The Delhi Bench of the Income Tax Appellate Tribunal (ITAT) has quashed an assessment for Assessment Year 2023–24 after holding that it was framed through the faceless assessment mechanism contrary to the applicable Central Board of Direct Taxes (CBDT) guidelines governing search-related scrutiny.
The bench of Mahavir Singh (Vice President) and S. Rifaur Rahman (Accountant Member) also found that the tax authorities had failed to provide the assessee with the seized documents relied upon, despite repeated requests, and had adopted an inconsistent approach when compared with assessments for earlier years.
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The Bench observed that the breach of the CBDT guidelines constituted a jurisdictional defect, rendering the assessment a nullity.
The dispute arose from a search conducted under Section 132 of the Income-tax Act, 1961, on Maharashtra Food Processing and Cold Storage Group (MFPCS) on January 3, 2023.
According to the Assessing Officer, documents seized during the search indicated that MFPCS had made unaccounted cash sales to several parties, including the assessee. Based on this information, the assessee’s return for AY 2023–24 was selected for compulsory scrutiny under the relevant CBDT guidelines.
A notice under Section 143(2) was issued on June 27, 2024. The assessment was subsequently completed on March 21, 2025, under Section 143(3), read with Section 144B.
The additions challenged in the appeal included ₹14,17,21,970 under Section 69C on account of alleged unexplained expenditure and ₹1,48,00,000 under Section 68. The Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, upheld the assessment through an order dated July 4, 2025.
The assessee then approached the Tribunal.
Before the ITAT, the assessee raised additional grounds challenging the jurisdiction of the officer who issued the scrutiny notice and completed the assessment.
The assessee argued that the CBDT guidelines dated May 3, 2024, required the relevant search-linked proceedings to be handled by the Jurisdictional Assessing Officer (JAO) or Central Charges, rather than a Faceless Assessing Officer (FAO).
Since the search took place on January 3, 2023, and the disputed assessment concerned the search year, the assessee maintained that the case fell within paragraph 2(ii) of those guidelines.
The Tribunal admitted the additional grounds because they raised jurisdictional questions capable of being decided from the material already on record.
Examining Section 144B, the Tribunal explained that faceless assessments apply to the territorial areas, persons, incomes or classes of cases specified by the CBDT under subsection (2).
The Bench found that the May 3, 2024 guidelines distinguished between cases requiring assessment through the JAO or Central Charges and cases to be assessed through the faceless mechanism.
Reading the relevant provisions together, the Tribunal held that the assessee’s case for the search year was covered by paragraph 2(ii). Consequently, the notice under Section 143(2) ought to have been issued by the JAO.
The Bench also rejected the proposition that the expression “JAO” could include the Faceless Assessing Officer. It noted that the guidelines expressly referred to NFAC or FAO wherever the Board intended proceedings to be conducted through those authorities.
The Tribunal also examined the exception under paragraph 4.2 of the guidelines concerning non-searched persons having one-off, very few or limited transactions with the searched person.
Under that exception, a case need not be centralised, and the information may instead be passed to the JAO for assessment.
However, the Bench found that the alleged transactions in the present case could not be described as isolated or limited. On examining the assessment records, it noted that most of the total unaccounted cash sales attributed to MFPCS were alleged to have been made to the assessee.
The Tribunal further clarified that even where the exception applied, the assessment was required to be framed by the JAO.
The Tribunal found a significant inconsistency in the Revenue’s treatment of the same seized material across different assessment years.
For AYs 2021–22 and 2022–23, the JAO had assessed income at 2.10% of the alleged undisclosed cash purchases, treating that amount as the undisclosed profit.
For AY 2023–24, however, the FAO added the entire alleged cash purchases to the assessee’s income.
The Bench held that this departure caused serious prejudice to the assessee and was contrary to the rule of consistency. It also noted that the earlier years’ notices under Section 143(2) had been issued, and assessments completed, by the JAO.
The Tribunal did not independently prescribe a 2.10% profit rate for the disputed year; it considered the difference in treatment while examining the prejudice and inconsistency arising from the impugned proceedings.
The Tribunal separately found a clear violation of the principles of natural justice.
The assessee had repeatedly requested copies of the documents allegedly seized from MFPCS on which the proposed addition was based. However, the assessment notices merely referred to the alleged transactions or provided extracts of transaction details.
The Bench found that neither the notice under Section 142(1) nor the show-cause notice dated March 10, 2025, contained the underlying seized documents or material.
The assessee had denied making unaccounted cash purchases and furnished a balance confirmation from MFPCS, ledger accounts and e-way bills in support of the recorded transactions.
Despite a specific request dated March 11, 2025, the underlying evidence was not supplied.
The Revenue’s representative asserted before the Tribunal that the documents had been furnished. However, the Bench recorded that he could not identify supporting material in the assessment order, appellate order or paper books, despite repeated queries.
The Tribunal also criticised the first appellate authority’s handling of the assessee’s objections.
The CIT(A) had treated references to the alleged transactions in the notices as sufficient and had faulted the assessee for not producing an affidavit or statement from MFPCS denying the alleged cash dealings.
The ITAT observed that the assessee had already furnished a confirmation and ledger account showing that the transactions recorded in its books were accepted by MFPCS.
It further noted that the CIT(A) upheld the entire addition without seeking a justification for the different treatment adopted in the earlier assessment years.
The Tribunal held that the applicable CBDT instructions were mandatory and that their breach went to the root of jurisdiction.
In reaching this conclusion, it relied on decisions including Pr. Commissioner of Income Tax-7 v. Raja Arora, CIT v. Best Plastics (P) Ltd., CIT v. Crystal Phosphates Ltd., and Principal Commissioner of Income Tax-1 v. Shree Shoppers Ltd.
The Bench treated these authorities as supporting the principle that assessments or scrutiny proceedings conducted contrary to binding CBDT instructions can be invalidated for want of jurisdiction.
The Tribunal concluded that the assessment had been framed through the faceless mechanism contrary to the applicable CBDT instruction, without confronting the assessee with the documents relied upon and through an inconsistent approach to the same seized material.
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