Reassessment Based on Wrong Sale-Purchase Facts Quashed: ITAT Amritsar

Ganga Prasad Vs ITO (ITAT Amritsar)

Summary: The Amritsar Bench of the Income Tax Appellate Tribunal allowed the appeal of Ganga Prasad and quashed the reassessment proceedings for Assessment Year 2010-11 because the reasons recorded by the Assessing Officer under Sections 147 and 148 of the Income-tax Act, 1961 were founded on fundamentally incorrect facts. The Assessing Officer had initiated reassessment proceedings alleging escapement of income of Rs.1,46,54,500 on account of two property sales aggregating Rs.1,37,92,000 and an unexplained property purchase of Rs.8,62,500. However, the underlying registered deeds established that the transactions had been incorrectly described: the alleged sales were actually purchases, while the alleged purchase was a sale. The Assessing Officer subsequently acknowledged this mistake while disposing of the assessee’s objections but sought to treat it as a curable defect under Section 292B.

The assessee contended that the recorded reasons demonstrated non-application of mind and could not sustain reassessment jurisdiction. He also challenged the proceedings because the notice under Section 148 had been issued by ITO Ward 3(4), Jalandhar, whereas the assessment was completed by ITO Ward II(1), Jalandhar. On merits, the assessee submitted that the relevant property transactions belonged to the partnership firm Dynamic Builders and Developers, in whose audited accounts and income-tax records the transactions had already been disclosed. The Assessing Officer nevertheless made additions aggregating Rs.1,46,54,500, which the Commissioner (Appeals) upheld.

The Tribunal examined the recorded reasons and observed that the Assessing Officer had obtained copies of the registered property deeds but failed to read their recitals before recording satisfaction regarding escapement of income. The incorrect description of purchases as sales and sales as purchases was not merely a technical mistake in a notice. It affected the foundational facts on which the belief of escapement of income had been formed. The Tribunal further observed that the approving authority had also failed to identify the obvious factual errors, demonstrating non-application of mind at the approval stage.

Relying on the Delhi High Court decision in Northern Exim Private Limited v. DCIT and the jurisdictional Punjab and Haryana High Court decision in CIT v. Atlas Cycle Industries, the Tribunal held that the validity of reassessment must be determined exclusively with reference to the reasons originally recorded, without relying on subsequent explanations or clarifications. Since those reasons were based on incorrect and non-existent facts, the notice under Section 148 was invalid from inception and the defect could not be cured under Section 292B. Accordingly, the reassessment was quashed and the assessee’s appeal was allowed. The remaining grounds relating to jurisdiction and the substantive additions were treated as academic and were not separately adjudicated.

Cases Discussed

• Sourav Bakshi, ITA No. 720/Asr/2019, dated 23.12.2021 (ITAT Amritsar) — Cited by the assessee in support of the contention that reassessment based on incorrect or non-existent facts is invalid.
• Smt. Paramjit Kaur v. ITO, ITA Nos. 65 and 140/Asr/2019, dated 14.10.2021 (ITAT Amritsar) — Relied upon by the assessee in support of the objection concerning issuance of a reassessment notice by an officer allegedly lacking jurisdiction.
• Gaurav Joshi, ITA No. 274/Asr/2018, dated 16.01.2019, 197 TTJ (Asr) 946 (ITAT Amritsar) — Cited in support of the challenge to reassessment founded on incorrect recorded facts.
• Mohd. Rizwan v. ITO, ITA No. 89/Lkw/2015, dated 16.04.2015 (ITAT Lucknow) — Relied upon by the assessee concerning the validity of a notice issued by an officer who allegedly lacked jurisdiction.
• Northern Exim Private Limited v. DCIT, W.P.(C) No. 8631/2007, dated 07.02.2012 (Delhi High Court) — Followed for the principle that reassessment jurisdiction must be tested on the reasons originally recorded, without supplementation by subsequent explanations.
• S. Sreeramachandra Murthy v. DCIT, (2000) 243 ITR 427 (Andhra Pradesh High Court) — Referred to in the reproduced judgment in Northern Exim concerning the controlling nature of the originally recorded reasons.
• CIT v. Agarwalla Brothers, (1991) 189 ITR 786 (Patna High Court) — Cited in the reproduced judicial discussion concerning the validity of reassessment reasons.
• CIT v. Atlas Cycle Industries, (1989) 180 ITR 319 (Punjab and Haryana High Court) — Relied upon for the proposition that reassessment jurisdiction fails where the grounds originally recorded are found to be incorrect or non-existent.
• Equitable Investment Co. (P.) Ltd. v. ITO, (1988) 174 ITR 714 (Calcutta High Court) — Referred to in Northern Exim concerning the requirement to confine jurisdictional examination to recorded reasons.
• Addl. CIT v. Ganeshilal Lal Chand, (1985) 154 ITR 274 (Rajasthan High Court) — Cited in Atlas Cycle Industries concerning reassessment based on grounds that cease to exist.
• East Coast Commercial Co. Ltd. v. ITO, (1981) 128 ITR 326 (Calcutta High Court) — Cited in the reproduced Northern Exim judgment concerning recorded reasons.
• Asa John Devinathan v. Addl. CIT, (1980) 126 ITR 270 (Madras High Court) — Cited concerning the limits of reassessment jurisdiction.
• CIT v. Ahmedabad Manufacturing and Calico Printing Co. Ltd., (1977) 106 ITR 159 (Gujarat High Court) — Discussed in the reproduced Atlas Cycle Industries judgment, which expressly disagreed with the Gujarat High Court’s view.
• G. M. Rajgharia v. ITO, (1975) 98 ITR 486 — Referred to in Northern Exim concerning the significance of recorded reasons.
• Bankipur Club Ltd. v. CIT, (1971) 82 ITR 831 (Supreme Court) — Cited in Atlas Cycle Industries in support of the limits on reassessment jurisdiction.
• Jamna Lal Kobra v. ITO, (1968) 69 ITR 461 (Allahabad High Court) — Cited in Northern Exim concerning the validity of reassessment based on recorded reasons.
• CIT v. A. Raman and Co., (1968) 67 ITR 11 (Supreme Court) — Cited in Atlas Cycle Industries in support of its conclusion regarding reassessment jurisdiction.

FULL TEXT OF THE ORDER OF ITAT AMRITSAR

This appeal is presented by the assessee against the order of the Ld. CIT (A) NFAC, order dated 13/03/2024, passed u/s 250 of the Act 61, confirming the action of the AO u/s 143 (3) r.w.s. 147 of the Act 1961, dated 27.12.2017 for A.Y. 2010-11.

2. The assessee has taken the following grounds:

“1. That the order passed by the Hon’ble CIT(A) dated 13.03.2024 is against the law and facts of the case.

2. (a) That having regard to the facts and circumstances of the case, Hon’ble CIT(A) has erred in law and on facts in confirming the action of Ld. AO in framing the impugned assessment order u/s 143(3) r.w.s 147 by recording incorrect facts and without complying with the mandatory conditions u/s 147 as envisaged under the Income Tax Act, 1961.

(b) That in any view of the matter, action of Ld. AO in disposing objections to reasons recorded by passing order by wrongly interpreting the provisions of law, is bad in law and against the facts and circumstances of the case.

(c) That having regard to the facts and circumstances of the case, Hon’ble CIT(A) has erred in law and on facts in confirming the action of Ld. AO in passing the impugned assessment order and that too without assuming jurisdiction as per law.

3. That having regard to the facts and circumstances of the case, Hon’ble CIT(A) has erred in law and on facts in confirming the action of Ld. AO in making an addition of Rs. 1,37,92,000/- u/s 69 of the Act on account of unexplained investment, without considering the facts of the case and without observing the principles of natural justice.

4. That having regard to the facts and circumstances of the case, Hon’ble CIT(A) has erred in law and on facts in confirming the action of Ld. AO in making an addition of Rs. 8,62,500/- u/s 69 of the Act as long term capital gain, without considering the facts of the case and without observing the principles of natural justice.

5. That the appellant craves the leave to add, modify, amend or delete any of the grounds of appeal at the time of hearing and all the above grounds are without prejudice to each other.”

3. Brief facts of the case are that on the basis of information received by the ITO, Ward 3(4), Jalandhar notice u/s 148 has been issued on 31.03.2017 that income has escaped assessment to the tune of Rs.1,46,54,500/-, the breakup of which are as follows:

3.1 Verification notice was issued to the assessee u/s 133(6) of the Act 1961 on various dates by the AO seeking explanation of the above financial transactions. Information was also obtained from the Sub Registrar, Ludhiana on the basis of which the AO recorded the reasons that sale of immovable property to the tune of Rs.1,37,92,000/- has not been accounted for by the assessee resulting in escapement of income.

Secondly, it was also recorded that there has been investment of Rs.8,62,500/- in purchase of property by the assessee which has remained unexplained. Thus, as per the AO a total amount of Rs.1,46,54,500/- has escapement assessment for the A.Y. 2010-11 within the meaning of section 147 of the Act.

3.2 Relevant portion of the recorded reasons are reproduced below for ready reference:

“I therefore, have reasons to believe that profit on sale of immoveable properties amounting to Rs. 1,37,92,000/- has not been accounted, for A.Y 2010-11 & has escaped assessment, within the meaning of section 147 of the LT Act, 1961. Further, the investment of Rs.8,62,500/- in the property has also remained unexplained as the assessee did not response to any of the notices/letters issued u/s 133(6) of the LT -ct 1961. Thus, income of the assessee to the tune of Rs. 1,46,54,500/- in respect of issues as mentioned supra has escaped assessment for the A.Y. 2010-11 ‘within the meaning of section 147 of the Income Tax Act, 1961.”

3.3 In response to notice u/s 148, the assessee filed return on 12.09.2017 disclosing a total income of Rs.72,810/- and also obtained copy of recorded reasons against which written objections were filed.

3.4 The AO disposed of the said objections vide order dated 14.11.2017, and while disposing of the objections the Income Tax Officer, Ward II (1), Jalandhar, admitted the mistake committed by the AO while recording the reasons u/s 148.

3.5 The relevant portion of the disposal of objection is reproduced below for ready reference:

“2. In this regard, it is stated that as per your letter submitted on 23.10.2017 you have filed a detailed objection to the reasons recorded by Assessing Officer before issuing Notice U/s 148 of the Income Tax Act. Your letter has been carefully considered by me and following objection have been summarised to settle before further proceedings in this case

1. While recording the reasons the Assessing Officer mentioned Sale instead of Purchase the transactions of property made by you via deed no. 4927 & 5235 dated 20.08.2009 & 27.08.2009 respectively totaling to Rs. 1,37,92,000/-

2. Notice u/s 148 was issued to the assessee by Income Tax Officer, Ward 3(4), Jalandhar, whereas jurisdiction to issue notice lies with Joint Commissioner of Income Tax, Range-II, Jalandhar

3. In respect of your first objection that you entered in the purchase of property instead of in the deed mentioned as 4927 & 5235, it is stated that it is merely a mistake and covered by protection provided by Section 292B of the Income Tax Act, which stated as under.”

3.6 As per the objection relating to the jurisdiction of the AO, the comments of the Income Tax Officer, Ward II(1), Jalandhar is reproduced below:

“As per record, you have filed your ITR in response of Section 148 on 12.09.2017 and furnished the acknowledgement of the same on 15.09.2017. Notice u/s 148 was issued to you on 31.03.2017 and time allowed in this notice was 30 days from the service of the notice. Notice u/s 148 was served to you on 06.04.2017 as per record of this office. Further notice u/s 142(1) dated 13.07.2017 was also served to you through affixture and you were required to file your ITR by 19.07.2017 but you have filed your ITR on 12.09.2017 and do not raise any question regarding jurisdiction of an Assessing Officer. You have raised this objection now on 23.10.2017 which is devoid of any merit in view of provisions of section 124(3)(b), your objection in this regard is devoid of any merit and stands removed. Further the case laws referred by you in your letter have no mention of section 292B, which is applicable in this case, therefore the facts and circumstances of the present case are clearly distinguishable to that of instant case.”

3.7 Thereafter, in course of assessment proceedings, the assessee filed requisite information, documents alongwith copies of registered deed of purchase and sale. The assessee further explained that he is associated with a partnership firm under the name and style of Dynamic Builder and Developers which is separately assessed under the PAN. He has also filed the copies of audited balance sheet, audit report, and copies of ledger account of the above mentioned firm to explain the fact that the aforesaid partnership firm is engaged in the business of real estate as promoter and developers. The transactions of these lands both purchase and sale are in fact transactions of the partnership firm, and the said purchase of Rs.68,96,000/- vide deed No. 4927 dated 20.08.2009 and purchase vide deed No. 5235 dated 27.08.2009 of equal amount, all are recorded in the books of account of the partnership firm, and is also reflected in the ledger account of purchase, a copy of which has been submitted before the AO duly signed by the managing partner of Dynamic Builder and Developers.

3.8 Similarly, it is also submitted that the sale of property vide deed No.12769 dated 30.03.2010 amounting to Rs.8,62,500/- is also reflected in the ledger account of sale in the books of the partnership firm Dynamic Builders and Developers, a copy of which he submitted before the AO duly signed by the managing partnership of the firm.

3.9 He also referred to the balance sheet of the partnership firm to point out that the entire purchase which is a subject matter of the notice u/s 148 is also disclosed in the audited balance sheet of the partnership firm.

3.10 Similarly, the sales which is the subject matter of the notice u/s 148 is also recorded in the Profit and Loss account of the said partnership firm and is considered as part of gross sales.

3.11 In other words, the assessee wanted to explain that the entire investment for purchase of land amounting to Rs.1,37,92,000/- is the purchase of the partnership firm Dynamic Builders and Developers and is duly reflected in their books of account and the source of investment are also reflected in their books of account and considered by their assessing officer and is a part of the Income Tax Return filed by the said firm on 04.10.2010 for A.Y. 2010-11 which is much before the date of issue of notice u/s 148, on the assessee.

3.12 Similarly, the sale of the property amounting to Rs.8,62,500/- also belongs to the partnership firm and the same is also duly recorded in the books of account and is a part of the written records. However, the AO refused to entertain any such explanations and finalized the assessed income by making an addition of Rs.1,46,54,500/-.

4. The matter was carried in appeal and submissions were filed in course of appellate proceedings alongwith supporting case laws on which the assessee relied upon for the purpose of his arguments.

5. The ld. Frist appellate authority dismissed the appeal of the assessee by observing as follows:

“From the above it is seen that the contention of the assessee is that there were factual mistakes in the notice u/s. 148 issued to the assessee and also that the order was passed by the AO without assuming jurisdiction over the case of the assessee. From the available documents it is seen that the AO vide letter dated 14.11.2017 addressed the above issues raised by the assessee. The AO stated that factual mistakes in notices are covered u/s. 292B of the Act which states that a notice shall not be invalid or deemed to be invalid merely by reason of any mistake, defect or omission if such notice is in substance and effect in conformity with the intent and purpose of the Act. Therefore, the contention of the assessee that the order should be quashed on account of factual mistakes in notice u/s. 148 is liable to be rejected.

As regards the jurisdiction over the case, section 124(3) of the Act clearly bars the assessee from challenging the jurisdiction. The assessee never challenged the jurisdiction of the AO during the assessment proceedings. Therefore, the contention of the assessee that the AO passed the order without assuming jurisdiction is liable to be rejected. Hence, ground no. 1 is dismissed.

6.0 In ground no. 2 and 3 the assessee challenged additions of Rs. 1,37,92,000/- u/s. 69 and of Rs. 8,62,500/-. The relevant part of the submission is produced as following:

That having regard to the facts and circumstances of the case, Ld. AO has erred in law and on facts in making an addition of Rs.1,37,92,000/- u/s 69 of the Act on account of unexplained investment, without considering the submissions of the assessee and without observing the principles of natural justice.

Sir, in this connection it is submitted that the case u/s 148 was opened on the basis of the information that the following transactions of sale / purchase of immovable properties during the F.Y 2009-10 relevant to A.Y 2010-11 were made by the assessee, which was not correct:

Sir, the reasons for reopening is that assessee sold properties for a consideration of Rs. 1,37,92,000/- and purchased property for a purchase price of Rs. 8,62,500/- but later Ld. AO vide letter dated 04.12.2017 raised a different point that assessee made unexplained investment of Rs. 1,37,92,000/-, and sale property for a consideration of Rs. 8,62,000/-, means it is not clear to the Ld. AO that whether the case was reopened for purchase of property or sale of property, so when the facts are incorrect/non-existent then proceedings needs to be quashed.

Sir, without prejudice to the above, it is further submitted that during the course of assessment proceedings assessee was asked to explain the of source of investment in properties to which assessee submitted that that assessee is associated with M/s Dynamic Builders and Developers, Jalandhar and assessee purchased properties on the behalf of the firm which has been duly recorded in the books of accounts all the purchases. The copy of ledger account of purchases as appearing in the books of accounts of firm, which was provided during the assessment proceedings is also enclosed herewith, also a copy of audited balance sheet of M/s Dynamic Builders and Developers along with the copy of acknowledgement and computation of return of M/s Dynamic Builders and Developers are enclosed herewith which substantiate the claim of the assessee and proves the source of investment in purchase of properties.

From the above it is seen that the assessee has contended that the AO was not clear while re-opening the assessment regarding the sale/purchase transactions carried out by the assessee. As discussed in foregoing paragraphs, the AO was aware of the factual mistake in reasons recorded for re-opening of the assessment. Mere fact that there was factual mistake in notice u/s. 148 does not imply that the addition made by the AO in the order was incorrect.

Further, the assessee contended that he is associated with M/s Dynamic Builders and Developers and that the transactions were carried out on behalf of the firm. However, apart from the contention the assessee did not submit any confirmation from the firm that the assessee was authorized to carry out transactions on behalf of the firm. Mere submission of ledger accounts and computation of income of the firm does not prove that the assessee carried out transactions on behalf of the firm unless the managing partner dealing with the affairs of the firm also confirms the fact. In absence of such confirmation, the contention of the assessee is liable to be rejected. Hence, ground no. 2 and 3 are dismissed.

7.0 In view of the facts of the case and above discussion, I believe that the action of the AO in bringing to tax amount of Rs. 1,37,92,000/- u/s. 69 and of Rs. 8,62,500/- on account of LTCG cannot be faulted. Therefore, the addition of Rs. 1,46,54,500/- is upheld.”

6. Now the matter is before the tribunal on the various grounds contained in the memorandum of appeal. The assessee has filed a short paper book containing 36 pages which includes the copy of the recorded reasons dated 28th March, 2017, as recorded by the income tax officer ward 3(4), Jalandhar, and also the copy of the disposal of objection by the income tax officer Ward 2(1) Jalandhar, dated 14/12/2017, and copies of submissions filed before the first appellate authority, along with judgments copies of various cases on which he relies upon for support.

The arguments of the Ld. AR of the assessee are mainly concentrated and focused on two legal issues, firstly, he refers to the copy of the recorded reasons dated 28/03/2017, as recorded by the ITO Ward 3(4), Jalandhar, on the basis of which the notice u/s 148 dated 31/03/2017 has been issued. He submitted that from the recorded reasons it is ascertainable that the AO has gathered information that the assessee during the year has sold immovable property vide deed numbers (a) 4927 dated 20/08/2009 and (b) 5235 dated 27/08/2009, amounting to Rs.68,96,000/- each, totaling Rs. 1,37,92,000/- and apart from the above, there has also been purchase of property vide deed No 12769 dated 30/03/2010, amounting to Rs.8,62,500/-, and since all the above transactions has gone unrecorded, income has escaped assessment within the meaning of section 148 of the Act 61.

He further submitted that the above factual recordings by way of recorded reasons are wrong and incorrect, because subsequently, on receipt of objections to recorded reasons, the AO while disposing off the same has admitted to the mistake apparent on the body of the recorded reasons, and the AO has explained that SALES are actually PURCHASES and the PURCHASE recorded are actually SALE, and the AO has tried to explain that it is merely a mistake and it is protected by section 292B of the Act 61, because the same is, in substance and effect in conformity with or according to the intent and purpose of the Act.

7. The Ld. AR submitted that the above explanation of the revenue regarding the factual mistake or incorrect facts as recorded in the body of the reasons, cannot be covered by section 292B of the Act, and in support of his arguments he relied on the judgment of the jurisdictional High Court in the case of CIT vs Atlas Cycle Industries reported 180- ITR page 319 (Punjab Haryana HC), to argue that the basic factual recording itself is incorrect, (fact of sales totaling Rs. 1,37,92,000/- and the basic fact of purchase of Rs.8,62,500/-) which has formed the basis of initiation of proceedings, simply does not exist in the present case and the initiation of proceedings u/s 148 based on incorrect facts are vitiated and should be quashed.

7.1 He further relied upon the jurisdictional ITAT judgment in the case of Sourav Bakshi ITA No 720/ ASR / 2019 dated 23/12/2021, and also in the case of Smt Monika Rani in ITA No 582/Chd/ 2019 for Asst year 2010-11, and in the case of Gaurav Joshi ITA No 274/ ASR / 2018 dated 16/01/2019, reported 197-TTJ (ASR) 946, to argue his case, that incorrect recording of facts or wrong facts recorded in the reasons for reopening, or recording of facts which simply does not exists, will make the entire proceedings invalid and in the instant case since wrong facts are recorded, the reassessment proceedings are void ab initio and the entire reassessment proceedings may please be quashed, because the same cannot be cured or protected by provisions of section 292B of the Act.

7.2 The second issue argued by the Ld. AR, relates to the jurisdiction issue, where he refers to the copy of the recorded reasons dated 28/03/2017, to point out that the same is recorded by the Income Tax Officer – Ward – 3(4), Jalandhar, whereas the jurisdictional officer of the assessee is ITO – Ward – II (1) Jallandhar, who ultimately conducted the hearing and passed the assessment order u/s 143(3)/147 of the Act dated 27/12/2017. He submitted that the notice u/s 148, has been issued by ITO Ward -3(4), Jalandhar, who recorded the reasons and issued the notice u/s 148, (but who is not the jurisdictional officer) and subsequently the case records has been transferred to ITO Ward – II(1), Jalandhar (who held proper jurisdiction over the assessee), for hearing of the case and completion of assessment procedure.

He submitted that the proceedings becomes legally defective, since no fresh notice u/s 148 has been issued by the jurisdictional AO, to assume jurisdiction to complete assessment u/s 147, and he simply proceeded on the basis of the notice issued by the earlier designated officer, which makes the assessment proceeding invalid, because order is passed by the officer, who never assumed valid jurisdiction by issue of proper notice, at any point of time, and in support of his contention he relied on the judgment of the Lucknow Tribunal in the case of Mohd Rizwan vs ITO dated 16/04/2015 in ITA No 89 / LKW/ 2015, where in an almost identical situation the tribunal held that since the notice u/s 148 was issued by an officer not having jurisdiction over assessee, notice itself was bad and invalid.

He further relied on the judgment of the coordinate Amritsar Bench in the case of Smt Paramjit Kaur vs ITO, ITA No 65 and 140/ ASR/ 2019 dated 14/10/2021, where in an identical situation, same view has been adopted by the tribunal. As such he prays that considering the entire facts of the case and submissions made along with various judgments relied upon, the assessment proceedings may be quashed being initiated on the basis of incorrect facts.

8. Regarding the grounds 3 and 4 of the appeal memo which are on merits of the case, he retreated the same submissions made before the AO and also before the Ld. CIT (A), and submitted that the assessee is an associate of a firm Dynamic Builders and Developers (PFAS) engaged in the business of promoters and developers of real estate and the said investment in the landed property amounting to Rs. 1,37,92,000/- has been made by the firm, (which is separately assessed to tax), and the same is duly disclosed in the firms audited balance sheet and books of accounts and in support the copies of ledger accounts (duly signed by the managing partner) are submitted before the AO in course of assessment proceedings and the sale of property amounting to Rs.8,62,500/-, are also disclosed in audited accounts of the firm and has been considered in sales, and in support copies of sales ledger (duly signed by the partner) is submitted before the AO in course of assessment.

In other words, he said that all the transactions of purchase and sales, contained in the recorded reasons, relates to the partnership firm and the assessee was just an associate of the said firm during that particular period of time. He further points out that the firm has already filed its return on 4th October, 2010, for the Asst year 2010-11, under PAN AAFFD0631H, along with copies of audited accounts reflecting all financial transactions, which is much before the date of issue of notice u/s 148 on the assessee on 31/03/2017, but the AO has not given any cognizance to the same. As such he submits that on merits also there is no case of escaped income, because all the financial transactions are considered in the hands of the firm.

9. The Ld. DR on the other hand relied on the order of the Ld. CIT(A) and argued that there was a minor mistake contained in the recorded reasons where purchase has been mentioned as sales and sales has been mentioned as purchase, and the said mistake is inadvertent error, which is protected by section 292B of the Act, and the notice is in substance and effect in confirmity with or according to the intent and purpose of this Act and the same cannot be held to be invalid.

10. On the jurisdiction issue the Ld DR submitted that in the instant case the notice u/s 148 has been issued on 31/03/2017, and the return u/s 148 has been filed on 12/09/2017, which is after the stipulated period of thirty days and as such as per provisions of section 124(3)(b) of the Act, the assessee is not entitled to call in question the jurisdiction of the assessing officer and the arguments of the assessee on this issue deserves to be rejected.

10.1 On merits the Ld. DR submitted that notice u/s 133(6) of the Act, issued to Dynamic Builders and Developers, during assessment proceedings, has not been replied by the said party and no confirmation has been received and in absence of any response from the party, the AO was very much justified in rejecting the assessee submission and completing the assessment in the manner, as has been done in the instant case.

10.2 We have heard the rival submissions and considered all available materials on record and the contents of the paper-book submitted by the assessee. The crux of the matter to be decided by us is whether the reasons recorded by the designated officer, emerges from the records available with him or not, or the reasons recorded are based on incorrect facts as claimed by the assessee.

10.3 From the first paragraph of recorded reasons, it is seen that the designated officer has recorded incorrect facts where he has considered purchase to be sales and sales to be purchase, alleged to have been made by the assessee and proceeded accordingly:

11. Now coming to the fourth paragraph of the recorded reasons, it is seen that the assessing officer (designated officer) has deputed his inspector to collect the copy of the property deeds from the office of the Sub Registrar, (west) Ludhiana, (the registration authority of the above mentioned transactions). After obtaining necessary information from the SR office, the AO recorded his reasons to believe that income chargeable to tax has escaped assessment, which is expected, that he must have done after proper application of mind.

11.1 But unfortunately, even after having the entire documents in his possession as collected from the ADSR office, he has not even read the recitals in the deeds, and has recorded completely incorrect facts that there has been sales of Rs.1,37,92,000/- which has not been accounted for, and the same has escaped assessment within the meaning of the Act and again went on to record another incorrect fact that there has been an investment in property amounting to Rs.8,62,500/- which is unexplained. The relevant portion is reproduced for easy reference:

“I therefore, have reasons to believe that profit on sale of immoveable properties amounting to Rs. 1,37,92,000/- has not been accounted, for A.Y 2010-11 & has escaped assessment, within the meaning of section 147 of the LT Act, 1961. Further, the investment of Rs.8,62,500/- in the property has also remained unexplained as the assessee did not response to any of the notices/letters issued u/s 133(6) of the LT -ct 1961. Thus, income of the assessee to the tune of Rs. 1,46,54,500/- in respect of issues as mentioned supra has escaped assessment for the A.Y. 2010-11 ‘within the meaning of section 147 of the Income Tax Act, 1961.”

12. It clearly proves that the AO has not read the contents and recitals of the deeds, before proceeding to record the reasons, because had he done so, such satisfaction as derived by him could not have arisen. This is a clear case of non-application of mind by the AO, which has not only resulted in recording of incorrect facts, but facts which does not emerge from the records available with the assessing officer. Here wrong reasons has been recorded for formation of belief for issue of notice u/s 148, on mere assumptions, without even reading the recital of the deed available before him.

12.1 To take the matter a step further, approval granted by the higher authorities to the recorded reasons (supposed to have been recorded on the basis of information collected from ADSR office), and even at the approval stage also, the gross factual error has remained undetected, which is clear indication of non-application of mind, even at the approval stage.

13. We are of the opinion that this legal defect makes the entire initiation of proceedings invalid and it cannot be protected by the provisions of section 292B of the Act 61, because we have to examine the recorded reasons as it exists on record, uninfluenced by any subsequent explanations or reasons or clarification given by the AO at the later stages.

14. On this issue, we would like to refer to the observation of the Hon’ble Delhi High court in the case of Northern Exim Private Limited vs DCIT, W.P.(C) No.8631/2007 dated 7th February, 2012, where the Hon’ble court has opined that we should only be guided by the reasons recorded for reassessment and not by reasons or explanations given the AO at later stage.

15. The relevant portion of the said High Court order is reproduced as under:

“The learned Standing Counsel for the Income Tax Department drew our attention to the entry made on 22.01.2001 in the proceedings sheet recorded in the course of the re-assessment proceedings. We have already seen that the said entry records that the authorized representative of the petitioner was asked to show cause why the difference in the amount of profit before tax and the amount declared under the VDIS cannot be treated as its income for the assessment year 1997-98 as no return of income had been filed. The entry made in the proceeding sheet is perhaps more elaborate and informative than the reasons recorded under Section 148(2) in the sense that it also states one more reason for initiating re-assessment proceedings, namely, that there is a difference between the profit before tax (Rs.42,79,340/-) and the amount declared in the VDIS (Rs.7,23,490/-). The reasons recorded however are not so explicit and do not refer to this fact. We are to be guided only by the reasons recorded for re-assessment and not by the reasons or explanation given by the Assessing Officer at a later stage in respect of the notice of re-assessment. [This legal position is well settled and if any authority is needed, reference may be made to the following judgments: –

(i) Jamna Lal Kobra v. ITO, (1968) 69 ITR 461 (Allahabad);

(ii) Commissioner of Income Tax v. Agarwalla Brothers, (1991) 189 ITR 786 (Patna);

(iii) G. M. Rajgharia v. ITO, (1975) 98 ITR 486;

(iv) Asa John Devinathan and Another v. Addl. Commissioner of Income-Tax, (1980) 126 ITR 270 (Mad.);

(v) East Coast Commercial Co. Ltd. v. ITO, (1981) 128 ITR 326 (Cal.);

(vi) Equitable Investment Co. (P.) Ltd. v. Income-Tax Officer, G. Ward, and Ors., (1988) 174 ITR 714 (Cal.);

(vii) S. Sreeramachandra Murthy and Anr. V. Deputy Commissioner of Income-Tax and Anr., (2000) 243 ITR 427 (A.P.).

The ratio laid down in all these cases is that, having regard to the entire scheme and purpose of the Act, the validity of the assumption of jurisdiction under Section 147 can be tested only by reference to the reasons recorded under Section 148(2) of the Act and the Assessing Officer is not authorised to refer to any other reason even if it can be otherwise inferred and/ or gathered from the records. He is confined to the recorded reasons to support the assumption of jurisdiction. He cannot record only some of the reasons and keep the others up his sleeves to be disclosed before the Court if his action is ever challenged in a Court of law.

16. At this stage we also refer to the observation of the jurisdictional Punjab and Haryana High court in the case of CIT vs Atlas Cycle Industries reported 180 ITR – 319, where the Hon’ble court has held that, when the grounds on which reassessment notice was issued were not found to exist, and the moment such is the position, the income tax officer does not get the jurisdiction to make a reassessment. The relevant portion is reproduced for easy reference:

“Adverting to the question referred regarding the reassessment proceedings, we are of the view that the Tribunal was right in cancelling the reassessment as both the grounds on which reassessment notice was issued were not found to exist, and the moment such is the position, the Income-tax Officer does not get the jurisdiction to make a reassessment.

This view of ours finds support from the Supreme Court decisions in CIT v. A. Raman and Co. [1968] 67 ITR 11 and Bankipur Club Ltd. v. CIT [1971] 82 ITR 831. Similar view has been taken by the Rajasthan High Court in Addl. CIT v. Ganeshilal Lal Chand [1985] 154 ITR 274. On behalf of the Revenue, CIT v. Ahmedabad Manufacturing and Calico Printing Co. Ltd. [1977] 106 ITR 159, a decision of the Gujarat High Court was cited. On a consideration of the matter, we are of the view that in view of the aforesaid Supreme Court decisions, the view taken by the Rajasthan High Court is correct and the view taken by the Gujarat High Court is not, correct. Accordingly, we dissent from the view taken by the Gujarat High Court and in view of the decisions of the Supreme Court and Rajasthan High Court, we hold that the Income-tax Officer did not have the jurisdiction to proceed with the reassessment, the moment he found the two grounds mentioned in the reassessment notice incorrect or non-existent. Accordingly, we answer the referred question in favour of the assessee, in the affirmative, that the Tribunal was right in cancelling the reassessment.

17. As such on the face of such judicial precedents, we have no hesitation in holding, that in the instant case, there has been no application of mind by the assessing officer to the materials available on record and the reasons are recorded on the basis of incorrect facts, in other words the reasons as recorded do not emerge from the materials before him, therefore the notice issued u/s 148, is void from the very beginning, and the reassessment framed on the basis of such notice, deserves to be declared legally invalid.

18. As such the appeal of the assessee is allowed on this legal ground.

Since we have already decided the issue in favour of the assessee on this legal issue, the other grounds of appeal become academic and are not considered for adjudication.

19. In the result, the appeal of the assessee bearing ITA No. 201/Asr/2024 is allowed.

Order pronounced in the open court on 13.08.2024