Assessee Wins Appeal as ITAT Slams CIT(A) for Skipping Key Legal Challenge on Search-Based Notice [Read Order]

The Pune Bench Income Tax Appellate Tribunal (ITAT) has set aside an income addition of Rs.72.18 lakh against a Jalgaon resident, ruling that the CIT(A) committed a "serious jurisdictional error" by failing to adjudicate a crucial legal challenge against the validity of reassessment proceedings initiated through a third-party search. The tribunal emphasized that appellate authorities cannot ignore substantive legal grounds while deciding tax appeals.

The case involved Shakeel Abdul Azeez Mohammad, whose bank deposits with Renuka Maata Multi-State Urban Co-operative Credit Society were treated as unexplained cash under Section 69A after the credit society underwent a search operation. While the Assessing Officer (AO) issued a Section 148 notice based on documents seized from the society, Mohammad contended the tax department should have invoked Section 153C instead - a critical distinction since Section 153C has stricter procedural safeguards for search-based assessments.

The ITAT bench comprising Accountant Member Dr. Dipak P. Ripote and Judicial Member Vinay Bhamore found the CIT(A) inexplicably bypassed this fundamental legal challenge despite it being the first ground in Mohammad's appeal. Quoting the Bombay High Court's Premkumar Arjundas Luthra ruling (2017), the tribunal reiterated that CIT(A)s must decide all issues arising from an assessment order, whether or not specifically pressed by the appellant. "The law doesn't permit appellate authorities to cherry-pick grounds," the order stated, noting that CIT(A)s have coterminous powers with AOs and must examine all aspects of a case.

The tribunal also admitted fresh evidence from Mohammad ; farmer confirmations and Aadhaar cards supporting his claim that the deposits represented agricultural income. While the NFAC (National Faceless Appeal Centre) had earlier upheld the addition without considering this documentation, the ITAT directed the CIT(A) to re-examine both the legal and factual aspects afresh.

Significantly, the order highlights growing judicial scrutiny over the tax department's increasing reliance on third-party search materials to reopen old cases. Mohammad's counsel had cited the Rajasthan HC's Shyam Sunder Khandelwal verdict (2024) and ITAT Pune's Vijaykumkar Mangilalji Chordiya decision (2024), both holding that documents found during searches against third parties must trigger Section 153C proceedings, not regular reassessment notices.

The ITAT stopped short of quashing the proceedings outright but left the door open for Mohammad to reargue the jurisdictional issue before the CIT(A). Its directive for "de novo adjudication" implies the CIT(A) must now properly evaluate whether the AO overstepped by using Section 148 instead of Section 153C - a determination that could invalidate the entire reassessment if answered in Mohammad's favor.

For now, the order serves as a procedural win for taxpayers facing additions based on indirect investigations. It underscores that appellate authorities cannot sidestep technical challenges to an AO's jurisdiction, even when dealing with substantive tax disputes. The case will return to the CIT(A), who must now confront the Section 148 vs 153C debate head-on while also considering Mohammad's agricultural income evidence, a second chance most appellants don't get due to strict ITAT norms on additional evidence.

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