The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has quashed reassessment proceedings initiated for Assessment Year 2014-15, holding that when an assessment completed under Section 143(3) of the Income Tax Act is reopened after four years, the Assessing Officer must specifically establish, in the recorded reasons, that the alleged escapement of income was caused by the assessee’s failure to fully and truly disclose all material facts.
The bench of Beena Pillai (Judicial Member) and Ratna Dasgupta (Accountant Member) observed that information subsequently received from the Investigation Wing or through the Insight Portal may constitute tangible material for forming a belief that income has escaped assessment, but such information by itself does not satisfy the additional jurisdictional requirement contained in the first proviso to Section 147. Since the reasons recorded by the Assessing Officer merely reproduced the statutory expression regarding failure to disclose material facts without identifying any specific undisclosed fact or explaining its nexus with the alleged escapement of income, the reassessment was held invalid and the proceedings were quashed.
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The assessee, a Non-Banking Financial Company (NBFC) engaged in money lending and investments, had filed its return of income for AY 2014-15 on November 21, 2014, declaring total income of ₹2,36,96,026.
The return was initially processed under Section 143(1), followed by scrutiny proceedings. Notices under Sections 143(2) and 142(1) were issued, and the assessee furnished details in response to the departmental queries.
After considering the material placed on record, the Assessing Officer completed the assessment under Section 143(3) on December 23, 2016, accepting the returned income without making any addition.
Subsequently, the Assessing Officer received information through the Insight Portal/Investigation Wing concerning certain alleged suspicious transactions relating to Financial Year 2013-14.
Based on this information, the assessment was reopened under Section 147 and notice under Section 148 was issued on March 31, 2021.
The reasons recorded by the Assessing Officer referred to alleged transactions involving Decent Vincom Pvt. Ltd., VMS Industries Ltd. and other parties, aggregating to ₹3,11,17,134. The Assessing Officer formed a belief that income chargeable to tax had escaped assessment and stated that the escapement had occurred on account of the assessee’s failure to disclose fully and truly all material facts necessary for the assessment.
A reassessment order under Sections 143(3) read with 147 was subsequently passed on March 30, 2022, resulting in several additions relating, among other things, to alleged accommodation entries, an alleged fictitious loss in VMS Industries Ltd., sale proceeds of Steel Exchange Ltd. and consequential commission.
The assessee challenged both the validity of the reopening and the additions made in reassessment proceedings.
Among the disputed additions were ₹50 lakh relating to alleged unexplained cash receipts from Decent Vincom Pvt. Ltd., ₹1,31,36,591 relating to the alleged bogus business loss from sale of VMS Industries Ltd., ₹2,27,277 as estimated commission, ₹48,41,603 relating to purchase transactions involving Nyssa Corporation Ltd., and ₹1,00,70,461 relating to sale consideration from shares of Steel Exchange Ltd.
The assessee also challenged the validity of the Section 148 notice on several jurisdictional grounds, including the alleged absence of proper sanction and violation of Section 151A.
However, the Tribunal ultimately found it unnecessary to adjudicate these additions on merits because the reassessment itself was invalid.
The central issue before the Tribunal was whether the Assessing Officer could validly reopen an assessment after four years from the end of the relevant assessment year when the original assessment had been completed under Section 143(3), but the recorded reasons did not identify any specific failure by the assessee to disclose fully and truly all material facts.
The Tribunal noted that the notice under Section 148 was issued on March 31, 2021, whereas the original scrutiny assessment had been completed on December 23, 2016. Consequently, the first proviso to Section 147 became critical to determining the Assessing Officer’s jurisdiction.
The Tribunal emphasized that where an assessment has already been completed under Section 143(3), reopening after the expiry of four years requires satisfaction of an additional statutory condition.
It is not enough for the Assessing Officer to form a belief that income has escaped assessment. The Assessing Officer must also establish that the escapement occurred “by reason of failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment.”
The Tribunal relied on the Supreme Court’s decision in Ganga Saran & Sons (P.) Ltd. v. ITO, observing that the conditions for assuming reassessment jurisdiction are distinct and that failure to satisfy either of the required conditions would render the notice without jurisdiction.
It also referred to the Supreme Court’s ruling in CIT v. Kelvinator of India Ltd., which reiterated that reassessment powers cannot be used as a power of review and that there must be tangible material supporting the assumption of jurisdiction.
A significant observation of the Tribunal was that the Assessing Officer cannot satisfy the first proviso to Section 147 merely by reproducing the statutory wording.
In the present case, the recorded reasons quantified the alleged transactions and stated that income had escaped assessment due to failure to disclose fully and truly all material facts. However, the reasons did not identify which particular material fact had not been disclosed, nor did they explain how the alleged failure resulted in the escapement of income.
The Tribunal held that the first proviso requires a factual nexus between the alleged failure to disclose and the alleged escapement of income. A bare recital of the statutory expression cannot substitute for the factual foundation required for assuming jurisdiction.
The Tribunal made an important distinction between two separate aspects of reassessment proceedings.
First, subsequent information received by the Department may provide tangible material enabling the Assessing Officer to form a belief that income has escaped assessment.
Second, where reopening takes place beyond four years after a scrutiny assessment, the Department must independently establish that the escapement occurred because the assessee failed to fully and truly disclose material facts.
The Tribunal made clear that these two requirements cannot be treated as interchangeable.
Thus, the subsequent receipt of Investigation Wing information could explain why the Assessing Officer suspected escapement of income, but it could not, by itself, establish that the assessee had failed to make the required disclosure during the original assessment proceedings.
The Tribunal attached significance to the fact that the original assessment was not a summary or unattended assessment.
The assessment under Section 143(3) was completed after notices under Sections 143(2) and 142(1) were issued and after the assessee furnished details and documentary material during the scrutiny proceedings.
According to the Tribunal, the material subsequently relied upon for reopening related to transactions that had been supported by documentary records and disclosed during the original assessment proceedings.
Therefore, the Tribunal found no specific withheld primary fact identified in the reasons recorded by the Assessing Officer.
The Tribunal further held that the validity of reassessment jurisdiction must be tested on the basis of the reasons recorded at the time the notice under Section 148 was issued.
The Revenue cannot subsequently attempt to demonstrate during appellate proceedings that some material fact had allegedly not been disclosed when that fact, and its connection with the alleged escapement of income, were absent from the original reasons.
If the Revenue’s case is that a material fact was withheld, that fact and its nexus with the alleged escapement should have been recorded when jurisdiction was assumed.
The Tribunal also observed that the case was not one where the Department discovered that the assessee had failed to disclose primary facts.
Instead, the material indicated that the relevant transactions had already been disclosed and supported by documentary particulars during the original scrutiny proceedings. What subsequently emerged was information concerning the nature or characterization of those transactions.
The Tribunal held that a subsequent change in the Revenue’s understanding of transactions that had already been disclosed cannot, by itself, be converted into a failure of disclosure by the assessee.
The Tribunal cautioned that accepting subsequent information alone as sufficient to satisfy the first proviso would effectively make the additional statutory safeguard meaningless.
According to the Tribunal, in every case where an assessment under Section 143(3) is sought to be reopened after four years, the Revenue could otherwise rely upon subsequently received information to establish escapement of income. But Parliament has imposed an additional requirement in such cases: the escapement must have occurred because of the assessee’s failure to make a full and true disclosure of material facts.
Therefore, the existence of new information and the existence of a failure of disclosure are separate jurisdictional requirements.
The ITAT concluded that they failed to demonstrate any specific failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment.
The statutory requirement had merely been stated as a conclusion without setting out the factual basis for that conclusion.
Since the Section 148 notice dated March 31, 2021 was issued beyond four years from the end of the relevant assessment year and the reasons did not establish the required failure of disclosure, the Tribunal held that the assumption of jurisdiction under Section 147 was invalid.
Accordingly, the reassessment proceedings were quashed and the additional legal ground raised by the assessee was allowed.
Once the Tribunal invalidated the reassessment proceedings themselves, it held that the grounds challenging the individual additions had become academic.
Consequently, the Tribunal did not adjudicate the disputed additions on their merits. The appeal filed by the assessee was allowed.
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