ITAT Hyderabad Annuls Reopening Under Section 148 Based on Third-Party Seized Material

Background and Context

The Hyderabad Bench of the Income Tax Appellate Tribunal in Exel Rubber Private Ltd Vs DCIT examined the legality of reassessment proceedings initiated under Section 147/Section 148 of the Income Tax Act 1961 following a search under Section 132 on Exel Rubber Group.

The core issue was whether the Assessing Officer (AO) could validly reopen assessments of the assessee by invoking Explanation 2(i) to Section 148 when the additions were based primarily on documents and electronic records seized from the residence of a third person – the group’s Senior Accounts Manager, Shri Ramesh Kumar Sanaka – and not from the assessee’s own premises.

The Tribunal ultimately held that the entire reassessment was vitiated because the AO:

  • Wrongly applied Explanation 2(i) instead of Explanation 2(iii)/(iv) to Section 148, which specifically deal with material seized in the case of “any other person”; and
  • Failed to record the mandatory satisfaction and obtain prior approval from the Principal Commissioner of Income Tax (Pr. CIT) as required where third-party seized material is used.

Accordingly, the reassessment orders for both years were declared void ab initio.

Facts of the Case

Original Assessment

  • The assessee, Exel Rubber Private Ltd, filed its return of income for A.Y. 2020-21 on 12.02.2021, declaring total income of Rs. 103,29,39,000/-.
  • The case was scrutinised, and assessment was completed under Section 143(3) read with Section 144B on 23.09.2022, accepting the returned income.

Search Operations Under Section 132

  1. A search and seizure action under Section 132 was conducted on 04.01.2023 in Exel Rubber Group entities, including the assessee.

  2. On the same date, a separate and independent search was carried out at the residence of Shri Ramesh Kumar Sanaka, Senior Accounts Manager of the group.

  3. During the search at his residence, the Department seized:

    • Loose papers, promissory notes and excel sheets; and
    • A DELL laptop containing accounting data.

  4. On analysis of the laptop, officers found:

    • A software named FOCUS 5.5 containing several hundred cash transactions (receipts and payments) across multiple financial years;
    • Data relating to cash receipts from scrap sales, faulty products, and scrap packaging material;
    • Details of cash expenditure for three group companies combined; and
    • Information on loans, repayments and contra entries.

  5. In a statement recorded under Section 132(4), Shri Ramesh Kumar Sanaka admitted that entries in FOCUS 5.5 related to unaccounted cash receipts and expenditure of the group.

  6. The Managing Director, Shri G. Raghunath Reddy, in his statement dated 07.01.2023, corroborated the fact that unaccounted cash transactions were captured through cash vouchers and slips and then entered into FOCUS 5.5.

  7. Based on this material, Shri G. Raghunath Reddy admitted unaccounted income of Rs. 107.63 crores for three entities put together. Out of this, Rs. 39.25 crores was stated to pertain to the assessee for various years.

Assessment Following Search and Reopening

  • The AO relied on:

    • The FOCUS 5.5 data seized from the residence of Shri Ramesh Kumar Sanaka and copied into a pen-drive (Annexure A/RKS/RES/01); and
    • Statements recorded under Section 132(4) from the Senior Accounts Manager and the MD.

  • The assessee was called upon to explain why additions should not be made towards unaccounted income from scrap and related activities as per the seized data.

  • The assessee furnished detailed reconciliations and revised workings explaining the entries in FOCUS 5.5.

  • Despite this, the AO made an addition of Rs. 62,16,740/- towards “adjustment purchase transactions”.

Appeal Before CIT(A)

In first appeal, the assessee:

  • Challenged the jurisdiction of the AO to reopen the assessment under Section 148; and
  • Disputed the addition of Rs. 62,16,740/- on merits.

Key jurisdictional contentions before CIT(A):

  • Though a search was conducted on the assessee, the material actually used for making additions was seized from a different person (the Senior Accounts Manager).
  • Therefore, Explanation 2(iii) and (iv) to Section 148 squarely applied, not Explanation 2(i).
  • In such cases, the AO must:
    • Record satisfaction that the seized books/documents “pertain to” or “relate to” the assessee; and
    • Obtain prior approval of the Pr. CIT before treating such information as suggesting escapement of income.

CIT(A) rejected the legal challenge, upheld the reopening, and confirmed the addition.

Appeal Before ITAT

The assessee carried the matter to the Tribunal for A.Y. 2020-21 (ITA No. 1566/Hyd/2025) and A.Y. 2021-22 (ITA No. 1571/Hyd/2025), raising both jurisdictional and substantive grounds.

1. Wrong Invocation of Explanation 2(i) to Section 148

  • The AO recorded reasons for reopening by invoking Explanation 2(i) to Section 148, which deals with a situation where:

    “a search is initiated under section 132… in the case of the assessee”