ITAT Held Reassessment Based on Third-Party Information and Borrowed Satisfaction as Invalid

Arcoy Industries (India) Private Limited filed appeals in the ITAT Ahmedabad for the Assessment Years 2013-14, 2014-15, 2015-16, and 2017-18, challenging orders passed by the CIT(A)/NFAC Delhi, all dated the same, i.e., January 30, 2024, under section 147 read with section 143(3) of the Income-tax Act. All appeals were based on the same issue; hence, the tribunal has issued a common order for all the years in consideration, taking AY 2013-14 as the lead case.

The tax department had begun the reassessment proceedings based on the information received from the department’s Insight Portal, which was sourced from a search conducted under section 132 in the case of Dishman Group. As per the extracted information, Dishman Group was alleged to have provided accommodation entries in the form of fake loans, advances, commissions, and other transactions, and the assessee was alleged to be the beneficiary of said transactions to the extent of Rs. 40,02,325 in AY 2013-14. In conclusion, AO treated this income as unexplained unsecured loans and made the addition of the same to the assessee’s income under section 69A on the grounds that the assessee had claimed non-genuine expenses of Rs. 40,02,325 in the form of commission expenses during the year in consideration.

The aggrieved assessee filed an appeal before the CIT(A); however, the CIT(A) upheld the addition made by the AO. Thereafter, the assessee approached the tribunal. During the hearing, the tribunal noted that the reasons given by AO behind opening the case were factually incorrect, because the assessee had never claimed any commission expenditure in its return of income (ITR). The amount in question represented a loan balance, which was duly reflected in the audited books of account.

The tribunal also noted that the AO did not properly verify the information received from the Insight Portal with the assessee’s assessment records before reopening the assessment. There was no examination of the nature of the transaction, nor any independent application of mind by the assessing officer. Meaning, it was clear that the reopening was completely based on borrowed satisfaction derived from third-party information, without establishing any live nexus between the material relied upon and the alleged escapement of income in the assessee’s case. It was also discovered that the initial assessment for the Assessment Year 2013-14 had already been completed; however, the reassessment notice was issued almost four years after the end of the relevant assessment year.

As per Section 147, reopening of a case is only allowed if there is a failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment. The tribunal discovered that the loan transactions with Dishman Group were clearly disclosed in the audited balance sheet as well as in the tax audit report by the assessee, and the AO failed to flag any specific material fact that the assessee failed to disclose. Additionally, the reopening was time-barred as per the first proviso to section 147. In conclusion, the tribunal held the reopening under the first proviso to section 147 as invalid in law on the grounds that there was no failure on the part of the assessee to disclose material facts in a case.

Accordingly, the Tribunal quashed the reassessment order passed under section 147 read with section 143(3) for AY 2013-14. Since the facts and issues involved in AYs 2014-15, 2015-16, and 2017-18 were identical, the reassessment orders for all the years were held invalid as per the law, hence were also set aside. Meaning, overall, the tribunal ruled in favour of the assessee.