ITAT Mumbai: Search-Based Additions for Preceding Year Invalid Without Section 148 & Section 148B Compliance

The Mumbai Bench of the Income Tax Appellate Tribunal in L N Enterprises Vs DCIT (ITAT Mumbai) has set aside an assessment for A.Y. 2023-24 that was framed under section 143(3) using material found in a subsequent search. The Tribunal held that, once a search under section 132 is conducted on or after 01.04.2021, and additions for earlier years are founded on seized material from that search, the Assessing Officer is required to proceed strictly under the reassessment framework of sections 147, 148 and 148B. A regular scrutiny route via section 143(2)/section 143(3) is not a permissible alternative.

Background of the case

Business profile and group context

  • The assessee, L N Enterprises, was engaged in trading electrical wires and cables.
  • It functioned as one of the distributors for Polycab India Limited and formed part of the broader Sunrise group of concerns (including Sunrise Enterprises, S.P. Electrosolutions Pvt. Ltd. and Hans Wires & Cables).

Search action and seized material

  • A search and seizure operation under section 132(1) was carried out on 22.12.2023 in the Polycab group and related distributors, including the assessee.
  • During the search, the Investigation Wing allegedly unearthed:
    • Digital devices and records showing a parallel Tally accounting system titled “Ka”.
    • This data was said to capture unrecorded cash dealings for the period from Financial Year 2013-14 to 2023-24.
  • Relying on this digital data and statements of certain employees and promoters, the Department alleged that:
    • There were unaccounted cash sales,
    • Unaccounted cash purchases routed through intermediaries, and
    • Book entries purportedly used to introduce unaccounted cash into regular books.

Returns filed and scrutiny selection

  • For A.Y. 2023-24, the assessee filed:
    • An original return on 22.09.2023; and
    • A subsequent return on 27.02.2024, declaring total income of Rs. 92,56,470/-.
  • The case was thereafter selected for compulsory scrutiny as per CBDT guidelines applicable to search-related cases.
  • Notice under section 143(2) was issued on 27.06.2024 within time and served on the assessee.

Assessment and first appellate order

  • The Assessing Officer, in the assessment order dated 30.01.2025 under section 143(3),:
    • Computed alleged unaccounted cash sales at Rs. 95,26,58,560/- for the year.
    • Applied a profit margin of 2.30% on those sales.
    • Made an addition of Rs. 2,19,11,147/- and assessed total income at Rs. 3,11,67,617/-.
  • On appeal:
    • The ld. CIT(A) accepted the core allegation of unaccounted cash sales based on the “Ka” data and connected evidence.
    • However, he restricted the profit rate to 1.72%, thereby sustaining an addition of Rs. 1,63,74,023/-.
    • Simultaneously, he:
      • Directed full allowance of general expenses by deleting an ad hoc 20% disallowance by the Assessing Officer, and
      • Allowed the Haryana expenses while confirming disallowance of Nikhil wedding expenses as personal in nature.

The assessee appealed to the Tribunal against both the addition and the validity of the assessment. The Revenue filed a cross-appeal challenging the relief on expenses.

Additional jurisdictional grounds before ITAT

New grounds challenging jurisdiction

Through an additional ground application, the assessee raised purely legal issues that went to the root of the assessment:

  1. No notice under section 148 had ever been issued; hence, the assessment under section 143(3) was without jurisdiction.
  2. Initiation of assessment without observing the mandate of section 148 rendered the order invalid in law.
  3. For a year preceding the search year, in a post-01.04.2021 search context, absence of mandatory approval under section 148B was fatal to the assessment.

The Tribunal, relying on National Thermal Power Co. Ltd. v. CIT (1998) 229 ITR 383 (SC), admitted these additional grounds since:

  • They raised pure questions of law.
  • They did not require fresh fact-finding.
  • They went to the foundation of jurisdiction.

The Tribunal decided to address these jurisdictional questions at the outset.

Search timing and statutory framework

  • The search under section 132 occurred on 22.12.2023, i.e., within F.Y. 2023-24, relevant to A.Y. 2024-25.
  • The appeal concerned `A.Y.