Kalpataru Retail Ventures Ltd. Vs DCIT (ITAT Mumbai)
Search During Pending Scrutiny: Mumbai ITAT Quashes Assessment for Bypassing Sections 148 and 148B
Summary: Can an Assessing Officer complete an assessment under section 143(3) after a search, using material found in that search, simply because scrutiny had already begun? In Kalpataru Retail Ventures Ltd., the Mumbai Tribunal answered no on the facts before it. It quashed the assessment on two independent procedural grounds: the Assessing Officer had proceeded under section 143(3) instead of the search-related mechanism under sections 147 and 148, and the Revenue had not established the statutory approval required under section 148B.
Scrutiny had begun before the search
Kalpataru Retail Ventures Ltd., engaged in real estate development and allied activities, had filed its return for assessment year 2022–23 declaring a loss of ₹69.14 crore. Its case was selected for scrutiny and a notice under section 143(2) was issued. While those proceedings were pending, a search under section 132 was conducted on 4 August 2023 in the Kalpataru Group, including premises connected with the assessee and its employees.
The search yielded diaries, loose sheets and electronic records. According to the Assessing Officer, some entries related to cash expenditure on approvals for real estate projects. Statements of persons associated with the group were also recorded. The Assessing Officer linked certain entries to the assessee’s “Sona Residential” project and ultimately added ₹44,96,000 as unexplained expenditure under section 69C, applying section 115BBE. He completed the assessment on 27 March 2025 under section 143(3).
The assessee disputed the entries, saying that some papers had been found at an employee’s premises and represented rough notings or estimates rather than completed transactions. It also questioned the reliance on statements that had subsequently been retracted. Before the Commissioner (Appeals), the addition was reduced: notings of ₹12,24,000 described as pending payments were deleted, while ₹32,72,000 was sustained.
Could the Assessing Officer continue under section 143(3)?
Before the Tribunal, the assessee challenged the very route used to make the assessment. Its case was that, once the search had taken place and the Assessing Officer relied on search-derived material for an assessment year covered by Explanation 2 to section 148, he was required to follow the statutory procedure under sections 147 and 148. The Revenue maintained that scrutiny had already started before the search and that the Assessing Officer could complete it after examining the seized material.
The Tribunal accepted the assessee’s objection. It noted that the assessment was not confined to the material involved in the original scrutiny: the addition itself rested on papers and statements emerging from the subsequent search. In the Bench’s view, the earlier issue of a section 143(2) notice did not give the Assessing Officer an unconditional right to finish the case under section 143(3) despite the intervening search.
Following the reasoning of the coordinate Bench decisions cited before it, including Homelife Buildcon (P.) Ltd., the Tribunal held that the search brought the relevant year within the statutory mechanism of Explanation 2 to section 148. In these circumstances, the Assessing Officer could not bypass that mechanism and complete the assessment under the general scrutiny provision. The assessment under section 143(3) was therefore legally unsustainable.
Administrative approval was not section 148B approval
The Tribunal identified a separate defect concerning approval. The assessment order stated that the Assessing Officer had obtained the Additional Commissioner’s prior approval under a CBDT instruction dated 15 July 2022. It did not state that approval had been granted under section 148B, and the Revenue placed no material before the Tribunal showing that the approval was an exercise of that statutory power.
The Bench drew a distinction between the two. A CBDT instruction may govern internal supervision of assessment work, but administrative approval cannot be treated as statutory approval merely because the same officer grants it. What mattered was the legal character of the approval, not only the rank of the approving authority. The Revenue’s failure to establish compliance with section 148B independently made the assessment unsustainable.
What the ruling does—and does not—decide
On these two grounds, the Tribunal quashed the assessment order dated 27 March 2025 and allowed the assessee’s appeal. It expressly declined to decide whether the loose papers proved that cash payments had been made, whether the retracted statements could be relied on, or whether the assessee was entitled to cross-examine the persons concerned. The grounds on telescoping, profit estimation and the section 69C addition also became academic. Thus, the ruling removes the addition through the invalidity of the assessment; it is not a finding that the alleged expenditure was factually explained.
Author’s comment
The significant feature of this decision is the sequence of events. Scrutiny was already pending, but a later search produced the material on which the Assessing Officer made the disputed addition. The Tribunal held that he could not use the pending section 143(3) proceeding to avoid the statutory route it considered applicable after the search.
The approval finding is equally practical. An order may recite that a senior officer approved it, yet that recital alone may not establish compliance with a specific approval provision. Where the Act requires statutory approval, the record must show approval granted in that capacity. Both findings are procedural; practitioners should take care not to cite this order as deciding the evidentiary merits of the seized papers or the alleged cash expenditure.
Cases Discussed
- Jamna Dass Nikkamal Saraf Pvt Ltd, ITA No. 403/Chd/2025 dated 16.10.2025 — relied upon on the jurisdictional route following search.
- Homelife Buildcon (P.) Ltd. v. DCIT [2025] 176 taxmann.com 614 (Chandigarh Trib.) — relied upon on the requirement to follow the special search-related statutory mechanism.
- Montage Enterprises (P.) Ltd. v. DCIT/ACIT [2026] 182 taxmann.com 11 — relied upon for the proposition that pending section 143(3) proceedings cannot continue in the circumstances considered after search.
- PCIT v. Citron Infraprojects Ltd. [2025] 181 taxmann.com 50 (Bom.) — cited by the assessee regarding approval and application of mind.
- Bannalal Jat Constructions (P.) Ltd. v. ACIT [2019] (SC) — relied upon by the Assessing Officer concerning the burden of substantiating retraction.
- K.T.M.S. Mohammed v. UOI [1992] Taxman 130 (SC) — relied upon by the Assessing Officer concerning retraction.
- R.W. Promotions P. Limited v. ACIT, ITA No. 1489 of 2013 dated 13.07.2015 — cited regarding denial of cross-examination.
- Andaman Timber Industries v. CCE [(2015) 127 DTR 241 (SC)] — cited regarding denial of cross-examination.
- P.R. Metrani, 157 Taxman 325 (SC) — cited regarding additions based on loose papers.
- CIT v. Golani Brothers, 85 taxmann.com 355 — cited regarding telescoping.
FULL TEXT OF THE JUDGMENT/ORDER OF ITAT, MUMBAI BENCH
1. This appeal by the assessee is directed against order dated 24th March 2026 passed by the learned Commissioner of Income Tax (Appeals) -51, Mumbai [in short CIT(A)] for Assessment Year 2022-23, arising out of the assessment order dated 27.03.2025 passed by the learned Deputy Commissioner of Income-tax, Central Circle-3(3), Mumbai, i.e. the Assessing Officer (AO) under section 143(3) of the Income-tax Act, 1961 (“the Act”). The assessee has raised grounds challenging both the validity of the assessment proceedings and the addition sustained under section 69C of the Act. The grounds of appeal raised by the assessee are reproduced as under :-
“1. Incorrect Assumption of Jurisdiction – Assessment u/s 143(3) instead of u/s 147 is Bad-in-Law No Mandatory Approval Obtained u/s 148B.
On the facts and circumstances of the appellant’s case and in law, the Ld. CIT(A) erred in not holding that the assessment completed by Ld. AO u/s 143(3) is bad-in-law as it is based on alleged incriminating material seized and statements recorded during search action conducted on 04.08.2023. Explanation 2 to section 148 applies on facts of appellant’s case and hence assessment was required to be completed by the L.d. AO u/s 147 after following prescribed procedure of obtaining prior approval of specified authority before issuance of notice u/s 148 and obtaining approval of Additional CIT u/s 148B of the Act before passing assessment order. In the absence of such mandatory compliances, the impugned assessment is vitiated and liable to be quashed. Reliance is placed on the decisions of Hon’ble Tribunals in the cases of Jamna Dass Nikkamal Saraf Pvt Ltd, ITA No403/Chd/2025 dated 16.10.2025; Homelife Buildcon Pvt Ltd 176 taxmann.com 614 (Chandigarh Trib) and Montage Enterprises Pvt Ltd 182 taxmann.com 11 (Delhi Tribunal).
2. Assessment u/s 143(3) by Ld. AO after Obtaining Instructions of Additional CIT Contrary to Law and Otherwise than Following Section 144A is Invalid.
Without prejudice to above ground, the approval sought by the Ld. AO from Additional CIT for passing order u/s 143(3) is non-est and bad-in-law. An AO while completing assessment u/s 143(3) is a quasi-judicial authority and as such required to make assessment of his own independent satisfaction. The Ld. AO before passing the assessment order borrowed the mind of the Ld. Additional CIT while seeking and obtaining the approval under some internal Instruction of CBDT vide F. No. 299/36/2021-Dir (Inv.Illy577 dated 15.07.2022 which is not mandated under the law. Action of Additional CIT in giving approval to AO’s findings adverse to the appellant without complying with mandatory provisions of section 144A and giving appellant of an opportunity of hearing is bad-in-law. Thus the final assessment order is invalid and void-ab-initio,
Further without prejudice to above, the Ld. CTT(A) erred in upholding the validity of approval granted by the Ld. Additional CIT without appreciating that the said approval was granted in undue haste without independent application of mind to the facts of appellant’s case, the evidentiary value of seized materials and detailed submissions made by the appellant as is evident from the fact that the approvals for multiple group cases were granted on a single day (26.03.2025) by Ld. Additional CIT without a meaningful examination of the appellant’s case vitiates the assessment proceedings and renders the final assessment order invalid and void-ab-initio as held by Jurisdictional High Court in the case of PCIT vs. Citron Infraprojects Ltd. [2025] 181 taxmann.com 50 (Bombay) dated 26.11.2025.
3. Violation of Natural Justice: Denial of Cross-Examination
On the facts and circumstances of the appellant’s case and in law, the Ld. CIT(A) erred in confirming alleged addition of Rs. 32,72,000/- (u/s 69C) based solely on retracted and stereotypical statements of third parties, namely Shri Keyur Ved & other employees of the Group without providing the Appellant an opportunity for cross-examination. During assessment proceedings retraction affidavits were filed, some of which were also filed before Investigation Wing. The deponents were not examined and retraction affidavits were not considered or rebutted. This constitutes a gross violation of the principles of natural justice as held by the Hon’ble Bombay High Court in R.W. Promotions P. Limited v. ACIT dated 13.07.2015[ITA No 1489 of 2013] and the Hon’ble Supreme Court in Andaman Timber Industries v. CCE[(2015) 127 DTR 241 (SC)].
4. Search conducted in violation of Rules 112(6) and 112(7) of Income Tax Rules 1962
On the facts and circumstances of the appellant’s case and in law and in furtherance to Ground No. 3 above, the Ld. CIT(A) has erred in upholding the alleged additions based on alleged statements of some persons recorded during search action conducted in violation of Rule 112(6) & (7) of the Income-tax Rules, 1962, by wrongly holding that no prejudice was caused to the appellant merely because opportunity was granted during assessment proceedings, without appreciating that non-compliance with the mandatory requirement of conducting search in the presence of independent and respectable local witnesses materially affected the legality, credibility and evidentiary sanctity of the alleged statements recorded itself, which constituted the sole basis of the impugned additions
5. Failure to Make Independent Inquiries: Action of AO Based on Borrowed Satisfaction of Investigation Wing
On the facts and circumstances of the appellant’s case and in law, the Ld. CIT(A) erred in confirming alleged addition of Rs. 32.72.000/- (u/s 69C) which is entirely based on borrowed satisfaction of Investigation Wing No independent inquiries of his own were made by Ld. AO from the payees for alleged unexplained expenditure, despite request in writing by the appellant. The Ld. AO mechanically reproduced information received from Investigation Wing. It is settled law that for the purpose of completing an assessment an AO can definitely collect information from any source but for making additions, it should be his own satisfaction. Information can be borrowed but satisfaction cannot be borrowed. Ld. AO did not make any independent inquiries with payees (u/s 133(6)/u/s 131). In the absence of corroborative evidences and no independent inquiries by Ld. AO the impugned addition is not sustainable in the eyes of law.
6. Addition based on Unsubstantiated Loose Papers being “Dumb Documents”
On the facts and circumstances of the appellant’s case and in law, the Ld. CIT(A) erred in sustaining the alleged addition of Rs. 32,72,000/- (u/s 69C) merely on the basis of loose papers which are ‘dumb documents’ found and seized from the premises of a third party. Mr. Keyur Ved. These documents do not contain specific particulars of alleged transactions and hence are not speaking. The addition made by Ld. AO has been confirmed by Ld. CIT(A) merely on presumptions and surmises by treating certain notings accompanied by dates as “materialized transactions” while deleting additions in respect of other notings contained in the very same document. Ld. CIT (A) failed to appreciate that mere mention of a date against a noting cannot, by itself, lead to an inference of a transaction having materialized. Ld. AO did not bring any corroborative material/evidence on record by making independent inquiries. Reliance is placed on decision of the Hon’ble Apex Court in the case of P.R. Metrani, 157 Taxman 325 (SC).
7. Incorrect Treatment of Alleged Unaccounted Cash Expenses u/s 69C instead of 37(1) of the Act
On the facts and circumstances of the appellant’s case and in law, the Ld. CIT(A) erred in confirming the addition of Rs 32,72,000/- u/s 69C of the Act without appreciating that the AO, while quoting and relying upon statements of various persons, has impliedly given a finding that the expenses for various real estate projects of Kalpataru Group have been made out of on-money receipts of the Group, thus addition u/s 69C cannot be sustained. Additionally, the Ld. AO and CIT(A) ought to have considered and allowed the alleged cash expenses incurred for the project u/s 37(1) of the Act since the appellant’s undisputed primary source of income is from business only.
8. Alternate Ground: Telescoping and Reasonable Profit Estimation
i. Without prejudice to the above, the Ld. CIT(A) erred in not allowing full telescoping (set-off) of the alleged cash payments against the alleged cash receipts of the Group to avoid double taxation, following the binding ratio of the Hon’ble Bombay High Court in CIT v. Golani Brothers 85 taxmann.com 355.
ii. Without prejudice to the above, the Ld. CIT(A) erred in not restricting the alleged addition to reasonable net profit element embedded in the alleged grossed-up receipts, even if the alleged transactions recorded in limited set of dumb documents are treated as materialized transactions.”
2. Briefly stated facts of the case are that the assessee is a company engaged in the business of real estate development, construction & allied activities and renting & operation of mall. For the assessment year under consideration, the assessee company had filed its return of income u/s 139(1) of the Act on 01.10.2022 declaring total loss at Rs. (-) 69,14,64,031/-. The return was processed under section 143(1) and the case was subsequently selected for scrutiny. Notice under section 143(2) was issued to the assessee.
2.1 During the pendency of the scrutiny proceedings, a search and seizure action under section 132 of the Act was conducted in the ‘Kalpataru’ Group on 04.08.2023, at their office premises as well as residential premises of the employees, directors/promoters of the Group including the residential premises of a employee namely Shri Keyur Mahendra Ved. The assessee was also covered under said search action being an entity of ‘Kalptaru’ Group. Pursuant to the search, the assessee’s case was centralised with the Central Circle-3(3), Mumbai. Thereafter, notices under section 142(1), accompanied by questionnaires, were issued by the AO and the assessee furnished its response from time to time.
2.2 During the search, diaries, loose sheets and electronic records were found at various premises of the Group, including the residential premises of Shri Keyur Ved. The Assessing Officer stated that he was associated with liaisoning and approval-related functions of the Group. Statements of Shri Keyur Ved and other persons associated with the Kalptaru Group including, Shri Anant Keshav Vanjare, AGM Liaison of M/s. Kalpataru Limited; Shri Shantilal Shivlal Surana, Cashier of Kalpataru Groupunder were recorded under section 132(4) of the Act. According to the Assessing Officer, the seized material and the statements indicated that cash expenditure had been incurred in connection with obtaining approvals for various real estate projects and that such expenditure was not recorded in the regular books of account.
2.3 The Assessing Officer further recorded that, on analysis of the seized material, certain entries were relatable to the project “Sona Residential”, developed by the assessee. The year-wise quantification made by him initially reflected cash expenditure of ₹77,68,000/- for the financial year 2021-22. The assessee was confronted with the relevant entries and called upon to explain them with supporting material. In response, the assessee submitted, inter-alia, that the documents had been found from the premises of a third party; that the entries were merely rough jottings or estimates; that they did not represent materialised transactions; and that certain persons whose statements were relied upon had subsequently retracted their statements.
2.4 The Assessing Officer did not accept the explanation. He recorded that Shri Keyur Ved was a senior employee associated with liaison functions; that the seized papers contained references to projects, persons, amounts and purposes of payments; and that statements of other members of the liaison team also referred to cash expenditure in connection with real estate projects. The Assessing Officer also considered the retractions filed by certain persons but rejected same, recording that they were general, unsubstantiated, and had also been rejected by the Investigation Wing by letter dated 12.02.2025. For the proposition that the burden of substantiating a retraction lies on the deponent, the Assessing Officer relied on decision in the case of Bannalal Jat Constructions (P.) Ltd. v. ACIT [2019] (SC) and K.T.M.S. Mohammed v. UOI [1992] Taxman 130 (SC). After excluding duplicate entries, the AO quantified the expenditure attributable to the assessee at ₹44,96,000/-.
2.5 The Assessing Officer continued with the assessment proceedings commenced u/s 143(2) of the Act rather than invoking relevant provisions dealing with search assessment during relevant time period. The assessment was accordingly completed under section 143(3) on 27.03.2025 and added the amount of ₹44,96,000/-, to the income of the assessee under section 69C of the Act, having tax rate applicable under Section 115BBE of the Act. He assessed the total income at ₹44,96,000/-, while allowed the returned loss to be carried forward. The assessment order further records that the order was passed with the prior approval of the Additional Commissioner of Income-tax, Central Range-3, Mumbai, conveyed vide letter dated 26.03.2025, stated to have been issued in terms of CBDT F.No. 299/36/2021-Dir(Inv.III)/577 dated 15.07.2022.
3. Before the learned CIT(A), the assessee challenged the addition on several grounds, including the evidentiary value of the seized material; reliance upon statements of third parties; retractions; denial of cross-examination; alleged violation of Rule 112(6) and (7) of the Income-tax Rules, 1962; absence of independent enquiry by the Assessing Officer; and applicability of section 69C. The assessee also challenged the validity of the assessment proceedings on jurisdictional and procedural grounds.
3.1 On merits, the learned CIT(A) held that loose papers and diary notings do not, as a class, constitute either conclusive proof or “dumb documents”; the question, in his view, is to be examined entry-wise, according to whether an entry carries specific, intelligible particulars i.e. amount, identifiable project or person, and narration of purpose , as against notings that are vague or incapable of being linked to any real transaction. Applying this test to the two pages underlying the addition, the learned CIT(A) found that the notings on Page 34, aggregating Rs. 12,24,000/-, were themselves recorded as “pending” payments and, absent evidence that any payment had actually been made, could not satisfy the essential precondition of Section 69C that an expenditure has in fact been incurred. He accordingly deleted the addition to that extent. As to Page 30, aggregating Rs. 32,72,000/-, he found the narrations specific i.e. recording amount, date, and purpose , and, read with Shri Keyur Ved’s statement that these payments were made in cash, held that they constituted admissible evidence of unexplained cash expenditure, and confirmed the addition to that extent. The learned CIT(A) rejected the assessee’s contentions that the source of the expenditure stood explained through a common pool of on-money generated across Group entities; that the expenditure should instead be allowed under Section 37(1); that telescoping ought to be granted; and that only a profit element should be taxed, holding that no verifiable nexus had been shown between any specific on-money receipt and the expenditure in the assessee’s own hands; that Section 69C’s deeming fiction admits no such deduction; and that the addition did not represent double taxation of income already assessed in the assessee’s hands.
3.2 On the challenge to the validity of the assessment (the ground concerning approval of the Additional CIT), the learned CIT(A) held that, even assuming no statutory requirement existed under Section 143(3) for such approval, its administrative or supervisory character did not, without more, establish absence of independent application of mind by the AO, and dismissed this ground. On the remaining procedural grounds i.e. search conducted in alleged violation of Rules 112(6)/112(7); denial of cross-examination; and alleged borrowed satisfaction; the learned CIT(A) held that the legality of a search under Section 132 cannot be examined in appellate proceedings before him; that the retractions were unsubstantiated and rejected for cogent reasons; that the assessee had been given adequate opportunity to rebut the material; so that absence of cross-examination did not by itself vitiate the addition; and that the AO’s entry-wise examination of the seized material; and his acceptance of part of the assessee’s explanation, demonstrated independent application of mind rather than mechanical reliance on the Investigation Wing. These grounds were accordingly dismissed.
4. Before us, learned counsel for assessee filed a paper book containing pages 1 to 348 comprising of the notices issued in the course of assessment proceeding as well as the first appellate proceeding before the CIT(A).
4.1 Before us, learned counsel for the assessee pressed, as the primary and threshold ground, the challenge to the very mode of assessment. It was submitted that the notice under Section 143(2) had already been issued on 31.05.2023, before the search of 04.08.2023; that, upon the search, Explanation 2 to Section 148 deemed the AO to possess information suggesting escapement of income for the three assessment years immediately preceding the year of search, of which AY 2022-23 is one; and that, in consequence, the pending Section 143(3) proceeding could not validly continue, and the AO was obliged to proceed under Section 147, upon notice under Section 148, with prior approval of the specified authority under Section 148B — a special procedure held to be a complete code for search-triggered assessments. The impugned assessment 27.03.2025, however, was completed under section 143(3), substantially relying upon material and statements emanating from the search. But when the case was selected for scrutiny, the reasons for scrutiny were different and independent of the findings of the subsequent search and scrutiny was restricted to the contents of the return of income, per se.
4.2 In support, reliance was placed on the decision of the Delhi Bench of this Tribunal in Montage Enterprises (P.) Ltd. v. DCIT/ACIT [2026] 182 taxmann.com 11, holding that once search under Section 132 yields material relating to an assessee, a pending Section 143(3) assessment cannot validly continue and must give way to Section 148; on the decision of the Chandigarh Bench in Jamna Dass Nikkamal Saraf (P.) Ltd., ITA No. 403/Chd/2025 (dated 16.10.2025), holding, on facts materially identical to the present case, that Section 148 (Explanation 2) furnishes the sole permissible route where search-based information exists for a year already covered by Section 143(2), that Sections 147–148 constitute a special provision overriding the general provision of Section 143 by the maxim generalia specialibus non derogant, and that continuing under Section 143(3) in such circumstances renders the assessment unsustainable; and on the coordinate decision of the Chandigarh Bench in Homelife Buildcon (P.) Ltd. v. DCIT [2025] 176 taxmann.com 614, to the same effect.
4.3 Without prejudice to this ground, it was further submitted that the approval obtained from the Additional CIT for the Section 143(3) order was itself invalid, being sought under an internal CBDT instruction rather than any procedure prescribed by the Act. It was submitted that approvals for several group cases having been granted on a single day, without independent application of mind. In support, he relied on PCIT v. Citron Infraprojects Ltd. [2025] 181 taxmann.com 50 (Bom.).
4.4 It was submitted that since the impugned year under appeal formed part of the three assessment years immediately preceding the year in which search was conducted, the assessment ought to have been initiated and framed by the AO u/s 148 with approval u/s 148B. The assessment was, however, completed by the AO u/s 143(3) and approval obtained from superior authority without quoting the section under which such approval was obtained. The approval taken only for the purposes of section 143(3) is thus fundamentally defective, bad-in-law, non-compliant with statutory mandate, and consequently void ab initio. It was contended that the approval referred to by the Assessing Officer in the assessment order was merely an administrative approval under CBDT Instruction dated 15.07.2022 and was not the statutory approval contemplated under section 148B.
4.5 Learned Counsel further submitted that the distinction is material. According to him, the approval under section 148B is a statutory safeguard and cannot be substituted by an administrative approval issued for purposes of internal supervision of assessments. The assessment order itself records the source and nature of the approval obtained, namely, the CBDT instruction dated 15.07.2022. It was therefore submitted that the mandatory statutory requirement under section 148B remained unfulfilled and the assessment order was consequently without jurisdiction.
4.6 On merits, learned Counsel submitted that the addition of ₹44,96,000/- was based principally upon loose papers found from the residential premises of Shri Keyur Ved and statements of third parties. It was contended that the loose papers did not, by themselves, establish that any expenditure had actually been incurred by the assessee; that the statements relied upon had been retracted; that the deponents had not been subjected to cross-examination; and that the Assessing Officer had not undertaken independent enquiry with the alleged recipients of the cash. Reliance was placed upon the judicial authorities cited in the written submissions. It was also submitted that the assessee had raised an alternative plea concerning telescoping and allowability of the expenditure.
5. The learned Departmental Representative supported the orders of the Assessing Officer and the learned CIT(A) and submitted that the assessment had been framed after examination of the seized material, statements and the explanations furnished by the assessee. It was submitted that the approval obtained from the Additional CIT constituted the supervisory approval contemplated by the departmental instructions and that the assessment could not be invalidated merely on the ground that the approval was not separately described as one under section 148B.
6. We have carefully considered the rival submissions and perused the material available on record. Since the assessee has raised a challenge to the very jurisdiction and validity of the assessment, we consider it appropriate to examine the legal issues first. Two distinct questions arise for our consideration: (i) whether, after the search conducted under section 132 on 04.08.2023, the Assessing Officer could validly continue and complete the pending assessment under section 143(3), or was required to proceed under section 147 read with section 148; and (ii) whether the approval obtained from the Additional Commissioner pursuant to CBDT Instruction F.No. 299/36/2021-Dir(Inv.III)/577 dated 15.07.2022 could be regarded as compliance with the statutory requirement of prior approval under section 148B.
6.1 The two questions are distinct. The first concerns the jurisdictional route adopted for framing the assessment; the second concerns the statutory approval required in respect of an assessment falling within the scope of Explanation 2 to section 148.
First question: Whether the assessment could validly continue under section 143(3) after the search
6.2 The material facts are undisputed. The assessee filed its return of income for the assessment year 2022-23 and its case was selected for scrutiny. Notice under section 143(2) was issued on 31.05.2023. Thereafter, on 04.08.2023, a search under section 132 was conducted in the Kalpataru Group, including the assessee on 04.08.2023. The assessee’s case was subsequently centralised with the Central Circle. During the search, documents and electronic records were found and statements under section 132(4) were recorded. The Assessing Officer thereafter relied upon such seized material and statements while making the impugned addition. The assessment was ultimately completed on 27.03.2025 under section 143(3) and not under Section 147, without notice under Section 148 or prior approval under Section 148B.
6.3 The assessee contends that, in view of the search having been initiated on 04.08.2023, the assessment year 2022-23 fell within the assessment years contemplated by Explanation 2 to section 148. It was, therefore, submitted that the Assessing Officer was required to invoke the special statutory machinery under sections 147 and 148 rather than continue the pending proceedings under section 143(3). Reliance has been placed, inter alia, upon Montage Enterprises (P.) Ltd.(supra), Jamna Dass Nikkamal Saraf (P.) Ltd.(supra) and Homelife Buildcon (P.) Ltd.(supra).
6.4 The learned Departmental Representative, on the other hand, supported the assessment on the ground that the scrutiny proceedings had commenced prior to the search and that the assessment was completed after examination of the seized material, statements and explanations furnished by the assessee.
6.5 We find considerable force in the contention of the assessee. Explanation 2 to section 148, as applicable to the relevant period, creates a statutory deeming fiction where a search under section 132 is initiated. In such a case, the Assessing Officer is deemed to have information suggesting escapement of income for the relevant assessment year and notice under section 148 could be issued under the limitation provided u/s 149 of the Act. The assessment year under consideration before us falls within that statutory period, and therefore, the notice u/s 148 was to be issued in the case. Section 143 provides the machinery for regular scrutiny assessment of a return furnished under section 139 or in response to section 142(1). Section 147, read with section 148, on the other hand, constitutes the statutory machinery where the Assessing Officer proceeds on information suggesting escapement of income. Explanation 2 to section 148 specifically addresses the consequence of a search and creates a statutory basis for invoking that machinery. The significance of the search in the present case cannot be diluted by the fact that the scrutiny proceedings had commenced earlier. The impugned assessment was not confined to the material forming the subject matter of the original scrutiny. The Assessing Officer himself proceeded upon material and statements emanating from the search and made an addition of ₹44,96,000 on that basis.
6.6 The coordinate Benches in Jamna Dass Nikkamal Saraf (P.) Ltd., (supra), Homelife Buildcon (P.) Ltd., (supra), and Montage Enterprises (P.) Ltd., (supra), have considered materially similar circumstances and held that, once a search has been conducted and the case falls within the statutory sweep of Explanation 2 to section 148, the Assessing Officer cannot bypass the special statutory mechanism and continue the assessment under section 143(3). Relevant extract of decision of Income tax Appellate Tribunal, Chandigarh Bench in the matter of Jamna Dass Nikkamal Saraf Pvt Ltd,(supra) is reproduced as under:
“13. We have carefully considered the rival submissions and perused the record. It is undisputed that search u/s 132 was conducted on 24.11.2022, relevant to A.Y. 2023-24. Thus, A.Y. 2022-23 is one of the three preceding years under Explanation 2(iv) to section 148. The Explanation reads that if a search is initiated, “the Assessing Officer shall be deemed to have information suggesting escapement of income for the three assessment years immediately preceding the assessment year relevant to the previous year in which the search is initiated.”
13.1 Therefore, the only permissible statutory course was to issue notice u/s 148 and obtain prior approval u/s 148B before passing assessment order.
13.2 As the Assessing Officer completed the assessment under section 143(3) of the Act without issuing the notice under section 148 of the Act. Therefore, the question before us is whether the assessment proceedings initiated under section 143(3) of the Act can be validly continued and completed after a search under section 132 has been conducted in the case of the same assessee, without following the procedure prescribed under section 148 (Explanation 2) of the Act.
13.3 In our considered opinion, the answer lies in the scheme of the Act itself. Section 143 provides the general framework for regular assessment, whereas sections 147-148 (post-2021 regime) deal with reassessment based on information suggesting escapement of income, including that unearthed during a search.
13.4 A plain reading of section 143(2) shows that such notice can be issued only when income is furnished under section 139 or in response return of to a notice under section 142(1). It empowers the Assessing Officer to scrutinize that return if he considers that income has been understated or tax underpaid. However, when a search under section 132 takes place and materials are found indicating possible escapement of income, the statute envisages a different route for carrying out assessment or reassessment under section 147 read with section 148, which is the special mechanism for bringing to tax the income discovered in consequence of a search.
13.5 Although section w.e.f. 148 (inserted 01.04.2021) does not begin with a non-obstante clause similar to the erstwhile section 1534, its context and Explanation 2 make it clear that where a search is initiated the jurisdiction thereafter must flow through this special channel, subject to prior satisfaction and approval of the Principal Commissioner or Commissioner. The legislative intent is to ensure that when a search is carried out, the assessment is framed under the specific provisions meant for such cases and not under the general provision of section 143(3). Further we may mention that no notice under section 143(2) could have been issued after 3 months from the from the end of the financial year in which the return is furnished. In the present case the original return of income was filled on 4/11/2022 for the assessment year 2022-23 and 143 (2) was issued on 21/6/2023, therefore also the assessment was framed under 143(3) of the Act is not sustainable. In other words the time required for issuing the notice under 143(2) had already expired, and the revenue cannot be allowed to issued issue 143(2) on 21.6.2023 after the search was carried out and notice had been issued on 21.6.2023 and assessment was framed under 143(3) of the Act. The relevant portion of section 143(3) reads as under-
143(2) Where a return has been furnished under section 139, or in response to a notice under sub-section (1) of section 142, the Assessing Officer or the prescribed income-tax authority, as the case may be, if considers it necessary or expedient to ensure that the assessee has not understated the income or has not computed excessive loss or has not under-paid the tax in any manner, shall serve on the assessee a notice requiring him, a date to be specified therein, either to attend the office of the Assessing Officer or to produce any evidence on which the assessee may rely in support of the return:
Provided that no notice under this sub-section shall be issued after the expiry of three months from the end of the financial year in which the return is furnished.
13.6 This position finds substantial support from the ratio of various decisions of Hon’ble High Court and Hon’ble Supreme Court. The Courts unanimously held that once a search has been conducted and proceedings are triggered under section 1534, the Assessing Officer cannot continue parallel proceedings under section 143(3) or section 147 for the same assessment year, because the entire assessment for that year stands merged in the search assessment. The Courts emphasized that the existence of a special procedure for assessment consequent to a search is a complete code in itself, therefore, ordinary assessments abate and cannot coexist with the search-based assessment.
13.7 Drawing this analogy to the current regime, it is evident that when a search takes place and information is unearthed suggesting escapement of income, the Assessing Officer must act under section 148 (which now performs the role formerly assigned to section 1534) rather than continuing with a pending section 143(3) proceeding. The legislative intent remains the same to prevent multiplicity of proceedings and ensure that only one comprehensive order is passed, factoring in both the pre-search and post-search materials.
13.8 The rationale is further reinforced by the well-settled principle of generalia specialibus non derogant the special provision overrides the general. Section 148 (as a special provision triggered by search information) must prevail over section 143 (the general provision for regular scrutiny). Allowing the Assessing Officer to continue and conclude proceedings under section 143(3) after a search would defeat this legislative scheme and render the safeguards, such as prior approval of the Principal Commissioner, redundant.
13.9 Accordingly, we hold that once a search is initiated under section 132 and material is found relating to the assessee, the pending assessment under section 143(3) cannot validly continue, as the time for issuing the 143(2) in response to original return of income had already expired, therefore the Assessing Officer must necessarily proceed in accordance with the special provisions contained in section 148 of the Act.”
6.7 We respectfully concur with the aforesaid reasoning. The circumstance that notice under section 143(2) had been issued before the search does not, in our considered view, confer upon the Assessing Officer an indefeasible right to complete the assessment under section 143(3), notwithstanding the subsequent search and the statutory consequence flowing from Explanation 2 to section 148. Once the search occurred and the assessment year fell within the period specified in Explanation 2, the Assessing Officer was required to examine the escaped-income consequence through the statutory mechanism prescribed by sections 147 and 148. The principle generalia specialibus non derogant is also attracted. The special statutory mechanism applicable to income escaping assessment consequent upon the circumstances specified in Explanation 2 cannot be bypassed by resorting to the general machinery of section 143(3). We, therefore, hold that the Assessing Officer was not justified in continuing and completing the assessment under section 143(3) after the search in the manner adopted in the present case. The assessment framed under section 143(3) is, on this ground itself, legally unsustainable.
Second question: Whether the approval obtained under the CBDT Instruction satisfies section 148B
7. There is, however, a separate and independent defect in the assessment which also requires consideration. Section 148B, as applicable to the relevant assessment year, expressly provides that no order of assessment, reassessment or recomputation shall be passed by an Assessing Officer below the rank specified therein in a case covered by the relevant provisions of Explanation 2 to section 148 except with the prior approval of the prescribed superior authority.
7.1 The search in the present case was conducted on 04.08.2023, after section 148B had come into force with effect from 01.04.2022. The assessment order itself records that the approval of the Additional Commissioner was obtained in terms of CBDT F.No. 299/36/2021-Dir(Inv.III)/577 dated 15.07.2022. It does not state that the approval was granted under section 148B. The distinction is material. An administrative instruction issued by the Board may regulate the internal administration and supervision of assessment work. Such an instruction, however, cannot substitute a statutory requirement expressly imposed by Parliament. The question, therefore, is not whether some approval of the Additional Commissioner was obtained, but whether the approval contemplated by section 148B was obtained before passing the assessment order. The learned CIT(A) considered the approval to be administrative or supervisory in character and held that the assessee had not established that the Assessing Officer had acted without independent application of mind.
7.2 In our considered view, that reasoning does not answer the statutory question. Independent application of mind by the Assessing Officer and statutory approval under section 148B operate in different fields. The former concerns the manner in which the Assessing Officer exercises his quasi-judicial function; the latter is a condition expressly prescribed by the statute before an order of assessment covered by the provision can be passed. The Revenue has not placed before us any material showing that the approval referred to in the assessment order was granted in exercise of the statutory power under section 148B. On the contrary, the assessment order itself expressly traces the approval to the aforesaid CBDT Instruction. The mere fact that such approval was accorded by the Additional Commissioner cannot cure the statutory defect. The relevant test is not the identity of the authority granting the approval, but the statutory source and legal character of the approval so granted. An approval granted administratively cannot be treated as statutory approval merely because it emanates from the same authority which is empowered to grant approval under the Act.
7.3 We are, therefore, unable to accept the Revenue’s submission that the approval obtained under the CBDT Instruction constituted substantial or sufficient compliance with section 148B. The statutory requirement cannot be dispensed with by an administrative mechanism, nor can the two forms of approval be treated as interchangeable. Accordingly, quite apart from the defect in the mode of assessment discussed in paragraph above, the assessment also suffers from failure to establish compliance with the mandatory requirement of prior approval under section 148B.
8. The two legal defects discussed above operate independently. Firstly, in the circumstances of the present case, the Assessing Officer could not validly continue and complete the assessment under section 143(3) after the search and upon reliance upon search-derived material, when the assessment year was within the statutory sweep of Explanation 2 to section 148. Secondly, even assuming, for the sake of argument, that the assessment could otherwise have been proceeded with, the Revenue has failed to establish compliance with the separate statutory requirement of prior approval under section 148B. The approval actually referred to in the assessment order was one obtained pursuant to the CBDT Instruction dated 15.07.2022 and cannot be equated with the statutory approval contemplated under section 148B. Both grounds, therefore, independently render the impugned assessment unsustainable in law.
9. Once the assessment itself is held to be invalid, the controversy concerning the addition of ₹44,96,000/- under section 69C does not survive for adjudication on merits. The grounds relating to the evidentiary value of the seized material, alleged retraction of statements, denial of cross-examination, alleged violation of Rules 112(6) and 112(7), alleged borrowed satisfaction, telescoping, estimation of profit and allowability of expenditure consequently become academic. We, therefore, refrain from expressing any opinion on those issues.
10. In view of the foregoing discussion, the assessment order dated 27.03.2025, passed under section 143(3) of the Act, is held to be unsustainable in law and is hereby quashed. Consequently, the impugned order of the learned CIT(A) stands set aside to that extent. The grounds challenging the addition made under section 69C and the other consequential grounds are rendered academic and are, accordingly, not adjudicated on merits.
11. In the result, appeal of the assessee is allowed.
Order pronounced in the open Court on 22/09/2026.
