ITAT Lucknow Nullifies Reassessments Based on Time-Barred and Jurisdictionally Invalid Section 148 Notices

Background of the Dispute

The Lucknow Bench of the Income Tax Appellate Tribunal (ITAT) dealt with a batch of three departmental appeals and one cross-objection arising from reassessment proceedings for Assessment Year 2011-12 in the cases of the Sahara City Homes group entities.

The matters related to:

  • ITA No.127/LKW/2025 – Sahara City Homes, Kanpur-1
  • ITA No.176/LKW/2024 – Sahara City Homes, Anand
  • ITA No.365/LKW/2024 – Sahara City Homes, Karnal
  • C.O. No.21/LKW/2024 – Cross Objection by Sahara City Homes, Karnal

All three entities were partnership firms formed for carrying on the business of construction, township and housing development, and other real estate projects. The firms were constituted on different dates with multiple partners, many of whom contributed land and/or work-in-progress (WIP) as capital.

Reassessments were initiated under Section 147 pursuant to notices under Section 148, with substantial additions made under Section 68 and Section 69C on account of:

  • WIP allegedly taken over from M/s Sahara India Commercial Corporation Ltd. (SICCL) and M/s Sahara Prime City Ltd. (SPCL)
  • Customer advances transferred from group companies
  • Certain sundry creditors

The National Faceless Appeal Centre (NFAC), acting as the first appellate authority, quashed the reassessment orders in all three cases, holding the very issuance of the Section 148 notices to be invalid in law. The Revenue carried these orders in appeal before the ITAT.

Since the factual matrix and legal issues were identical across all three appeals, the Tribunal disposed of them through a single consolidated order.

Facts in the Case of Sahara City Homes, Karnal

Constitution of the Firm and Business Structure

The assessee-firm, Sahara City Homes, Karnal, was constituted on 28.03.2011 with eight partners. Six of these partners contributed either land or WIP to the firm, which was credited to their respective capital accounts. The stated object of the firm was to execute construction, township and housing projects, and related real estate activities.

Reopening Under Section 147 / 148

The Assessing Officer (AO) reopened the concluded assessment for AY 2011-12 by issuing a notice under Section 148. Reasons were recorded (as discussed in the assessment order) referring to:

  • Transfer of WIP and liabilities from SICCL and SPCL
  • Reflection of such amounts under “Current Liabilities” and WIP in the Balance Sheet

In response to the notice, the assessee filed its return on 02.04.2019 declaring a loss of Rs.2,758/-.

Key Financial Entries Scrutinized

From the Balance Sheet as on 31.03.2011, the AO noticed:

  • “Current Liabilities” aggregating to Rs.1,47,82,79,811/-
  • This included:
    • WIP taken over from SICCL amounting to Rs.146,43,91,467/-
    • Customer advances of Rs.1,38,85,586/-
    • Sundry creditors of Rs.2,758/-

Further, from the journal records, the AO identified:

  • Additional WIP of Rs.30,05,39,913/- taken over from SPCL
  • Additional customer advances of Rs.1,38,17,486/- (Rs.1,09,49,708/- + Rs.28,67,778/-)

The AO issued notices under Section 142(1) calling for detailed explanations and documentary support. According to the AO, the assessee could not substantiate these entries to his satisfaction.

Additions Made by the AO in the Karnal Case

1. WIP from SICCL – Addition Under Section 69C

The AO noted that as per a Memorandum of Understanding (MoU) dated 30.03.2011 between the assessee-firm and M/s Sahara India Commercial Corporation Ltd. (SICCL), the assessee took over WIP of Rs.146,43,91,467/-.

He concluded that:

  • The expenditure representing this WIP had been incurred in the preceding previous year (AY 2010-11)
  • The assessee failed to offer a satisfactory explanation for the source and nature of this expenditure

Accordingly, the AO treated Rs.146,43,91,467/- as unexplained expenditure under Section 69C and added it to the total income.

2. WIP from SPCL – Further Addition Under Section 69C

The assessee’s journal records showed WIP of Rs.30,05,39,913/- taken over from M/s Sahara Prime City Ltd. (SPCL), a partner in the firm.

The AO observed that:

  • The partnership deed did not clearly specify the terms, basis, or valuation mechanism for this WIP takeover
  • No supporting documentation or valuation records were produced regarding how this figure was computed or on what basis the transfer took place

On this reasoning, the AO treated the entire amount of Rs.30,05,39,913/- as unexplained expenditure under Section 69C.

3. Customer Advances (Rs.1,38,85,586/-) – Addition Under Section 68

The assessee had disclosed “Customer Advances” of Rs.1,38,85,586/- under “Current Liabilities”, which were stated to have been taken over from SPCL.

Since the AO believed that:

  • There were no supporting agreements or records for customer-wise advances
  • The partnership deed was silent on such transfer of customer advances from SPCL to the firm