Income Tax: Assessing Officer Cannot Introduce New Income Source In Set Aside Assessment

Income Tax: Assessing Officer Cannot Introduce New Income Source in Set-Aside Assessment

The respondent, Shri Prem Prakash, a salaried Director, filed his return declaring an income of Rs. 1,13,000 for the Assessment Year 1992-93. The Assessing Officer (AO) initially made an ad-hoc addition of Rs. 40 lakh based on a separate FERA-related cash recovery, which the CIT(A) set aside in 1995 with directions to make a fresh assessment after affording proper opportunity to the assessee. Meanwhile, a search operation at a third party’s residence yielded handwritten slips allegedly belonging to the assessee.

During the remanded assessment proceedings, the AO used these newly discovered loose slips to frame a massive addition of ₹22.31 crore under Section 68 of the Income Tax Act. The CIT(A) subsequently deleted this addition, stating the AO traveled beyond his jurisdiction by introducing an entirely new source of income not present during the original set-aside order. The Revenue challenged this deletion before the ITAT, filing additional grounds to justify the AO’s expanded jurisdiction despite a 19-year delay in raising them.

Main Issue: Whether the assessing officer has the jurisdiction to bring on record fresh material discovered during a third-party search to assess a new source of income while completing a set-aside (remand) assessment under Section 143(3).

Tribunal’s Decision: The ITAT dismissed the appeal filed by the Revenue, firmly upholding the CIT(A)’s decision. The Tribunal noted that in set-aside proceedings, the Assessing Officer is strictly bound by the directions of the appellate authority and must restrict the fresh assessment to the material and issues available at the time of the remand. If new evidence, such as seized material from a search, comes to light subsequently, the AO is required by law to initiate separate and specific proceedings, such as under Section 158BC or 158BD for undisclosed income.

The bench ruled that the AO bypassed the statutory mandate by merging the new search-related discoveries into the pending regular assessment under Section 143(3). Therefore, the ITAT declared the assessment order bad in law and jurisdictionally flawed, concluding that the additions could not survive.

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