Can Income Tax Dept. Reopen Assessment Through Rectification After Granting Immunity U/S 270AA? ITAT Says No

The Income Tax Act, the Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has held that once immunity is granted under Section 270AA and the assessment attains finality, the Assessing Officer cannot subsequently alter the tax consequences of that assessment through rectification proceedings under Section 154. The bench of Amit Shukla (Judicial Member) and Prabhash Shankar (Accountant Member) quashed a rectification order that sought to convert an assessed loss into taxable income by invoking Sections 69C and 115BBE several years after immunity had been granted. The assessee had filed its return of income for Assessment Year 2017-18 declaring a loss of approximately ₹31.90 crore. During scrutiny assessment proceedings, the Assessing Officer observed that the company had claimed “other expenses” of around ₹35.54 crore. Since complete supporting details were not furnished to the satisfaction of the department, the Assessing Officer made an ad hoc disallowance of 5% of such expenses amounting to ₹1.77 crore. While making this disallowance, the Assessing Officer characterized the amount as “unexplained expenditure” under Section 69C of the Income Tax Act. However, the addition was adjusted against the company's current year business losses, and the assessment ultimately continued to reflect a loss. Subsequently, penalty proceedings were initiated under Section 270A for under-reporting of income. The assessee opted to avail the benefit of Section 270AA and applied for immunity from penalty and prosecution. After examining the application, the Assessing Officer passed an order dated 28 February 2020 granting immunity under Section 270AA. The officer recorded that all statutory conditions had been satisfied, including the fact that the assessee had not filed any appeal against the assessment order. The officer also noted that no tax demand was payable because the assessed income still remained in loss. Nearly three years later, the department issued a notice under Sections 154 and 155 alleging a mistake apparent from the record. According to the department, the addition made under Section 69C should not have been allowed to be set off against business losses because Section 115BBE prohibits such set-off against deemed income. The Assessing Officer subsequently passed a rectification order recomputing the total income at ₹1.77 crore by denying the set-off of business losses and applying Section 115BBE. The first appellate authority affirmed the action in ex parte proceedings. The assessee contended that the rectification proceedings were wholly without jurisdiction. It argued that once immunity had been granted under Section 270AA and the assessment order had attained finality, the department could not indirectly revisit the assessment through Section 154 proceedings. The assessee further argued that the original addition itself could never have been brought under Section 69C because the expenditure was duly recorded in the books of account and reflected in the profit and loss account. According to the assessee, the addition was merely an estimated disallowance and not unexplained expenditure. The Tribunal agreed with the assessee's position and observed that the addition of ₹1.77 crore was purely an estimated disallowance amounting to 5% of expenditure already recorded in the books. Therefore, it could not be classified as unexplained expenditure under Section 69C. The Bench noted that Section 69C applies where expenditure is found to have been incurred but the assessee fails to satisfactorily explain its source. In the present case, the expenditure was admittedly recorded in the books and reflected in audited financial statements. The only issue was non-verification of some details, making it a case of estimated disallowance rather than unexplained expenditure. The Tribunal undertook a detailed examination of the legislative intent behind Section 270AA. It observed that the provision was introduced to provide certainty and reduce litigation by allowing taxpayers to accept assessment orders in exchange for immunity from penalty and prosecution. According to the Bench, Section 270AA embodies a statutory compact between the taxpayer and the Revenue. The taxpayer gives up valuable appellate rights and accepts the assessment order, while the Revenue grants immunity and accords finality to the assessment proceedings. The Tribunal emphasized that after granting immunity and inducing the taxpayer not to file an appeal, the department could not subsequently reopen the same assessment through rectification proceedings and fundamentally alter its consequences. The Bench observed that the department's action went far beyond correcting a patent mistake. Instead, it attempted to rewrite the assessment by converting an assessed loss into taxable positive income through the application of Section 115BBE. Such a drastic alteration, the Tribunal held, exceeded the limited scope of rectification under Section 154. The Tribunal further cautioned that permitting such actions would undermine the sanctity and effectiveness of the immunity mechanism under Section 270AA and defeat the legislative objective of reducing litigation and ensuring certainty in tax administration. Holding that the rectification order suffered from fundamental legal infirmities, the ITAT ruled that the addition in question could not be treated as unexplained expenditure under Section 69C. The Assessing Officer exceeded the scope of Section 154 by attempting to fundamentally alter the assessment. The grant of immunity under Section 270AA had conferred statutory finality on the assessment proceedings. The rectification proceedings were unsustainable in law. The Tribunal quashed both the rectification order and the appellate order affirming it, and allowed the assessee's appeal. Case Details Case Title: The Nilgiri Dairy Farm Private Limited Versus DCIT Citation: JURISHOUR-1493-ITA-2026(MUM) Case No.: ITA No.1099/Mum/2026 Date: 27/05/2026 Counsel For Appellant: Mani Jain & Shir Prateek Jain Counsel For Respondent: Swapnil Choudhari Click Here To Read Order Read More: LTCG Deduction Be Denied Merely Because Sale Deed Was Registered After 2 Years? ITAT Says No

Can Income Tax Dept. Reopen Assessment Through Rectification After Granting Immunity U/S 270AA? ITAT Says No

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