Abatement under section 153A: pending assessment quashed and search-year additions disallowed; abandoned project write-off allowed.

The note explains that initiation of a search triggers abatement of pending assessments under the abatement rule, so a 143(3) assessment issued after search was quashed and set aside; where assessments remain unabated, additions are confined to income evidenced by incriminating material. Expenditure on an abandoned project connected to the existing retail business, yielding no enduring asset, was held revenue in nature and allowable. Reconciliations and supporting records rebutted alleged suppressed sales, and claimed prior-period charges, VAT write-offs and sundry balance write-offs met the business nexus test and were allowed as deductible under general business expense principles.

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Issues: (i) Whether the assessment under section 143(3) for A.Y. 2017-18 was valid after initiation of search proceedings and whether the second proviso to section 153A required abatement of the 143(3) assessment; (ii) Whether the write-off of capital work-in-progress of Rs. 47,93,370 on abandonment of project is allowable as revenue expenditure or is a capital expenditure disallowable; (iii) Whether the addition of Rs. 96,77,633 as alleged suppressed sales is sustainable; (iv) Whether disallowances under section 37(1) of Rs. 15,284 (prior period expenses), Rs. 1,20,809 (sales tax/VAT written off) and Rs. 91,806 (sales tax/VAT and sundry balances written off for AY 2018-19) are sustainable.

Issue (i): Validity of assessment under section 143(3) after initiation of search and effect of second proviso to section 153A.

Analysis: The Tribunal examined the chronology: search on 29.05.2018, notice under section 143(2) on 09.08.2018, assessment under section 143(3) on 22.12.2019, and subsequent notice and assessment under section 153A on 18.02.2021 and 12.06.2021 respectively. Relying on the principle that section 153A is invoked to tax income detectable from incriminating material found during search and on the binding authority that limits additions in unabated years to incriminating material, the Tribunal found the AO wrongly proceeded under section 143(3) after initiation of search, contrary to the abatement rule in the second proviso to section 153A.

Conclusion: In favour of Assessee. The assessment under section 143(3) for A.Y. 2017-18 is quashed as bad in law and set aside.

Issue (ii): Nature of the write-off of capital work-in-progress of Rs. 47,93,370 on abandonment of project (revenue v. capital).

Analysis: The Tribunal considered that the Hyderabad project was part of the assessee's existing line of retail business, was abandoned before any enduring asset came into existence, and that binding decisions of the jurisdictional High Court permit treating such expenditure as revenue where no enduring benefit accrues. The assessee produced bills and evidence of project-related expenses; revenue did not bring cogent material to establish capital character.

Conclusion: In favour of Assessee. The write-off of Rs. 47,93,370 is allowable as revenue expenditure and the enhancement disallowance is deleted.

Issue (iii): Validity of addition of Rs. 96,77,633 as alleged suppressed sales.

Analysis: The assessee explained the difference between ERP-extracted sales and returns shown in the return, provided reconciliations and supporting details; the revenue's rejection lacked substantive evidence demonstrating suppression. The Tribunal found the assessee's reconciliation credible and that the AO's conclusions were not supported by cogent material.

Conclusion: In favour of Assessee. The addition of Rs. 96,77,633 is deleted.

Issue (iv): Allowability of amounts disallowed under section 37(1): prior period expenses, sales tax/VAT written off, and sundry balances.

Analysis: The Tribunal examined the nature and business nexus of the claimed expenditures, noting prior period maintenance charges related to AY 2015-16 and that written-off sales tax/VAT and sundry balances were reflected in profit and loss account. Revenue did not produce cogent evidence to rebut the business nexus and allowability under section 37(1).

Conclusion: In favour of Assessee. Disallowances of Rs. 15,284 and Rs. 1,20,809 for AY 2017-18 and Rs. 91,806 for AY 2018-19 are deleted.

Final Conclusion: The Tribunal allowed the assessee's challenges in part and in full as to substantive adjustments: the section 143(3) assessment for A.Y. 2017-18 is quashed; additions for suppressed sales and specified disallowances are deleted; the write-off of capital work-in-progress is treated as allowable revenue expenditure. Overall, ITA No.6485 is partly allowed and ITA Nos.6486 and 6487 are allowed.

Ratio Decidendi: The second proviso to section 153A requires abatement of pending assessments upon initiation of search, and where assessments remain unabated additions under a subsequent search-based assessment are permissible only to the extent of income evidenced by incriminating material unearthed during the search; expenditure on an abandoned project that yields no enduring asset and is in continuation of existing business may be allowable as revenue expenditure.

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