Case Law Details
Nilgiri Dairy Farm Private Limited Vs DCIT (ITAT Mumbai)
Summary : The Income Tax Appellate Tribunal (ITAT) quashed a rectification order passed under Section 154 of the Income-tax Act that denied the assessee the benefit of set-off of business losses against an addition of ₹1.77 crore. The original assessment had disallowed 5% of certain expenses on an estimated basis due to inadequate supporting details and incorrectly treated the amount as unexplained expenditure under Section 69C. Subsequently, the assessee obtained immunity under Section 270AA by accepting the assessment and refraining from filing an appeal. Nearly three years later, the Assessing Officer invoked Section 154 and Section 115BBE to deny loss set-off and convert the assessed loss into taxable income. The Tribunal held that once immunity under Section 270AA was granted, the assessment attained statutory finality and could not be substantially altered through rectification proceedings. It further ruled that an estimated disallowance of recorded expenses could not be characterized as unexplained expenditure under Section 69C.
Core Issue: Whether, after granting immunity under section 270AA and the assessee accepting the assessment without filing an appeal, the Assessing Officer could invoke section 154 to deny loss set-off by treating an ad hoc disallowance of expenditure already recorded in the books as unexplained expenditure under section 69C taxable under section 115BBE, thereby converting the assessed loss into taxable income.
Facts: The assessee filed a return declaring a loss of ₹31.90 crore. During scrutiny, the AO disallowed 5% of “other expenses” amounting to ₹1.777 crore on an estimated basis due to non-furnishing of complete details and treated the same as unexplained expenditure under section 69C. The addition was adjusted against business loss and the assessment resulted in a reduced loss. The assessee accepted the assessment, did not file an appeal, and was granted immunity under section 270AA. Nearly three years later, the AO passed a rectification order under section 154 holding that section 115BBE applied to the addition under section 69C and consequently denied loss set-off, converting the assessed loss into taxable income.
AO/CIT(A) Findings: The AO held that income assessed under section 69C was taxable under section 115BBE and no set-off of business loss was allowable. Accordingly, the assessment was rectified under section 154. The CIT(A) affirmed the rectification order.
ITAT Findings: The Tribunal held that section 270AA provides statutory finality where an assessee accepts the assessment and foregoes appellate remedies in exchange for immunity from penalty and prosecution. Once immunity was granted, the AO could not indirectly rewrite the assessment through section 154. The addition was merely an ad hoc disallowance of expenditure already recorded in the books and therefore could not be treated as unexplained expenditure under section 69C. Since section 69C itself was inapplicable, section 115BBE could not be invoked. The rectification order fundamentally altered the original assessment by converting assessed loss into taxable income and thus exceeded the limited scope of section 154. Accordingly, the Tribunal quashed both the rectification order and the appellate order.
Relevant Paras: 12 to 20.
Held: An ad hoc disallowance of expenditure already recorded in the books cannot be treated as unexplained expenditure under section 69C. After grant of immunity under section 270AA, the assessment attains finality and cannot be fundamentally altered through rectification under section 154. Consequently, section 115BBE was held inapplicable and the rectification order was quashed.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
The aforesaid appeal has been filed by the assessee against the impugned order dated 20.11.2025 passed by the learned Additional Commissioner of Income Tax (Appeals)-2, Gurgaon/NFAC, arising out of rectification order passed under section 154 read with section 143(3) of the Income-tax Act, 1961 for the assessment year 2017-18.
2. The assessee is mainly aggrieved by the action of the learned Assessing Officer in passing rectification order under section 154 of the Act and denying adjustment/set off of addition of Rs. 1,77,70,000/- by treating the same as income assessable under section 69C read with section 115BBE of the Act, despite the fact that the original assessment order had already attained finality in view of immunity granted under section 270AA of the Act. The assessee has also challenged the ex parte order passed by the learned CIT(A) confirming the action of the Assessing Officer.
3. Brief facts borne out from the record are that the assessee company had filed its return of income declaring loss of Rs. 31,90,20,163/-. During the course of scrutiny assessment proceedings, the learned Assessing Officer observed from the Profit & Loss Account that the assessee had debited “other expenses” amounting to Rs. 35.54 crores as against Rs. 33.29 crores in the preceding year. According to the Assessing Officer, the assessee could not furnish complete details in support of such expenditure and therefore, on estimated basis, 5% of such expenses amounting to Rs. 1,77,70,000/- was disallowed. However, while making such ad hoc disallowance, the Assessing Officer erroneously characterized the same as unexplained expenditure under section 69C of the Act.
4. The relevant observations of the Assessing Officer in the assessment order are reproduced hereunder:
“During the course of assessment proceedings, on perusal of the Profit & Loss Account, it is noticed that during the year under consideration the assessee has debited an amount of Rs. 35,54,00,000/- towards other expenses as compared to earlier year of Rs. 33,29,00,000/-. This shows a huge hike in the other expenses. The assessee company was asked to produce the party wise details of expenses but the assessee company shows its inability to submit the required details in respect of other expenses and till date of passing the order, failed to produce the same. Hence, in the absence of documentary evidences, expenses shown by the assessee company remains unverified.
In this circumstance, an amount of Rs. 1,77,70,000/- (being 5% of Rs. 35,54,00,000/-) is hereby treated as unexplained expenses u/s 69C of the Income-tax Act, 1961 and added to the total income of the assessee company.”
5. Thereafter, while computing assessed income, the learned Assessing Officer adjusted the aforesaid addition against current year business loss and ultimately assessed the loss at Rs. 30,12,50,163/-. Simultaneously, penalty proceedings under section 270A(2) were initiated for alleged underreporting of income.
6. Subsequently, the assessee preferred application under section 270AA seeking immunity from levy of penalty under section 270A and immunity from initiation of prosecution proceedings. The learned Assessing Officer, after examining the application filed by the assessee, passed order dated 28.02.2020 under section 270AA accepting the assessee’s application and granting immunity. In the said order, the Assessing Officer categorically recorded that no appeal had been preferred against the assessment order and all conditions stipulated under section 270AA stood fulfilled. The Assessing Officer further observed that no tax demand was payable because assessed income still remained under loss.
7. The relevant finding recorded by the Assessing Officer in order passed under section 270AA reads as under:
“In view of the penalty proceedings initiated by way of issue of notice u/s 270A(2) of the Income-tax Act, 1961 for under reporting of income, the assessee has filed application dated 14.01.2020 in prescribed form u/s 270AA of the Act seeking immunity from imposition of penalty u/s 270A and initiation of proceedings u/s 276C or 276CC of the Act.
… On verification from the system, it is observed that no demand is determined as payable by the assessee consequent to the order under section 143(3) of the Act and has also not preferred appeal before the CIT(A) against the said order.”
8. Thereafter, after almost three years, the learned Assessing Officer issued notice under section 154/155 dated 16.11.2022 alleging that there was a mistake apparent from record inasmuch as addition made under section 69C could not have been allowed to be set off against current year business loss in view of section 115BBE of the Act. In the said notice, the Assessing Officer alleged that income assessed under section 69C was liable to be taxed separately and no deduction or set off could be allowed against such deemed income.
9. Finally, the Assessing Officer passed impugned rectification order dated 07.12.2022 under section 154 and recomputed total income at Rs. 1,77,70,000/- by denying set off of business loss and by invoking provisions of section 115BBE. The learned CIT(A), in ex parte proceedings, confirmed the action of the Assessing Officer.
10. Before us, the learned counsel for the assessee submitted that the entire rectification proceedings are wholly without jurisdiction and contrary to the statutory framework of sections 270A and 270AA of the Act. He submitted that once the Assessing Officer himself accepted the assessee’s application under section 270AA and granted immunity after recording satisfaction that all statutory conditions stood fulfilled, then the original assessment order attained finality and the Assessing Officer could not thereafter indirectly reopen or alter the assessment consequences through rectification proceedings under section 154. He further submitted that the original addition itself was not sustainable under section 69C because the expenditure was admittedly recorded in the books of account and debited in the Profit & Loss Account. Therefore, once expenditure stood disclosed in books, provisions of section 69C dealing with unexplained expenditure could not have been invoked at all. At best, it was merely an ad hoc or estimated disallowance under normal computation provisions.
11. On the other hand, the learned CIT-DR strongly relied upon the orders of the lower authorities and submitted that once the Assessing Officer had treated the addition under section 69C in the original assessment order, then by operation of section 115BBE, such addition could not have been allowed to be set off against business loss and therefore rectification under section 154 was rightly carried out.
12. We have carefully considered the rival submissions, perused the orders of the authorities below and material placed on record. The undisputed facts borne out from the record are that the addition of Rs. 1,77,70,000/- was made purely on estimated basis being 5% of expenditure already debited in the books of account. The Assessing Officer himself in the original assessment order has noted that the assessee had debited such expenditure in the Profit & Loss Account and due to non-furnishing of complete details, 5% thereof was disallowed. Thus, fundamentally and intrinsically, it was merely an ad hoc disallowance of expenditure claimed in books of account.
13. Once expenditure is duly recorded in the books and disclosed in audited financial statements, then by no stretch of imagination can such expenditure be characterized as “unexplained expenditure” within the meaning of section 69C. The provisions of section 69C operate in altogether different field and contemplate expenditure which is found to have been incurred but for which the assessee either offers no explanation regarding source or explanation offered is not satisfactory. Here, admittedly, the expenditure stood recorded in the books themselves and only a part thereof was disallowed on estimate due to alleged non-verification. Therefore, the very edifice on which section 69C was invoked in the original assessment order itself was fundamentally erroneous.
14. At this stage, it would be apposite to briefly refer to the statutory scheme embodied in section 270AA of the Act, which has been introduced with a clear legislative intent to provide certainty and quietus to assessment proceedings where an assessee accepts the assessment order and seeks immunity from penalty and prosecution. The relevant conditions incorporated in section 270AA contemplate that the assessee should pay tax and interest payable as per assessment order within prescribed time and should not file any appeal against such assessment order. Upon satisfaction of these conditions, the Assessing Officer may grant immunity from imposition of penalty under section 270A and from initiation of prosecution proceedings under sections 276C and 276CC. The provision thus envisages a statutory compact between the Revenue and the assessee, whereby the assessee foregoes its valuable appellate remedies and accepts the assessment order in entirety, and in return, the Revenue grants immunity and accords finality to the assessment proceedings qua the issues accepted therein.
15. In the present case, the assessee, acting upon such statutory framework, consciously chose not to prefer any appeal against the original assessment order. The learned Assessing Officer, while passing order under section 270AA dated 28.02.2020, categorically recorded that all the conditions stipulated under section 270AA stood satisfied. The Assessing Officer himself noted that no appeal had been preferred against the assessment order and further observed that no tax demand was payable since assessed income still remained under loss. It is only thereafter that immunity from penalty proceedings under section 270A was formally granted and the assessee altered its legal position by accepting the assessment order as final.
16. Once such immunity order had been passed and statutory finality had attached to the assessment proceedings, it was no longer open for the Assessing Officer to indirectly unsettle the very same assessment by invoking rectification jurisdiction under section 154 and thereby fundamentally altering the tax consequence of the original assessment order. What the Assessing Officer has sought to do through the impugned rectification proceedings is not merely correction of any patent or clerical mistake, but virtually to rewrite the assessment order itself by converting assessed loss into taxable positive income under section 115BBE. Such an exercise completely changes the complexion and civil consequences of the original assessment order and travels far beyond the limited jurisdiction conferred under section 154.
17. The entire approach of the Assessing Officer, in our considered opinion, defeats the very legislative object behind section 270AA. The provision was introduced to reduce avoidable litigation and to instill certainty and repose in tax administration where the assessee accepts the assessment and the Revenue, in turn, grants immunity from penalty and prosecution. If after inducing the assessee not to file appeal by granting immunity under section 270AA, the Revenue is still permitted to revisit and substantially modify the assessment order through rectification proceedings, then the sanctity and efficacy of the entire statutory mechanism would stand seriously undermined. Such an interpretation would render the protection contemplated under section 270AA wholly illusory.
18. Quite apart from the above, even on merits, the very foundation adopted by the Assessing Officer is legally misconceived. The disallowance in the original assessment order was admittedly made on ad hoc basis being 5% of expenditure already debited in the books of account. Once expenditure is duly recorded in books and reflected in audited financial statements, then the same cannot partake the character of “unexplained expenditure” within the meaning of section 69C. At best, it could have been a case of estimated disallowance under normal computation provisions owing to alleged non-verification, but certainly not a deeming fiction under section 69C which contemplates expenditure not satisfactorily explained as to source.
19. Thus, viewed from any angle, whether from the standpoint of statutory finality attached to proceedings under section 270AA, or from the narrow scope of rectification jurisdiction under section 154, or even from the merits of applicability of section 69C itself, the impugned rectification order cannot be sustained. The learned CIT(A), instead of examining these fundamental jurisdictional and legal infirmities, merely affirmed the action of the Assessing Officer ex parte without proper judicial analysis of the statutory interplay between sections 154, 69C, 115BBE, 270A and 270AA.
20. Accordingly, we hold that the rectification order dated 07.12.2022 passed under section 154 as well as the impugned appellate order confirming the same are unsustainable in law and are hereby quashed. Consequently, the appeal of the assessee stands allowed.
21. In the result, appeal of the assessee is allowed.
Order pronounced on 27th May, 2026.
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