The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has held that approval granted for reopening an income-tax assessment cannot be treated as mechanical merely because the Assessing Officer’s proposal, superior officer’s recommendation and Principal Commissioner’s approval were all made on the same day, or because the sanctioning authority recorded only the word “Approved”.
The bench of Beena Pillai (Judicial Member) and Jagadish (Accountant Member) has observed that a mere difference between two turnover reports cannot by itself sustain an addition as unexplained expenditure unless the Assessing Officer records a factual finding regarding the existence of expenditure actually incurred by the assessee and its source.
The appeal arose from an assessment order passed under Section 143(3) read with Sections 147, 254 and related provisions of the Income-tax Act. The assessee challenged, among other things, the validity of reassessment, disallowance of salary expenditure of ₹65.10 lakh, disallowance of business associate expenditure of ₹1.17 crore, and an addition of ₹1.08 crore under Section 69C arising from a difference in buy turnover.
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The reassessment proceedings were initiated on the basis of information received from the DDIT (Investigation), Unit-6(3), Mumbai regarding client code modifications and information obtained from the National Spot Exchange Ltd. (NSEL).
According to the material available to the tax authorities, NSEL reflected buy turnover of ₹3,28,98,252, whereas the assessee had reported ₹2,20,87,302, resulting in a difference of ₹1,08,10,950. The Tribunal found that these constituted “specific, external and tangible inputs” having a live nexus with the formation of a belief that income chargeable to tax had escaped assessment.
The ITAT emphasised that at the stage of recording reasons for reopening, the Assessing Officer was required only to form a prima facie belief and was not required to conclusively establish escapement of income. The correctness of the information and the assessee’s explanation could be examined during reassessment proceedings.
A significant challenge raised by the assessee concerned the approval obtained under Section 151.
It was argued that the reassessment notice was dated March 31, 2019 and that the proposal of the Assessing Officer, recommendation of the Joint Commissioner and final approval of the Principal Commissioner were all recorded on the same day. The Principal Commissioner had also merely written the word “Approved”.
The assessee therefore contended that the sanction was mechanical and suffered from non-application of mind.
The Tribunal, however, declined to invalidate the approval merely because all the steps had taken place on the same date.
It observed that the proposal placed before the sanctioning authority contained the assessee’s identity, assessment year, nature and quantum of the alleged escaped income and the reasons recorded by the Assessing Officer. The proposal also travelled through the prescribed superior authority before being approved by the competent Principal Commissioner.
Crucially, the ITAT observed that the fact that statutory authorities acted on the last day of limitation or completed the approval process on the same day does not, by itself, establish absence of application of mind. What mattered was whether the sanctioning authority had the reasons and relevant proposal before it and had signified its satisfaction.
The Tribunal considered judicial precedents relied upon by the assessee, including CIT v. S. Goyanka Lime & Chemical Ltd., Saraswat Co-operative Bank Ltd. v. ACIT and Capital Broadways (P.) Ltd. v. ITO.
It acknowledged the principle that sanction under Section 151 must be real and not ritualistic. However, the Tribunal clarified that whether approval is mechanical is ultimately a factual inference that must be drawn from the approval record and surrounding circumstances.
According to the Bench, the cited decisions could not be treated as laying down an inflexible proposition that use of the word “Approved” or grant of sanction on the same day would automatically invalidate the approval irrespective of what had actually been placed before the sanctioning authority.
In the present case, the sanction followed a specific proposal based on investigation information and a quantified NSEL turnover difference. The assessee had not established that the approving authority was not supplied with or did not consider the recorded reasons.
The Tribunal therefore found no ground to invalidate the Section 151 sanction merely because it was granted on March 31, 2019.
Another challenge concerned an apparent discrepancy in dates.
The recorded reasons referred to “details received from the assessee”. However, according to the assessee, its response dated March 29, 2019 carried a tapal acknowledgement dated April 1, 2019. It was therefore questioned how a document allegedly received on April 1 could find reference in reasons recorded on March 31.
The Tribunal held that even if the disputed reference to the assessee’s response was excluded, the reasons independently referred to investigation information regarding client code modification and NSEL data received on March 11, 2019 showing the ₹1.08 crore turnover difference.
Those materials existed before the reasons were recorded and were sufficient to provide a prima facie foundation for reopening.
The ITAT held that ambiguity regarding when one particular response reached the Assessing Officer did not wipe out the independently available information from the Investigation Wing and NSEL. In the absence of material demonstrating fabrication or alteration of the reasons, the date anomaly was insufficient to invalidate the notice.
The Tribunal also rejected the contention that jurisdiction was invalid because the entire NSEL report had not been supplied before issuance of the reassessment notice.
It noted that the reasons supplied to the assessee disclosed the source and substance of the information, including the turnover reported by NSEL, turnover reported by the assessee and the precise difference proposed to be examined.
The Tribunal observed that at the initiation stage, adequacy or sufficiency of the underlying material was not open to appellate substitution so long as there was a rational connection between the material and the belief formed.
However, it safeguarded the assessee’s rights by stating that while deciding the matter on merits, the Assessing Officer would have to confront the assessee with any material proposed to be used against it and consider the reconciliation offered.
Since the reassessment notice was issued more than four years after the end of the relevant assessment year and the original assessment had been completed under Section 143(3), the assessee also invoked the first proviso to Section 147.
The Tribunal found that the information leading to reopening concerned client code modifications and a material mismatch between the buy turnover shown in NSEL data and that disclosed by the assessee.
Nothing was placed before the Tribunal to demonstrate that during the original assessment the assessee had disclosed NSEL-reported buy turnover of ₹3.28 crore, reconciled it with its lower figure of ₹2.20 crore or placed the client code modification information before the Assessing Officer.
The Bench notably observed that disclosure of books or general trading records does not amount to full and true disclosure of a specific external-data mismatch that was neither identified nor reconciled.
Consequently, the Tribunal dismissed the ground challenging reopening, holding that the AO possessed tangible material, the Section 151 sanction had not been shown to be mechanical, the alleged date discrepancy did not displace the pre-existing information, and the conditions applicable to reopening beyond four years were satisfied.
On merits, the dispute also involved disallowance of salary expenditure of ₹65.10 lakh and business associate expenditure of ₹1,17,92,352.
The salary expenditure was claimed to represent the assessee’s share of common employee costs under an April 1, 2011 Memorandum of Understanding with a group company. The assessee relied upon the MOU, debit notes, employee details and the stated basis for allocation of common expenditure.
However, the Tribunal found gaps in the evidence before the lower authorities. Employee-wise information regarding appointment and period of service, designation and functions, salary and deductions, payment details, TDS compliance, payroll entity and the nature and extent of services rendered to the assessee required verification.
The Bench observed that the MOU and debit notes might explain the framework of cost sharing, but without underlying payroll, payment and accounting records they could not by themselves establish the genuineness and correct quantification of the deduction.
Similar deficiencies were noticed regarding business associate expenditure. The Tribunal said it was necessary to determine whether the evidence covered the entire ₹1.17 crore expenditure rather than merely sample parties and whether payments could be reconciled with ledgers, TDS returns, bank accounts, recipient confirmations and brokerage income generated through the respective business associates.
Accordingly, both issues were restored to the Assessing Officer for de novo verification. The Tribunal also directed correction of the apparent figure of ₹1,70,92,352 mentioned in the appellate order and verification with reference to the amount actually disallowed in the assessment order.
The other major issue concerned the ₹1,08,10,950 addition under Section 69C.
The addition represented the difference between buy turnover of ₹3,28,98,252 reported by NSEL and ₹2,20,87,302 initially reported by the assessee.
The assessee explained that its first saudabook reflected purchases generated from its system, whereas a later party-wise saudabook reflected the same figure as NSEL. The discrepancy was attributed to a software/report-generation issue. The later reconciliation showed buy turnover of ₹3,28,98,252, matching the NSEL figure.
The Tribunal found that this reconciliation required factual examination through complete party-wise saudabooks, client ledgers, exchange data, contract notes, settlement records, bank/commodity accounts, brokerage ledgers and the system-generated audit trail.
Importantly, because the addition had been made under Section 69C, the ITAT directed the Assessing Officer to specifically ascertain whether expenditure had actually been incurred by the assessee and what its source was.
The Tribunal categorically observed that “a mere difference between two turnover reports cannot be sustained under section 69C without such factual finding.”
The ₹1.08 crore issue was therefore restored to the Assessing Officer for fresh adjudication. The assessee was directed to provide transaction-wise reconciliation of both saudabooks with NSEL data, supporting primary records and technical evidence concerning the alleged software/report-generation error.
The ITAT dismissed the challenge to reopening of assessment. The additional ground concerning the ₹427 client code modification addition was dismissed as not pressed, while the natural justice ground was treated as academic.
The issues concerning salary expenditure, business associate expenditure and the ₹1.08 crore Section 69C addition were restored to the Assessing Officer for fresh verification and were therefore allowed for statistical purposes.
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