Ashwani Kumar — Sat, 18 Jul 2026 05:02:14 +0000

Unrecorded Sales Gross Profit Estimate Deleted As Assessing Officer Failed To Formally Reject Books

Issue

Whether the Assessing Officer can legally estimate a firm’s gross profit on unrecorded sales without formally rejecting its books of account under section 145(3) or invoking best judgment assessment under section 144.

Facts

The case pertains to a registered partnership firm for the assessment year 2019-20.
During survey proceedings, tax authorities discovered a bill book containing unrecorded sales.
A partner of the assessee-firm admitted to the unaccounted sales and surrendered the corresponding amount during the survey.
The assessee later retracted this statement via an affidavit, claiming the initial admission was made under pressure.
The Assessing Officer rejected the retraction, relied entirely on the survey statement, estimated a gross profit rate of 22.17% on the unrecorded sales, and added ₹10.75 lakhs to the firm’s income.
The Assessing Officer did not formally reject the assessee’s books of account under section 145(3) or proceed with a best judgment assessment under section 144 before making the estimation.

Decision

Held in favor of the assessee.
It is legally impermissible for the Assessing Officer to estimate the profit of an assessee without first formally rejecting their books of account under the statute.
Consequently, the addition of ₹10.75 lakhs made on account of estimated gross profit from the unrecorded sales was ordered to be deleted.

Key Takeaways

Mandatory Rejection Prerequisite: Before an Assessing Officer can resort to estimating an assessee’s income or profit margins, they must follow the strict statutory workflow of explicitly rejecting the books of account under section 145(3).

Evidentiary Limitations: Even if unrecorded transactions or admissions are uncovered during a survey, any subsequent ad-hoc profit estimation fails judicial scrutiny if the underlying accounting books are left unchallenged and unrejected.

IN THE ITAT RAIPUR BENCH ‘SMC’

Isha Metal Stores

Assistant Commissioner of Income-tax

Partha Sarathi Chaudhury, Judicial Member

IT Appeal No.756 (RPR) of 2025
[Assessment year 2019-20]

FEBRUARY 23, 2026

Sunil Kumar Agrawal, CA and Vidya Verma, Adv. for the Appellant. Dr. Priyanka Patel, Sr. DR for the Respondent.

ORDER

Partha Sarathi Chaudhury, Judicial Member.- The present appeal preferred by the assessee emanates from the order of the Ld.CIT(Appeals), Raipur-3, dated 27.11.2025 for the assessment year 2019-20 as per the grounds of appeal on record.

2. Brief facts in this case are as follows:

“The assessee is engaged in retail & wholesale trading of household goods. The return of income for the above period was filed by the assessee on 07.03.2020 declaring total income of Rs.28,08,610/-.

During a survey proceedings on 19.02.2019, only sales bill book and some purchase vouchers were found in the premises, sales bills were generated physically and many of the entries were found to be unaccounted. A bill book, “Chandan estimate cash memo” bill (BI-06) was found and impounded, as the entries of sales for Rs.48,49,112/- were found to be not accounted in the computerized accounts in Tally software. Shri. Sanjay Gupta, partner of assessee firm admitted that the purchase and sales of Rs.48,49,112/- were made completely out of accounts and declared Rs. 48,49,112/- as the income of the firm for the current year and voluntary surrender the same.

During the assessment proceedings, the assessee retracted from the statement through the sworn affidavit dated 10.03.2020. The contention of the assessee firm was not accepted by tile assessing officer as the partner of assesse firm, Shri Sanjay Gupta himself stated in his statement that the transactions of sale/purchase found in bill book “Chandan estimate cash memo Bill” is not recorded in tally data and regular books of account and disclosed Rs.48,49,112/- as unrecorded sales without any pressure built up by the survey team.

The Assessing Officer concluded that the GP i.e. 22.17% (i.e. 10,75,050/-) of total unrecorded sales of Rs.48,49,112/- was added back to the total income of the assesse.”

3. The Ld. CIT(Appeals) had dismissed the appeal of the assessee observing as follows:

“The assessee firm is contesting the addition of Rs. 10,75,050/-made by the Id. AO on account of unrecorded sales detected during the survey proceedings conducted on 19.02.2019. During the survey, a bill book titled “Chandan estimate cash memo” was found, which contained sales bills of Rs.48,49,112/- that were not accounted for in the computerized accounts maintained in Tally software. Shri Sanjay Gupta, partner of the assessee firm, admitted to the unaccounted sales and purchases and declared Rs.48,49,112/- as income of the firm for the current year, surrendering the same for taxation.

The assessee has retracted from this statement through a sworn affidavit dated 10.03.2020, claiming that the surrender was made under pressure from the survey team and was not based on actual unaccounted sales. However, the Id. AO did not accept this retraction, relying on the statement given by Shri Sanjay Gupta, Partner of assessee’s firm during the survey proceedings. The Id. AO estimated a GP rate of 22.17% on the unrecorded sales of Rs.48,49,112/-,resulting in an addition of Rs.10,75,050/- to the total income of the assessee.

The assessee’s contention that the surrender was made under pressure and was not based on actual unaccounted sales is not supported by any evidence. The statement given by Shri Sanjay Gupta during the survey proceedings was voluntary and without any coercion. The assessee’s retraction from the statement without any corroborative evidence to prove that the surrender was involuntary cannot be accepted. The retraction appears to be an afterthought, aimed at avoiding tax liability. The absence of evidence to substantiate the claim of pressure or coercion undermines the validity of the retraction. Therefore, the Id. AO’s decision to reject the retraction and estimate the GP on unrecorded sales is justified. The retraction does not alter the fact that unaccounted sales were detected, and the GP estimation is based on the assessee’s own financial records.

The Id. AO estimated a GP rate of 22.17% on the unrecorded sales of Rs.48,49,112/-, resulting in an addition of Rs. 10,75,050/- to the total income assessee. This estimation is based on the assessee’s own financial records for the A.Y. 2019-20, which show a GP rate of 22.17%. The assessee has not provided any evidence to suggest that this GP rate is not applicable to the unrecorded sales. Therefore, the ld. AO’s estimation of GP is reasonable and justified.”

4. At the time of hearing, the contention in law raised by the Ld. Counsel for the assessee was that the estimated GP addition @22.17% on unrecorded sales made by the A.O without rejecting the books of account u/s.145(3) of the Income Tax Act, 1961 (for short ‘the Act’) is illegal, unsustainable and bad in law and liable to be deleted. The Ld. Counsel further submitted that if at all, additions were to be made by the A.O, in such circumstances, the A.O need to have rejected the books of account first and only after that he could have proceeded to make addition over and above the transaction reflected in the books of account. In absence of such exercise by the A.O, the entire action is bad in law.

5. Per contra, the Ld. Sr. DR vehemently supported the findings of the Revenue authorities.

6. I have heard the submissions of the parties herein, carefully considered the documents placed on record and analyzed the facts and circumstances in this case. The limited point of argument as assailed by the Ld. Counsel was that in the present facts and circumstances of the case, the A.O made an estimated addition over and above the purchase and sales transaction reflected in the books of account without rejecting the said books of account u/s. 145(3) of the Act. That further, it was also submitted without resorting to Section 145(3) of the Act, it was not open to the A.O to proceed with his own assessment and make further additions over and above the transactions reflected in the books of account. If the A.O is not satisfied with the recordings in the books of account and has serious doubt about the genuineness of the same, he can definitely reject books and thereafter, proceed to make his own assessment and in the consequent assessment, the A.O may make further additions since he has already rejected the books of accounts.

7. However, in the present case of the assessee, it is clearly evident from facts on record that the A.O has not resorted to Section 145(3) of the Act but had still proceeded to make further additions on estimated basis on the unrecorded sales. That on one hand, the A.O has not doubted the genuineness of the books of account and on the other hand, he has proceeded to make his own assessment and making additions on estimated basis over and above the transactions recorded in the books of account of the assessee. That, such an exercise is not permissible within the purview of the settled legal principles on this issue. This issue is no more “Res-Integra” and it has been held by ITAT in numerous decisions as well as Higher Judicial Forums order that in order to render books of account as non-genuine and making further additions, the A.O first has to reject the books of account and without doing that any additions are not warranted. I take guidance from the judgment of the Hon’ble High Court of Madras in the case of Pr. CIT, Chennai v. Marg Ltd. 396 ITR 580 (Madras), wherein the Hon’ble High Court has held and observed as follows:

“4. We now proceed to merits of the matter under the caption “Discussion’ infra.

DISCUSSION

4(a) As stated supra, the Assessee is a Public Limited Company engaged in the business of Civil Construction and related services.

4(b) A.O had made addition to the income returned by the Assessee by estimating gross profit. The power to make such addition on estimate basis is available to the A.O under section 144 of the IT Act. Section 145 enables the A.O to invoke the power under section 144 when certain conditions adumbrated in sub-section (3) of Section 145 are satisfied. Therefore, it becomes necessary and useful to extract Section 145(3) of the I.T Act, which reads as follows:

“145(3) Where the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided in sub- section (1) has not been regularly followed by the assessee, or income has not been computed in accordance with the standards notified under subsection (2), the Assessing Officer may make an assessment in the manner provided in Section 144.”

4(c) Therefore, it is sine qua non that the AO to come to a conclusion that the Books of Accounts maintained by the Assessee are incorrect, incomplete or unreliable and reject the Books of Accounts before the proceeding to make his own assessment. In the instant case, there is no reference in the Assessment Order of the AO regarding rejection of Books of Account.

4(d) Therefore, there is nothing on record to show that the AO came to the conclusion that the Books of Accounts maintained by the Assessee are incorrect, incomplete, unreliable and as a consequence rejected the Books of Account.

4(e) Therefore, after setting out the plethora of case laws on this point, CIT (A) held that the accounts of the Assessee cannot be rejected merely based on the perception of the AO that the Assessee has declared low profit margin for certain projects when Books of Accounts have not been rejected. Considering the factual position that there is no reference in the Assessment Order made by the AO regarding the Books of Accounts (this has been fairly admitted by the Revenue before ITAT), we are not, therefore, labouring through the labyrinth of case laws relied on by CIT (A). The relevant portion pertaining to admission in this regard by the Revenue is at Paragraph 4 of the order of ITAT and the same reads as follows:

“4. On a query from the bench, whether the assessing officer rejected the books of account during the course of assessment proceedings, the learned department representative very fairly submitted that there is no reference in the assessment order in the rejection of books of account”

4(f) As this factual position has been admitted, ITAT, dismissed the appeal 9f the Revenue by holding that profits of an Assessee cannot be estimated without rejecting the books of account.

4(g) ITAT has expressed its considered opinion that only when an assessee is not maintaining Books of Accounts properly and the correct income cannot be estimated on the basis of the Books of Accounts, the Books of Accounts can be rejected. ITAT has gone on to hold that the AO can estimate profit only thereafter.”

8. Further, I find that similar issue has been adjudicated by the ITAT, SMC Bench, Raipur in the case of Anil Kumar Jain v. ACIT (Central, Bilaspur, ITA No.584 & 585/RPR/2025, dated 06.01.2026 wherein, this issue has been answered in favour of the assessee against the Revenue observing as follows:

“9. Having heard submissions of the parties herein even without going into the factual merits of the matter, the legal contention that is there before me for adjudication is where the Revenue has failed to reject the books of account and proceeded to estimate income without framing assessment u/s. 144 of the Act, whether such action is sustainable as per law. In this regard, the Hon’ble High Court of Delhi in the case of Pr. CIT v. Forum Sales (P). Ltd. (supra.) has observed and held as follows:

“19. A plain reading of the aforementioned provisions would indicate that the AO wields an authority to make additions on the basis of estimation of income upon fulfillment of the conditions mentioned in Section 145(3) of the Act. Once the AO is satisfied about the existence of irregularities in the books of account as per Section 145(3) of the Act, it shall proceed in the manner provided under Section 144 of the Act. At this juncture, what needs consideration is the question whether such an addition must be made only after the rejection of the books of account by the AO.

20. The Division Bench of the High Court of Bombay in the case of Principal Commissioner of Income-tax v. Swananda Properties Pvt. Ltd. [2019 SCC OnLine Bom 13359] had an occasion to consider the said question and the same was accordingly answered as under:-

“11. We note that the books of account of the respondent were rejected by the Commissioner of Income-tax (Appeals) under section 145(3) of the Act. However, the Tribunal found in the impugned order that the invocation of section 145(3) of the Act is unjustified as no defect was noted in the books of account to disregard the same. We note that the Commissioner of Income-tax (Appeals) in his order while rejecting the books of account does not specify the defect in the record. The basis of the rejection appears to be best judgment of assessment done by him. The rejection of the books should precede the best judgment assessment. On facts, the Revenue has not been able to show any defect in the respondent’s records which would warrant rejection of the books and making a best judgment assessment. Thus, on facts the view taken by the Tribunal is a possible view. Therefore, no substantial question of law arises. Thus not entertained.”

[Emphasis supplied]

21. The Division Bench of the Karnataka High Court in the case of CIT v. Anil Kumar & Co. [2016 SCC OnLine Kar 8512], has held that in cases where the Revenue had failed to reject the books of account and proceeded to an estimation of income without framing the assessment under Section 144 of the Act, such an action is unsustainable as per law. The relevant paragraph of the said decision is reproduced as under:-

“11. In so far as the estimation of gross profit made by the Assessing Officer modified by the Commissioner of Incometax (Appeals), the Tribunal has rightly held that when the books of account of the assessee had not been rejected and assessment having not been framed under section 144 of the Income-tax Act the said authorities were in error in resorting to an estimation of income and such exercise undertaken by them was not sustainable. Section 145(3) of the Act lays down that the Assessing Officer can proceed to make assessment to the best of his judgment under section 144 of the Act only in the event of not being satisfied with the correctness of the accounts produced by the assessee. In the instant case the Assessing Officer has not rejected the books of account of the assessee. To put it differently the Assessing Officer has not made out a case that conditions laid down in section 145(3) of the Act are satisfied for rejection of the books of account. Thus, when the books of account are maintained by the assessee in accordance with the system of accounting, in the regular course of his business, the same would form the basis for computation of income. In the instant case it is noticed that neither the Assessing Officer nor the Commissioner of Income-tax (Appeals) have rejected the books of account maintained by the assessee in the course of the business. As such the Tribunal has rightly rejected or set aside the partial addition made by the Assessing Officer for arriving at gross profit and sustained by the Commissioner of Income-tax (Appeals) and rightly held that the entire addition made by the Assessing Officer was liable to be deleted. The said finding is based on sound appreciation of facts and it does not give rise for framing substantial question of law.”

[Emphasis supplied]

22. In another case of Principal Commissioner of Income-tax v. Marg Ltd. [2017 SCC OnLine Mad 37852], the Division Bench of the High Court of Madras has held that the rejection of books of account is sine qua non before the AO proceeds to make his own assessment. Paragraph 4(c) of the said decision is reproduced as under:-

“4(c). Therefore, it is sine qua non that the Assessing Officer to come to a conclusion that the books of account maintained by the assessee are incorrect, incomplete or unreliable and reject the books of account before the proceeding to make his own assessment. In the instant case, there is no reference in the assessment order of the Assessing Officer regarding rejection of books of account.”

[Emphasis supplied]

23. In the case of CIT v. Gian Chand Labour Contractors [2007 SCC OnLine P&H 1577], the Division Bench of the High Court of Punjab and Haryana while taking a similar view, has held as follows:-

“8. Section 29 of the Act prescribes that the income referred to in section 28 which is assessable under the head “Profits and gains of business or profession” shall be computed in accordance with the provisions contained in sections 30 to 43A of the Act. Section 145 of the Act provides for computation of income under section 29 on the basis of books of account and the method of accounting regularly followed by the assessee. However, where the Assessing Officer is not satisfied with the correctness or completeness of the said books, he may reject the same and estimate the income to the best of his judgment in accordance with the provisions of section 144 of the Act. When an estimate is made to the best judgment of an Assessing Officer, he substitutes the income that is to be computed under section 29 of the Act. Once the best judgment assessment is made by fixing a rate of net profit, the assessee’s claim for deduction on account of expenses cannot be deemed to have been ignored. The net profit rate is applied after taking into consideration all factors and it accounts for all the deductions which are referred to under section 29 and are deemed to have been taken into consideration while making such an estimate.”

[Emphasis supplied]

24. The series of judgments referred to hereinabove clearly allude to the settled position of law that the books of account have to be necessarily rejected before the AO proceeds to the best judgment assessment upon fulfilment of conditions mentioned in the Act. The underlying rationale behind such an action is to meet the standards of correct computation of accounts for the purpose of a more transparent and precise assessment of income. Therefore, any pick and choose method of rejecting certain entries from the books of account while accepting other, without an appropriate justification, is arbitrary and may lead to an incomplete, unreasonable and erroneous computation of income of an assessee.

25. In the present case, the ITAT has made a categorical finding that despite the fact that the AO was provided with the requisite bills, vouchers and addresses of the transacting parties, it did not make any effort to confirm the veracity of the alleged bogus or inflated bills.

26. We, hereby, also take note of the observations made by the ITAT in its order dated 22.10.2018 in Paragraph 25, wherein, while affirming the deletion of additions vide order of the CIT (A), it was held as under:-

“25. We find although the Assessing Officer was having complete address of the parties, however, he did not bother to call for any information from the said parties if he had some doubts. The entire addition by disallowing of 40% of the purchases in our opinion is not justified when the books of account are not rejected. We find the Hon’ble Gujarat High Court in the case of Yunus Haji Fazawala v. CIT (supra) has held that action of the Assessing Officer in disallowing 25% of purchases by doubting its genuineness without rejecting the books of account cannot be sustained. The order of the Tribunal confirming the disallowance was accordingly reversed. Since in the instant case also the books of account are not rejected, therefore, action of the CIT(A) in deleting such addition is justified. Further we find merit in the findings of the CIT (A) that if the action of the Assessing Officer is accepted then profit of the assessee will be 32.9% for A.Y. 2013-14 and 56.09% for A.Y. 2014-15 which is illogical and absurd. Since the order of the CIT(A) on this issue is just and proper under the facts and circumstances of the case, therefore; we do not find any infirmity in the same. Accordingly the same is upheld and the ground raised by the revenue is dismissed.”

27. Also, the decisions relied upon by the Revenue do not essentially support its case as the facts of the cited cases are strikingly different from the case at hand and therefore, the same are distinguishable. Though the decision of the Division Bench of the Calcutta High Court in Unit Construction Co. Ltd. would only have a persuasive value, however, a closer scrutiny of the same leads us to the conclusion that the said decision was rendered in the context of unexplained investments as per the scheme of Section 69 of the Act. In Paradise Holidays, the issue pertained to the rejection of books of account without an appropriate justification and therefore, unlike the present case, the challenge was laid with respect to the rejection of books of account itself.

28. So far as the proposed question (D) is concerned, the same is a matter of fact which has been settled by the ITAT which states that the action of the AO in making an addition of Rs.1,00,000/- on the protective basis, which already stood explained, deserved to be deleted. The ITAT further held that the substantive addition has already been made in the hands of Mr. Moin Akhtar Qureshi, which has been mentioned by the AO himself and therefore, there is no infirmity in deletion of the said addition by the CIT(A).

29. Admittedly, the addition of income as discussed in questions (B), (C) and (D) on estimate basis has been done without rejecting the books of account. In view of the aforesaid, we find that no substantial question of law arises in the present appeals.

30. Consequently, we do not find any merit in the case of the Revenue and have no reason to interfere with the view taken by the ITAT. Therefore, the appeals stand dismissed. Pending application(s), if any are also disposed of.”

10. Reverting to the facts of the present case, admittedly, the A.O has not resorted to either Section 145(3) of the Act or Section 144 of the Act. On one hand, the A.O accepts the purchase and sales recorded in the books of accounts and thereby, he decides not to reject the same and at the same time, on estimation he adds commission income over and above purchase and sales as reflected in the books of accounts. That as per the judicial precedent referred hereinabove, such addition is unjustified, arbitrary and bad in law and hence, the A.O is directed to delete the said addition from the hands of the assessee while providing appeal effect of this order.

11. Since the legal issue has been answered in favour of the assessee, then other grounds pertaining to the merits becomes academic only.

12. In the result, appeal of the assessee in ITA No.584/RPR/2025 for A.Y. 2018-19 is allowed.”

9. Respectfully following the aforesaid judicial pronouncements on the same parity of reasoning, I hold that it is not open for the A.O to estimate profit of the assessee without rejecting the books of account. That since this legal contention is answered in affirmative in favour of the assessee against the Revenue, all other grounds stands academic only.

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