Delhi ITAT Quashes Reassessment for ‘Non-Application of Mind’ – AO Incorrectly Claimed Original Return Was Never Scrutinized

Kuljeet Singh Vs ITO (ITAT Delhi)

Delhi ITAT Quashes Reassessment for ‘Non-Application of Mind’ – AO Incorrectly Claimed Original Return Was Never Scrutinized

Delhi ITAT quashed the entire reassessment proceedings against the assessee after finding glaring non-application of mind in the very reasons recorded for reopening under section 147. The Tribunal noted that while recording reasons, the AO wrongly stated that the assessee’s return was only processed u/s 143(1) and had never been scrutinized, whereas in reality a regular assessment u/s 143(3) had already been completed on 11.02.2015.

The reassessment was triggered on the basis of Investigation Wing information alleging suspicious transactions with M/s Goodwill Enterprises and M/s Shree Shyam Overseas, entities which had allegedly not filed returns and had huge cash deposits in their bank accounts. Based on such information, the AO reopened the case alleging escapement of income of ₹59.80 lakh.

However, the Tribunal observed that while recording reasons, the AO invoked Explanation 2(b) to section 147, which applies only where a return has been filed but no assessment has been made. Since a scrutiny assessment u/s 143(3) had admittedly already been completed in the assessee’s case, invocation of Explanation 2(b) itself demonstrated complete lack of application of mind by the AO.

The assessee had also argued on merits that the impugned amounts represented genuine sales transactions of tyres and tubes to the concerned parties, supported by VAT registrations, Form-C declarations, invoices, ledger accounts and banking transactions. The assessee contended that the Revenue had accepted the sales turnover in books and without rejecting books of account, the same sales proceeds could not again be taxed u/s 68 as unexplained credits.

The ITAT noted that the AO’s entire addition was based merely on inability of the assessee to produce some old purchase bills relating to FY 2011-12. The Tribunal observed that despite extensive documentary evidence regarding sales, no independent enquiry was conducted by the department to establish that the transactions were bogus or accommodation entries.

Ultimately, the Tribunal held that the incorrect invocation of Explanation 2(b) while recording reasons clearly vitiated the jurisdiction assumed under section 147. Accordingly, the reassessment proceedings were declared “void ab initio, bad in law and erroneous” and quashed in entirety.

FULL TEXT OF THE ORDER OF ITAT DELHI

The instant appeal filed by the assessee is directed against the order dated 16.09.2025 passed by the ld. Commissioner of Income-tax (Appeals), NFAC, Delhi [hereinafter referred to as the Ld. CIT(A)] under Section 250 of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) arising out of the assessment order dated 31.12.2019 passed by the ITO, Ward-35(3), Delhi (hereinafter referred to as ‘the ld. AO’) under Section 143(3) r.w.s 147 of the Act for Assessment Year 2012-13.

2. Additional ground has been raised by the assessee challenging the reopening of the assessment u/s 147 of the Act in the following manner:

1. That the aforesaid appeal is listed before this Hon’ble Bench for hearing on 17th December, 2025. In this regard, it is stated that the appellant has filed the present appeal aggrieved by the order dated 16.09.2025 of the CIT (A), NFAC, Delhi for the A.Y. 2012-13, by virtue of which the assessment order dated 31.12.2019 passed U/s 147ws. 143(3) by the Ld. AO was confirmed.

2. To briefly recapitulate the facts germane for the issue under consideration, it is stated that the return filed earlier by the assessee was subject to scrutiny and an assessment order dated 11 Feb, 2015 was passed by the then AO U/s 143(3) of the Income Tax Act. Thereafter, in this case allegedly some information from DDIT(Inv.) was received that the transaction entered by the assessee with two entities i.e. M/s Goodwill Enterprises and M/s Shree Shyam Overseas are bogus. The assessee duly replied to it has entered ‘sale’ transaction with these entities and the amount is duly included under the figure of ‘sales”. Dehors this fact, the Ld. AO made an addition of Rs. 1,31,52,942/-while passing the reassessment order.

3. The assessee challenged the initiation of the reassessment proceedings as well as on merits before the CIT (A). The CIT (A) has dismissed the appeal of the present assessee and therefore appeal has been filed before this Hon’ble Bench.

4. In the grounds of appeal already filed before this Hon’ble Bench, the appellant has challenged the order passed by the CIT (A) on various grounds. However, the appellant desires to take the following additional Ground of Appeal, which directly flows from the order of the lower authorities. These grounds of appeal is therefore reproduced as under:

Ground No. 5- That the reassessment proceedings are bad in law, as the reasons recorded for reopening of the case has been recorded without application of mind by the Ld. Assessing Officer, which vitiates the entire reassessment proceedings.

Ground No. 6- That while recording the reasons for reopening the Ld. Assessing officer mentioned that the income tax return filed by the assessee was not subjected to scrutiny proceedings, clearly ignoring that in this case scrutiny assessment has been already conducted under sechon 143(3) of the Income Tax Act, and hence, the reasons are recorded without application of mind.

Ground No. 7- That the reassessment proceedings are also vitiated on the ground that the mandatory sanction granted by the competent authority U/s 151 of the Income Tax Act, has been also granted in a mechanical manner.

5. It is humbly stated that in the aforesaid case of NTPC the Hon’ble Supreme Court has observed that “Under section 254 of the Income-tax Act, 1961, the Tribunal may, after giving both the parties to the appeal an opportunity of being heard, pass such orders thereon as it thinks fit. The power of the Tribunal in dealing with appeals is, thus, expressed in the widest possible terms. The purpose of the assessment proceedings before the taxing authorities is to assess correctly the tax liability of an assessee in accordance with btw. If, for example, as a result of a judicial decision given while the appeal is pending before the Tribunal, it is found that a non-taxable item is taxed or a permissible deduction is denied, we do not see any reason why the assessee should be prevented from raising that question before the Tribunal for the first time, so long as the relevant facts are on record in respect of that item. We do not see any reason to restrict the power of the Tribunal under section 254 only to decide the grounds which arise from the order of the Commissioner (Appeals). Both the assessee as well as the Department have a right to file an appeal/cross-objections before the Tribunal. We fail to see why the Tribunal should be prevented from considering questions of law arising in assessment proceedings although not raised earlier”. [Emphasis Supplied]

6. In view of the aforesaid legal position, it is submitted that since in the present case, the additional ground raised involves a purely legal issue and facts in relation to the same are already available on record, the appellant should not be precluded from raising the ground at this stage

7. In view of the above, the submission of the Appellant is that the admission of the additional ground is very important for the facts of the case and therefore the same needs to be admitted in the interest of justice.

It is humbly prayed accordingly.

3. Since, the jurisdictional issue has been raised, we have decided to proceed with the same at the very threshold of the matter.

4. In this particular case, the original assessment was passed under section 143(3) of the Act on 11.02.2015 upon assessment of income at Rs.4,50,750/-. On the basis of alleged information that all entities namely M/s. Goodwill Enterprises and M/s. Shree Shyam Overseas has not filed the return of income for A.Y. 2012-13 and it was observed that some debit and credit entries were made in the bank account of the said entities, upon recording the following reasons, reopening of assessment was done :

Annexure-A

“The Assessee Sh. Kuljeet Singh (PAN CKHPS0929K) (Prop. Mukesh Agencies) J-35, Double Storey, Partap Nagar, Delhi-110007 is an individual whose territorial jurisdiction lies with the undersigned. As per ITS Details, the assessee has filed his Income tax return for assessment year under consideration, which has been processed u/s 143(1) of I.T. Act.

2. In this case, information was received from DDIT(Inv.), Unit 5(3), New Delhi vide e­mail dated 23.03.2019.

3. As per the information received. M/s Goodwill Enterprises had made high value transaction through account no. 083005000485 of ICICI Bank, Lawrence Road Branch, Delhi during FY 2011-12. Further, M/s Goodwill Enterprises had not filed ITR for AY 2012-13. As per the bank statements, the total debits and credits in the bank account during FY 2011-12 is Rs. 15,24,07,312/-and Rs. 14,85,81,968/- respectively, out of which cash credit being Rs. 9,93,66,370/-. In view of the fact that the M/s Goodwill Enterprises has not filed any return of Income for FY 2011-12, the transactions in this bank account remain unexplained. Further, transactions in the bank account of M/s Goodwill Enterprises for the assessee is given below:

4. M/s Shree Shyam Overseas, had made high value transaction through account no. 083005000333 of ICICI Bank, Lawrence Road Branch, Delhi during FY 2011-12. Further, M/s Shree Shyam Overseas had not filed ITR for AY 2012-13. As per the bank statements, the total debits and credits in the bank account during FY 2011-12 is Rs. 16,32,09,784/- and Rs. 16,12,94,479/-respectively, out of which cash credit being Rs. 10,71.15.950/-. In view of the fact that the M/s Shree Shyam Overseas has not filed any return of Income for FY 2011-12, the transactions in this bank account remain unexplained. Further, transactions in the bank account of M/s Shree Shyam Overseas for the assessee is given below:

5. In view of the facts mentioned in para 3 & 4, the credit of Rs. 59,80,900/- in bank account of the assessee Sh. Kuljeet Singh needs to be verified. Therefore, I have reasons to believe that assessee’s income of Rs. 59,80,900/- chargeable to tax has escaped assessment.

6. In view of the information as above, Explanation 2(b) to section 147 is applicable in the case which lays down that the following shall also be deemed to be case where income chargeable to tax has escaped assessment, “where a return of income has been furnished by the assessee but no assessment has been made and it is noticed by the Assessing Officer that the assessee has understated the income or has claimed excessive loss, deduction, allowance, or relief in the return.

7. In view of the above fact, I have the reasons to believe that a sum of Rs. 59,80,900/- on account of unexplained credit during the F.Y. 2011-12 relevant to AY 2012-13 chargeable to tax has escaped assessment-Since, four years have elapsed but not more than six years have elapsed from the end of the relevant assessment year, it is therefore, proposed as per the provisions of section 149(1)(b) read with section 151(3) of the 1.T. Act, 1961 that approval for initiating action u/s 147 of income tax Act, 1961 may be granted in the case.

Sd/-
(Virender Singh)
Income Tax Officer,
Ward-35(3), New Delhi”

Date : 26.03.2019
Place : New Delhi

5. It is the case of the assessee that explanation 2(b) of Section 147 of the Act is not applicable to the instant case in hand.

6. The Assessing Officer while recording the reasons mentioned that the Income-tax Return filed by the assessee was not subjected to scrutiny proceedings and therefore, applied the explanation 2(b) of section 147 of the Act clearly ignoring the fact of this scrutiny assessment under section 143 of the Act was made on 11.02.2015 in the case of the assessee. Therefore, such recording of reason is without application of mind and thus, liable to be quashed. In these facts and circumstances of the matter, we have, therefore, considered the explanation 2(b) of section 147 of the Act which reads as follows:

“Brief Facts:

The appellant Mr. Kuljeet Singh is an individual and is the proprietor of M/s Mukesh Agencies. He is engaged in the business of retail trading of tires, tubes and flaps. The case of the assessee was selected for regular assessment and an order U/s 143(3) was passed on 11.02.2015 by the Ld. A.O. and assessed the total income of the assessee at Rs. 4,50,750/-while making certain minor additions.

Re: Reopening of the case by applying incorrect explanation to section 147

After passing of the original assessment order, in this case, the reassessment proceedings were initiated in the case of the appellant. The reason for the same was that some alleged information was received that two entities namely “M/s Goodwill Enterprises” and “M/s Shree Shyam Overseas” has not filed the income tax return for the A.Y. 2012-13. It was observed that there are some debits and credits in the bank account of the said entities.

In this regard, it is pertinent to state that while recording the reasons for reopening the Ld. Assessing Officer has mentioned that the income tax return filed by the assessee was not subjected to scrutiny proceedings and has hence applied explanation 2(b) of section 147. The Ld. AO has thus clearly ignored that in this case, scrutiny assessment has been already conducted under section 143(3) of the Income Tax Act, and hence, the reasons are recorded without application of mind. In the reasons recorded the Ld. AO has reproduced the explanation 2(b) which says that “where a return of income has been furnished by the assessee but no assessment has been made and it is noticed by the Assessing Officer that the assessee has understated the income or has claimed excessive loss, deduction, allowance or relief in the return”. Thus the Ld. AO has applied an incorrect explanation, which depicts a clear non application of mind on the part of the Ld. AO, and thus the same vitiates the entire reassessment proceedings. To this effect, the appellant has taken an additional ground in the matter.

As regards the merits of the case, in this case, during the course of reassessment proceedings, the appellant stated that he has entered into sale transactions with M/s Goodwill Enterprises and M/s Shree Shyam Overseas. To substantiate the same, the Appellant duly enclosed all the relevant documents, however, without considering the same and in a complete haste, hurried and arbitrary manner, the Ld. AO passed the reassessment order making an addition of Rs. 1,31,52,942/-U/s 68 of the Income Tax Act, 1961.

Re: Passing of the reassessment order.

As regards M/s Goodwill Enterprises, the appellant submitted that it has entered into a fully genuine and authentic transaction pertaining to sale of tires, tubes and flabs to the said firm. To substantiate the said transaction, the Appellant has duly stated and submitted that M/s Goodwill Enterprises is duly registered with the VAT Dept. in Rajasthan having TIN No. 08580607211. The VAT registration of the said entity was duly provided. Based on this, the Appellant submitted that the said entity i.e., M/s Goodwill Enterprises is also dealing in tires and tubes and hence it is not a case that the sales has been made to unrelated/unconnected person which is not engaged in the business of tires and tubes. The Appellant further submitted that the sale has been made on the strength of statutory form- C, which has been issued by the VAT Dept. to M/s Goodwill Enterprises. The Appellant duly enclosed the other necessary details like copy of ledger account in its books of M/s Goodwill Enterprises, copy of invoices and copy of bank account, substantiating that the sale consideration has been received through banking channels. (Kindly refer to page no. 95-101 of the paper-book).

As regards M/s Shree Shyam Overseas, the appellant submitted that it has entered into a fully genuine and authentic transaction pertaining to sale of tires, tubes and flabs with the said firm for the period under consideration. To substantiate the said transaction, the Appellant has duly stated and submitted that M/s Shree Shyam Overseas is duly registered with the VAT Dept. in Himachal Pradesh having TIN No.02040400522. The VAT registration of the said entity was duly provided. Based on this, the Appellant submitted that the said entity i.e., M/s Shree Shyam Overseas is also dealing in tires and tubes and hence it is not a case that the sales has been made to unrelated/unconnected person which is not engaged in the business of tires and tubes. The Appellant further submitted that the sale has been made on the strength of statutory form- C, which has been issued by the VAT Dept. to M/s Shree Shyam Overseas. The Appellant duly enclosed the other necessary details like copy of ledger account in its books of M/s Shree Shyam Overseas, copy of invoices and copy of bank account, substantiating that the sale consideration has been received through banking channels. (Kindly refer to pаде но. 105­115 of the paper-book).

Observation in the reassessment order. At this juncture, it shall be worthwhile to reproduce the relevant part of para no. 8 of the assessment order:

“All bank accounts-maintained statement was also filed by the assessee. He further submitted all information about M/s Goodwill Enterprises and M/s Shree Shyam Oversens such as with regard to its registration with VAT Department Rajasthan, Certificate of Registration of M/s Goodwill Enterprises and M/s Shree Shyam Overseus with-VAT Department Rajasthan etc. However, the assessee has furnished a number of documents pertaining to his case for FY 2011-12 including documents related to M/s Goodwill Enterprises and M/s Shree Shyam Overseas but express his inability to produce the relevant purchase bills for the goods sold to M/s Goodwill Enterprises and M/s Stree Shyam Overseas on the ground the matter under consideration related to the FY 2011-12 which decade ago from now.” [Emphasis Supplied]

From the perusal of the aforesaid observations made by the Ld. AO, it shall be clear that the only reasons given by him is that the appellant could not produce some purchase bills. Only on this thrust, the Ld. AO has chosen to make the addition. The Ld. AO has therefore made the addition, without considering the fact that in this case, the sales have not been doubted and the same cannot be made in the absence of purchases. Hence, merely because the appellant could not submit some purchase bills (which were very old) do not mean that the figures of sale is also not genuine. It is reiterated that the only thrust of the Ld. AO is that the appellant could not reproduce the purchase bills, nothing more nothing less.

RE: the CIT (A):

Before the CIT (A), the appellant has in essence stated as under:

a. The Appellant has taken a fully genuine entry w.r.t. the sale transaction entered by it with M/s Goodwill Enterprises and M/s Shree Shyam Overseas;

b. Addition made by the AO shall tantamount to making double addition;

c. No accommodation entry has been taken by the Appellant;

d. The addition made is beyond the reasons recorded at the time of issuance of notice U/s 148;

e. The transaction of the appellant M/s Goodwill Enterprises and M/s Shree Shyam Overseas has been duly accepted in the preceding and succeeding years;

f. No independent enquiry carried by the AO while coming to adverse conclusion against the appellant;

g. The figures of sales cannot be doubted, when the books of accounts are not rejected

The CIT (A) has not considered the submissions of the appellant and has chosen to confirm the assessment order. The order of the CIT (A) is a complete non-speaking order. At this juncture, it shall be relevant to reproduce the exact finding of the CIT(A). The entire finding of the Ld. CIT (A) same is as under:

“The appellant is into business from long time and he is subjected to income tax audit and VAT audit. Therefore, sales & purchase bills for all the years must be in the custody of the appellant. It is clear that, if the purchase bills are not available with the appellant then corresponding sales to M/s Goodwill Enterprises and My Shree Shyam Overseas is also bogus.

Therefore, I am of the opinion that, the action of AO treating the amount of Rs. 1,31,52.942/-received by the assessee from M/s Goodwill Enterprises and M/s Shree Shyam Oversens during the year under consideration, represents income of the assessee from undisclosed sources is justified. Therefore, grounds raised by the appellant are dismissed”

Broad submission on merits: From the perusal of the above, it shall be clear that Ld. CIT (A) has merely confirmed the findings of the Ld. AO, without considering the facts of the matter, and without disputing the fact that the entire amount has already been disclosed in the sales. If again, an addition is made on this account, the same shall tantamount to double addition. It is not disputed by the lower authorities that in this case, the amount is duly offered for taxation and is already included under the total “sales” declared by the assessee, and hence, again the said amount cannot be considered for making the taxation, much less U/s 68 of the Income Tax Act. The same shall constitute making double addition in the case of the present assessee. In other words, it is a trite law that when the amount is already included under the sales figure the same cannot be taxed again. It’s a trite law that when the amount is included in the sales and the Assessing Officer thinks otherwise, then he is required to reject the books of accounts. In this case admittedly, the books of accounts are not rejected. In other words, the addition can be made, only when the books of account of the assessee are rejected. In view of the above, the submission of the appellant is that the appeal be allowed. The addition has been made only on the basis of surmises and conjectures. In this case, there is no adverse report/material/document etc to suggest that the appellant has taken some kind of accommodation entry or has routed its own money. No independent inquiry has been made by the lower authorities.

It is submitted and prayed accordingly.”

7. Having regard to the fact of scrutiny proceedings done under section 143(3) of the Act dated 11.02.2015 in the case of the assessee copy whereof appearing at pages 1 to 4 of the paper book filed before us, the application of provision of Explanation 2(b) of section 147 of the Act while recording reasons evidencing clear non-application of mind. Thus, the entire assessment proceeding is vitiated and liable to be quashed as the argument made by the learned AR is found to be acceptable which has not been able to be controverted by the learned DR.

Thus considering the entire aspect of the matter, the proceeding is found to be void ab initio, bad in law, erroneous and thus, quashed.

8. In the result, appeal preferred by the assessee is allowed.

Order pronounced in the open court on 22.05.2026