2026 (3) TMI 334 - AT - Income Tax

Set-aside assessment scope: seized third-party search material must be processed under search assessment procedure, else assessment invalid.

Admissibility of additional legal grounds filed late was permitted because they raised pure questions of law apparent on the record and caused no ... AO jurisdiction to complete the set aside proceedings when the seized material was not before the CIT(A) at the time of set aside - Admission of additional legal grounds - scope of de novo assessment - jurisdictional limitation on use of subsequently seized material in set-aside proceedings - whether in the set aside proceeding, can the AO bring on record fresh material which was not available before the CIT(A) at the time of set aside to make fresh assessment? HELD THAT: - AO has no jurisdiction to complete the set aside proceedings when the seized material was not before the Ld CIT(A) at the time of set aside. It is settled proposition that even the Ld CIT(A) cannot make addition or enhance the addition without any notice of enhancement. Regarding set aside proceedings also, first Ld CIT(A) has to issue enhancement notice, he has to get the response on the issue of enhancement from the assessee, only after which he can set aside the proceedings to the AO to make fresh assessment. As held in the case of Saheli Synthetics (P) Limited [2008 (2) TMI 182 - GUJARAT HIGH COURT] that it is not possible to define a set aside assessment as either open set aside or a conditional set aside or a limited set aside. The set aside assessment made by the appellate authority is always in accordance with the directions given by the appellate authority for making a fresh assessment. Information what was available at the time of set aside alone is the material to be applied for completing the set aside proceedings. Subsequently, any new material is made available to the AO, he must apply the same as per law depending upon the quality of material. In the given case, the material available with the AO is the seized material from the possession of the third party, AO must have initiated the proceedings as per law. AO only had the option to proceed to make separate proceedings u/s 158BD only to the extent of undisclosed income unearthed during the search. Therefore, the order passed by the AO utilizing the material found during the search in the set aside proceedings is bad in law. Therefore, we are inclined not to disturb the findings of Ld CIT(A) for quashing the assessment order. Final Conclusion: The Revenue's appeal is dismissed: the AO erred in completing the set-aside regular assessment by relying on seized material that was not before the appellate authority at the time of set-aside and without initiating the requisite separate search-assessment proceedings; having found the assessment process legally flawed on jurisdictional and procedural grounds, the Tribunal declined to examine the merits of the addition. Issues: (i) Whether the Revenue's additional legal grounds filed after long delay are admissible; (ii) Whether the Assessing Officer in a set-aside de novo assessment could lawfully rely upon seized third party material that was not before the appellate authority at the time of set aside, and whether the assessment made on that basis was maintainable.Issue (i): Admissibility of additional grounds of appeal filed by the Revenue after long delay.Analysis: The additional grounds were legal questions arising on the face of the record and concerned jurisdictional and legal principles already engaged by the parties. Admission was considered in light of the Tribunal's plenary powers under the appeal statute to decide pure questions of law without necessitating fresh factual inquiry. The long delay was examined against the nature of the grounds (pure law, record-based) and the absence of prejudice to the other side.Conclusion: The additional grounds are admitted; admission is upheld in favour of the Revenue.Issue (ii): Legality of AO relying on seized material not before the appellate authority in set-aside proceedings and validity of the resulting addition under the Income tax Act.Analysis: The set-aside direction required the AO to make a fresh assessment in accordance with the appellate directions. Material that was not before the appellate authority at the time of set-aside and which arose from search proceedings of a third party was held to fall within the special search/undisclosed income regime and required initiation of separate statutory search assessment proceedings. The AO instead utilized seized third party material while completing the regular set aside assessment under the assessment provisions; the process bypassed the statutory route for search/undisclosed income and thereby exceeded the lawful mandate of the set aside assessment. Given that the assessment impugned was founded on material obtained after the set aside and on which separate statutory procedure should have been invoked, the assessment was held to be beyond the permissible scope of the set aside proceedings. The Tribunal did not proceed to decide merits of the addition because jurisdictional defect rendered the assessment bad in law.Conclusion: The Assessing Officer exceeded jurisdiction by completing the set aside assessment on the basis of seized third party material without initiating the appropriate search/undisclosed income proceedings; this conclusion is in favour of the Assessee.Final Conclusion: The admitted additional legal grounds were considered and, on the principal issue, the set aside assessment based on seized third party material not before the appellate authority was quashed as beyond the mandate of the set aside proceedings; the Tribunal dismissed the Revenue's appeal without adjudicating the merits of the addition.Ratio Decidendi: Where an appellate authority sets aside an assessment with directions for a fresh assessment, material that comes to light subsequently from search/undisclosed income operations and was not before the appellate authority must be dealt with under the statutory regime applicable to search/undisclosed income assessments rather than being incorporated into and concluded within the regular set aside assessment; using such subsequently discovered search material in the set aside assessment without invoking the appropriate statutory search assessment process renders the assessment invalid.