Reassessment Notice under Section 148 Quashed for Want of Proper Sanction: Analysis of ITAT Chennai Ruling in Integrated Service Point Ltd. Vs Dy./ACIT

1. Background and Context

The Income Tax Appellate Tribunal, Chennai Bench, in the case of Integrated Service Point Ltd. Vs Dy./ACIT / ACIT, examined the legality of reassessment proceedings initiated under Section 148 of the Income Tax Act, 1961, and the evidentiary weight of statements recorded under Section 132(4) during a search.

The ruling primarily concerns:

  • The validity of notice issued under Section 148 when prior approval was obtained from a Member of CBDT instead of the Pr. CCIT, as mandated by law.
  • The extent to which a statement under Section 132(4) can be relied upon where the deponent has subsequently retracted or clarified it, and where seized material does not fully support the earlier admission.
  • The tax treatment of alleged inflated transportation/port charges, bogus purchases, unexplained money/expenditure, and on-money receipts, in the context of a search-based proceeding.

The appeals before the ITAT were filed both by the assessee company and the Revenue for Assessment Years (AYs) 2016-17, 2019-20 and 2022-23, arising out of separate orders of the Commissioner of Income Tax (Appeals), Chennai–19 passed under Section 250.

While the issues for AYs 2019-20 and 2022-23 were broadly similar in nature, AY 2016-17 involved an additional and crucial challenge to the very jurisdiction of the Assessing Officer (AO) to reopen the assessment, on the ground that the Section 148 notice was sanctioned by an inappropriate authority.

2. Business Profile and Search Operation

2.1 Business Activities of the Assessee

The assessee is a company engaged in two main lines of business:

  1. Export of Black Strap Molasses, and
  2. Bulk supply of agricultural commodities, including edible oil, pulses, sugar and allied products, largely to government entities such as Tamil Nadu Civil Supplies Corporation (TNCSC).

The nature of these businesses involves extensive logistics and time-sensitive movement of goods across multiple States and to ports for export.

2.2 Search under Section 132 and Seizure of Electronic Data

A search action under Section 132 was carried out on 23.11.2022 at:

  • The business premises of the assessee company, and
  • Residential and office premises of its Directors.

The search, which was temporarily concluded on 26.11.2022, was resumed later and finally concluded on 19.01.2023.

During the search, the Department seized a TOSHIBA 1TB hard disk from the residence of Director Shri Karlapatti Srikanth Apparao. From this device, the Department extracted Excel files containing:

  • Monetary transactions outside the regular books of account,
  • Entries relating to transportation, port handling, purchases, interest, on-money on land sale, and other cash flows.

On the basis of this data, statements under Section 132(4) were recorded from:

  • Employees (notably Shri Stanley Babu, Deputy Manager (Accounts)),
  • Directors, including Shri Karlapatti Srikanth Apparao and Shri K. Ramnath Apparao, and
  • Other connected persons.

3. Key Statements and Subsequent Retraction

3.1 Statement of Shri Stanley Babu under Section 132(4)

In his sworn statement under Section 132(4), Shri Stanley Babu stated, inter alia, that:

  • Certain transportation bills were inflated,
  • Some purchases were bogus, and
  • The Excel sheet reflected transactions outside the books.

This statement was referred to extensively by the Investigation Wing and subsequently by the AO to support additions relating to:

  • Inflated transportation and port handling expenses,
  • Bogus purchases,
  • Unaccounted cash inflows/outflows,
  • Interest payments, and
  • On-money on sale of land.

3.2 Directors’ Clarifications

Director Shri Karlapatti Srikanth Apparao partly accepted the employee’s version but did not confirm that all entries represented income.

Later, Director Shri K. Ramnath Apparao, in his Section 132(4) statement, clarified that:

  • All credits in the Excel sheets were not income;
  • Many entries were loans or liabilities, and
  • Cash inflows recorded were used only for business purposes, not for personal benefit.

He categorically contended that treating the entire credit side of the Excel sheet as income would be incorrect.

3.3 Post-search Letter and Affidavit

Subsequent to receiving copies of seized material and statements, the assessee filed a detailed letter dated 22.03.2023 before the DDIT (Inv.), Unit–3(4), Chennai. In this letter, the assessee: