Shailesh Khodabhai Ramani Vs ITO (ITAT Rajkot)
Reopening Merely to Verify Third-Party Information Invalid: ITAT Sets Aside Reassessments
The Rajkot Bench of the Income Tax Appellate Tribunal (ITAT) set aside reassessment proceedings initiated on third-party information without demonstrated independent application of mind by the Assessing Officer. The Tribunal held that information suggesting possible escapement of income did not, by itself, satisfy the requirement of forming a reason to believe that taxable income had escaped assessment. Both appeals were allowed, and the additions arising from the reassessments were deleted.
The assessee, Shailesh Khodabhai Ramani, was proprietor of M/s Bhoomi Casting and engaged in manufacturing cast iron castings. The Tribunal heard his appeals for Assessment Years 2011-12 and 2012-13 together, taking Assessment Year 2011-12 as the lead case.
Cash transactions through National Shroff formed basis of reopening
The Assessing Officer received information from the DCIT, Central Circle-1, Rajkot alleging that the assessee had deposited cash of ₹50,24,340 with M/s National Shroff & Co. during Financial Year 2010-11 and obtained cheques or demand drafts in exchange.
The recorded reasons stated that the case was being reopened to verify the genuineness and correctness of these transactions.
In response to the Section 148 notice, the assessee filed a return on 6 April 2018, declaring income of ₹5,78,074. During reassessment, he denied undertaking transactions through National Shroff & Co.
The Assessing Officer nevertheless treated the alleged transactions as unaccounted sales. Applying the assessee’s disclosed gross profit rate of 10.74%, he added ₹5,39,614. A further addition of ₹2,724 was made for interest under Section 244A allegedly not offered to tax.
The CIT(A) sustained the assessment, following which the assessee approached the Tribunal.
Assessee questioned absence of independent examination
The assessee argued that the Assessing Officer had acted solely on information supplied by another departmental authority without conducting independent enquiry or verification.
He submitted that such information could create suspicion but could not automatically establish a reason to believe that income had escaped assessment. Reopening could not be used to undertake a roving enquiry without first satisfying the statutory jurisdictional requirement.
The assessee relied on the Punjab and Haryana High Court’s decision in CIT v. Paramjit Kaur, [2008] 168 Taxman 39.
The Revenue defended the reopening, maintaining that the information received justified initiation of reassessment proceedings.
Reason to suspect distinguished from reason to believe
The Tribunal observed that information from another authority could constitute relevant material. However, the Assessing Officer was required to independently consider it and record the requisite satisfaction in accordance with law.
On the material before it, the Revenue had not demonstrated any independent examination or preliminary verification establishing a nexus between the information received and the alleged escapement of income in the assessee’s case.
Applying the principle in Paramjit Kaur, the Tribunal held that the initiation of reassessment was unsupported by demonstrated independent application of mind. The proceedings were therefore unsustainable.
Relief extended to both assessment years
For Assessment Year 2011-12, the Tribunal set aside the reassessment order and deleted the additions sustained by the CIT(A).
The parties submitted that the material facts and jurisdictional issue for Assessment Year 2012-13 were identical. The Tribunal accordingly applied the same reasoning, set aside that reassessment and deleted the related additions as well.
Both appeals were allowed. The relief followed from the invalid initiation of reassessment, rather than a separate finding on the genuineness of the alleged cash transactions.
Cases Discussed
- CIT v. Paramjit Kaur — [2008] 168 Taxman 39 (Punjab & Haryana High Court). Exact TaxGuru judgment page not verified; therefore left unlinked.
FULL TEXT OF THE JUDGMENT/ORDER OF ITAT RAJKOT
Captioned appeals filed by the assessee in ITA Nos. 257 and 366/Rjt/2024 relate to Assessment Years 2011-12 and 2012-13, respectively. ITA No. 257/Rjt/2024 is directed against the order dated 26.02.2024 passed by the Ld. Commissioner of Income Tax (Appeals) [ hereinafter referred to as ‘Ld.CIT(A)’], arising out of the assessment order dated 16.12.2018 passed under section 143(3) read with section 147 of the Income-tax Act, 1961. ITA No. 366/Rjt/2024 is directed against the order dated 18.04.2024 passed by the Ld. Commissioner of Income Tax (Appeals), arising out of the assessment order passed under section 143(3) of the Act dated 08.12.2019.
02. Since both appeals are filed by the same assessee and involve common issues, except for the assessment years and the figures involved, they were heard together and are being disposed of by this common order for the sake of convenience.
03. First we take up ITA No. 257/Rjt/2024 as lead case and findings shall apply mutatis mutandis to the ITA No. 366/Rjt/2024 as well.
04. Brief facts of the case are that the assessee, is proprietor of M/s. Bhoomi Casting, engaged in the business of manufacturing cast iron castings, filed his return of income for Assessment Year 2011-12 on 06.04.2018 in response to notice issued under section 148 of the Income-tax Act, 1961, declaring total income of Rs.5,78,074/-. The Assessing Officer initiated reassessment proceedings on the basis of information indicating that the assessee had undertaken cash transactions aggregating to Rs.50,24,340/- through M/s. National Shroff & Co., Rajkot, during Financial Year 2010-
11. During the reassessment proceedings, the Assessing Officer issued notices under sections 143(2) and 142(1) of the Act. In response, the assessee denied having carried out any transactions through M/s. National Shroff & Co. The Assessing Officer treated the transactions aggregating to Rs.50,24,340/- as proceeds of unaccounted sales and, applying the gross profit rate of 10.74% disclosed by the assessee, made an addition of Rs.5,39,614/- to the assessee’s income. The Assessing Officer further made an addition of Rs.2,724/- towards interest received under section 244A of the Act, which had allegedly not been offered to tax. Accordingly, the assessment was completed under section 143(3) read with section 147 of the Act on 16.12.2018, determining the total income at Rs.11,20,412, after allowing deduction under section 80C of Rs.1,00,000/-.
05. Aggrieved by the assessment order and the additions made therein, the assessee preferred an appeal before the Ld. Commissioner of Income Tax (Appeals). The assessee carried the matter in appeal before the Ld. CIT(A), who dismissed the appeal and sustained the order of the Assessing Officer.
06. Still, aggrieved by the order of the Ld. CIT(A), the assessee is in appeal before the tribunal.
07. At the time of hearing, the Ld. AR challenged the validity of the reassessment proceedings and submitted that the reopening of the assessment itself was bad in law. He submitted that the Assessing Officer had initiated the reassessment proceedings solely on the basis of information received from the DCIT Central Circle-1, Rajkot, containing a list of beneficiaries who had allegedly obtained cheques or demand drafts in lieu of cash from a particular person. The assessee was also alleged to have deposited cash in lieu of a cheque or demand draft. However, according to the Ld. AR, the Assessing Officer had not conducted any independent inquiry or verification before initiating the reassessment proceedings. The Ld. AR placed on the record relevant extract of the relevant reason supplied to assessee here inunder:
“Subject: Assessment proceedings u/s. 147 for AY 2011-12-Reason Recorded-request-reg. This office has received information from DCIT (CC)-1, Rajkot, vide letter no. DCIT/CC- 1/RJT/Angadiya/National Shroff/17-18 dated 08/02/2018, received under Jt. CIT, Central Range, Rajkot containing list of beneficiaries who got cheque/DD in lieu of cash from M/s. National Shroff & Co., Rajkot, that you have deposited cash amount of Rs. 50,24,340/- with M/s. National Shroff & Co., Rajkot on various dates and got cheque/DD, in lieu of cash deposited during the financial year 2010-11. Therefore, to verify the genuineness and correctness of the transactions made through M/s. National Shroff & Co., Rajkot, the case of your is to be re-opened.
3. You have failed to disclose fully and truly all material facts necessary for the assessment for the above F.Y.2010-11 within the meaning of explanation 2(b) of Section 147 of the Income-tax Act, 1961.”
08. The Ld. AR contended that the information received from the Investigation Wing or another Assessing Officer could, at best, constitute a reason to suspect, but could not, by itself, constitute a reason to believe that income chargeable to tax had escaped assessment. He submitted that the Assessing Officer was required to apply his independent mind to the information received and examine the relevant facts before forming the requisite belief. In the absence of any such independent inquiry or tangible material demonstrating the escapement of income, the initiation of reassessment proceedings was legally unsustainable. In support of his submissions, the Ld. AR relied upon the decision of the Hon’ble Punjab and Haryana High Court in CIT v. Paramjit Kaur [2008] 168 Taxman 39 (Punjab & Haryana), wherein it was held that reassessment proceedings initiated merely on the basis of suspicion, without the Assessing Officer examining the material and recording his own satisfaction regarding the escapement of income, could not be sustained in law. The Ld. AR also relied upon other judicial precedents to contend that the Assessing Officer could not undertake a roving inquiry without first forming the requisite belief on the basis of relevant material.
09. Per contra, the Ld. DR supported the orders of the authorities below and submitted that the reassessment proceedings had been initiated on the basis of information received from the DCIT, Central Circle-1, Rajkot. According to the Ld. DR, the information available with the Department justified the initiation of reassessment proceedings, and the order passed by the Ld. CIT(A) did not call for any interference.
10. We have heard the rival submissions and perused the material available on record. The principal issue requiring adjudication is whether the reassessment proceedings were validly initiated on the basis of the information received from the DCIT, Central Circle-1, Rajkot, in the absence of any independent inquiry or application of mind by the Assessing Officer. The settled legal position is that the existence of information suggesting possible escapement of income does not, by itself, dispense with the statutory requirement that the Assessing Officer must form the requisite belief that income chargeable to tax has escaped assessment. Although information received from another authority may constitute relevant material for initiating reassessment proceedings, the Assessing Officer must independently consider such information and record the requisite satisfaction in accordance with law. The distinction between a reason to suspect and a reason to believe is material in determining the validity of reassessment proceedings. In the present case, the assessee has specifically contended that the Assessing Officer initiated the reassessment proceedings solely on the basis of third-party information without undertaking any independent inquiry or verification. On the material and submissions placed before us, the Revenue has not demonstrated that the Assessing Officer undertook any independent examination of the information or conducted any preliminary verification to establish the requisite nexus between the information received and the alleged escapement of income in the assessee’s case. The principle laid down by the Hon’ble Punjab and Haryana High Court in CIT v. Paramjit Kaur (supra) supports the proposition that reassessment proceedings cannot be sustained where the Assessing Officer acts merely on the basis of suspicion without forming the requisite belief on the basis of relevant material and his own satisfaction. Applying the said principle to the facts of the present case, we find that the initiation of reassessment proceedings is not supported by a demonstrated independent application of mind by the Assessing Officer. In view of the foregoing discussion, we hold that the reassessment proceedings initiated in the present case are not sustainable in law. Accordingly, the reassessment order is set aside and the additions made therein and sustained by the Ld. CIT(A) are deleted. The grounds challenging the validity of the reassessment proceedings are allowed, and the appeal of the assessee is allowed.
11. We have also considered the appeal in ITA No. 366/Rjt/2024. The Ld. representatives have submitted that the issues involved in this appeal are identical to those adjudicated by us in ITA No. 257/Rjt/2024 for Assessment Year 2011-
12. Since the material facts and the legal issue concerning the validity of the reassessment proceedings are stated to be identical, our decision in ITA No. 257/Rjt/2024 shall apply mutatis mutandis to the present appeal as well. Accordingly following the reasoning and findings recorded hereinabove, the reassessment proceedings in the present case are also held to be unsustainable in law. The reassessment order is set aside, and the additions made therein and sustained by the Ld. CIT(A) are deleted.
12. In the result, both appeals filed by the assessee are allowed.
Order pronounced in the open court on this 15th day of October, 2026.
