Infra Developers Vs ITO (ITAT Agra)
Reopening for Section 40A(3) disallowance on existing assessment records amounts to change of opinion: ITAT
Legal principle and decision
The Income Tax Appellate Tribunal, Agra, quashed reassessment proceedings initiated to disallow cash expenditure under section 40A(3) where the AO relied on material already available during the original scrutiny assessment and identified no fresh evidence.
Following a coordinate Bench decision, the Tribunal treated the reopening as an impermissible change of opinion. It held that the notice dated 30.03.2021 under section 148 and the consequential reassessment dated 30.03.2022 were invalid. The assessee’s appeal was allowed without deciding the expenditure disallowance on merits.
Background of the original assessment
The assessee filed its return for assessment year 2014-15 on 29.11.2014, declaring income of ₹8,46,040. The case was selected for limited scrutiny through CASS.
The original assessment was completed under section 143(3) on 14.07.2016, determining total income at ₹9,50,000.
The AO subsequently reopened the assessment on the ground that the assessee had made cash payments exceeding the applicable ₹20,000 per person per day threshold. The expenditure identified for disallowance aggregated ₹20,19,400. The reopening notice was issued on 30.03.2021, beyond four years from the end of the relevant assessment year.
Assessee disputed the cash-payment allegation
During reassessment, the assessee explained that the expenditure concerned water, sand and boulder expenses. It produced ledger accounts and maintained that payments to individual recipients did not exceed the applicable daily limit.
The AO, however, observed that the assessee had not furnished supporting bills, vouchers and bank statements. He therefore rejected the explanation and disallowed ₹20,19,400 under section 40A(3).
The CIT(A) dismissed the assessee’s appeal. Before the Tribunal, the assessee challenged the disallowance and also raised additional legal grounds questioning the validity of reopening itself.
Additional jurisdictional grounds admitted
The assessee explained that the reopening objections had not been included in the original appeal grounds because of an inadvertent omission.
The additional grounds questioned reopening beyond four years after scrutiny, the absence of fresh material and reliance on facts already considered during the original assessment.
The Tribunal found these grounds legal in nature, with the relevant facts available on record. Relying on National Thermal Power Co. Ltd. Vs CIT [1998] 229 ITR 383 (SC), it admitted them.
Because the objections went to the foundation of jurisdiction, the Tribunal examined them before considering the merits of the expenditure addition.
Recorded reasons relied on existing case records
The Tribunal reproduced the AO’s recorded reasons, which began by stating that perusal of the case record revealed cash payments exceeding the statutory threshold.
The AO reasoned that the assessee should have disallowed these payments itself and that failure to do so resulted in escaped income. The recorded reasons also contained general assertions concerning failure to disclose material facts.
However, the Tribunal found that the reopening rested on information available during the original assessment, rather than subsequently discovered evidence. The AO had not identified fresh material coming to his attention that justified revisiting the completed scrutiny assessment.
Change of opinion could not support reopening
The Tribunal relied on Eminence Corporation Pvt. Ltd. Vs ITO, a coordinate Cuttack Bench decision involving a similar proposed section 40A(3) disallowance.
That decision held that reopening could not be sustained where all relevant facts and evidence were already before the AO during scrutiny and no fresh evidence had emerged.
The principle applied was that reassessment cannot operate as a mechanism for reconsidering the same material merely because the AO later takes a different view. On comparable facts, the Agra Bench concluded that the reopening in Infra Developers’ case was unsustainable.
Beyond-four-year reopening required proper foundation
The assessee specifically invoked the safeguards applicable to reopening a completed scrutiny assessment beyond four years. The Tribunal considered the absence of fresh evidence and the existing assessment record material decisive.
Although the reproduced reasons used language alleging non-disclosure, the Tribunal’s substantive conclusion was that the necessary basis for reopening had not been established on the facts.
The order should therefore be understood through its central finding: the AO revisited existing material without identifying a fresh evidentiary foundation. The resulting reconsideration could not sustain the impugned reassessment proceedings.
Notice and consequential reassessment quashed
The Tribunal held that the section 148 notice dated 30.03.2021 was invalid. Consequently, the order passed under section 147 read with section 144B on 30.03.2022 also lacked validity.
It quashed both the reopening notice and the reassessment order, allowing the additional legal ground concerning the invalid assumption of jurisdiction.
Once that ground succeeded, the remaining grounds became academic and were left open. The Tribunal did not remand the section 40A(3) dispute for another factual inquiry.
Final outcome and scope of ruling
The assessee’s appeal was allowed outright. The ₹20,19,400 disallowance could not survive the quashing of the reassessment in which it was made.
The decision does not hold that cash expenditure under section 40A(3) can never form the subject of reopening. Its conclusion concerns a completed scrutiny assessment revisited on existing records without fresh evidence. Nor did the Tribunal finally establish that every payment complied with the daily threshold; relief followed from the invalid reopening itself.
Cases Discussed
- National Thermal Power Co. Ltd. Vs CIT [1998] 229 ITR 383 (SC) – The Tribunal relied on this Supreme Court decision to admit the assessee’s additional legal grounds challenging the validity of reassessment. The grounds were legal in nature, the relevant facts were already available on record, and the jurisdictional objections went to the root of the matter.
- Eminence Corporation (P) Limited Vs ITO (ITAT Cuttack), ITA No. 227/CTK/2019 – The Tribunal followed this coordinate Bench decision to hold that reassessment based on material already available during the original scrutiny assessment, without fresh evidence, amounted to an impermissible change of opinion. Applying the same principle, it quashed the notice under section 148 and the consequential reassessment order.
- Earth Craft Limited, Bhubaneshwar Vs ITO (ITAT Cuttack), ITA No. 146/CTK/2019 – This decision was cited by the assessee in support of the additional legal grounds challenging reopening. The Agra Bench recorded the citation but did not separately analyse or expressly follow this decision.
FULL TEXT OF THE ORDER OF ITAT AGRA
This appeal is directed against the impugned order dated 26.03.2026 passed in appeal No. NFAC/2013-14/10151758 by the ld. Commissioner of Income Tax(Appeals), National Faceless Appeal Centre (NFAC), Delhi [hereinafter referred to as the “CIT(A)] u/s. 250 of the Income Tax Act, 1961 (hereinafter referred to as the “Act”) for the A.Y. 2014-15, wherein ld. CIT(A) has dismissed assessee’s appeal.
2. In this case, the original assessment u/s. 143(3) was completed on 14.07.2016, assessing the total income of the assessee at Rs. 9,50,000/- as against the returned income of Rs.8,46,040/-. Subsequently, the assessment was reopened vide notice u/s. 148 of the Act dated 30.03.2021 on the ground that the assessee had made payment exceeding Rs. 20,000/- in cash in one day amounting to Rs. 20,19,400/- in violation of section 40A (3) of the Act.
2.1 During the course of assessment proceedings, the assessee submitted that the above expenditure related to water expenses, sand expenses and bolder expenses and in support, produced the ledger account of the same. The assessee also contended that the payments made to the various persons for expenses and purchases were not in excess of Rs.20,000/-, which was supported by the ledger produced. However, the AO noted that the assessee did not submit any supporting documents such as bills, vouchers and bank statement in support of the above claim and accordingly, the AO did not accept the above explanation of the assessee and disallowed the sum of Rs.20,19,400/- u/s. 40A(3) of the Act.
2.2 Aggrieved with the said order, the assessee filed an appeal before the learned CIT(A), which was dismissed by the learned CIT(A).
3. Aggrieved with the said order, the assessee is in appeal before us. Further, during the course of appellate proceedings, the assessee filed additional grounds and relevant submission in this regard is reproduced as under :
“Re: Filing of additional grounds (legal grounds)
Respectfully submitted,
1. That the appellant has file the appeal as above, wherein, has taken only one ground, challenging the addition made, invoking the provisions of section 40A(3) of Income tax Act. That on account of invertent mistake, legal grounds related with, invoking of section 147 could not be taken, which the appellant has now been taken with a request to admit the same as additional legal grounds and oblige.
The additional legal grounds now being taken are as under :-
Ground No. 2 (Addl. Legal Ground)
“That as per proviso to section 147, the provisions of section 147 are not applicable in this case, being original assessment relates to A.Y. 2014-15 completed u/s 143(3) dt. 14.07.2016, which after passing of four years, without having new material, cannot be reopened, invoking the provisions of section 147. Notice issued u/s 148 in the case is bad in law, liable to be quashed”.
Ground No. 3 (Addl. Legal Ground)
“That there was no new material before the AO, for recording the reasons u/s 147 in respect of escapement of income, all the material (subject matter of the reasons) were duly before the AO during the original assessment proceedings, duly considered. Issue of notice u/s 148 on such reason or facts is not valid, liable to be quashed”.
Ground No. 4 (Addl. Legal Ground)
“That provisions of section 147 are not attracted on the disallowances made subject matter of the escapement, which is not the income chargeable to tax, as per section 2(24) r.w.s. 14 of IT Act, disallowing of the expenditure u/s 40A(3) is not the income, so as to attract the provisions of section 147, notice issued u/s 148 on such reasons is bad in law, liable to be quashed.
2. It is requested that the grounds as above now being taken are the legal grounds related with the maintainability of the notice issued u/s 148 and assessment completed.
3. It is, therefore, requested that additional legal grounds, now being taken as per ground no. 2,3,4 may kindly be admitted as additional legal grounds and oblige.”
3.1 In support of the above additional grounds the Ld. AR relied upon following orders of the Tribunal of the Cuttack Bench:
(i) Earth Craft Limited, Bhubaneshwar vs. ITO vide ITA no. 146/CTK/2019.
(ii) Eminence Corporation (P) Limited vs. ITO vide ITA no. 227/CTK/2019.
4. On the other hand, learned Sr. DR supported the orders of the authorities below.
5. We have heard both the parties and perused the material on record. The assessee has raised the above additional grounds, which are legal in nature and the facts to adjudicate the same are available on record. Therefore, relying upon the decision of Hon’ble Apex Court in the case of National Thermal Power Co. Ltd. v. CIT (1998) 229 ITR 383 (SC), we admit the additional grounds of appeal. Since the additional grounds go to the very root of the matter, hence it is taken up for adjudication, first.
5.1. The assessee has filed copy of reasons recorded on page No. 1, 2, 3 of the paper book and the relevant extract of the said reasons are reproduced as under :
“Reason for issue of notice u/s 148 of the IT Act, 1961
The assessee had filed its return of income for the assessment year 2014-15 on 29.11.2014 declaring total income at Rs. 8,46,040/-, Case was selected for limited scrutiny through CASS. Scrutiny assessment u/s 143(3) of the Act was completed on 14.07.2016 assessing the total income of Rs. 9,50,000/-.
2. On perusal of case record, it has been noticed that the assessee had made payment exceeding to Rs. 20,000/- in cash in one day. The details are as under:-
(here the AO has given a table containing the details of such payments amounting to Rs.20,19,400/-)
3. As per subsection 3 of section 40A of the Act “Where the assessee incurs any expenditure in respect of which a payment or aggregate of payment made to a person in a day, otherwise than by an account payee cheque drawn on a bank or account payee bank draft, exceeds twenty thousand rupees, no deduction shall be allowed in respect of such expenditure”.
4. In view of the section 40A (3) of the Act, the assessee has committed default and it was assessee’s liability to disallow these payments suo-moto in his Profit & Loss Account; but, the assessee did not do so. In such circumstances, the amount of Rs. 20,19,400/- is disallowable u/s 40A (3) of the Act; whereas the assessee has not disclosed all the facts of case at the time of assessment proceeding.
5. It is ample clear from the discussion made above that the assessee’s case falls within the sub-clause (i) of clause (c) of explanation 2 of section 147 of the I.T. Act, 1961. As such, I have reason to believe that by reason of failure on the part of the assessee to disclose all material facts necessary for his assessment for the A.Y. 2014-15, an amount of Rs. 20,19,400/- chargeable to tax has escaped assessment within the meaning of section 147 of the Income Tax Act, 1961. I am satisfied this is a fit case for reopening of assessment u/s 147 of the I.T. Act, 1961..
6. In this case more than four years have elapsed from the end of the assessment year under consideration and income chargeable to tax which has escaped assessment is more than Rs. 1 lakh, necessary sanction to issue notice u/s 148 of the Act’ is being obtained separately from the Pr. Commissioner of Income Tax, Gwalior under the provisions of section 151 (1) of the Act.”
(emphasis supplied by us)
5.2 In this case, admittedly, the assessment was reopened after a lapse of four years from the completion of scrutiny assessment. It is noted that the assessment was reopened by the AO on the basis of information available on record in the course of original assessment and the AO has not mentioned in the reasons recorded that any fresh evidence had been brought out or had come to his attention. Further, there is no whisper in the reasons recorded that the said escapement of income was by reason of the failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment for the present assessment year. On similar facts, the coordinate Cuttack Bench of Tribunal in the case of Eminence Corporation Pvt. Ltd. vs. ITO (supra), quashed the assessment order and the relevant extract of the said order is reproduced as under :
“We have considered the rival submissions. The question of whether the income has escaped is to be considered at the point when the reasons are recorded and the notices were issued. Clearly the Hon’ble Jurisdictional High Court of Orissa in the various cases, referred to supra, has categorically held that for the purpose of making an addition by invoking the provisions of Section 40A(3) of the Act, the provisions of reopening u/s.147/148 of the Act cannot be invoked especially when all the materials were before the AO in the course of original assessment u/s.143(3) of the Act. When all the facts and evidences were before the AO in the course of original assessment and no fresh evidence had been brought out or had come to the attention of the AO, the reopening would be clearly on the basis of change of opinion and this is not permissible. This being so, in respectful obedience of the principle laid down by the Hon’ble Jurisdictional High Court in the cases referred to above, the reopening as made is found to be unsustainable and the same stands quashed. Since we have quashed the reassessment framed by the AO u/s.143(3)/147 of the Act on the issue raised by the assessee in ground No.1, the submission of the ld. Sr. DR that this Tribunal has confirmed the addition on merit is not sustainable.”
5.3 Accordingly, following the above order of the Tribunal, on similar facts, we hold that the notice u/s. 148 of the Act dated 30.03.2021 in this case is not a valid notice and consequently, the order u/s. 147 r.w.s. 144B of the Act dated 30.03.2022 is also not a valid order in the eyes of law. Accordingly, we quash the impugned notice u/s 148 of the Act dated 30.03.2021 and the assessment order dated 30.03.2022 in this case. Hence, the additional ground No. 2 of appeal is allowed. In view of the additional ground no. 2 of the appeal being allowed, the other grounds of appeal become academic and are left open in this case.
6. In the result, appeal of the assessee is allowed.
Order pronounced in the open court on 16/10/2026.
