Search Assessment, Not Reassessment, Applies To Cases Based On Pre-April 1, 2021 Third-Party Search Material: ITAT Kolkata

The Kolkata Bench of the Income Tax Appellate Tribunal (ITAT), on 26 June held that where reassessment is initiated on the basis of material seized during a third-party search conducted prior to 1 April 2021, the Income Tax Department must proceed under the special search assessment provisions and cannot invoke Sections 147 and 148 of the Income Tax Act, 1961.

Accountant Member Rajesh Kumar allowed the appeals filed by Maan Steel & Power Ltd. for assessment years 2018–19 and 2019–20 and dismissed the Revenue's cross appeals as infructuous, while quashing the reassessment proceedings. The Bench held:

"Therefore, the re-opening of assessment under section 147 read with section 148 of the Act as well as the consequent assessment framed under section 147 are nullity and bad in law and cannot be sustained."

The Assessing Officer issued a notice under Section 148 on 31 March 2022 on the basis of information alleging that Maan Steel & Power had made cash purchases of coal worth Rs. 13.62 crore, leading to an addition of Rs. 7.72 crore on account of estimated suppressed production.

The Commissioner of Income Tax (Appeals) reduced the addition by applying a 6 per cent gross profit rate. The reassessment proceedings were based on material seized during a search conducted on the Majhi Group on 5 November 2020, which fell within the pre-1 April 2021 regime governing search-related assessments.

Before the Tribunal, Maan Steel & Power challenged the jurisdiction of the reassessment, contending that proceedings ought to have been initiated under Section 153C since the material emanated from a third-party search conducted prior to the statutory cut-off date, and therefore Sections 147 and 148 were not applicable.

Interpreting the second proviso to Section 149(1), the Tribunal held that reassessment provisions cannot be invoked where search assessment provisions apply to searches conducted on or before 31 March 2021. It relied on decisions including Nawal Kumar Kanodia, Ajay Jalan, Suresh Kumar Banthia, and High Court rulings in Shyam Sunder Khandelwal, Sri Dinakara Suvarna, and Sejal Jewellery.

On merits, the Bench also observed that the additions were based solely on third-party material without furnishing the underlying documents or granting an opportunity for cross-examination, thereby violating principles of natural justice as held in Shakambhari Ispat & Power Ltd.

Accordingly, the ITAT quashed the reassessment proceedings and allowed the appeals.