Reopening of assessment and alleged bogus purchases rejected due to lack of independent corroboration and natural justice violations.

Reopening of assessment premised on alleged bogus purchases and unexplained expenditure was critiqued for reliance on loose papers, Tally data and third-party statements without independent corroboration; the assessing officer bore the onus to verify suppliers and authenticate records, and failure to do so defeated the additions, which were deleted. Reliance on uncorroborated electronic data and a witness statement without affording opportunity for cross-examination constituted breach of principles of natural justice, undermining the probative value of the evidence and precluding taxation on the estimated profit element.

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Issues: (i) Whether an assessment framed under section 143(3) relying on documents/digital data seized from third parties and material extracted from third-party devices without recording satisfaction under section 148 (Explanation 2) and without prior approval under section 148B is valid; (ii) Whether the additions made on merits(a) estimated profit on alleged bogus purchases, (b) unexplained expenditure under section 69C, and (c) gross profit on alleged out-of-books salesare sustainable.

Issue (i): Whether the assessment framed under section 143(3) is valid when it relies on third-party search material without recording requisite satisfaction under section 148 (Explanation 2) and without obtaining prior approval under section 148B.

Analysis: The assessment year falls within the three years immediately preceding the year of search and the AO relied substantially on material seized from third parties and on statements/data from ex-employees. Explanation 2 to section 148 and the post-2021 amendments bring third-party search material within the reassessment regime and require recording of satisfaction and prescribed prior approval. The statutory approval procedure and supervisory safeguards were not complied with; the approval relied upon was administrative/mechanical and did not evidence forwarding of seized material or application of mind as required by the statutory scheme and departmental procedure.

Conclusion: The assessment framed under section 143(3) is invalid and quashed for non-compliance with Explanation 2 to section 148 and for absence/vitiation of prior approval under section 148B (decision in favour of assessee on jurisdictional ground).

Issue (ii): Whether the additions on meritsestimated profit on alleged bogus purchases, unexplained expenditure u/s 69C, and gross profit on alleged out-of-books salesare sustainable.

Analysis: The contested additions were founded on incomplete/unreliable Tally/hard-disk data and third-party statements without independent corroboration. The assessee produced supplier ledgers, invoices, weighment slips, inward registers authenticated by excise officials, bank/payment evidence and other records substantiating purchases and sales. No meaningful independent enquiries of suppliers were undertaken and no opportunity for cross-examination of third-party witnesses was afforded. The Trial Balance relied upon for out-of-books sales was inconsistent and incapable of being treated as reliable evidence.

Conclusion: The additions are not sustainable on merits: estimated profit on alleged bogus purchases deleted in full; unexplained expenditure u/s 69C deleted; gross-profit addition on alleged out-of-books sales deleted (decisions in favour of assessee on merits).

Final Conclusion: The legal infirmity in framing the assessment under section 143(3) without adherence to the reassessment procedure and prior approval mandated by Explanation 2 to section 148 and section 148B renders the assessment void; additionally, the disputed additions based on unreliable third-party material and without independent corroboration cannot be sustained.

Ratio Decidendi: Where an assessment year falls within the three years immediately preceding the year of a search, reliance on material seized from third parties mandates satisfaction and prior approval under Explanation 2 to section 148 and section 148B, and failure to comply with these jurisdictional preconditions vitiates any assessment based on such third-party material.

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