In abated search assessments u/s 153A, AO’s investigative powers are wide and are not restricted to “incriminating material” only – High Court
In a recent judgment, Hon’ble High Court has held that in an abated search assessments under Section 153A, the AO’s investigative powers are as wide as a regular scrutiny and are not restricted to “incriminating material.” The absence of specific seized material regarding a particular expense does not immunize the AO’s failure to verify a substantial tax claim
ABCAUS Case Law Citation:
5157 (2026) (05) abacus.in HC
Important Case Laws relied upon by Parties:
PCIT vs. Abhisar Buildwell P. Ltd.
CIT vs. Maithan International
PCIT vs. Russel Credit Limited
PCIT vs. Abhisar Buildwell P. Ltd
In the instant case, the assessee had challenged the impugned order passed by the ITAT sustaining a revisionary intervention by the Principal Commissioner of Income Tax (PCIT) under Section 263 of the Income Tax Act, 1961 (the Act).
The appellant was an industrial house engaged in the manufacture of iron and steel, which established three Captive Power Plants (CPPs). The appellant had claimed exemption/deduction under section 80-IA(8). Following a search and seizure operation conducted upon the business group of the appellant, the Assessing Officer, during the course of the scrutiny assessment, made a formal reference to the Transfer Pricing Officer (TPO) under Section 92CA for the determination of the Arm’s Length Price (ALP).
The TPO accepted this methodology of cost allocation but proposed a significant downward adjustment to the price of power, reducing the rate per unit. When the The Assessing Officer acted in strict conformity with TPO’s findings as a result of which eligible profits of the power plants were extinguished, and the deduction under Section 80-IA was reduced to NIL, and the tax liability was correspondingly enhanced.
The CIT(A) directed the Assessing Officer to allow the deduction. The Revenue challenged the order of the CIT(A) before the Tribunal and the matter was remanded for the limited purpose of verifying these revised figures.
However, during the remand period, the PCIT invoked his revisionary powers u/s 263 who alleging that the original assessment was “erroneous” for the AO’s failure to ensure a proportionate distribution of Head Office expenses among the units. The Appellant challenged the PCIT order u/s 263 before the ITAT but with no avail.
The Hon’ble High Court admitted appeal on the question as to whether the PCIT was having jurisdiction u/s 263 to revisit the quantum of a Section 80-IA deduction when the said deduction had already been the subject matter of an adjudication by the CIT(Appeals) or after the same had undergone the specialized rigor of Transfer Pricing proceedings under Section 92CA?
The Hon’ble High Court held that in the context of an abated search assessment, where the AO’s power of inquiry is at its zenith, the failure to verify the “expense side” of the ledger creates a jurisdictional void. Since this void was not addressed by the appellate authority, hence no merger occurred. The AO’s order, therefore, retained its independent identity regarding the un-probed costs, leaving it open to the PCIT’s corrective intervention.
The Hon’ble High Court further held that if the TPO did not adjudicate the allocation of Head Office expenses because it fell outside the scope of the ALP determination, there was no “finding” to bind the AO. The Hon’ble High Court stated that the mechanism for Transfer Pricing orders does not divest the jurisdictional PCIT of his power under Section 263. While the TPO determines the fairness of the price, the AO remains the guardian of the completeness of the Profit & Loss account. Where the AO fails to reconcile these two distinct variables, the resulting order is both “erroneous” and “prejudicial.”
The appellant had also taken refuge under the decision of Hon’ble Supreme Court contending that in the absence of tangible seized evidence or “incriminating material” discovered during the search, the Revenue is precluded from disturbing the reported income.
The Hon’ble High Court stated that the legal effect of “abatement” is the total restoration of the Assessing Officer’s plenary powers. For an abated year, the AO’s jurisdiction is not a narrow, evidence-centric window, but a wide, all encompassing door, co-extensive with a regular scrutiny under Section 143(3). In this “reset” jurisdiction, the AO is mandated to determine the “total income” of the assessee from all sources. This mandate exists independently of whether specific components of that income—such as the internal allocation of corporate overheads—were reflected in seized documents.
The Hon’ble High Court held that in abated search assessments under Section 153A, the AO’s investigative powers are as wide as a regular scrutiny and are not restricted to “incriminating material.” The absence of specific seized material regarding a particular expense does not immunize the AO’s failure to verify a substantial tax claim.
Accordingly, the appeals were dismissed.
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