The Income-Tax Appellate Tribunal, Mumbai, has clarified that when an assessment is founded on incriminating material unearthed during a search and seizure operation under Section 132 of the Income-tax Act, and such material pertains to a person other than the searched party, the Assessing Officer is mandatorily bound to proceed under Section 153C. Any attempt to initiate reassessment under Section 147/148 in such circumstances is void ab initio and without jurisdiction.
Background & Facts
The Dispute
The appellant, M/s Nanne Gulzar & Company, a firm engaged in livestock commission business (Kachcha Arhtiya), was assessed for Assessment Years 2017-18 and 2018-19 under Section 143(3) of the Income-tax Act, 1961. The Assessing Officer (AO) made additions of Rs. 54,95,920 and Rs. 1,34,02,035 respectively, on account of alleged undisclosed commission income at 0.5% of turnover. The AO relied entirely on information and statements obtained during a search and seizure operation conducted on M/s Allanasons Pvt. Ltd. and related entities on 03.01.2019. The partner of the appellant firm, Shri Md. Saleem, was also present at the searched premises and his statement was recorded under Section 132(4). The same material was used to assess both Shri Md. Saleem individually and the appellant firm.
Key Facts
- The appellant firm’s PAN: AALFN4781E
- The search under Section 132 was conducted on M/s Allanasons Pvt. Ltd. and associated entities on 03.01.2019
- The premises of Shri Md. Saleem, partner of the appellant firm, were included in the search
- Shri Md. Saleem’s statement under Section 132(4) was recorded and formed the basis of the assessment against both him and the firm
- The total transactions unearthed during the search were Rs. 268,04,06,987/-
- The AO applied a uniform 0.5% profit rate to the turnover of both Shri Md. Saleem and the appellant firm
- The appellant’s return for A.Y. 2017-18 declared income of Rs. 1,31,360/-
- The appellant’s books of accounts were maintained and produced before the AO
- The appellant is engaged in rural livestock commission business, where formal documentation from illiterate suppliers is often unavailable
Procedural History
- 03.01.2019: Search and seizure conducted under Section 132 on M/s Allanasons Pvt. Ltd. and related parties, including premises of Shri Md. Saleem
- 22.05.2021: Show cause notice issued to the appellant under Section 148, alleging undisclosed income based on search material
- 30.12.2019: Assessment order passed under Section 143(3) for A.Y. 2017-18
- 31.03.2020: Assessment order passed under Section 143(3) for A.Y. 2018-19
- 13.10.2025: Order of the Commissioner of Income-tax (Appeals)/National Faceless Appeal Centre, Delhi, upholding the assessments
- 09.04.2026: Hearing before ITAT Mumbai
- 15.06.2026: Judgment pronounced
The Parties' Positions
The appellant contended that since the assessment was based on material seized during a search and since the material pertained to a person other than the searched party (i.e., the appellant firm), the mandatory procedure under Section 153C had to be followed. The AO had wrongly invoked Section 147/148, which is a general provision, to reassess income based on search material.
The Revenue, represented by the Senior Assistant Representative, argued that the AO had the discretion to proceed under Section 147/148 even when search material was involved, and that Section 153C was not triggered because the appellant was not the searched person.
Relief Sought
The appellant sought:
- Quashing of the assessment orders dated 30.12.2019 for A.Y. 2017-18 and 31.03.2020 for A.Y. 2018-19
- Declaration that the notices under Section 148 and reassessment proceedings under Section 147 were void ab initio
- Deletion of the additions of Rs. 54,95,920 and Rs. 1,34,02,035
- Cancellation of penalty proceedings under Section 270A
The Legal Issue
The central question was whether, when an assessment is based on incriminating material seized during a search under Section 132 and such material pertains to a person other than the searched party, the Assessing Officer is mandatorily required to proceed under Section 153C of the Income-tax Act, or whether he may instead invoke Section 147/148 to reassess income.
Arguments Presented
For the Appellant
The appellant relied on the non-obstante clause in Section 153C, which overrides Sections 147, 148, and other regular assessment provisions. It was argued that the Supreme Court in Abhisar Buildwell (P.) Ltd. v. Pr. CIT and the Bombay High Court in Sejal Jewellery v. Union of India had unequivocally held that once the basis of assessment is search material relating to another person, Section 153C is the exclusive and mandatory route. The appellant highlighted that the same material and identical findings were used to assess both Shri Md. Saleem (under Section 153C) and the firm (under Section 147), which was inconsistent and legally impermissible. The appellant also cited Zubin Paul Driver v. ACIT and Kalyanika Infra Mega Ventures v. DCIT to reinforce that Section 153C is a special procedure that supersedes general reassessment powers.
For the Respondent
The Revenue contended that Section 147/148 could be invoked even when search material was involved, provided the AO was satisfied that income had escaped assessment. It argued that Section 153C was only applicable if the seized material belonged to the assessee, and since the appellant was not the searched person, the AO was free to proceed under Section 147. The Revenue also relied on the Delhi High Court’s decision in Naveen Kumar Gupta, which took a contrary view to the Bombay and Rajasthan High Courts.
The Court's Analysis
The Tribunal undertook a detailed analysis of the statutory scheme under Sections 153A and 153C. It emphasized that Section 153C begins with a non-obstante clause: "Notwithstanding anything contained in Section 147, Section 148..." This language leaves no room for discretion. The Tribunal noted that the Supreme Court in Abhisar Buildwell had held that Section 153A and 153C are special provisions designed to deal with income disclosed through search operations, and they override the general reassessment powers under Sections 147 and 148.
"The provisions of Section 153A and 153C have an overriding effect on the regular provisions for assessment or reassessment under Sections 139, 147, 148, 149, 151 & 153."
The Tribunal observed that the assessment against the appellant was entirely based on the search material from M/s Allanasons Pvt. Ltd., including the statement of Shri Md. Saleem. The AO had admitted in the order that the foundation of the addition was the search material. The Tribunal further noted that the same AO had correctly initiated proceedings under Section 153C against Shri Md. Saleem on identical facts. To treat the firm differently was arbitrary and violative of the legislative intent.
The Tribunal also relied on the Rajasthan High Court’s decision in Shyam Sunder Khandelwal, which held that when material seized pertains to a person other than the searched party, Section 153C is the only permissible route. The Tribunal explicitly rejected the Delhi High Court’s contrary view in Naveen Kumar Gupta, noting that jurisdictional High Court decisions bind the Tribunal within its territorial jurisdiction. The Bombay High Court’s decision in Sejal Jewellery was binding on the Mumbai Bench.
The Tribunal concluded that the AO’s failure to follow Section 153C rendered the entire reassessment proceedings void ab initio. The use of Section 147/148 in such circumstances was not merely procedural irregularity but a jurisdictional defect.
The Verdict
The appeals of the assessee were allowed. The Tribunal held that the notices under Section 148 and the assessment orders under Section 143(3) for both Assessment Years 2017-18 and 2018-19 were without jurisdiction and void ab initio. The additions of Rs. 54,95,920 for A.Y. 2017-18 and Rs. 1,34,02,035 for A.Y. 2018-19 were deleted. The penalty proceedings under Section 270A were quashed. The Tribunal directed the Assessing Officer to treat the assessments as non est and to take no further action based on the impugned orders.
What This Means For Similar Cases
Section 153C Is Mandatory When Search Material Pertains to Another Person
- Practitioners must now argue that any reassessment based on search material relating to a third party must be initiated under Section 153C, not Section 147
- The mere fact that the assessee was not searched does not exempt the Revenue from following Section 153C
- If the AO uses seized documents, statements, or assets belonging to another person to assess the taxpayer, Section 153C is triggered
Jurisdictional Precedents Bind ITAT
- ITAT benches are bound by the decisions of the jurisdictional High Court, even if other High Courts have taken contrary views
- The Bombay High Court’s ruling in Sejal Jewellery is binding on ITAT Mumbai
- Reliance on Delhi High Court decisions in similar matters is not permissible before Mumbai ITAT
Section 147 Cannot Be Used to Circumvent Section 153C
-
Attempting to use Section 147 to bypass Section 153C renders the entire reassessment void
-
The Revenue cannot selectively apply special provisions - if Section 153C applies, it must be followed
-
Any assessment based on search material without following Section 153C is liable to be quashed on jurisdictional grounds
-
The burden shifts to the Revenue to prove that the material used was not derived from search or that it was independently corroborated
-
Practitioners should immediately challenge reassessments under Section 147 where search material from a third party is the basis, regardless of whether the assessee was searched
