ITAT Agra Quashes Assessment Under Section 153A for Lack of Incriminating Material Found During Search: Sanskar Nagar vs. ACIT - 2025-03-28

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ITAT Agra Sets Aside Assessments: No Incriminating Evidence, No Tax liability

In a significant ruling for taxpayers, the Income Tax Appellate Tribunal (ITAT) of Agra has quashed assessment orders framed under Section 153A of the Income Tax Act. The tribunal, led by the bench of Shri Satbeer Singh Godara and Shri Manoj Kumar Aggarwal, emphasized the strict requirements of law regarding the discovery of incriminating material during search operations and the necessity of independent application of mind by approving authorities.

A Quest for Legitimacy: The Case Background

The case involved the assessee firm, Sanskar Nagar Jhansi , which faced search proceedings under Section 132 of the Income Tax Act on February 7, 2018. The Assessing Officer (AO) had framed assessments for several assessment years (AY 2014-15 to 2018-19) based on search materials, specifically notebooks seized not from the assessee’s own premises, but from the residential premises of a third party, Shri Rama Kant Verma.

The core legal contention brought forward by the assessee was that the department could not invoke Section 153A to make additions in "unabated assessments" based on material seized from third-party premises. Furthermore, the assessee argued that the approval granted by the Additional Commissioner of Income Tax under Section 153D was obtained in a mechanical, "copy-paste" fashion across 13 distinct cases, failing the test of judicial scrutiny.

Arguments: Probing the Limits of Search Authority

The appellant’s representative, CA Shri Suresh Gupta, argued that the jurisdiction under Section 153A was flawed from the outset. Relying on the landmark Supreme Court decision in Pr. CIT vs. Abhisar Buildwell (P.) Ltd. , he asserted that in the absence of incriminating material found during the search of the assessee's own premises , additions cannot be sustained in completed assessments.

The Revenue, represented by Shri Sukesh Kumar Jain, defended the additions, maintaining that the materials recovered from the premises shared by the partners were implicitly linked to the assessee-firm and that the legal grounds were previously handled by lower authorities.

The Tribunal’s Verdict: A Lesson in Procedural Integrity

The ITAT bench ultimately sided with the assessee. The tribunal observed that to utilize materials seized from third parties, the department is legally mandated to initiate proceedings under Section 153C, which requires a formal, recorded satisfaction note—a step the Revenue failed to demonstrate.

Furthermore, the ITAT took a strong stance against the "mechanical" nature of the prior approval under Section 153D. Citing the Allahabad High Court’s ruling in Pr. CIT vs. Sapna Gupta , the bench highlighted that approval is not a mere bureaucratic formality but a safeguard against arbitrary taxation.

Key Observations

The judgment features several critical observations from the bench:

• On the necessity of incriminating material: "This being the case, this being unabated year, the assessment is liable to be quashed in terms of the decision of Hon’ble Apex Court in the case of Pr. CIT vs. Abhisar Buildwell (P.) Ltd. "
• On the misuse of third-party evidence: "To use third-party material against the assessee, proceedings u/s 153C could be initiated for which recording of satisfaction is a mandatory requirement which is not shown to have been fulfilled."
• On mechanical administrative approvals: "If an approval has been granted by the Approving Authority in a mechanical manner without application of mind then the very purpose of obtaining approval under section 153D of the Act and mandate of the enactment by the legislature will be defeated."

Implications for Future Assessments

By quashing the assessments, the ITAT has reinforced that the procedural mandates of the Income Tax Act—specifically the requirement for incriminating evidence during searches and the need for thoughtful, individual approval of assessment orders—cannot be bypassed. Tax authorities must ensure that search and seizure evidence is properly linked to the specific entity under assessment, or risk having the entire framework of their proceedings collapse under judicial review.

This ruling serves as a potent reminder to both the Revenue and taxpayers that the legitimacy of a tax demand rests as much on how it was investigated as it does on the underlying financial facts.