Third-party loose paper and search-linked reassessment rules defeated the addition and the regular scrutiny assessment.

Unexplained expenditure could not be added merely on the basis of an uncorroborated loose paper found from a third party, because the presumptions under sections 292C and 132(4A) operate only against the person from whose possession the material is seized and not against the assessee without independent corroboration; the addition was deleted. After a search under section 132 initiated on or after 01.04.2021, the prior-year assessment had to proceed through the reassessment framework under sections 147 to 148, with the approval contemplated by section 148B where applicable, and could not be completed under section 143(3); the assessment was quashed.

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Issues: (i) Whether an addition for unexplained expenditure could be sustained on the basis of an uncorroborated loose paper found from the possession of a third person and not from the assessee. (ii) Whether, after a search under section 132 of the Income-tax Act, 1961, the assessment for the prior year could validly be completed under section 143(3) instead of following the reassessment route under section 148 with the approval contemplated by section 148B.

Issue (i): Whether an addition for unexplained expenditure could be sustained on the basis of an uncorroborated loose paper found from the possession of a third person and not from the assessee.

Analysis: The seized paper was not found from the assessee's possession, was not signed by the assessee, and was not supported by any enquiry from the seller or other co-buyers. The presumption under section 292C and the allied presumption under section 132(4A) apply, at the highest, against the person from whose possession the material is found, and not against a third party in the absence of corroboration. As no independent material established that the assessee paid the alleged cash amount, the document could not be treated as sufficient proof of the alleged transaction. Denial of cross-examination also weakened reliance on the third-party statement.

Conclusion: The addition of unexplained expenditure was deleted and this issue was decided in favour of the assessee.

Issue (ii): Whether, after a search under section 132 of the Income-tax Act, 1961, the assessment for the prior year could validly be completed under section 143(3) instead of following the reassessment route under section 148 with the approval contemplated by section 148B.

Analysis: For searches initiated on or after 01.04.2021, Explanation 2 to section 148 treats the search as information suggesting escapement of income for the relevant prior years, and the assessment must proceed through the reassessment framework under sections 147 to 148, with prior approval where required by section 148B. The regular scrutiny route under section 143(3) could not be continued for a search-linked prior year assessment in the facts of the case. The Tribunal followed coordinate bench precedent and held that the assessment framed under section 143(3) without recourse to section 148 was not sustainable.

Conclusion: The assessment order under section 143(3) was quashed and this issue was decided in favour of the assessee.

Final Conclusion: Both appeals succeeded, the disputed addition was deleted, and the assessment framed under the regular scrutiny provision was annulled.

Ratio Decidendi: A loose paper found from a third party cannot justify an addition against the assessee without independent corroboration, and where a search triggers the special post-2021 reassessment regime, the assessment must proceed under section 148 rather than under section 143(3).

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