ITO Vs Juzar Mustansir Angoothiwala (ITAT Mumbai)
AO Said There Was No Scrutiny Assessment—His Own Records Said Otherwise: ITAT Quashes Reopening After Four Years
Case Details
The order describes the cross-objection as CO No. 160/Mum/2026 in its body, although its opening page prints CO No. 60/Mum/2026.
The Original Assessment and Reopening
The assessee carried on a readymade garment export business under the name Hind Exports. He filed a return declaring income of ₹1,50,13,380 for Assessment Year 2012–13. The return was selected for scrutiny, and the Assessing Officer completed an assessment under section 143(3) on 23 February 2015.
Subsequently, the Investigation Wing supplied information concerning transactions between Hind Exports and Supreme Multitrade Pvt. Ltd., an entity alleged to be a shell company. Referring to transactions aggregating ₹57 lakh, the Assessing Officer issued a reopening notice under section 148 on 30 March 2019.
That date was significant: the notice was issued more than four years after the end of Assessment Year 2012–13. Since a scrutiny assessment had already been completed, the first proviso to the then section 147 became relevant. The officer had to examine whether the alleged escapement of income was attributable to the assessee’s failure to disclose fully and truly all material facts necessary for the original assessment.
But the recorded reasons proceeded on an entirely different factual basis.
The Error in the Recorded Reasons
The Assessing Officer stated in the reasons that no regular assessment had been made and that the return had merely been processed under section 143(1). He invoked the corresponding deemed escapement provision on that footing.
The statement was plainly inconsistent with the Department’s own record: a scrutiny assessment under section 143(3) had been completed on 23 February 2015. The assessee drew attention to this error in his objections to the reopening. While disposing of the objections, the officer noted the contention but did not correct or address the mistaken foundation of the reasons. He proceeded with the reassessment.
The reassessment resulted in additions of ₹60,10,000 under section 68 and ₹1,20,000 under section 69C. The Commissioner (Appeals) deleted both additions on their merits but upheld the validity of the reopening. The Revenue appealed against the deletions, while the assessee filed a cross-objection challenging the officer’s jurisdiction to reopen the assessment.
Why the Tribunal Considered Jurisdiction First
The Tribunal took up the cross-objection before considering the Revenue’s appeal. If the reopening itself was invalid, any additions made in the resulting reassessment would have no independent basis.
The Revenue argued that the Investigation Wing had provided tangible information about possible accommodation entries. At the stage of reopening, it submitted, the officer needed only a prima facie belief that income had escaped assessment; the ultimate correctness of the information could be tested later.
The Tribunal accepted that external information could provide a starting point for inquiry. It held, however, that the Assessing Officer still had to examine the assessee’s own assessment record and determine which statutory conditions applied. Here, the mistake concerned the very nature of the original assessment. It could not be dismissed as an inconsequential reference to the wrong section.
Because the original order was under section 143(3) and the reopening notice came after four years, the officer needed to address the failure-to-disclose requirement. By assuming that the return had only been processed under section 143(1), he failed to examine the reopening under the statutory framework that actually governed the case.
Later Explanations Could Not Cure the Defect
The Tribunal held that the validity of a reopening notice must be judged from the reasons recorded before its issue. The subsequent order rejecting the assessee’s objections could not supply a missing jurisdictional basis. Nor could the officer leave a condition for assuming jurisdiction to be investigated after reassessment proceedings had begun.
The Bench relied particularly on the Bombay High Court decisions in Fine Arts Society and Feng Shui Realtors Pvt. Ltd. In Feng Shui Realtors, the recorded reasons had similarly overlooked an existing section 143(3) assessment. The Tribunal also referred to Yum! Restaurants Asia Pte. Ltd. on the need for meaningful supervisory scrutiny while granting sanction under section 151.
In this case, the sanctioning authority had likewise failed to notice the incorrect premise and the resulting need to examine the first proviso to section 147. The Tribunal held that the recorded belief and approval did not reflect the required application of mind.
It therefore quashed the section 148 notice and the consequential reassessment order. The assessee’s cross-objection was allowed, and the Revenue’s appeal was dismissed as academic. The Tribunal expressed no opinion on the merits of the additions.
Author’s Comments
The decisive fact was already in the Department’s file. A completed section 143(3) assessment changed the conditions applicable to a notice issued after four years. Overlooking that order meant the Assessing Officer framed his belief around the wrong jurisdictional test.
The ruling also explains why sanction under section 151 must involve scrutiny of the proposal’s factual basis. Approval did not rescue reasons that incorrectly stated how the original assessment had been completed.
The result is final relief against this reassessment, rather than a remand for another examination of the same additions. The ₹60.10 lakh and ₹1.20 lakh additions ceased to survive because the reassessment was quashed; their factual merits were left undecided.
Cases Discussed
- Fine Arts Society v. Deputy Director of Income-tax (Exemptions) [2024] 159 taxmann.com 776 (Bom.) — relied upon for the principle that reasons to believe founded on an incorrect understanding of the manner in which the original assessment was completed indicate mechanical formation of belief and non-application of mind.
- Feng Shui Realtors Pvt. Ltd. v. Income Tax Officer, Writ Petition No. 3304 of 2022, judgment dated 12.03.2024 (Bombay High Court) — relied upon where the Assessing Officer had similarly recorded that no regular assessment under section 143(3) had been made despite an existing section 143(3) assessment; the High Court found non-application of mind at the Assessing Officer and approval stages.
- Yum! Restaurants Asia Pte. Ltd. v. Deputy Director of Income-tax [2017] 397 ITR 665 (Delhi) — relied upon for the principle that section 151 operates as a supervisory safeguard and the superior authority is expected to detect and correct errors in the Assessing Officer’s reasons rather than mechanically concur with them.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
The aforesaid appeal has been preferred by the Revenue against the order dated 29.01.2025 passed by the learned Commissioner of Income Tax (Appeals) for the Assessment Year 2012–13, whereby the learned CIT(A), though upheld the validity of the reassessment proceedings initiated under sections 147/148 of the Income-tax Act, 1961, deleted on merits the additions of ₹60,10,000 made under section 68 and ₹1,20,000 made under section 69C of the Act. The assessee has filed the accompanying Cross-objection No. 160/Mum/2026 challenging the findings of the learned CIT(A) insofar as he has upheld the assumption of jurisdiction under sections 147/148 and rejected the assessee’s objection regarding absence of application of mind while recording the reasons and granting approval under section 151 of the Act.
2. Since the grounds raised by the assessee in its cross-objection assail the very jurisdiction assumed by the Assessing Officer and, therefore, go to the root of the reassessment proceedings, the cross-objection was taken up first. If the assumption of jurisdiction is found to be legally unsustainable, the additions made in pursuance of such proceedings would cease to survive and the grounds raised by the Revenue against their deletion would be rendered academic.
3. The relevant facts, insofar as they have a bearing upon the jurisdictional issue, are that the assessee is an individual carrying on the business of export of Indian readymade garments under the name and style of “Hind Exports”. For the Assessment Year 2012–13, the assessee filed his return of income declaring total income of ₹1,50,13,380. The return was selected for scrutiny and, after issuance of notice under section 143(2) and examination of the details furnished by the assessee, an assessment order under section 143(3) was passed on 23.02.2015. Thereafter, on the basis of information received from the Investigation Wing concerning certain transactions of Hind Exports with M/s Supreme Multitrade Pvt. Ltd., the Assessing Officer issued notice under section 148 on 30.03.2019. The notice was thus issued beyond four years from the end of the relevant assessment year.
4. The Assessing Officer, while recording the reasons for reopening, referred to the information that M/s Supreme Multitrade Pvt. Ltd. was allegedly a shell company and that the assessee’s proprietary concern had transactions aggregating to ₹57,00,000 with the said entity. However, while examining the manner in which the original return had been dealt with, the Assessing Officer recorded as under:
“It is pertinent to mention here that in this case the assessee has filed return of income for the year under consideration but no assessment as stipulated under section 2(40) of the Act was made and the return of income was only processed under section 143(1) of the Act. In view of the above, provisions of clause (b) of Explanation 2 to section 147 are applicable to the facts of this case and the assessment year under consideration is deemed to be a case where income chargeable to tax has escaped assessment.”
5. The aforesaid factual premise was demonstrably incorrect. It is an admitted position borne out from the assessment record that the return filed by the assessee had been selected for scrutiny and a regular assessment under section 143(3) had been completed on 23.02.2015. Thus, the Assessing Officer proceeded to record his reasons and assume jurisdiction on the specific premise that the return had merely been processed under section 143(1), whereas the assessment had in fact been completed under section 143(3). This was not an extraneous fact lying outside the assessment record, but a foundational fact forming part of the Department’s own record and having a direct bearing upon the statutory conditions governing the reopening.
6. The assessee, after receiving the reasons recorded, filed detailed objections and specifically pointed out that the assertion regarding processing of the return under section 143(1) was factually incorrect, since the assessment had already been completed under section 143(3) on 23.02.2015. The assessee also pointed out that the notice under section 148 had been issued after the expiry of four years from the end of the relevant assessment year and, therefore, the case was governed by the first proviso to the erstwhile section 147. The Assessing Officer, while disposing of the objections, noticed the assessee’s submission concerning the completed assessment under section 143(3), but did not confront or rectify the foundational error appearing in the recorded reasons. He proceeded to uphold the reopening by observing, inter alia, that the sufficiency or correctness of the material could be examined during the reassessment proceedings.
7. The learned counsel submitted that the reasons disclose complete non-application of mind to the assessment record. Had the Assessing Officer examined the record, he could not have recorded that the return had merely been processed under section 143(1). She further submitted that the error was not clerical or inconsequential because the nature of the original assessment determined the statutory conditions for reopening beyond four years. Since the original assessment was under section 143(3), the Assessing Officer was required to examine whether income had escaped assessment by reason of any failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment. Instead, he proceeded on the legally distinct premise that no regular assessment had been made. It was further submitted that the sanctioning authority under section 151 also failed to notice this evident error and granted approval mechanically. In support, reliance was placed upon the judgments of the Hon’ble jurisdictional Bombay High Court in Fine Arts Society v. Deputy Director of Income-tax (Exemptions) [2024] 159 taxmann.com 776 (Bom.) and Feng Shui Realtors Pvt. Ltd. v. Income Tax Officer, Writ Petition No. 3304 of 2022, judgment dated 12.03.2024, as well as the judgment of the Hon’ble Delhi High Court in Yum! Restaurants Asia Pte. Ltd. v. Deputy Director of Income-tax [2017] 397 ITR 665 (Delhi).
8. The learned Departmental Representative, on the other hand, relied upon the reasons recorded and submitted that the Assessing Officer had received tangible information from the Investigation Wing concerning the assessee’s transactions with an entity alleged to be engaged in providing accommodation entries. It was contended that, at the stage of initiation of reassessment proceedings, the Assessing Officer was only required to form a prima facie belief regarding escapement of income and the sufficiency or ultimate correctness of the material could not be examined. According to the learned Departmental Representative, the reasons recorded disclosed the necessary nexus between the information received and the formation of belief and, therefore, the reopening could not be invalidated merely because an incorrect reference had been made to section 143(1).
9. We have heard the rival submissions and examined the material placed before us. The limited issue which arises for consideration is not whether the information received from the Investigation Wing was ultimately sufficient to sustain the additions or whether the transactions with M/s Supreme Multitrade Pvt. Ltd. were genuine. The anterior question is whether the statutory satisfaction for reopening was formed by the Assessing Officer after independently examining the information in the context of the assessee’s assessment record and upon a correct appreciation of the jurisdictional facts. The receipt of information from an external source may furnish a starting point for enquiry, but it does not dispense with the obligation of the Assessing Officer to apply his own mind and ascertain whether the statutory conditions for assumption of jurisdiction are satisfied in the facts of the particular assessee.
10. In the present case, the Assessing Officer expressly proceeded on the basis that the return had only been processed under section 143(1) and that no regular assessment, as contemplated under section 2(40), had been made. This statement is directly contrary to the assessment order under section 143(3) dated 23.02.2015. The error cannot be regarded as an incidental or inconsequential misdescription, for the nature of the original assessment materially altered the threshold for reopening. Once the original assessment had been completed under section 143(3) and the notice under section 148 was issued beyond four years from the end of the relevant assessment year, the first proviso to the then section 147 stood attracted. The Assessing Officer was consequently required to examine whether the alleged escapement was occasioned by the assessee’s failure to disclose fully and truly all material facts necessary for the original assessment. By proceeding on the erroneous footing that the return had merely been processed under section 143(1), the Assessing Officer failed to examine the case within the statutory framework which actually governed it.
11. The subsequent order disposing of the assessee’s objections does not cure this infirmity. The validity of the notice under section 148 has to be determined on the basis of the reasons recorded before issuance of the notice and cannot be supplemented or improved through subsequent reasoning. More importantly, even after the assessee specifically drew attention to the assessment order under section 143(3), the Assessing Officer did not revisit the jurisdictional assumption on the correct factual foundation. His observation that the assessee’s contention could be investigated during the reassessment proceedings overlooks the distinction between existence of jurisdiction and the exercise of jurisdiction. A condition precedent for assumption of jurisdiction must exist at the time when the notice is issued; it cannot be left to be investigated or supplied after the proceedings have commenced.
12. In Fine Arts Society v. DDIT(E) (supra), the Hon’ble jurisdictional High Court held that there must be tangible material leading to the conclusion that income has escaped assessment and that, where the reasons to believe proceed upon an incorrect understanding of the manner in which the original assessment had been completed, such reasons indicate mechanical formation of belief and non-application of mind. Though the factual error in that case operated in the converse direction, the principle laid down is that the Assessing Officer must form his belief upon the correct assessment record. A belief founded upon a demonstrably erroneous jurisdictional fact cannot acquire validity merely because some information concerning possible escapement was otherwise available.
13. The decision of the Hon’ble Bombay High Court in Feng Shui Realtors Pvt. Ltd. v. ITO (supra) is even closer to the facts before us. In that case also, the Assessing Officer had recorded that no regular assessment under section 143(3) had been made, whereas an assessment order under section 143(3) was already on record. The Hon’ble High Court observed that, had the Assessing Officer examined the record, he would have noticed the completed scrutiny assessment. It was further held that the Range Head and the Principal Commissioner, while recommending and granting approval, had also failed to notice the fundamental factual error and, therefore, there was non-application of mind at every level. The Hon’ble High Court also emphasised that, where the notice was issued beyond four years after completion of an assessment under section 143(3), it was incumbent upon the Assessing Officer to examine whether there had been any failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment. In the absence of such examination, the reopening and the consequential proceedings were held to be unsustainable.
14. The same principle was enunciated by the Hon’ble Delhi High Court in Yum! Restaurants Asia Pte. Ltd. v. DDIT (supra), wherein an incorrect statement regarding the manner of completion of the original assessment was held to demonstrate that the Assessing Officer had not perused the assessment record before recording the reasons. The Hon’ble High Court further explained that section 151 introduces a supervisory safeguard over the exercise of power by the Assessing Officer and that the superior authority is expected to correct an error committed at the level of the Assessing Officer. Where the authority merely concurs with reasons founded upon an incorrect factual premise, the statutory safeguard is reduced to an empty formality.
15. Applying the aforesaid principles, we find that the reasons in the present case were recorded upon an erroneous and fundamental assumption that the return had merely been processed under section 143(1), though an assessment under section 143(3) had admittedly been completed and was available on record. The prescribed authority granting sanction under section 151 also failed to notice that the reasons proceeded upon an incorrect factual foundation. Had the assessment record been examined, the authority would necessarily have noticed the order under section 143(3), the issuance of notice beyond four years and the consequent applicability of the first proviso to section 147. The approval accorded to the proposal without noticing these aspects does not reflect the informed satisfaction contemplated under section 151.
16. We accordingly hold that the present case is not one where the Assessing Officer merely arrived at a conclusion which subsequently proved to be incorrect. The infirmity lies at a more fundamental level, namely, that the jurisdictional belief itself was formed without examining an indisputable and material fact forming part of the assessment record. The reasons proceeded on the premise that the return had only been processed under section 143(1), whereas a scrutiny assessment under section 143(3) had admittedly been completed. Such reasons cannot be regarded as embodying the independent and informed belief contemplated under section 147. Consequently, the notice issued under section 148 and the reassessment order passed in pursuance thereof are legally unsustainable and are hereby quashed. The grounds raised by the assessee in C.O. No. 160/Mum/2026 are accordingly allowed.
17. Once the reassessment proceedings and the consequential assessment order have been quashed for want of valid assumption of jurisdiction, the additions made therein cease to have any independent existence. Consequently, the grounds raised by the Revenue in ITA No. 1822/Mum/2025 challenging the deletion of the additions of ₹60,10,000 under section 68 and ₹1,20,000 under section 69C do not survive for adjudication and are rendered academic. We, therefore, refrain from expressing any opinion on the merits of the impugned additions.
18. In the result, the cross-objection filed by the assessee is allowed and the appeal filed by the Revenue is dismissed.
Order pronounced in the open Court on 24th September, 2026.
