ITAT Hyderabad Quashes Reassessment Notices for AY 2017-18 to 2019-20, Partly Allows Appeal on Two-Zero Truncation Issue

ITAT Hyderabad set aside Section 148 notices for three years as barred by limitation, and directed the AO to restrict additions to entries supported by corroborative evidence.

The Income Tax Appellate Tribunal, Hyderabad “B” Bench, has partly allowed six consolidated appeals filed by Sohini Developers LLP, a Hyderabad-based real estate firm, against reassessment orders covering assessment years 2017-18 to 2022-23. The Bench, comprising Vice President Shri Vijay Pal Rao and Accountant Member Shri Manjunatha G, quashed the Section 148 notices and consequent assessment orders for AY 2017-18 to 2019-20 on the ground that the Assessing Officer failed to satisfy the jurisdictional conditions under Section 149(1)(b) of the Income-tax Act, 1961. For the remaining years, the Tribunal set aside the additions made by multiplying seized cash book entries by one hundred, holding that the two-zero truncation theory could not be applied wholesale across all entries. The 16% profit rate adopted by the AO was, however, upheld for all six years.

The Search, the Seized Material, and the Reassessment

A search and seizure operation under Section 132 of the Act was conducted on 6 December 2022 in the case of M/s. Vamsiram Builders Group. Sohini Developers LLP is one of the entities of that group. Separate search warrants were issued in the names of the Managing Director, Shri Badvelu Subba Reddy, and key employees including Shri Atla Chandrashekar (Manager, Accounts) and Shri Regu Venkata Vara Prasad (Manager, Accounts & Finance).

Based on digital surveillance, the Department identified that material belonging to the group was in the possession of Shri Sameer Yegge Kadel, a cook at the Managing Director's residence. Summons under Section 131 were issued to him on 8 December 2022. He appeared and produced loose sheets, promissory notes, cheques, a diary, and two mobile phones. The authorised officer seized this material and inventoried it as Annexures A/ENX01/YS/01 to 04.

Separately, Shri Atla Chandrashekar, in his statement recorded on 8 and 9 December 2022, stated that cash transactions in the seized material — including pen drives — were recorded after truncating two zeroes. Shri Regu Venkata Vara Prasad confirmed this in his statement on 10 December 2022. However, Shri Badvelu Subba Reddy, in his sworn statement on 10 and 11 December 2022, denied any suppression of digits and denied authorising the employees to maintain pen drives. On 9 February 2023, Shri Chandrashekar and Shri Vara Prasad filed retracting affidavits before the DDIT (Investigation), followed by detailed additional affidavits in March and April 2023.

Consequent to the search, the AO issued notice under Section 148 on 7 December 2023 after obtaining approval. The assessee filed a return in response on 26 February 2024, admitting additional income of Rs. 40,00,000/- at 10% of unaccounted receipts as per its own reading of the seized material. The AO rejected this, applied the two-zero theory to the entire cash book, computed total unaccounted receipts of Rs. 4,00,00,000/- for AY 2017-18, and estimated income at 16% — arriving at an addition of Rs. 64,00,000/- for that year alone. The CIT(Appeals) upheld both the validity of the notices and the additions.

The Jurisdictional Challenge: Section 149(1)(b) and the Three-Year Bar

Before the Tribunal, the assessee's counsel, CA M.V. Prasad, argued that the notices for AY 2017-18 to 2019-20 were issued beyond three years from the end of the relevant assessment years. For such notices to be valid, Section 149(1)(b) requires the AO to be in possession of books of account, documents, or evidence revealing that income chargeable to tax — represented in the form of an asset, expenditure in respect of a transaction or event, or an entry in the books of account — has escaped assessment amounting to Rs. 50,00,000/- or more.

The counsel contended that the seized cash book was not a book of account. It contained only selective cash receipts and payments of the entire Vamsiram Group in consolidated form, not entity-wise accounts. No undisclosed asset was identified. No accommodation entry or unexplained banking entry was pointed to. The AO had simply relied on the ADIT (Investigation)'s quantification without independently verifying the nature of the transactions or attributing amounts to each group entity.

The Revenue's Senior AR, Dr. Sachin Kumar, and CIT-DR countered that the Finance Act, 2021 amendments made Section 148 information-driven, and that Explanation 2(i) to Section 148 deemed the AO to have information where a search was initiated on or after 1 April 2021. The search here was on 6 December 2022. The Revenue also argued that undisclosed income offered or estimated on undisclosed receipts itself constitutes an “asset” for the purposes of Section 149.

The Tribunal rejected the Revenue's position. It held that the cash book entries were receipts and payments in cash, with no corresponding asset found during the search. The transactions related to sale of flats and commercial spaces — ordinary business transactions — which do not constitute an asset within the Explanation to Section 149. The cash book was not a book of account; it was a consolidated record of selective cash transactions of the entire group, not a separate account for each entity. It therefore did not satisfy sub-clause (iii) of Section 149(1)(b) either.

The Tribunal also found that the AO had recorded satisfaction in a mechanical manner, relying on the ADIT (Investigation)'s figures without minimum verification of the nature of transactions, the net outcome of receipts and payments, or the apportionment of amounts to each group company. The reasons recorded did not contain a single word describing what kind of asset the escaped income represented. This was, in the Tribunal's words, “a simple case of non-application of mind and a borrowed satisfaction.”

The Bench followed the coordinate Bench decision in M/s. ACE Tyres (P.) Ltd. v. ACIT in ITA Nos. 1084 to 1088 and 1207/Hyd/2025, which had taken an identical view on materially similar facts involving the same Vamsiram Group. It also drew support from the Delhi High Court decisions in Mohd. Athar Anjum v. ACIT reported in (2025) 174 taxmann.com 337 and Huawei Telecommunications (India) Company Pvt. Ltd. v. ACIT in W.P.(C) No. 15970/2023, and the Supreme Court's ruling in Arun Kumar & Ors. v. Union of India & Ors. reported in 286 ITR 89 (SC) on the necessity of jurisdictional facts.

Legality of the Seizure from Shri Sameer Yegge Kadel

The Tribunal also addressed a separate procedural challenge. The material seized from Shri Sameer Yegge Kadel was not found in the premises of the assessee or any associated concern. It was brought by him in response to summons under Section 131. The Tribunal held that under Section 131(3), an authority may impound and retain documents produced before it, but cannot seize them as if found in searched premises.

More significantly, the Tribunal held that Section 131(1A) empowers the authorised officer to issue summons only before taking action under Section 132(1) clauses (i) to (v). In this case, the summons to Shri Sameer Yegge Kadel were issued on 8 December 2022 — after the search had already commenced on 6 December 2022. The summons were therefore issued after the search action had begun, making them illegal under Section 131(1A). The material obtained through those summons could not be used to support a notice under Section 148 read with Explanation 2(i). If the AO wished to rely on that material, the proper route was Section 148A, with its prescribed procedure. Since that procedure was not followed, the notice under Section 148 based on that material was unsustainable. The Tribunal relied on the Telangana High Court's decision in Kanakanala Ravinder Reddy v. ITO reported in (2023) 156 taxmann.com 178 for the principle that where a thing is to be done in a particular manner, it must be done in that manner alone.

The Two-Zero Truncation Theory: Partly Accepted, Partly Rejected

For AY 2020-21 to 2022-23, the notices were within three years and the Tribunal proceeded to examine the merits of the additions. The core dispute was whether the entries in the seized cash book were recorded after suppressing the last two digits, so that each figure had to be multiplied by one hundred to arrive at the actual amount.

The AO had relied on the sworn statements of Shri Atla Chandrashekar and Shri Regu Venkata Vara Prasad, enquiries with eighteen third parties including vendors, landlords, and service providers, and certain estimate slips, handwritten loose sheets, WhatsApp chats, and cash vouchers found during the search. The AO applied the two-zero theory uniformly to all entries and estimated income at 16% of the grossed-up receipts.

The Tribunal found several infirmities in this approach. First, the retraction affidavits filed by Shri Chandrashekar and Shri Vara Prasad were general in nature, but the statement of Shri Badvelu Subba Reddy — the Managing Director and key person of the group — specifically denied suppression of digits during the search itself. The Tribunal held that the Managing Director's sworn statement carried greater evidentiary weight and could not be ignored.

Second, the AO did not produce the eighteen third-party witnesses for cross-examination before the assessee, despite their statements being used as the basis for adverse findings. The Tribunal applied the Supreme Court's ruling in Andaman Timber Industries v. CCE reported in (2015) 62 taxmann.com 3 (SC), which held that denying cross-examination of witnesses whose statements form the basis of an order is a serious flaw amounting to a violation of natural justice and renders the order a nullity.

Third, no forensic or scientific examination of the digital material was conducted. No expert opinion was obtained to establish any manipulation or coding pattern in the excel sheets or diaries. No corroborative evidence in the form of actual sale deeds, bank deposits, or customer confirmations establishing collection of on-money above the figures in the cash book was found during the search.

The Tribunal, however, did not entirely reject the two-zero theory. It found that for certain entries, the AO had brought on record supporting evidence in the form of cash receipts, estimate slips, bills, and WhatsApp chats. For those specific entries, the theory was corroborated. The Tribunal therefore directed the AO to restrict the addition of two zeros to entries in the cash book that are fully supported by such corroborative evidence. For all remaining entries, the figures in the cash book are to be taken as they stand, without multiplication.

On the profit rate, the Tribunal upheld 16%. The assessee had itself declared an average of approximately 15% profit in its regular returns over several years. The Tribunal accepted the AO's reasoning that profit on unaccounted receipts tends to be higher than on declared transactions because general administrative and overhead expenses are typically absorbed in the regular books. The assessee failed to produce evidence justifying the 10% rate it had adopted. The CIT(Appeals)' confirmation of 16% was therefore upheld for all six assessment years.

Order

The Tribunal quashed the Section 148 notices and the assessment orders under Section 143(3) read with Section 147 for AY 2017-18, 2018-19, and 2019-20. For AY 2020-21, 2021-22, and 2022-23, the Tribunal set aside the CIT(Appeals)' order on the two-zero truncation issue and directed the AO to recompute gross receipts by adding two zeros only to those cash book entries supported by corroborative evidence such as cash receipts, bills, and WhatsApp chats. The 16% profit rate was upheld across all years. All six appeals in ITA Nos. 792 to 797/Hyd/2026 were partly allowed by the common order pronounced on 5 June 2026.