Reassessment under section 147 quashed when based on third party search material requiring section 153C application

ITAT DELHI quashed reassessment order passed u/s 143(3) r.w.s. 147 based on incriminating material found during search of third party. Tribunal held that when reassessment proceedings are initiated based on material found in third party search, provisions of section 153C apply, which exclude application of sections 147 and 148. Following precedents from coordinate benches, the assessment was declared void ab initio as it was passed under incorrect provisions, ignoring mandatory sections 153A/153C. Assessee's appeal was allowed.

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Issues Involved:
1. Reopening of assessment u/s 147 of the Act.
2. Addition made u/s 68/69C of the Act.
3. Legality of assessment based on search conducted on a third party.
4. Violation of principles of natural justice.

Summary:

Reopening of Assessment u/s 147 of the Act:
The assessee challenged the reopening of assessment u/s 147, arguing that it was based merely on information from the investigation wing without proper procedure. The Tribunal noted that the reassessment was initiated following a search on Jain Brothers, where incriminating materials were found. The Tribunal admitted the additional ground raised by the assessee regarding the jurisdiction of making assessment u/s 153C rather than u/s 147, citing the decision in National Thermal Power Company Ltd. Vs. CIT 229 ITR 383.

Addition u/s 68 of the Act:
The assessee contested the addition of Rs. 1,51,00,000/- u/s 68 for share application money, claiming it was genuine. The Tribunal observed that the addition was based on materials found during the search on Jain Brothers, which indicated the transactions were accommodation entries.

Addition u/s 69C of the Act:
The assessee also disputed the addition of Rs. 3,02,000/- u/s 69C for alleged unexplained expenditure on commission for accommodation entries. The Tribunal noted that the addition was based on conjectures without concrete evidence.

Legality of Assessment Based on Search Conducted on a Third Party:
The Tribunal highlighted that assessments based on incriminating materials found during a search on a third party should be made u/s 153C, not u/s 147. Citing the decisions in M/s MAH Impex Pvt. Ltd. Vs. ITO and Mr. Nilesh Bharani Vs. DCIT, the Tribunal held that the assessment u/s 143(3) r.w.s. 147 was void ab initio as it should have been made u/s 153C.

Violation of Principles of Natural Justice:
The assessee argued that the addition was confirmed without confronting the evidence and statements gathered by the revenue, violating natural justice principles. The Tribunal did not specifically address this issue after quashing the reassessment order on jurisdictional grounds.

Conclusion:
The Tribunal quashed the reassessment order dated 28.03.2016 as void ab initio, holding that the assessment should have been made u/s 153C based on the incriminating material found during the search on Jain Brothers. Consequently, other grounds raised by the assessee became academic and were not adjudicated. The appeal of the assessee was allowed.

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