Rajeshkumar Babulal Panjri Vs DCIT (ITAT Rajkot)
Section 147: Investigation Report Cannot Replace Independent Reason to Believe—₹2.66 Crore Deemed Dividend Reassessment Quashed
Background of the Dispute
The assessee, an individual, filed his return for assessment year 2013-14 on 28 March 2014, declaring income of ₹18,43,390. The return was processed under section 143(1), without a scrutiny assessment under section 143(3).
Subsequently, the Assessing Officer received information from the Deputy Director of Income Tax (Investigation), Jamnagar, concerning alleged circular transactions aggregating to ₹276 lakh during the period from 13 February 2012 to 8 January 2013.
The transactions involved linked bank accounts and RTGS transfers among group companies in which the assessee allegedly held substantial interest through a family trust. According to the information, the transactions were undertaken to clear inter-group loans and advances. The companies were stated to have substantial accumulated reserves and profits.
The Assessing Officer considered that the transactions attracted the deemed dividend provisions of section 2(22)(e). After obtaining approval, he issued notice under section 148 on 30 March 2021.
Addition Made in Reassessment
In response to the notice, the assessee filed a return declaring the same income as originally returned.
During reassessment, the assessee explained that the transactions were undertaken to clear inter-group balances and acknowledged receipt of certain amounts from private limited companies.
The Assessing Officer considered the explanation and supporting evidence insufficient to rebut the applicability of section 2(22)(e). He consequently assessed ₹2,66,55,000 as deemed dividend, determining total income at ₹2,84,98,390.
The Commissioner (Appeals), NFAC, sustained the reassessment and the addition.
Before the Tribunal, the assessee challenged both the jurisdiction to reopen the assessment and the substantive addition.
Assessee’s Challenge to the Recorded Reasons
The assessee argued that the reopening rested on information received from the Investigation Wing without independent application of mind by the Assessing Officer.
The recorded reasons referred to circular transactions, inter-group balances, accumulated reserves and the assessee’s alleged substantial interest through a family trust. However, according to the assessee, they did not establish a sufficient connection between those circumstances and taxable deemed dividend in his hands.
The core objection was that the Assessing Officer had formed a reason to suspect, rather than the statutory reason to believe that income had escaped assessment.
Reliance was placed on ACIT v. Dhariya Construction Co. [2011] 197 Taxman 202 (SC) to support the requirement that the Assessing Officer independently examine information received from another authority.
The Revenue defended the reopening, submitting that the Investigation Wing had supplied tangible information concerning the circular transactions.
Tribunal: Information and Formation of Belief Are Distinct
The Tribunal examined the jurisdictional ground first because success on that issue would render the merits academic.
It found that the recorded reasons primarily relied on the Investigation Wing’s information concerning transactions among group companies.
However, the reasons did not demonstrate independent enquiry or verification concerning the assessee’s actual receipt of the relevant amounts or the statutory conditions necessary to invoke section 2(22)(e).
The Tribunal emphasised that information about transactions between group companies could not automatically establish escapement of taxable income in the assessee’s hands. The assessee’s specific role and the relevant statutory requirements required examination.
It distinguished between the existence of information suggesting possible escapement and the Assessing Officer’s formation of the requisite belief.
A mere suspicion, however strong, could not substitute the requirement of reason to believe.
After considering Dhariya Construction Co., the Tribunal concluded that the Assessing Officer had not demonstrated independent application of mind establishing a prima facie nexus between the information received and the alleged escapement of income in the assessee’s hands.
Reassessment Quashed; Merits Left Open
The Tribunal held the reopening unsustainable and quashed the reassessment order.
The Commissioner’s order was also set aside insofar as it sustained the reassessment and consequential addition.
The appeal was allowed. However, the Tribunal did not adjudicate whether the loans and advances constituted deemed dividend under section 2(22)(e). Those grounds became academic and were expressly left open.
Thus, the assessee succeeded on the jurisdictional defect in reopening, rather than on a substantive finding that the transactions fell outside section 2(22)(e).
Author’s Comments
The decision illustrates the importance of connecting investigation information with the precise statutory basis of the proposed addition.
Circular movement of funds, accumulated profits and an alleged interest through a family trust may warrant examination. Their existence does not automatically establish deemed dividend taxable in a particular individual’s hands.
The recorded reasons must demonstrate the Assessing Officer’s own reasoning linking the material to possible taxable escapement. A recital that information has been verified cannot replace an intelligible examination of the assessee’s role and the conditions of the charging provision.
The ruling also does not prohibit reliance on Investigation Wing information. Its objection concerns the absence of demonstrated independent application of mind on the facts before the Tribunal.
Finally, the decision concerns a notice issued on 30 March 2021 under the then applicable reassessment framework. Its jurisdictional reasoning should be understood in that context, while the substantive deemed dividend controversy remains undecided.
Cases Discussed
1. Assistant Commissioner of Income-tax v. Dhariya Construction Co., [2011] 197 Taxman 202 (Supreme Court) — Relied upon for the proposition that information or an opinion received from another authority does not automatically justify reopening without independent examination by the Assessing Officer and formation of the requisite belief.
2. GKN Driveshafts (India) Ltd. v. Income Tax Officer, (2003) 259 ITR 19 (Supreme Court) — Referred to in the assessee’s challenge before the Commissioner (Appeals) concerning the requirement to dispose of objections to reopening by a speaking order.
FULL TEXT OF THE ORIGINAL ORDER OF ITAT RAJKOT
Captioned appeal filed by the assessee, pertaining to Assessment Year (AY) 2013-14, is directed against the order under section 250 of the Income-tax Act, 1961 [hereinafter referred to as ‘the Act’] passed by the National Faceless Appeal Centre [hereinafter referred to as ‘NFAC’], dated 05.01.2026, which in turn arises out of an order passed by assessing officer u/s. 147 of the Act, dated 24.03.2022.
02. Brief facts of the case are that the assessee is an individual, filed his return of income for Assessment Year 2013-14 on 28.03.2014, declaring total income of Rs.18,43,390/-. Subsequently, on the basis of specific information received from the DDIT (Investigation), Jamnagar, the Assessing Officer (AO) noticed that the assessee had allegedly undertaken circular transactions aggregating to Rs.276 lakh during the period from 13.02.2012 to 08.01.2013 through linked bank accounts and RTGS transfers involving various group companies in which he allegedly had substantial interest through a family trust. The transactions were stated to have been undertaken for adjusting inter-group loans and advances, and the companies concerned were reported to have substantial accumulated reserves and profits. The AO observed that the assessee had received loans and advances from certain companies in which the provisions of section 2(22)(e) of the Income-tax Act, 1961, were allegedly attracted, but had not offered any income as deemed dividend in his return. Accordingly, after obtaining the requisite approval, the AO issued notice under section 148 of the Act on 30.03.2021. In response, the assessee filed his return on 23.04.2021, declaring the same income as originally returned. Thereafter, notices under sections 143(2) and 142(1) of the Act were issued, calling upon the assessee to furnish details of bank accounts, loans and advances, assets and liabilities, and other supporting documents concerning the reassessment the transactions. During proceedings, the assessee stated that the transactions were undertaken to clear inter-group balances and acknowledged receipt of certain amounts from private limited companies. However, according to the AO, the assessee failed to furnish satisfactory explanations and supporting documentary evidence to rebut the applicability of section 2(22)(e) of the Act. Consequently, the AO treated loans and advances aggregating to Rs.2,66,55,000/- as deemed dividend under section 2(22)(e) of the Act and completed the assessment under section 147 read with section 144B of the Act, determining the total income at Rs.2,84,98,390/-.
03. Aggrieved by the reassessment order, the assessee preferred an appeal before the Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), challenging, inter alia, the validity of the reopening of assessment on the grounds that the reasons recorded were furnished only in unsigned form, the reopening was allegedly time-barred in respect of certain transactions, the AO had only reason to suspect rather than reason to believe that income had escaped assessment, the reopening was undertaken for a roving inquiry, and the AO had failed to pass a speaking order in accordance with the decision of the Hon’ble Supreme Court in GKN Driveshafts (India) Ltd. The assessee also challenged the applicability of Explanation 2 to section 147 of the Act, whereby the appeal of the assessee was dismissed and the addition made by the Assessing Officer was sustained.
04. Now the aggrieved by the order of the Ld. CIT(A) the assessee is in appeal before the tribunal. Among other grounds, the assessee has challenged the validity of reopening of the assessment under section 147 of the Income-tax Act, 1961, contending that the same was based merely on reason to suspect and not on reason to believe that income chargeable to tax had escaped assessment.
05. At the time of hearing the Ld. AR submitted that the reasons recorded for initiating proceedings under section 147 of the Act were based solely on information received from the DDIT (Investigation), Jamnagar, the relevant extract of which is reproduced at pages 14 and 15 of the paper book.
“Reasons Recorded For initiate Proceedings u/s. 147 of the I.T. Act, 1961.
Reasons for reopening of the Income-tax assessment in the case of Shri Rajesh Babulal Panjari (PAN: ABXPP 1547 M) for A. Y. 2013-14 u/s 147 of thel.T. Act, 1961.
The assessee filed his Return of Income for the A.Y.2013-14 on 28/03/2014 declaring total income of Rs. 18,43,390/-, The return of income was processed u/s 143(1) of the Act.
2. The DDIT (Inv.), Jamnagar vide letter No. DDIT (Inv.)/Jam/RBP/Information/2017- 18 dated 05.03.2018 forwarded information in the above case intimating that the assessee carried out circular transactions aggregating to Rs.276 lakhs during the period from 13.02.2012 to 08.01.2013 through linked account and RTGS amongst various companies in which the assessee is having substantial interest through hid family trust. It is further stated that this transactions that have taken place are carried out for the purpose of clearing intergroup concern’s loans and advances which were standing in liabilities side in one concern and on assets side in other concerns books of accounts. As these concerns are making profit but no dividend was distributed by them which entails provisions of sec.2(22)(e) (deemed dividend).
3. The on verification of information forwarded by the DDIT it is noticed that the companies having substantial general reserve in which the assessee has substantial interest through family trust carried out transactions of loans and advances attracting provisions of section sec.2(22)(e).
4. On verification of the return of income of the assessee it is noticed that no deemed dividend is offered to tax by the assessee.
5. In this case a return of income was filed for the year under consideration but no scrutiny assessment u/s.143(3) of the Act was made. Accordingly, in this case, the only requirement to initiate proceedings u/s.147 is reason to believe which has been recorded above (para 2, 3 & 4 above)
6. 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 u/s.2(40) of the Act was made and the return of income was only processed u/s.143(1) of the Act. In view of the above, provisions of clause (b) of explanation 2 to section 147 are applicable to facts in this case and the assessment year under consideration is deemed to be a case where income chargeable to tax has escaped assessment.
7. In view of the above, I have reasons to believe that the income exceeding Rs.1,00,000/- chargeable to tax has escaped assessment within the meaning of section 147 of the Income Tax Act, 1961.
8. In this case more than four years have lapsed from the end of assessment year under consideration. Hence necessary sanction to issue notice u/s 148 has been obtained separately from Principal Commissioner of Income Tax as per the provisions of section 151 of the Act”
It was contended that the Assessing Officer had merely referred to information regarding circular transactions and inter-group loans and advances reflected in the books of account of certain companies, without bringing any independent material on record to establish that the assessee had actually received taxable deemed dividends. The Ld. AR argued that information received from an investigation authority, without independent application of mind and verification by the Assessing Officer, could not, by itself, constitute a valid basis for reopening the assessment. Reliance was placed on the decision of the Hon’ble Supreme Court in Assistant Commissioner of Income-tax v. Dhariya Construction Co. [2011] 197 Taxman 202 (SC), in support of the contention that an opinion or report of another authority could not automatically justify reopening without the Assessing Officer independently examining the material and forming the requisite belief. Accordingly, it was submitted that the reopening of the assessment was invalid and the reassessment order deserved to be quashed.
06. On the other hand, the Ld. DR supported the orders of the authorities below and submitted that the assessment had been reopened on the basis of tangible information received from the DDIT (Investigation), Jamnagar, indicating circular transactions involving group companies in which the assessee allegedly had substantial interest through a family trust.
07. We have heard the rival submissions and perused the material available on record. Since the assessee has challenged the very validity of the reassessment proceedings, we consider it appropriate to adjudicate this legal ground first. If the assessee succeeds on this ground, the other grounds challenging the additions on merits would become academic and would not require adjudication. On examination of the reasons recorded for reopening the assessment, we find that the Assessing Officer primarily relied upon the information received from the DDIT circular (Investigation), Jamnagar, regarding alleged transactions aggregating to Rs.276 lakh during the period from 13.02.2012 to 08.01.2013 through linked bank accounts and RTGS transfers involving various group companies in which the assessee allegedly had substantial interest through a family trust. However, the reasons recorded, as placed before us, do not or verification demonstrate any independent inquiry undertaken by the Assessing Officer to establish the assessee’s actual receipt of the amounts in question or to substantiate the applicability of section 2(22)(e) of the Act. The information regarding transactions among group companies, without further examination of the assessee’s specific role and the relevant statutory conditions, cannot automatically lead to the conclusion that income chargeable to tax has escaped assessment in the hands of the assessee. It is settled law that the existence of information suggesting possible escapement of income and the formation of the requisite belief by the Assessing Officer are distinct requirements. The Assessing Officer must apply an independent mind to the information received and the material available on record before initiating reassessment proceedings. A mere suspicion, however strong, cannot substitute the statutory requirement of reason to believe. In this regard, we have considered the decision of the Hon’ble Supreme Court in Assistant Commissioner of Income- tax v. Dhariya Construction Co. [2011] 197 Taxman 202 (SC), relied upon by the Ld. AR. Having regard to the reasons recorded in the present case and the material placed before us, we find that the Assessing Officer has not demonstrated the requisite independent application of mind to establish a prima facie nexus between the information received and the alleged escapement of taxable income in the hands of the assessee. In view of the foregoing discussion, we hold that the reopening of the assessment under section 147 of the Act, on the facts and material placed before us, is not sustainable in law. Accordingly, the reassessment proceedings are held to be invalid, and the reassessment order is quashed. Consequently, the order of the Ld. CIT(A), insofar as it sustains the reassessment and the consequential addition, is set aside. Since the assessee succeeds on the ground challenging the validity of the reassessment proceedings, the remaining grounds of appeal, which relate to the merits of the addition, are rendered academic and are, therefore, left open without adjudication.
08. In the result, the appeal of the assessee is allowed.
Order pronounced in the open court on this 13th day of October, 2026.
