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Facts
The assessee filed a return for AY 2014-15. The AO reopened the assessment based on information about the sale of immovable property and TDS transactions, believing income had escaped assessment. The AO completed reassessment by disallowing various expenses, including those under Section 40A(3).
Held
The Ld.CIT(A) allowed the assessee's legal issue, quashing the reassessment order because the AO made additions on issues not mentioned in the reasons for reopening, relying on High Court judgments. The Tribunal agreed with the Ld.CIT(A), finding no infirmity in quashing the assessment order.
Key Issues
Whether the AO can make additions/disallowances on issues not forming part of the reasons recorded for reopening, even after the amendment by Explanation 3 to Section 147.
Sections Cited
147, 148, 40A(3), 151, 80 HHC, 147(1), 148(2)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, ‘C’ BENCH: CHENNAI
Before: SHRI ABY T. VARKEY & SHRI AMITABH SHUKLA
आदेश / O R D E R
PER ABY T. VARKEY, JM:
1. This is an appeal preferred by the Revenue against the order of the Learned Commissioner of Income Tax (Appeals)/NFAC, (hereinafter referred to as ‘Ld.CIT(A)‘), Delhi, dated 13.02.2025 for the Assessment Year (hereinafter referred to as ‘AY‘) 2014-15.
2. The main grievance of the Revenue is against the impugned action of the Ld.CIT(A) allowing the legal issue raised by the assessee against the reopening of assessment by the AO.
3. Brief facts relating to the impugned action of the Ld.CIT(A) is that assessee is noted to have filed the return of income (RoI) for AY 2014-15 admitting total income of ₹35,66,120/-. Later, the AO on the basis of an information that (i) assessee along with two others had sold immovable property for a consideration of ₹7,55,55,190/- and had disclosed only ₹57,27,000/- as proceeds for land sales in the income & expenditure account and (ii) regarding some transactions pertaining to TDS deduction, he was of the view that income chargeable to tax has escaped assessment and therefore, he reopened the assessment u/s.147 of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act‘) by issuing notice u/s.148 of the Act on 29.06.2021. Thereafter, the AO is noted to have completed the reassessment on 11.05.2023 by disallowing the expenditure of ₹3,39,90,859/- towards advertisement, wages, salary, JCB expenses, legal and compensation expenses, audit fees and marketing expenses, traveling, meeting and vehicle expenses as well as under Section 40A(3) of the Act.
Aggrieved, by the aforesaid action of the AO, the assessee is noted to have filed an appeal before the Ld.CIT(A)/NFAC wherein he raised legal issue challenging the jurisdiction of the AO to have made the additions/disallowances, by contending that even though the AO has reopened the assessment on certain issues [i.e. as stated in the reasons recorded for reopening], without making any additions/disallowances on those issues, the AO erred in making addition on other issues which were not stated in the reasons recorded for reopening, by relying on the ratio of the Hon’ble Bombay High Court judgment in the case of Jet Airways (I) Ltd. reported in [2011] 331 ITR 236 (Bombay HC), Ranbaxy Laboratories Ltd. v. CIT reported in [2011] 336 ITR 136 (Delhi) and the Hon’ble Madras High Court decision in the case of Martech Peripherals (P)
1. Ltd. reported in [2017] 394 ITR 733 (Mad.) and in the case of Tractors & Farm Equipment Ltd. v. ACIT reported in [2018] 409 ITR 369 (Mad.) The Ld.CIT(A) while adjudicating the legal issue noted that the AO has reopened the assessment on account of sale of immovable property of ₹7,55,55,190/- and some other transactions pertaining to TDS deduction, but without making any additions/disallowances pertaining to the issues for which he has reopened the assessment, has passed the reassessment order on 11.05.2023, by making the following disallowances:
(i) Disallowance of Advertisement expenses - Rs.30,55,190 (ii) Disallowance of Wages - Rs. 1,69,74,460 (iii) Disallowance of Salary - Rs. 18,90,000 (iv) Disallowance of JCB expenses - Rs.3,01,000 (v) Disallowance of legal expenses - Rs.22,00,000 (vi) Disallowance of advertisement exp - Rs.87,280 (vii) Disallowance of compensation exp - Rs.4,00,000 (viii) Disallowance of audit fees u/s 40(a)(ia) - Rs.60,000 (ix)Disallowance of marketing exp - Rs.4,19,052 (x)Disallowance of travelling expenses - Rs.36,99,567 (xi) Disallowance of meeting exp, vehicle allowance - Rs.8,31,329 and vehicle allowance (xii) Disallowance u/s 40A(3) - Rs.40,72,980
And the Ld.CIT(A) found that the AO didn’t made any additions qua issues for which the assessment was reopened (as stated in the reasons recorded before issuing notice u/s.148 of the Act). Thus he found force in the legal issue raised by the assessee, by relying on the decision of the Hon’ble Bombay High Court in the case of Jet Airways (I) Ltd (supra) & other case laws and was pleased to quash the reassessment order passed by the AO dated 11.05.2023. Aggrieved by the aforesaid action of the Ld.CIT(A), the Revenue is before us.
In order to adjudicate the impugned action of the Ld.CIT(A), we need to examine the reasons recorded by the AO for reopening the assessment [same has been reproduced by the Ld.CIT(A) at Para No.5.2.2 of the impugned order which are reproduced as under]:
F.Y in Which Name of the Information Value in PAN transaction was assessee Description Rs. made AVMPS5356G 2013-14 GOVINDA TDS Statement - 44338 RAJULU Payments to SRINIVASAN contractors (Section 194C) TDS Statement – 131249 Interest other than interest on securities (Section 194A) TDS Statement - 50780 Insurance commission (Section 194D)
The assessee had filed his return of income on 30.11.2014 admitting total income of Rs. 35,66,120/-for the A.Y. 2014-15. It is noticed from the Department Software (Insight-High Risk CRIU/ VRU Information) that the assessee had sold a immovable property jointly and received sale consideration of Rs.7,55,55,190/. And also made the transactions classified in the aforesaid table.
By virtue of the aforesaid transactions, it has transpired that the assessee mentioned in the table above had also not fully and truly disclosed all the material facts necessary for completion of the assessment, for the assessment year 2014-15.
Having perused the material evidences available, I am satisfied that the income of the assessee chargeable to tax had escaped assessment within meaning of provisions of section 147 of the I.T. Act 1961 for the A.Y 2014-15.
In this case, more than 4 years have lapsed from the end of the assessment year. Hence, proposal to issue notice u/s. 148 is submitted to the Principal Commissioner of Income Tax through the Additional Commissioner of Income Tax for necessary approval as per the provisions of section 151.
Having noted the reasons recorded for reopening the assessment, we note that the assessment was reopened by the AO taking note that the assessee had sold immovable property jointly and has received sale consideration of ₹7,55,55,190/- and has also made certain transactions with the contractors and others on which TDS has been deducted. Taking note of the same, the AO was of the view that the assessee didn’t fully and truly disclose all material facts necessary for completion of the assessment for AY 2014-15 and therefore, he re-opened the assessment.
However, having reopened the assessment on the aforesaid information on the basis of which he formed his reasons to believe escapement of income viz., regarding sale of immovable property jointly with some party and receiving ₹7,55,55,190/- and (ii) some other transactions pertaining to TDS deduction, the AO is noted to have made additions/disallowances on eleven (11) counts, [which has been reproduced supra]. However we note that the AO had not made any adverse finding or made any addition/disallowances on the issues, for which, he has reopened the assessment as rightly found by Ld.CIT(A). Therefore as rightly held by him, the AO couldn’t have made any additions without making any addition for which he has reopened the assessment. In this regard, we note that the Ld.CIT(A) has rightly relied on the decision of the Hon’ble Bombay High Court in the case of Jet Airways (I) Ltd., (supra). We note that the aforesaid ratio laid down by the Hon’ble Bombay High Court in Jet Airways (I) Ltd., has been concurred by the Hon’ble Madras High Court in the case of Martech Peripherals (P) Ltd. (supra) and in the case of Tractors & Farm Equipment Ltd. (supra). Therefore, we don’t find any infirmity in the action of the Ld.CIT(A) quashing the assessment order pursuant to reopening the assessment.
Before we part, we would like to take note of the Ground No.3 raised by the Revenue i.e. Ground No.3 which reads as under:
3. The CIT(A) has not taken into consideration the subsequent amendment made in the Finance Act, 2009. The Finance Act 2009 has inserted Explanation 3 to Section 147 which mandates that Assessing Officer assesses or re assess under section 147 any issue which has escaped assessment when such issue comes to the AO notice and the said issue has not been included in the reasons for reopening. The Explanation 3 to section 147 does not envisage interconnection between reasons for reopening and subsequent addition. The AO is rightly empowered to examine all the issues which arise subsequently during assessment proceedings.
We note that similar issue/ground has already been considered by the Hon’ble Madras High Court while deciding the case of Tractors & Farm Equipment Ltd., (supra) wherein the Hon’ble High Court has held as under:
Though we have held so, we have also considered the arguments advanced by the learned counsel for the Revenue by referring to Explanation 3 to Section 147 of the Act. The counsel for the assessee is right in his submissions that Explanation 3 would stand attracted only upon the Court being satisfied that there has been no fully or truly disclosure of all the material facts necessary for assessment. For the sake of argument, if we consider the submission of the Revenue, we are not persuaded to accept the same for the reasons that (a) a notice issued to the assessee under Section 148 of the Act dated 30.03.2004 was to disallow the contribution to the welfare fund as it was not an approved fund; and (b) on hearing the submissions of the assessee, the Assessing Officer accepted the case of the assessee and dropped the proposal.
In such circumstances, the question would be as to whether the Revenue can fall back to Explanation (3) to Section 147 and proceed to make roving enquiry into some other matter, in the instant case, with regard to computing eligible profits for the purpose of Section 80 HHC of the Act. This issue is no longer res-integra and considered by the Hon'ble Division Bench of the Bombay High Court in the case of CIT v. Jet Airways (1) Ltd. [2010] 195 Taxman 117/[2011] 331 ITR 236.
The Tribunal, while considering the said issue, had referred to the decisions in the case of ITO v. K.L. Srihari (HUF) [2001] 118 Taxman 890/250 ITR 193 (SC) and the judgment of the Hon'ble Supreme Court in the case of CIT v. Sun Engg. Works (P.) Ltd. [1992] 64 Taxman 442/198 ITR 297. The decision in the case of K.L. Srihari (HUF) (supra) was referred to in the decision of the Hon'ble Supreme Court in the case of V Jaganmohan Rao v. CIT [1970] 75 ITR 373.
In Jet Airways (1) Ltd. (supra), the Hon'ble Division Bench of the Bombay High Court took note of the decisions in the case of Sun Engg. Works (P.) Ltd. and V. Jaganmohan Rao (supra) and examined the effect of Explanation (3) in a case of somewhat similar to the case on hand. The operative portion of the judgment reads as follows:-
'18. The effect of the amended provisions came to be considered in two distinct lines of precedent on the subject. The first line of authority, to which a reference has already been made earlier, adopted the principle that where the AO has formed a reason to believe that income has escaped assessment and has issued a notice under s.148 on certain specific issues, it was not open to him during the course of the proceedings for assessment or reassessment to assess or reassess any other income, which may have escaped assessment but which did not form the subject-matter of the notice under s.
This view was adopted in the judgment of the Punjab & Haryana High Court in Vipan Khanna (supra) and in the judgment of the Kerala High Court in Travancore Cements Ltd. (supra). This line of authority, would now cease to reflect the correct position in law, by virtue of the amendment which has been brought in by the insertion of Expln. 3 to s. 147 by Finance (No. 2) Act of 2009. The effect of the Explanation is tha once an AO has formed a reason to believe that income chargeable to tax has escaped assessment and ha proceeded to issue a notice under s. 148, it is open to him to assess or reassess income in respect of an other issue though the reasons for such issue had not been included in the reasons recorded under 148(2).
Explanation 3 lifts the embargo, which was inserted by judicial interpretation, on the making of an assessment or reassessment on grounds other than those on the basis of which a notice was issued under s. 148 setting out the reasons for the belief that income had escaped assessment. Those judicial decisions had held that when the assessment was sought to be reopened on the ground that income had escaped assessment on a certain issue, the AO could not make an assessment or reassessment on another issue which came to his notice during the proceedings. This interpretation will no longer hold the field after the insertion of Expln. 3 by the Finance Act (No. 2) of 2009. However, Expln. 3 does not and cannot override the necessity of fulfilling the conditions set out in the substantive part of s.
147. An Explanation to a statutory provision is intended to explain its contents and cannot be construed to override it or render the substance and core nugatory. Sec. 147 has this effect that the AO has to assess or reassess the income ("such income") which escaped assessment and which was the basis of the formation of belief and if he does so, he can also assess or reassess any other income which has escaped assessment and which, comes to his notice during the course of the proceedings. However, if after issuing a notice under s.148, he accepted the contention of the assessee and holds that the income which he has initially formed a reason to believe had escaped assessment, has as a matter of fact not escaped assessment, it is not open to him independently to assess some other income. If he intends to do so, a fresh notice under s. 148 would be necessary, the legality of which would be tested in the event of a challenge by the assessee.
22……....We agree with the submissions which has been urged on behalf of the assessee that s. 147(1) as it stands postulates that upon the formation of a reason to believe that income chargeable to tax has escaped assessment for any assessment year, the AO may assess or reassess such income "and also" any other income chargeable to tax which comes to his notice subsequently during the proceedings as having escaped assessment. The words "and also" are used in a cumulative and conjunctive sense. To read these words as being in the alternative would be to rewrite the language used by Parliament. Our view has been supported by the background which led to the insertion of Expln. 3 to s.
Parliament must be regarded as being aware of the interpretation that was placed on the words "and also" by the Rajasthan High Court in Shri Ram Singh (supra). Parliament has not taken away the basis on that decision. While it is open to Parliament, having regard to the plenitude of its legislative powers to do so, the provisions of s. 147(1) as they stood after the amendment of 1st April, 1989 continue to hold the field.'
The decision in the case of Jet Airways (1) Ltd. (supra) was referred to by the High Court of Delhi in the case of Ranbaxy Laboratories Ltd. v. CIT [2011] 12 taxmann.com 74/200 Taxman 242/336 ITR 136, wherein it was held that the legislature could not be presumed to have intended to give blanket powers to the Assessing Officer that on assuming jurisdiction under Section 147 regarding assessment or reassessment of escaped income, he would keep on making roving inquiry and thereby including different items of income not connected or related with the reasons to believe, on the basis of which he assumed jurisdiction. Further, it was held that for every new issue coming before the. Assessing Officer during the course of proceedings of assessment or reassessment of escaped income, and which he intends to take into account, he would be required to issue a fresh notice under Section 148 of Act. Thus, it was held that the Assessing Officer had. jurisdiction to reassess the income other than the income in respect of which the proceedings under Section 147 were initiated, but, he was not justified in doing so when the reasons for the initiation of those proceedings ceased to survive. Therefore, the argument advanced by the Revenue placing reliance on Explanation 3 to Section 147 is of little avail.
In the light of the aforesaid decision of the Hon’ble Madras High Court in the case of Tractors & Farm Equipment Ltd., on the Ground No.3 (AY 2014-15) Govinda Rajulu Srinivasan raised by the Revenue, we don’t find any substance in Ground No.3 raised by the Revenue to the given facts of the case, since Revenue failed to show that the AO had made additions on the issues for which he reopened the assessment (as stated in reasons recorded). If the AO had made any additions/disallowances on the issue for which he reopened, the Ground No.3 raised by the Revenue would have substance, which is not the case. Therefore, Ground No.3 of the Revenue also stands dismissed.
In the result, appeal of the Revenue stands dismissed
Order pronounced on the 04th day of September, 2025, in Chennai.