ITAT Mumbai Ruling on Search Assessment, Suppression of Sales and CWIP Write-Off in Tin Tar Retail Corp Vs ACIT

1. Background and Case Overview

The Mumbai Bench of the ITAT in Tin Tar Retail Corp Vs ACIT examined a cluster of appeals concerning:

  • Validity of simultaneous assessments under Section 143(3) and Section 153A following a search under Section 132
  • Allegations of suppressed sales based on ERP data
  • Allowability of prior period expenses and sales tax/VAT written off under Section 37(1)
  • Tax treatment of capital work-in-progress (CWIP) written off on abandonment of a retail expansion project
  • Similar disallowances of write-offs in a subsequent assessment year

The assessee is engaged in the business of trading and designing garments. A search under Section 132 was carried out on 29.05.2018. This triggered assessments for A.Y. 2017-18 and A.Y. 2018-19 under Section 153A, even though an assessment under Section 143(3) had already been completed for A.Y. 2017-18, post-search.

Three appeals came up before the Tribunal:

  • ITA No. 6485/Mum/2024 – A.Y. 2017-18 (order under Section 153A)
  • ITA No. 6486/Mum/2024 – A.Y. 2018-19 (order under Section 153A)
  • ITA No. 6487/Mum/2024 – A.Y. 2017-18 (order under Section 143(3))

All appeals related to the same assessee, with common issues, and were disposed of through a consolidated order.

2. Chronology of Key Events – A.Y. 2017-18

For clarity, the relevant dates for A.Y. 2017-18 were as follows:

  1. 12.10.2017 – Return of income filed under Section 139(1).
  2. 29.05.2018 – Search and seizure action initiated under Section 132 at the assessee’s premises.
  3. 09.08.2018 – Notice under Section 143(2) issued, selecting the return for scrutiny.
  4. 22.12.2019 – Assessment order passed under Section 143(3), disallowing write-off of CWIP of Rs. 47,93,370/-.
  5. 18.02.2021 – Notice issued under Section 153A for, inter alia, A.Y. 2017-18.
  6. 12.06.2021 – Assessment order passed under Section 153A making:
    • Addition of alleged suppressed sales of Rs. 96,77,633/-
    • Disallowance of prior period expenses Rs. 15,284/-
    • Disallowance of sales tax/VAT written off Rs. 1,20,809/-

The CIT(A):

  • Upheld additions under Section 153A
  • Upheld the disallowance of CWIP write-off under Section 143(3)
  • Additionally enhanced income in the Section 153A appeal by again disallowing the CWIP write-off of Rs. 47,93,370/- on abandonment of project

The Tribunal had to decide, broadly:

  1. Jurisdictional issue –
    Whether the AO could lawfully proceed with an assessment under Section 143(3) after a search under Section 132 and later also frame an assessment under Section 153A for the same year.

  2. Scope of Section 153A –
    Assuming the Section 143(3) assessment is considered valid, whether additions under Section 153A could be made without incriminating material found during search, in light of PCIT v. Abhisar Buildwell (P.) Ltd. 454 ITR 212 (SC).

  3. On merits – A.Y. 2017-18 (Section 153A order):

    • Whether the alleged difference between ERP sales and books represented suppressed sales of Rs. 96,77,633/-
    • Whether prior period expenses of Rs. 15,284/- and Sales tax/VAT written off of Rs. 1,20,809/- were allowable under Section 37(1)
    • Whether CWIP written off Rs. 47,93,370/- on abandonment of an expansion project was allowable as revenue expenditure

  4. On merits – A.Y. 2018-19 (Section 153A order):

    • Disallowance of Rs. 91,806/- comprising:
      • Sales tax/VAT written off Rs. 40,391/-
      • Sundry balances written off Rs. 51,415/-

4. Validity of Assessment under Section 143(3) Post-Search (ITA No. 6487/Mum/2024)

4.1 Assessee’s Contention

The assessee argued that:

  • At the time of search (29.05.2018), the statutory time limit for issuance of notice under Section 143(2) had not expired, hence the assessment for A.Y. 2017-18 was potentially open.
  • Under the second proviso to Section 153A, any assessment or reassessment pending on the date of search shall abate.
  • Once search was initiated, the only permissible assessment for A.Y. 2017-18 was under Section 153A. Therefore, the subsequent notice under Section 143(2) dated 09.08.2018 and the order under Section 143(3) dated 22.12.2019 were without jurisdiction and void.

Reliance was placed on the Supreme Court decision in PCIT v. Abhisar Buildwell (P.) Ltd. 454 ITR 212 (SC) to emphasize the scheme and purpose of Section 153A in the context of search assessments.

4.2 CIT(A)’s View

The CIT(A) took the position that: