Reassessment Quashed as Reasons Recorded Only Sought Verification of Claims: ITAT Delhi

Praveen Khurana Vs ACIT (ITAT Delhi)

Summary: The Delhi Bench of the Income Tax Appellate Tribunal allowed Praveen Khurana’s appeal for Assessment Year 1998-99 and quashed the reassessment notice and consequential assessment because the Assessing Officer’s recorded reasons did not establish the mandatory “reason to believe” that income chargeable to tax had escaped assessment. The Tribunal found that the reasons merely identified claims requiring verification or supporting particulars allegedly unavailable on record. Such observations amounted to suspicion and could not support the assumption of reassessment jurisdiction under Sections 147 and 148 of the Income-tax Act, 1961.

The supplied order records that the assessee filed his return on 31.03.1998, declaring gross total income of Rs.22,06,990/- and a total tax liability of Rs.6,37,070. The Department subsequently issued a notice under Section 148 dated 11.01.2001. According to the factual narration, the assessee complied with the notices during reassessment and furnished explanations and supporting documents sought by the Assessing Officer. The assessment completed under Section 143(3) read with Section 147 made six additions aggregating to Rs.14,89,612/-. These comprised disallowance of long-term capital loss of Rs.5,45,105/-, short-term capital loss of Rs.5,20,825/-, repair and maintenance expenses of Rs.1,31,330/-, travelling expenses of Rs.1,12,550/-, telephone expenses of Rs.29,802/-, and Rs.1,50,000/- on account of travel to the USA.

The assessee instituted his first appeal on 24.08.2002. The appellate order was passed only on 27.03.2026, after nearly 24 years. The CIT(A) granted partial relief but sustained the long-term capital-loss disallowance, short-term capital-loss disallowance and addition relating to USA travel. Before the Tribunal, the assessee challenged the validity of reopening, alleged denial of a proper opportunity to rebut the additions, and contested the three surviving additions.

On jurisdiction, the authorised representative submitted that the recorded reasons contained no bona fide belief of escaped income and merely sought verification of claims already appearing in the return and accompanying documents. The assessee had furnished the Profit and Loss Account and Balance Sheet. His submission was that any examination of those claims should have been undertaken through scrutiny proceedings under Section 143(2), rather than by reopening without satisfying the statutory jurisdictional condition. The CIT(A), however, had reasoned that the original return was processed under Section 143(1), that no earlier opinion had been formed, and that the Explanation to Section 147 covered excessive loss or understatement of income in such cases.

On the surviving additions, the assessee referred to documentary evidence supporting the long-term capital loss at pages 167 to 184 of the paper book and the short-term capital loss at pages 93 to 166. He also relied on a letter dated 26.03.2002 stating that his brother, residing in the USA, had borne the entire expenditure relating to the assessee’s travel there. The departmental representative relied on the findings of the lower authorities.

The Tribunal accepted the jurisdictional challenge. It held that, however strong the suspicion, it could not replace the statutory requirement of a belief founded on relevant material. The recorded reasons did not state that taxable income had escaped assessment; they merely indicated that claims needed verification. The Tribunal relied on Sheo Nath Singh v. Appellate Assistant Commissioner of Income-tax, (1971) 82 ITR 147 (SC), for the distinction between belief based on relevant material and mere suspicion, gossip or rumour. It also followed Signature Hotels (P) Ltd. v. ITO & Anr., (2011) 338 ITR 51 (Delhi), concerning the need for discernible material, a connection between that material and the recorded belief, and the Assessing Officer’s independent application of mind. Accordingly, it quashed the notice under Section 148 and the assessment, allowed Ground No.1 and allowed the appeal. The remaining grounds were not adjudicated and were expressly kept open. The order was pronounced on 23.09.2026.

Cases Discussed

• Sheo Nath Singh v. Appellate Assistant Commissioner of Income-tax, (1971) 82 ITR 147 (Supreme Court) — Relied upon by the assessee and followed by the Tribunal for the principle that “reason to believe” must rest on relevant material, rather than mere suspicion, gossip or rumour.
• Signature Hotels (P) Ltd. v. ITO & Anr., (2011) 338 ITR 51 (Delhi High Court) — Relied upon by the assessee and followed by the Tribunal; the reproduced extract addresses vague information, absence of a nexus between material and belief, and lack of independent application of mind in initiating reassessment.

FULL TEXT OF THE JUDGMENT/ORDER OF ITAT DELHI

1. This appeal is filed by the assessee against the order of ld. ADDL/ JCIT (A)- 1, Mumbai [“Ld. CIT(A)”, for short] dated 27.03.2026 for the Assessment Year 1998-99 raising following grounds of appeal:-

“1. That, on the facts and in the circumstances of the case, the Ld. CIT(A) has erred both in law and on facts in upholding the validity of the notice issued under Section 148 of the Income-tax Act, 1961. The said notice is bad in law as it has been issued without proper recording and furnishing of reasons, thereby failing to satisfy the mandatory conditions precedent for assumption of jurisdiction under Section 147. Accordingly, the impugned notice is liable to be quashed as void ab initio.

2. That, on the facts and in the circumstances of the case, the Ld. CIT(A) has erred in confirming the additions made by the Ld. AO without appreciating that no proper opportunity of being heard or rebuttal was afforded to the appellant. The failure to provide such opportunity is in gross violation of the principles of natural justice and are therefore unlawful, and liable to be deleted.

3. That, on the facts and in the circumstances of the case, the Ld. CIT(A) has erred in confirming the addition made by the Learned Assessing Officer on account of disallowance of long- term capital loss amounting to Rs.5,45,105/-. The said disallowance is contrary to the facts on record and settled principles of law. and is therefore liable to be deleted.

4. That, on the facts and in the circumstances of the case, the Ld. CIT(A) has erred in confirming the addition made by the Learned Assessing Officer on account of disallowance of short- term capital loss amounting to Rs.5,20,825/-. The said disallowance is arbitrary, unjustified, and contrary to law, and is therefore liable to be deleted.

5. That, on the facts and in the circumstances of the case, the Ld. CIT(A) has erred in confirming the addition made by the Learned Assessing Officer on account of disallowance of travelling expenses incurred for travel to the USA amounting to Rs.1,50,000/-. The said disallowance is without proper appreciation of facts and evidence on record, and is therefore liable to be deleted.”

2. Brief facts of the case are, the assessee duly filed his return of income for the Assessment Year 1998–99 on 31.03.1998, declaring a Gross Total Income of Rs.22,06,990/- and a total tax liability of Rs.6,37,070. Thereafter, the Income Tax Department initiated reassessment proceedings by issuing a notice under Section 148 of the Income-tax Act, 1961 (for short ‘the Act’) dated 11.01.2001. In response thereto, the assessee duly complied with all the notices issued during the reassessment proceedings and furnished the requisite explanations along with the supporting documents as called for by the Assessing Officer. Upon completion of the reassessment proceedings, the AO passed an assessment order under Sections 143(3) read with 147 of the Act for the Assessment Year 1998–99, making following six (6) additions aggregating to Rs.14,89,612/- to the returned income of the assessee:-

3. Aggrieved with the above order, assessee preferred an appeal before the ld. CIT (A) challenging the additions made by the Assessing Officer. Although the appeal was instituted on 24.08.2002, the learned CIT (A) passed the impugned appellate order only on 27.03.2026, resulting in an inordinate delay of nearly 24 years in the disposal of the first appeal. By the said order, the ld. CIT (A) granted partial relief to the assessee while sustaining Addition Nos. 1, 2 and 6, as set out in the table above, made by the Assessing Officer.

4. Aggrieved with the aforesaid order, assessee filed an appeal before us.

5. At the time of hearing, ld. AR of the assessee submitted as under:-

1. At the outset, it is respectfully submitted that the jurisdiction to reopen an assessment under Section 147 of the Income-tax Act, 1961, can be assumed only upon fulfilment of the statutory pre- condition that the Ld. AO has “reason to believe” that any income chargeable to tax has escaped assessment.

2. During the course of the hearing, Appellant has raised the fundamental question of law as set out in Ground No. 1 of the present appeal. It is respectfully submitted that the reasons recorded by the Ld. AO do not disclose any “reason to believe” that income chargeable to tax had escaped assessment. The reasons merely record certain observations requiring verification, which, at the highest, amount to a “reason to suspect” and not a “reason to believe” as mandated under Section 147 of the Act.

3. The reasons recorded by the Ld. AO for initiating proceedings under Section 148 as mentioned in para 2 of the assessment order. Subsequently, a bare reading of the para 2 of the assessment order, demonstrates that the Ld. AO has nowhere recorded a belief that any income chargeable to tax had escaped assessment. The reasons merely indicate that certain claims required verification or that certain supporting particulars were not available on record. Such observations do not satisfy the statutory requirement of formation of a bona fide belief regarding escapement of income. Additionally, the Appellant had duly furnished its Profit and Loss Account and Balance Sheet along with the return of income. If the Ld. Assessing Officer had found any material in the said documents indicating escapement of income, the proper course available under the Act was to issue a notice under Section 143(2) of the Income-tax Act and undertake a scrutiny assessment. However, no such notice was issued, which clearly demonstrates that the Ld. Assessing Officer had not formed any opinion, much less a bona fide “reason to believe”, that any income chargeable to tax had escaped assessment. Thereafter, the Ld. Assessing Officer initiated reassessment proceedings by issuing a notice under Section 148 of the Act without first forming the statutory “reason to believe” as mandated under Section 147(1) of the Act. Such assumption of jurisdiction is contrary to the express requirements of Section 147 of the act.

4. The Ld. CIT(A), while deciding the issue in paragraphs 8.2 to 8.5 of the impugned order, observed that:

a. the reasons were based upon the return and accompanying documents filed by the Appellant;

b. since the original return had only been processed under Section 143(1), no opinion had earlier been formed by the AO;

c. the Explanation to Section 147 provides that in cases processed u/s 143(1), the AO’s noticing of excessive loss or understatement of income is deemed to be a case of escaped income. In the present case, the reasons recorded specifically point to the potential excessiveness of the claim for capital loss and expenses; Accordingly, Ground No. 1 was dismissed.

5. It is respectfully submitted that the expression “reason to believe” is fundamentally different from “reason to suspect.” However strong a suspicion, it cannot confer jurisdiction under Section 147. The Ld. AO must possess tangible material leading to the formation of a bona fide belief that income chargeable to tax has escaped assessment. Consequently, the findings recorded by the Ld. CIT(A) are contrary to the settled position of law.

6. In support of the aforesaid proposition, reliance is placed upon the following judicial precedents:

a. Sheo Nath Singh v. Appellate Assistant Commissioner of Income- tax [(1971) 82 ITR 147 (SC)]; and

b. Signature Hotels (P) Ltd. v. ITO & Anr. [(2011) 338 ITR 51 (Delhi)].

7. Submission to Ground No. 3: Disallowance of Long-Term Capital Loss- The Ld. CIT(A) erred in disallowing the Long-Term Capital Loss amounting to Rs. 5,45,105/-. The complete documentary evidence in support of the claim has been placed on record and forms part of the Paper Book at Pages 167 to 184.

8. Submission to Ground No. 4: Disallowance of Short-Term Capital Loss- The learned Assessing Officer further erred in disallowing the Short-Term Capital Loss amounting to Rs. 5,20,825/-. The relevant documentary evidence supporting the claim has also been filed in the Paper Book at Pages 93 to 166.

9. Submission to Ground No. 6: Disallowance of Travelling Expenses- The Appellant, vide letter dated 26.03.2002, specifically informed the Ld. AO that the entire expenditure relating to the Appellant’s travel to the United States of America had been borne by his brother, who was residing in the U.S.A.”

6. On the other hand, ld. DR of the Revenue relied on the findings of the lower authorities.

7. Considered the rival submissions and material placed on record. At the time of hearing, ld. AR specifically argued legal issue raised vide Ground No.1 regarding notice issued u/s 148 issued without ‘reason to believe’. I observed that the jurisdiction to reopen an assessment under Section 147 of the Act can be assumed only upon fulfillment of the statutory pre-condition that the AO has “reason to believe” that any income chargeable to tax has escaped assessment. I further observed that the reasons recorded by the AO do not disclose any “reason to believe” that income chargeable to tax had escaped assessment. The reasons merely recorded certain observations requiring verification, which, at the highest, amount to a “reason to suspect” and not a “reason to believe” as mandated under Section 147 of the Act. I further observed from the assessment order that AO has nowhere recorded a belief that any income chargeable to tax had escaped assessment. The reasons merely indicate that certain claims required verification or that certain supporting particulars were not available on record. I observed that such observations do not satisfy the statutory requirement of formation of a bona fide belief regarding escapement of income. Further, I observed that the assessee had duly furnished its Profit and Loss Account and Balance Sheet along with the return of income and if the Assessing Officer had found any material in the said documents indicating escapement of income, the proper course available under the Act was to issue a notice under Section 143(2) of the Income-tax Act and undertake a scrutiny assessment or other method available at his disposal. However, no such notice was issued, which clearly demonstrates that the Assessing Officer had not formed any opinion, much less a bona fide “reason to believe”, that any income chargeable to tax had escaped assessment. Thereafter, the Assessing Officer initiated reassessment proceedings by issuing a notice under Section 148 of the Act without first forming the statutory “reason to believe” as mandated under Section 147(1) of the Act. Such assumption of jurisdiction is contrary to the express requirements of Section 147 of the Act.

10. I observed that the expression “reason to believe” is fundamentally different from “reason to suspect.” However strong a suspicion, it cannot confer jurisdiction under Section 147. The AO must possess tangible material leading to the formation of a bona fide belief that income chargeable to tax has escaped assessment. I observed that the findings of ld. CIT(A) are contrary to the settled position of law.

11. In support of the above proposition, I find force from the judgment of the Hon’ble Supreme Court in Sheo Nath Singh v. Appellate Assistant Commissioner of Income-tax (1971) 82 ITR 147, wherein it was held that “reason to believe” postulates belief founded on relevant material and not mere suspicion, gossip or rumour.

12. Further, in the case of Signature Hotels (P) Ltd. Vs. ITO and another, of the Hon’ble Delhi High Court, reported in 338 ITR 51 (Delhi), it was held as under:-

“For the A.Y. 2003-04, the return of income of the assessee company was accepted u/s.143(1) of the Income-tax Act, 1961 and was not selected for scrutiny. Subsequently, the Assessing Officer issued notice u/s.148 which was objected by the assessee. The Assessing Officer rejected the objections. The assessee company filed writ petition and challenged the notice and the order on objections.

The Delhi High Court allowed the writ petition and held as under:

“(i) Section 147 of the Income-tax Act, 1961, is wide but not plenary. The Assessing Officer must have ‘reason to believe’ that income chargeable to tax has escaped assessment. This is mandatory and the ‘reason to believe’ are required to be recorded in writing by the Assessing Officer.

(ii) A notice u/s.148 can be quashed if the ‘belief’ is not bona fide, or one based on vague, irrelevant and non-specific information. The basis of the belief should be discernible from the material on record, which was available with the Assessing Officer, when he recorded the reasons. There should be a link between the reasons and the evidence/material available with the Assessing Officer.

(iii) The reassessment proceedings were initiated on the basis of information received from the Director of Income-tax (Investigation) that the petitioner had introduced money amounting to Rs.5 lakhs during F.Y. 2002-03 as stated in the annexure. According to the information, the amount received from a company, S, was nothing but an accommodation entry and the assessee was the beneficiary. The reasons did not satisfy the requirements of section 147 of the Act. There was no reference to any document or statement, except the annexure. The annexure could not be regarded as a material or evidence that prima facie showed or established nexus or link which disclosed escapement of income. The annexure was not a pointer and did not indicate escapement of income.

(iv) Further, the Assessing Officer did not apply his own mind to the information and examine the basis and material of the information. There was no dispute that the company, S, had a paid-up capital of Rs.90 lakhs and was incorporated on January 4, 1989, and was also allotted a permanent account number in September 2001. Thus, it could not be held to be a fictitious person. The reassessment proceedings were not valid and were liable to the quashed.”

13. Respectfully following the aforesaid decisions, I am of the considered view that the mandatory jurisdictional conditions prescribed under Sections 147 and 148 of the Act were not satisfied in the present case. Accordingly, I quash the impugned notice issued under Section 148 which is without jurisdiction, contrary to the statutory mandate. Hence, I quash the assessment and allow the legal Ground No.1

14. Since I have quashed the assessment on the legal issue, the other grounds raised are not adjudicated at this stage and the same are kept open.

15. In the result, the appeal filed by the assessee is allowed.

Order pronounced in the open court on this 23rd day of September, 2026.