Rajesh Kumar Jain Vs DCIT (ITAT Mumbai)
Mumbai ITAT Quashes Search-Based Scrutiny Assessment: Notice Under Section 148 Mandatory for Pre-Search Year
In Rajesh Kumar Jain v. DCIT, the Mumbai ITAT held that where a search was conducted after 1 April 2021, the assessment of a year preceding the search year must be undertaken through the reassessment mechanism under sections 147 and 148. Such assessment cannot be initiated merely by selecting the return for compulsory scrutiny and issuing a notice under section 143(2).
The search was conducted on 31 January 2023, whereas the disputed assessment related to AY 2022-23. The Assessing Officer selected the case for compulsory scrutiny based on CBDT guidelines and completed the assessment under section 143(3) without issuing any notice under section 148. Additions were made under section 69A in respect of cash found during the search and notings contained in a loose paper.
The Tribunal observed that the Finance Act, 2021 restricted section 153A to searches initiated up to 31 March 2021 and brought subsequent searches within the redesigned reassessment framework. Under Explanation 2 to section 148, a post-1 April 2021 search constitutes deemed information suggesting escapement of income. Therefore, issuance of notice under section 148 was the jurisdictional gateway for assessing a preceding year.
The Tribunal clarified that:
- Administrative compulsory-scrutiny guidelines cannot replace statutory jurisdiction.
- A notice under section 143(2) cannot substitute a notice under section 148.
- The assessee’s participation in scrutiny proceedings cannot cure the absence of jurisdiction.
- Prior approval of the Additional Commissioner at the stage of passing the assessment order cannot retrospectively cure the failure to assume jurisdiction under sections 147 and 148.
Accordingly, the Tribunal quashed the entire assessment. Consequently, the surviving additions of ₹12.88 lakh based on the loose paper and ₹4.30 lakh relating to unexplained cash were deleted without examining their merits.
List of Cases Discussed / Relied Upon
- Rajesh Kumar Jain Vs DCIT (ITAT Mumbai)
- Montage Enterprises Pvt. Ltd. Vs DCIT/ACIT (ITAT Delhi)
- Jamna Dass Nikkamal Jain Saraf Pvt. Ltd. v. DCIT
- Malbros International Pvt. Ltd Vs DCIT (ITAT Chandigarh)
- Deepak Agarwal v. DCIT
- Pilot Industries Ltd. v. DCIT
- Homelife Buildcon Pvt. Ltd. v. DCIT
FULL TEXT OF THE ORDER OF ITAT MUMBAI
The aforesaid appeal has been preferred by the assessee against the impugned order passed by the learned Commissioner of Income Tax (Appeals) for the Assessment Year 2022-23, arising out of the assessment order dated 26.06.2024 passed by the Assessing Officer under section 143(3) of the Income-tax Act, 1961 (“the Act”). Though in the original grounds of appeal the assessee has challenged the additions sustained by the learned CIT(A) under section 69A of the Act, during the course of hearing the assessee has raised additional grounds going to the very root of the jurisdiction assumed by the Assessing Officer. The principal challenge raised therein is that, having regard to the date of search and the statutory regime governing searches initiated on or after 01.04.2021, the assessment for the year under consideration could not have been initiated merely by issuance of notice under section 143(2) and thereafter completed as an ordinary scrutiny assessment under section 143(3), without first invoking and complying with the jurisdictional machinery provided under sections 147 and 148 and the other provisions engrafted by the Legislature in the post-Finance Act, 2021 regime. Since this challenge strikes at the very authority of the Assessing Officer to assume jurisdiction and the material facts relevant for deciding the same are undisputed and already borne out from the assessment record, we consider it appropriate to first deal with the additional grounds before entering upon the merits of the additions.
2. The material facts, insofar as they are germane to the aforesaid jurisdictional challenge, are not in dispute. The assessee is an individual who filed his return of income for the Assessment Year 2022-23 on 29.12.2022 declaring total income of Rs.2,40,15,770/-, which return was processed under section 143(1) of the Act. Thereafter, a search and seizure action under section 132 of the Act was carried out on 31.01.2023 in the case of Cipla Group and its related and connected entities/persons and the assessee was also covered in the said search. Thus, the search was admittedly initiated after 01.04.2021 and fell in the previous year 2022-23 relevant to the Assessment Year 2023-24, whereas the assessment presently before us relates to Assessment Year 2022-23, i.e., a year preceding the assessment year relevant to the previous year in which the search was initiated. The assessment order itself records that, in terms of para 2.2 of the revised guidelines dated 26.09.2022, cases in which search and seizure action/requisition under sections 132/132A had been conducted on or after 01.04.2021 were required to be selected for complete scrutiny under the “compulsory category”. Acting upon the said basis, the assessee’s case was selected for complete scrutiny and notice under section 143(2) dated 28.06.2023 was issued, followed by notice under section 142(1). The assessee participated in the proceedings and furnished the requisite details. Ultimately, the Assessing Officer passed the impugned assessment order dated 26.06.2024 specifically under section 143(3) of the Act. Significantly, there is no dispute before us that no notice under section 148 of the Act was issued for the Assessment Year 2022-23 before commencement of these proceedings.
3. During the course of search, cash aggregating to Rs.5,30,450/- was found at the premises covered in the assessee’s case. The assessee sought to reconcile the same by reference to cash available with him, his spouse and M/s Jayadev Pharmacy. Apart therefrom, a loose paper containing certain handwritten notings and calculations was found embedded between the assessee’s mobile phone and its cover. The assessee explained that these notings pertained to cash gifts and expenditure relating to the marriage of his elder daughter, which had taken place in November 2019. The Assessing Officer, however, did not accept the explanation in its entirety and made an addition of Rs.4,30,144/- towards cash found during search and a further addition of Rs.22,06,977/- on the basis of the notings contained in the loose paper, treating both amounts as unexplained money under section 69A. The assessed income was consequently determined at Rs.2,66,52,890/-. On appeal, the learned CIT(A), after examining the loose paper, statement recorded during search and the subsequent explanation of the assessee, noticed that the expression “Mamera” appearing in the seized document supported, to an extent, the assessee’s explanation regarding marriage-related receipts. He accordingly accepted the explanation to the extent of Rs.9,18,577/- and directed deletion thereof, while sustaining the balance addition of Rs.12,88,400/- out of Rs.22,06,977/-. The separate addition of Rs.4,30,144/- representing cash found during search was confirmed. The assessee is, therefore, in appeal before us against the additions which survive after the order of the learned CIT(A).
4. Before us, apart from challenging the aforesaid additions on merits, the assessee has raised the following additional grounds challenging the very validity of the assessment proceedings:
“1. On the facts and circumstances of the case and in law, no notice u/s 148 was issued by the Assessing Officer and hence, the assessment proceedings initiated and the assessment order passed u/s 143(3) are liable to be quashed.
2. On the facts and circumstances of the case and in law, the assessment proceedings initiated without complying with the provisions of section 148 of the Act is bad in law and without jurisdiction and therefore, the assessment order passed by the Assessing Officer is liable to be quashed.
3. On the facts and circumstances of the case and in law, the assessment framed u/s 143(3) is bad in law, as it pertains to a year preceding search year where the mandatory approval as prescribed u/s 148B of the Act has not been followed.”
4.1. The learned counsel submitted that the additional grounds raise a pure question of law arising from facts which are already available on record and do not require investigation into any fresh factual matrix. His principal submission is that the search in the present case was initiated on 31.01.2023, i.e., much after 01.04.2021, and therefore the legal regime governing assessment of years preceding the year of search has to be determined with reference to the amendments brought about by the Finance Act, 2021 and the subsequent rationalisation carried out by the Finance Act, 2022. It was submitted that prior to 01.04.2021, a search initiated under section 132 attracted the special assessment machinery contained in sections 153A to 153C. The Finance Act, 2021 fundamentally recast this scheme and searches initiated on or after 01.04.2021 were brought within the newly substituted reassessment framework contained in sections 147 to 151. In support, our attention was invited to Explanation 2 to section 148, under which initiation of a search under section 132 on or after 01.04.2021 in the case of an assessee constitutes a statutory circumstance in which the Assessing Officer is deemed to have information suggesting that income chargeable to tax has escaped assessment. The learned counsel thus submitted that, for an assessment year preceding the assessment year relevant to the previous year in which such search was initiated, the jurisdictional route contemplated by the Legislature was through sections 147 and 148 and not by treating the already-filed return as an ordinary scrutiny case merely on the strength of an administrative guideline for compulsory selection. The legislative transition relied upon by the assessee is also reflected in the Memorandum and statutory provisions.
5. Elaborating the jurisdictional objection, the learned counsel submitted that the consequence of what has been done in the present case is not confined to an erroneous mention of the provision under which the assessment has been framed. According to him, sections 147 to 151, as substituted/amended by the Finance Act, 2021 and further rationalised by the Finance Act, 2022, constitute an integrated statutory mechanism governing assumption and exercise of reassessment jurisdiction. Section 148 requires issuance of a statutory notice before making an assessment, reassessment or recomputation under section 147; Explanation 2 thereto specifically deals, inter alia, with a search initiated under section 132 on or after 01.04.2021; section 149 prescribes the temporal limits within which jurisdiction under section 148 may be invoked; the approval contemplated in connection with the issuance of notice under section 148 is linked with the specified authority referred to in section 151; and section 148B, inserted by the Finance Act, 2022 with effect from 01.04.2022, further provides that where an assessment year falls within clauses (i) to (iv) of Explanation 2 to section 148, no order of assessment, reassessment or recomputation can be passed by an Assessing Officer below the rank of Joint Commissioner except with the prior approval of the authority specified therein. The official explanatory material to the Finance Act, 2021 and Finance Act, 2022 also recognises this legislative migration of post-01.04.2021 search assessments into the reassessment framework. The Finance Act, 2022, in particular, inserted section 148B and retrospectively removed from Explanation 2 the earlier reference restricting the deeming provision to the three assessment years immediately preceding the search year. The learned counsel, therefore, submitted that these are not isolated procedural stipulations capable of being substituted by an ordinary scrutiny proceeding, but constitute statutory safeguards attached to the very manner in which jurisdiction consequent upon a post-01.04.2021 search is to be assumed and exercised.
5.1. It was further pointed out that, in the present case, the Assessing Officer did not invoke section 147 at all and admittedly did not issue any notice under section 148; instead, he proceeded directly from selection of the return under the compulsory-scrutiny guidelines to issuance of notice under section 143(2), culminating in an assessment under section 143(3). According to the learned counsel, an administrative guideline regulating selection of cases for scrutiny cannot confer substantive jurisdiction contrary to or in substitution of the jurisdictional mechanism prescribed by Parliament. Reliance was also placed upon the decisions of the Coordinate Benches in Pilot Industries Ltd. v. DCIT, Deepak Agarwal v. DCIT, Montage Enterprises Pvt. Ltd., Malbros International Pvt. Ltd., Jamna Dass Nikkamal Jain Saraf Pvt. Ltd. and Homelife Buildcon Pvt. Ltd., which, according to the assessee, have considered the same post-amendment statutory regime and held that assessments of years preceding the search year could not be framed directly under section 143(3) without recourse to the statutory procedure governing reassessment.
5.2. At the same time, we notice from the assessment order that the Assessing Officer has specifically recorded that the final assessment order was passed with the prior approval of the Additional Commissioner of Income Tax, Central Range-I, Mumbai. Therefore, the question before us is not to be approached merely on the assumption that no approval whatsoever existed. The more fundamental question, which precedes and indeed controls the issue of approval, is whether jurisdiction for Assessment Year 2022-23, consequent upon a search initiated on 31.01.2023, could at all have been assumed by issuing only a notice under section 143(2) and proceeding under section 143(3), without invoking section 147 and issuing the jurisdictional notice contemplated under section 148. It is this question which requires us to examine the legislative transition brought about by the Finance Act, 2021, the subsequent amendments by the Finance Act, 2022, and the interrelationship between sections 147, 148, 148A, 148B, 149 and 151 on the one hand and the ordinary scrutiny provisions contained in section 143 on the other. We, therefore, proceed first to examine the statutory architecture as it stood applicable to the search in the present case.
6. Per contra, the Ld. DR relied upon the assessment order and opposed the additional grounds raised by the assessee. He submitted that the assessee’s case had been selected for complete scrutiny under the compulsory category in terms of the applicable guidelines governing cases where search and seizure action under section 132 had been conducted on or after 01.04.2021. Pursuant thereto, notice under section 143(2) was duly issued, the assessee participated in the assessment proceedings and furnished the requisite details, whereafter the assessment was completed under section 143(3) of the Act. He thus submitted that the assessment could not be regarded as without jurisdiction merely because the proceedings had been initiated by issuance of notice under section 143(2). He further relied upon the fact recorded in the assessment order that the order had been passed with the prior approval of the Additional Commissioner of Income Tax, Central Range-I, Mumbai, and accordingly contended that the jurisdictional objection raised by the assessee did not warrant annulment of the assessment. The Ld. DR, therefore, strongly relied upon the orders of the authorities below and submitted that the additional grounds raised by the assessee deserve to be rejected.
7. We have heard the rival submissions and have carefully considered the material placed before us. Since the additional grounds challenge the very assumption of jurisdiction, it becomes necessary, before examining the validity of the course adopted by the Assessing Officer, to first ascertain the statutory regime which governed an assessment year preceding the year of search where the search under section 132 was initiated on 31.01.2023. This assumes significance because the law governing assessments consequent upon search underwent a fundamental legislative change with effect from 01.04.2021. Prior thereto, section 153A constituted a self-contained machinery for assessment in the case of a person searched under section 132. The provision opened with a non obstante clause overriding, inter alia, sections 139, 147, 148, 149, 151 and 153 and required the Assessing Officer, upon initiation of search, to issue notice calling for returns for the prescribed block of assessment years preceding the year of search and thereafter assess or reassess the total income of those years. However, the Finance Act, 2021 consciously marked the terminus of this regime for searches initiated after 31.03.2021. Section 153A, as amended, itself confined its operation to cases where search under section 132 was initiated, or requisition under section 132A was made, “on or before the 31st day of March, 2021.” Thus, for a search initiated on 31.01.2023, as in the present case, the Assessing Officer could not have resorted to the erstwhile machinery under section 153A. This is not merely an inference drawn from the amendment; the legislative material accompanying the Finance Act, 2021 makes it explicit that assessment or reassessment in cases where search or requisition was initiated or made on or after 01.04.2021 was brought within the new procedure governing income escaping assessment. The legislative change, therefore, did not leave a vacuum after the cessation of section 153A for post-31.03.2021 searches; it simultaneously relocated such assessments within the newly recast framework of sections 147 to 151. The subsequent legislative material also describes the Finance Act, 2021 as having restricted sections 153A and 153C to searches/requisitions initiated on or before 31.03.2021.
8. The starting point of the substituted regime is section 147. As substituted by the Finance Act, 2021 with effect from 01.04.2021, section 147 empowers the Assessing Officer, where income chargeable to tax has escaped assessment for any assessment year, subject to sections 148 to 153, to assess or reassess such income and also any other income chargeable to tax which has escaped assessment and comes to his notice subsequently in the course of proceedings. What is material for the present controversy is that the power under section 147 is expressly made subject to sections 148 to 153. The authority to assess escaped income and the statutory conditions governing the assumption and exercise of that authority thus operate together. Section 148, in turn, provides the jurisdictional mechanism by which proceedings under section 147 are set in motion. In its material part applicable to the statutory regime under consideration, it provided that before making assessment, reassessment or recomputation under section 147, and subject to section 148A, the Assessing Officer shall serve upon the assessee a notice requiring him to furnish a return for the relevant assessment year. The statutory command is therefore sequential: there must first exist the jurisdictional foundation contemplated by the reassessment provisions; the notice prescribed under section 148 must thereafter be issued in accordance with law; and the assessment or reassessment under section 147 follows upon valid assumption of such jurisdiction. A notice under section 148 is thus not an interchangeable procedural formality. It is the statutory instrument through which the jurisdiction contemplated by section 147 is invoked.
8.1. The significance of section 148 for a post-01.04.2021 search becomes even clearer from Explanation 2 thereto, which, insofar as relevant, provided:
“Explanation 2.—For the purposes of this section, where,—
(i) a search is initiated under section 132 or books of account, other documents or any assets are requisitioned under section 132A, on or after the 1st day of April, 2021, in the case of the assessee; or
(ii) a survey is conducted under section 133A, other than under sub-section (2A) of that section, on or after the 1st day of April, 2021, in the case of the assessee; or
(iii) the Assessing Officer is satisfied, with the prescribed prior approval, that money, bullion, jewellery or other valuable article or thing seized or requisitioned in the case of another person belongs to the assessee; or
(iv) the Assessing Officer is satisfied, with the prescribed prior approval, that books of account or documents seized or requisitioned in the case of another person pertain to, or information contained therein relates to, the assessee,
the Assessing Officer shall be deemed to have information which suggests that the income chargeable to tax has escaped assessment in the case of the assessee…”
8.2. Thus, Parliament itself identified initiation of a search under section 132 on or after 01.04.2021 as a circumstance giving rise to the statutory deeming of information suggesting escapement of income. The provision is of considerable importance because it demonstrates the legislative bridge between a post-01.04.2021 search and the reassessment machinery. Under the earlier law, search itself activated section 153A. Under the substituted regime, section 153A ceased to apply to a search initiated after 31.03.2021 and Explanation 2 to section 148 brought the specified search circumstances within the jurisdictional architecture of reassessment. The Finance Act, 2021 Memorandum likewise explained that assessments/reassessments/recomputations in searches initiated after 31.03.2021 would fall under the new procedure.
9. At this stage, it is equally necessary to notice section 148A, because the architecture of the substituted law cannot be correctly understood by reading section 148 in isolation. Section 148A introduced a pre-notice enquiry and opportunity mechanism before issuance of notice under section 148. Broadly stated, it contemplated enquiry, if required, with prior approval; issuance of show-cause notice to the assessee; consideration of the assessee’s reply; and an order deciding whether it was a fit case for issuance of notice under section 148. However, the Legislature itself carved out specified cases from this pre-notice procedure. In the statutory regime relevant to the search before us, the proviso to section 148A excluded, inter alia, a case where a search was initiated under section 132 in the case of the assessee on or after 01.04.2021. Therefore, the legal consequence of a search in the assessee’s own case after 01.04.2021 was not that the reassessment regime became inapplicable; rather, the consequence was that the preliminary enquiry contemplated under section 148A was dispensed with in the specified search cases because the search itself supplied the statutory foundation contemplated by Explanation 2 to section 148. This distinction is material. The exception from section 148A cannot be read as an exception from section 148 itself. To do so would conflate two different stages of the statutory scheme. Section 148A dealt with the preliminary enquiry preceding the notice; section 148 was the provision for issuance of the notice through which proceedings under section 147 were initiated. Thus, where the Legislature intended to dispense with the pre-notice enquiry in search cases, it said so expressly; but the statutory framework did not, on that account, convert a preceding assessment year into an ordinary scrutiny assessment capable of being initiated solely under section 143(2). This distinction becomes particularly relevant in the present case because the assessee does not found his jurisdictional challenge upon non-compliance with section 148A; the challenge is more fundamental, namely that section 148 itself was never invoked.
10. The legislative scheme is further fortified by sections 149 and 151. Section 149 prescribes the limitation within which a notice under section 148 may be issued and, therefore, places a temporal boundary upon the jurisdiction to reopen an assessment. Section 151, in the statutory framework then applicable, identifies the “specified authority” whose approval is contemplated at the relevant stage of the reassessment proceedings. These provisions assume importance not because we are presently called upon to determine whether the limitation under section 149 had actually expired or whether a particular authority under section 151 did or did not grant approval in the assessee’s case. No such wider enquiry is necessary at this stage. Their relevance lies in demonstrating that Parliament did not confer an unstructured power to reopen years preceding a post-01.04.2021 search. Once the assessment of such preceding year travels through the reassessment regime, the jurisdiction is circumscribed by the statutory conditions accompanying that regime, including the notice prescribed under section 148, limitation under section 149 and approval of the specified authority wherever statutorily required. Indeed, section 149 itself preserved the distinction between the old and new search regimes by providing separately for cases where notices under sections 153A/153C were required in relation to searches initiated on or before 31.03.2021. The legislative architecture, therefore, consistently recognises 31.03.2021/01.04.2021 as the dividing line between the erstwhile section 153A search-assessment mechanism and the substituted reassessment regime.
11. The statutory position was further rationalised by the Finance Act, 2022. Of particular relevance is the insertion, with effect from 01.04.2022, of section 148B, captioned “Prior approval for assessment, reassessment or recomputation in certain cases”. The provision, as applicable, reads:
“148B. No order of assessment or reassessment or recomputation under this Act shall be passed by an Assessing Officer below the rank of Joint Commissioner, in respect of an assessment year to which clause (i) or clause (ii) or clause (iii) or clause (iv) of Explanation 2 to section 148 apply except with the prior approval of the Additional Commissioner or Additional Director or Joint Commissioner or Joint Director.”
11.1. The Memorandum explaining the Finance Bill, 2022 also stated that the proposed provision was intended to require prior approval for an assessment, reassessment or recomputation in an assessment year to which any of the four clauses of Explanation 2 to section 148 applied. This provision is important for two reasons. First, by expressly referring to each of the four clauses of Explanation 2 to section 148, section 148B reinforces that assessment years arising from the specified post-01.04.2021 search circumstances were being administered within the statutory framework built around section 148. Secondly, Parliament imposed an additional institutional safeguard at the stage of passing the assessment order where the Assessing Officer was below the rank specified therein. The safeguard under section 148B is conceptually distinct from the approval contemplated in relation to issuance of notice under section 148 read with section 151. One operates at the stage and in the manner contemplated for assumption/initiation of reassessment jurisdiction; section 148B operates at the stage of passing the eventual assessment, reassessment or recomputation order in the specified cases. The two cannot be collapsed into one another.
11.2. It is equally necessary to keep this distinction in view while examining the present assessment. As noticed earlier, the assessment order records that it was passed with prior approval of the Additional Commissioner of Income Tax, Central Range-I, Mumbai. We shall, therefore, not proceed on any assumption that the final order lacked every species of approval contemplated by the statute. The anterior question is different: whether the existence of an approval at the stage of passing the final order can substitute the statutory mode by which jurisdiction over the preceding assessment year was required to be assumed in the first place. That question shall be examined separately while applying the statutory scheme to the facts of the present case.
12. On a conjoint reading of the above provisions, the legislative progression becomes discernible. Until 31.03.2021, a search under section 132 attracted the special machinery contained in section 153A, which itself overrode the ordinary reassessment provisions. The Finance Act, 2021 drew a statutory line at that date: sections 153A and 153C continued for searches/requisitions initiated or made on or before 31.03.2021, whereas searches initiated thereafter were brought within the redesigned reassessment architecture. Section 147 supplied the substantive power to assess or reassess escaped income; section 148 prescribed the notice preceding such assessment or reassessment; Explanation 2 to section 148 statutorily treated the specified post-01.04.2021 search circumstances as information suggesting escapement of income; section 148A prescribed a preliminary enquiry but expressly dispensed with that preliminary stage in specified search cases; section 149 imposed the applicable limitation upon issuance of notice; section 151 supplied the approval architecture wherever attracted; and, from 01.04.2022, section 148B introduced a further safeguard before the passing of an assessment/reassessment/recomputation order by an Assessing Officer below the prescribed rank in cases falling within Explanation 2 to section 148. The official explanatory material accompanying the Finance Act, 2021 described the change in the same terms, and the subsequent explanatory material records that after the Finance Act, 2021, assessment or reassessment in search cases for relevant years prior to the search year was made under section 147.
12.1. What emerges from this statutory transition is that the Legislature did not merely change the nomenclature of a search assessment. It changed the jurisdictional route through which an assessment of the preceding years consequent upon a post-01.04.2021 search was to be undertaken. The conditions embedded in that route cannot be treated as dispensable merely because the assessee had already filed a return under section 139 or because such return was otherwise capable of being selected for scrutiny. Whether, notwithstanding this statutory scheme, the Assessing Officer could validly select the assessee’s return for Assessment Year 2022-23 under the compulsory scrutiny category, issue only a notice under section 143(2), and complete the assessment under section 143(3), is the precise question which we now proceed to examine.
13. Having delineated the statutory framework, we now revert to the facts before us. The chronology assumes significance. The assessee had already filed his return of income for Assessment Year 2022-23 on 29.12.2022 declaring total income of Rs.2,40,15,770/-. Thereafter, search under section 132 was initiated on 31.01.2023. The search thus fell in the previous year relevant to Assessment Year 2023-24, whereas the year before us, namely Assessment Year 2022-23, is a year preceding the assessment year relevant to the previous year in which search was initiated. The Assessing Officer did not invoke section 147 and admittedly no notice under section 148 was issued. Instead, as the assessment order itself records, the return was selected for complete scrutiny under the “compulsory category” by placing reliance upon para 2.2 of the revised guidelines dated 26.09.2022 applicable to cases in which search and seizure action/requisition under sections 132/132A had been conducted on or after 01.04.2021. Notice under section 143(2) dated 28.06.2023 was thereafter issued and the proceedings culminated in the order dated 26.06.2024 passed specifically under section 143(3). These are not disputed facts; indeed, they emanate from the assessment order itself. The question, therefore, is not whether the Assessing Officer possessed information arising from the search, nor whether the case could otherwise attract examination by the Department. The question is anterior and jurisdictional: having regard to the statutory regime applicable to a search initiated on 31.01.2023, could jurisdiction for Assessment Year 2022-23 be assumed merely by selecting the existing return for compulsory scrutiny and issuing notice under section 143(2), without invoking section 147 and issuing notice under section 148?
14. In our considered opinion, the answer has to be in the negative. The distinction between selection of a return for scrutiny and assumption of jurisdiction consequent upon a search is fundamental and cannot be effaced. Section 143(2) operates upon a return furnished under section 139 or in response to a notice under section 142(1) and enables the Assessing Officer, where he considers it necessary or expedient to ensure that the assessee has not understated income, computed excessive loss or underpaid tax, to require the assessee to attend and produce evidence in support of the return. It is thus part of the ordinary assessment machinery. Sections 147 and 148, on the other hand, operate upon the statutory premise that income chargeable to tax has escaped assessment and prescribe the jurisdictional mechanism for bringing such escaped income to assessment or reassessment. In a case falling within Explanation 2(i) to section 148, Parliament itself has attached a specific legal consequence to initiation of search under section 132 on or after 01.04.2021: the Assessing Officer “shall be deemed to have information which suggests that the income chargeable to tax has escaped assessment.” Once the statute itself identifies a post-01.04.2021 search as the event giving rise to deemed information of escapement and places such event within section 148, it would be incongruous to hold that, for an assessment year preceding the search year, the Assessing Officer may disregard that statutory route altogether and achieve the same consequence merely by selecting the existing return for scrutiny under section 143(2). Such an interpretation would render the deliberate placement of post-01.04.2021 searches within Explanation 2 to section 148 substantially otiose.
15. There is another facet which fortifies this conclusion. Under the pre-amendment regime, Parliament had enacted section 153A as a special machinery dealing with assessment consequent upon search. That provision expressly displaced, inter alia, sections 147 and 148 and prescribed its own jurisdictional route. With effect from 01.04.2021, Parliament consciously restricted section 153A to searches initiated on or before 31.03.2021 and, simultaneously, incorporated searches initiated on or after 01.04.2021 into the newly substituted section 148 through Explanation 2. The significance of this legislative transition cannot be diluted by treating it as a mere administrative rearrangement. If, despite the withdrawal of the section 153A regime for searches after 31.03.2021 and the simultaneous incorporation of such searches into Explanation 2 to section 148, the Assessing Officer could nevertheless assess the preceding years simply by issuing an ordinary notice under section 143(2), the legislative migration from one special jurisdictional mechanism to another would lose much of its content. The statutory provisions must be read so as to give meaningful operation to the change consciously brought about by Parliament. The new regime did not leave the Assessing Officer without authority in consequence of a post-01.04.2021 search; it identified the source and manner of exercising that authority differently. Therefore, the question is not whether income detected pursuant to such search could be brought to tax it undoubtedly could, subject to law but through which jurisdictional channel Parliament authorised it to be brought to tax.
16. This also answers the reliance placed in the assessment order upon the revised guidelines dated 26.09.2022 for compulsory selection of search cases. There can be no quarrel with the proposition that administrative guidelines may prescribe categories of returns which are required to be taken up for scrutiny and may regulate the internal process of selection. But such guidelines operate within the four corners of the statute. They cannot create a jurisdiction which the Act requires to be assumed in another manner; nor can an administrative prescription dispense with a statutory condition governing assumption of jurisdiction. There is a conceptual difference between a guideline which tells the Department which case should be examined and a statutory provision which determines the legal authority and manner in which that examination can be undertaken. The former regulates administrative selection; the latter constitutes the source and conditions of jurisdiction. The assessment order records that the case was selected for complete scrutiny under the compulsory category precisely because search had been conducted after 01.04.2021. But the very event which occasioned such compulsory selection namely the search dated 31.01.2023 is an event for which Parliament had already prescribed a specific consequence in Explanation 2 to section 148. An administrative guideline cannot be construed in a manner which permits that statutory consequence to be bypassed. If the guidelines are capable of operating consistently with the Act, they must necessarily be so read; they cannot become an alternative source of jurisdiction.
17. We also find substance in the assessee’s contention that the defect cannot be regarded as one merely of form or nomenclature. Had the Assessing Officer invoked section 147 by issuing a valid notice under section 148 and thereafter, upon completion of proceedings, merely employed an inaccurate description or omitted reference to one of the enabling provisions in the caption of the final order, an entirely different question might have arisen. That is not the factual situation before us. Here, the jurisdictional proceeding contemplated under section 148 was never initiated at all. No notice under section 148 was issued; there was consequently no return in response thereto; and the Assessing Officer proceeded throughout on the footing that the assessee’s existing return could be subjected to ordinary compulsory scrutiny under section 143(2). The distinction is substantive because the reassessment framework carries with it statutory conditions concerning initiation, limitation and approval. Section 149 places the exercise of jurisdiction under section 148 within legislatively prescribed temporal boundaries, while section 151 identifies the specified authority for the approval contemplated by the reassessment framework as applicable. Thus, issuance of notice under section 148 is not a dispensable ceremonial step which can be replaced by a notice under section 143(2). The two notices perform different statutory functions. A notice under section 143(2) cannot perform the office of a notice under section 148, just as participation in scrutiny proceedings cannot retrospectively supply the jurisdiction which the statute required to exist at their inception.
18. The Revenue’s reliance upon the approval of the Additional Commissioner recorded in the assessment order does not, in our view, answer this fundamental defect. We have already noticed that paragraph 9 of the assessment order records that the order was passed with prior approval of the Additional Commissioner of Income Tax, Central Range-I, Mumbai. We, therefore, do not rest our conclusion upon an assumption that no approval of any nature was obtained before passing the final order. Equally, however, the existence of such approval cannot be transposed backwards so as to supply an altogether absent assumption of jurisdiction under sections 147 and 148. Section 148B, as applicable from 01.04.2022, operates at the stage of passing the order in an assessment year falling within clauses (i) to (iv) of Explanation 2 to section 148 where the Assessing Officer is below the stipulated rank. The approval mechanism governing the initiation/issuance of notice under the reassessment provisions and the safeguard contained in section 148B operate at distinct stages and serve distinct statutory purposes. Compliance at a later stage cannot dispense with a jurisdictional requirement which ought to have been fulfilled at the threshold. Put differently, approval validates an act only within the jurisdiction which the statute otherwise permits to be exercised; approval by itself is not the source of that jurisdiction. Therefore, even assuming that the approval recorded in the assessment order satisfied the requirement operating at the stage of passing the final order, it cannot cure the anterior absence of proceedings initiated under section 148.
19. The aforesaid construction also finds support from the decisions of the Coordinate Benches relied upon by the learned counsel. In Pilot Industries Ltd. v. DCIT, ITA Nos.6124 & 6125/Del/2025, the Delhi Bench was confronted with assessments of years preceding the assessment year relevant to the search and examined the effect of the amended provisions governing post-01.04.2021 searches. After noticing Explanation 2 to section 148 and the statutory regime comprising sections 148, 148B and 151, the Coordinate Bench held that assessments framed directly under section 143(3) for the preceding years, without following the prescribed reassessment procedure, could not be sustained. The relevant conclusion reproduced in the assessee’s written submissions records that the assessments under section 143(3) were held to be bad in law because the assessment ought to have proceeded under the special statutory provisions governing section 148 and the prescribed approval mechanism. The assessee has also relied upon Deepak Agarwal v. DCIT, Montage Enterprises Pvt. Ltd. v. DCIT/ACIT, Malbros International Pvt. Ltd. v. DCIT, Jamna Dass Nikkamal Jain Saraf Pvt. Ltd. v. DCIT and Homelife Buildcon Pvt. Ltd. v. DCIT, which are stated to have taken a similar view and were also noticed in Pilot Industries. We do not consider it necessary to reproduce extensive passages from each of these decisions, for the conclusion which we have reached flows principally from the statutory scheme itself. The decisions relied upon reinforce that construction rather than constitute its foundation.
20. At this juncture, it is necessary to clarify the precise ambit of our conclusion. We are not laying down an abstract proposition that the expression “section 143(3)” can under no circumstances find place in an order ultimately made pursuant to reassessment proceedings, nor is the validity of an assessment to be determined merely from the label placed upon the final order. The infirmity in the present case lies much deeper. There was no invocation of section 147 and no notice under section 148 at all. The assessment was conceived, initiated and completed as an ordinary scrutiny assessment on the premise that compulsory selection of the existing return under the administrative guidelines was sufficient to confer jurisdiction. It is this course which cannot be reconciled with the statutory scheme governing the assessment of a preceding year consequent upon a search initiated after 31.03.2021. Likewise, we are not holding that proceedings were invalid because the Assessing Officer failed to undertake the preliminary enquiry under section 148A. As explained earlier, the statutory regime itself carved out specified search cases from that preliminary procedure. The jurisdictional defect is the failure to invoke section 148 itself, not the absence of an enquiry which the Legislature had otherwise dispensed with in the relevant category of search cases. This distinction is material because it confines our decision to the precise statutory infirmity arising on the undisputed facts before us.
21. Viewed cumulatively, therefore, the statutory position admits of little ambiguity in the facts of the present case. The search was initiated on 31.01.2023; section 153A was no longer the governing provision for such a search; Assessment Year 2022-23 preceded the assessment year relevant to the previous year in which search was initiated; Explanation 2(i) to section 148 expressly treated such post-01.04.2021 search as giving rise to deemed information suggesting escapement of income; and the Act provided the jurisdictional machinery through sections 147 and 148, subject to the attendant statutory requirements applicable to that machinery. Yet the Assessing Officer did not invoke that jurisdiction at all. He instead proceeded from an administrative selection under the compulsory-scrutiny guidelines directly to a notice under section 143(2) and ultimately to an assessment under section 143(3). What has been omitted, therefore, is not an ancillary procedural formality capable of being viewed independently of the jurisdiction exercised. The statutory gateway itself was never entered. Once Parliament has prescribed the manner in which jurisdiction consequent upon a specified event is to be assumed, the authority exercising that jurisdiction must act within that prescription. Administrative convenience, participation by the assessee, or approval obtained at a subsequent stage cannot substitute the jurisdictional act which the statute required at the inception. We accordingly hold that the assessment proceedings for Assessment Year 2022-23, having been initiated without issuance of notice under section 148 and by resorting directly to section 143(2), cannot be sustained in law.
22. There is yet another reason why the aforesaid conclusion is important in the context of the statutory safeguards built into the amended regime. To treat the course adopted by the Assessing Officer as permissible would mean that, whenever a return for a preceding year happens to be available for scrutiny, the Revenue could choose between two parallel jurisdictional routes after a search—one under sections 147 and 148 carrying the conditions, limitation and approval architecture enacted by Parliament, and another through ordinary scrutiny under section 143(2) merely because the return was capable of selection. Nothing in the statutory scheme confers such an election. An interpretation producing such a result would make compliance with the reassessment safeguards dependent upon the fortuitous circumstance whether a return remained amenable to scrutiny and would permit an administrative mode of selection to determine whether statutory safeguards enacted specifically in the context of post-01.04.2021 searches are attracted. Such a construction cannot be accepted. The provisions have to operate harmoniously: section 143 continues to govern ordinary assessment of returns within its field, whereas sections 147 and 148, read with Explanation 2 and the allied provisions, govern assumption of jurisdiction over escaped income in the circumstances legislatively identified therein. In the peculiar and undisputed facts before us, the Department itself traces the selection of Assessment Year 2022-23 to the search conducted on 31.01.2023. Once that is so, the jurisdictional consequence statutorily attached to that search cannot be severed from the very assessment sought to be made pursuant thereto. The assessment framed by bypassing that statutory route is therefore legally unsustainable.
23. Before parting with the jurisdictional issue, we may briefly deal with the contention that the assessee had participated in the assessment proceedings pursuant to the notice issued under section 143(2) and had furnished the details called for by the Assessing Officer. In our opinion, such participation does not alter the conclusion reached hereinabove. The objection before us is not founded upon any irregularity in service of a notice which the Assessing Officer was otherwise competent to issue in exercise of the jurisdiction validly assumed by him. The objection goes to the anterior question whether the jurisdiction which was required to be assumed under the statutory framework governing a post-01.04.2021 search was ever assumed at all. Once the statute prescribed recourse to sections 147 and 148 for the assessment of the preceding year in the circumstances contemplated by Explanation 2 to section 148, participation in proceedings initiated under a different statutory route cannot supply the jurisdiction which was never assumed in the manner contemplated by law. Nor can the fact that the assessee had originally filed a return under section 139 enlarge the scope of section 143(2) so as to make it a substitute for the jurisdictional notice contemplated under section 148. The two provisions operate at different stages and for different statutory purposes. What is material here is that the very foundation upon which Assessment Year 2022-23 was taken up by the Assessing Officer was the search conducted on 31.01.2023; indeed, the assessment order itself records that the case was selected under the compulsory category because search and seizure action had been conducted after 01.04.2021. The Revenue cannot, therefore, draw jurisdictional consequences from the search for selecting and assessing the preceding year, and at the same time detach that assessment from the statutory regime which Parliament had specifically enacted for such post-01.04.2021 searches.
24. We accordingly hold, on the peculiar and undisputed facts of the present case, that for Assessment Year 2022-23, which precedes the assessment year relevant to the previous year in which search under section 132 was initiated on 31.01.2023, the Assessing Officer could not have assumed jurisdiction merely by selecting the return for compulsory scrutiny and issuing notice under section 143(2). The legislative scheme brought into force from 01.04.2021 had confined the erstwhile section 153A regime to searches initiated on or before 31.03.2021 and had brought searches initiated thereafter within the redesigned reassessment framework. Explanation 2(i) to section 148 expressly treated initiation of search under section 132 on or after 01.04.2021 as a circumstance in which the Assessing Officer was deemed to possess information suggesting that income chargeable to tax had escaped assessment. The jurisdiction for the preceding year was, therefore, required to be assumed under sections 147 and 148, subject to the statutory conditions and safeguards forming part of that regime. Admittedly, no notice under section 148 was issued in the present case. The assessment was initiated only through notice under section 143(2) and was ultimately completed under section 143(3). The prior approval of the Additional Commissioner recorded in the final assessment order does not cure this anterior defect, because an approval obtained at the stage of passing an order cannot retrospectively create a jurisdiction which was required to be assumed at the inception of the proceedings. Equally, the compulsory-scrutiny guidelines could regulate administrative selection of cases, but could neither supplant nor dispense with the jurisdictional machinery enacted by Parliament. We, therefore, hold that the assumption of jurisdiction in the manner adopted by the Assessing Officer was not in accordance with the statutory scheme applicable to the search in question and, consequently, the assessment order dated 26.06.2024 cannot be sustained.
25. Once the assessment itself is held to be legally unsustainable for want of valid assumption of jurisdiction, the additions made therein cannot survive independently of the assessment from which they emanate. We accordingly allow the additional grounds raised by the assessee and set aside the impugned order of the learned CIT(A) to the extent it sustains the assessment and the additions arising therefrom. Consequently, the assessment order dated 26.06.2024 passed for Assessment Year 2022-23 is quashed. In view of our decision on the jurisdictional issue, it is neither necessary nor appropriate for us to enter upon the merits of the two additions which survive after the order of the learned CIT(A), namely, Rs.12,88,400/- out of the addition based upon the loose paper found during search and Rs.4,30,144/-representing the cash treated as unexplained under section 69A. Those grounds have become academic and are therefore left open. Our decision should not be understood as expressing any opinion upon the explanation of the assessee regarding the marriage-related receipts, the interpretation of the notings contained in the seized loose paper, the effect of the statement recorded during search, the alleged duplication of Rs.10,00,000/-, or the explanation and reconciliation furnished in respect of the cash found. Those matters do not call for adjudication once the assessment in which the additions were made is held to be unsustainable at the threshold.
26. To sum up, the additional grounds raised by the assessee are admitted and allowed. The assessment framed under section 143(3) for Assessment Year 2022-23, consequent upon the search initiated under section 132 on 31.01.2023 but without invocation of section 147 and issuance of notice under section 148, is held to be unsustainable in law and is accordingly quashed. The grounds challenging the additions on merits are rendered academic and require no separate adjudication. Accordingly, the appeal of the assessee is allowed.
27. In the result, appeal of the assesse is allowed.
Order pronounced in the open court on 18thAugust, 2026.
