Reassessment procedure and share-valuation additions: search-based assessment, cash payment, bogus purchases and interest disallowance principles

A search after 1 April 2021 brought the relevant year within the reassessment framework under the deeming fiction in Explanation 2 to section 148, so the assessment had to follow sections 147 and 148 with the required approvals and could not be completed as a regular scrutiny assessment under section 143(3). On merits, an addition for undervalued fresh allotment of shares under section 56(2)(x)(c) was deleted because the transaction did not fall within the charging provision. A cash payment addition under section 69C was sustained on seized material, the bogus-purchase disallowance was confined to the incriminating entries, and the interest disallowance under section 36(1)(iii) was deleted on availability of interest-free funds.

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Issues: (i) Whether the assessment for the year immediately preceding the search year could be framed under section 143(3) instead of the reassessment procedure under sections 147 and 148 with the approvals contemplated by section 148B; (ii) whether the addition under section 56(2)(x)(c) on alleged under-valuation of shares allotted by a fresh issue was sustainable, including the valuation of leasehold land and FF&E reserve under Rule 11UA(1)(c)(b); (iii) whether the addition of alleged cash payment under section 69C was justified; (iv) whether the disallowance of alleged bogus purchases was to be sustained in full or restricted to the incriminating material found; and (v) whether the interest disallowance under section 36(1)(iii) could survive.

Issue (i): Whether the assessment for the year immediately preceding the search year could be framed under section 143(3) instead of the reassessment procedure under sections 147 and 148 with the approvals contemplated by section 148B.

Analysis: The search was conducted after 1 April 2021, and the year in question fell within the three assessment years covered by the deeming fiction in Explanation 2 to section 148. In such a case, the statutory route was reassessment under section 147 read with section 148, and the order could not validly be completed as a regular scrutiny assessment under section 143(3). The approval obtained was for a section 143(3) assessment and not for the reassessment framework required by the Act.

Conclusion: The assessment was invalid on jurisdictional grounds and was quashed.

Issue (ii): Whether the addition under section 56(2)(x)(c) on alleged under-valuation of shares allotted by a fresh issue was sustainable, including the valuation of leasehold land and FF&E reserve under Rule 11UA(1)(c)(b).

Analysis: The shares were not acquired by transfer from an existing shareholder but were allotted afresh by the company. The material found in search, the signed and unsigned agreements, and the statements recorded in search showed that the transaction did not answer the statutory requirement for taxing a fresh allotment as receipt of property at undervalue. The valuation dispute also turned on leasehold land, ground rent, unearned increase, and FF&E reserve, but once the transaction itself was found outside the mischief of the provision, the reworked valuation did not govern the charge.

Conclusion: The addition under section 56(2)(x)(c) was deleted.

Issue (iii): Whether the addition of alleged cash payment under section 69C was justified.

Analysis: The seized handwritten record, the receipt, and the statements recorded during search consistently pointed to a cash component forming part of the deal, and there was no credible retraction or rebuttal to the incriminating material. The evidence supported the conclusion that cash of Rs. 7 crores had in fact been paid outside the books.

Conclusion: The addition under section 69C was sustained.

Issue (iv): Whether the disallowance of alleged bogus purchases was to be sustained in full or restricted to the incriminating material found.

Analysis: The addition could not be expanded by extrapolation beyond the specific seized entries. The incriminating material supported only the cash-back component reflected in the relevant seized pages, and the balance of the purchases was not supported by comparable seized evidence for the entire year.

Conclusion: The disallowance was restricted to the incriminating amount found in the seized material.

Issue (v): Whether the interest disallowance under section 36(1)(iii) could survive.

Analysis: The investment was made for business expansion and commercial expediency, and the assessee had sufficient interest-free funds to cover the investments and capital work in progress. The presumption in favour of use of interest-free funds applied.

Conclusion: The interest disallowance was deleted.

Final Conclusion: The assessee succeeded on the jurisdictional challenge and on part of the quantum additions, while some additions were sustained on merits; the appeal was accordingly allowed in part.

Ratio Decidendi: Where a search after 1 April 2021 brings an assessment year within the ambit of Explanation 2 to section 148, the assessment must proceed under the reassessment regime with the statutory approvals prescribed by law, and a regular assessment under section 143(3) cannot be used to bypass that special procedure.

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