PITTI HOLDINGS PRIVATE LIMITED,HYDERABAD vs. ACIT., CENTRAL CIRCLE-1(1), HYDERABAD

Ground Nos.4 to 9 are regarding validity of reassessment framed by the Assessing Officer, when the Assessing Officer has not made any addition on the issue of reopening. The Ld. AR of the assessee has submitted that the Assessing Officer has initiated the reassessment proceedings by issuing the notice u/s. 148A(b) of the Act dated 12.03.2022 giving the reasons that as per the information in the possession of the Department, the assessee has availed accommodation entries from M/s. Khoobsoorat Limited, a shell company controlled and managed by well known entry operator Sri Arun Kumar Khemka. Thus the Assessing Officer alleged in the reasons recorded that assessee was involved in transfer of Rs.90 lakhs, Rs.10 lakhs and Rs.25 lakhs by way of accommodation 20 ITA.No.450/Hyd./2025 entries in the form of unsecured loans and sale of shares (total Rs.1.25 Crores). The Ld. AR has then referred to the order passed by the Assessing Officer u/s.148A(d) of the Act dt.30.03.2022 and submitted that the Assessing Officer has reiterated his stand in the said order that the assessee is a beneficiary of accommodation entries to the tune of Rs.1.25 Crores in the form of unsecured loans. He has contended that while framing the assessment u/s.144 of the Act the Assessing Officer has not made any addition on account of unsecured loans, however, some other additions were made on account of disallowance of expenditure and therefore once the Assessing Officer has not made any addition on the issue on which the assessment was reopened then the additions made by the Assessing Officer by making the disallowances of expenditure are not sustainable in law and liable to be deleted. In support of his contention, he has relied upon the judgment of Hon'ble Bombay High Court in the case of CIT Vs. Jet Airways (I) Ltd. 331 ITR 236 (Bom).

On the other hand, the Ld. DR has submitted that the Assessing Officer has followed the procedure as prescribed u/s.148 and 148A of the Act. The Assessing Officer has 21 ITA.No.450/Hyd./2025 reproduced the details as received from the Investigation Wing as detected in search operation u/s.132 of the Act conducted in the case of M/s. Vamsiram Builders Pvt. Ltd. and group concerns, Hyderabad on 06.12.2022 the assessee company being part of the said group was covered and the case was centralised to Central Circle, Hyderabad vide order u/s. 127 of the I.T. Act dt.10.03.2023. The Assessing Officer has proceeded as per the investigation report received in the case of Khoobsurat Limited, a shell company and the assessee is found to be a beneficiary of accommodation transaction in the shape of unsecured loans. Therefore, the reopening of assessment is based on tangible material available with the Assessing Officer regarding the accommodation entries received by the assessee in the shape of unsecured loans. He has relied upon the orders of authorities below.

We have considered the rival submissions as well as the material available on record. The Assessing Officer has issued notice u/s.148A(b) of the Act dt.12.03.2022 placed at page Nos.1 & 2 of the paper book are as under :

In this case, information was flagged as per Risk Management Strategy formulated by the CBDT through ITBA software under the head NMS/High Risk CRI/VRU cases. As per "High Risk Transactions" data in Insight portal, for F.Y. 2017-18 relevant to the A.Y. 2018-19, the assessee is a beneficiary of accommodation entry in the form of unsecured loans and advances in-lieu of commission & sale of share with potential tax liabilities. 1.2. As per the information received, M/s. Khoobsurat Limited (AABCK0685K) is listed as Shell Company controlled and managed by well-known entry operator Shri Arun Kumar Khemka as per the database of Kolkata based shell companies maintained by the department. M/s. Khoobsurat Ltd earlier raised share capital and premium which were invested in bogus unlisted equities and subsequently, 26 ITA.No.450/Hyd./2025 investments were sold to convert these into unsecured loans and advances. These unsecured loans were provided as accommodation entries to various beneficiaries in lieu of commission and subsequently company was also acquired by current shareholders. 1.3. M/s. Khoobsurat Ltd. is a shell company, which has been used to bring back unaccounted income of the beneficiaries in their regular books of accounts by way of accommodation entries in the form of Unsecured Loans and sale of shares. Hence, after fund trail it has been identified as the assessee company M/s Pitti Holdings Pvt. Ltd was involved in transfer of Rs.90,00,000/-on 06-04-2017, Rs 10,00,000/- on 07-04-2017 and Rs.25,00,000/-on 27-06- 2017 as a L4 layer. 1.4. These findings have established the fact that the transaction held in the bank account is nothing but the routing of fund in for the ultimate purpose of accommodation entry to beneficiary (l.e., assessee company) in the form of unsecured loans and advances in-lieu of commission & sale of share. Thus, it is identified as the assessee company is one of the beneficiaries for the amount of Rs.1,25,00,000/-. 1.5. It is found that the assessee company is one of the beneficiaries for the amount of Rs.1,25,00,000/- in the form of unsecured loans. Upon verification of the Balance Sheet schedule in ITR-6 filed by the assesse, Rs.42,95,40,000/- is shown as Other Loans and Advances under Long-Term Loans and advances under Non-Current Assets which includes the accommodation entry availed from M/s. Khoobsurat Ltd."

These findings have established the fact that the transaction held in the bank account is nothing but the routing of funds for the ultimate purpose of accommodation entry to beneficiaries in the form of unsecured loans and advances and in-lieu of commission & sale of share, the nature. The modus operandi of the above transactions remains unexplained. The assessee ahs to prove the purpose of loan, identity, genuineness and credit worthiness of the parties. Hence, as per the amended provisions of sec 148A of Income-tax 1961 and in accordance with the provisions of sec 27 ITA.No.450/Hyd./2025 151, the assessee was provided an opportunity of being heard by issuance of show cause notice u/s 148(A)(b) of the Income-tax Act, 1961 dated 12.03.2022, with prior approval from Pr. Commissioner of Income Tax-4, Hyderabad, requiring the assessee to show cause as to why notice u/s 148 should not be issued on the basis of the afore stated information in order to assess the transactions undertaken by the assessee.

Sufficient time was allowed to the assessee in accordance with the provisions of section 148A(b) for compliance to Show cause Notice dated 12.03.2022. Show cause Notice was delivered to the assessee through e-mail on12.03.2022. In response to the show cause notice, on 19- 03-2022, the assessee furnished its online been examined and scrutinized under 143(2) scrutiny conducted for AY 2018- 19. Hence the transactions are not bogus and hence no Income has escaped assessment. Copy of Assessment order is attached in Annexure 7. Therefore we hereby request you to drop the proposal to reopen case u/s 148 as there is no Income which has escaped assessment"

The assessee has also made various attachments as stated above. In this case the assessee filed it's return of income for the assessment year 2018-19 on 27-09-2018 and returned current year loss at Rs.1.55,676/-. The case was selected for complete scrutiny under CASS and assessment uls 143(3) was passed on 22-01-2021 by the AD, National e- Assessment Centre, Delhi. The issue for CASS selection was i) Business Loss ii) Share Capital/Other Capital. The AO passed the assessment stating that "After considening the assessee's submissions and documents filed in response to the statutory notices, no addition on the above issue(s) is made."

In Commissioner of Income Tax Vs. M/s. Sun Engineering Works (P.) Ltd., the Supreme Court dealt with the following question of law in the course of its judgment: Where an item unconnected with the escapement of income has been concluded finally against the assessee, how far in reassessment on an escaped item of income is it open to the assessee to seek a review of the concluded item for the purpose of computation of the escaped income.? The issue which arose before the Supreme Court was whether, in the course of a reassessment on an escaped item of income could an assessee seek a review in respect of an item which stood concluded in the original order of assessment. The Supreme Court dealt with the provisions of Section 147, as they stood prior to the amendment on 1 April 1989. The Supreme. Court held that the expression "escaped assessment". Includes both "non-assessment" as well as ""under assessment"". Income is said to have escaped assessment within the meaning of the section when it has not been charged in the hands of an assessee during the relevant assessment year. The expression ""assess"" refers to a situation where the assessment of the assessee for a particular year is, for the first time, made by resorting to the provisions of Section 147. The expression ""reassess"" refers to a situation where an assessment has already been made but the Assessing Officer has reason to believe that there is under assessment on account of the existence of any of the grounds contemplated 35 ITA.No.450/Hyd./2025 by Explanation 1 to Section 147. The Supreme Court adverted to the judgment in V. Jaganmohan Rao and Others Vs. Commissioner of Income Tax and Excess Profits Tax, Andhra Pradesh, , which held that once an assessment is validly reopened, the previous under assessment is set aside and the Income Tax Officer has the jurisdiction and duty to levy tax on the entire income that had escaped assessment during the previous year. The Court held that the object of Section 147 enures to the benefit of the Revenue and it is not open to the assessee to convert the reassessment proceedings as an appeal or revision and thereby seek relief in respect of items which were rejected earlier or in respect of items not claimed during the course of the original assessment proceedings. The judgment in Jaganmohan Rao''s case dealt with the language of Sections 22(2) and 34 of the Act of 1922 while the judgment in Sun Engineering Works (supra) interprets the provisions of Section 147 as they stood prior to the amendment on 1 April 1989.

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 Assessing Officer has formed a reason to believe that income has escaped assessment and has issued a notice u/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 36 ITA.No.450/Hyd./2025 mater of me notice u/s 148. 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 Limited (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 Explanation 3 to Section 147 by Finance (No. 2) Act of 2009 The effect of the Explanation is that once an Assessing Officer has formed a reason to believe that income chargeable to tax has escaped assessment and has proceeded to issue a notice u/s 148, it is open to him to assess or reassess income in respect of any other issue though the reasons for such issue had not been included in the reasons recorded u/s 148(2).

The second line of precedent is reflected in a judgment of the Rajasthan High Court in Commissioner of Income Tax v. Shri Ram Singh (2008) 306 ITR 343 (Raj). The Rajasthan High Court construed the words used by Parliament in Section 147 particularly the words that the Assessing Officer ''may assess or reassess such income and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings'' u/s 147. The Rajasthan High Court held as follows. .... it is only when, in proceedings u/s 147 the Assessing Officer, assesses or reassesses any income chargeable to tax which has escaped assessment for any assessment year, with respect to which he had ""reason to believe"" to be so, then only, in addition, he can also put to 37 ITA.No.450/Hyd./2025 tax, the other income, chargeable to tax, which has escaped assessment, and which has come to his notice subsequently, in the course of proceedings u/s.

To clarify it further, or to put it in other words, in our opinion, if in the course of proceedings u/s 147, the Assessing Officer were to come to the conclusion, that any income chargeable to tax, which, according to his ""reason to believe"", had escaped assessment for any assessment year, did not escape assessment, then, the mere fact that the Assessing Officer entertained a reason to believe, albeit even a genuine reason to believe, would not continue to vest him with the jurisdiction, to subject to tax, any other income, chargeable to tax, which the Assessing Officer may find to have escaped assessment, and which may come to his notice subsequently, in the course of proceedings u/s 147.

Parliament, when it enacted the Explanation (3) to Section 147 by the Finance (No. 2). Act, 2009 clearly had before it both the lines of precedent on the subject. The precedent dealt with two separate questions. When it effected the amendment by bringing in Explanation 3 to Section 147, Parliament stepped in to correct what it regarded as an interpretational error in the view which was taken by certain courts that the Assessing Officer has to restrict the assessment or reassessment proceedings only to the issues in respect of which reasons were recorded for reopening the assessment. The corrective exercise embarked upon by Parliament in the form of Explanation 3 consequently provides that the Assessing Officer may assess or reassess 38 ITA.No.450/Hyd./2025 the income in respect of any issue which comes to his notice subsequently in the course of the proceedings though the reasons for such issue were not included in the notice u/s 148(2). The decisions of the Kerala High Court in Travancore Cements Limited (Supra) and of the Punjab & Haryana High Court in Vipan Khanna (supra) would, therefore, no longer hold the field. However, insofar as the second line of authority is concerned, which is reflected in the judgment of the Rajasthan High Court in Shri Ram Singh (supra), Explanation 3 as inserted by Parliament would not take away the basis of that decision. The view which was taken by the Rajasthan High Court was also taken in another judgment of the Punjab & Haryana High Court in Commissioner of Income Tax Vs. Atlas Cycle Industries, The decision in Atlas Cycle Industries held that the Assessing Officer did not have jurisdiction to proceed with the reassessment, once he found that the two grounds mentioned in the notice u/s 148 were incorrect or non existent. The decisions of the Punjab & Haryana High Court in Atlas Cycle Industries (supra) and of the Rajasthan High Court in Shri Ram Singh (supra) would not be affected by the amendment brought in by the insertion of Explanation 3 to Section 147.

Explanation 3 lifts the embargo, which was inserted by judicial interpretation, on the making of an assessment of reassessment on grounds other than those on the basis of Which a notice was issued u/s 148 setting out the reasons for the belief that income had escaped assessment. Those judicial decisions had held that when the 39 ITA.No.450/Hyd./2025 assessment was sought to be reopened on the ground that income had escaped assessment on a certain issue, the Assessing Officer 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 Explanation 3 by the Finance Act (No 2) of 2009 However, Explanation 3 does not and cannot override the necessity of fulfilling the conditions set our in the substantive part of Section 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. Section 147 has this effect that the Assessing Officer has to assessee 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 u/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 u/s 148 would be necessary, the legality of which would be tested in the event of a challenge by the assessee.

We have approached the issue of interpretation that has arisen for decision in these appeals, both as a matter of first principle, based on the language used in 40 ITA.No.450/Hyd./2025 Section 147(1) and on the basis of the precedent on the subject. We agree with the submission which has been urged on behalf of the assessee that Section 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 Assessing Officer 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 Explanation 3 to Section 147. 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 of that decision. While it is open to Parliament, having regard to the plenitude of its legislative powers to do so, the provisions of Section 147(1) as they stood after the amendment of 1 April 1989 continue to hold the field.”

Since we have quashed the reassessment order, therefore, we do not propose to go into the merits of the other issues raised by the assessee.

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