ITAT Mumbai: Reopening Invalid – Firm Partner Cannot Be Interchanged

ACIT Vs Amul Kalyanji Sadiwala (ITAT Mumbai)

ITAT Mumbai: Reopening Invalid – Firm Partner Cannot Be Interchanged

In this case, the ITAT Mumbai upheld the quashing of reassessment proceedings where the Assessing Officer reopened the case based on alleged cash loan of ₹3 crore reflected in seized material during a search on a third party.

The crucial flaw identified was that the seized documents referred to “Dr. Sadiwala Clinic” (a partnership firm), whereas the reopening was made in the hands of the individual partner without any direct evidence linking the transaction to him personally.

The Tribunal emphasized a settled legal principle that a partnership firm and its partners are distinct taxable entities under the Income Tax Act, and income cannot be shifted between them without clear evidence of diversion or personal receipt.

It held that:

• The AO proceeded on a wrong assumption equating firm and partner
• There was no “rational nexus” between material and escapement of income of the individual
• Hence, the essential condition of “reason to believe” under Section 147 failed

Accordingly, the reassessment was declared void ab initio, and since jurisdiction itself failed, the Tribunal did not examine merits.

Final Outcome:

• Reopening under Section 147 quashed
• ₹3 crore addition u/s 69A does not survive
• Revenue’s appeal dismissed

This ruling strongly reiterates that jurisdiction for reopening must be based on correct person and proper nexus-wrong entity = fatal defect

FULL TEXT OF THE ORDER OF ITAT MUMBAI

This appeal by the Revenue is directed against order dated 28.10.2025 passed by the Ld. Commissioner of Income-tax (Appeals) – National Faceless Appeal Centre, Delhi [in short ‘the Ld. CIT(A)’] for assessment year 2012-13, raising following grounds:

“1. Whether on the facts and in the circumstances of the case, the Ld. CT(A) erred in law and on facts in holding that the reopening of assessment u/s 147 of the Income-tax Act, 1961 was invalid, despite the Assessing Officer having received specific, credible, and tangible information from the Investigation Wing supported by documentary evidence and duly sanctioned u/s 151, thereby satisfying the conditions precedent for reopening under sections 147 and 148 of the Act?

2. Whether the Ld. CIT(A) was justified in deleting the addition of f3,00,00,000/ – made u/s 69A of the Act, ignoring the corroborative material seized during search in the case of M/ s Evergreen Enterprises, the statement recorded u/s 132(4) of the principal person involved (Mr. Nilesh Bharani), and the assessee’s failure to provide any cogent explanation or documentary evidence disproving the cash loan transaction?

3. Whether the Ld. CIT(A) was correct in holding that the addition is invalid for want of cross-examination of Mr. Nilesh Bharani, when the seized documents and the statement recorded u/s 132(4) constitute independent evidentiary material, and the AO had provided opportunity to the assessee to rebut the evidence but the assessee failed to do so?

4. Whether the Ld. CIT(A) erred in law in holding that the AO did not dispose of the objections to reopening, when the AO had passed a speaking order dated 14.10.2019 addressing the assessee’s objections, thereby fulfilling the procedural requirement laid down in GKN Driveshafts (India) Ltd. v. ITO (259 ITR 19 SC)?

5. Whether the Ld. CIT(A) erred in treating the assessment order as bad in law on the ground that the AO issued a show cause notice without an accompanying notice u/s 142(1), when the AO had already issued multiple statutory notices u/s 143(2) and 142(1) during the reassessment proceedings and provided due opportunity to the assessee?

6. Whether the Ld. CIT(A) was correct in deleting the addition merely on the basis that the name “M/ s Dr. Sadiwala Clinic” appeared in the seized documents, ignoring that the clinic is not an independent juristic entity separate from its partners, and that the evidence linked the transaction specifically to the assessee’s PAN and contact details, thereby establishing the assessee’s individual involvement?”

2. The Revenue’s primary grievance is the Ld. CIT(A)’s decision to quash the reassessment proceedings initiated under Section 147 of the Income-tax Act, 1961 (the Act’) and the consequent deletion of an addition of 83,00,00,000/-.

3. The assessee, an individual engaged in the medical profession, is also a partner in the firm M/s. Dr. Sadiwala Clinic. For the Assessment Year 2012-13, the assessee filed his original return of income on 19.09.2012 declaring a total income of 258,11,216/-.

3.1 Subsequently, the Assessing Officer received information from the Deputy Director of Income-tax (Investigation), Unit-5(4), Mumbai, pursuant to a search action conducted in the case of M/s. Evergreen Enterprises. The information indicated that one Mr. Nilesh Bharani was engaged in undisclosed money-lending activities involving unaccounted cash transactions. It was further reported that certain coded entries in seized material suggested that “Dr. Sadiwala Clinic” had allegedly borrowed a sum of 23,00,00,000/- in cash during the financial year 2011-12 through the said person/entity.

3.2 Proceeding on the assumption that the reference to “Dr. Sadiwala Clinic” pertained to the assessee, the Assessing Officer attributed the alleged transaction to the individual assessee. On this basis, he recorded reasons to believe that income chargeable to tax had escaped assessment and, accordingly, initiated reassessment proceedings under section 147 of the Act by issuing notice under section 148 on 30.03.2019. In response thereto, the assessee filed a return of income on 09.04.2019, reiterating the income of 258,11,220/-.

3.3 Statutory notices under the provisions of the Act were duly issued, and the assessment proceedings were carried out accordingly. During the course of such proceedings, notices under sections 143(2) and 142(1) of the Act were issued from time to time, in response to which the assessee furnished certain explanations and supporting details. However, the Assessing Officer was not satisfied with the same. Consequently, the Assessing Officer proceeded to complete the assessment by making an addition of 23,00,00,000/- under section 69A of the Act, treating the same as unexplained income of the assessee. Relevant portion of the assessment order is re-produced as under:

“…6. Addition under section 69A of the Income Tax Act 1961.

Based on the above information and subsequent additional findings, show cause notices dated 21/ 11/ 2019 was issued to the assessee requesting the assessee to furnish explanation as to why this loan of Rs 3,00,00,000/ – will not be treated as his undisclosed income for the A.Y.2012-13. The copy of the document, seized from the premises of M/ s Evergreen Enterprises showing the assessee’s name and amount of loan, was also furnished to the assessee as proof of his cash loan transaction.

In response, the assessee upload his submission vide letter dated 26/ 11/ 2019 denying the cash loan transaction.

The submission of the assessee is perused but not acceptable.

Against the backdrop of the information received and subsequent submissions made by the assessee, the return of income and the available documents were perused and examined. It is pertinent to mention here that the information passed on by the investigation wing of the Income Tax Department to the jurisdictional assessing officers are not without substance. The information is gathered after proper investigation of documents, bank accounts, deposition of concerned persons and seized documents. In the instant case seized documents reveal that the assessee had borrowed a cash loan of Rs 3,00,00,000/ – during the year under consideration. Further from the statements of Mr Nilesh Bharani it is gathered that Mr Nilesh Bharani was into the business of cash loan lending and borrowing in his individual capacity and for this purpose he used the employees and premises of Evergreen Enterprise. During the course of search proceedings the statement of Mr. Nilesh Bharani was recorded on oath on 11/ 10/ 2017 where he has admitted that he was conducting cash loan lending and borrowing business. The assessee by denying that no cash loan transaction was done even after being furnished with evidence cannot be acceptable as these transactions are recorded and are backed by credible evidences. Mr. Nilesh Bharani’s statement and the conclusive evidence gathered by the Income Tax Department cannot be overlooked.

As per section 69A of the 1.T.Act, 1961 if the assessee is found to be the owner of any money and he offers no explanation, then the money will be deemed to be the income of the assessee for that financial year. The onus is on the assessee to offer explanation regarding the said undisclosed transaction and if the assessee fails to prove to the satisfaction of the A.O. then A.O. has every right to draw an inference that the money represents the undisclosed income of the assessee. The burden to explain the genuineness of the transaction lies entirely with the assessee as the relevant facts are exclusively in the knowledge of the assessee. Therefore, the sum of Rs.3,00,00,000/ – is nothing but undisclosed income of the assessee itself and hence added to the total income of the assessee for the A.Y 2012-13. Penalty proceedings u/ s 271(1)(c) of the Income Tax Act, 1961 are being initiated separately for concealment of income.”

4. On further appeal, the Ld. CIT(A) quashed the assessment, holding that the material relied upon by the AO pertained to a distinct partnership firm, “M/s Dr. Sadiwala Clinic” (bearing a separate PAN), and not the assessee in his individual capacity. Relying on the principle that a firm and its partners are distinct taxable entities under the Act, the Ld. CIT(A) held that the AO lacked “reason to believe” that income had escaped assessment in the hands of the individual assessee.The relevant finding of the Ld. CIT(A) challenging the validity of the reassessment is reproduced as under:

“7.2 As noticed from the appellant’s submission and the assessment order, addition had been made solely based on information received from the Investigation Wing stating that during the search in the case of M/s. Evergreen Enterprises, a coded ledger entry indicated that “Dr. Sadiwala Clinic” had borrowed Rs. 3,00,00,000/ – in cash. The Assessing Officer has assumed that Dr. Sadiwala Clinic refers to the present appellant, Dr. Amul Kalyanji Sadiwala, and accordingly treated the amount as unexplained money in his personal hands. However, the name appearing in the seized ledger is M/s. Dr. Sadiwala Clinic, which is also evident from the reasons recorded for re-opening of the assessment order by the AO in the assessment order(also re-produced in the Para 5.1 of this order). M/s. Sadiwala’s Clinic is separate entity registered with PAN:• AAAFD0246M and the appellant is merely one of its partners. The Assessing Officer has not shown any evidence to justify treating a transaction (allegedly recorded in the assessment order) in the firm’s name as that in the hands of an individual partner. In law, a partnership firm and its partners are distinct taxable entities. The Hon’ble Supreme Court in CIT v. R.M. Chidambaram Pillai [1977] 106 ITR 292 (SC) recognized that the firm’s income and a partner’s individual income cannot be interchanged unless there is conclusive proof of diversion or direct receipt by the partner.”

5. The assessee filed a Paper Book(PB) containing pages 1 to 202. With reference to ground No. 6 of the appeal challenging validity of reassessment, the Ld. counsel submitted that the seized document pertains to M/s Dr. Sadiwala Clinic which is a separate partnership firm whereas on the basis of the said documents, assessment of the assessee has been reopened which is invalid action on the part of the Assessing Officer.

6. We have heard the rival submissions and perused the material on record, specifically the reasons recorded for reopening the assessment. The pivotal question is whether the material available with the AO provided a “rational nexus” for the belief that the assessee’s income had escaped assessment.

6.1 It is a well-settled judicial principle, as enunciated by the Hon’ble Supreme Court in ACIT v. Rajesh Jhaveri Stock Brokers Pvt. Ltd. (291 ITR 500) that the “existence” of relevant material on the basis of which a reasonable person can make requisite belief , is a jurisdictional prerequisite. The material must point specifically to the escapement of income of the concerned assessee. Thus in the case, the issue is whether the material on the basis of which the Assessing Officer has recorded reasons was relevant to the case of the assessee. For ready reference, relevant portion of reason recorded for re- opening of the assessment (as re-produced in the assessment order and also available on PB 17 to 18) is extracted as under:

“…The assessee is an individual. The assessee had filed its return for A.Y. 2012-13 on 19.09.2012 declaring income at Rs. 58,11,216/. The assessee is declaring income as income from business and profession and income from other sources.

Information in this case is received from Dy. Director of Income Tax(Inv.) Unit 5(4), Mumbai on 25.03.2019 that a search action u/s. 132 was carried out in the case of M/ s. Evergreen Enterprises (AADFE8617J). Mr. Mr. Nilesh Bharani is one of the partners in M/ s. Evergreen Enterprises. The documentary evidence found in the search as well as statement on oath of Mr. Nilesh Bharani recorded u/s. 132(4) of the Income Tax Act, 1961 unearthed as undisclosed activity of money lending and borrowing in unaccounted cash being operated at the premises of M/ s. Evergreen Enterprises by Mr. Nilesh Bharani.

Shri Amul Kayanji Sadiwala has borrowed cash loan of Rs.3,00,00,000/ – in F.Y. 2011-12 through Nilesh Bharani/Evergreen Enterprises.

Therefore, in view of the above facts, I have reason to believe that income to the extent of Rs.3,00,00,000/ – has escaped assessment for the A.Y.2012-13.

It is evident from the above facts that the assessee had not truly and fully disclosed material facts necessary for his assessment for the year under consideration thereby necessitating reopening u/s 147 of the Act.

In this case more than four years have lapsed from the end of assessment year under consideration. Hence necessary sanction to issue notice u/s 148 has been obtained separately from Principal Commissioner of income Tax as per the provisions of section 151 of the Act.

The proceedings of section 147 of the I.T. Act are duly attracted as mentioned in explanation to section 148. Hence, it is a fit case for issue of notice under section 148 of the LT. Act.

6.2 It is evident form reasons recorded and extracted above that information received form investigation wing explicitly identifies the borrower as “Dr. Sadiwala Clinic.” The Assessee has demonstrated that “M/s Dr. Sadiwala Clinic” is a registered partnership firm with its own separate PAN (AAAFD0246M). For the purposes of the Income-tax Act, a partnership firm and its partners are independent taxable units. As held by the Hon’ble Supreme Court in CIT v. R.M. Chidambaram Pillai (106 ITR 292), while a firm is not a separate legal person under general law, it is a distinct “Person” under Section 2(31) of the Act.

6.3 The Revenue argues that the clinic is not an independent juristic entity separate from its partners. We find this argument legally untenable in tax jurisprudence. When material is found pertaining to a firm, the appropriate jurisdictional action lies against the firm. Reopening the individual assessment of a partner based on a transaction explicitly recorded in the name of the firm—without establishing a direct diversion of funds to the partner—constitutes a jurisdictional error.

6.4 The AO proceeded on a flawed assumption that “Dr. Sadiwala Clinic” and “Dr. Amul Kalyanji Sadiwala” are interchangeable for the purpose of taxation. In the absence of any material linking the individual assessee to the specific receipt of these funds in his personal capacity, the “Reason to Believe” lacks the requisite nexus.

6.5 Consequently, the reassessment is bad in law and void ab-initio. Since the jurisdictional challenge is upheld, we find no necessity to adjudicate upon the grounds pertaining to the merits of the addition or the lack of cross-examination. Accordingly, we uphold the finding of the Ld. CIT(A) allowing the appeal as unsustainable in law.

6.6 Since, we have already upheld the quashing of the reassessment proceedings, the other grounds challenging the validity as well as merit are not required to be adjudicated upon. The appeal of the Revenue is accordingly dismissed.

7. In the result, the appeal of the Revenue is dismissed.

Order pronounced in the open Court on 20/04/2026.