The Hyderabad Bench of the Income Tax Appellate Tribunal (ITAT) has held that reassessment cannot be invoked while scrutiny window remains open.

The bench of  Ravish Sood (Judicial Member) and Madhusudan Sawdia (Accountant Member) has observed that reassessment proceedings initiated under Sections 147/148 of the Income Tax Act cannot be invoked when the statutory time limit available to the Assessing Officer (AO) for issuing a scrutiny notice under Section 143(2) has not expired. On this basis, the Tribunal quashed the reassessment proceedings and the consequential addition of ₹2.74 crore made towards alleged undisclosed long-term capital gains (LTCG). 

The appellant/assessee had filed his return of income for Assessment Year (AY) 2019-20 on 16 June 2020 declaring total income of ₹1.72 crore. During a search operation conducted under Section 132 in the case of a third party, Shri Y. Kartheek, an affidavit was allegedly found indicating that the assessee had admitted LTCG of ₹4.30 crore for AY 2019-20. 

Upon comparing the affidavit with the return of income, the Assessing Officer observed that the assessee had disclosed LTCG of only ₹1.55 crore in the return. Consequently, the AO formed a belief that income amounting to ₹2.74 crore had escaped assessment and initiated reassessment proceedings under Section 147 by issuing a notice under Section 148 on 24 February 2021. 

The reassessment was ultimately completed under Sections 147 read with 144, resulting in an addition of ₹2,74,94,064 and assessment of total income at ₹4.47 crore. 

The department challenged the order of the Commissioner of Income Tax (Appeals), contending that the CIT(A) had wrongly deleted the addition despite the assessee’s alleged admission regarding capital gains. The Revenue argued that the CIT(A) had disregarded the assessee’s own computation of LTCG and had deleted the addition of ₹2.74 crore without adequate justification. 

Before the Tribunal, the assessee raised a jurisdictional challenge to the reassessment proceedings. The principal argument was that the notice under Section 148 had been issued on 24 February 2021 while the statutory time available to the AO for issuing a scrutiny notice under Section 143(2) remained open until 30 September 2021. 

According to the assessee, when the regular assessment mechanism under Sections 143(2) and 143(3) was still available, the AO could not bypass that procedure and directly resort to the extraordinary reassessment provisions contained in Section 147. The assessee relied upon the Bombay High Court decision in Smt. Suman v. ITO to support this proposition. 

The department opposed the challenge and argued that the mere availability of time for issuing a notice under Section 143(2) did not bar reassessment proceedings. The Department relied on the Punjab & Haryana High Court decision in Punjab Tractors Ltd. v. JCIT, which had taken a view that reassessment proceedings could still be initiated even where scrutiny notice under Section 143(2) could have been issued. 

The Tribunal noted that two High Courts had expressed conflicting views on the issue. While the Bombay High Court in Smt. Suman held that reassessment proceedings should not be used to bypass the normal assessment mechanism when the scrutiny route remains available, the Punjab & Haryana High Court in Punjab Tractors Ltd. had upheld reassessment in similar circumstances. 

Faced with these conflicting judicial precedents, the Tribunal relied upon the Supreme Court’s landmark ruling in CIT v. Vegetable Products Ltd. which lays down that where two reasonable interpretations of a taxing provision are possible, the interpretation favourable to the taxpayer should be adopted. 

Applying the principle laid down by the Supreme Court, the Tribunal preferred the view taken by the Bombay High Court. It held that since the statutory period for issuing a notice under Section 143(2) had not expired on the date when the notice under Section 148 was issued, the reassessment proceedings were not sustainable in law. 

The Tribunal observed that the Assessing Officer should have proceeded through the normal assessment route rather than invoking reassessment provisions while the scrutiny window remained open. Consequently, the notice issued under Section 148 dated 24 February 2021 was declared invalid and the reassessment order passed under Sections 147/144 was quashed. 

Since the reassessment itself was quashed, the Tribunal held that the issues raised by the Revenue regarding the addition of ₹2.74 crore became purely academic and no longer survived for adjudication. Accordingly, the Revenue’s appeal was dismissed as infructuous, while the assessee’s cross-objection was allowed. 

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