AO Cannot make Additions on Issues Unrelated to Recorded Reopening Reasons: ITAT [Read Order]

The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) held that a reassessment cannot be sustained where the Assessing Officer (AO) makes additions on issues completely unrelated to the reasons recorded for reopening the assessment, whereas, no addition is ultimately made on the very ground that formed the basis of reopening.

Chintan Harshad Kanakia, an individual assessee, appellant in the case, filed his return of income for Assessment Year 2015-16 declaring income of ₹10.06 lakh and claiming exemption of long-term capital gains (LTCG) amounting to ₹1.41 crore under Section 10(38) of the Income Tax Act, 1961, on sale of shares of Parag Shilpa Investments Limited.

The case was reopened after information was received from the Principal Commissioner of Income Tax (PCIT) indicating that the assessee was a beneficiary of alleged bogus LTCG arising from trading in shares of Global Cap, identified as a penny stock during a search conducted on a share broking entity. On this basis, notice was issued under Section 148 of the Income TaxAct, 1961, which was later treated as a deemed notice under Section 148A pursuant to the decision of the Supreme Court in Union of India v. Ashish Agarwal.

However, during reassessment proceedings, no addition was made in respect of the Global Cap transactions forming the recorded reason for reopening. Instead, the AO disallowed the LTCG exemption claimed on sale of shares of Parag Shilpa Investments Limited, citing discrepancies in the date of purchase and holding period. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld both the validity of reopening and the disallowance on merits, leading to the appeal before the Tribunal.

Chartered Accountant, Riddhisha Jain representing the appellant, contended that the reassessment proceedings were invalid in law as no addition was made on the issue for which the assessment was originally reopened.

It was argued that the entire basis for reopening was alleged trading in shares of Global Cap, whereas the addition was ultimately made on an entirely different issue relating to Parag Shilpa Investments Limited. Relying on judicial precedents, it was submitted that once the AO fails to assess the income which formed the reason to believe that income had escaped assessment, he cannot assess any other income during reassessment proceedings.

Representatives of the Revenue argued that once reassessment proceedings were validly initiated, the Assessing Officer was empowered to examine any issue that came to notice during the proceedings.

The Bench comprising Pawan Singh, Judicial Member and Renu Jauhri, Accountant Member, allowed the appeal, holding that the reassessment was unsustainable as no addition was made on the issue that formed the very foundation of the reopening.

Relying on the decision of the Bombay High Court in Commissioner of Income Tax v. Jet Airways (India) Limited and similar precedents, the Bench observed that where the AO accepts that the income referred to in the recorded reasons has not escaped assessment, he cannot proceed to assess some other income without issuing a fresh notice under Section 148 of the Income Tax Act, 1961.

Accordingly, the disallowance was deleted and the reassessment order was set aside.

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