ITAT Quashes Reassessment Notice for Lack of Fresh Tangible Material and Independent Inquiry

Introduction

Reassessment proceedings under the Income-tax Act, 1961 (‘Act’), have long occupied a contentious space in Indian tax litigation, especially when initiated years after the completion of a scrutiny assessment. The statutory framework under s. 147 of the Act mandates that the Assessing Officer (‘AO’) must form a ‘reason to believe’ that income chargeable to tax has escaped assessment, an expression that courts have consistently held to be more than a mere suspicion. This threshold becomes even more rigorous when the reassessment is initiated beyond four years from the end of the relevant assessment year, as it requires a demonstrable failure on the part of the assessee to disclose material facts fully and truly.

In this context, the Hon’ble Income Tax Appellate Tribunal Chennai Bench (‘ITAT’) in the case of Mrinal Shroff v. Income-tax Officer [i] examined the validity of a reassessment notice issued under s. 148 of the Act, in the context of the procedural safeguards and statutory thresholds governing the reopening of completed assessments. The ITAT considered key legal questions such as the validity of information received from third-party sources, the nature and sufficiency of reasons recorded by the AO, whether a reopening can be sustained in the absence of any fresh ‘tangible material’ or independent application of mind, and the jurisdictional prerequisites under the first proviso to s. 147 of the Act.

Facts of the Case

• Minal Shroff (‘Assessee’) filed her return of income (‘RoI’) for the relevant Financial Year (‘F.Y.’) 2013-14, declaring total income of Rs. 12,63,210/-. During the relevant F.Y., the Assessee received a Long-Term Capital Gain (‘LTCG’) aggregating to Rs. 96,73,796 and claimed it as exempt.

• The RoI of the Assessee was selected for scrutiny through the Computer-Assisted Scrutiny Selection (CASS) system.  In response to notices under ss.143(2) and 142(1) of the Act, the Assessee furnished the books of accounts, balance sheets, income and expenditure statements, and other details as requisitioned.

• Upon perusal of the material placed in the Paper Book, the AO issued a notice dated 07.06.2016 for seeking details regarding the increase in the Assessee’s capital account. After verifying the documents submitted, the AO passed the assessment order under s. 143(3) of the Act (‘First Assessment Order’) dated 24.06.2016. The AO in its order observed that ‘the Ld. AR of the Assessee has explained the increase in capital of Rs. 37,82,856/-, which includes the exemption.

• After the expiry of the four years from the end of the relevant A.Y., the AO reopened the assessment by issuing a notice under s.148 of the Act dated 31.03.2021, based on information received from the CCIT, Coimbatore, alleging that the assessee was a beneficiary in ‘penny stock’ transactions. In the reasons recorded for reopening, the AO claimed that the LTCG was bogus, arising from accommodation entries, and treated the entire sale consideration of Rs. 98 lakhs as unexplained cash credit under s. 68 of the Act.

• Thereafter, the AO issued a draft assessment order on 29.03.2022 proposing the addition of Rs. 98 lakhs as unexplained cash credit under s.68 of the Act and framed a re-assessment order dated 31.03.2022 under ss.147/143(3) of the Act (‘re-assessment Order’).

• The Assessee objected to the reopening on the ground that there was no failure to disclose all material facts in the original assessment, and thus the proviso to s. 147 of the Act barred reassessment beyond four years. The objections were dismissed, and reassessment was completed under ss. 147/143(3) of the Act.

• Aggrieved by the same, the Assessee filed an appeal before the Ld. Commissioner of Income-tax, Appeal (‘CIT(A)’). However, the Ld.CIT(A) dismissed the legal issue as well as the grounds of appeal raised on merits by the Assessee against the re-opening of assessment.

• The Assessee being aggrieved by the order of the Ld. CIT(A) preferred an appeal before the ITAT.

Held

• The ITAT allowed the appeal in favour of the Assessee.

• It held that the AO had erroneously recorded that the original assessment was not a scrutiny assessment, whereas it had, in fact, been completed under s. 143(3) of the Act after a full enquiry.

• The ITAT held that since more than four years had passed from the end of the relevant AY, the proviso to s. 147 of the Act required the AO to establish that income escaped assessment due to failure of the assessee to disclose fully and truly all material facts, a condition not satisfied in this case.

• It observed that the law governing income tax assessments is rooted in the principle of finality, and the reopening of assessments is an exception to that rule. It reiterated that an AO may invoke s. 147 of the Act only applies when there is a ‘reason to believe’ that income chargeable to tax has escaped assessment, and that such belief must be recorded with reasons. It further observed that the Commissioner of Income-tax (‘CIT’) can revise the assessment under s. 263 of the Act, however, such interference is only permitted when the order is both erroneous and prejudicial to the revenue. The ITAT noted that both these provisions safeguard the exercise of jurisdiction, ensuring that the re-opening and revision occur only when specific conditions are met, as clarified by the legislative amendments and judicial precedents.

• The ITAT relied upon the decision in the case of Ganga Saran & Sons (P.) Ltd. v. ITO[ii], to hold that ‘reason to believe’ is a stricter standard than mere ‘satisfaction,’ and that such belief must be formed independently by the AO, not borrowed from another authority. Thus, it categorically held that any reopening based on borrowed satisfaction is invalid in law.

• It was further observed that where reassessment is sought after the expiry of four years from the end of the relevant assessment year, the first proviso to Section 147 mandates an additional condition: that the escapement of income must have occurred due to the assessee’s failure to disclose material facts fully and truly. The ITAT placed reliance on CIT v. Kelvinator of India Ltd.[iii], wherein the Hon’ble Supreme Court held that the AO does not possess the power of review and, in the absence of tangible material, cannot reopen a concluded assessment.

• The ITAT clarified that for valid reopening under s. 147 of the Act, the reasons recorded must explicitly reflect the AO’s belief that income has escaped assessment. In cases beyond four years, such escapement was attributable to the assessee’s default in disclosure. These reasons must be evaluated strictly as recorded by the AO, without any additions, assumptions or inferences. In this regard, reliance was also placed upon the judgment of the Bombay High Court in the case of Hindustan Lever Ltd. v. R.B. Wadkar [iv], wherein it emphasised that the recorded reasons must be clear, self-explanatory and directly linked to evidence.

• The ITAT noted that the AO had incorrectly recorded that no scrutiny assessment had taken place under s. 143(3) of the Act, despite a scrutiny assessment concluded on 24.06.2016. This factual error further rendered the reopening invalid, as the AO failed to comply with the first proviso to s. 147 of the Act. It further observed that there was no finding that the assessee failed to disclose material facts at the time of the original assessment. The Tribunal relied on CIT v. Avadh Transformers (P.) Ltd. [v], wherein the Hon’ble Supreme Court held that in the absence of failure by the assessee to disclose material facts, reassessment proceedings beyond four years could not be initiated.

• The ITAT, in view of the foregoing observation, held that the essential condition precedent to invoke the jurisdiction to re-open the assessment for the A.Y. 2014-15 was absent. Consequently, the issuance of notice under s. 148 of the Act and all subsequent proceedings were declared void ab initio and quashed accordingly.

Our Analysis

This ruling reaffirms the judicial safeguards built into reassessment proceedings under the Act, particularly when assessments are sought to be reopened after the statutory period of four years. The Tribunal drew a clear line between ‘reason to suspect’ and ‘reason to believe.’ The case reiterates that alerts, reports, or general circulars from other authorities, such as the CCIT office, cannot substitute for an AO’s obligation to examine and justify reassessment independently. When no enquiry is undertaken and no fresh, tangible material is gathered post-assessment, the AO’s satisfaction is nothing but a borrowed belief, which the courts have consistently held as insufficient. The Tribunal’s reliance on the landmark Kelvinator (supra) and Hindustan Lever(supra) judgments further reinforces this principle.

The implications of this decision are far-reaching for the assessee and revenue authorities. For taxpayers, it offers robust protection against reopening assessments on vague or unverified grounds. For the Department, it serves as a cautionary reminder that appellate authorities will not condone procedural shortcuts and jurisdictional errors. The decision is also a valuable precedent for the assessee facing reassessment solely on the basis of inclusion in penny stock lists or alerts, without any enquiry into the specific facts of their case. Overall, the ITAT has upheld the rule of law and the constitutional principles of fairness and reasoned exercise of power.

End Notes

[i] 2025 SCC OnLine ITAT 1016 dated 10.01.2025.

[ii] S. Ganga Saran & Sons (P) Ltd. v. ITO, (1981) 3 SCC 143.

[iii] [2010] 187 Taxman 312/320 ITR 561 (SC)].

[iv] [2004] 137 Taxman 479/268 ITR 332 (Bombay)].

[v] [2014] 51 taxmann.com 369/227 Taxman 376 (SC).

Authored by Kushagra Gahlot, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinions.