Assessee is an HUF and sold its half share in a residential property and offered the capital gains to tax after claiming indexed cost of acquisition. A search & seizure action under section 132 of the Act was carried out in case of buyers and addition was made for unexplained on-money. AO initiated re-assessment proceedings under section 147 of the Act in the hands of the Assessee under the belief that addition made in hands of buyer has direct bearing on the seller as well as they were the recipient of the on-money. Accordingly, AO made addition of half share of alleged on-money received by Assessee and not declared as part of sales consideration and revised the capital gain tax payable by Assessee.

On appeal, CIT(A) held that the AO had not followed the procedure laid down by the law for reopening proceedings. CIT(A) noted that reasons of reopening provided to Assessee were mechanical in nature and the AO had adjudicated the matter without disposing the objections of Assessee. It was further submitted that AO received the information in respect of the valuation report from the CIT(A) before whom the appeal of the purchaser was pending for adjudication. The AO of the buyer did not find it worth passing on and thus buyers AO did not record his satisfaction in this respect. The CIT(A) who passed the information to the AO, while adjudicating the matter in case of buyer of property granted substantial relief to the buyer and held that the “valuation report of the valuer cannot be taken as yardstick for unaccounted investment. Hence, the basis for reopening the case, i.e., the copy of valuation report, was held to be invalid for the purpose of making any addition in the hands of the buyer by the CIT(A) and accordingly CIT(A) quashed the impugned order.

Tribunal relied on various decisions and held that reopening on the basis of documents found during course of search of third party premises was invalid and could be done only under section 153C of the Act and quashed the assessment as null and void. (AY. 2008-09)