No “reason to believe” without new material – Mumbai ITAT quashes reopening based on mere reappraisal of old records

Jaydeep Construction Vs ITO (ITAT Mumbai)

No “reason to believe” without new material – Mumbai ITAT quashes reopening based on mere reappraisal of old records

In a significant ruling, the Mumbai ITAT quashed reassessment proceedings initiated u/s 147 after holding that the AO had reopened the completed scrutiny assessment merely on the basis of a reappraisal of existing records, without any new or tangible material coming into possession after completion of original assessment.

The assessee, a construction firm following the Project Completion Method, had originally undergone scrutiny assessment u/s 143(3) wherein income was assessed at Nil. Subsequently, the AO reopened the assessment alleging that the assessee had borrowed huge interest-bearing funds while simultaneously granting interest-free loans and advances of about ₹3.93 crore, resulting in alleged escapement of proportionate interest expenditure of ₹52.52 lakh u/s 36(1)(iii).

Before the Tribunal, the assessee contended that the reopening was entirely based on the very same balance sheet, profit & loss account, and details already furnished during original scrutiny proceedings. It was argued that there was absolutely no fresh information, new material, or external input available with the AO to justify reopening.

Accepting the contention, the ITAT observed that the reasons recorded for reopening themselves clearly revealed that the AO had formed the belief of escapement solely from perusal of documents already available on record during the original assessment. The Tribunal specifically noted absence of even a “whisper” of any new or tangible material in the recorded reasons.

The Bench reiterated that existence of a valid “reason to believe” is a mandatory jurisdictional condition for invoking section 147 and such belief must be founded upon some fresh tangible material having live nexus with escapement of income. Mere review or reappraisal of existing records cannot justify reassessment proceedings.

FULL TEXT OF THE ORDER OF ITAT MUMBAI

The assessee has filed the present appeal against the impugned order dated 29.08.2025, passed under section 250 of the Income Tax Act, 1961 (“the Act”) by the learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi [“learned CIT(A)”], for the assessment year 2014-15.

2. In this appeal, the assessee has raised the following grounds: –

“On the facts and in law,

1. The Hon CIT(A) erred in upholding the re-opening of assessment u/s 147 of the Income Tax Act 1961, by issue of the notice u/s 148 on 29.03.2019, not appreciating that such re-opening was not valid as per law and therefore the notice u/s 148 dt. 29.03.2019, as well as the assessment flowing therefrom, were required to be struck down and quashed as bad in law.

2. The Hon CIT(A) erred in upholding the addition of Rs.52,52,725/- by disallowing proportionate interest on loans borrowed for the reason that appellant firm had granted interest free loans and advances, not appreciating that no deduction for such interest was claimed by the appellant u/s 36(1)(iii) of the I.T Act 1961 in computing the total income for the year under appeal and therefore the disallowance of interest was not justified and the consequent addition bears to be deleted.

3. The Hon CIT(A) erred in upholding the disallowance of interest of Rs.52,52,725/- on borrowed funds based on presumptions and surmises without appreciating the fact that appellant had sufficient interest free funds available for advancing such interest free loans and advances and for this reason also, the disallowance of interest to the extent of Rs.52,52,725/- was not called for and may kindly be deleted.

4. The Hon CIT(A) erred in directing the ld. AO to evaluate and assess the income corresponding to the expenditure incurred on the project till 31.03.2014, which direction of the Hon. CIT(A) is unjustified by facts and in law and also breaches the provisions of section 251(2) of the I.T Act 1961, the appellant being not granted any opportunity to show cause against such enhancement of income and therefore these directions be set aside and quashed.”

3. Ground No. 1 raised in the assessee’s appeal pertains to the validity of reassessment proceedings initiated under section 147 of the Act.

4. The brief facts of the case pertaining to this issue, as emanating from the record, are: The assessee is engaged in the business of construction and development. For the year under consideration, the assessee filed its return of income on 27.11.2014, declaring a total income of Rs. Nil. The return filed by the assessee was selected for scrutiny, and vide order dated 29.05.2016, passed under section 143(3) of the Act, the scrutiny proceedings were concluded, assessing the income of the assessee at Rs. Nil. Subsequently, a notice under section 148 of the Act was issued on 29.03.2019, initiating reassessment proceedings in the case of the assessee on the basis that on perusal of the balance sheet, profit and loss account and details filed by the assessee, it was observed that the assessee has taken secured and unsecured loans totalling to Rs. 22,12,76,088/- from various parties and has debited interest expenses totalling to Rs. 2,95,62,940/- in its profit and loss account. As the assessee had tendered interest free loans and advances amounting to Rs. 3,93,16,199/- to various persons, it was alleged that the interest-bearing funds were utilized for giving huge amount of interest free advances, and therefore, the proportionate interest amounting to Rs. 52,52,725/- in respect of interest free loans and advances has escaped assessment, as such interest free loans and advances given by the assessee were not wholly and exclusively utilized for the purposes of the assessee’s business as per section 36(1)(iii) of the Act.

5. In response to the notice issued under section 148 of the Act, the assessee filed its return of income on 06.08.2019, declaring a total income of Rs. Nil. In response to the statutory notices issued during the reassessment proceedings, the assessee submitted that the entire expenses debited to the profit and loss account were transferred to the closing work-in-progress, as the assessee follows the Project Completion Method for revenue recognition, and the entire expenses debited also include finance costs, which are relatable to interest-free loans and advances given. Thus, the assessee submitted that the closing work-in-progress consists of two components, namely, the project closing work-in-progress and the interest component related to interest-free loans and advances given by the assessee.

6. The Assessing Officer (“AO”), vide order dated 23.12.2019 passed under section 143(3) read with section 147 of the Act, disagreed with the submissions of the assessee and made an addition of Rs. 52,52,725/- being the proportionate interest in respect of interest-free loans and advances given by the assessee to various persons.

7. In its appeal before the learned CIT(A), the assessee, inter alia, raised the ground challenging the validity of the reassessment proceedings. However, the learned CIT(A), vide impugned order, dismissed the said ground raised by the assessee and upheld the validity of the reassessment proceedings initiated under section 147 of the Act. Being aggrieved, the assessee is in appeal before us.

8. During the hearing, the learned Authorized Representative (“learned AR”), by referring to the reasons recorded by the AO for reopening the assessment, forming part of paper book at pages 13–14, submitted that the reassessment proceedings initiated by issuance of notice under section 148 of the Act are bad in law, as no new or tangible material was relied upon by the AO. The learned AR submitted that all details on the basis of which the AO alleged that the income to an extent of Rs. 52,52,725/- has escaped assessment were found from the perusal of balance sheet, profit and loss account, and the details already filed by the assessee, which were in the possession of the AO since the scrutiny proceedings under section 143(3) of the Act. Thus, the learned AR submitted that the present proceedings under section 147 of the Act had been initiated on a reappraisal of the very same documents which were already on record by the AO. The learned AR further submitted that the assessee follows the Project Completion Method for revenue recognition, and the same has not been disputed by any of the lower authorities. Accordingly, since in the year under consideration, no project was completed, the entire cost, including interest cost as reflected in the profit and loss account, was transferred to closing work-in-progress, and no deduction of such interest expenditure was claimed during the year.

9. On the other hand, the learned Departmental Representative (“learned DR”) vehemently relied upon the orders of the lower authorities.

10. We have considered the submissions of both sides and perused the material available on record. In the present case, the return filed by the assessee was selected for scrutiny, and the assessment was completed under section 143(3) of the Act. However, before the expiry of four years from the end of the relevant assessment year, i.e., AY 2014–15, a notice under section 148 of the Act was issued to the assessee on 29.03.2019. While initiating the re-assessment proceedings, the AO recorded the following reasons for reopening assessment: –

“The assessee has filed their return of income on-27.11.2014 declaring total income of Rs. NIL. Subsequently, the case was selected for scrütiny under CASS in order to verify certain limited issue. The case has completed u/s.143(3) of the Income Tax Act, 1961 determined assessed income of Rs. NIL.

On perusal of balance sheet, profit & loss account and the details filed by the assessee, it is seen that the assessee has taken secured loan at Rs.14,91,15,885/- and unsecured loan at Rs.7,21,60,203/- totaling to Rs.22,12,76,088/- from various parties. It is also seen that the assessee has debited interest expenses of an huge amount of Rs.2,11,30,085/- as bank interest and an amount of Rs.84,32,855/- as interest accounts from the profit and loss account totaling to Rs.2,95,62,940/-. On going through the records, it is seen that assessee has given the interest free loan & advances Rs.3,93,16,199/- to the parties persons. However, it is noticed that no interest whatsoever is charged from the above parties persons. However, it is noticed that no interest whatsoever is charged from the above parties to whom the assessee had advanced loan.

Section 36(1) (ili) is very emphatic that the borrowed funds availed by an assessee should be wholly and exclusively utilized for the purpose of assessee’s business and. this section vividly make it clear that the amount of interest paid on the capital borrowed for the purpose of business or profession is allowable as deduction in computation the Income u/s28 of the IT Act, 196. Moreover, in event of the sum being used for the purpose of business and that if it is not for the purpose other than that of business, then interest to the extent to which the capital was so used is not entitled for deduction. Support in thisd is drawn from decision of Madras High Court P.R.M.S. Ramanathan Chetiar Vs. CIT 72 ITR 534 and M.S.P. raja Vs. CIT 105 ITR 295 (Mad).

In the instant case, the interest bearing funds were utilized for given huge amount of interest free advances. It is construed that the interest on borrowed funds is to be disallowed partially to the extentas not mean for business purposes since certain loans and advances were advanced without interest and the same were not used wholly and exclusively for own business purposes. The assesses has used the interest bearing fund for the purpose of giving in free advances. Hence the proportionate Interest ought to be disallowed, which is worked out as under:-

2,95,62.040 X 3,03,16,100= 52,52,725/- 22,12,70,088

In view of the above facts, the income of the assessee needs to be assessed in its proper perspective and bring to tax appropriate income of the assessee. It is, therefore, necessary to reopen the case u/s 148 of the Income Tax Act. Thus considering the facts and circumstances of the case, I have reason to believe that income of Rs. 52,52,725/-chargeable to tax in the hands of the assessee has escaped assessment due to failure on the part of the assessee to disclosed fully and truly all material facts for A.Y. 2014-15 within the meaning of section 147 of the Income Tax Act, 1961 read with Explanation Thereto. Hence, notice under section 148 of the Income Tax Act being issued.”

11. From the perusal of the reasons recorded by the AO for reopening the assessment, it is evident that the fact that the assessee had given interest free loans and advances amounting to Rs. 3,93,16,199/- and had incurred interest expenditure to an extent of Rs. 2,95,62,940/- on secured and unsecured loans taken during the year was noted only on the basis of perusal of the balance sheet, profit and loss account and details filed by the assessee. From the perusal of the reasons recorded by the AO for reopening the assessment, we do not find any whisper of any new or tangible material which came into the possession of the AO after completion of the scrutiny assessment proceedings. Thus, from a bare perusal of the reasons recorded for reopening the assessment, it is evident that there was no new or tangible material forming the basis for the “reason to believe” that income chargeable to tax has escaped assessment in the present case.

12. Further, the existence of a valid “reason to believe” is a sine qua non to exercise the jurisdiction under section 147 of the Act. The expression “reason to believe” imports the cumulative presence of following four elements, viz. some new or tangible material or materials to establish that income has escaped assessment; nexus between such material and the belief of escapement of income from assessment as envisaged under section 147; application of mind by the AO to such material; and an inference, based on reason drawn tentatively by the officer that income has escaped assessment. However, in the present case, as noted in the foregoing paragraph, the entire exercise of reassessment was initiated on the basis of material already available on record of the AO, and thus, no new or tangible material came into the possession of the AO to initiate reassessment proceedings.

13. It is further pertinent to note that in the present case, the assessee is engaged in the business of construction and building. Undisputedly, the assessee follows the Project Completion Method for revenue recognition.

Accordingly, from the perusal of the profit and loss account for the year ending 31.03.2014, forming part of the paper book, we find that the assessee transferred all the expenses incurred, including interest expenditure, to closing work-in-progress and took it to the subsequent assessment year, as the project was not completed in the year under consideration. Therefore, even though the assessee has shown the interest cost on the debit side of the profit and loss account, no expenditure, including interest expenditure, was claimed as a deduction in the year under consideration while computing the total income, as the same was capitalised to the work-in-progress and carried forward to the subsequent assessment year. Therefore, the allegation of the AO that proportionate interest expenditure amounting to Rs. 52,52,725/- has escaped assessment has no basis, and the entire belief of escapement of income as formed by the AO is apparently completely baseless and misplaced in the facts of the present case. Therefore, we are of the considered view that the entire reassessment proceedings were initiated merely on the basis of suspicion without any substantiated belief that income chargeable to tax has escaped assessment in the present case. Thus, having considered the facts and circumstances of the case, we are of the considered view that the reassessment proceedings initiated by the AO are not in conformity with the provisions of section 147 of the Act and therefore, the same are bad in law. Thus, the same is quashed. Consequently, the assessment order is also quashed.

14. Since the relief has been granted to the assessee on the afore-noted jurisdictional aspect, the other grounds raised by the assessee in the present appeal are rendered academic and are kept open.

15. In the result, the appeal filed by the assessee is allowed.

Order pronounced in the open Court on 04/05/2026