Facts of the Case

The assessee, Shri Puneet Kulthia, filed his return of income for the relevant assessment year declaring his income. The case was later reopened by the Assessing Officer by issuing notice under Section 148 of the Income-tax Act, 1961 on the basis of information received from the Investigation Wing.

The information was based on material found during a search and seizure action conducted on another person/group, wherein it was alleged that certain accommodation entries were provided to various beneficiaries including the assessee.

Based on such information, the Assessing Officer initiated reassessment proceedings under Section 147 and completed the reassessment under Section 143(3) read with Section 147. During the reassessment proceedings, the Assessing Officer made additions under Section 68 of the Income-tax Act treating certain credits as unexplained.

Aggrieved by the reassessment order and additions made therein, the assessee filed an appeal before the Income Tax Appellate Tribunal. 

Issues Involved

  1. Whether reassessment proceedings initiated under Section 147/148 are valid when the information relied upon arises from search material belonging to a third party.
  2. Whether the proper course of action for the Assessing Officer in such circumstances is to invoke Section 153C instead of Section 147.
  3. Whether additions made under Section 68 in such reassessment proceedings can be sustained.

Petitioner’s Arguments (Assessee)

The assessee submitted that:

  • The reassessment proceedings were initiated solely on the basis of material found during search proceedings conducted on another person.
  • Where documents or information relating to a person are found during the search of another person, the correct statutory provision applicable is Section 153C of the Income-tax Act.
  • The Assessing Officer cannot bypass the specific provisions of Section 153C and instead initiate proceedings under Section 147.
  • Therefore, the reassessment proceedings initiated under Section 147 were without jurisdiction and liable to be quashed.
  • Consequently, any addition made under Section 68 pursuant to such invalid proceedings is also unsustainable. 

Respondent’s Arguments (Income Tax Department)

The Department contended that:

  • The Assessing Officer had reason to believe that income chargeable to tax had escaped assessment based on information received from the Investigation Wing.
  • Therefore, initiation of reassessment proceedings under Section 147 read with Section 148 was justified.
  • The additions made by the Assessing Officer under Section 68 were based on the material available on record and were therefore valid. 

Court Findings / Order

The Income Tax Appellate Tribunal examined the facts and legal provisions and observed that:

  • The reassessment proceedings were initiated on the basis of information arising from a search conducted on another person.
  • In such cases, the law specifically provides a mechanism under Section 153C for assessment of income of a person other than the searched person.
  • When the statute provides a specific procedure under Section 153C, the Assessing Officer cannot invoke the general provisions of Section 147 for reassessment.

Accordingly, the Tribunal held that:

  • The reassessment proceedings initiated under Section 147/148 were not valid in law.
  • Since the reassessment itself was invalid, the additions made under Section 68 could not survive.

Therefore, the reassessment order was set aside and the appeal of the assessee was allowed. 

Important Clarification by the Tribunal

The Tribunal clarified an important legal principle:

  • When incriminating material relating to a person is found during the search of another person, the correct procedure for assessment is under Section 153C of the Income-tax Act.
  • The Assessing Officer cannot circumvent the special provisions of Section 153C by invoking the reassessment provisions under Section 147/148. 

Sections Involved

  • Section 68 – Unexplained Cash Credits
  • Section 143(3) – Regular Assessment
  • Section 147 – Income Escaping Assessment
  • Section 148 – Issue of Notice for Reassessment
  • Section 153C – Assessment of Income of Any Other Person in Search Cases

Link to download the order - https://itat.gov.in/public/files/upload/1703238310-1148%20del%202023.pdf

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