Assessment under Section 147 invalid if based on information from seized material during search operations

ITAT Delhi set aside the impugned order and remitted the matter to CIT(A) to determine whether information for proceedings u/s 147 emanated from seized material during search operations u/s 132. The tribunal held that complete facts are required to establish the source of information through panchanama and relevant documentation. If CIT(A) finds the information originated from incriminating material seized during search, the assessment u/s 147 read with 144 would be unsustainable. The assessee's appeal was allowed for statistical purposes.

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1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal were:

(a) Whether the initiation of proceedings under section 147 of the Income Tax Act, 1961 (the Act) was valid, particularly regarding the recording of satisfaction and approval under sections 147 and 151 of the Act;

(b) Whether the reopening of assessment under section 148 of the Act was legally sustainable in the absence of valid reasons recorded prior to issuance of notice;

(c) Whether the proper legal recourse for taxing the cash payment of Rs. 34,41,000/- made towards purchase of immovable property was under section 148 or section 153C of the Act, given that the information allegedly emanated from incriminating material seized during search operations under section 132;

(d) Whether the assessment completed under section 147 read with section 144 of the Act was sustainable if the information regarding the cash payment had indeed emanated from the seized material during search operations;

(e) Ancillary issues relating to procedural compliance, including the availability and production of approval under section 151(2) of the Act and the correctness of the assessment proceedings in light of the facts.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a) and (b): Validity of Initiation of Proceedings under Section 147/148 and Recording of Satisfaction

The legal framework mandates that for reopening an assessment under section 147, the Assessing Officer (AO) must record satisfaction that income chargeable to tax has escaped assessment and obtain prior approval under section 151(2) before issuing notice under section 148. The appellant contended that the AO failed to record valid satisfaction prior to issuance of notice and that the approval under section 151(2) was not furnished despite requests.

The AO's response, supported by a factual report, asserted that prior approval was obtained before issuance of notice dated 31.03.2021, within the permissible time limit. The AO further clarified that the return for the relevant year was processed only under section 143(1), not assessed, thereby attracting the provisions of explanation 2(b) to section 147, deeming the case one where income had escaped assessment.

The Tribunal noted that the appellant relied on RTI responses indicating satisfaction was recorded only on 16.07.2021, post issuance of notice, and no approval under section 151(2) was produced. However, the Tribunal accepted the AO's explanation that the RTI response date was mistakenly taken as the date of satisfaction recording and that prior approval was in fact obtained before notice issuance. The Tribunal emphasized that the factual finding of the AO regarding recording of satisfaction and approval is to be accepted unless disproved by the appellant with cogent evidence.

Thus, the Tribunal upheld the procedural compliance by AO in recording satisfaction and obtaining approval, rejecting the appellant's contention of invalid initiation of proceedings.

Issue (c) and (d): Applicability of Section 148 versus Section 153C for Reopening Based on Seized Material

The appellant argued that since the incriminating material seized during search operations under section 132 at premises of Sweta & Oriental Group mentioned the name of the assessee and the cash payment, the reopening should have been initiated under section 153C, which deals specifically with cases where income has escaped assessment as revealed from search material, rather than under section 148. The appellant prayed for annulment of the assessment order as void ab initio on this ground.

The AO and Revenue contended that the assessee had filed a return for the relevant year which was only processed under section 143(1) and no assessment under section 2(40) had been made. Therefore, explanation 2(b) to section 147 applied, permitting reopening under section 148. The AO also asserted that the information regarding cash payment was received from the investigation wing through the Insight Portal and was not necessarily emanating from the incriminating material seized during search, thus justifying initiation under section 148.

The Tribunal examined the evidence and found that the appellant failed to produce the panchanama or annexures of the seized material to conclusively establish that the information regarding the cash payment originated from the search material. The Tribunal held that RTI responses alone cannot establish the source of information for reopening. It emphasized that the source of information must be clearly established by reference to the panchanama and related documents from the Investigation Directorate and AO records.

Given the lack of conclusive evidence on whether the information emanated from seized material, the Tribunal deemed it necessary in the interest of justice to remit the matter to the CIT(A) for a fresh determination of this limited issue. The CIT(A) was directed to call for relevant information from both Revenue and assessee and decide whether the information triggering reopening emanated from the search material under section 132.

The Tribunal clarified that if the CIT(A) finds that the information did emanate from the incriminating material seized during search, then the assessment under section 147 read with section 144 would not be sustainable, and the proper procedure would have been under section 153C.

Issue (e): Procedural Compliance and Evidentiary Burden

The Tribunal underscored the importance of procedural compliance, including the recording of satisfaction and obtaining prior approval under sections 147 and 151, which were affirmed by the AO's factual report and documents. The appellant's failure to produce documentary evidence such as panchanama or approval letters weakened their challenge.

The Tribunal also noted the necessity of corroborating RTI responses with other documentary evidence before drawing conclusions on procedural lapses or the source of information for reopening.

3. SIGNIFICANT HOLDINGS

The Tribunal held:

"The factual finding of the AO had to be believed to be true unless proved otherwise."

"The replies to RTI applications have to be appreciated in response to the specific query under RTI to the concerned officer. The source of information has to be established with the help of panchanama along with annexure, etc."

"In the interest of justice, the complete and correct facts are required to arrive at the conclusion whether the said information emanated from seized material under section 132 of the Act or otherwise."

"If the CIT(A) finds that the said information has emanated from the incriminating material found & seized during the course of search operations; then the relevant assessment completed under section 147 r/w section 144 of the Act is not sustainable in the eyes of the law."

Core principles established include:

(i) The procedural safeguards under sections 147, 148, and 151 must be complied with, and the AO's satisfaction and approval are presumed valid unless convincingly challenged.

(ii) The source of information for reopening is critical to determine the correct legal procedure-whether section 148 or section 153C applies.

(iii) Mere RTI responses are insufficient to establish the source of information; corroborative evidence such as panchanama and investigation reports are essential.

(iv) In cases of doubt regarding the source of information, remand to the appellate authority for fresh consideration is appropriate.

Final determinations:

- The initiation of proceedings under section 148 was not held invalid on procedural grounds.

- The question whether the information emanated from search material under section 132, thereby mandating proceedings under section 153C, was left open and remanded for fresh adjudication.

- The appeal was allowed for statistical purposes, setting aside the impugned order and remitting the limited issue to the CIT(A) for fresh decision.

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