The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has quashed reassessment proceedings involving a ₹2 crore addition after finding that the mandatory notice under Section 143(2) of the Income Tax Act, 1961, was issued before the taxpayer filed its return in response to the reassessment notice.
The bench of Debjani Mitra Neogy (Judicial Member) and Girish Agrawal (Accountant Member) has observed that the absence of a fresh notice under Section 143(2) after the return was filed rendered the entire reassessment void ab initio. It further ruled that the addition could not survive even on merits because the Assessing Officer had treated the unsecured loans as accommodation entries merely on the basis of an Investigation Wing report, without conducting an independent inquiry or rebutting the documentary evidence produced by the taxpayer.
The dispute related to Assessment Year 2010-11. The taxpayer had filed its original income tax return on September 8, 2010, declaring a total income of approximately ₹91.99 lakh.
The assessment was subsequently reopened through a notice issued under Section 148 on February 13, 2015. The reopening was based on information received following a search and survey conducted by the Directorate General of Income Tax (Investigation), Mumbai, in the case of the Bhanwarlal Jain Group on October 3, 2013.
According to the Assessing Officer, the investigation indicated that the taxpayer was one of the beneficiaries of accommodation entries allegedly provided by concerns connected with the searched group. The transactions identified by the department involved ₹1 crore received from Daksh Diamonds and another ₹1 crore received from Rahul Exports.
On the basis of this information, the Assessing Officer formed the belief that income amounting to ₹2 crore had escaped assessment.
During the reassessment proceedings, notices under Sections 143(2) and 142(1) were issued on February 7, 2016. However, the taxpayer filed its return in response to the Section 148 notice only on February 8, 2016—one day after the Section 143(2) notice had been issued.
No fresh notice under Section 143(2) was issued after the return was filed.
The Tribunal noted that this factual position was undisputed. It accepted the taxpayer’s contention that a notice under Section 143(2) issued before the filing of the return could not satisfy the mandatory statutory requirement.
The Bench observed that the reassessment had been completed without issuing a valid Section 143(2) notice after the taxpayer filed its return in response to the Section 148 notice. Consequently, the proceedings were legally unsustainable.
The ITAT relied on the Bombay High Court’s ruling in ACIT v. Geno Pharmaceuticals Ltd. and the Mumbai Tribunal’s decision in Sudhir Menon v. ACIT. In those decisions, assessments framed without issuing a Section 143(2) notice after the filing of a return pursuant to a Section 148 notice were held to be invalid.
Following these precedents, the Tribunal declared the reassessment bad in law and quashed it as void ab initio.
The Tribunal also examined the merits of the ₹2 crore addition made under Section 68.
Dhaval Shah, Counsel for the taxpayer had submitted documentary evidence relating to both lenders, including loan confirmations, income tax return acknowledgements, audited financial statements and bank statements reflecting the loans and their subsequent repayment. The transactions had been carried out through account-payee cheques.
Despite these documents, the Assessing Officer treated the entire amount as unexplained cash credit.
The original reassessment order had inadvertently recorded the amount received from each lender as ₹10 lakh instead of ₹1 crore and consequently made an addition of only ₹20 lakh. The mistake was later corrected through a rectification order under Section 154, increasing the addition to ₹2 crore.
The Tribunal noticed an important inconsistency in the department’s case.
While the recorded reasons referred to accommodation “bills” allegedly issued to the taxpayer, the reassessment order mentioned parties issuing bills without supplying goods or services. However, the transaction actually under consideration involved unsecured loans, rather than purchases based on accommodation bills.
The Bench found that the Assessing Officer subsequently shifted the focus to the taxpayer’s alleged failure to establish the creditworthiness of the lenders and the genuineness of the loan transactions.
The record, however, showed that the taxpayer had furnished documents establishing the lenders’ identity, their financial capacity and the movement of funds through banking channels.
The Tribunal observed that neither the Assessing Officer nor the Commissioner of Income Tax (Appeals) had identified any defect or deficiency in the documents produced by the taxpayer.
No summons under Section 131 or notices under Section 133(6) were issued to the lenders to independently verify the transactions. The authorities also did not examine the persons whose statements had allegedly formed the basis of the Investigation Wing’s conclusions.
According to the Bench, both the Assessing Officer and the first appellate authority had relied solely on the investigation conducted in the case of the Bhanwarlal Jain Group.
The ITAT held that the department had failed to bring any cogent or corroborative material on record to demonstrate that the loans were, in fact, accommodation entries. There was also no evidence showing that the taxpayer had routed its own unaccounted money through the two lender entities in the guise of unsecured loans.
The taxpayer had specifically requested copies of the statements and other materials relied upon by the Assessing Officer. It had also sought an opportunity to cross-examine Bhanwarlal Jain and the other persons whose statements were used against it.
These requests were made both before the Assessing Officer and the Commissioner (Appeals). However, neither the relied-upon material nor an opportunity for cross-examination was provided.
The Tribunal recorded that the reassessment addition was founded on third-party statements and an investigation report, while the taxpayer was denied an opportunity to rebut that material.
Another significant fact noticed by the Tribunal was that the loans had been repaid within six to seven months during 2010 itself. Their repayment occurred well before the October 3, 2013 search against the Bhanwarlal Jain Group.
The taxpayer explained that the funds had been borrowed to make business purchases. Once the relevant sales were completed and the sale consideration was realised, the loans were repaid out of those proceeds.
The repayment was supported by confirmations and bank statements and was not disputed by the department.
The Tribunal found these facts comparable to its earlier decision in ACIT v. Vashu Bhagnani. That case also concerned a loan from Daksh Diamonds and proceedings initiated on the basis of the same search against the Bhanwarlal Jain Group. The addition in that matter had been deleted because the loan was taken and repaid before the search, and the department had not produced supporting evidence to establish that it was an accommodation entry.
The Commissioner (Appeals) had relied substantially on the Calcutta High Court’s decision in PCIT v. Swati Bajaj while sustaining the addition.
The ITAT held that this precedent was distinguishable on facts. The cases considered in Swati Bajaj involved penny-stock transactions and claims of long-term capital gains, whereas the present dispute concerned unsecured loans that had already been repaid several years before the search against an unrelated party.
Accordingly, the Tribunal found that the penny-stock precedents could not be applied mechanically to the loan transactions involved in the present case.
The ITAT concluded that the taxpayer had discharged the initial burden imposed under Section 68 by establishing the identity and creditworthiness of the lenders and the genuineness of the transactions.
The department had neither disproved the supporting documents nor produced independent evidence establishing that the transactions were sham or bogus.
The Bench observed that the addition had been made purely on conjectures and surmises by relying on the Investigation Wing’s report while ignoring the cogent evidence placed on record by the taxpayer.
It therefore held that there was no justifiable reason to treat the loans received from the two parties as unexplained cash credits and ordered the deletion of the ₹2 crore addition.
Since the reassessment itself was quashed for want of a valid notice under Section 143(2), the Tribunal left the taxpayer’s remaining legal contentions open. The appeal was allowed both on the jurisdictional issue and on the merits of the Section 68 addition.
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