Assessment under Section 143(3) based on third party search materials declared void ab initio, should follow Section 153C procedure instead.

ITAT DELHI held that assessment made u/s 143(3) following search and seizure operations on a third party was void ab initio. The tribunal ruled that when assessment is based on materials found during search of another person, it should be made u/s 153C instead of regular assessment u/s 143(3). Following precedent in Arti Dhall case, the assessment was deemed invalid as wrong provision was applied. Decision favored the assessee.

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ISSUES PRESENTED and CONSIDERED

The core legal issues considered in the judgment are:

1. Whether the assessment made under Section 143(3) of the Income Tax Act, 1961, is valid when the assessment should have been conducted under Section 153C due to the involvement of search and seizure operations on a third party.

2. Whether the assessment made under Section 143(3) is void ab initio due to non-compliance with the provisions of Section 153C, which requires assessments to be made based on materials found during the search on a third party.

ISSUE-WISE DETAILED ANALYSIS

1. Validity of Assessment under Section 143(3) vs. Section 153C

Relevant Legal Framework and Precedents: The legal framework revolves around Sections 143(3) and 153C of the Income Tax Act. Section 143(3) pertains to regular assessments, while Section 153C deals with assessments based on materials found during a search on a third party. The Tribunal referred to precedents from the Supreme Court and High Courts, including NTPC Vs. CIT and Pr. CIT & Anrs vs. Ojjus Medicare P. Ltd., which emphasize the correct application of these sections.

Court's Interpretation and Reasoning: The Tribunal noted that the assessment should be made under Section 153C when materials from a search on a third party are involved. The Court emphasized that the assessment year under consideration was not the search year, and the assessment should have been conducted under Section 153C, not Section 143(3).

Key Evidence and Findings: The Tribunal found that the assessment order was based on materials found during a search on a third party (Hans Group). The satisfaction note under Section 153C was recorded, but the assessment was incorrectly conducted under Section 143(3).

Application of Law to Facts: The Tribunal applied the legal principles to the facts, noting that the satisfaction note was recorded under Section 153C, and the assessment should have been conducted under this section. The assessment year in question fell within the block period defined by Section 153C, necessitating compliance with its provisions.

Treatment of Competing Arguments: The Tribunal considered the arguments of both parties. The appellant argued that the assessment was void ab initio due to non-compliance with Section 153C. The respondent supported the assessment under Section 143(3), but the Tribunal found this approach incorrect.

Conclusions: The Tribunal concluded that the assessment under Section 143(3) was void ab initio due to non-compliance with Section 153C. The assessment should have been conducted under Section 153C, considering the materials found during the search on a third party.

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 judgment establishes that when materials from a search on a third party are involved, assessments must be conducted under Section 153C. Failure to comply with this section renders the assessment void ab initio.

Final Determinations on Each Issue: The Tribunal quashed the assessments made under Section 143(3) for the assessment year 2021-22, holding them void ab initio. The assessments should have been conducted under Section 153C, considering the materials found during the search on a third party.

In conclusion, the Tribunal allowed the appeals, quashing the assessments made under Section 143(3) due to non-compliance with Section 153C. The judgment emphasizes the importance of adhering to the correct legal provisions when conducting assessments based on materials found during searches on third parties.

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