ITAT Hyderabad Quashes Section 148 Reassessments for Four Years, Partly Allows Vamsiram Builders Appeals on Unaccounted Cash Additions
ITAT Hyderabad quashes Section 148 notices for assessment years 2016-17 to 2019-20 for want of Section 149(1)(b) conditions, while partly sustaining additions on unaccounted cash receipts for later years.
The Income Tax Appellate Tribunal's Hyderabad "B" Bench, in a consolidated order pronounced on 5 June 2026, partly allowed nine appeals filed by Vamsiram Builders and Developers Pvt. Ltd. (formerly Vamsi Ram Builders, a partnership firm) against the ACIT, Central Circle-1(1), Hyderabad. The appeals covered assessment years 2016-17 to 2023-24. The Bench quashed Section 148 notices and the consequent assessment orders under Section 143(3) read with Section 147 for assessment years 2016-17 to 2019-20, holding that the Assessing Officer had not satisfied the mandatory conditions under Section 149(1)(b). For the remaining years, the Bench partly allowed the appeals, directing the AO to recompute unaccounted cash receipts without adding two zeroes except where supporting evidence existed, while upholding the 16% profit rate applied to those receipts.
The Dispute Before the Tribunal
The assessee is a Hyderabad-based real estate developer engaged in construction and sale of residential flats and commercial spaces. A search and seizure operation under Section 132 was conducted on 6 December 2022 across the Vamsiram Builders Group. During the search, the Investigation Department, acting on digital surveillance, issued summons under Section 131 to Shri Sameer Yegge Kadel — a cook at the residence of the group's Managing Director, Shri Badvelu Subba Reddy — who produced loose sheets, diaries, promissory notes, cheques, and two mobile phones. Separately, Shri Atla Chandrashekar, Manager (Accounts), produced pen drives containing Excel sheets recording cash transactions.
Statements recorded from Shri Atla Chandrashekar and Shri Regu Venkata Vara Prasad, Manager (Accounts & Finance), during the search indicated that cash transactions in the seized material had been recorded after truncating the last two digits — effectively suppressing two zeroes. Both employees subsequently filed retraction affidavits on 9 February 2023, with further detailed affidavits on 17 March 2023 and 5 April 2023, stating their initial statements were signed without verifying the contents. Shri Badvelu Subba Reddy, in his own statement recorded on 10 and 11 December 2022, denied any suppression of two digits and stated he had not authorised the employees to maintain the pen drives.
Following the search, the AO reopened assessments for AY 2016-17 to 2022-23 by issuing notices under Section 148 on 22 December 2023. The assessee filed returns in response, admitting additional income of Rs. 1,21,896 for AY 2016-17. The AO, relying on the seized material and statements from eighteen vendors, landlords, and service providers, concluded that cash transactions had been recorded after suppressing two zeroes, computed gross unaccounted receipts accordingly, and estimated income at 16% of those receipts. For AY 2016-17, the addition came to Rs. 1,95,03,320. The Commissioner of Income Tax (Appeals), Hyderabad-11, upheld the AO's findings across all years.
The Assessee's Case on Jurisdiction
CA M.V. Prasad, appearing for the assessee, argued that for AY 2016-17 to 2019-20, the Section 148 notices were issued beyond three years from the end of the relevant assessment years. In such cases, 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 lakhs or more.
The assessee contended that the seized cash book was not a book of account; it was a selective record of cash receipts and payments for the entire Vamsiram Group without company-wise segregation. No undisclosed asset had been identified, no unexplained expenditure under Section 69C had been established, and no accommodation entries in the books of account had been pointed to. The AO had merely referred to alleged cash receipts without establishing the nexus required by Section 149(1)(b). The assessee relied on decisions of the Delhi High Court in Mohd. Athar Anjum v. ACIT (2025) 174 taxmann.com 337 and Huawei Telecommunications (India) Company Pvt. Ltd. v. ACIT, and on the coordinate Bench's earlier order in M/s. Ace Tyres Private Limited v. ACIT, ITA Nos. 1084 to 1088/Hyd/2024.
On the material seized from Shri Sameer Yegge Kadel, the assessee argued that the summons under Section 131 had been issued after the search under Section 132(1) had already commenced. Section 131(1A) permits the authorised officer to issue summons only before taking action under Section 132(1) clauses (i) to (v). The post-commencement summons was therefore illegal, and the material produced in response could not form the basis of a Section 148 notice without following the procedure under Section 148A.
The Revenue's Response
The CIT-DR, Dr. Narendra Kumar Naik, and Senior AR Dr. Sachin Kumar submitted that Explanation 2(i) to Section 148, inserted by the Finance Act 2021, creates a deeming fiction: where a search is initiated under Section 132 on or after 1 April 2021, the AO is deemed to have information suggesting escapement of income. The search in this case was initiated on 6 December 2022, well after that date. The Revenue argued that the term “asset” in Section 149 should be read broadly to include undisclosed income itself as a resource with economic value, and that the AO's reasons clearly showed information suggesting escapement.
On the seizure from Shri Sameer Yegge Kadel, the Revenue argued that even if the search were treated as irregular, evidence collected during an illegal search is not automatically inadmissible, relying on the Supreme Court's decisions in Pooran Mal v. DIT (1974) 93 ITR 505 (SC) and Dr. Prathap Singh v. Director of Enforcement (1985) 155 ITR 166 (SC).
How the Tribunal Reasoned on Section 149(1)(b)
The Bench examined the seized cash book and found that the transactions recorded in it were cash receipts and payments relating to sale of flats, office spaces, and business expenditure. No corresponding cash or other asset had been found during the search representing those entries. The transactions were not in respect of purchase or acquisition of any asset within the meaning of the Explanation to Section 149. The cash book was not a book of account or a parallel set of books; it was a selective record of cash transactions for the entire group without company-wise accounts. Accordingly, the entries in the cash book did not constitute “entries in the books of account” under Section 149(1)(b)(iii), and the transactions did not represent an “asset” under Section 149(1)(b)(i).
The Bench further found that the AO had recorded satisfaction in the reasons for reopening in a mechanical manner. The reasons did not identify any specific asset or describe the nature of entries in the books of account. The AO had proceeded on the basis of figures provided by the ADIT (Investigation) without independently verifying the nature of transactions, the net outcome of receipts and payments, or the apportionment of amounts to each group company for each assessment year. This amounted to borrowed satisfaction and non-application of mind.
Following the coordinate Bench's reasoning in M/s. Ace Tyres Private Limited v. ACIT and the Delhi High Court's decisions in Mohd. Athar Anjum and Huawei Telecommunications, the Bench held that the conditions under Section 149(1)(b) were not satisfied for AY 2016-17 to 2019-20. The notices under Section 148 and the consequent assessment orders for those four years were quashed.
Illegality of Summons Issued During Search
On the material seized from Shri Sameer Yegge Kadel, the Bench held that Section 131(1A) authorises 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 was issued on 8 December 2022, after the search had already commenced on 6 December 2022. The summons was therefore issued in violation of Section 131(1A), and the consequent seizure of material from his possession was illegal. The AO could rely on such material only by following the procedure under Section 148A, which had not been done. The Bench applied the principle that where a thing is required to be done in a particular manner, it must be done in that manner and no other, citing the Telangana High Court's decision in Kanakanala Ravinder Reddy v. ITO (2023) 156 taxmann.com 178.
Validity of Notices for AY 2020-21 to 2022-23
For AY 2020-21 to 2022-23, the Bench examined whether Explanation 2(i) to Section 148 applied. The Bench found that even under the deeming fiction, the AO was required to demonstrate that the information obtained during the search suggested escapement of income for the specific assessment year for which the notice was issued. The AO had not done so. The notices for AY 2022-23 were quashed on the same basis. For AY 2020-21 and 2021-22, the Bench's detailed reasoning in paragraphs 39 to 48 of the order was applied.
Addition of Two Zeroes and the 16% Profit Rate
For the assessment years where the notices were not quashed, the Bench considered the AO's methodology of adding two zeroes to the figures in the seized cash book to arrive at gross unaccounted receipts, and then applying a 16% net profit rate.
The Bench directed the AO to adopt the gross receipts as recorded in the cash book without adding two zeroes, except in cases where there was supporting evidence — such as cash receipts, bills, vouchers, or WhatsApp chats — corroborating the truncation of two zeroes. The Bench upheld the 16% profit rate, noting that the assessee had declared an average net profit of 19.43% in earlier years with a median of 16.05%, and that unaccounted transactions typically carry a higher profit margin because general administrative expenses are absorbed in the declared accounts. The assessee's proposed 10% rate was not supported by any justification.
Addition Under Section 69 — Cash Payment to M/s. Unique Inflatables Ltd.
For AY 2019-20, the AO had added Rs. 2 crores under Section 69 as unexplained investment, representing alleged cash payments to M/s. Unique Inflatables Ltd. for development of land at Survey No. 92, Nanakaramguda, Serilingampalli, RR District. The evidence was a signed cash receipt found during a survey at the premises of Shri Ramdugu Ramdev Rao, Managing Director of M/s. Unique Inflatables Ltd. The assessee did not dispute the land development transaction but challenged the evidentiary value of a third-party document. The Bench upheld the addition, finding that the assessee had neither denied the transaction nor explained the cash payments, and that the signed receipt constituted clear evidence.
For AY 2022-23, a similar addition of Rs. 50 lakhs under Section 69 for cash payment to M/s. Unique Inflatables Ltd. was upheld on the same reasoning.
For AY 2023-24, the AO had added Rs. 2 crores on the basis of an unsigned cash receipt found as a WhatsApp message downloaded from a mobile phone during a survey. Shri Ramdugu Ramdev Rao stated in his recorded statement that he normally signed receipts wherever he received cash, and since the receipt in question was unsigned, he could not confirm receipt of cash from Shri B. Subba Reddy. The Bench found the evidence inconclusive. It directed the AO to verify whether a signed cash receipt existed: if a signed receipt was available, the addition was to be sustained; if not, the AO was directed to delete the Rs. 2 crore addition.
Outcome
All nine appeals — ITA Nos. 661 to 667/Hyd/2026 for AY 2016-17 to 2022-23 and ITA Nos. 836 and 837/Hyd/2026 for AY 2022-23 and 2023-24 — were partly allowed. The Section 148 notices and assessment orders for AY 2016-17 to 2019-20 were quashed. For the remaining years, the AO was directed to recompute gross unaccounted receipts without adding two zeroes except where corroborated by documentary evidence, while the 16% profit rate was sustained. The Section 69 additions for AY 2019-20 and 2022-23 were upheld; the AY 2023-24 addition was remanded for verification of the signed receipt. The order was pronounced in open court on 5 June 2026 by Vice President Shri Vijay Pal Rao and Accountant Member Shri Manjunatha G.