Case Law Details
Regalia Jewels Pvt. Ltd Vs DCIT/ACIT (ITAT Delhi)
ITAT Delhi rules tax reassessment invalid under Section 147 as AO’s ‘reason to believe’ was based on an incorrect assumption of facts about purchases; ITAT Quashes Tax Reassessment Based on Flawed Factual Premise; Dehradun Bench Rules Incorrect Assumption Invalidates Reopening Jurisdiction
Dehradun: The Income Tax Appellate Tribunal (ITAT), Delhi Bench (Dehradun), has set aside a reassessment order passed under Section 147 of the Income Tax Act, 1961, ruling that the Assessing Officer (AO) had invalidly assumed jurisdiction because the “reason to believe” that income had escaped assessment was founded on an incorrect assumption of facts. The Tribunal held that a fundamental factual error at the stage of forming the belief necessary for reopening is fatal to the entire reassessment process.
The case involved Regalia Jewels Pvt. Ltd. and pertained to the assessment year 2015-16. The company had filed its original income tax return for this year, which was routinely processed by the Income Tax Department. No detailed scrutiny assessment was initially carried out for this period.
The events leading to the reassessment began later, following a search and seizure operation conducted by the department on November 6, 2019, in the case of an individual named Shri Deepak Jain. According to the department’s findings from this search, Shri Deepak Jain was identified as a person providing accommodation entries, essentially facilitating transactions that create a false appearance of genuineness. Information unearthed during the search suggested that Shri Deepak Jain, through five different entities controlled by him, had allegedly provided accommodation entries to Regalia Jewels Pvt. Ltd. This information indicated that the company was a beneficiary of these entries, seemingly obtaining bogus purchase bills from these entities.
Based on this information suggesting the company had received bogus purchase bills, the Assessing Officer formed a “reason to believe” that income chargeable to tax had escaped assessment for the assessment year 2015-16. Consequently, the AO initiated reassessment proceedings by issuing a notice under Section 148 of the Act on March 30, 2021, seeking to bring the escaped income to tax.
Upon receiving the notice, Regalia Jewels Pvt. Ltd. participated in the reassessment proceedings. The company requested and was provided with the reasons recorded by the AO for reopening the assessment. After reviewing the reasons, the company filed formal objections, challenging the validity of the reopening itself. These objections were subsequently disposed of by the AO through a separate speaking order, allowing the reassessment proceedings to continue.
During the reassessment, the AO focused on specific transactions, particularly alleged purchases made by Regalia Jewels Pvt. Ltd. from one of the entities linked to Shri Deepak Jain, M/s. Surya Diamond Pvt. Ltd. The AO’s information suggested purchases to the tune of Rs. 1,15,83,620/- and later, the AO concluded based on certain information (amounting to Rs. 1,43,83,620/- as per the final order) from M/s. Surya Diamond Pvt. Ltd.
In response to the AO’s inquiries, Regalia Jewels Pvt. Ltd. furnished extensive documentation to substantiate the genuineness of its transactions with M/s. Surya Diamond Pvt. Ltd. This included copies of purchase bills, the ledger account of M/s. Surya Diamond Pvt. Ltd. as maintained in the company’s books, confirmation of the balance from the supplier entity, the company’s stock register showing the recording of the purchases, and bank statements evidencing that payments to M/s. Surya Diamond Pvt. Ltd. were made through proper banking channels (RTGS).
Crucially, the company also provided a specific clarification to the AO regarding the timing of these transactions. The company explicitly stated that no purchases were made from M/s. Surya Diamond Pvt. Ltd. during the assessment year 2015-16, the year under reassessment. It clarified that the payments amounting to Rs. 1,43,83,620/-, which were made during the financial year relevant to AY 2015-16, were actually for purchases that had been made by the company from M/s. Surya Diamond Pvt. Ltd. in earlier financial years. Consequently, since no purchases were made in AY 2015-16, there was no corresponding debit entry for purchases from this party in the profit and loss account for the year under consideration.
Despite this clear explanation and the supporting documentation, the Assessing Officer proceeded to conclude that Regalia Jewels Pvt. Ltd. had failed to prove the genuineness of the transaction amounting to Rs. 1,43,83,620/- with M/s. Surya Diamond Pvt. Ltd. Treating this amount as bogus purchases made during the year, the AO added it back to the total income of the company. This addition made by the AO in the reassessment order was subsequently challenged before the Commissioner of Income Tax (Appeals) [CIT(A)]. The CIT(A), however, upheld the action of the AO and confirmed the addition.
Regalia Jewels Pvt. Ltd. then took the matter to the ITAT. While the company raised several grounds in its appeal, the primary legal challenge focused on the very foundation of the reassessment proceedings – the validity of the assumption of jurisdiction by the AO under Section 147 of the Act. The appellant reiterated that the AO’s belief that income had escaped assessment due to bogus purchases was based on a factual misunderstanding of when the purchases from M/s. Surya Diamond Pvt. Ltd. actually occurred.
The ITAT examined the rival submissions and scrutinised the material on record, paying particular attention to the ledger account of M/s. Surya Diamond Pvt. Ltd. in the appellant’s books for AY 2015-16. The Tribunal’s perusal of the ledger confirmed the appellant’s assertion: there were indeed no purchase entries recorded from M/s. Surya Diamond Pvt. Ltd. during the assessment year 2015-16. The entries reflected only payments made towards past purchases. As there were no purchases in the year under review, there was no corresponding debit for such purchases in the profit and loss account for that year.
Based on this factual finding, the ITAT concluded that the entire basis for the AO’s “reason to believe” that income had escaped assessment in AY 2015-16 due to obtaining bogus purchase bills from M/s. Surya Diamond Pvt. Ltd. was fundamentally flawed. The AO’s belief was rooted in the incorrect assumption that the alleged bogus purchases occurred during the year under consideration, when in reality, the payments were for purchases from previous years and had no impact on the profit and loss account of AY 2015-16.
In income tax law concerning reopening of assessments, the formation of a valid “reason to believe” that income has escaped assessment is a jurisdictional prerequisite for initiating proceedings under Section 147. This belief must be based on some material and cannot be merely a suspicion or conjecture. A critical aspect is that the material must lead to a belief that income has escaped assessment for the relevant assessment year. If the foundational facts upon which the AO’s belief is based are found to be incorrect, the “reason to believe” itself collapses, rendering the assumption of jurisdiction invalid. This principle is well-established in judicial precedents dealing with the validity of reassessments.
Applying this legal principle, the ITAT held that since the AO’s belief regarding bogus purchases in AY 2015-16 was based on an incorrect assumption of fact (i.e., mistakenly treating payments for old purchases as current year’s purchases), the entire basis for forming the belief that income had escaped assessment for that specific year was vitiated. The Tribunal stated that an incorrect assumption of fact is fatal to the assumption of jurisdiction under Section 147.
Consequently, the ITAT had no hesitation in quashing the entire reassessment proceedings initiated under Section 147 as “void ab initio,” meaning they were invalid from the very beginning due to the jurisdictional defect. Since the reassessment proceedings themselves were held to be invalid, the Tribunal determined that there was no need to deliberate upon the other legal grounds or grounds on merits raised by the appellant concerning the actual addition of bogus purchases, as those issues became academic. Those grounds were left open.
In the result, the appeal filed by Regalia Jewels Pvt. Ltd. was allowed by the ITAT, providing relief against the reassessment and the confirmed addition.
FULL TEXT OF THE ORDER OF ITAT DELHI
The appeal in ITA No.23/DDN/2024 for AY 2015-16, arises out of the order of the Commissioner of Income Tax (Appeals)-3, Noida [hereinafter referred to as ‘ld. CIT(A)’, in short] dated 05.01.2024 against the order of assessment passed u/s 147 of the Income-tax Act, 1961 (hereinafter referred to as ‘the Act’) dated 22.03.2022 by the Assessing Officer, DCIT, Central Circle, Dehradun (hereinafter referred to as ‘ld. AO’).
2. Though the assessee has raised several grounds before us, the primary issue to be decided is as to whether the ld AO was justified in valid assumption of jurisdiction u/s 147 of the Act in the facts and circumstances of the instant case.
3. We have heard the rival submissions and perused the material available on record. The assessee company filed its regular return of income for AY 2015-16 on 29.11.2015 declaring taxable income of Rs. 26,73,826/- which was duly processed u/s 143(1) of the Act. No assessment was framed on the same. A search and seizure operation u/s 132 of the Act was conducted on 06.11.2019 in the case of Shri Deepak Jain who was found to be an accommodation entry provider. It was noticed that Shri Deepak Jain through his 5 entities had provided certain accommodation entries to the assessee company thereby making the assessee company as beneficiary for obtaining bogus purchase bills. Accordingly, the case of the assessee was reopened for the issuance u/s 148 of the Act on 30.03.2021. The assessee participated in the reassessment proceedings and sought for reasons recorded for reopening the assessment which were duly supplied to it. The assessee filed objections for the reasons recorded and the said objections were duly disposed of separately by a speaking order of the ld AO.
4. The issue in dispute was purchases made from M/s. Surya Diamond Pvt. Ltd by the assessee during the year to the tune of Rs. 1,15,83,620/-. The assessee furnished the complete details of purchase made from the said party such as purchase bills, ledger of the said entity in the books of accounts of the assessee, confirmation of balance from the said entity, stock register duly recording the purchase made from the said party, bank statements evidencing the payment made to the said party through regular banking channels, by way of documentary evidences to prove the veracity of the purchases. The assessee also clarified before the ld AO that no purchases were made during the year under consideration from the said party and that the purchases were made in earlier years and payments for the same were made during the year. As such it was submitted that there was no debit to the profit and loss account with regard to purchase made from Surya Diamond Pvt. Ltd for the year. Despite this explanation, the ld AO proceeded to conclude that assessee had failed to prove the transaction of purchase of Rs. 1,43,83,620/- from M/s. Surya Diamond Pvt. Ltd and proceeded to treat the same as bogus purchase and added to the total income of the assessee. This action of the ld AO was upheld by the ld CIT(A).
5. On perusal of the ledger account of M/s. Surya Diamond Pvt. Ltd as appearing in the books of account of the assessee, it is found that no purchases were made during the year under consideration from the said party by the assessee. During the year under consideration, the assessee merely made payment through RTGS to M/s. Surya Diamond Pvt. Ltd to the tune of Rs. 1,43,83,620/- for the purchase made in the earlier years. Since no purchase was made during the year, there was no debit to the profit and loss account to that effect. Hence, it could be safely concluded that the entire reasons recorded were based on incorrect assumption of fact and hence, the ld AO could not have had formed a reasonable belief that income of the assessee had escaped for the year under consideration by way of obtaining bogus purchase bills. Since, the reopening is based on incorrect assumption of fact, the same becomes fatal to entire assumption of jurisdiction u/s 147 of the Act and hence, we have no hesitation to quash the reassessment proceedings as void ab initio. Since, the reassessment was quashed as void ab initio, there is no need to go into the other legal ground and other grounds on merits raised by the assessee as they become academic and they are left open.
6. In the result, the appeal of the assessee is allowed.
Order pronounced in the open court on 09/04/2025.
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