The Bombay High Court has quashed income-tax reassessment proceedings concerning alleged unaccounted cash loans of ₹9.75 crore, holding that the department could not invoke the general reassessment provisions when the proceedings were founded on material seized during a third-party search attracting Section 153C of the Income-tax Act, 1961.

The Bench of Justice B. P. Colabawalla and Justice Firdosh P. Pooniwalla has observed that subsequent analysis or corroboration of seized material does not change its source or permit the department to bypass the special statutory procedure governing assessments based on third-party search material.

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The taxpayer had filed his income-tax return for Assessment Year 2016-17 on March 31, 2017, declaring a total income of ₹10,02,740. The return was processed under Section 143(1).

On March 18, 2023, the department issued a notice under Section 148A(b), relying on information received from the Investigation Wing following a search and seizure operation involving the Ramesh Manihar Group.

According to the Revenue, the group arranged unaccounted cash loans between borrowers and lenders. Pen drives, electronic records and Excel sheets recovered during the search allegedly contained details of such transactions.

The department attributed entries recorded against the code or name “S. TOTUKA” to the taxpayer. It alleged that he had advanced unaccounted cash loans aggregating to ₹9.75 crore during Financial Year 2015-16 and earned undisclosed interest on those loans.

In the subsequent Section 148A(d) order, the Assessing Officer relied on an Excel file said to contain the taxpayer’s full name and PAN. The officer concluded that the alleged transactions represented undisclosed income and satisfied the requirements of Section 149(1)(b), including the condition concerning income represented in the form of an asset.

The taxpayer disputed the proposed reassessment on several grounds, including limitation, inadequate supply of the material relied upon, lack of a demonstrated connection between the seized entries and him, and the absence of independent authentication of the electronic records.

His principal objection, however, concerned jurisdiction.

He argued that the entire case originated from material seized during a search on another person. Consequently, the department was required to follow Section 153C read with Section 153A, rather than initiate proceedings under Sections 147, 148 and 148A.

The taxpayer submitted that Section 153C specifically addresses assessments of persons other than the person searched where seized assets, books or documents belong to or relate to such other persons and bear upon the determination of their income.

He also relied on the provision’s overriding clause, which gives the special search assessment mechanism precedence over the general reassessment provisions.

The submissions referred to the temporal restriction in Section 153C(3), under which the provision ceases to apply to searches initiated on or after April 1, 2021. The dispute therefore concerned the applicable search assessment framework, rather than a universal prohibition on reassessment using any information originating from a search.

The Revenue argued that the origin of information in a third-party search did not, by itself, exclude the Assessing Officer’s powers under Sections 147 and 148.

It maintained that the electronic material had been analysed and corroborated. According to the department, key persons associated with the searched group had explained how the transactions were recorded, including an alleged practice of suppressing five zeroes in the figures appearing in the records.

The department further asserted that other seized material containing the taxpayer’s full name and PAN corroborated the identification of “S. TOTUKA”.

It also relied on the amount involved, the asset-related requirement under Section 149(1)(b), and the approval obtained under Section 151. The Revenue contended that the amended reassessment provisions permitted action where information suggested that income had escaped assessment.

Rejecting the Revenue’s position, the Court held that the nature and source of the material forming the foundation of the proceedings were decisive.

The Assessing Officer’s own order showed that the information came from the DDIT (Investigation)-II, Jaipur, following the search and post-search proceedings involving the Ramesh Manihar Group.

The Court noted that the officer relied on seized pen drives, electronic data, Excel sheets, statements of key persons and the subsequent analysis of those records.

The alleged loan transactions, the identification of “S. TOTUKA”, the computation of ₹9.75 crore and the allegation of unaccounted interest all emerged from the search material. The department had not independently obtained information from a source unconnected with that search.

The Bench held that where incriminating material recovered during a search relates to or belongs to another person and attracts Section 153C, the department must follow that special machinery. Merely describing the material as information suggesting escapement of income under Section 148 cannot justify bypassing the prescribed procedure.

The Court rejected the contention that subsequent analysis and corroboration enabled the Revenue to use the ordinary reassessment route.

It explained that the relevant question was the source and foundation of the material that prompted the proceedings, rather than whether the department had subsequently examined that material.

The Bench also rejected the argument that the alleged interest income was a separate inference drawn from the seized records. It relied on the reasoning that separating a conclusion from the underlying search material would undermine the statutory scheme governing search-based assessments.

The Court relied on the Rajasthan High Court’s decision in Shyam Sunder Khandelwal v. Assistant Commissioner of Income-tax, which concerned the same Ramesh Manihar Group search.

That decision held that proceedings based on incriminating material seized during a third-party search had to follow Section 153C rather than Section 148.

The Bench also relied on Sejal Jewellery v. Union of India, in which a coordinate Bench of the Bombay High Court agreed with the Rajasthan High Court’s interpretation.

Drawing from these authorities, the Court explained that Sections 147 and 148 and the special provisions under Sections 153A and 153C operate in distinct fields. The overriding clauses in the special provisions carve out an exception to the ordinary reassessment mechanism.

The Court held that reliance on Section 149(1)(b) or the sanction obtained under Section 151 could not cure the fundamental defect in the assumption of jurisdiction.

The Court quashed the March 31, 2023 order under Section 148A(d) and the consequential notice under Section 148. It held that the proceedings initiated pursuant to them could not be sustained.

The Bench did not examine the taxpayer’s other objections concerning limitation, non-supply of material, nexus with the seized entries, authentication of electronic records or consideration of his replies. Those issues were left open.

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