The Income Tax Appellate Tribunal (ITAT), Kolkata Bench, has held that reassessment proceedings founded on material arising from a search of a third party should have been undertaken under Section 153C of the Income Tax Act, 1961, rather than Sections 147 and 148, in the facts of the case before it.
The Bench of George Mathan (Judicial Member) and Laxmi Prasad Sahu (Accountant Member) allowed the taxpayer’s cross-objections for Assessment Years 2014–15 and 2015–16. It consequently dismissed the Revenue’s appeals, holding that the reassessment orders could not survive because the initiation of proceedings under Sections 147 and 148 was invalid.
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The Income Tax Department received information from its Investigation Wing concerning transactions with companies allegedly controlled by entry operator Mukesh Banka.
According to the assessment proceedings, M.A. Financial Services Private Limited was allegedly a paper or shell company used to provide accommodation entries. The information linked the taxpayer to a receipt of ₹10,00,056 for Assessment Year 2014–15 and a further loan of ₹30 lakh for Assessment Year 2015–16.
Acting on this information, the Assessing Officer issued notices under Section 148 dated March 30, 2021, and completed reassessment proceedings under Section 147 read with Section 144B.
The taxpayer submitted financial statements, bank statements and other documents in support of the unsecured loans. However, the Assessing Officer questioned the lenders’ creditworthiness and the genuineness of the transactions, referring to their financial position, banking patterns and the material arising from the Banka Group search.
The department’s appeal challenged the deletion of an addition of ₹10,00,056 relating to M.A. Financial Services and ₹51,99,944 relating to other lenders. It also contested the deletion of an interest disallowance of ₹6,50,307 under Section 36(1)(iii) and an addition of ₹25,001 under Section 69C towards alleged commission for arranging accommodation entries.
For Assessment Year 2015–16, the disputed loan additions included ₹30 lakh relating to M.A. Financial Services, ₹20,00,056 relating to Mahamani Shoppers Private Limited, and ₹1,01,03,738 relating to other lenders. The Revenue also challenged relief concerning interest expenditure of ₹15,70,431 and alleged commission expenditure of ₹1,25,001.
The Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, had granted relief on the merits through separate orders dated March 26 and March 27, 2025. The Revenue challenged those orders before the Tribunal.
The taxpayer raised a threshold legal objection: the information used to reopen the assessments arose from the search conducted in the Banka Group case on May 21, 2018.
The taxpayer argued that the Department was therefore required to follow Section 153C, which provides the assessment mechanism for a person other than the searched person where the relevant seized material belongs to, pertains to, or contains information relating to that other person.
Its representatives contended that the Assessing Officer of the searched person should have recorded the requisite satisfaction and transmitted the relevant material to the taxpayer’s jurisdictional Assessing Officer for action under Section 153C.
The Tribunal considered this objection first because it went to the root of the reassessment orders.
The department maintained that the jurisdictional Assessing Officer had received information identifying the taxpayer as a beneficiary of accommodation entries and had validly reopened the assessments.
It argued that no satisfaction had been recorded by the Assessing Officer of the searched person for initiating proceedings under Section 153C. It also relied on judicial authorities concerning the availability of reassessment powers under Sections 147 and 148.
The taxpayer responded that the information was founded on statements and documents arising from the search itself. It submitted that the search-based character of that material required the Department to adopt the special procedure under Section 153C.
The Tribunal examined the statutory provisions and the authorities cited by both sides. It also relied on a coordinate Bench decision concerning information arising from the search of the same Banka Group.
Addressing the department’s reliance on Paras Chandreshbhai Koticha v. ITO, the Tribunal distinguished the circumstances in which independently emerging post-search information could support reassessment.
The passage reproduced in the order concerned purchasers whose identities and cash transactions emerged through subsequent disclosures and comparison of data before the Income Tax Settlement Commission. In that factual setting, the subsequent information was treated as an independent source supporting proceedings under Sections 147 and 148.
The Tribunal found that the authority did not support the Revenue’s position in the present case.
Following the authorities discussed in its order and the coordinate Bench ruling relating to the Banka Group search, the Tribunal concluded that the assessments should have been completed under Section 153C instead of Sections 147 and 148.
It held that once the very basis for initiating reassessment failed, the consequential assessment orders could not survive. Both cross-objections were accordingly allowed, and both Revenue appeals were dismissed.
The disposal rested on the jurisdictional defect in the reassessments. The Tribunal did not independently uphold the genuineness of the disputed loans or decide the Revenue’s substantive objections concerning interest, commission and the evidentiary issues.
The Tribunal also condoned a delay of 78 days in filing the cross-objections. The taxpayer supported its application with an affidavit and medical documents concerning the illness of a director’s wife.
Relying on the Supreme Court’s decision in Collector, Land Acquisition v. Mst. Katiji, the Bench accepted that reasonable cause had been established and admitted the cross-objections for adjudication.
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