Sarita Shetty Vs DCIT (ITAT Bangalore)
Summary: The assessee had invested ₹21 lakh in 700 unsecured convertible bonds of Mysore Polymers and Rubber Products Private Limited in June 2011, which were converted in July 2014 into 7,000 equity shares at ₹34 per share. The Assessing Officer determined the fair market value at ₹65.85 per share and treated the differential amount of ₹25,09,500 as taxable income under section 56(2)(vii)(c) of the Income-tax Act, 1961 for assessment year 2015-16, leading to reassessment proceedings under section 147. Before the Bangalore ITAT, the assessee contended that she had specifically requested the recorded reasons for reopening by letters dated 17 April 2021 and 9 July 2021, but the reasons had not been supplied before completion of reassessment, contrary to the procedure laid down by the Supreme Court in GKN Driveshafts (India) Ltd. v. ITO (259 ITR 19). The Assessing Officer’s factual report before the Tribunal itself stated that no evidence was available to show that the recorded reasons had been communicated or furnished to the assessee and that no correspondence enclosing those reasons was available on record. Relying on the Karnataka High Court decision in PCIT v. V. Ramaiah (2019) 103 taxmann.com 201 (Karnataka) and the Supreme Court decision in GKN Driveshafts (India) Ltd. v. ITO (259 ITR 19), the Tribunal held that the recorded reasons had not been furnished despite the assessee’s request and quashed the reassessment order. Consequently, the Tribunal did not adjudicate the remaining grounds, including the merits of the ₹25,09,500 addition under section 56(2)(vii)(c), and the appeal was partly allowed.
Failure to Supply Recorded Reasons Despite Assessee’s Request Invalidates Reassessment: Bangalore ITAT Quashes ₹25.09 Lakh Addition
The assessee had invested ₹21 lakh in 700 unsecured convertible bonds of Mysore Polymers and Rubber Products Private Limited in June 2011. Upon conversion in July 2014, she received 7,000 equity shares at ₹34 per share. Since the AO determined their fair market value at ₹65.85 per share, the differential amount of ₹25.09 lakh was treated as taxable income under Section 56(2)(vii)(c). The assessment for AY 2015-16 was consequently reopened under Section 147, and the addition was confirmed by the CIT(A).
Before the Tribunal, the assessee contended that she had specifically requested the recorded reasons for reopening through letters dated 17 April 2021 and 9 July 2021. However, the AO had failed to furnish them before completing the reassessment. The assessee argued that this violated the mandatory procedure laid down by the Supreme Court in GKN Driveshafts (India) Ltd. v. ITO.
Significantly, the AO’s own factual report submitted before the Tribunal admitted that no evidence was available on record to show that the recorded reasons had ever been communicated to the assessee. There was also no copy of any correspondence enclosing or supplying those reasons in response to the assessee’s requests.
Relying on the Karnataka High Court’s decision in PCIT v. V. Ramaiah and the Supreme Court’s ruling in GKN Driveshafts, the Bangalore ITAT held that non-supply of the recorded reasons despite a specific request renders the reassessment invalid. The reassessment order was accordingly quashed.
Since the reassessment itself was annulled, the Tribunal did not adjudicate the merits of the ₹25.09 lakh addition under Section 56(2)(vii)(c), including the assessee’s contention that the convertible bonds had been allotted in 2011, before the relevant valuation rules for unquoted equity shares were introduced.
FULL TEXT OF THE ORDER OF ITAT BANGALORE
1. This appeal is filed by Sarita Shetty (the assessee/appellant) for assessment year 2015–16 against the order dated 5 August 2025 passed by the National Faceless Appeal Centre (NFAC), Delhi [the learned CIT(A)], which partly allowed the assessee’s appeal against the reassessment order dated 30 March 2022 passed under section 147 of the Income- tax Act, 1961, by the ITO, Karnataka-C(131)(1), Bengaluru (the learned AO).
2. The Assessee has raised the following grounds of appeal:
1. The orders of the authorities below in so far as they are against the appellant, are opposed to law, equity, weight of evidence, probabilities, facts and circumstances of the case.
2. The impugned order passed u/s. 147 of the Act is bad in law and void ab- initio in as much as the reasons recorded for reopening have not been furnished to the appellant as prayed for and therefore, the impugned order passed is contrary to judgement of the Hon’ble Supreme Court in GKN Driveshafts reported in 259 ITR 19 [SC] and hence, the same requires to be cancelled.
2.1 Without prejudice to the above, the reopening of assessment is bad in law as there is no income escaping assessment under the facts and in the circumstances of the appellant’s case.
3. The learned CIT[A] is not justified in upholding the addition of Rs.25,09,500/- made by invoking the provisions of section 56[2][vii][c] of the Act under the facts and in the circumstances of the appellant’s case.
3.1 The learned CIT[A] failed to appreciate that the provisions of section 56[2][vii][c] of the Act were entirely inapplicable to the facts and circumstances of the appellant’s case.
3.2 The learned CIT[A] ought to have appreciated that the FMV of equity shares worked out at Rs. 65.85/- by purportedly adopting the valuing the non- quoted Equity Shares of the Company (MYPOL) as per IT (Fifteenth Amendment) Rules 2012 (introduced with effect from 29/11/2012) for valuation of non- which valuation was never furnished to the appellant under the facts and in the circumstances of the appellant’s case.
3.3 The learned CIT[A] ought to have appreciated that the IT (Fifteenth Amendment) Rules 2012 (introduced with effect from 29/11/2012) for valuation of non- quoted Equity Shares was not applicable to the appellant’s case in as much as the appellant was allotted the convertible bonds as per contractual terms negotiated with the investors vide allotment letter dated 30/06/2011, much prior to the introduction of the aforesaid Income Tax Rules introducing FMV for non – quoted Equity Shares under the facts and circumstances of the appellant’s case.
4. Without prejudice to the right to seek waiver with the Hon’ble CCIT/DG, the appellant denies herself liable to be charged to interest u/s 234-B and 234- D of the Act, which under the facts and in the circumstances of the appellant’s case deserves to be cancelled.
5. For the above and other grounds that may be urged at the time of hearing of the appeal, your appellant humbly prays that the appeal may be allowed and Justice rendered and the appellant may be awarded costs in prosecuting the appeal and also order for the refund of the institution fees as part of the costs.
3. Briefly stated, the assessee, an individual, filed her return of income for assessment year 2015– 16 on 18 February 2017 declaring total income of ₹ 2,832,350. Subsequently, information was received that she had invested ₹ 21 lakhs in 700 unsecured convertible bonds of Mysore Polymers and Rubber Products Private Limited at ₹ 3,000 per bond and had received the bond allotted 7,000 equity shares to the assessee on conversion of those 700 bonds at ₹ 34 per share, comprising face value and premium. Since this value was lower than the fair market value of ₹ 65.85 per share, the difference in value of the 7,000 shares was computed at ₹ 2,509,500.
4. On this basis, reassessment proceedings were initiated and notice under section 148 was issued on 30 March 2021. In response, the assessee filed a return of income on 27 April 2021 declaring total income of ₹ 2,832,350. The learned Assessing Officer invoked section 56(2) (vii)(c) of the Act and held that the assessee had not offered ₹ 2,509,500 to tax. Accordingly, this amount was added to the assessee’s total income under the head “Income from other sources” by reassessment order dated 30 March 2022 passed under section 147 read with section 144B of the Income- tax Act, determining the total income at ₹ 5,341,850.
5. The assessee filed an appeal before the learned CIT(A), who upheld the action of the learned Assessing Officer.
6. The assessee is, therefore, in appeal before us. The learned authorised representative, Shri V. Srinivasan, Advocate, appearing for the assessee, filed a paper book comprising 37 pages and submitted that the assessee had sought the reasons recorded for reopening the assessment by letter dated 17 April 2021, and had reiterated the request on 9 July 2021. However, the reasons recorded for reopening were not supplied to the assessee. He submitted that the Hon’ble Karnataka High Court, in 103 taxmann.com 201, relying on the decision of the Hon’ble Supreme Court, has held that where the reasons for reopening are not furnished to the assessee, the assessment framed pursuant to such reopening is invalid. Referring to the letter dated 17 April 2021 placed at pages 12– 13 of the paper book, he contended that the learned Assessing Officer failed to furnish the recorded reasons to the assessee and, therefore, the assessment order deserves to be quashed.
7. Shri Pradeep S., learned Additional Commissioner of Income Tax and Senior Assessing Officer by email dated 25 June 2026, for which time had been granted to rebut the assessee’s arguments.
8. In the factual report, the learned Assessing Officer stated that no evidence was available to show that the reasons recorded for reopening the assessment were communicated or furnished to the assessee during the reassessment proceedings, and that no copy of any communication enclosing those reasons was found on record. It was further stated that no material was available to establish that the recorded reasons were supplied to the assessee in response to any request made during the assessment proceedings. The report therefore clearly indicates, based on the records available in the office of the Assessing Officer, that the reasons recorded for reopening the assessment were never furnished to the assessee.
9. On careful consideration of the rival submissions and the report of the learned Assessing Officer, it is clear that the reasons recorded for reopening the assessment were not furnished to the assessee. Respectfully following the decision of the Hon’ble Karnataka High Court in PCIT v. V. Ramaiah (2019) 103 taxmann.com 201 (Karnataka), wherein reassessment proceedings were held to be invalid for non- supply of the recorded reasons despite the assessee’s request, and the decision of the Hon’ble Supreme Court in GKN Driveshafts (India) Ltd. v. ITO (259 ITR 19), we quash the reassessment order passed in the present case. Accordingly, ground No. 2 of the assessee’s appeal is allowed.
10. In view of our decision on ground No. 2, the remaining grounds of appeal do not require adjudication and are dismissed as infructuous.
11. In the result, the appeal filed by the assessee is partly allowed.
Order pronounced in the open court on 24th August, 2026.
