Notice u/s 148 Invalid as Seized Material Not an 'Asset' or 'Books of Account': ITAT Quashes Reassessment [Read Order]

The Hyderabad Bench of the Income Tax Appellate Tribunal (ITAT) quashed the reassessment proceedings initiated under Section 147 read with Section 148 of the Income Tax Act, 1961, for multiple assessment years (AYs 2014-15 to 2018-19).

ACE Tyres Private Limited (assessee) for whom the case stemmed from a search and seizure operation in 2023 on the Exel Group of Companies, including the assessee, and a simultaneous, separate search conducted at the residential premises of Shri Ramesh Kumar Sanaka, the Group's Senior Accounts Manager.

During the latter search, a laptop was seized, revealing Excel sheets and data in softwares detailing numerous cash receipts (from scrap sales, etc.) and payments, which the department treated as unaccounted income.

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The Assessing Officer (AO) used this seized material to initiate reassessment proceedings beyond the initial three-year limitation period. Under Section 149(1)(b) of the Act, to open an assessment after three years, the escaped income must amount to ₹50 lakhs or more and be represented in the form of an asset, an expenditure, or an entry in the books of account.

The assessee challenged the validity of the notice on several legal grounds. The assessee argued that the cash receipts and payments found in the laptop which were consolidated transactions for the entire group did not constitute an "asset" as defined under the Act, nor did the loose, selective transaction details in the software constitute "books of account."

The two-member Bench, comprising Vijay Pal Rao (Vice President) and Manjunatha, G. (Accountant Member) observed that the receipts and payments, being business transactions, did not represent a specific "asset" in existence at the time of the search.

The tribunal also observed that the selective details of cash transactions in a software file, not being a comprehensive record, did not qualify as "books of account."

The Tribunal highlighted that the AO had mechanically recorded satisfaction without applying his mind, as demonstrated by the subsequent difference in the income calculated during the assessment compared to the reasons recorded for the reopening.

The Bench observed that the satisfaction and approval granted by the superior authority (DGIT) under Section 151 was also mechanical and flawed, as it overlooked the fundamental jurisdictional requirement that the income must be represented as an asset or entry in the books of account.

The tribunal also highlighted the procedural flaw that the material was seized from a third party (the Accounts Manager) under a separate search warrant, but the AO incorrectly proceeded as if the material was seized from the assessee directly.

The Tribunal ruled that the notices issued under Section 148 were bad in law by concluding that the mandatory conditions of Section 149(1)(b) were not fulfilled and the required sanction under Section 151 was invalid.

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The tribunal quashed the consequential reassessment orders. In the result, the appeal filed by the assessee was allowed.

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