Reassessment Invalid as AO Relied Solely on Investigation Report without Inquiry: ITAT Delhi

Marvelous Cement Pvt. Ltd. Vs ITO (ITAT Delhi)

In this case, the Income Tax Appellate Tribunal (ITAT), Delhi, examined the validity of reassessment proceedings initiated under Section 147 of the Income-tax Act, 1961, for Assessment Year 2010-11. The assessee had originally filed its return declaring income of ₹7,64,430, which was first processed under Section 143(1) and later assessed under Section 143(3). Subsequently, the Assessing Officer (AO) reopened the assessment based on information received from the DCIT, Central Circle-2(2), Mumbai, alleging that the assessee had received two payments of ₹50 lakh each from Prraneta Industries Ltd., described as a paper entity controlled by Shri Shirish C. Shah and allegedly providing accommodation entries.

The Tribunal noted that reassessment under Section 147 requires the AO to have a valid “reason to believe” that income chargeable to tax has escaped assessment. It observed that such belief must be founded on tangible material, a nexus between the material and alleged escapement of income, application of mind by the AO, and a reasoned inference that income has escaped assessment. The Tribunal found that the AO had merely relied upon the investigation report received from Mumbai without conducting any independent inquiry or applying his own mind to the information. According to the Tribunal, there was no tangible evidence demonstrating escapement of income and the reasons recorded were based solely on the investigation report. Relying on judicial precedents, including the Delhi High Court’s decision in Signature Hotels Pvt. Ltd. v. ITO, the Tribunal held that vague information and mechanical reliance on third-party reports do not satisfy the statutory requirements for reopening an assessment.

The Tribunal further observed that the reasons recorded by the AO only referred to the investigation report concerning Shri Shirish C. Shah and entities allegedly controlled by him. Merely because the assessee received ₹1 crore from Prraneta Industries Ltd., it could not automatically be treated as an accommodation entry. The reasons recorded did not specify whether the receipt was capital or revenue in nature, nor did they explain how it represented income that had escaped assessment. The Tribunal concluded that the reassessment appeared to have been initiated merely to conduct fishing and roving inquiries regarding the nature of the credit received by the assessee, which is impermissible in law.

During reassessment proceedings, the AO sought details regarding the sale of shares of Imperative Buildwell Private Limited by the assessee to Prraneta Industries Ltd. for ₹1 crore. The assessee furnished complete details relating to the identity of the purchaser, creditworthiness, and genuineness of the transaction, and contended that these details had already been provided during the original assessment proceedings. The Tribunal accepted the assessee’s contention that the transaction had formed part of the material available during the original scrutiny assessment and that no adverse inference had been drawn at that stage. It held that the assessee had made full and true disclosure of all material facts relevant to the assessment.

The Tribunal also emphasized that the reassessment had been initiated beyond four years from the end of the relevant assessment year after a scrutiny assessment under Section 143(3) had already been completed. Therefore, the first proviso to Section 147 became applicable. In such circumstances, the AO was required to demonstrate with cogent evidence that the assessee had failed to make a full and true disclosure of material facts. The Tribunal found that no such failure had been established. It held that merely receiving information subsequently from another tax authority or forming a different view on already disclosed facts could not override the statutory protection available under the first proviso to Section 147.

Relying on decisions of the Supreme Court and the Delhi High Court, including New Delhi Television Ltd. v. DCIT, PCIT v. L&T Ltd., and PCIT (Central) v. K R Pulp and Papers Ltd., the Tribunal held that reassessment cannot be sustained where the assessee had already disclosed primary facts and the reopening is based only on investigation reports without demonstrating any failure of disclosure by the assessee.

Accordingly, the Tribunal held that the reassessment proceedings suffered from an invalid assumption of jurisdiction and were liable to be quashed. Since the reassessment itself was set aside, the Tribunal did not examine the merits of the additions and left those issues open. The assessee’s appeal was allowed.

FULL TEXT OF THE ORDER OF ITAT DELHI

1. The appeal in ITA No.4153/Del/2019 for AY 2010-11, arises out of the order of the ld ld. Commissioner of Income Tax (Appeals)-6, Delhi [hereinafter referred to as ‘ld. CIT(A)’, in short] dated 20.03.2019 against the order of assessment passed u/s 147 r.w.s. 143(3) of the Income-tax Act, 1961 (hereinafter referred to as ‘the Act’) dated 18.12.2017 by the Assessing Officer, Income Tax Officer, Ward-16(2), New Delhi (hereinafter referred to as ‘ld. AO’).

2. The Assessee has raised several grounds challenging the validity of assumption of jurisdiction under section 147 of the Act. The Assessee had also raised additional grounds on 18.3.2026. Since these are legal issues going to the root of the matter and facts relevant for its adjudication are on record, in view of the decision of the Hon’ble Supreme Court in the case of NTPC Ltd reported in 229 ITR 383 (SC), we are inclined to admit the additional grounds and take up the same first for adjudication.

3. We have heard the rival submissions and perused the materials available on record. The Assessee Company filed its return of income for the assessment year 2010-11 on 25-09-2010 under Section 139(1) of the Act declaring total income of Rs. 7,64,430 which was duly processed under Section 143(1) of the Act. Subsequently the assessment was completed under Section 143(3) of the Act on 23-03­2013 determining total income at Rs. 8,39,527. Subsequently, information was received from DCIT Central Circle-2(2), Mumbai vide intimation dated 7-3-2017 stating that assessee had received Rs 50,00,000 twice on 23-6-2009 from Prraneta Industries Ltd which is a paper entity controlled by Shri Shirish C Shah in the form of accommodation entries. Accordingly, the case of the Assessee was sought to be reopened by the Learned AO. The reasons recorded for reopening the assessment are enclosed in pages 77-88 of the paper book. Accordingl, notice under section 148 of the Act stood issued to the Assessee on 29-3-2017. The Assessee vide letter dated 13-11-2017 replied that return already filed may be treated as a return in response to notice under section 148 of the Act and sought for reasons recorded for reopening the assessment. We find that for resorting to reassessment, the most crucial requirement is that the Learned AO should have reason to believe that income chargeable for the relevant assessment year had escaped assessment. The language of section 147 of the Act makes it very clear that while the powers of an Assessing Officer in initiating the reassessment proceedings are very wide, at the same time they are not all encompassing in nature. These powers are widely controlled by the words ‘reason to believe’ employed by the section . The reasons for formation of belief for reopening an assessment must have a rational connection or relevant bearing on the formation of the belief. The existence or otherwise of such a belief, on the part of the Assessing Officer, is not a mere question of limitation, but the very foundation of his jurisdiction. These words import the presence of the following four essential ingredients:-

a) some material or materials and not mere fancy, imagination, speculation, suspicion ;

b) a nexus between such material and the belief of escapement of income from assessment;

c) an application of mind by the Assessing Officer to such material; and

d) an inference based on reason drawn tentatively by the Officer that income has escaped assessment.

Hence, it is very clear that the basis for formation of belief and recording of the reasons as to escapement of income cannot be based on mere suspicion and conjectural inferences not backed by any tangible evidence. In the instant case, the Learned AO had merely relied on the report of the DCIT Central Circle 2(2), Mumbai without in any manner undertaking any independent inquiries or applying his mind to the said report / information. There is absolutely no tangible evidence of escapement of income to warrant a revisit of the assessment and resorting to reassessment proceedings and accordingly the basis of recording of ‘reason to believe’ as to escapement of income does not exist in the instant case. We find that the Learned AR before us rightly relied on the decision of the Hon’ble Jurisdictional Delhi High Court in the case of Signature Hotels Pvt Ltd vs ITO reported in 338 ITR 51 (Del) wherein the relevant observations are as under:-

“12. In these circumstances, we are examining the reasons given by the Assessing Officer in the proforma seeking permission/approval of the Commissioner and whether the same satisfy the pre-conditions mentioned in section 147 of the Act.

13. Annexure attached to the said proforma placed on record of the petitioner reads as under :

14. The first sentence of the reasons states that information had been received from Director of Income-tax (Investigation) that the petitioner had introduced money amounting to Rs. 5 lakhs during the financial year 2002-03 as per the details given in the annexure. The said annexure, reproduced above, relates to a cheque received by the petitioner on October 9, 2002, from Swetu Stone PV from the bank and the account number mentioned therein. The last sentence records that as per the information, the amount received was nothing but an accommodation entry and the assessee was the beneficiary.

15. The aforesaid reasons do not satisfy the requirements of section 147 of the Act. The reasons and the information referred to is extremely scanty and vague. There is no reference to any document or statement, except the annexure, which has been quoted above. The annexure cannot be regarded as a material or evidence that prima facie shows or establishes nexus or link which discloses escapement of income. The annexure is not a pointer and does not indicate escapement of income. Further, it is apparent that the Assessing Officer did not apply his own mind to the information and examine the basis and material of the information. The Assessing Officer accepted the plea on the basis of vague information in a mechanical manner. The Commissioner also acted on the same basis by mechanically giving his approval. The reasons recorded reflect that the Assessing Officer did not independently apply his mind to the information received from the Director of Income-tax (Investigation) and arrive at a belief whether or not any income had escaped assessment.

(Emphasis supplied by us)

4. We find that in the entire reasons recorded the Learned AO had merely relied on the investigation report of Shri Shirish C Shah and the modus operandi adopted by him while conducting his business. Merely because the Assessee had received some amount of Rs 1,00,00,000 on 23-6-2009 from one of the entities controlled by Shri Shirish C Shah, it cannot be automatically be concluded as an accommodation entry. First of all, whether it is a capital receipt or a revenue receipt was not mentioned in the reasons recorded by the Learned AO. The nature of receipt is not at all mentioned in the reasons recorded. Hence it is very clear that the opening has been made in the instant case only to make fishing and roving enquiries to ascertain the nature of credit of Rs 1,00,00,000 received by the Assessee from Prraneta Industries Limited. It is trite law that reopening of an assessment cannot be made for making fishing and roving enquiries. Reliance in this regard is placed on the decision of the Hon’ble Punjab and Haryana High Court in the case of Vipan Khanna vs CIT reported in 255 ITR 220 (P&H).

5. During the course of reassessment proceedings, specific details were sought by the Learned AO with respect to sale of shares of Imperative Buildwell Private Limited by the Assessee to Prraneta Industries Limited for a consideration of Rs. 1 crore. In response thereto, the Assessee furnished complete details relating to the identity, creditworthiness and genuineness of the transaction and specifically submitted that the said transaction had already formed part of the material available during the original assessment proceedings, whereupon no adverse inference had been drawn. Since no adverse inference was drawn during the original assessment proceedings, no specific discussion concerning the said transaction came to be recorded in the assessment order passed under Section 143(3) of the Act. But in the reasons recorded, it was mentioned that the Assessee had not specifically brought the said transaction to the notice of the then Assessing Officer during original assessment proceedings and accordingly the Assessee had failed to make full and true disclosure of the transaction that is relevant for the purpose of assessment. It is a fact that the Assessee had sold shares of Imperative Buildwell Private Limited to Prraneta Industries Limited and had received a sum of Rs. 1 crore on that account through regular banking channels. The details regarding the same had already been filed by the Assessee in the original assessment proceedings. The then Assessing Officer having taken due cognizance of the details furnished by the Assessee had resorted to frame the assessment under Section 143(3) of the Act without drawing any adverse inference on the amounts received from Prraneta Industries Limited in the sum of Rs. 1 crore on account of sale of shares. Hence, there cannot be any failure that could be attributed on the part of the Assessee to make full and true disclosure of all material facts that are relevant for the purpose of assessment. Admittedly in the instant case, the reopening has been done beyond four years from the end of the relevant assessment year and original assessment stood completed under section 143(3) of the Act. Hence, the first Proviso to Section 147 of the Act comes into operation. It is the duty of the Learned AO to bring on record with cogent evidences that there was indeed a failure on the part of the Assessee to make full and true disclosure of all material facts that are relevant for the purpose of assessment, which in the instant case, in our considered opinion, the Learned AO had failed to do so. Hence, there is a violation of first Proviso to Section 147 of the Act committed by the Learned AO while recording the reasons and also in the consequential framing of reassessment proceedings. The reopening of assessment deserves to be quashed on this count also. Reliance in this regard is placed on the decision of Hon’ble Supreme Court in the case of New Delhi Television Ltd vs DCIT reported in 116 taxmann.com 151 (SC) wherein it was held that where Assessing Officer issued notice to reopen assessment in case of Assessee taking a view that funds raised by its subsidiary company by issue of Step UP Coupon Bonds represented its own unaccounted money, however, failed to show non-disclosure of material facts by Assessee, notice issued to Assessee after a period of 4 years was to be quashed and set aside.

6. Once the Assessee furnishes the primary facts before the learned AO during the course of original assessment proceedings, it is for the Assessing Officer to draw proper legal or factual inferences therefrom. The Assessee is under no obligation to instruct the Assessing Officer what inference should be drawn from the disclosed materials. Mere subsequent receipt of material or information from DCIT Central Circle 2(2), Mumbai or later formation of a different inference by the department does not override the statutory protection contained in the first proviso to section 147 of the Act. Hence, the ratio of the aforesaid decision of Hon’ble Supreme Court squarely applies to the instant case. Similar view was taken by the Hon’ble Supreme Court in yet another decision in the case of PCIT vs L&T limited reported in 113 taxmann.com 48 (SC). Further, the Hon’ble Jurisdictional Delhi High Court in the case of PCIT (Central) vs K R Pulp and Papers Limited reported in 175 taxmann.com 278 (Del HC) held that where the Assessee had already furnished details of PAN and ITRs of the relevant parties and there was no clear recording as to how the assessee failed to fully and truly disclose material facts, reassessment is not justified merely on basis of report of investigation wing.

7. In view of the aforesaid observations and respectfully following the judicial precedents relied upon hereinabove, we have no hesitation to quash the entire reassessment proceedings on invalid assumption of jurisdiction and consequential framing of reassessment. Since the entire reassessment proceedings are quashed, the grounds raised by the Assessee on merits need not be adjudicated and they are left open.

8. In the result, the appeal of the Assessee is allowed.

Order pronounced in the open court on 23/03/2026.