AO Can’t Use Fresh Search Material in Set-Aside Assessment: ITAT

The Delhi Bench of the Income Tax Appellate Tribunal (ITAT) has dismissed the Revenue’s appeal and upheld the deletion of a massive Rs. 22.31 crore addition made against an individual taxpayer, ruling that the Assessing Officer (AO) exceeded jurisdiction by relying on fresh search material while completing a set-aside assessment. The bench of Sudhir Kumar (Judicial Member) and S. Rifaur Rahman (Accountant Member) held that material unearthed in a third-party search could not be used in a reassessment proceeding that had been set aside for a limited purpose. Such material, the Bench observed, required initiation of separate proceedings under the special provisions governing search assessments. The assessee, a salaried employee serving as Director in a DCM Group company, had declared income of ₹1.13 lakh for Assessment Year 1992-93. During the original assessment, the AO made an ad-hoc addition of ₹40 lakh, alleging that cash recovered during a FERA-related investigation belonged to the assessee. The Commissioner of Income Tax (Appeals) later set aside the assessment on June 7, 1995, observing that the AO had failed to provide the assessee with proper opportunity of hearing before making the addition. The matter was remanded to the AO with directions to conduct proper investigation and complete the assessment afresh. During the pendency of the set-aside proceedings, the Investigation Wing forwarded certain handwritten slips seized during a search at the premises of a third party, M/s Shyam Garments. The documents allegedly contained abbreviated entries and financial figures written in the assessee’s handwriting. Relying on these documents and interpreting the entries as evidence of undisclosed financial transactions, the AO concluded that the assessee had unexplained income of ₹22.31 crore. The addition comprised ₹9.74 crore treated as capital appreciation and ₹12.57 crore attributed to “charity/donations.” On appeal, the CIT(A) deleted the entire addition. The appellate authority held that the AO had no jurisdiction to introduce a new source of income in the set-aside proceedings since the original remand order had not authorized such an inquiry. The CIT(A) also noted that the addition was based solely on loose papers which could not be treated as books of account under Section 68 of the Income Tax Act. Relying on judicial precedents, including the Supreme Court’s ruling in CBI v. V.C. Shukla, the CIT(A) held that loose papers have limited evidentiary value and cannot by themselves establish taxable income. The department challenged the CIT(A)’s decision before the ITAT and sought to introduce additional grounds after nearly 19 years. The Department argued that the grounds raised pure questions of law relating to the scope of de novo assessment and the applicability of Evidence Act principles in tax proceedings. While the assessee opposed the admission of the additional grounds citing inordinate delay, the Tribunal condoned the delay, observing that legal and jurisdictional issues can be raised at any stage if the relevant facts are already on record. The Tribunal framed the central issue as whether the AO could rely on new material discovered during a third-party search while completing a set-aside assessment under Section 143(3) read with Section 250 of the Act. The Bench noted that the CIT(A) had set aside the original assessment only because the assessee was not given adequate opportunity during the initial proceedings. The remand order did not authorize investigation into new sources of income. Crucially, the Tribunal emphasized that the seized documents relied upon by the AO emerged from a search conducted on October 1, 1993, at the premises of a third party. Such material, the Bench said, fell within the domain of search assessment provisions applicable at the time, particularly the block assessment framework under Section 158BC. According to the Tribunal, once the AO received information from search proceedings, he was required to initiate separate proceedings under the relevant search provisions—such as Section 158BD—to assess any undisclosed income. Instead, the AO used the seized material while completing the set-aside assessment under Section 143(3), which the Tribunal held to be legally impermissible. The Tribunal clarified that the scope of a set-aside assessment is confined to the material available at the time the appellate authority issued the remand directions. Any subsequent material discovered must be dealt with through independent statutory procedures. It further observed that even the CIT(A) cannot enhance an assessment by introducing a new source of income without issuing a formal enhancement notice. Consequently, the AO could not assume broader powers than those available to the appellate authority. Since the additions made by the AO were entirely based on seized documents that were not before the CIT(A) when the original assessment was set aside, the Tribunal held that the reassessment itself was invalid. Holding that the AO failed to follow the proper statutory procedure for dealing with search-related material, the ITAT concluded that the assessment order was “bad in law.” As a result, it declined to interfere with the CIT(A)’s decision deleting the Rs. 22.31 crore addition. Case Details Case Title: ACIT Versus Shri Prem Prakash Citation: JURISHOUR-250-ITA-2026(DEL) Case No.: ITA No.5136 /Del./1998, A.Y. 1992-93 Date: 06/03/2026 Counsel For Appellant: Ajay Vohra, Sr. Advocate Counsel For Respondent: Monika Singh, CIT-DR Click Here To Read Order Read More: Parallel Proceedings U/S 143(3) and 147 Impermissible: ITAT Quashes Reassessment Against Lalit Kumar Modi

AO Can’t Use Fresh Search Material in Set-Aside Assessment: ITAT

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