Reassessment Quashed as AO Taxed Capital Gains Instead of Recorded Escapement Issue

Ichchaben Kantilal Desai Vs ITO (ITAT Surat)

Summary: The ITAT Surat held that a reassessment under Section 147 cannot survive when the Assessing Officer (AO) ultimately makes additions on issues completely unrelated to the reasons recorded for reopening. In this case, the reassessment was initiated solely on the basis of alleged unexplained time deposits of ₹10 lakh and interest income of ₹24,329. However, during reassessment proceedings, the AO instead made a substantial addition of ₹24,62,107 towards long-term capital gains (LTCG) arising from the sale of ancestral land, along with an addition of ₹5 lakh for unexplained investment. The Tribunal found that the recorded reasons never referred to the sale of land or capital gains. Further, no sustainable addition survived on the very issue forming the basis of reopening. Relying on judicial precedents, the Tribunal held that once the foundation of reopening fails, the AO cannot assess entirely new issues without recording fresh reasons and obtaining proper approval. Accordingly, the reassessment was quashed as void ab initio.

Core Issue: Whether a reassessment under section 147 can survive when the reasons recorded for reopening referred only to unexplained time deposits of ₹10 lakh and interest income of ₹24,329, but the Assessing Officer ultimately made no sustainable addition on that issue and instead assessed long-term capital gains of ₹24,62,107 arising from sale of land, which did not form part of the recorded reasons.

Facts: The assessee had not filed a return of income for AY 2011-12. Based on NMS information, the Department noticed that the assessee had allegedly made investments of ₹10,00,000 in time deposits during FY 2010-11 and had earned interest income of ₹24,329. Accordingly, after recording reasons, notice under section 148 was issued on 26.03.2018. In response, the assessee filed a return and explained that the deposits were out of past savings. During assessment proceedings, the AO examined the source of fixed deposits and noticed that the assessee had sold ancestral land situated at Channod and had received sale consideration of ₹24,71,792 as her share. The AO was of the view that the assessee had not disclosed capital gains arising from the sale of such land. Consequently, instead of confining himself to the issue mentioned in the recorded reasons, the AO proceeded to compute long-term capital gains on the sale of land and also made an addition towards unexplained investment in fixed deposits. Thus, the assessment culminated in total additions of ₹29,62,107, comprising ₹24,62,107 as LTCG and ₹5,00,000 as unexplained investment.

Reasons Recorded for Reopening: The Tribunal reproduced the reasons recorded by the AO and noted that the entire foundation for reopening was restricted to alleged escapement of income of ₹10,24,329, being investment in time deposits of ₹10,00,000 and interest income of ₹24,329. The reasons nowhere referred to sale of land, capital gains, transfer of immovable property or any issue relating to agricultural land. Thus, the jurisdiction under section 147 was assumed solely for examining the source of time deposits and interest income.

AO’s Findings: During reassessment proceedings, the AO rejected the assessee’s explanation regarding fixed deposits and held that the deposits of ₹5,00,000 had been made in cash and remained unexplained. Simultaneously, while examining the source of the deposits, he discovered that the assessee had received consideration from sale of ancestral land. The AO then proceeded to compute LTCG by adopting a cost of acquisition based on sale instances collected from the office of the Sub-Registrar, Killa-Pardi. Using a rate of approximately ₹0.62 per sq. metre as on 01.04.1981, the AO computed LTCG of ₹24,62,107 attributable to the assessee’s share in two parcels of land. The AO therefore added ₹24,62,107 under the head “Capital Gains” and ₹5,00,000 as unexplained investment, resulting in total additions of ₹29,62,107.

CIT(A)’s Findings: The CIT(A) upheld both additions. In relation to LTCG, the CIT(A) rejected the valuation report of the registered valuer relied upon by the assessee and preferred the valuation adopted by the AO based on actual sale instances obtained from the Sub-Registrar. The CIT(A) also observed that the assessee had not produced sufficient evidence to establish that the land was agricultural land. Accordingly, the addition of ₹24,62,107 towards LTCG and ₹5,00,000 towards unexplained investment was confirmed.

ITAT Findings: The Tribunal admitted the additional legal ground challenging the very validity of reopening, relying on the Supreme Court decision in National Thermal Power Company Ltd. vs. CIT. On examining the reasons recorded, the Tribunal found that the AO had assumed jurisdiction only on the allegation that the assessee had made time deposits of ₹10 lakh and earned interest income of ₹24,329. However, the principal addition ultimately made was on account of LTCG of ₹24,62,107, which was never part of the recorded reasons.

The Tribunal further noted that even on the issue of time deposits, the very foundation of reopening was factually incorrect because there was no evidence of time deposits made in cash in the manner alleged by the AO. Consequently, no valid addition survived on the very issue for which the assessment had been reopened. Once no addition survived on the basis of the recorded reasons, the AO could not continue to exercise jurisdiction under section 147 and make additions on entirely new issues. If the AO wanted to tax LTCG arising from sale of land, he was required to record fresh reasons and obtain the necessary approval in accordance with law. Since this was not done, the reassessment became unsustainable.

The Tribunal relied on the Gujarat High Court judgment in CIT vs. Mohmed Juned Dadani, which held that where no addition is ultimately made on the issue forming the basis of reopening, reassessment cannot be sustained merely by making additions on other independent issues.

Case Laws Relied Upon:

1. National Thermal Power Company Ltd. vs. CIT

2. CIT vs. Mohmed Juned Dadani.

Relevant Paras: Paras 15 to 18.

Held: The reassessment was quashed as void ab initio. The Tribunal held that the reasons recorded referred only to alleged unexplained time deposits and interest income, whereas the principal addition was ultimately made on account of LTCG arising from sale of land, which was not part of the recorded reasons. Since no valid addition survived on the issue forming the basis of reopening, the AO lacked jurisdiction to sustain the reassessment by making an independent addition on a different issue. Consequently, the reassessment proceedings were quashed and the grounds challenging the additions on merits were treated as academic and left undecided.

FULL TEXT OF THE ORDER OF ITAT SURAT

Captioned appeal filed by the assessee, pertaining to Assessment Year 2011-12, is directed against the order under section 250 of the Income Tax Act, 1961 (hereinafter referred to as “the Act”) by Commissioner of Income-tax (Appeals), National Faceless Appeal Centre, Delhi (hereinafter referred to as “the Ld.CIT(A)/NFAC”), dated 10.12.2025, which in turn arise out of an assessment order passed by the Assessing Officer u/s 143(3) r.w.s. 147 of the Act, on 13.12.2018.

2. The grounds of appeal raised by the assessee, are as follows:

“1. Ld. CIT[A], NFAC, Delhi and the Jassessing officer, has erred in law and on facts to reopen assessee’s assessment u/s 147 and issued of notice u/s 148 of the Act and subsequently completed the assessment by making addition of Rs.29,62,107/- which is altogether on different grounds.

2. CIT[A], NFAC, Delhi has erred in law and on facts to upheld A.O.’s addition of Rs.24,62,107/- on account of LTCG on rural agriculture land and that too, without considering valuation report of RVO w. r. t. cost of acquisition as on date 1/4/1981.

3. CIT[A], NFAC, Delhi has erred in law and on facts to upheld Jassessing officer’s addition of Rs.5,00,000/- ignoring the fact that assessee was having sufficient cash balance on account of previous cash withdrawals from her own bank account.”

3. The additional grounds of appeal raised by the assessee, are as follows:

“Ld. CIT[A], NFAC, Delhi and the Jassessing officer, has erred in law and on facts to reopen assessee’s assessment u/s 147 and issued of notice u/s 148 of the Act and subsequently completed the assessment by making addition of Rs.29,62,107/- which is altogether on different grounds.”

4. Learned Counsel for the assessee stated that above ground is an additional ground raised as the ground no. I of appeal memo in Form 36. It was not raised and argued before the Ld. CIT(A), NFAC, Delhi as well as before the assessing officer. It is raised before the Honorable Tribunal for the 1st time. The Ld. Counsel further submitted that above ground is purely technical and legal in nature. As all relevant facts pertains to the said ground are on record of the assessing officer and CIT(A), so it does not require investigation of facts. Hon’ble ITAT has power to admit and adjudicate the said ground, therefore, such legal ground may be admitted.

5. On the other hand, Ld. DR for the revenue, opposed the prayer of the assessee and submitted that since the assessee did not raise this legal ground before lower authorities, therefore, at this stage, assessee cannot raise additional legal ground. I have heard, both the parties on this preliminary issue. I note that it is purely a legal issue and all facts are already on record which goes to the root of the matter and no further inquiry is required for deciding the same as all facts are already on record. Therefore, in the light of ratio laid down by the Hon’ble Supreme Court in the case of National Thermal Power Company Ltd., vs. CIT (1998) 229 ITR 382 (SC), I admit the additional ground raised by the assessee and proceed to adjudicate first.

6. Succinct facts are that there was information with the Department that the assessee has made investment and earned interest of Rs. 10,24,329/-. Therefore, notice u/s 148 of the I.T. Act, in the case of assessee, was issued on 26.03.2018, after recording reason for escapement of Income. In response to notice u/s 148 of the Act, the assessee filed his return of income on 23.04.2018. The notice u/s 143(2) of the Act has been issued in assessee’s case on 23.09.2018. The Reasons for re-opening the assessment have been provided to the assessee. The notices u/s 142(1) of the Act has been issued from time to time. During the course of assessment proceedings, the assessee filed a written submission that the assessee had made fixed deposits of Rs. 5,00,000/-, with Saraswat bank. On perusal of the date of fixed deposits and the bank accounts submitted by the assessee it was seen by the assessing officer that the fixed deposits were made out of cash payment in the bank. The assessee further submitted that the cash was out of the sale proceeds of ancestral land at channod from which the assessee received a share of Rs. 24,71,792/-. The assessee has not shown the capital gain on such transaction to the Department. It was only when the department asked the assessee regarding the fixed deposits, the matter came up in the file. On perusal of the sale deed submitted by the assessee, it was noted by the assessing officer that the amounts of Rs. 24,71,792/-, have been received through cheque and the time deposits of Rs. 5,00,000/- (Rs. 2,50,000/- + Rs. 2,50,000/-) have been made in cash. The source of the same remains unexplained. Therefore, the same was added to the total income of the assessee as unaccounted investment.

7. During the assessment proceedings, the assessee has submitted that the time deposits was made out of the sale proceeds of ancestral land at channod from which the assessee received a share of Rs. 24,71,792/-. The contention of the assessee was found to be incorrect by the assessing officer. However, the capital gain on such land was not disclosed by the assessee in her return of income. The assessee did not submit any valuation report nor did he worked out the capital gain on such sale of land. Therefore, an instance of sale was asked regarding sale of agricultural land at channod, from the sub-registrar, Killa-Pardi. The sub-registrar gave an instance related to sale of land at channod in the year 1983 wherein the sale price is Rs. 7,000/- and the area is 2.83.19 acres, i.e. approximately 11460 sq. meters. Therefore price per sq meter comes to Rs. 0.62 per sq. meter. The capital gain on sale of land by the assessee was worked out by the assessing officer, as under:

9. The assessing officer observed that the assessee has failed to pay tax on such long term capital gain arising out of sale of agricultural land, therefore, an addition of Rs. 24,62,107/- was made to the total income of the assessee under the head “CAPITAL GAINS”.

10. Therefore, total addition made by the assessing officer in the hands of the assessee was to the tune of Rs. 29,62,107/- ( Rs. 24,62,107 + Rs. 5,00,000).

11. Aggrieved by the order of the assessing officer, the assessee carried the matter in appeal before the Ld. CIT(A), who has confirmed the action of the assessing officer. The Ld. CIT(A) noticed that assessee has relied on the valuation of the land by the approved valuer. On the other hand, it was seen by Ld. CIT(A) from the assessment order that the assessing officer has made inquiries with the office of the Sub-Registrar and he has collected the instances of sale of similar lands in the same village and has adopted such value as the value of the said lands as on 01-04-1981. The assessee has not brought on record any evidence to disprove the value adopted by the assessing officer. The valuation report submitted by the assessee does not have any clear reasoning to arrive at the value of Rs.150 per mt, whereas the assessing officer has adopted the said value based on actual sale of land in the same village. The assessee has not brought on record any material evidence to refute the value adopted by the assessing officer which is based on the actual sale value recorded by a Government Authority. The value recorded by such Government Authority cannot be simply brushed aside without the assessee bringing on record any material to demonstrate that the said value is incorrect. Therefore, the value adopted by the assessee by relying on the valuation report is not acceptable as the same is made without any proper reasoning or computation for arriving at the value of Rs.150 per sq.mt. Further, the assessee has submitted that the said lands were agricultural lands. However, no material evidence has been brought on record both at the assessment stage and appellate stage to substantiate such claim. Therefore, the action of the assessing officer to compute the LTCG on the sale of the said lands was upheld by Ld. CIT(A).

12. Aggrieved by the order of the Ld. CIT(A), the assessee is in further appeal before this Tribunal.

13. At the outset, Learned Counsel for the assessee vehemently submitted that during the assessment proceedings, the assessing officer has reopened the assessment on the fact that assessee has not disclosed fixed deposit and interest on the fixed deposit. However, the assessing officer made addition on different footing on account of Long Term Capital Gain to the tune of Rs.24,62,107/-. Therefore, the assessing officer made addition account of Long Term Capital Gain to the tune of Rs.24,62,107/-, without recording fresh reasons of reopening and without taking permission from the Higher Authority. That is, without recording reasons, made an addition on different footing, that is, on account of Long Term Capital Gain, which was not the reason to reopen the assessment, hence it is not acceptable. Therefore, reassessment proceedings initiated against the assessee may be quashed.

14. On the other hand, the Ld. DR for the Revenue has primarily reiterated the stand taken by the Assessing Officer, which I have already noted in our earlier para and is not being repeated for the sake of brevity.

15. I have heard, the rival parties and have gone through the material placed on record. For the sake of clarity and also being pertinent, I reproduce, the reasons recorded by the assessing officer, which are as follows:

“Reasons for the belief that income has Escaped assessment:

1. In this case, assessee has not filed her return of income for the year under consideration.

2. As per the NMS information available with system, it was seen that the assessee had made investment of Rs.10,00,000/-in form of time deposit during the F.Y. 2010-11 pertaining to A.Y. 2011-12.Also, as per the ITS data, she has earned interest income of Rs.24,329/- during the year under consideration.

3. In connection with the above, assessee was issued a query letter, dated 19/01/2018 by this office, seeking details of the above transactions, supported with necessary documentary evidences as also tax treatment of above. Assessee vide her letter dated 07/02/2018 replied that she is an old lady and what so ever deposits are made as above are out of her and her husband’s past savings. However, she did not furnish any details/evidences in support of her above claim.

4. Reply of the assessee has been perused. It is clear that she could not furnish satisfactory reply in connection with the above claim. The unsatisfactory reply of the assessee makes the undersigned to believe that the assessee is not in a position to explain that the sources of above investment and the interest income were not liable to be taxed during the year under consideration.

5. It is pertinent to mention here that in this case, the assessee has chosen not to file return of income for the year under consideration although the total income in form of deposits and interest income has exceeded the maximum amount which is not chargeable to tax as discussed in paragraph 4 above and the assessee was assessable under the Act.

6. As the assessee neither filed her return of income for the year nor did she satisfactory reply regarding the above transactions, undersigned has reason to believe that the income chargeable to tax amounting to Rs.10,24,329/- (10,00,000 + 24,329) has escaped assessment in the hands of the assessee for the assessment year under consideration for reason of failure on the part of the assessee to disclose fully and truly all the material facts of the case. In view of the above, the provision of clause (a) of explanation 2 to section 147 is applicable to the facts of this case where income chargeable to tax has escaped assessment.

7. Therefore, undersigned has reason to believe that the income chargeable to tax amounting to Rs.10,24,329/- has escaped assessment in the hands of the assessee for the assessment year under consideration and the case of the assessee is a fit case for action u/s 147 of the Act.

16. From the above reasons recorded by the assessing officer, it is vivid that reasons were recorded by the assessing officer, to tax investment of Rs.10,00,000/-and interest income of Rs.24,329/- made by the assessee in form of time deposit during the F.Y. 2010-11, pertaining to A.Y. 2011-12. Therefore, assessing officer stated in the reasons recorded that he had reason to believe that the income chargeable to tax amounting to Rs.10,24,329/- (10,00,000 + 24,329) had escaped assessment in the hands of the assessee for the assessment year under consideration for the reason of failure on the part of the assessee to disclose fully and truly all the material facts. However, the assessing officer made addition on different footing on account of Long Term Capital Gain to the tune of Rs.24,62,107/-. Therefore, the assessing officer made addition on account of Long Term Capital Gain to the tune of Rs.24,62,107/-, without recording fresh reasons of reopening and without taking permission from the Higher Authority to tax a different item, which is not part of the reasons recorded by the assessing officer.

17. I also note that in the reasons recorded by assessing officer it is mentioned that there is time deposit made by the assessee in cash, however, there is no time deposit in cash, in the name of the assessee, therefore addition made by assessing officer on account of time deposit, is also wrong. Therefore, I find that when the assessing officer had not made any addition, as regards the very basis on which the proceedings under section 147 of the Act were initiated in the case of the assessee, that is, time deposit and the assessing officer has divested of his jurisdiction from making an independent addition, and has made a different addition, therefore, the assessment order framed by the assessing officer is bad in law. Hence, I find that, when on account on which reopening of the assessment was passed, no addition was made by the assessing officer. In these circumstances, assessing officer could not make addition on other grounds (long term capital gain of Rs.24,62,107/-), which did not form part of the reasons recorded by the assessing officer. The assessing officer, of course, may make different addition after recording fresh reasons of reopening and after taking permission from the higher authorities, as per law, however, the assessing officer has failed to do so. Such ratio has been upheld by the Hon’ble Gujarat High Court in the case of CIT Vs. Mohmed Juned Dadani, (2013) 30 taxmann.com 1 (Guj). Based on these facts and circumstances, I quash the reassessment proceedings, initiated against the assessee, under section 147 of the Act, dated 13.12.2018, being void ab-initio.

18. As the reassessment itself is quashed, all other issues on merits of the additions, in the impugned assessment proceedings, are rendered academic and infructuous.

In the result, the appeal of the assessee is allowed.

Order is pronounced in the open Court on 04/06/2026.