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Facts
The assessee, engaged in construction, filed its return for AY 2016-17. The case was reopened under Section 147 based on information of under-reported property sales. While the AO accepted the reported gross receipts, an ad hoc disallowance of 10% was made for certain expenses, leading to reassessment.
Held
The tribunal held that the reassessment proceedings were void ab initio because the original ground for reopening (under-reported sales) was not sustained. The tribunal further ruled that the ad hoc disallowance of expenses was unwarranted as the books of accounts were not rejected under Section 145(3).
Key Issues
The key legal issues were the validity of the assumption of jurisdiction under Section 147 when the original ground for reopening was not pursued, and the justification for ad hoc disallowance of expenses without rejecting the books of account.
Sections Cited
Section 147, Section 148, Section 145(3)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, AGRA BENCH “SMC”: AGRA
(Assessment Year: 2016-17) Shyama Shyam Vs. ITO, Infradevelopers Pvt Ltd, Ward-2(1)(2), Khasra No. 961, Bhahistabad, Agra Sikandra, Agra (Appellant) (Respondent) PAN: AATCS9899R Assessee by : Shri Gaurav Agarwal, CA Revenue by: Shri Anil Kumar, Sr. DR Date of Hearing 20/01/2026 Date of pronouncement 21/01/2026 O R D E R AY 2016-17, arises out of the order of the National Faceless Appeal Centre, Delhi [hereinafter referred to as ‘ld. CIT(A)’, in short] dated 12.09.2025 against the order of assessment passed u/s 147 r.w.s. 144B of the Income-tax Act, 1961 (hereinafter referred to as ‘the Act’) dated 18.05.2023 by the Assessing Officer, ITO, Ward-2(1)(2), Agra (hereinafter referred to as ‘ld. AO’).
The only effective issue to be decided in this appeal is as to whether the ld AO could be stated to have validly assumed jurisdiction u/s 147 of the Act and whether the ld CITA was justified in confirming the disallowance of expenditure on ad hoc basis in the facts and circumstances of the instant case.
I have heard the rival submissions and perused the materials available on record. The assessee is engaged in the business of construction and had filed its return of income for AY 2016-17 on 17.09.2016 declaring income of ₹3,48,150/-. The case of the assessee was sought to be reopened u/s 147 of the Act based on the information posted on Insight Portal that the assessee has sold immovable property at ₹6,21,43,000/- during the year, out of which, the assessee had shown only ₹3,86,89,960/- as gross receipts. Accordingly, notice u/s 148 of the Act is issued to the assessee on 30.07.2022. In response to the said notice, the assessee filed its return of income on 23.08.2022 disclosing the same total income of ₹3,48,150/-. During the course of re-assessment proceedings, the assessee furnished the following documents on the following dates before the ld AO: –
Sl No. Date of Details of submission submission 1 17-01-2023 Acknowledgement, Reply to notice, ITR, Computation of Total Income, sale deeds, Audit Report, P&L account, Balance sheet. 2. 22-04-2023 Acknowledgement, Reply to notice, Construction contract Agreement 3 07.05.2023 Acknowledgement, Reply to notice, ITRs, computations of income of the land owners.. 4. 11.05.2023 Acknowledgement, Reply to notice, Audit report for A.Y.s 2015-16 & 2016-17 5 16.05.2023 Acknowledgement, bills/vouchers/details of expenditure 4. In the aforesaid replies, the assessee also furnished the gross profit and net profit ratio for FYs 2013-14, 2014-15 and 2015-16 in a tabular form by stating that there is no abnormal increase or decrease in the financial performance and also objected to the proposal of the ld AO to reject the books of account of the assessee. The ld AO after detailed discussion in page 11 para 3.6 did not proceed to make any addition on account of under reporting of consideration in gross receipts on account of sale of land. For the purpose of this issue, the Assessing Officer duly accepted the audited books of account furnished before him and concluded that entries recorded therein are correct warranting no addition on account of under reporting of gross receipts as mentioned in the reasons recorded for reopening the assessment. For the purpose of disallowance of expenditure incurred towards bricks and labour payments, the ld Assessing Officer concluded that books of accounts were not maintained by the assessee properly and proceeded to make 10% ad hoc disallowance and completed the reassessment. Hence, it is very clear that no addition has been made by the ld Assessing Officer on the issue, which was subject matter of reopening of assessment. Accordingly, the very basis of assumption of jurisdiction u/s 147 of the Act for forming a belief that income of the assessee had escaped assessment fails. This issue was indeed raised by the assessee by way of a detailed written submissions before the ld CIT(A), which is also reproduced by the ld CIT(A) in his appellate order. The ld CIT(A) placed reliance on the decision of the Hon’ble Karnataka High Court in the case of Govind Raju and dismissed the objections of the assessee.
I find that this issue in dispute is directly covered by the decision of the Hon’ble Bombay High Court in the case of CIT Vs. Jet Airways India Ltd reported in 331 ITR 236 (Bom) ; decision of the Hon’ble Delhi High Court in the case of Ranbaxy Laboratories Ltd. Vs. CIT reported in 336 ITR 136 (Del) and the decision of the Hon’ble Gujarat High Court in the case of CIT Vs. Mohammed Junaid Dadani reported in 355 ITR 172 (Guj). The ld CIT(A) had laid more emphasis on provisions of Explanation 3 to Section 147 of the Act which permits the ld AO to make addition on issues that are not subject matter of reasons recorded for reopening. In our considered opinion, the said addition could be made only if the addition that was subject matter of reasons recorded is also made by the ld AO. If for any reason, the addition which was subject matter of reopening was not sought to be made by the ld Assessing Officer, then he has no other choice, but to drop the said reopening proceedings and issue another notice u/s 148 of the Act by duly recording reasons for escapement of income of any other issue. This view of mine has been further fortified by the aforesaid decisions of the Hon’ble Bombay High Court and Delhi High Court and Hon’ble Gujarat High Court. Hence, I have no hesitation to quash the reassessment proceedings by declaring it as void ab initio.
Even on merits, the addition has been made only on ad hoc basis by disallowing 10% of certain expenses claimed by the assessee. As stated supra, the ld AO had given due cognizance to the audited books of account submitted by the assessee in respect of issue of gross receipts on sale of land disclosed thereon (which was subject matter of reasons recorded) but had sought to ignore the books of account only for the limited purpose of disallowance of expenses. The books of the assessee have not been rejected by applying the provisions of Section 145(3) of the Act and hence there is no basis for the ld AO to make ad hoc disallowances of expenses. Hence, even on merits, the disallowance is liable to be deleted.
In the result, the appeal of the assessee is allowed.
Order pronounced in the open court on 21/01/2026.