The Income Tax Appellate Tribunal (ITAT), Mumbai Bench, has quashed an assessment for Assessment Year (AY) 2022-23 after holding that, where a search under Section 132 of the Income-tax Act, 1961 is initiated on or after April 1, 2021, the Assessing Officer cannot assess a preceding assessment year merely by selecting the existing return for compulsory scrutiny and issuing a notice under Section 143(2). 

The bench of Amit Shukla (Judicial Member) and Arun Khodpia (Accountant Member) has observed that the statutory reassessment mechanism under Sections 147 and 148 had to be invoked, including issuance of a notice under Section 148.

The assessee had filed his return of income for AY 2022-23 on December 29, 2022, declaring total income of approximately ₹2.40 crore. The return was processed under Section 143(1).

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Subsequently, a search and seizure action under Section 132 was conducted on January 31, 2023 in the Cipla Group and connected cases, and the assessee was also covered by the search. Since the search took place during the previous year relevant to AY 2023-24, AY 2022-23 was a year preceding the assessment year relevant to the previous year in which the search was conducted.

The Department selected the assessee’s AY 2022-23 return for complete scrutiny under the compulsory scrutiny guidelines applicable to cases involving searches conducted on or after April 1, 2021. A notice under Section 143(2) was issued on June 28, 2023, followed by proceedings under Section 142(1). The Assessing Officer ultimately passed the assessment order dated June 26, 2024 under Section 143(3). Crucially, there was no dispute that no notice under Section 148 had been issued for AY 2022-23.

During the search, cash amounting to ₹5,30,450 was found at premises covered in the assessee’s case. A loose paper containing handwritten notings and calculations was also found between the assessee’s mobile phone and its cover.

The assessee explained that the notings related to cash gifts and expenditure connected with the marriage of his elder daughter, which had taken place in November 2019. The Assessing Officer, however, made an addition of ₹4,30,144 towards the cash found during the search and another addition of ₹22,06,977 based on the loose paper, treating the amounts as unexplained money under Section 69A. The assessed income was consequently determined at approximately ₹2.67 crore.

The Commissioner of Income Tax (Appeals) partly accepted the assessee’s explanation concerning the loose paper. After considering the expression “Mamera” appearing in the seized document and the other material, the CIT(A) granted relief of ₹9,18,577 but sustained ₹12,88,400 out of the loose-paper addition. The separate addition of ₹4,30,144 relating to cash found during the search was also confirmed.

However, before the ITAT, the assessee raised additional grounds challenging the very assumption of jurisdiction by the Assessing Officer.

The principal question before the Tribunal was whether, after a search initiated on January 31, 2023, the Department could assess AY 2022-23—a year preceding the search year—through an ordinary scrutiny assessment under Sections 143(2) and 143(3), without invoking Sections 147 and 148.

The assessee argued that the Finance Act, 2021 fundamentally changed the statutory framework governing search assessments. According to the assessee, the erstwhile Section 153A machinery was restricted to searches initiated on or before March 31, 2021, while searches conducted thereafter were brought within the reassessment framework under Sections 147 to 151.

The assessee therefore contended that the existing return could not simply be taken up for compulsory scrutiny under an administrative guideline. A valid notice under Section 148 was necessary to assume jurisdiction over the preceding assessment year in consequence of the post-April 1, 2021 search.

The Revenue, on the other hand, argued that the case had been selected for complete scrutiny under the applicable compulsory scrutiny guidelines following the search, that a valid Section 143(2) notice had been issued, and that the assessee had participated in the proceedings. The Department also relied upon the fact that the assessment order recorded prior approval of the Additional Commissioner of Income Tax.

The Tribunal undertook an extensive examination of the legislative transition introduced by the Finance Act, 2021.

Before April 1, 2021, searches under Section 132 were governed by the special assessment mechanism under Section 153A. That provision operated as a self-contained search-assessment framework and overrode several ordinary assessment and reassessment provisions.

The Finance Act, 2021, however, restricted Section 153A to searches initiated on or before March 31, 2021. For searches initiated thereafter, the legislation moved the assessment of escaped income into the reassessment framework contained in Sections 147 to 151.

The Tribunal observed that this was not merely a change in terminology. Parliament had consciously altered the jurisdictional route through which assessments relating to preceding years following a post-April 1, 2021 search were to be undertaken.

The Tribunal placed particular emphasis on Section 148 and Explanation 2 thereto.

Under Explanation 2 to Section 148, initiation of a search under Section 132 on or after April 1, 2021 constitutes a statutory circumstance in which the Assessing Officer is deemed to have information suggesting that income chargeable to tax has escaped assessment.

The Tribunal held that this provision creates the legislative bridge between a post-April 1, 2021 search and the reassessment mechanism. While Section 153A ceased to govern such searches, the reassessment provisions became applicable instead.

The Bench stressed that Section 148A and Section 148 serve different purposes. Although specified search cases were excluded from the preliminary enquiry mechanism under Section 148A, that did not mean that the requirement of Section 148 itself disappeared.

According to the Tribunal, the Legislature had expressly dispensed with the preliminary enquiry in specified search cases, but had not dispensed with the Section 148 notice. The distinction was therefore crucial: the absence of a Section 148A enquiry was not the defect; the defect was the complete failure to invoke Section 148.

The Department had relied on the revised guidelines dated September 26, 2022, under which cases involving search or seizure action conducted on or after April 1, 2021 were placed in the compulsory scrutiny category.

The Tribunal accepted that administrative guidelines could determine which cases should be selected for scrutiny and regulate internal administrative processes. However, it held that such guidelines operate within the statute and cannot create jurisdiction where the Income-tax Act prescribes a different jurisdictional mechanism.

The Bench drew a clear distinction between administrative selection and statutory jurisdiction. A guideline may tell the Department which case to examine, but it cannot determine how statutory jurisdiction must be assumed where Parliament has prescribed a particular procedure.

The Tribunal made it clear that a notice under Section 143(2) and a notice under Section 148 perform fundamentally different statutory functions.

Section 143(2) forms part of the ordinary scrutiny assessment mechanism applicable to a return filed under Section 139 or in response to Section 142(1). Sections 147 and 148, in contrast, operate where income is considered to have escaped assessment and prescribe the jurisdictional mechanism for reassessment.

The Bench therefore rejected the proposition that a Section 143(2) notice could effectively perform the role of a Section 148 notice.

The Tribunal observed that the defect in the present case was not merely an incorrect reference to a statutory provision in the final assessment order. Rather, the reassessment proceedings contemplated by Section 148 were never initiated at all.

The department  relied on the fact that the assessment order recorded prior approval of the Additional Commissioner.

The Tribunal, however, held that such approval could not retrospectively cure the failure to assume jurisdiction under Sections 147 and 148.

The Bench distinguished the approval contemplated at the reassessment initiation stage from the safeguard under Section 148B applicable at the stage of passing the assessment or reassessment order. According to the Tribunal, compliance at a later stage cannot substitute a jurisdictional requirement that ought to have been fulfilled at the inception of the proceedings.

The Tribunal succinctly held that approval is not the source of jurisdiction. It can validate an act only where jurisdiction otherwise exists; it cannot create jurisdiction retrospectively.

The Tribunal also rejected the argument that the assessee’s participation in the scrutiny proceedings could cure the defect.

The assessee had responded to the notices and furnished details during the assessment proceedings. Nevertheless, the Bench held that participation cannot confer jurisdiction where the statutory route for assuming jurisdiction was never followed.

The Tribunal explained that the objection was not about an irregularity in service of a valid notice. It concerned the more fundamental question of whether jurisdiction had been assumed in the manner prescribed by Parliament.

Thus, participation in proceedings initiated under Section 143(2) could not retrospectively convert those proceedings into reassessment proceedings under Sections 147 and 148.

After examining the statutory scheme, the ITAT concluded that the assessment for AY 2022-23 could not be sustained.

The Bench noted that the search was conducted on January 31, 2023, after the statutory transition date of April 1, 2021; AY 2022-23 preceded the assessment year relevant to the previous year in which the search occurred; and no Section 148 notice had been issued. The assessment was instead initiated through Section 143(2) and completed under Section 143(3).

Accordingly, the Tribunal quashed the assessment order dated June 26, 2024. Since the assessment itself was held to be legally unsustainable for want of valid assumption of jurisdiction, the additions made in that assessment could not survive independently.

The Tribunal therefore did not adjudicate the merits of the surviving additions of ₹12,88,400 relating to the loose paper and ₹4,30,144 relating to the cash found during the search. Those issues were left open and were rendered academic by the jurisdictional decision.

The ITAT Mumbai admitted and allowed the assessee’s additional jurisdictional grounds and held that the assessment framed under Section 143(3) for AY 2022-23, consequent upon the January 31, 2023 search but without invocation of Section 147 and issuance of notice under Section 148, was unsustainable in law.

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