Assessment under section 143(3) void when based on search materials, should follow section 153C procedure instead

ITAT Delhi held that assessment under section 143(3) was void ab initio when made based on materials seized during search operations. The assessee contended that since assessment was based on materials found during Hans Group search on 06.01.2021, including WhatsApp chats from seized mobile phone, it should have been made under section 153C instead of regular assessment under section 143(3). ITAT agreed, noting that AO had recorded satisfaction note under section 153C but incorrectly proceeded under section 143(3). The assessment was quashed as not permissible under law, and assessee's additional ground was allowed.

---

---

ISSUES PRESENTED AND CONSIDERED

The core legal issues considered in this appeal were:

• Whether the assessment order for the assessment year (AY) 2021-22, passed under section 143(3) of the Income Tax Act (I.T. Act), was valid when the assessment was based on materials seized during a search on a third party.
• Whether the assessment should have been conducted under section 153C of the I.T. Act instead of section 143(3), given the circumstances of the search and seizure.
• Whether the assessment order was void ab initio due to procedural errors in the application of the relevant legal provisions.

ISSUE-WISE DETAILED ANALYSIS

Validity of Assessment under Section 143(3)

Relevant Legal Framework and Precedents: The primary legal framework involves sections 143(3) and 153C of the I.T. Act. Section 143(3) pertains to regular assessment, whereas section 153C deals with assessments related to materials found during a search on a third party. The precedents cited include decisions from the Supreme Court and various High Courts, emphasizing the procedural requirements for assessments involving search-related materials.

Court's Interpretation and Reasoning: The Tribunal noted that the assessment for AY 2021-22 was based on materials seized during a search on the Hans Group, a third party. The Tribunal emphasized that when assessments are based on search materials, they should be conducted under section 153C, not section 143(3).

Key Evidence and Findings: The evidence included WhatsApp chats found during the search on the Hans Group, which were used to make additions to the assessee's income. The Tribunal found that the Assessing Officer (AO) had recorded a satisfaction note under section 153C, indicating the applicability of this section.

Application of Law to Facts: The Tribunal applied the law by determining that the satisfaction note recorded under section 153C required the AO to proceed under this section for assessments related to the seized materials. The Tribunal found that the AO's decision to proceed under section 143(3) was incorrect.

Treatment of Competing Arguments: The assessee argued that the assessment should have been under section 153C, citing procedural errors in the AO's approach. The Revenue supported the assessment under section 143(3). The Tribunal sided with the assessee, emphasizing the procedural missteps.

Conclusions: The Tribunal concluded that the assessment under section 143(3) was void ab initio due to the failure to follow the correct procedural path under section 153C.

SIGNIFICANT HOLDINGS

Preserve Verbatim Quotes of Crucial Legal Reasoning: "The impugned assessment framed under section 143(3) of the Act thus, is void ab-initio as rightly pleaded on behalf of the assessee. Hence, the assessment order passed is vitiated in law and requires to be quashed at the threshold."

Core Principles Established: The Tribunal established that when assessments are based on materials seized during a search on a third party, section 153C must be invoked. The procedural requirements under section 153C are mandatory, and failure to comply renders the assessment void.

Final Determinations on Each Issue: The Tribunal determined that the assessment for AY 2021-22 was void ab initio due to the incorrect application of section 143(3) instead of section 153C. Consequently, the additional ground raised by the assessee was allowed, and the assessment order was quashed. The other grounds raised by the assessee were not adjudicated as they became academic following the decision on the procedural issue.

---