Search on 14.03.2022, however notice issued after Finance Act 2024

[Mukul Panpher]

Where a search under Section 132 of the Income-tax Act was conducted on 14.03.2022 in the case of a third party and certain documents allegedly pertaining to the assessee were found therein, the AO issued a notice under Section 148 dated 25.03.2025 to the Assessee.

On the date of issuance of the impugned notice, which Finance Act was in force. As Finance Act, 2024 came with effect from 01.09.2024 whereby Explanation 2 to Section 148 stood omitted. Consequently, the statutory deeming fiction treating third-party search material as “information suggesting escapement of income” was no longer available to the Assessing Officer. 

In the absence of the said deeming provision, proceedings against an “other person” could be initiated only after strict compliance with the mandatory procedure prescribed under Section 148A, including issuance of show-cause notice under Section 148A(b), grant of opportunity of hearing, and passing of a reasoned order under Section 148A(d). So is the notice dated 25.03.2025 legally valid ?

[YAGAY and SUN]

No — the notice dated 25.03.2025 is not legally sustainable, for the reasons set out below.

On the date of issuance of the impugned notice, i.e. 25.03.2025, the law in force was the Income-tax Act as amended by the Finance Act, 2024, which had come into effect from 01.09.2024. By virtue of this amendment, Explanation 2 to Section 148 stood omitted, thereby removing the statutory deeming fiction which earlier treated material found during a search on a third party as “information suggesting escapement of income” in the hands of an “other person.” Consequently, the Assessing Officer could no longer rely on the mere fact of a third-party search under Section 132 to directly assume jurisdiction under Section 148 against the assessee.

In the absence of the said deeming provision, initiation of reassessment proceedings against an “other person” was permissible only after strict compliance with Section 148A, including (i) issuance of a show-cause notice under Section 148A(b), (ii) grant of an effective opportunity of being heard, and (iii) passing of a reasoned order under Section 148A(d) deciding whether it is a fit case for issuance of notice under Section 148. Since the impugned notice dated 25.03.2025 was issued directly under Section 148 without following the mandatory procedure under Section 148A, it suffers from a jurisdictional defect and is liable to be quashed as being contrary to the law prevailing on the date of issuance of the notice.

[Mukul Panpher]

I appreciate the inputs provided. However, I would like to draw your attention to the saving clause under Section 152(3) of the Income-tax Act, which is critical to this case.

This section mandates that for any search initiated between 01.04.2021 and 01.09.2024, the assessment proceedings shall be governed by Sections 147 to 151 as they stood prior to the Finance (No. 2) Act, 2024. Section 152(3) is reproduced hereinbelow for your reference:

“(3) Where a search has been initiated under section 132 or requisition is made under section 132A, or a survey is conducted under section 133A [other than under sub-section (2A) of the said section], on or after the 1st day of April, 2021 but before the 1st day of September, 2024, the provisions of sections 147 to 151 shall apply as they stood immediately before the commencement of the Finance (No. 2) Act, 2024.”

Given that the search in question occurred on 14.03.2022, the amendments introduced by the Finance Act, 2024 (such as the omission of Explanation 2) would not apply retrospectively to this procedure. Therefore, the issuance of the notice under Section 148 by the Assessing Officer appears to be in accordance with the law.

[YAGAY and SUN]

Section 152(3), as inserted by the Finance (No. 2) Act, 2024, is an express saving clause which preserves the applicability of Sections 147 to 151, as they stood immediately prior to the commencement of the said Finance Act, in respect of searches initiated between 01.04.2021 and 01.09.2024. The language employed is mandatory and unambiguous the provisions of Sections 147 to 151 shall apply as they stood hereby legislatively freezing the procedural and substantive framework governing reassessment for the specified class of search cases. Consequently, any amendments brought about by the Finance (No. 2) Act, 2024, including omission or modification of Explanations or deeming provisions, cannot be pressed into service for such searches, as the statute itself expressly excludes their retrospective application.

In the present case, the search having been conducted on 14.03.2022, it squarely falls within the temporal window contemplated under Section 152(3). Therefore, the reassessment proceedings must be tested against Sections 147 to 151 as they existed prior to the Finance (No. 2) Act, 2024, and not under the amended regime. If the notice under Section 148 has been issued in conformity with the pre-amendment statutory requirements including jurisdictional satisfaction, limitation, and procedural safeguards it cannot be invalidated on the ground that subsequent amendments (such as omission of Explanation 2) were not applied. The saving clause statutorily insulates such proceedings from the effect of later amendments.

[NAMRATA KAYARWAR]

What if search is conducted on 09/11/2022 in any other case. Statement recorded u/s 131(1A) on 23/01/2023 of other person discussing details of assessee (i.e. HUF) in his statement. whereas no any documents or material was found related to the assessee during search. The other person is coparcener assessee HUF. Department is issuing notice u/s 148 for AY 2022-23 on 16/03/2026.

Kindly suggest.

AI Summary

Deeming provision removal vs statutory saving: reassessment notice validity hinges on which regime governs prior searches.
The 2024 amendment omitted the deeming provision treating third party search material as information suggesting escapement of income, while an express saving clause preserves the pre-amendment reassessment regime for searches initiated in a specified earlier window; the central question is whether a reassessment notice issued after the amendment but based on a preserved-date search must follow pre-amendment procedures or the post-amendment pre-notice procedure introduced by the 2024 changes.