2024 (5) TMI 1634 - AT - Income Tax

Assessments reopened under s.147 invalid where AO relied on third-party seized documents instead of using s.153C procedure

ITAT AHMEDABAD - AT allowed the assessee's appeal, holding that additions made by the AO under s.147 based on documents seized at a third party were ... Validity of proceedings u/s 147 or 153C - undisclosed investments on the basis of documents found during the course of search at third party premises - HELD THAT:- In the case of Radheshyam B. Agrawal [2015 (3) TMI 1141 - ITAT PUNE] ITAT held that once an assessment has been framed u/s 158BA in relation to undisclosed income for block period as a result of search, AO cannot issue notice u/s 148 for reopening of such assessment; reopening of assessee's assessment was bad in law. Accordingly, looking into the instant facts, the Ld. Assessing Officer proceeded to make additions in the hands of the assessee, on account of undisclosed investments on the basis of documents found during the course of search at third party premises. However, in our view, the correct course should have been to initiate proceedings under section 153C after handing over the relevant materials to the Ld. Assessing Officer of the assessee rather than directly initiating proceedings u/s 147 of the Act. Appeal of the assessee is allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether proceedings and additions initiated and completed by the Assessing Officer under Section 147/148 read with Section 143(3) - on the basis of documents seized in a search of a third party's premises - are valid where no prior proceedings under Section 153C/153A were initiated and the seized material was not first transmitted to the jurisdictional Assessing Officer of the assessee. 2. Whether, on the facts, the material seized from the third-party (builder) premises could sustain reassessment under Section 147 when the statutory scheme for search-related assessments (Sections 153A/153C) was not followed. ISSUE-WISE DETAILED ANALYSIS Issue 1: Legality of initiating reassessment under Section 147/148 instead of proceeding under Sections 153C/153A when incriminating material is found during search at a third party's premises Legal framework: The Act contains a special procedural code for assessments following a search. When incriminating material relating to a person is found during a search of another person (a third party), Sections 153C and 153A prescribe the mechanism - the material must be transmitted to the jurisdictional Assessing Officer of the person concerned and proceedings must be taken under Sections 153C/153A. Section 147/148 governs reopening of assessments generally where income has escaped assessment. Precedent treatment: The Tribunal relied on several authorities treating the point consistently: High Court and Supreme Court authority holding that reopening assessment under Section 147/148 (or issuing notice under Section 148) is not sustainable where the only source of information is documents seized at a third party and no proceedings under Section 153C were initiated; multiple Tribunal decisions to the same effect were cited and followed. Interpretation and reasoning: The Tribunal held that the statutory scheme contemplates a distinct procedure for search-related material. Where the only information against the assessee originates from material seized during a search of a third party, the Assessing Officer is obliged to follow Sections 153C/153A by obtaining the material and initiating proceedings accordingly. Bypassing that procedure and directly invoking Section 147/148 (and framing assessment under Section 143(3)) is inconsistent with the procedure prescribed by the statute. The Tribunal treated the course adopted by the Assessing Officer in the present case - making additions on the basis of third-party seized documents without first transmitting those materials and invoking Section 153C - as impermissible and lacking jurisdictional validity. Ratio vs. Obiter: The statement that reassessment under Section 147/148 is not valid where incriminating material emanates solely from a third-party search and Sections 153C/153A were not invoked is treated as ratio decidendi of the decision, following and applying earlier higher and co-ordinate authority. Citations of multiple Tribunal authorities and a reinforced High Court/Supreme Court pathway were applied as governing precedent and followed rather than distinguished. Conclusion: The Tribunal concluded that the Assessing Officer should have initiated proceedings under Section 153C, and that initiation of proceedings under Section 147/148 (and consequent addition) was improper. The defect was jurisdictional and required allowing the appeal on that ground. Issue 2: Sufficiency of seized material to sustain the addition on merits where procedure under Section 153C was not followed Legal framework: Evidence seized in a search of a third party can form the basis of assessment against another person only if the statutory procedure for transmission and assessment under Sections 153C/153A is complied with. Procedural non-compliance affects the validity of any resultant assessment or addition. Precedent treatment: The authorities relied upon support the principle that evidence derived from a third-party search cannot be utilised in reassessment made under Section 147 where the search-related procedure has not been invoked; such reassessment is void ab initio. The Tribunal followed these authorities rather than assessing the seized material's intrinsic weight in a Section 147 reassessment. Interpretation and reasoning: While the Assessing Officer and Commissioner (Appeals) treated the seized excel chart as linking the assessee to a cash component, the Tribunal declined to uphold a merits-based addition because the procedural prerequisite (initiating Section 153C and transmitting material) was not satisfied. The Tribunal emphasised that whether the seized documents would, on merits, establish an unexplained investment is a matter that cannot cure or validate a jurisdictional procedural omission; therefore the correctness or sufficiency of the seized material on merits was not determinative once the statutory route was misapplied. Ratio vs. Obiter: The point that the merits of the seized material cannot validate a procedurally defective reassessment is treated as ratio, consistent with precedents that hold procedural compliance is compulsory and jurisdictional. Observations regarding specific factual discrepancies (e.g., timing of payments, later execution of sale deed) are left as factual matters that would be for adjudication in proper Section 153C/153A proceedings and are therefore obiter to the extent they were noted but not relied upon to decide validity. Conclusion: The Tribunal held that the addition could not be sustained because the Assessing Officer proceeded under Section 147/148 instead of under Sections 153C/153A; the seized third-party material, even if indicative, could not cure the procedural defect. Consequently the appeal was allowed and the reassessment/addition set aside on jurisdictional grounds. Cross-reference: The Tribunal's conclusions on both issues are interlinked: the finding that Section 153C should have been invoked (Issue 1) is the dispositive ground rendering any reliance on the third-party seized material (Issue 2) inadmissible for sustaining the Section 147 addition in this proceeding.